Overview key concepts

On this page you'll find all the key concepts and tables used in the ultimate investing guide. Not all chapters have a key concepts section. I would still recommend to read the entire guide because only reading key concepts might nog give you all the infomation you need. But for a quick read it's an easy way to find general information and concepts.

Key Concepts Chapter 2:

A stock represents (a very small piece) ownership in a company.
Stocks, shares and equity all refer to the same thing. The only difference is the context. All stocks are also be called a type of security.
There are two kinds of stocks. Common stocks and preferred stocks. They have different features.
When buying a stock, you do not own everything the company possesses. This is legally separated. For example, you don’t own any computer the company possesses just because you own shares.
Companies mainly sell stocks to raise money and grow the business.

Feature / rights	Common stock	Preferred stock
Voting rights	Yes	No
Dividends	Variable amount	Fixed amount
Dividend payment order	Last	First
Claim on leftovers after company liquidation	Last	Second Last
Call Option	No	Yes

Key Concepts Chapter 3:

People buy or invest in stocks to make money.
Buying stocks is a proven way to make money in the long term.
It’s considered best practise to invest in stocks for at least ten years or more.
Companies issue stocks to raise money.
Stock from large, well known companies that exist for decades are called blue chip stocks.

Key Concepts Chapter 6:

There are multiple ways to buy stocks:
- Using a broker
- Using a exchange
- Using your employer
- Using an financial advisor
- Using a virtual robot
- Using a 401(k)

Key Concepts chapter 7:

Stocks are stored at the broker and are registered by each company.
Brokers are heavily regulated.
Brokers are required by law to separate clients assets and their own assets.
The Securities Investor Protection Corp will protect up to $500.000 in securities and from that amount, $250.000 can be in cash.
There are many institutions involved in this process.
Chapter 11 bankruptcy means the company is almost bankrupt and will go to court to hold off creditors.
Chapter 7 bankruptcy means the company is bankrupt and stocks will be worthless. They will also be delisted from exchanges.

Key Concepts Chapter 8:

A stock split increases the outstanding shares and decreases price.
Most common split ratio is 1:2 or 1:3.
A reverse stock split decreases the outstanding shares and increases price.
When any split happens, the value of the company remains the same.
Stock splits are used to attract more investors, raise liquidity and to stay listed on exchanges when price per share drops to low.

Key Concepts Chapter 9:

Bonds are outstanding loans from companies and governments
Bond = debt

Bond returns compared:

Year	2019	2020
Bonds (10 year treasury)	7.18%	10.01%
Stocks	28.27%	16.61%

Year	2000	2001	2002
Bonds (10 year treasury)	12.84%	2.67%	13.32%
Stocks	-12%	-14.27%	-23.18

Key Concepts Chapter 10:

Bonds can be secured or unsecured.
Secured bonds are backed by collateral.
Unsecured bonds are back by nothing.
Secured bonds can still become worthless when the market collapses.
The maturity date is the lifespan of the bond.
The par value is the amount of money the issuer has to pay the buyer when the bond matures.
Bond holders have other rights than stockholders.

Feature / rights	Common stock	Preferred stock	Bonds
Voting rights	Yes	No	No
Dividends	Variable amount	Fixed amount	No (interest)
Dividend payment order	Last	First	x
Claim on leftovers after liquidation	Last	Second Last	First and last*
Call Option	No	Yes	Yes
Maturity date	x	x	Depends on the bond

Key Concepts Chapter 11:

Par value is the value the bond is issued for. These are fixed prices most of the time like $100, $1000 or $5000.
Par value and face value refer to the same thing and are interchangeable.
Principal is used to describe payments of bonds when they mature. For example, at the end of maturity a bond will pay the principal. Par value and principal represent the same.
Coupon rate is interest paid annually or quarterly based on par value.
Coupon payment is the annual interval payment.
The market price is the price you pay for a bond regardless of par value.
The yield till maturity shows how much you’ll earn if you held the bond till maturity.
Yield to Maturity = / [(PV+Price)/2].
When market interest is high, most bonds will trade below par value. This is called interest rate risk.
Bonds with long maturity and low coupon rates have the highest amount of interest rate risk.
There is no guarantee that your secured bonds will be worth something in the market.
Keep in mind that market interest rates and interest paid by the coupon rate are two different things.
Bonds trading above par value are called “at a premium”.
Bonds trading below par value are called “at discount”.

