Introduction
Background
Tony is currently a student at De Paul University. He is a
third year student who is working toward his major in Information Assurance and
Security Engineering, an information technology bachelor degree. He has been
saving up his money for the past several years from working for several
security companies because he has a lot of security knowledge and it's in
demand. He has about $10,000 saved up and feels that he can do better things
with it than keeping it in his Etrade account and getting only 5.05% annual
return. He was thinking about investing in bonds, but he realized that he would
barely be beating inflation using that approach. So he was wondering how to get
started investing in stocks. He does not really have any knowledge of the stock
market other than what he watches on the news about the S&P 500 and the
Dow. He knows that S&P 500 tracks the 500 companies that represent the
stock market, while the Dow tracks the top companies in the market. When he
tried researching about how to invest, he was bombarded with a myriad of
information that was dispersed all over the place and that he could not
understand. This paper is for him.
Purpose
This paper is written with the beginning investor in mind. The
current economic downturn has numerous banks and financial institutions in
trouble and they are unable to provide decent rates of return on money that
people put in the savings accounts of these institutions. The Fed has decreased
the rate of return on Federal Savings Bonds and they barely beat the rate of
inflation. But does the person that has no knowledge of finance or the stock
market really stand no chance of profiting and getting returns that are better
than the average 3% annually offered in an average savings account? Is the only
way to profit in the stock market through sheer luck like gambling in a Las
Vegas casino? Or is there a way to make informed buying and selling decisions
that can provide a great return for the risk the investor chooses to take? Is
it possible to take publicly available information and analyze it to make
informed and confident stock valuations and purchases? And is it possible to
follow in the strategies of investing of the great gurus like Buffet and make a
profit? If so, is the only way to do it by reading hundreds of boring 1000 page
books that an accountant would not understand, much less Tony, the average
no-knowledge investor?
This paper provides a way for Tony to understand the stock
market but only to the point of getting him off on the right track in
investing. We try to suggest what works and what doesn't and try to take the
best from some of the greatest investing gurus. We try to set him on a path to
a strategy that will keep him out of trouble in the stock market while
providing a decent return. Of course, we can't guarantee that, because the only
thing sure about the market is that it will fluctuate. However, we can see what
worked for the best, and what worked historically, combine the data and come up
with a strategy that may not work 100% of the time, but overall provides a
positive return. That is the purpose of this paper.
Problem Statement
By writing this paper we try to answer the two main questions
that have driven us to pick this topic. We know that there is more than one way
to make money in stocks and in the market in general. However, what we focus on
in this thesis is how to make money by finding, buying, and holding stocks of
good, solid companies, and how to obtain the most return for the risk taken.
Therefore, or main problems are:
· How does the beginning investor make money through
capital appreciation of stocks of companies on major stock exchanges?
· How does the beginning investor obtain the most return
for the risk that he or she undertakes while investing?
Research Methodology
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