Like their law and technology cousins, financial people seem to be infatuated with monosyllables, acronyms and endless gibberish. If you are comfortable with this annoying fact of life, you probably like 90's rap music, then.

Don't let this distract you!

For those of us who can't afford to get that overrated Ivy League degree, here is a simpler, informational guide to steer through the verbal nonesense and get to the facts.


Take a look at a quote, any quote. Let's dissect it:

1. Obviously, you'll look at the company symbol and price. Don't let the two or three prices confuse you, just look at the one marked as "last" or "net" or "current" (anything that would reflect how much it costs now). What does that number mean? It is the amount, in U.S.dollars, that a single stock costs. Yes, we couldn't believe when we heard it either, but it is true. More incredibly enough, you don't have to buy so many that you could cover the entire four walls of your bedroom with them. You can own as many as you can afford, your e-broker will respect your decision.



2. The next thing to check is not the impressive (or pathetic) graphic. What you really want to know is the "P/E ratio". What is this? It's your reality check indicator! Translated, this means Price/Earning ratio. Don't ask us what it means, remember we're only amateurs! What we can tell you is that the pros look at this factor very closely because, the higher this number, the bigger the risk you are taking. On the other hand, the lower the number, the safer the investment is but also the less money you make. It's your call...you want to find the exceptions to this rule! .



3. Don't be impressed by the "year-to-date" percentage growth. Remember: the market is ALWAYS subject to corrections, so last year's earnings will not necessarily be the same this or the next year. That is why the dot coms that inflated the market went bust: because everyone ignored this fact, then the companies didn't deliver what they promised and the panicked investors pulled out their money massively and at once. That was "the market correction". ALWAYS look for the long term. If you look closely at the historical information of stocks (i.e. those that have been in the market for five years or more), the most successful ones will show an upward trend in the big picture (let's say, a graph showing the evolution of their price since inception or for the past three years), and have rebounded from every bear market.



4. Don't quit yet! To reduce your loss potential and increase the chances of gains, you need to do your homework. Monitor the companies and their stocks closely several times a week, if not daily. This will help you make your final decision. After all, you are looking for stability and growth, right?. Check on the financial sponsors of this site and links to other sites for more information, in detail, about the stocks that catch your attention. Hey, that's the way we learned it too!



5. Keep track of the inflation rate and the interest rates, particularly the one they call "Prime". We don't know exactly what it means, but we do know that this is a standard rate to measure how much it costs to borrow money. The difference between the interest rate minus the inflation rate is what they call the "spread". Translated, this the percentage of every dollar that lenders make out of borrowers. Imagine what is the profit if we consider the "APR" (gibberish for "the percentage we charge you of interest per year") from your credit card instead of the "prime" rate!



Interest rate - Inflation rate = lenders' profit

Like the Motley Fool guys say, perhaps we should consider setting-up a credit card company!



6. Of course, there is a balance to everithing. When investing, you are ALSO making a profit. When it is done carefully, investing is like lending money: you give it to some organization or club (stock) for a certain amount of time, and they return it to you, with interest, on a "balance due" date that you set at any time (when you decide to sell or "cash-in" your stock). Sounds beautiful, eh? This is pure capitalism. In the good old days, banks used to pay you for doing them the honor of depositing your money with them, unlike today, that they nickel and dime you to death with surcharges for just about everything. OK, enough of our soapbox. As we were saying, look at the "spread" that concerns you:




Stock return rate - Inflation rate = investor's profit (your profit!)

In the end, you have to decide between:

1. Low profits with no risk.
   This is to protect your money's purchasing power against the erosion of inflation, usually recommended if you are living (or soon to be living) in retirement. Examples: Money Market, Gold, Silver, Bonds.



2. Low-to-medium profits with moderate risk.
   This is to keep your money's worth AND make it grow in the relatively long term. Examples: Real Estate, solid and stable Companies (Coca Cola, GE, Eli Lilly).



3. High profits with risk.
   This is usually recommended for young investors, because they can make up for losses pretty quickly. They can easily switch jobs for higher pay in an age-discriminating market, and they do not depend on a pension fund. When there are no losses, the gains are real, and they are S-P-E-C-T-A-C-U-L-A-R (where did we hear that?). Examples: all other stocks.



4. High profits with no risk.
   Whoever says this is pulling your leg! This is as real as that "World Currency Secret Flaw", those letters from a British lawyer and the widow that left all her fortune to you and, of course, that Nigerian money that you "can" claim, Google paying you $6,000 a-week working from home...

We have been studying a little more about finances and there are some more things to share for this section.

• The P/E ratio stands for the PRICE of the full volume of stocks that the company is trading, divided by the volume of EARNINGS of the same company for the current year. The reliability of this indicator has become tarnished in the year 2002 by the likes of Enron, Global Crossing, Worldcom and the rest of the notorious "accounting chefs".
• In 2003, Investment University recommended to pay attention to another indicator instead: (7)the PRICE/SALES ratio (P/S). This is obtained dividing the PRICE of the company's full value by the current SALES volume, thus giving you a more realistic point of reference, since sales are a bit harder to manipulate than earnings.
  Now you know what this indicator means, but how does it work for you? Let's get an example: the value of Raspanchos Inc. is approximately $43 billion dollars, while the sales volume (not pictured in this chart) is $13.41 billion; divide the first by the latter and you'll see that Raspanchos Inc. trades at a Price/Sales ratio of 3.43, Are you with us, so far?
  Historicaly, stocks have been trading with a Price/Sales ratio a little lower than one (0.9). In these terms, our sample company shows a 3.43, which makes it look quite expensive. When this happens, it is said that the company is "overvalued" which means "overpriced"...why would you buy something like that? Are you trying to impress girls? (we'll talk more about what do they mean by "undervalued" in further lessons).
  So, now you can see if a stock is trading cheap or expensively, and you know what happens to expensive stocks sooner or later (remember the keywords "market correction", that sparked the current bear market?).
  Bottom line: the closer the P/S ratio to 1, the greater the possibility of profits for you, because it means that the company is selling a lot of its product or service, and when there are lots of sales, you don't need a Ph. D. in Economics to know that you make money.

Another important thing that you should have in your mind, before venturing in the world of stocks, is an exit plan. This means, to know when to sell your investment if this has stopped making you profits (more details in lesson 3)

In this lesson, you have learned to filter gibberish from stock quotes and get to the point with the company of your choice. You have also learned what the heck do the interest rates have to do with investments and you are ready to hunt for stocks.

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