Yield to maturity calculations:

Terms	Bond A	Bond B	Bond C
Face value (par value)	$1000	$1000	$1000
Market price	$900	$1000	$1100
Coupon rate	3%	3%	3%
Maturity	10 years	10 years	10 years
Yield to maturity	4.1%	3%	1.9%

Key Concepts Chapter 13:

Type	Years until Maturity	Interest rate	Interest and principal payments
Treasury bonds	20,30	Fixed	Interest paid every six months and principal at maturity
Treasury bills	<1	Fixed	Interest and principal paid at maturity
Treasury notes	2,3,5,7,10	Fixed	Interest paid every six months and principal at maturity
TIPS	5,10,30	Variable	Interest paid every six months and principal at maturity
FRNs	2	Variable	Interest paid quarterly and principal at maturity
STRIPS	Variable	Fixed	Interest and principal paid at maturity
Saving bonds	Variable depending on the issue date. New saving bonds (from 2021) are always 30 years	Fixed	Interest paid monthly and compounded. Principal paid at maturity

Pro and cons of treasury bonds

Pro’s	Cons
High credit rating(backed by U.S. Government)	Inflation risk. With low yield inflation can ruin your profits
Tax advantages (no state or local taxes)	Low yields
Populair and much choice (many bond variants and extreme high liquidity)	Yields depending on market interest (interest rate risk)

Key Concepts Chapter 14:

Type	Years until Maturity	Interest rate	Collateral
Junk bonds	Variable	Fixed	Nothing
Guaranteed bonds	Variable	Fixed	A third party
Mortgage bonds	Mostly 5,15,20 or 30 years	Fixed	Real estate
Collateral trust bonds	Variable	Fixed	Stocks, bond, notes or other securities
Equipment trust certificates	Variable	Fixed	Underlying asset (car or airplane)
Debenture bonds*	Variable	Fixed	Nothing
Convertible bonds	Variable	Fixed	Nothing (mostly unsecured bonds)

Pro and cons of corporate bonds

Pro’s	Cons
Highest yielding bonds	Mostly unsecured
Many different options	Highest risk of defaulting
High liquidity for some types	Interest rate risk
	Selling over the counter
	Can be hard to sell in the secondary market

Key Concepts Chapter 15:

Type	Years until Maturity	Interest rate	Collateral
Revenue bonds	Variable	Variable	Variable (but can’t be claimed)
General obligation bonds	Variable	Variable	Mostly taxes (not backed by any assets or revenue streams)

Pro and cons of municipal bonds

Pro’s	Cons
Not taxable in most cases	Risk of callable (interest payments are stopped and principal is paid)
Less risky vs stocks	Credibility risks
High liquidity	Risk of default
	Interest rate risk
	Inflation risk

Key Concepts Chapter 16:

Pro and cons of agency bonds

Pro’s	Cons
Not taxable in most cases	Risk being callable (interest payments are stopped and principal is paid)
High liquidity	High minimum investment ($10.000 or more)
Backed by the government	Inflation risk
Low risk, moderate yield	Interest rate risk

Key concepts chapter 17:

A mutual fund is a company that gathers investors' money from all over the world with the goal to invest this money in multiple securities like stocks, bonds, real estate or gold.
Mutual funds consist of multiple parts:
- Sponsors
- Trustees
- Asset management company (AMC)
- Registered at the securities exchange commission (SEC)
- Investment advisors registered at the SEC
- Portfolio
Shares of mutual funds are calculated at the end of the day called NAV (Net Asset Value). You can’t buy shares during the day and have to wait until the next NAV is calculated.
A mutual fund is an open-end investment company.
There are many fees (also called sales load) to consider.
Breakpoints are discount options a mutual fund offers.
Bonds can have different class shares. Each class comes with it’s own benefits and risks.
The sponsor is the promoter of the mutual fund. The sponsor gathers capital and sets up an AMC (Asset management company).
Trustees protect the unit holders (the investors) from the AMC. The board of trustees oversees and monitors the AMC. They assign a custodian to keep the assets safe. The board of trustees also monitor new investments and ensure full compliance with regulations are met.
There are four types of mutual funds:
- Stock funds
- Bond funds
- Money market funds
- Target date funds

Type of fee	Paid to
Front-end load	Broker when buying shares
Back-end load	Broker when selling shares
Purchase fee	Mutual fund with high transaction cost shares
Exchange fee	Mutual fund
Account fee	Mutual fund
Redemption fee	Mutual fund (max 2%)
Distribution fee	Mutual fund
Management fee	Mutual fund

Key Concepts chapter 19:

ETFs do not sell shares directly to their investors.
ETFs are traded at an exchange.
ETFs need authorised participants to buy and sell securities.
ETFs can be open-end but also be UITs or closed-end.
ETFs are 98% passively managed, but can be actively managed.
An passive ETF is called an index ETF.
An active managed ETF is called an active ETF.
Larger ETFs have multiple authorised participants. This increases liquidity.

