Stock market investing for beginners

By

Gianmarco Venturisi
© Copyright 2019 By Gianmarco Venturisi – All rights reserved.

It is not permitted to reproduce, duplicate or send any part of this document by electronic means or by
printing. Registration of this document is strictly prohibited.
TABLE OF CONTENTS
INTRODUCTION

1.1 BASIC INFORMATION

1.1.1 WHAT ARE THE STOCKS?
1.1.2 WHY INVEST IN STOCKS?
1.2 WHAT YOU NEED TO INVEST IN stocks
1.2.1 PRIMARY REQUIREMENTS
1.2.2 OTHER REQUIREMENTS
1.2.3 OPEN THE DEPOSIT: BANK SELECTION AND COSTS
1.3 HOW THE STOCK MARKETS WORK
1.3.1 THE PURCHASE OF A share: OPERATIVITY
1.3.2 THE PLACEMENT OF THE PURCHASE ORDER
1.3.3 WHAT HAPPENS AFTER SENDING THE ORDER
1.3.4 THE ORDER STATES
1.3.5 NEGOTIATION FEES
1.4 ANALYSIS
1.4.1 FUNDAMENTAL ANALYSIS - THE BASICS
1.4.2 THE RISK ASSESSMENT
1.4.3 INVESTING WITH FUNDAMENTAL ANALYSIS
1.4.4 MORNINGSTAR 5 STAR SHARES
1.5 TECHNICAL ANALYSIS
1.5.1 HOW TO FIND A TREND
1.5.2 TECHNICAL ANALYSIS GRAPHS
1.5.3 MOBILE AVERAGES
1.6 THE MOST IMPORTANT TECHNICAL ANALYSIS PATTERN
1.6.1 HARAMI and ENGULFING
1.6.2 TWEEZER
1.6.3 HEAD AND SHOULDERS
1.6.4 INVESTING WITH THE TECHNICAL ANALYSIS
1.7 SIMPLE ALTERNATIVES TO INVEST IN SHARES
1.7.1 INVESTMENT IN MUTUAL FUNDS
1.7.2 THE IMPORTANCE OF BENCHMARK
1.7.3 INVESTMENT IN COMMON FUNDS WITH ACCUMULATION PLAN
1.8 CONCLUSION
I NTRODUCTION

If you are reading this book you will most likely have heard friends or
acquaintances talking about the fantastic world of the Stock Exchange and in
particular of the Shares.
Someone may have seen a film that intrigued him or, again, heard on the
news of a 2 or 3 percent increase in a day of a stock.
Someone else may have been contacted by their bank to try to invest a small
amount of saved capital and will have started to take an interest in
investment issues.
Who, however, has never heard of the legendary "trading" and "online
trading" or dreamed of becoming a shark on Wall Street?
If you read this book, you definitely want to get down to work and start with
your first experiences; of course, you don't want to disfigure in front of a
new challenge and you certainly have an interest in not losing money with
rash investments.
In one case or another, you are eager to understand how to deal with the
world of stock exchange investment and, in particular, you are eager to
understand how the world of stocks works.
Well.
This book is for you.
It was written to help each of you understand the basics of investment
activities and increase your chances of success.
We immediately introduce a fundamental concept. The risk. You will never
hear of luck or at the same time of certainties, but of probability and risk.
Some of you will turn up your nose: many say that investments are the result
of luck and that someone invests in risk-free stocks. Nothing could be more
false. In investments there is a probability of making losses, which can be
calculated according to statistical indicators. At the same time, there is NO
certainty. Each investment, however secure it may appear, is associated with
a risk.
This risk may be greater or lesser, but however small it may be, there is NO
investment that is truly risk-free. Whoever tells you otherwise is either
ignorant or lies knowing that he is lying.
Strengthened by this awareness, we begin to speak in our text of the main
issues related to the stock market.
Thank you once again for choosing this text. Before starting, I ask a little
courtesy ... If you would like to release a review on Amazon, I would be
grateful to you. Any suggestion is essential to improve.
Enjoy the reading.
1.1 BASIC INFORMATION

1.1.1 WHAT ARE THE STOCKS?

The stocks are "securities" representative of the share capital of an issuing

company. These securities confer on the holder various rights, including the
property right to participate, based on the share held, in the company's profit.
Participation in this profit can occur both if it is transferred in the form of
dividends, and if it is intended to increase the value of equity.
It is essential to observe the difference between the shares and the bonds:
while the latter constitutes in fact the "loans" made to the issuing company,
the shares represent capital shares.
The difference is fundamental, because with the obligations the subscriber
does not participate in the corporate social life, while with the shares the
subscriber assumes the business risk and at the same time assumes the right
to affect the management of the company by exercising the right to vote.

