Basic Investing Curriculum

The Basic Investing Curriculum has been curated by the Sow4Future team for students participating in the Climate Investing Challenge. Please go through these resources at your own pace and choose which lessons you want to read depending on your skill level. Test your knowledge with every session’s quiz at the bottom.

We thank Bank Julius Baer & Co. Ltd. for their guidance on the ESG resources.

Session 1: Investments

What are investments? An investment is giving up a resource now to benefit later. An example is paying for college. You pay college tuition with the belief that the degree you’ll earn will reap back what you sow. In these Financial Literacy Resources, the investments we’ll be talking about are primarily stocks. A stock (also called equities) represents ownership of part of the company.

Let’s say you’ve found a company you like. How do you invest? First, you have to make sure the company is public, meaning that anyone can buy or sell the shares. A simple way to see whether a company is public is to try to find its share price on reputable websites like Bloomberg, Yahoo Finance!, and Google Finance. If it has one, it is public. If it doesn’t, it usually isn’t. Each company has a unique ticker symbol (for example: Apple’s ticker symbol is AAPL). Each public company is also listed on a stock exchange. Some companies are listed on two stock exchanges to let more people trade the stock (for example: China’s Alibaba is listed on the New York Stock Exchange as well as the Hong Kong Stock Exchange).

Useful Links:

Session 2: Company Business/Revenue Models

A common misconception is that a company’s business and revenue model are exactly the same. In reality, a company’s business model focuses on how it creates and delivers its product or services to customers, while a revenue model is a subset of the business model that focuses on how a company generates revenue. For example, a company with a dropshipping business model would have a price markup revenue model because they are a reseller who doesn’t add anything to the product.

To identify the industry a company operates in, ask yourself: What product/service does it provide? Here are the main industries called Russell sub-sectors: Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate, and Utilities.

Useful Links:

Session 3: ESG Analysis

Let’s get socially and environmentally responsible! The primary metric used now in the investing world is ESG or Environmental, Social, and Governance analysis. The environmental aspect refers to the company’s impact on the environment, taking into account factors like carbon emissions, energy efficiency, water usage, and waste management. The social aspect refers to the company’s relationship with its employees, customers, suppliers, and the communities in which it operates, taking into account factors like labor practices, workplace diversity and inclusion, employee well-being, product safety, and customer satisfaction. The governance aspect refers to the systems that guide a company’s decisions, taking into account factors like board diversity, executive compensation, and transparency in financial reporting.

No company is perfect. For page 6 of the report on the Deliverables page, analyze in what ways the company is facing ESG risks, but justify why you believe its ESG strengths outshine the risks.

In this competition, you are highly encouraged to identify a UN Sustainable Development Goal (SDG) that your company’s actions support. One example might be how Apple’s initiatives to provide free laptops to disadvantaged students supports the 4th UN SDG goal of “inclusive and equitable quality education” (https://sdgs.un.org/goals).

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Session 4: Macroeconomic Analysis

Macroeconomic analysis refers to the financial analysis of an economy. Macroeconomic analysis is important because each stock is traded on an exchange which uses the currency of the country it is located in. If a company is doing very well, but the currency of the country on which the company is listed is devalued relative to your own currency, buying the stock might not yield you a profit. Furthermore, the fact that an economy is not doing very well usually has an effect on the company’s performance as it represents that consumers are less willing to spend, possibly decreasing revenue.

To properly analyze an economy, there are several basic factors to take into account: gross domestic product (GDP), inflation rate, unemployment rate, and the transparency of the fiscal system.

GDP is a measure of the total value of all goods and services produced within a country’s borders.
Inflation rate is percentage change in the general price level of goods and services in an economy.
Unemployment rate is the percentage of the labor force without a job that is seeking employment.
The transparency of the fiscal system refers to the degree to which government finances are disclosed to the public. Here is a country data set of corruption, a sub-factor of transparency: https://www.transparency.org/en/cpi/2022.

Using these factors and others you find on the Internet, create an argument of why an investment in the country of your choice is a good decision for medium-term investments. Keeping in mind the medium-term is important because the investment term dictates to some extent what factors are “good”. For example, short-term investments tend to emphasize risk-taking. In this context, an investment in an economically-developing country would be a better idea than an economically-developed country like the U.S. When considering medium-term investments in an economy, steady growth is emphasized instead. Ask yourself: what economic factors indicate steady economic growth in the next several years?

