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The stock market for beginners, part four. In this section, we will talk about different types of stocks as investments. We'll talk about value stocks and different types of value investing, including Warren Buffett's style and that of his mentor. And we'll look at an allegory that will help explain the stock market so you can better understand how it operates day in and day out.
So let's get straight to the point. Now let's talk about types of stocks as investments. The first type is dividend stocks. These are the safest stocks. I say " safest" because no stock is completely safe, but this is the safest type due to its low volatility and stable dividend payments. So, volatility— let's give some definitions.
Volatility is the tendency of stocks to change in price quickly and unpredictably. Therefore, stocks with high volatility are less reliable. You can count less on a stable upward trend in such stocks. If volatility is high , the price can fluctuate in any direction. If volatility is low , the trend can be either stable or smoothly upward.
Blue chip stocks are the opposite of high volatility stocks. Blue chip stocks are companies with a long-standing reputation for profitability and stable dividend payments . Let's move on to the next type of stock—penny stocks ( cheap stocks). Penny stocks are typically stocks of companies that trade at a price of no more than $5.
Usually, when someone talks about penny stocks, they mean stocks priced at less than $1, but technically they can include stocks priced up to $5 a share. These are usually small companies with a high level of risk. Next come speculative stocks. You may be familiar with speculative stocks. These are stocks of exploration companies trying to enter new technological or product markets.
Or it could be stocks where investors are betting on a significant price increase or a change in the company's financial condition. This category includes "meme promotions," which is why I placed our meme overlord Roaring Kitty in the corner. Suck my daddy's dick. Okay, next we have growth stocks. Growth stocks are stocks of companies that are trying to grow as quickly as possible.
Such companies usually do not pay dividends , as they invest all their profits in development, trying to capture as much market share as possible and obtain maximum income. They reinvest all their profits back into development. Then we have cyclical promotions. These are stocks that are significantly affected by the state of the economy.
These are sectors such as airlines, new cars, and luxury goods. These are consumer goods of non-priority demand. Remember, if we go back to sectors, this fits into the consumer choice goods category. Next we have defensive stocks, which again are the opposite of cyclical or discretionary. These are stocks that typically remain unchanged during downturns.
These are products or services that people need. Some examples would be food suppliers , healthcare, and utilities. They are the same as the consumer staples sector in that demand usually does not fall, or it does not fall as much as incomes fall or if the economy is badly hit. Next we have the last type of stock on the next page, and that is value stocks.
These are stocks that investors believe are undervalued by the market: the stock price is lower than investors believe it should be, and they believe it is a buying opportunity. So, this falls into two main styles. The first is the Ben Graham style. Ben Graham would say what I wrote here: I'll buy anything as long as it's cheap.
He would buy any company if the stock price was low enough, even if it was a bad company. This is sometimes called investing in " cigar butts." And then we have the style of Warren Buffett, whose mentor was Benjamin Graham. Warren Buffett took what he liked about Benjamin Graham's style and made it his own.
So his style is that he wants great companies at a fair price. He would rather buy a great company at a reasonable price than a bad company at a bargain price because he wants to buy the company and just hold it forever. Thus, he does not need to sell, and he does not need to pay capital gains taxes on such sale.
So, the assumption about value stocks is that the market is not always perfect, at least in the short term. It does not take into account all the information and does not give an ideal price, at least in the short term. And because of this, Benjamin Graham in his 1949 book The Intelligent Investor, which is a great book, the link to which I will leave in the description.
You should read it if you are interested in value investing. He describes how the market price of stocks is not always ideal in the short term, using the allegory of " Mr. Market." So, let me explain this really quickly. Imagine that you are one of two business owners, and your business partner is Mr.
Market. Your partner offers to either buy your share in the business or sell you his share in the business, every day. Your partner is either overly optimistic about the company and its future prospects or overly pessimistic, depending on the day, and their mood can change 180 degrees, or there are days when they become completely bored and say, "Well, you know, I don't care." So, your partner is irrational, exaggerates the significance of small events, and is prone to frequent mood swings.
Benjamin Graham says that's what the stock market is. The stock market essentially provides you with quotes every day, and many of the daily price fluctuations are driven by small events that usually don't have much significance in the long run. Here is a great quote from him and a great way to think about the stock market in both the short and long term.
The quote goes like this: "In the short term, the stock market is a voting machine. In the long term, it is a weighing machine." So, what does this mean? A weighing machine, a voting machine? In the short term, stock prices are disproportionately affected by small things: news, analyst forecasts, drama, rumors, hype, whatever—it significantly changes the stock price.
But in the long run, the stock market and the price of individual companies are determined largely by how much value they create. That's why I made these uneven scales, where you can see that cash flows in the long term are more important than, say , a short-term tweet by Elon Musk, which can shake the markets for just one day.
But in the long run, it matters more. What real value is created by this company, this asset in the stock market? That's it, part four is complete. I see that you now have a better understanding of what is happening in the stock market, what the real value of stocks is in everyday trading, and why it may not always be ideal.
In part five, we'll delve even deeper. We'll talk about ETFs, index funds, and mutual funds. We will compare them all, the similarities, the differences of each of them, as well as REITs— real estate investment trusts. This is very important information that you should not miss. So make sure you like this video, like part four, subscribe if you like what's going on and if you want more content like this, and see you all in part five.
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