There are different types of shares.

Ordinary shares
Savings Shares
Preferred Shares

Let's see the main differences.

Preferred shares, as can be guessed by their name, guarantee the owner of

the "privileges" with respect to ordinary shares. In fact, the preference shares
attribute of the owner of the privileged property rights, that is, with a higher
yield than ordinary shares.

Furthermore, the preference shares are guaranteed by "pre-emption" in the

event of the division of the company assets, or in the event of bankruptcy.
This represents an indisputable and remarkable advantage for those who
want to invest in society.

However, the advantages described above are followed by some

disadvantages in terms of administrative rights. In fact, preference shares
attribute the right to vote only in extraordinary shareholders' boards; on the
contrary, ordinary shares attribute to the holders the right to vote both in
ordinary and extraordinary boards.

Savings shares are another type of share that can only be issued by
companies listed on the stock exchange. Compared to other types of shares,
they have a higher return in terms of dividends: in fact, they are attributed an
extra return compared to what is attributed to ordinary shareholders in terms
of dividends. However, savings shares have a significant disadvantage: they
do not allow the holder to participate in social life. In fact, savings shares are
excluded from the assignment of rights to participate in ordinary and
extraordinary boards.
 1.1.2 WHY INVEST IN STOCKS?

Needless to fantasize excessively. You invest money in stocks because you

would like to earn. The goal of anyone who invests in stocks is profit and
speculation. Those who invest in equities want to earn in two ways:

- By generating capital gains

- By collecting dividends

The shares, once issued, see their prices fluctuate.

The value of the shares is determined by the law of supply and demand: the
matching between the purchase price and the sale price in fact determines
the market price, which in turn determines the value of the shares.
Once purchased at a certain price, the shares will vary in value due to the
performance of the securities and may generate, upon their sale:
- Capital Gains, where the seller sells the securities at a higher price than the
initial purchase price
- Losses, where the seller sells the securities at a lower price than the initial
purchase price
Shareholders want to generate capital gains, that is, they want to earn from
the difference in the final sale price compared to the initial price.
Historically, stocks over a long period of time, on average, have produced
significant increases in value. It is right to underline the term "on average",
because on average, there are both companies that fail or lose, and by a great
deal, their value, and those that achieve substantial increases in value.
However, it should be noted that there are different ways of generating
capital gains, or rather there are different strategies based on the "time" of
holding the securities in the portfolio:

- Long term stockholders - are the investors who aim to generate capital
gains on the shares purchased in the medium and long term (between 5
and 10 years). These investors purchase equity securities on the basis
of the so-called "fundamentals" of the issuing company, or on the basis
of the "structural" values ​of the issuing companies. For example, a
long term stockholder analyzes the financial statements of equity
companies, checks if profits are growing, if there are good prospects
for the future, if the debt is limited, if equity is interesting and, based
on this analysis (based on the "economic and financial fundamentals"),
he decides to invest. Once the stock has been purchased, the long term
 stockholder holds it for a significant period, waiting for the value to
rise before the sale.

