Stock Basics
What is a stock?
Small ownership stake in a company
What is the difference between revenue and profit?
What does it mean when investors say they think a company has strong growth potential?
They believe the company may increase sales, profits, or business value in the future.
Which company makes the iPhone and MacBook?
Apple
Your friend tells you to buy a stock because it is trending on social media. What should you do before investing?
Perform research and verify the information
What is the stock market?
A place where people buy and sell shares of publicly traded companies.
A company makes $400K in revenue and has $320K in expenses, what is the profit margin?
20% with profit at $80K
Profit margin: Net income/Revenue
Net Income: Money after expenses
What does the P/E ratio compare?
It compares the share price with earnings per share(Share price/EPS)
Used to see if a stock ir over/undervalued or compare against peers/past performance.
Which company earns money from online shopping and AWS, its cloud-computing business?
Amazon
Why might an investor choose to invest in a fund that holds hundreds of stocks instead of buying shares in just one company?
Diversification: the investment is spread across many companies, reducing reliance on any single company. It does not eliminate market risk.
If you buy a stock for $10 and it rises $15 how much have you theoretically earned if you sell it? (Before taxes)
$5 per share
A company's revenue grows from $2 million to $2.5 million. What is it's percentage revenue growth?
25%
Revenue Growth = ((New Revenue-Old Revenue)/Old Revenue) x 100
A stock costs $40 per share and earns $2 per share annually. What is the P/E ratio?
40/2 = $20
Share price/EPS
Which company owns Instagram, Facebook, and WhatsApp?
Meta
A company reports better-than-expected profits, but its stock price falls. Give one possible reason.
Investors may have expected even better results, or the company's forecast for future performance may have disappointed them.
A company's stock price drops 15%. Does that mean the company has lost 15% of its revenue?
No, stock price and revenue. The stock price reflects investor expectations and other factors while revenue is the money earned from sales before expenses.
A company reports record revenue, but its profit is lower than last year. What two things would you investigate?
Look at whether expenses increased, and whether the company is earning less profit per dollar of revenue. An increase in production labor, shipping, or marketing costs should be able to explain the change.
Two companies have the same EPS. Company A has a P/E of 12 while Company B has a P/E of 28. What might explain the difference?
It means Company B has a higher stock price which indicates the market is willing to (as of right now) pay more for Company B than Company A
Which company designs chips widely used to train and run AI models, as well as to power gaming graphics?
Nvidia
Company A is growing quickly but has a lot of debt. Company B is growing slowly but has little debt. What is one advantage and one risk of each?
A: Faster growth could create greater future earnings, but debt creates repayment obligations and financial risk. B: Lower debt may provide more financial flexibility, but slower growth could limit future expansion. More information is needed to compare them.
Company A has 10 million shares trading at $15 each. Company B has 5 million shares trading at $30 each. Which company has the larger market capitalization?
Neither, both have the same market capitalization.
Company A has a 10% profit margin, and Company B has a 25% profit margin. If each earns $1 million in revenue, how much more profit does Company B make?
$150K more. Company A earns $100K in profit while Company B earns $250K
A company increases its EPS by 20%, but its stock price increases by 50%. What happens to its P/E ratio?
Its P/E ratio increases by about 25%. The new ratio is 1.5/1.2=1.25 times the old ratio, assuming the starting earnings and price are positive.
This company is known for electric vehicles, battery technology, and its CEO Elon Musk.
Tesla
You have researched two companies. Company A has stronger growth but a very high valuation. Company B has slower growth but a lower valuation. What three questions would help you decide which investment better fits your goals?
Possible answers: Are the growth expectations realistic? Does the current stock price already account for future growth? What are the companies' financial risks? How sustainable are their profits? How do their risks and time horizons fit my goals? Neither company is automatically the better investment.