How the Stock Market Works

Course No. 5852
Professor Ramon P. DeGennaro, Ph.D.
The University of Tennessee, Knoxville
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Course No. 5852
  • Audio or Video?
  • You should buy audio if you would enjoy the convenience of experiencing this course while driving, exercising, etc. While the video does contain visual elements, the professor presents the material in an engaging and clear manner, so the visuals are not necessary to understand the concepts. Additionally, the audio audience may refer to the accompanying course guidebook for names, works, and examples that are cited throughout the course.
  • You should buy video if you prefer learning visually and wish to take advantage of the visual elements featured in this course. The video version is not heavily illustrated, featuring a variety of visuals designed to aid in your understanding of the course material. These visuals include charts and graphs that help you better visualize the flow of money in and out of the stock market and that help you quickly decode the complex numbers and systems you see on everyday financial reports.
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Course Overview

You can learn about the stock market in many ways. But most people cannot afford to learn the wrong way—by making expensive mistakes.

The stock market is a way for anyone to own the valuable assets of a company and, as investments, stocks historically have offered a good chance for long-term gains. If you own a well-diversified portfolio of individual stocks or stock funds, your wealth tends to grow when the economy grows. But too many investors succumb to the high-risk pursuit of beating the market by trying to pick winners, predict price trends, or otherwise find opportunities that other investors have missed.

Today, millions of people in all walks of life are invested in the stock market through brokerage accounts and retirement plans such as IRAs and 401(k)s. What to buy and when to sell stocks are up to each investor, who often feels besieged by conflicting advice. The wisest approach is to understand exactly what the stock market is and how it works, appreciating such basic facts as these:

  • Factors of success: Many people focus on increasing their rate of return on stocks, which is hard to do without taking substantial risks. It’s much safer to focus on two other factors that affect how much money you earn.
  • No free lunch: You can’t make much money in the stock market if you miss the handful of best trading days of each year, which are unpredictable. But if you stay invested so that you enjoy the good days, you’ll experience some horrible days too—because there’s no free lunch.
  • Above all, diversify: Diversification is the closest thing to a free lunch in investing. Just holding three different stocks instead of one decreases portfolio variation by about 40% on average. That’s a significant reduction in risk that doesn’t cost anything in terms of expected returns.

For anyone who owns stocks or is thinking of entering the market, How the Stock Market Works provides indispensable advice from Dr. Ramon P. DeGennaro, an award-winning professor in banking and finance at The University of Tennessee, Knoxville. A congenial and straight-talking expert, Professor DeGennaro leads you through 18 detailed lectures that explain the stock market from the inside, introducing you to the factors that make company stocks rise and fall and the information you need to grasp the market’s role in the world economy, evaluate the relative soundness of stocks, and understand the stock investment options available to you.

Even if you have owned stocks for years, you’ll find How the Stock Market Works to be a helpful focus on the fundamentals of investing in stocks. And if you entrust the management of your assets to a financial advisor, this course will give you the insights you need to converse knowledgeably with him or her and be an informed participant in your own financial well-being.

Tailor Your Investments to Fit You

Your decision about whether and how to invest in the stock market should start with an understanding of the fundamental difference between stocks and bonds. Both represent claims on the assets of a company, but with different returns, different levels of risk, and a different relationship between you and the company.

As with other concepts presented in the course, Professor DeGennaro explains these key points with simple examples that are memorable and insightful. He also uses helpful charts, graphs, and other visual aids, some of which are reproduced in the course guidebook for audio customers.

The many topics you cover in How the Stock Market Works include these:

  • How to open a brokerage account and choose a financial advisor
  • The essentials of mutual funds, including index funds, and exchange traded funds (ETFs)
  • How to trade individual stocks, including how to use options
  • The relative advantages of traditional IRAs, Roth IRAs, and 401(k) plans
  • How to minimize transaction costs and use tax laws for your benefit
  • The dangers of frequent trading and other counterproductive habits
  • Financial concepts and terms that allow you to understand business news and communicate more effectively with your broker
  • The basics of corporate balance sheets, income statements, and cash flow statements

Aim to Become Well Off—Slowly

How the Stock Market Works opens with a fascinating lesson for the average investor. Imagine you’re sitting at home, watching your computer screen track the price of a stock that interests you. Suddenly, you see a huge spike; it goes up and down so fast—in just a quarter of a second—that it barely registers on your screen. You wonder, “What was that?”

That, says Professor DeGennaro, was a high-tech computer algorithm automatically placing and canceling dozens and even hundreds of buy and sell orders. Some algorithms exploit tiny differences in prices, multiplying a profit of a fraction of a cent many times over. No one without access to such technology can hope to take advantage of these tiny and fleeting opportunities.

But you shouldn’t be discouraged by the sophisticated techniques available to professionals, says Professor DeGennaro. You should be relieved, because their ceaseless competition means that stock prices are as close to fair as possible. You can invest in the market confident that the price you are paying for most stocks reflects their true worth at that particular moment. This is the efficient market hypothesis in action, an idea that Professor DeGennaro discusses at length throughout the course.