Key Concepts chapter 20:

Warren Buffet recommends ETFs to any individual investor due to low cost and low maintenance.
Over a period of 15 years, only 10% of all mutual funds and other funds outperform the index.
ETFs give average returns at best.
You can use my trading tools to find companies and build a portfolio that might outperform ETFs.

Key concepts chapter 22:

Hedge funds use various investing and trading tactics including arbitrage and leverage.
Hedge funds can only be used when you have a very high net worth / income ($1 million net worth without counting your house).
Not very transparent
Can hold any asset
High fees
Sometimes restriction on cashing out.
Hedge funds managers are regulated by the SEC.
Hedge funds perform worse compared to indices (indexes).

Key Concepts chapter 23:

Derivatives are risky investments based on future predictions.
Best known derivatives are:
- Options
- Futures
- CFDs
When buying derivatives, you are buying a contract and not the underlying assets.
When you buy options you have the right, not the obligation, to buy or sell. While for other derivatives you have to buy or sell before the end of the contract.

Key Concepts Chapter 26:

Type	Risk/Reward	Time needed to start and maintain
Stocks	High/high	High to start and to maintain
Bonds	Low/low	High to start, low to maintain
Derivatives	High/high	High to start and high to maintain
Mutual funds	High/medium	High to start, low to maintain
Hedge funds	High/high	High to start, low to maintain
ETFs	Medium/medium	Low to start, low to maintain
Commodities	High/medium	High to start, low to maintain
Indices	Medium/medium	Low to start, low to maintain

Key Concepts Chapter 27:

	Fundamental analysis	Technical analysis
Definition	Uses economic reports and various sources of information to determine the intrinsic value of a company with the goal of finding long term investment opportunities	Uses various amounts of indicators and other tools to determine short term buy or sell opportunities
Data used	Income statements Financial reports News messages Insiders trading Market conditions Industry conditions Economic conditions Previous data (up to 30 years)	Various indicators Support and resistance lines Previous data (<1 year) Candlestick patterns Trendlines (market structure) Moving averages And many more
Time frames	Very long, at least holding for 10 years or more	Very short, mostly trading on the 5 min or 1 hour charts.
Type of trader	Long term investing	Short term trading

Key Concepts Chapter 28:

IPO stands for Initial Public Offering.
It describes the event when a privately owned company goes public.
Venture capitalists use IPOs as an exit strategy.
The average age before a company goes public is 8 years.
VC backed IPOs are backed by venture capitalists.
Buyout backed IPOs are companies in which financial sponsors obtain a significant amount of shares before going public.
In 2001-2021, 53% of all IPOs were VC backed.
24% of companies were buyout-backed.
Out of 2500+ companies, 844 were technology related.
For comprehensive comparison and more information about IPOs read here and here.

Key Concepts Chapter 30:

Dividends is a percentage of profit that a company pays its investors.
For investors, dividends are considered a passive income.
Dividends are paid annually or each quarter.
Dividend yield shows annual dividends paid to shareholders as a percentage based on the current price of the share.
In case stock prices are plummeting, the dividend yield will rise.
Companies that are paying dividends are not using this money to grow the business.
Capital gain can drop while dividend payments stay the same.
Dividends are prone to Interest rate risk.

Key Concepts Chapter 32:

The profitability of a company tells you if the company is making profits or is losing money.
The net profit margin measures how much income or profits a company generates as a percentage or decimal of the revenue. This is based on every $1 in sales. Meaning, if the profit margin is higher, the company is keeping more % of every dollar as profit.
Return on assets indicates how profitable a company is in relation to its total assets. In other words, how effectively the company is using their assets to generate profits.
Return on equity measures the profitability of a company in relation to it’s equity. Equity is ownership of assets that may have debts or other liabilities attached to them.

Profitability type	How to calculate	How to interpret
Net profit margin	Net profit / net revenue * 100	Higher is better
Return on assets	Net profit / total assets * 100	Higher is better
Returns on equity	Net profit / shareholders equity	Higher is better

Key Concepts Chapter 33:

Operating efficiency measures the efficiency of a company.
Efficiency means producing the same amount with less resources.
Operating margin is used to calculate how much profit a company makes after variable costs of production but before paying interest and taxes.
The operating ratio measures the efficiency of a company at keeping low costs while generating profits from sales.

Operation efficiency type	How to calculate	How to interpret
Operating margin	Operating earnings / revenue	Above 15% is considered healthy
Operating ratio	Operating expenses + COGS \ Net sales	Lower is better

Key Concepts Chapter 34:

The liquidity of a company is the ability to raise cash when the company needs it. Or the ability of a company to pay off it’s short term (<1) debts.
The current ratio measures if the company is able to pay short-term debts (obligations).
The quick ratio measures the same thing as the current ratio, only it uses the most liquid assets a company has. Meaning, the assets that can be sold for cash the easiest and fastest.

