Investing 101

Created by:
YFC, 2013
Table of Contents
1) Why do we invest?
2) Time Value of Money
3) Risk-Return Tradeoff
4) Diversification
5) Getting Started
6) Additional Resources
7) How to Pitch a Stock
1. Why Do We Invest?
Expectation for returns
Consumption timing:
shifting purchasing power
from high-earning to low-
earning periods in
individuals life.
Allocate excess wealth into
needed areas of production
Protection for effects of
inflation




Why Do We Invest?
2. Time Value of Money
Is $100 today worth the same
as $100 a year from now?
Opportunity cost (1957-2009)
Equities: 10.72%
Long-term bonds: 8.68%
T-bills: 6.5%





Time Value of Money
Performance of S&P 500 (1991-2011)
Is $100 today worth the same
as $100 a year from now?
Inflation:
~4%/yr average since 1957
2-3% over the last 20 years





Time Value of Money
Imagine your parents had $15,000 in 1991. They have the option of
holding it in cash, purchasing 10-year government of Canada bonds, or
investing it in a balanced market portfolio (the S&P 500)
Cash: 0%
10-yr bonds: ~6.5%
Stocks: ~10%
Inflation: ~2%
Time Value of Money: Example
3. Risk vs. Return Tradeoff
So why not invest entirely in stocks?
Positive correlation between risk and return
Two securities, A and B, with identical risk profile but price of A is
higher than B: Sell A, buy B. Price of A Price of B
Two securities, A and B, have same price but Security B is riskier
than Security A: Sell B, Buy A. Price of B Price of A


Risk vs Return Tradeoff
Overall:
Stocks are riskier than bonds (debt holders have priority on cash flows)
Corporate debt is riskier than government debt (default risk)
Longer-term government bonds are riskier than shorter-term bonds or
T-bills (interest rate risk)
U.S. 3-year government bonds are riskier than Canadian 3-year
government bonds for Canadians (foreign exchange risk).

Risk vs. Return Tradeoff
4. Diversification
Diversification
Diversification- offsetting
portfolio gains with other
losses by selecting assets with
interests in different sectors of
the economy, which react
differently to economic
conditions and cycles. This
results in long-run growth at a
fairly predictable rate.
Seeks to eliminate unique, or
stock-specific, risk in the
portfolio



Diversification
In the long-run, well-
informed and patient
investors with well-
diversified portfolios
achieve handsome
returns
Studies have shown that
diversification greatly
improves the portfolios
return-risk ratio,
especially up until 8 or
9 securities.
5. Getting Started


Getting Started
What you will need to begin investing:
Money:
Theoretically, you can start with as little as $100
In practice, you will want at least a few thousand so that you can
diversify and digest account fees.
Online simulators: Investopedia, WallStreetSurvivor, Stocktrak
A broker: discount vs. full-service
Tradeoff between price and service
Big 5, Questrade, Credential
Stingy Investor: http://www.ndir.com/SI/brokers/discount.shtml


Getting Started
Transactions: Buy/Sell/Short/Cover
Order types: Market/Limit/Stop
Price: Bid/Ask
9. Additional Resources
Additional Resources
Read YFCs Recommended Books

News:
Online News Publications: Globe and Mail, Financial Post, Wall Street Journal, NY Times
DealBook, The Economist, The Gartman Letter, CNBC, BNN, and Bloomberg

Educational Websites/Resources:
Educational tools: Stockcharts.coms ChartSchool, Investopedia
Investment ideas: Seeking Alpha, News, Your Life, Fund Letters & 13Fs, and Stock Screening
Career Information: WallStreetOasis, Mergers & Inquisitions, and Vault
Analyst Opinions/Analysis: Investext

Educational Courses
YFC Certification: Level 1, 2, & 3
Canadian Securities Course
Bloomberg Essentials Training Program