When you view investing not as a contest against quick-acting competitors, but as a long-term strategy for increasing your wealth, you are much less likely to act on impulse. “Instead of trying to get rich quickly,” counsels Professor DeGennaro, “you should aim to become comfortably well off rather slowly and without having to stay up all night worrying about losing everything.”

Whatever investment strategy you decide to pursue, Professor DeGennaro advises you to get started today. He compares saving and investing to planting a tree, dieting, or exercising. Although the best day to start was 15 years ago, the second best day is today! You can do yourself a world of good by acting now.

Disclaimer:

The financial information provided in these lectures is for informational purposes only and not for the purpose of providing specific financial advice. Financial investing carries an inherent risk that you will lose part or all of your investment. Investors must independently and thoroughly research and analyze each and every investment prior to investing. The consequences of such risk may involve but are not limited to: federal/state/municipal tax liabilities, loss of all or part of the investment capital, loss of interest, contract liability to third parties, and other risks not specifically listed herein. Use of these lectures does not create any financial advisor relationship with The Teaching Company or its lecturers, and neither The Teaching Company nor the lecturer is responsible for your use of this educational material or its consequences. You should contact a financial advisor to obtain advice with respect to any specific financial investing questions. The opinions and positions provided in these lectures reflect the opinions and positions of the relevant lecturer and do not necessarily reflect the opinions or positions of The Teaching Company or its affiliates. Pursuant to IRS Circular 230, any tax advice provided in these lectures may not be used to avoid tax penalties or to promote, market, or recommend any matter therein.

The Teaching Company expressly DISCLAIMS LIABILITY for any DIRECT, INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES OR LOST PROFITS that result directly or indirectly from the use of these lectures. In states that do not allow some or all of the above limitations of liability, liability shall be limited to the greatest extent allowed by law.

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18 lectures
 |  30 minutes each
  • 1
    Is Investing in Your Blood?
    Begin the course by exploring the difference between beating the market and investing in it. One carries very high risk, while the other is a much safer strategy. Learn about the human propensity to look for patterns in everything—but are stock returns predictable? x
  • 2
    Understanding Fundamental Securities
    Learn how stock is an outgrowth of simple business relationships. Use an ingenious analogy to compare two major types of securities: stocks and bonds. Both are ways to share the assets that a corporation owns and the cash that it produces—but with crucial differences. x
  • 3
    What Is the Stock Market?
    The stock market may be high-tech and getting more sophisticated every year, but it is essentially like markets you already know, such as grocery stores and car dealerships. Armed with this insight, delve into the special features of stock markets and how they work. x
  • 4
    Historical Returns and Volatility
    Explore the relationship between the risk of investing in stocks and the return you can expect from owning them. Survey the average return on a broad portfolio of stocks held over many decades. Next, focus on the short-term volatility that makes many people understandably nervous. x
  • 5
    Risk, Expected Return, and Diversification
    Address the investment advisor’s favorite question: Do you want to eat well or do you want to sleep well? Analyze your risk tolerance in simple role-playing games. Then investigate strategies for limiting risk and improving your odds of making money in the long run. x
  • 6
    What Determines How Much You’ll Make
    Learn the most important formula in investing—the simple equation for compounding earnings. Then focus on the three variables that determine how much money you’ll have at the end of an investment. Most people worry too much about the one variable that they can’t reliably control. x
  • 7
    The Efficient Market Hypothesis
    Delve into evidence that beating the market is hard even for seasoned professionals. According to the efficient market hypothesis, stock prices are almost always fair, with very few bargains available for sharp-eyed investors. Examine different scenarios and evidence that support this view. x
  • 8
    Choosing a Brokerage Firm
    Walk through the steps for choosing a brokerage firm, which can be as simple as going online and filling out an application or as involved as interviewing multiple firms to find the right fit. Analyze your needs, and dispel misconceptions that you may have about brokers. x
  • 9
    Trading and Investing Basics
    Explore how stock trades are made. Then look at ways you can place orders tailor-made to your needs. For example, you can avoid the emotion of spur-of-the moment decisions by specifying in advance when to buy or sell a stock. Also learn the mechanics of short selling. x
  • 10
    Trading Strategies and Common Mistakes
    Review a range of useful trading strategies, and identify some common trading mistakes, such as confirmation bias, overconfidence, and loss aversion. Finally, survey the fascinating world of options, looking at cases when it makes sense to use them. x
  • 11
    The Language of Financial Reporting
    Dispel the mystery surrounding financial reporting by analyzing three important documents: the corporate balance sheet, income statement, and cash flow statement. You can think of these as analogous to your personal mortgage application, tax return, and checking account statement. x
  • 12
    Corporate Analysis and Valuation
    Dig deeper into corporate finance by looking at different ways to value a corporation. Study the price-earnings ratio, book value, liquidation value, and other measures, evaluating their strengths and weaknesses. In the process, learn terms that are widely used by financial analysts in the media. x
  • 13
    Mutual Funds and Other Investment Companies
    Probe the tremendous growth of mutual funds, one of the most successful examples of financial innovation in history. Examine managed versus index funds, and compare mutual funds with exchange-traded funds (ETFs). x
  • 14
    Minimizing Transaction Costs and Taxes
    Consider various strategies for minimizing taxes and transactions costs, thereby increasing the rate of return on your investments. Discover the good sense behind two investing mantras: (1) the more you trade, the worse you do; (2) sell your losers, and let your winners ride. x
  • 15
    Tax Shelters—Roths, IRAs, and 401(k) Plans
    Focus on tax shelters that work for everybody, not just high earners. Traditional IRAs, Roth IRAs, and 401(k) plans offer tax advantages for even the most casual of investors. Review the requirements and advantages of each type of account. x
  • 16
    Making Sense of IPOs
    Initial public offerings, or IPOs, are some of the most glamorous and lucrative events in the stock market. What are they? How do they work? And what can go wrong? Learn what investment banks do to set the share price for an IPO, and then see how unpredictable market forces take over. x
  • 17
    The Stock Market and the Macro Economy
    Explore national and global economic forces that affect stock prices. Then look at what you should do in a recession. Is there a way to avoid losses? Also examine the purpose and activities of the Federal Reserve System, asking if you need to care about its decisions. x
  • 18
    Investing with Confidence
    In the last lecture, learn how to analyze your current financial position with the goal of deciding how much to invest and how to allocate your assets in a well-diversified portfolio. Now that you know how the stock market works, it’s time to make it work for you! x

