Contents

Introduction – 1

1 The power of the internet – 3

Nasdaq and the Big Bang – 3
The internet opens the door wide – 4
Not all has been positive – 4
Playing the game – 5

2 Setting the scene – 6

The market participants, facilitators, and influencers – 6
Ways of investing – 7
The leading stock markets – 7
USA – 7
China – 8
Europe – 9
Japan – 10
Key considerations – 10
Some definitions – 11

3 Stock markets – 12

Introduction – 12
Stocks and shares – 13
Long and short – 14
Market capitalization – 14
Public stock exchanges – 16
The New York Stock Exchange – 17
The Nasdaq Stock Market – 18
The London Stock Exchange – 19
Stock market capitalizations – 21
Stock market indices – 22
The Dow Jones Industrial Average – 23
The S&P 500 – 24
The Russell Index – 24
The Nasdaq 100 – 24
The Nasdaq Composite – 25
The London Stock Exchange indices – 25
China – 26
Japan – 26
France – 27
Germany – 27
Some global indices – 27
MSCI – 27
STOXX – 28
Private exchanges – alternative trading venues – 28
The dark pools – 29
What are they? – 29
Impact on price discovery – 30
Dark pools and high-frequency trading – 31
Reporting – 31
Buying and selling shares on the public exchanges – 32
The bid-offer spread – 32
Normal market size/Exchange market size – 33
Trading levels – 33
Level 1 – 33
Level 2 – 33
Level 3 – 33
The stock exchange limit order book – 33
Best execution – 35
Market orders and aggressive orders – 36
Trading volume – 36
Platforms – 37
Types of order – 38
Automatic trades – 38
Limit order – 38
Rising buy order – 39
Stop-loss – 39
Trailing stop-loss 39
Stock market sectors – 39
Stock market correlations – 41
The trading day – 42
NYSE – 42
The Nasdaq – 43
LSE – 44
Cross-listing and American depositary receipts – 44
The futures and options markets – 44
Stock transfer and registrar services – 45
Settlement – 46

4 About shares and how shares are valued – 47

Introduction – 47
Total return on investment – 48
Capital structure – 48
Shares in issue – 49
Income statement and earnings per share – 50
Exceptional items – 51
Interest – 52
Tax – 52
Dividends on preference share – 52
Earnings per share and P–E ratio – 52
Smoothing EPS – 53
Underlying profit – 53
Balance sheet – 54
EBITDA and gross margin – 54
Dividends and cover – 55
Enterprise value – 56
The difference between income and growth shares – 56
Income shares – 56
Growth shares – 57
Global economic context – some key indicators – 58
Fundamentals or Technicals? – 58
Fundamentals – 59
Technicals – 62
Efficient markets, price discovery and value – 62
Efficient markets – 62
Price discovery – 63
Value – 63
Short selling – 64
Reporting day – 64
News flow – 65
Macroeconomic events – 66
The analysts – 66
Let’s look at some charts – 66
Intrinsic share valuation – value investing – 69
Share valuations in the 1920s – 69
Benjamin Graham’s Intrinsic Value formula – 71
Discounted cash flow (DCF) methods – 72
Net present value (NPV) – 72
Assessing cash – 73
EPS growth – 74
Discount rate – 75
Time frame – 75
Some calculations – 76
Benjamin Graham formula – 82
Use of DCF – 82
Empirical share valuation – 83
Convention – 83
Price/Earnings ratio – 84
PEG – 85
Price/sales ratio – 85
Enterprise value/EBITDA – 86
Momentum investing – 86
Goodwill – 87
Price to book ratio (P/B) – 88
Return on capital employed (ROCE) – 89
Return on equity (ROE) – 90
Debt – 90
Cash flow – 90
Pension fund liability – 91
Predator or target – 91

