Introduction to Building Wealth

Stocks and Investing: Introduction to Building Wealth

 

1. Introduction / Overview

Why is this topic important in finance?

 

Investing in stocks is a fundamental part in building wealth, as it allows individuals to participate and benefit from the growth of companies and access compounding returns over time. For anyone managing money (personally or professionally), understanding stocks is extremely important.

 

What area of finance does this belong to?

• Personal Finance, Capital Markets, Portfolio Optimization / Management

By the end of this lesson, you will be able to:

• Define what a stock is and how it represents ownership
• Understand how the stock market operates
• Differentiate between individual stocks and funds
• Recognize key concepts like diversification, volatility, and returns
• Identify long-term investing principles

 

2. Key Concepts & Vocabulary

Stock

Definition: A unit of ownership in a company.

Example: Owning 50 shares of Coca-Cola means owning a fraction of the company’s equity.

Analogy: Like owning slices of a company’s pie.

 

Stock Market

Definition: A platform where buyers and sellers exchange stocks.

Example: The New York Stock Exchange (NYSE) and Nasdaq are two primary U.S. exchanges.

Analogy: A centralized marketplace for trading pieces of companies.

 

Dividend

Definition: A portion of company profits paid out to shareholders.

Example: Utilities and consumer staples firms often distribute quarterly dividends.

Analogy: A cash thank-you for being a partial owner.

 

ETF (Exchange-Traded Fund)

Definition: A security that tracks a group of stocks and trades like a single stock.

Example: SPY is an ETF tracking the S&P 500 index.

Analogy: A pre-packaged basket of stocks.

 

 

Diversification

Definition: Spreading investments across different assets to reduce risk.

Example: Holding tech, healthcare, and industrial stocks rather than just one sector.

Analogy: Not relying on one leg to stand.

 

Volatility

Definition: The degree of variation in a stock’s price over time.

Example: Tech stocks typically have higher volatility than utilities.

Analogy: How bumpy the ride is.

3. Use in Today’s World

Why people invest in stocks:

• To grow their wealth over time
• To earn dividends and reinvest gains
• To save for long-term goals like retirement

 

How investors participate:

• Direct ownership: Buying individual companies (e.g. Apple, McDonald’s)
• Indirect exposure: Through ETFs, mutual funds, or retirement accounts
• Passive investing: Tracking indexes with low fees
• Active investing: Choosing specific stocks based on research or trends

 

Key market drivers:

• Earnings reports and guidance
• Interest rates and inflation
• News events and global policy shifts

4. Reflection

Even with wide access to markets and data, most investors still underperform long-term benchmarks. This usually comes down to behavior, not a lack of tools.

 

Questions to consider:

• What causes investors to sell at the worst time?

• It's common knowledge that people sell their winners too early and their losers too late, and usually, overthinking and panic is to blame.

• How do you decide whether a stock is worth holding for years?

• While there is no surefire way to determine if a stock is worth investing in long-term, you can use a plethora of valuation methods and research to determine if the company is undervalued initially.

• Can a well-diversified portfolio still lose money?

• Of course. Some things (like recessions, economic downturns, etc.), are out of one's control. The goal of diversification is not to completely eliminate downside risk from your portfolio, but merely to minimize downside risk.

5. Takeaways / Final Summary

5 Key Takeaways:

• Stocks give you ownership in companies and a share in their success or failure.
• The stock market exists to match buyers and sellers in real time.
• Diversification is a risk management tool, not a guarantee of returns.
• Emotions like fear and greed often impact investment results more than skill.
• ETFs and index funds are useful starting points for new investors.

 

Helpful Tip: Investing is less about picking the perfect stock and more about sticking to a consistent strategy over time.

 

6. Quiz / Self Assessment

1. True or False
You need thousands of dollars to begin investing in the stock market.
Answer: False - You can buy fractional shares on brokerages like Schwab and Robinhood

2. Multiple Choice
Which is the best reason to invest in a diversified ETF?
A. It guarantees profits
B. It avoids taxes
C. It spreads risk across many companies
D. It only holds technology stocks
Answer: C

3. Multiple Choice
What is one common mistake investors make?
A. Reinvesting dividends
B. Checking portfolios too often
C. Holding for the long term
D. Investing in index funds
Answer: B

4. True or False
The stock market is only for professional traders.
Answer: False - Investing has become increasingly democratic in the recent decades with the introduction of online trading.

5. Multiple Choice
What does diversification help reduce?
A. Inflation
B. Personal income tax
C. Risk from individual stock losses
D. Management fees
Answer: C