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Video DVD
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  • Downloadable PDF of the course guidebook
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  • Ability to download 18 audio lectures from your digital library
  • Downloadable PDF of the course guidebook
  • FREE audio streaming of the course from our website and mobile apps
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DVD Includes:
  • 18 lectures on 3 DVDs
  • 152-page printed course guidebook
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  • FREE video streaming of the course from our website and mobile apps
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CD Includes:
  • 18 lectures on 9 CDs
  • 152-page printed course guidebook
  • Downloadable PDF of the course guidebook
  • FREE audio streaming of the course from our website and mobile apps

What Does The Course Guidebook Include?

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Course Guidebook Details:
  • 152-page course synopsis
  • photos, diagrams & graphs
  • Suggested readings
  • Questions to consider

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Your professor

Ramon P. DeGennaro

About Your Professor

Ramon P. DeGennaro, Ph.D.
The University of Tennessee, Knoxville
Dr. Ramon P. DeGennaro is the CBA Professor in Banking and Finance at The University of Tennessee, Knoxville. In addition, he consults in the areas of business valuation, investments, and financial management and is a Luminary Member of the Angel Capital Group. He also served as a Visiting Scholar at the Federal Reserve Banks of Cleveland and Atlanta and for the American Institute for Economic Research. Professor...
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Reviews

How the Stock Market Works is rated 4.7 out of 5 by 31.
Rated 2 out of 5 by from Too Elementary I purchased this course in order to learn more about investing in stocks. The course--at least for me--was disappointing because it was so "basic"; it presented a general understanding of how the stock market works, but it was pitched at such a low level that it seemed too simplistic at times. Also, I found it dated--the most recent references were to 2013. Finally, I found some of the advice to be either wrong or contradictory. The most glaring was "sell your losers and ride your winners." The general wisdom is "buy low and sell high."
Date published: 2018-06-28
Rated 5 out of 5 by from Clear! Covers every item for you to start trading with more confidence.
Date published: 2018-04-02
Rated 5 out of 5 by from Good advice based on common sense. I've invested in the stock/bond market for many years. Yet I benefitted from this course because it convinced me that complicated strategies are no better (and no worse) than simple ones. And simple strategies are, well, simpler and less time consuming. It saved me time, effort and added greater clarity to my thinking. Thank you.
Date published: 2018-03-28
Rated 5 out of 5 by from For learners on the go All it takes is one course and your hooked you are going to want another and another.
Date published: 2018-03-05
Rated 4 out of 5 by from More background would've been handy This course wasn't dumbed down enough for me (background in science and engineering, with very little knowledge of finance and the like).
Date published: 2017-12-31
Rated 5 out of 5 by from Clear and pragmatic Excellent course that covers some general investment advice in addition to its stock market focus. Clear examples. Pragmatic approach. For example, Professor DeGennaro teaches how to read key items from a company's financial statements but asserts you don't have to study everything before investing. I especially appreciated his perspective and advice about letting go of investments that “got away.”
Date published: 2017-12-23
Rated 4 out of 5 by from Great Stock Market video My husband and I are long time stock market investors, but always thought we needed to know more about how it all works. This Great Courses video does the trick.
Date published: 2017-06-09
Rated 5 out of 5 by from Fantastic Video & Great Analogies This was my very first course from the Great Courses. When I first started this course, I had some basic knowledge of how the stock market worked, but now, this video helped enhance that knowledge so I have a better understanding of how everything works. I really like the Professor's analogies that he uses in the video. I was formerly in the Navy, so I definitely liked his analogy of the USS Scorpion disaster and the statistical probability of finding the wreckage. I liked the way he correlated that with the statistical probability of predicting stock market prices and price movements. I really liked the lesson on the types of stock market orders. I also liked the manner in which he toned down the vocabulary, so it's not too complex. It was easy to follow along.
Date published: 2017-05-07
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