5 Factors that influence share prices – 93

Introduction – 93
Macroeconomic factors – 93
Gross domestic product – 93
Correlation – 94
Key economic data – 95
Currency movements – 96
Politics – elections and political unrest – 97
Law and regulation – 98
Tail risks and black swans – 99
Tail risks – 99
Black swans – 100
Commodity prices – 101
Company factors – 102
Company communications – 102
Financial calendars – 102
Company financial calendars – 102
Statutory financial reporting – 103
Guidance – 104
Preannouncements – 104
Close period – 105
Conference calls – 105
Consensus forecasts – 105
Roadshows – 106
Annual general meetings – 106
Investor events and product launches – 107
Corporate news flow – 107
Dividend policy – 107
Exceptional and extraordinary items – 108
Material events – 109
Profit warnings – 109
Stock exchange news feeds – 110
Taxation – 110
Free float – 111
Rights issues – 111
Stock overhang – 111
Share buybacks – 112
Acquisitions – predator or prey? – 113
Award of contracts – 114
Management changes and quality of management – 115
Executive pay 115
Insider/director transactions in their company shares – 115
Competitor behaviour – 116
Disruptive products – 116
Activist investors – 117
Shareholder register – 117
Market factors – general – 118
Sentiment – bull or bear? – 118
Psychology – 119
Interaction between global stock markets – 120
Analyst reports – upgrades and downgrades – 121
The sales desk – 121
Ex-dividend action – 121
Dividend cut – 122
Sector sentiment – 123
Sector rotation – 123
The economic cycle – 124
Political policies – 125
Interest rates – 126
Geography – 126
Seasonality – 126
Company enters or exits an index – 127
Company strategy – 127
Insider dealing – 128
Media coverage – journalists, broadcasters, bloggers – 128
News flow – 129
Chat rooms and bulletin boards – 130
Market factors – technical – 131
The S&P 500 – 131
Stock market cycles – 132
Interest rates – 132
Liquidity – 133
Historical P/E ratio – 134
CAPE – Robert Shiller’s Cyclically Adjusted P/E ratio – 134
Forward P/E ratio – 134
Tobin’s Q ratio – 135
Relative Strength Index (RSI) for the major indices – 135
Moving averages for the major indices – 135
Borrowing to invest – 136

6 The market participants, facilitators, and influencers – 137

Introduction – 137
Dealers, brokers and broker-dealers – 137
The institutional investors – 138
The banks – 140
Investment banks – 140
Retail banks – 142
Fund managers – 143
The trading desk – 144
Activist investors – 145
Hedge funds – 146
Traditional hedge funds – 147
Quant funds – 148
Stock exchanges – 149
Market makers – 149
Index companies – 150
Investment advisers – 151
Corporate or house stockbrokers – 152
Retail stockbrokers – 153
The analysts – 153
The sell-side and buy-side analysts – 153
Sell-side analysts – 154
Analyst recommendations and target price – 155
Analyst coverage – 156
Analyst consensus – 157
Analyst influence – 158
Analyst reports – 159
Regulation of analysts – 159
The retail market – 160
Retail investors – 160
Investment platforms – 161
Financial websites – 162
Private equity – 162
Predator companies – 163
Corporate interests – 163
Company insiders – 164
Founders and owners – 164
Short sellers – 165
Traders – 165
Futures and options traders – 165
High-frequency traders – 166
Financial information groups – 166
Media – 166
Academics – 166
Regulators – 167

7 Recent history – and what we can learn – 169

Introduction – 169
Charts – 170
For the main indices – 170
Charts for the crashes – 171
Charts for P/E ratios – 171
S&P 500 12-month trailing P/E – 171
CAPE – Robert Shiller’s Cyclically Adjusted P/E ratio –172
S&P 500 12-month forward P/E – 172
VIX volatility index – 173
The crash of 1987 – 173
1987 – the signs and lessons – 174
The great bull run of the 1990s – 175
The crash of 2001 – 176
2000 – the signs and lessons – 178
The dot.com leg – 178
The September 11, 2001 leg – 180
2008 – the global financial crisis – 181
2007 – the signs and lessons – 182
2009 through 2012 – 182
2013 – bad news is good news! – 184
2014 – nowhere to go! – 185
2015 – 186
2016 – 187
So what can we learn? – 188
Bull runs – 188
The crashes – 190
1987 – 190
2001 – 190
2008 – 190
Conclusion – 191

8 Short selling – 192

Introduction – 192
Hedging – 193
Ways to short sell – 193
Who are the short sellers? – 194
Where do short sellers borrow their shares from? – 195
Information on short positions – 196
Shares out on loan – 196
Short interest – 196
The case for short selling – 197
The case against short selling – 198
Naked short selling – 199
Shorting the subprime market – 199
Bear raids and short squeezes – 199
Dynamics and risks of short selling – 200
Some short selling specialists – 202
Muddy Waters – 202
Sino-Forest – 202
Standard Chartered – 202
Blinkx – 203
Gotham City – 203
Quindell – 203
Pershing Square Capital – 204
Herbalife – 204
Citron Research – 204
Regulation – 205
US – 205
Europe – 205
China – 206
Some guidelines for shorting – 207