Liquidity ratio type	How to calculate	How to interpret
Current ratio	Current assets / current liabilities	Above 1 is better
Quick ratio	Cash & equivalents + marketable securities + accounts receivable / current liabilities	Above 1 is better

Key Concepts Chapter 35:

Solvency is the ability of a company to meet it’s long term financial obligations.
The debt to total assets ratio shows if the company is owned by creditors or shareholders. Or in other words, the total debt in relation to the total amount of assets.
Debt to equity measures the total debt versus the total shareholders equity.
Finding out if a company is healthy or not is done by looking at multiple parts:
- Profitability
- Operating Efficiency
- Liquidity
- Solvency

Solvency ratio	How to calculate	How to interpret
Total debts to total assets ratio	Total debt / total assets	Below 1 and preferably below 0.5
Debt to equity ratio	Total debt / shareholders equity	Between 0.5 and 1.5. Anything above might be a bad sign

Key Concepts Chapter 36:

Market evaluation is the process of checking if the current stock price is overvalued, undervalued or on par with the intrinsic value of the company (based on fundamentals).
The price to earnings ratio is a very commonly used ratio to determine the value of a company by comparing the current stock price relative to its earnings per share (EPS).
The price to book ratio is used to compare all the assets in relation to the stock price.
You can only compare ratios between companies from the same industry.

Market evaluation	How to calculate	How to interpret
P/E ratio	Market value per share / earning per share	P/E ratio depends on the market. Overall higher rates should be treated with caution
Price to book ratio	Stock price / book value	Any value under 1 is considered a good value

Key Concepts Chapter 37:

High Inflation	Low interest rate	High interest rate	Low inflation
Interest rate decreases	Inflation increases	Inflation decreases	Interest rate increases
Borrowing money is cheap	Borrowing money is cheap	Borrowing money is expansive	Borrowing money is expansive
Goods and services are traded at higher prices	Goods and services are traded at higher prices	Goods and services are traded at lower prices	Goods and services are traded at lower prices
More money in the market	More money in the market	Less money in the market	Less money in the market

Annual return	Amount of fee	Portfolio value after 20 years
4%	0%	$219,112.31
4%	0.25%	$208,413.03
4%	0.5%	$198,211.30
4%	1%	$179,213.48

Annual return	Amount of fee	Money lost due to fees
4%	0%	$0
4%	0.25%	$10.699,28
4%	0.5%	$20.901.01
4%	1%	$38.898.83

Key Concepts Chapter 39:

Investing portfolios are created based on your age, goals, amount of risk you want to take and amount of time and money you want to invest.
Age is a crucial factor when creating an investing portfolio. The older you are, the less risky investments you should have.
Rebalancing your portfolio is crucial when picking your own stocks and other securities.
When handpicking stocks, pick at least 30 different stocks from different industries.

Portfolio type	Risk/Reward	Time needed to inspect and rebalance portfolio
Zero effort	Low risk, low/medium reward	Low
Defensive	Low risk, low reward	Low
Balanced	low/Medium risk, Medium reward	Low / Medium
Enterprising	High risk, high reward	High

Key Concepts Chaper 40:

You can’t time the market. Don’t spend too much time on when to buy.
Set price alerts for stocks you want to buy/sell but you think are over or undervalued at this moment.
There are multiple buying and selling strategies, each with their own benefits and pitfalls.
Knowing when to sell is just as important as knowing when to buy.
Keeping some cash on the side can help you invest in unique opportunities.

Key Concepts Chaper 41:

Picking the right broker is crucial. It can save you a lot of money.
Be careful of high spreads or other fees.
Find the broker that allows you to invest in the things you need. For example, world wide stocks.

Key Concepts Chapter 42:

Nobody cares if you make profits or not, only you care.
The financial markets are full of parties which all have conflicting interests.
The biggest enemy you’ll face when investing are your emotions.
Reduce the impact of emotions to a minimum by having a solid investing plan backed by data.
Mr. Market will show you offers each day, sometimes undervalued, sometimes overpriced. He does not care if you buy them or not. He will come with a new offer the next day.
You are not trading against others (Mr. market), you are trading against yourself.
The only way to protect yourself from bad offers from Mr. Market is by doing in-depth analysis for all your trades and investments.
Investing is not without risk. Even the products with the lowest amount of risk can cost you money.

Chapters: The Ultimate Investing Guide

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