Useful Links

https://www.investopedia.com/insights/macroeconomic-analysis/
https://www.imf.org/en/Capacity-Development/Training/ICDTC/Topics/GMA (more advanced)

Session 5: Industry Analysis

Time to step into the shoes of an industry analyst. There are many ways to analyze an industry, but the most prominent one is Porter’s Five Forces.

First, the threat of new competition/entrants refers to the potential for new businesses to enter the market and increase competition. This can be measured by evaluating barriers to entry. Ask yourself: does entering this business require a big start-up cost? An example is how an airline needs to have a lot of upfront cash to buy airplanes before it can even start flying passengers.

Second, the threat of substitutes represents the risk that customers can easily switch to alternative products or services. This can be measured by evaluating barriers to exit. Ask yourself: does leaving this business require a cost? Are there other close substitutes? For example, some telecom providers charge you a fee if you end the subscription early.

Third, the bargaining power of customers signifies the ability of buyers to negotiate for lower prices, better terms, or higher quality. This can be measured by analyzing whether only a few customers account for the majority of the company’s revenue and how high the threat of substitutes is. For example, the bargaining power of customers of corn-selling companies is very high because of a lack of product differentiation and easily comparable prices.

Fourth, the bargaining power of suppliers pertains to the influence suppliers have in dictating terms, prices, or the availability of crucial resources. This can be measured by analyzing whether the company singlehandedly depends on only a few suppliers for products you can’t get anywhere else. For example, technology companies that depend on semiconductor companies often have a very high bargaining power of suppliers because only those specific semiconductor companies can produce their patented, differentiated goods.

Fifth, the intensity of competitive rivalry indicates the level of competition among existing firms in an industry. This can be measured by analyzing how many rivals the company has and whether your product is differentiable compared to them. For example, Internet retailers often have very high intensity of competitive rivalry because they have many rivals and their service is very similar.

Remember, you don’t have to include all five of Porter’s Five Forces in your industry analysis. Part of the Judging criteria is assessing whether you are able to identify what is necessary to include in your analysis, due to the specific circumstances of the company you chose.

Don’t just stop here. When talking about the attractiveness of the market/industry, situate your report in the present-day. What recent developments have made the market/industry particularly attractive as of late?

Useful Links:

Session 6: Company Quantitative Analysis

Quantitative analysis means analyzing the company’s financials from a numbers standpoint. There are many different quantitative measurements, but we’ll focus on the following six. We won’t be teaching you the equations here because these measurements are very accessible for public companies.

Market cap

Valuing a public company is very easy. Simply search up its market cap which is calculated by multiplying the current stock price by the number of shares.

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

It can be a bit of a mouthful, but it’s actually quite simple. EBITDA calculates the company’s profitability from the operating business only. It is calculated by subtracting interest, taxes, depreciation, and amortization from total earnings. The higher the number, the more profitable.

Earnings Per Share (EPS)

EPS measures the profitability of the company from a per-share basis. It is calculated by dividing the total earnings by the number of shares. The higher the number, the more profitable per share.

Debt-to-Equity Ratio

The debt-to-equity ratio measures the reliance of the company on debt or equity for its financing. It is calculated by dividing debt financing by equity financing. The higher the number, the more it depends on debt financing.

Current Ratio / Liquidity Ratio

The current ratio, also called the liquidity ratio, measures the ability of a company to pay its short-term debts. It is calculated by dividing current assets by current liabilities. The higher the number, the better position the company is in to pay the debts. Current assets are expected to be sold, and current liabilities are expected to be paid off within the fiscal year.

Price-to-Earnings (P/E) Ratio

The P/E ratio measures whether a company is overpriced relative to its earnings or underpriced relative to its earnings. It is calculated by dividing the share price by the earnings per share. The higher the number, the more overpriced the company could be. It is important to note that a low P/E ratio does not necessarily mean the company is undervalued. The company could have been experiencing unsustainably high earnings, reflected by its tanking share price.

Please note that these are just the most important six general quantitative measurements. There are many others which may be more important for your specific industry. For example, if I were to evaluate McDonalds, a fast food company, I might include the inventory turnover ratio because of its importance within the food & beverages industry.

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Session 7: Company Qualitative Analysis

Prepare to become a financial detective! The two most prominent company qualitative analysis methods are SWOT analysis and Porter’s Generic Competitive Strategies.

