Investing BasicsYour success as an investor is highly dependent on your understanding of the investing basics. You don't need an expert level of knowledge in finance to be reasonably successful at investing, but you do need to know enough about the subject to ensure that you're not just guessing when you make investing decisions, and you need to know more than enough to be dangerous. So your level of knowledge needs to be greater than that which is just enough to make you feel cocky and confident, which is the point at which you're a liability to yourself. This section contains a lot of material that is quantitative in nature. If you're not used to working with numbers, don't let that scare you away. For the most part you'll only have to learn how to interpret published figures that have been generated by someone else. What those figures are, how they are generated and how they should be interpreted is explained in this section on investing basics. If you absorb the content of this section and put it to use in a logical, methodical, disciplined and unemotional manner, you should do well as an investor, regardless of your quantitative skills. The Need for Capital & The Capital MarketsThe primary investing concept is the fact that corporations, governments and government agencies need capital. They satisfy that need by selling securities to investors in the capital markets, thus providing investors the opportunity to profit by trading capital for securities that are expected to deliver an acceptable return on investment.Securities are transferable claims on the assets of the entity that originally sold the securities. Securities include, but are not limited to, common stock, preferred stock, bonds, convertible bonds, commercial paper, short-term government debt, certificates of deposit and, of course, mutual funds. The Time Value of MoneyThe time value of money (TVM) explains the power of compounding that transforms seemingly minor differences in rates of return into very large differences in accumulated wealth over time. It also is used to determine the value of bonds and in some stock valuation models. This is one of the investing basics that should be especially important to you.Financial CalculatorsEvery investor needs a financial calculator. This subsection tells you what to look for in a financial calculator.How Interest Rates Affect the Demand for Debt and Equity CapitalInterest rates play a big role in determining how capital is allocated. Changes in interest rates not only affect the value of existing bonds and other debt securities, they also have a big impact on stock prices. Every investor needs to understand the role interest rates play in the securities markets, as it is one of the investing basics that has a significant impact on securities prices.Basic Statistics for InvestorsThe science of statistics is used throughout the study and practice of investing. Every investor needs to understand the basic concepts of statistics that are commonly used for the analysis and comparison of securities. These basic concepts are fairly easy to understand and are essential to your understanding of investing and your ability to interpret published information on securities you own or you are considering for inclusion in your portfolio. With this basic knowledge, you can evaluate investing opportunities, the performance of your individual investments and the performance of your portfolio as a group of complementary securities. So don't skip this subsection, as it's one of the most important investing basics!The fundamental statistical concepts covered here are: Investment Risk & ReturnIn the Basic Statistics subsections, you learned about the most important basic concepts of the science of statistics that are relevant to investing, particularly those pertaining to risk. Risk & Return will recap what you learned in Basic Statistics and bring it all together with a discussion of the relationship between risk and return. Risk & Return has been broken down into the following subsections:
Asset AllocationAsset allocation will account for over 90% of your success as an investor, thus a good understanding of how capital should be allocated to your various investments is crucial to your success. The capital allocation line is a basic model that explains how investors allocate their capital to different investments and sets the stage for introducing the efficient frontier. Identifying the efficient frontier provides a means of establishing the optimal allocation of capital across your investment universe.
Those are the investing basics in a nutshell, Investing 101. Once you understand the fundamental concepts presented in this section you'll be well-prepared for the next two sections, which build of the basic concepts to teach you how to construct your portfolio.
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