Reading Knoxville: How the Stock Market Works

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Book by Ramon DeGennaro, Reviewed by Michael K. Smith, Ph.D.

 

MS2

“We’ll learn what stocks actually are and how they are traded. We’ll learn about the risks you’ll take if you invest in stocks, and why you might find buying them attractive despite those risks.” Ramon DeGennaro, a Professor in Banking and Finance at the University of Tennessee-Knoxville, explains the reality and the myths of the stock market in his illuminating course, How the Stock Market Works. Published by The Great Courses, this series of 24 lectures can help both students and parents become much more conversant with the language of money and finance and the advantages and disadvantages of buying stocks.

Dr. DeGennaro provides insightful explanations of key concepts that are often baffling to the average person. He explains the origins of the stock market, the idea of risk and expected returns, and the benefits of compound interest applied to investments over a long period of time. This course also overviews how to evaluate corporations, how mutual funds work, how to choose a brokerage firm and minimize transaction costs, and trading strategies and common mistakes.

His analysis of the stock market suggests two crucial lessons. First, “the historical record tells us that you can make a good deal of money investing in stocks”, especially if you have a diversified portfolio held for longer periods of time. Second, “don’t waste your time and money trying to beat the market.” In other words, no one has been able to consistently find a way to pick specific winners and losers in the stock market. Claims that investment counselors can provide huge returns routinely to clients should be viewed skeptically: “The truth is pretty simple: There’s no free lunch. If a deal sounds too good to be true, then it is probably is.”

“The stock market is like a teenager,” he wryly notes in explaining efforts to predict the stock market. “Researchers have tried to analyze large one-day market moves to determine their causes but have been unable to find answers.” In other words, the behavior of the stock market from day to day is beyond explanation, a phenomenon also experienced by many parents of adolescents.

Dr. DeGennaro provides insightful explanations of key concepts that are often baffling to the average person.

Dr. DeGennaro also provides lots of practical advice for the personal investor. His final lecture, “Investing with Confidence”, outlines how to understand your financial position, how to set financial goals, and how to start investing. This advice is tempered with the behavioral biases that can influence the individual investor. For instance, the “overconfidence bias” is the belief that you have a skill that others don’t. The “loss-aversion bias” is “the tendency to avoid admitting a mistake or accepting a bad outcome.”

How the Stock Market Works is an entertaining course that will appeal to students from middle school and beyond and also to the parents of these students. Dr. DeGennaro helps his viewers understand the mechanics of money and investment. These topics are seldom the subject of educational curriculum despite their importance. This course can be recommended to all families who want to learn more about the world of the stock market.

Michael K. Smith, Ph.D., is owner of TESTPREP EXPERTS (www.testprepexperts.com ) which prepares students for standardized tests such as the ACT and SAT. He is also a consultant to Discovery Education Assessment. He can reached at mike@testprepexperts.com.

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