9 Futures and options – 208

Introduction – 208
Fair value – 209
How futures trading works – 210
The futures exchanges and their role – 211
US index futures – 212
Trading – 212
Trading costs and leverage – 214
Trading volumes – 214
The attractions of index futures trading – 214
What is the significance of futures trading? – 215
Options – 216
Triple witching – 217

10 Trading – 218

Introduction – 218
The difference between trading and Investing – 219
Algorithmic trading – 220
Trading on margin and leverage – 221
Trading platforms – 222
Information and trading levels – 224
Types of order – 224
Technical Analysis – 224
Volume – 225
Beta – 226
Relative strength index (RS)I – 226
Chart patterns – 227
Moving averages – 227
Bolinger bands – 228
Keltner channels – 228
Candlestick charts – price action – 228
Support and resistance levels – 228
Accumulation and distribution – 229
Put-to-call ratio – 229
VIX – volatility index – 229
News flow – 230
Trading signals and tradable moments – 231
The trading environment – 232
About trading – some important factors – 235
Market makers – 235
The bid-offer spread – 235
Slippage – 236
Opening and closing auctions – 237
Stop losses – 237
Technical trading – 239
Long or short? – 240
Psychology – 241
Some trading approaches – 242
Information is key – 242
Day trading – 243
Swing trading – 245
Momentum trading – 245
Trading on company reports – 247
Trading on the financial calendar – 248
Using the analysts – 249
Ex-dividend plays – 250
Specialize – 250
Devising your approach – 251
High-frequency Trading (HFT) – 252
About high-frequency trading – 252
The high-frequency traders and their markets – 254
The flash crash – 255
The case for HFT – 255
The case against HFT – 256

11 Trading with Contracts for Difference (CFDs) – 258

Introduction – 258
The mechanics of CFDs – 259
Trading CFDs – 260
CFD trading platforms – the service providers – 262
Spread betting – 264

12 About funds – 265

Introduction – 265
The fund management industry – 266
The dynamics of the fund management Industry – 266
Some fund management firms – 269
Pension funds – 270
Paradigms of the fund management industry 270
Think long term – 271
Don’t attempt to time the market – it’s just too difficult – 271
Stay invested – 271
Reinvest your dividends if you don’t need the income – 272
Stick with the funds you’re in – 272
Older people should shift into fixed-income instruments – 273
Types of fund – 273
Mutual funds – 274
Mutual fund costs – 274
External costs – 275
Internal costs – 276
OEICs – 277
OEIC costs – 277
Unit trusts – 279
Valuation time – 279
Exchanging or switching – 280
Use of derivatives – 280
Investment companies and investment trusts – 280
ETFs – Exchange Traded Funds – 282
Smart beta – 283
Overseas – 283
Fund categories – 284
Income or growth? – 286
Active or passive fund management? – 287
Active fund management – 288
Passive fund management – 290
Active management potential – 291
Advantages of actively managed funds – 292
Disadvantages of funds – 293
Trading funds – 293
Fund risk – 293
Management and mitigation of risk – 293
The fund management industry approach to risk – 294
Alpha and beta – 295
Sharpe Ratio – 296
Morningstar rankings – 296
EU Risk & Reward profile – 297
Fund performance – 298
Benchmarking – 298
Small caps – 298
Mutual funds – performance – 298
OEICs – Performance – 300
Investment companies and investment trusts – performance – 303
The fund supermarkets – 304

13 Fund selection methodology – 305

Introduction – 305
Strategy – 305
Fund documentation – 306
Fund categories – 307
Fund information websites and rankings – 307
US – 308
Morningstar US – 308
Kiplinger – 308
U.S. News MONEY – 308
Fidelity US – 308
UK – 308
FE Trustnet – 308
Morningstar UK – 309
Fidelity UK – 309
Hargreaves Lansdown – 309
BESTINVEST – 309
Citywire Money – 309
Drawing up a shortlist – 309
Benchmarking performance – 310
US – 310
UK – 311
Fund selection – 311
Fund attributes – 312
Fund manager – 312
Income – 314
Sectors – 314
Fund size – 315
Number of holdings – 315
Turnover of holdings – 316
Risk rating – 316
Top ten companies – 317
Fund costs – 317
Fund selection – 318
Virtual portfolio and monitoring – 318
Investment companies/trusts – 319
Overseas – 319