- Traders - traders are investors who aim to generate capital gains in the
short or very short term (often within a few hours). These investors
purchase the shares on the basis of "trading" analyzes, that is, on the
basis of the analysis of short and very short time indicators that aim to
identify short and very short term trends. The graphs are in this case
the basis of the traders' assessments. While the long term stockholder
invests on the basis of long-term trends, the trader considers daily
movements, volumes, "patterns", or some factors which, based on
experience, denote a high probability of occurrence of certain price
movements.
Dividends represent an additional important element in the perspective of the
profitability of the investment in shares. Especially for a long term
stockholder, the dividend represents a formidable way to get cash.
Dividends, in fact, represent portions of profits distributed by the company.
If a company produces profits, or through its management it is profitable, it
can repay its shareholders through the distribution of dividends. The more
shares you own, the higher the dividend value you will be entitled to.
Once the distribution of the dividend has been approved by the shareholders'
board, it is necessary for a shareholder to wait for the expected date of
distribution of these dividends to receive the consideration credited to his
account. Dividends therefore, in a certain sense, repay the long term
stockholder shareholder for his "patience" in holding the stock for longer
before selling it.
Needless to say, dividends are not the real decision-making leverage for
traders. In fact, the latter does not make their own choices on the basis of the
dividends to be distributed by the company in which they invested.
For those who start studying the stock exchange and its phenomena, it is
important to remember one fundamental thing: whether you are a long term
stockholder or a trader, the possibility of suffering a loss, or of recording
losses, is activated from the first moment you invest in the securities equity.
Therefore, before making investments, it is advisable to study the market
and possibly contact an expert on the subject who is well aware of the
fundamental concepts related to the world of the Stock Exchange.
The experts are generally well aware of a very important concept:
diversification.
What does "diversification" consist of?
Let's take an example to clarify the concept. If you invest in a basket
consisting of a single share, the result after one year, i.e. obtaining a capital
gain or a loss, will be tied to that single share. That is, you will be making a
bet on a single title and you will be betting everything on that single title.
What if you build a basket with 100 stocks? Or do you invest in 100
different companies?
Some of these will record capital losses, others capital gains, but, if the
initial assumption is valid, that is that in the long term the stock market
records on average returns higher than the bond and monetary investments,
then it can be expected that the overall basket considered will have produced
a positive result.
We reiterate: some actions will have gone wrong, others good, others very
well. Especially if the shares in which you have invested are "uncorrelated",
or if they move in terms of prices independently of each other, you can
expect that, on the average, result of the well-diversified portfolio will be
better than the result of the concentrated portfolio.
Once again, this concept is almost never present in the activities of traders,
who, on the contrary, tend to operate in a rather "concentrated" way, on one
or a few stocks, as the perspective followed is of the short and very short
term and it is assumed that the forecast of future movements is quite reliable.
We point out that in reality there is a third type of investor, or "fund
managers or asset managers". The latter does not act properly as traders, as
they typically do not perform intra-daily movements and at the same time do
not represent classic long term stockholder operators, as they make portfolio
adjustments to follow investment guidelines, given for example by the so-
called benchmarks, or references, in particular, in the "weights" of the
securities in the portfolio.

For example, a benchmark can be given by the percentage weight of the

shares of a specific stock market index. Fund managers typically rely on the
analysis of the "fundamentals" of the companies in which they intend to
invest in order to make their investments, however, at the same time they
consider the benchmarks as references to define the percentage "weights" of
the investments in the portfolio.

At the same time, unlike the long term stockholders, they periodically
"adjust" the weight of investments in securities, over-weighting some or
under-weighting others, based on the benchmarks and the main market
"rumors". Like long term stockholders, fund and asset managers also tend to
follow medium or long-term trends to make their choices.

Already from these few lines, it will be understood that the commonly used
term "to bet on the stock market" is completely inappropriate. The stock
market is not simple, it is not a game, it is risky and in order to operate on
the stock market, and in particular in shares, it is necessary to have
knowledge. But that's not enough.

Experiences must be added to knowledge. In fact, knowledge alone is not

enough, since being the rather complex concepts, by means of the study
alone, you risk not fully perceiving what on the contrary can be learned by
means of direct action on the market.

A very lively advice for those approaching the stock exchange world,
especially the DIY type, is NOT to throw money away through reckless and
improvised choices. For those who want to try and experience, several sites
are available on the internet that offer very valid investment "simulations".
Through these sites, stock investments are simulated, profits and losses
recorded are monitored and the riskiness of the instruments purchased is
learned. In this case we can properly talk about "playing on the stock
exchange", since through simulations those who participate in it "play"
without being able to lose a penny.

Readers are also invited to reflect on another thing. Statistics show that long
term stockholders produce similar if not superior results to traders in the
long run. This is because the long term stockholders do not incur in the
"destruction" of value deriving from the choice of sales or purchases at the
wrong times.

