There is no easy way to learn about stocks and bonds, particularly bonds. The securities markets are complex and stock prices move for different reason than bond prices. The best way to learn is to become a student of the securities markets, reading magazines such as the Economist and the daily financial presses including the Wall Street Journal, the Financial Times and Bloomberg.com. Watch the financial news channels, such as CNBC, on television and take classes in economics and finance.
Pick several stocks that represent major companies in different industries such as oil, automobile manufacture, banking, consumer products, utilities, and retail. Read their quarterly and annual reports, which you can obtain from the investor relations managers at the companies or download online at the SEC's Edgar.com database site.
Follow the price movements of these stocks, noticing how they react to economic conditions, company announcements of earnings and industry news. Learn technical analysis of stock price charts and note how the stocks traded during recessions and boom times.
Pay attention to the news coming out of the Federal Reserve regarding its monetary policy, interest rate adjustments and open market operations. The Federal Reserve moves interest rates up to make financing more expensive to slow a booming economy that is so strong it may give rise to inflation; it moves rates down to spur economic activity when there is a recession.
Notice that bonds trade according to the fluctuation of interest rates. When rates go up, bond prices go down. When rates go down, the bond market rallies. Stock prices trade more on company and industry fundamentals, but they also trade according to the bond market's reaction to interest rate fluctuation. When rates go up, company earnings go down because it is more expensive to fund the company operations, so the stock price will decline.
Learn to read and understand company financial statements, particularly the balance sheet, profit and loss statement and the cash flow statement. This will enable you to see how the stock price moves according to the financial strength of the company.
- There are three main types of bonds: U.S. Treasury bonds, which are debt obligations of the U.S. Government and guarantee timely payment of interest and principal at maturity. They are the highest quality bonds. There are also corporate bonds, which are debt obligations of corporations, and municipal bonds, which are debt obligations of states and cities and pay interest that is not taxed as part of your income. It is important to know the difference between these and follow their changes in interest rates, as reported in the financial press.
- Restrict your studies to reputable sources of information. It is tempting to read the email hot stock promotions that promise easy profits, but they are simply promotions and not necessarily truthful.
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