14 Share selection methodology – 320

Introduction – 320
Essentials – 321
Where to start – 322
First look – 323
Business model – 323
Income versus growth – 324
Study some charts – 324
Look at the basics – 325
DigitalLook – 325
Nasdaq – 325
CNN Money – 326
Next step – 326
Share selection methodology – check list – 326
Conclusions – 331

15 A day in the markets – 332

Introduction – 332
The cash indices and the future indices – 332
The state of the market – sentiment – 333
Moods and themes – 333
Market psychology – 334
Global economic growth – 334
Central bank policies – 334
The reporting or earnings season – 335
Tail risks hanging over the markets – 335
Interest rates and bond yields – 335
Currencies – 335
Commodity prices – 336
Sector rotation – 336
The Asian and European markets – 337
The London and New York markets – 337
Connectivity – 337
An early start – 338
The financial TV channels and financial press – 338
The economic calendar – 339
Spread betting opening call – 340
The VIX index and options – 340
Stock exchange news feeds – 340
Pre-opening activity – 340
The opening bell in London – 341
The opening bell in New York – 341
Corporate activity – 341
Company reports – 341
Dividend action – 342
Conference calls – 342
AGMs – 343
The analysts – 343
Chat rooms and bulletin boards – 343
Investor activity through the day – 344
The big players – 344
The traders – 344
The short sellers and bear raiders – 345
Alternative trading venues and dark liquidity – 345
Fund flows – 345
News flow – 346

16 The stock market is not a level playing field – 347

Introduction – 347
Disclosure – 348
Access to company management – 349
The influence of analysts – 349
Traders – 351
Information and financial information companies – 352
Collaboration, insider trading, and market abuse – 352
Dark pools – 354
IPOs – 354
Conclusions – 355

17 Using a stockbroker – 356

Introduction – 356
Registered representatives–stockbrokers – 356
Fees and commissions – 357
Approach to the market – 358
Strategy – 359
Monitoring share prices – 359
Margin – 359
Direct market access – 359
Going short – 360
Automatic trading – 360
Stop losses – 360
Size of position – 360
Frequency of trading – 361
Taking profits – 361
Cutting losses – 361
Share picking – 361
Execution – 362
A typical day – 362
If there’s a crash – 363
Stockbroker regulatory requirements – 364
How to find a stockbroker – 365
Evaluating the performance of your stockbroker – 366
What if my stockbroker performs poorly? – 366
Conclusions – 367

18 Managing your portfolio – 368

Introduction – 368
Prerequisites – 369
Tax management – 370
Trading or investing? – 371
Fundamentals or Technicals? – 372
Investing for income or capital growth? – 372
Individual shares or funds? – 374
Short term or long term? – 374
US and UK or overseas? – 375
Preserving your capital – 376
Consider risk properly – 376
How bad can it get? – 377
Asset allocation – 377
It goes without saying – 378
Market risk – 378
Borrowing to invest – 379
If you lose touch – 380
Selecting your platform – 380
Free choice – 380
US – 381
UK – 382
Holding cash – 382
Choice constrained – 383
Information flows – 383
Establishing your information sources – 383
Virtual portfolios and watchlists – 384
Review your portfolio – 385
Staying in touch – 385
Timing and exposure/percent invested (PCI) – 386
Timing – 386
Exposure/percent invested (PCI) – 389
Reducing PCI – 390
Increasing PCI – 390
Sector rotation – 391
Managing funds – 391
Virtual portfolios – 392
Monitoring and exchanging/switching – 392
Structured investing in funds – 393
Fund pricing – 393
Managing shares – 394
Managing your risk – 394
Your watchlist – 395
Your virtual portfolio – 397
Buy decisions – 398
Buying on a pullback – 399
Buying when the market is high – 400
Monitoring and managing your holdings – 401
Sell decisions – 403
Automatic trading – 404
Managing your downside risk on individual shares – 405
Limit maximum size of holding – 406
Use of stop losses – 407
Investing for dividend yield – 407
Investing overseas – 409
Ways to even up the odds – 412
Recent background – 412
Buy around company reporting – 413
Look for recovery stories – 413
Look for momentum plays – 415
Specialize – 417
Some investing techniques and tactics – 417
Seasonality – 417
Doubling up – 418
Averaging – 418
Invest in low P/E shares – 418
Buying the dogs – 418
Rolling and gapping stocks – 419
Using social media – 419
Initial public offerings (IPOs) – 419
Finding the big winners – 420
How much shorting? – 421
Hedging – 422
Speculation – 422
Using a stockbroker – 423
Day to day – building your expertise – 424
Judging your success – 424