Timing is a destructive factor of value. We will talk about the form of

investment in equity securities represented by the accumulation plan, a valid
alternative to the one-shot investment of the long term stockholders and the
continuous movements of the traders.
1.2 WHAT YOU NEED TO INVEST IN STOCKS

We have identified the very first knowledge bases relating to the world of
stocks. Now let's try to alternate these theoretical concepts with something
more practical and let's start dealing with what it takes to invest in stocks.

1.2.1 PRIMARY REQUIREMENTS

• Age of majority - In order to invest in shares, you must be of legal age. It

is not possible for those under the age of majority to invest in shares. The
legislator is very clear about this requirement. In fact, it is important to note
that precisely as a person with the age of majority recognizes a complete
ability to understand and want, at the age of majority it is assumed that a
person is able to decide, with awareness, what to do with their savings,
assuming also, in case, the risk of losing them. This does not mean that
financial education that starts well before reaching the age of majority is
absolutely desirable. Children should study from an early age how to
manage their savings, as well as the most important aspects of the world of
finance.
• Possession of a securities custody - To purchase shares, it is necessary to
be equipped with a securities custody, that is, a virtual portfolio in which the
purchases, as well as the sales made, are recorded and which therefore
contains the investments made and held by the investor. Security deposits
can only be opened by authorized companies: banks. Nowadays, it is
possible to open the deposits both by going to your bank in person and
online.
A fundamental condition to be able to open the securities custody is the
possession of a current account with the bank that will open the custody. The
current account is important both for making payments related to the
purchase of securities and for being able to receive the credits of any
dividends. Furthermore, the possession of a current account will facilitate the
payment of stamp duties due on the securities custody for the possession of
the securities themselves.
It should be noted that today there are numerous banks that offer the service
by opening the securities custody and current account with very low costs
for the customer and very quickly. In summary, however, the current account
and custody will be "hooked" to each other and allow normal operations in
securities.

1.2.2 OTHER REQUIREMENTS

Well, these are what can be defined as essential requirements to be able to

operate with the purchase of securities. We now come to other requirements,
also very important, to be able to operate on the Stock Exchange.
• Choice between buying on your own or through the support of a
consultant - There is nothing wrong with requesting the support or
help of a consultant. Today the banks have staff who work in the field
of financial consultancy with specific preparation. By law, consultants
must have appropriate certified training.
The consultants can offer their services against the payment of
consultancy fees (consultancy fee only) or on the basis of a
remuneration deriving from the commissions obtained on the basis of
the transactions carried out. For those who are entering the world of
finance for the first time, it can be useful if not advisable to be
accompanied by a professional in order to learn the practical
rudiments of operations.
• Risk profile - Regardless of the choice referred to in the previous
point, that is to say, to purchase on one's own or through the support of
a consultant, the Bank will be asked to complete the so-called
"Profiling Questionnaire" when opening a securities custody.
One of the cornerstones of customer protection is that there must be a
correspondence between the investments made and the risk profile of
the investor. This means that each investor, on the basis of a
questionnaire, obtains his own "financial identikit". This identikit
includes some fundamental characteristics:
o Risk aversion - Each person has a propensity or risk aversion.
The Bank (or online investment platform) must respect and
enforce the client's profile. Consequently, if a significant
aversion to risk has been declared, risky operations cannot be
carried out or risky operations on average can be carried out for
a very low percentage of one's portfolio.
o Knowledge and experience - Investors must declare their
theoretical knowledge and practical experience gained in the
purchase of financial instruments. In the case of shares, if a
customer declares that he does not know them in their
theoretical aspects and / or does not have practical experience,
they will not be able to invest in shares.
Therefore, before you can buy shares, you need to have the
proper knowledge of these tools. The percentage that can be
 purchased compared to the available investment portfolio will
then vary based on the experience of the investor.
o Financial capacity - Financial capacity and the need for
short-term liquidity is another relevant factor, for the purposes
of profiling, to define what is the percentage of investments of a
certain type that can be purchased by a given investor.
The customer profile therefore determines whether or not to acquire shares.
In order to purchase shares, whether you act in the Bank or operate through
an online bank, you will need to have a suitable risk profile that includes the
purchase of these instruments. The shares, as already noted, are high or very
high risk instruments (depending on the classification method carried out by
the Bank).
Now, we talked previously about bank account and securities custody
reports. In reality and without wanting to go into too much technical detail, it
will be necessary to create specific contracts with the intermediary,
including:
• contract relating to the exercise of trading, receipt and transmission
of orders;
• contract relating to the custody and administration of financial
instruments;
• specific contract with the online operator;
• information pursuant to the privacy law and related consent to the
processing of personal data;
• documentation for the detection of the investor's risk profile;
• form for the recognition of subscribers;
• accessory documentation required for operations on specific markets
(for example the American market);
 • document on the general risks of investments in financial instruments
and profil questionnaire
Once these tasks are fulfilled, in particular where you decide to operate
online on your computer, you will obviously need the minimum technical
equipment, consisting of the PC and an internet connection, possibly stable
where you want to operate as a trader and can be estimated the realization of
numerous infra-daily operations.
There are also numerous apps available today that allow effective investment
management using your smartphone or mobile applications.
Both in the case of apps and web platforms, after obtaining the operator's
authorization to operate, user authentication is required and passwords and
access methods are defined, according to the now widespread IT security
methods .
By operating via the Internet, procedures for confirming the purchase and
sale provisions will also be provided, typically by means of security tools
such as dispositive passwords or confirmations via one-time passwords.

