How the Stock Market Works
Dr. Ramon P. DeGennaro is the CBA Professor in Banking and Finance at The University of Tennessee, Knoxville. In addition, he consults in the areas of business valuation, investments, and financial management and is a Luminary Member of the Angel Capital Group. He also served as a Visiting Scholar at the Federal Reserve Banks of Cleveland and Atlanta and for the American Institute for Economic Research. Professor DeGennaro holds a Ph.D. in Finance from The Ohio State University. At The University of Tennessee, Professor DeGennaro has been nominated for the Allen H. Keally Outstanding Teacher Award, the John B. Ross Outstanding Teaching Award (three times), and the College of Business Outstanding Teaching Award. Professor DeGennaro has presented original research at dozens of professional conferences, and he is the recipient of more than 50 research and professional development grants. His current research involves investments, financial markets, and entrepreneurship. He has published more than 40 refereed articles on investments, financial market volatility, small-firm finance, the term structure of interest rates, financial institutions, and prediction markets. He also has written research reports, book chapters, book reviews, and several Federal Reserve publications.
01: Is Investing in Your Blood?
Begin the course by exploring the difference between beating the market and investing in it. One carries very high risk, while the other is a much safer strategy. Learn about the human propensity to look for patterns in everything-but are stock returns predictable?
02: Understanding Fundamental Securities
Learn how stock is an outgrowth of simple business relationships. Use an ingenious analogy to compare two major types of securities: stocks and bonds. Both are ways to share the assets that a corporation owns and the cash that it produces-but with crucial differences.
03: What Is the Stock Market?
The stock market may be high-tech and getting more sophisticated every year, but it is essentially like markets you already know, such as grocery stores and car dealerships. Armed with this insight, delve into the special features of stock markets and how they work.
04: Historical Returns and Volatility
Explore the relationship between the risk of investing in stocks and the return you can expect from owning them. Survey the average return on a broad portfolio of stocks held over many decades. Next, focus on the short-term volatility that makes many people understandably nervous.
05: Risk, Expected Return, and Diversification
Address the investment advisor's favorite question: Do you want to eat well or do you want to sleep well? Analyze your risk tolerance in simple role-playing games. Then investigate strategies for limiting risk and improving your odds of making money in the long run.
06: What Determines How Much You'll Make
Learn the most important formula in investing-the simple equation for compounding earnings. Then focus on the three variables that determine how much money you'll have at the end of an investment. Most people worry too much about the one variable that they can't reliably control.
07: The Efficient Market Hypothesis
Delve into evidence that beating the market is hard even for seasoned professionals. According to the efficient market hypothesis, stock prices are almost always fair, with very few bargains available for sharp-eyed investors. Examine different scenarios and evidence that support this view.
08: Choosing a Brokerage Firm
Walk through the steps for choosing a brokerage firm, which can be as simple as going online and filling out an application or as involved as interviewing multiple firms to find the right fit. Analyze your needs, and dispel misconceptions that you may have about brokers.
09: Trading and Investing Basics
Explore how stock trades are made. Then look at ways you can place orders tailor-made to your needs. For example, you can avoid the emotion of spur-of-the moment decisions by specifying in advance when to buy or sell a stock. Also learn the mechanics of short selling.
10: Trading Strategies and Common Mistakes
Review a range of useful trading strategies, and identify some common trading mistakes, such as confirmation bias, overconfidence, and loss aversion. Finally, survey the fascinating world of options, looking at cases when it makes sense to use them.
11: The Language of Financial Reporting
Dispel the mystery surrounding financial reporting by analyzing three important documents: the corporate balance sheet, income statement, and cash flow statement. You can think of these as analogous to your personal mortgage application, tax return, and checking account statement.
12: Corporate Analysis and Valuation
Dig deeper into corporate finance by looking at different ways to value a corporation. Study the price-earnings ratio, book value, liquidation value, and other measures, evaluating their strengths and weaknesses. In the process, learn terms that are widely used by financial analysts in the media.
13: Mutual Funds and Other Investment Companies
Probe the tremendous growth of mutual funds, one of the most successful examples of financial innovation in history. Examine managed versus index funds, and compare mutual funds with exchange-traded funds (ETFs).
14: Minimizing Transaction Costs and Taxes
Consider various strategies for minimizing taxes and transactions costs, thereby increasing the rate of return on your investments. Discover the good sense behind two investing mantras: (1) the more you trade, the worse you do; (2) sell your losers, and let your winners ride.
15: Tax Shelters-Roths, IRAs, and 401(k) Plans
Focus on tax shelters that work for everybody, not just high earners. Traditional IRAs, Roth IRAs, and 401(k) plans offer tax advantages for even the most casual of investors. Review the requirements and advantages of each type of account.
16: Making Sense of IPOs
Initial public offerings, or IPOs, are some of the most glamorous and lucrative events in the stock market. What are they? How do they work? And what can go wrong? Learn what investment banks do to set the share price for an IPO, and then see how unpredictable market forces take over.
17: The Stock Market and the Macro Economy
Explore national and global economic forces that affect stock prices. Then look at what you should do in a recession. Is there a way to avoid losses? Also examine the purpose and activities of the Federal Reserve System, asking if you need to care about its decisions.
18: Investing with Confidence
In the last lecture, learn how to analyze your current financial position with the goal of deciding how much to invest and how to allocate your assets in a well-diversified portfolio. Now that you know how the stock market works, it's time to make it work for you!