We’ll start off with the SWOT analysis that stands for Strengths, Weaknesses, Opportunities, and Threats. First, identify the company’s strengths that sets it apart from its competitors. For example, Apple is well-known for its exceptional customer service, high-quality products, strong brand recognition, and innovative technology. Second, identify the company’s weaknesses compared to its competitors. For example, Kodak, a successful photo business, was unable to innovate from print to digital photography. Third, identify the company’s opportunities—external or environmental factors that can benefit a business. Some examples include industry growth, shifts in consumer preferences, emerging markets, or favorable regulatory changes. Finally, identify the company’s threats/risks that could potentially harm a company’s prospects. Some examples include intense competition, disruptive technologies, or regulatory challenges.

Another qualitative analysis method is Porter’s Generic Competitive Strategies. There are five primary strategies: cost leadership (focus & not), differentiation (focus & not), integrated. Cost leadership refers to achieving the lowest production costs for competitive pricing. Differentiation refers to creating unique products to command higher prices. Focus just refers to cost leadership and differentiation done in a specific niche. An integrated strategy of low cost and differentiation aims to give customers more value for their money by selling unique products at lower prices. Identify the following strategy your company uses!

Leadership matters! A great leader behaves professionally at all times because they know they represent their company. Elon Musk is an example of a leader who sometimes fails to act professionally in interviews and on Twitter. His behavior has sometimes scared investors off. (www.businessinsider.com/elon-musk-scaring-off-potential-tesla-investors-fund-manager-2021-3)

Don’t worry too much about this though. When evaluating public companies, leadership is almost always solid. Just search up the leader’s name to make sure they’ve not recently been embroiled in some controversy.

Useful Links:

https://www.businessnewsdaily.com/4245-swot-analysis.html
https://www.investopedia.com/terms/s/swot.asp
https://www.wallstreetmojo.com/fundamental-analysis/
https://www.youtube.com/watch?v=5CnmtbFuQbk (Porter’s Generic Competitive Strategies)

Session 8: Earnings Projections

Time to gaze into the crystal ball! To project earnings, we must first predict their annual growth rate. We will focus on the three most simplest ways to do so here: historical data analysis, the top-down approach, and the bottom-up approach.

For historical data analysis, start by gathering and graphing the company’s historical financial data for the past several years. See if there are any trends in the earnings annual growth rate.
For the top-down approach, start with the industry’s annual growth rate and then estimate how much market share the company can capture to decide the predicted earnings annual growth rate.
For the bottom-up approach, start by estimating the individual annual growth rates of the company’s products, businesses, or regions and to estimate overall annual earnings growth rate.

Using this projected annual earnings growth rate, predict future earnings.

Don’t feel constrained to these types of analyses. We want you to use your unique subset of skills and be creative in your report. If you’re experienced in Python, see whether machine learning algorithms can help you. If you’re taking advanced math courses, try to experiment with time series or regression analysis.

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Session 9: Share Price Targets & Returns

At the most basic level, using your projected earnings growth rate, calculate the projected earnings per share growth rate by dividing the projected earnings growth rate by the number of shares.

Now, we’ll use a formula we learned in our Company Quantitative Analysis section: the P/E ratio or the share price to earnings per share ratio. Since we know the company’s P/E ratio (search it up online) and we now know the projected earnings per share growth rate, we can calculate the projected share price growth rate, assuming the P/E ratio stays the same. It is important to note that in the real world, the P/E ratio will most likely not stay the same, but this is a typical generalization made in these basic share price projections.

When trying to predict the future share price, it is up to you to decide how complex you want to make it. Consider how the P/E ratio would change by this change in earnings. Think about the industry’s direction over the next few years. Evaluate the potential effect from your SWOT analysis findings. Anything goes, as long as you can back it up.

Finally, calculating returns is the same for all. We highly suggest that you use the following compound interest formula to calculate returns, compounded yearly as the growth rates are calculated on an annual basis.

K = P(1+r)t where K is the projected share price, P is the initial share price, r is the internal rate of return (IRR), and t is the number of years passed. The goal is to find the internal rate of return.

Compare your internal rate of return to the average inflation rate of your country. Is it higher, equal, or lower? If your IRR was less than the inflation rate, what does that mean about your investment’s return?

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