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
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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.


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
 |  Average 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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  • Download 18 video lectures to your computer or mobile app
  • Downloadable PDF of the course guidebook
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  • 18 lectures on 3 DVDs
  • 152-page printed course guidebook
  • Downloadable PDF of the course guidebook
  • FREE video 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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How the Stock Market Works is rated 4.7 out of 5 by 46.
Rated 5 out of 5 by from How the Stock Market Works very informative and applicable for everyone , itS never to late for this course
Date published: 2020-06-27
Rated 5 out of 5 by from Knowledge vs. money.. KNOWLEDGE! LOVE... LOVE....LOVE.. Have ordered from The Great Courses for years and have not been disappointed. I mean.. how could you be with such great terms like exchanging out one set for another. One feels empowered with the choice to learn and preserve brain cells by learning from these teaching courses. Wish could own them all
Date published: 2020-06-15
Rated 5 out of 5 by from Excellent A great way to get the fundamentals of investing. The delivery and quality of the lecture was very good.
Date published: 2020-05-30
Rated 5 out of 5 by from Fair and Balanced Presentation I knew very little about stocks, bonds and other financial investments. Our family invests in the stock market, using an advisor. Professor DeGennaro gave the best explanations about all aspects of the stock and bond markets, using advisors or by personal, individual stock investments. He presented all these ideas in a fair and balanced way, giving pros and cons of each. Although he expressed throughout his lectures that the market is fair, he did not explain how markets increase in value over the long term, if they are fair. This is a minimal criticism. His lectures were well organized and were presented in a calming and pleasant way. He may have been reading from a teleprompter, but, you couldn't tell if he was, at all. There were no disruptive pauses, plus he emphasized certain points with pleasant mannerisms and emphasises. Professor DeGennaro gave numerous examples of investment activities, including historical analyses of real companies and their stocks. He explains the intricacies of buying and selling stocks and strategies for each. He explains many types of investments, such as IRAs, Roth IRAs, IPOs and others. He did not push his biases very much. He was trying not to give specific advice, only options. As I have stressed, he gave a fair analysis of investing. I would highly recommend this course to anyone who wants information on how to start investing in the stock market or how someone may want to rethink their investment strategies.
Date published: 2020-03-21
Rated 5 out of 5 by from Lots of good information and a single key equation Really enjoyed this course that focused on "the basics" of how the stock market works but in fact included a great deal of information most of us with no professional investment experience will find of interest and encouraged a proactive approach to meeting financial objectives. Even though Professor DeGennaro wanted the content to be relevant over decades I think it would be helpful to record an updated 2020 version as trading platforms have changed and fees have trading costs have plummeted. There was significant time and space devoted to stock analysis/picking that seemed inappropriate for the non-professional investor. DeGennaro acknowledges being a big fan of mutual funds. I would have expected he might make a stronger suggestion to "buy the whole haystack instead of searching for the needle"...e.g. buy indexed funds. Well done!
Date published: 2020-02-15
Rated 5 out of 5 by from Great way to learn a new hobby and trade. I purchased trading stocks and investing and the program had top notch professor from Harvard and Princeton.
Date published: 2020-02-15
Rated 5 out of 5 by from Informative information! How the stock market works is great information for someone new, like me, wanting to learn about how the markets work. Informative information that I recommend for anyone new interested in learning!
Date published: 2019-12-27
Rated 4 out of 5 by from A solid introduction I'm an economist, so I bought this course to pick up some tips on how to present this material to undergraduates and to have something to possibly recommend to friends. While I have a few quibbles, overall I think Dr. DeGennaro did an excellent job presenting the material for a general audience interested in investing in the stock market. I wouldn't hesitate to recommend the course to friends or students, because it emphasizes the difficulty of "beating the market" and the need to take a well-considered approach to risk while also getting started on saving goals today. One word of caution that I'd offer is that, as is appropriate given its title, this is not a course on financial planning in general. But I do think anyone new to investing would get a lot of value from this course in conjunction with learning more about financial planning or talking to an appropriate adviser.
Date published: 2019-09-10
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