1.2.3 OPEN THE DEPOSIT: BANK SELECTION AND COSTS

Now that we know the basics, let's move on to a very practical explanation.
The opening of the securities custody. It is also referred to as internet trading
deposit. It will be clear to everyone that securities or trading deposits,
whatever you want, have different costs from bank to bank.
It being understood that in order to open the deposit it is necessary to possess
the requirements mentioned above, now let's see how it is possible to
extricate ourselves in practice from the chaos of the different offers available
on the market.
To evaluate the costs, there are interesting "comparators" on the internet. It is
sufficient to type in Google the words "comparator + trading" to receive, as a
result of the search, a series of addresses of websites comparing the costs of
the services.
By going to the site of a comparator, you can fill in a form, inserting some
basic information; with the information entered, the site processes
evaluations in terms of cost, extracting the different offers available on the
market.
Let's take an example. We tried to hypothesize the request for offers for the
opening of a securities deposit account (or trading) to invest about 10,000
dollars, assuming that we will do 4 transactions per month for the sale and
purchase of shares.
The site requires the insertion of the portfolio value, the average value (in
the hypothesis that it remains stable, we leave the value of 10,000 dollars),
and insert the type of securities that we will purchase (in our hypothesis,
10,000 dollars of American shares).
By clicking on the "Compare" button, the site provides interesting
information, highlighting a list of platforms that allow the opening of the
securities deposit and showing its cost.
For each account, the site offers information on the costs and characteristics
of the operations that can be carried out through the various platforms. All
that remains is to click on the most congenial platform and then proceed
with the online or branch opening.
1.3 HOW THE STOCK MARKETS WORK

How do stock markets work? Firstly, the shares are equity securities of
companies that have decided to "list" on a stock exchange. Stock exchanges
are regulated exchange systems that allow the exchange of shares, bonds,
raw materials, derivatives and other financial instruments. Markets and
exchanges are used in common language as synonyms.

It is important to note that the stock exchanges have specific regulations, in

particular for a company to be admitted to "listing" and for its shares to be
priced on the stock exchange, therefore, it must comply with certain
requirements defined by the stock exchange itself. Be careful though. The
fact that a company is listed and that its shares are present in the stock
market does not constitute any guarantee of profit for the investor and, at the
same time, the listing must not be confused with the absence of risk. The risk
of losing money, as we have said, is always present in the case of the
purchase of shares.

There are several stock exchanges worldwide. Since the stock exchanges
themselves are companies, they can create, and have given rise to, mergers
over time.

In order to be admitted to listing on a regulated market, or on a stock

exchange, stock companies must comply with certain admission
requirements. Stock exchanges and market control bodies verify that the
requirements are respected and maintained. These checks are evidently for
investor protection.

The existence of the minimum requirements is verified both with regard to

the issuer and with regard to the instrument subject to listing.

The admission of a financial instrument to the list may take place upon
specific request from the same issuer, or even in the absence of such request
(for example upon the request of a market participant). The Stock Exchange
may accept the request for listing or may reject it if all the conditions set out
in the regulation of the Stock Exchange are not met, both with reference to
the issuer and with reference to the instrument subject to listing.

It is interesting to observe, as shown in the following table, the capitalization

in billions of dollars and the volume of exchanges of the most important
stock exchanges in the world.

A security admitted to listing, in one of the markets listed above, obtains an

estimated starting price from experts who support the listing operation, after
which it is the law of supply and demand that sets the effective exchange
price, once the security has been placed on the market.

Therefore, regardless of the method of estimating the price of the security, an

estimate made according to the most varied methods (of multiples, of the
dividend discount model, etc ...), it is always the demand and offer of the
securities that determines, on the listed markets, the negotiation and
definitive price fixing.

BASIC:

On markets, the price is determined by the law of supply and demand. The
matching between the price that a buyer is willing to pay to buy a certain
number of shares and the price that a seller is willing to receive to sell a
certain number of shares determines the "exchange price". Where there is no
such matching, no exchange will take place.

It is useful to make some examples to clarify this passage. Let's assume that
a company X has issued 100 shares on the market, that the company is listed
and that 50% of the shares were subscribed by investor A and 50% by
investor B at the time of issue. Investor A would like to buy more shares and
investor B would like to sell. The market price of the shares of the previous
day is $ 10.

Let's assume that they both place market orders, buy and sell respectively. A
will place a buy order of 50 shares at a price of $ 8 per share, while B will
place a sell order of 50 shares at a price of $ 12 per share. Orders from both
investors will remain unresolved: since no matching point in the prices of the
respective offers, investor A will not be able to buy anything and investor B
will not be able to sell anything. The market price will still remain
unchanged at $ 10.
Now let's assume that A, believing that company X will be particularly
profitable in the long run, will enter a higher purchase order, equal to $ 13
for 50 shares. B simultaneously will have placed, for the same day, a
purchase order of $ 12 per share, for 50 shares. There is a matching point.
The supply and demand agree to make the purchase for $ 12. There will be a
sale of 50 shares on the market for $ 12. A will then buy 50 shares and B,
specularly, will sell 50 for $ 12 each. An exchange price of $ 12 will be
recorded on the market.

A further observation is that, being the buyer willing to pay more to

complete the purchases, this will determine a "positive" sign in the
negotiations. When in fact prices rise, the sign of the exchange market is
positive. In television or radio news, the speakers speak in these cases of
"positive sign" and "positive" day for the Stock Exchange.

Let us now take another example, reporting a further piece of the mosaic of
stock market trading. Let's assume there are 3 investors on the market, with
A holding 50 shares, B holding 40 and C holding 10. The initial market price
is $ 10. A is keen to buy more shares, B and C want to sell. Both B and C
enter sell orders for their entire equity capacity, however B enters a sell price
of $ 12 and C a sell price of $ 10.

Let's assume that A places a 30-share purchase order for $ 11. Now, unless A
has entered a "minimum quantity" purchase order, or for the total of the
order entered, in which case no exchange would take place, C would sell its
10 shares for $ 10 each, while B would not sell any shares. The stock
exchange identifies the conditions for the exchange to take place correctly,
due to the specific requests foreseen in the orders by the buyers and sellers.

The purchase price, or rather the maximum price at which the buyer is
willing to buy, is the so-called bid price or money. The selling price, or
rather the minimum price at which the seller is willing to sell, is the so-
called ask or letter price. In the context of stock exchanges, instant by
instant, the last break-even price between bid and ask is highlighted. In
addition, the stock exchanges provide the various bid and ask prices, and the
respective quantities of shares associated with them, at a given time. Let's
take an example by taking company Y with 1,000,000,000 shares
outstanding on the stock market as a reference.

Let's assume there are several buyers and sellers. The stock exchange
obviously does not show who the investors who are going to buy or sell are,
while it merely highlights the financial data relating to the exchange prices
and the relative volumes. So, for example, you will have the following
situation.

Quantity Bid Ask Quantity

5.000 10,1$ 10,1$ 5.000

10.000 10$ 10,2$ 11.000

30.000 9,80$ 10,5$ 25.000

100.000 9,70$ 10,8$ 40.000

As can be seen, the first line of the market book highlights the price at which
the exchanges are taking place. At $ 10.1 per share, buyers and sellers agree
to complete the exchange. $ 10.1 is the last exchange price.

Obviously, the purchase offers that have not yet been confirmed are those at
a lower price than the last exchange price. Similarly, the sales offers that
have not yet found correspondence are those published at a higher price than
the last exchange price.

The tendency to raise or lower the price will derive from the movement of
investors: where there is greater interest in buying, there will be an
adjustment of the bid to the minimum letter price. Conversely, where there is
a tendency to sell, sellers will adjust their selling price.

As a result, they will lower the letter price, trying to bring the bargaining to a
close.

From what has been written, it is observed that, beyond the functioning of
the stock exchange markets, linked (beyond the quotation mechanisms) to
the law of supply and demand, the lesson that can be learned is that "the
price" and its performance over time are "fundamental" indicators of the
quality of a security.

A price that is gradually increasing over time is symptomatic of a "solid"

issuing company, a "dancer" price, that is, a very "volatile" price, will
identify the performance of a not particularly stable company.

1.3.1 THE PURCHASE OF A SHARE: OPERATIVITY

We have identified what are the essential aspects to be able to operate on the
stock exchange. Let's take a moment away from stock selection issues; the
latter will be discussed later in the text. Let's assume instead that you have
already logged in to our trading site.
To do this, we will surely, first of all, log in with our user and password, we
will have signed a securities custody contract with the intermediary and we
will have fulfilled a questionnaire, from which, if we want to operate in
stocks, our adequate risk appetite and possession of all the characteristics
necessary to operate on the Stock Exchange must have emerged.

Now let's try to understand what is the operating sequence for placing an
order on the market. In this text we will try to illustrate the set of steps that
will be followed; the different options or the different steps that may occur
following the insertion of the purchase order will also be highlighted.

We therefore start by placing the order.

1.3.2 THE PLACEMENT OF THE PURCHASE ORDER

Let's assume that you want to proceed with the purchase of 1,000 shares of
title X. In order to place the order, you typically need to enter the securities
list of the trading application. The list generally presents the list of securities
that can be purchased in a given market and, what is really fundamental, a
search function by description.

After selecting the title of interest, by clicking directly on the title in the list
or by clicking on the title sought, the trading system will display a mask in
which inputs must be entered in order to continue. Some of these are
mandatory, others can be left out: the trading system will complete them,
according to the default options that the system selects in the event of a user
not completing it.

The mask typically presents the following information:

• Buy or sell - It is a "radio buttom" type feature. The user must click
(selecting) one of the two possibilities. Depending on the selection,
some information or distinctive requests of the type of operation are
shown. In this case, the purchase hypothesis is being discussed,
therefore the user will click on the "Buy" checkbox

• Quantity - It is the quantity of securities that the user wants to buy

(or, if the sale is being treated, sell). The quantity must obviously be
equal, minimum, to the minimum contractually required lot or equal to
a multiple of the same. For example, if the minimum trading lot is
equal to 1,000 shares, the user will have to enter a purchase quantity
equal to 1,000 or a multiple thereof (2,000, 3,000 etc ...).

• Price - The price is one of the most important information, since it

determines the expense that the investor will actually incur in
purchasing the security. In this case, there are options that the systems
allow you to adopt to specify the type of price you want to use. In
particular, typically there are two types of price proposed by the
systems:

o Maximum price (or “at the limit”) - By selecting this option,

the investor is asked to specify, in the case of purchase, the
maximum price that he is willing to pay (and in the case of sale,
the minimum price at which he is willing to sell

o "Best" price - By selecting this option, the investor can decide

to buy (or sell) at the "best" price available at that moment on
the market, or, if it is a purchase, at the lowest price in that
available moment or, if it is a sale, at the highest price currently
offered.
 o Pros and cons of entering the offer at best or at the limit - The
pros and cons of entering one or the other type of prices will be
evident. The insertion of a "limit" price allows to fully satisfy
the "desired", in terms of price, of the investor, provided that
there are sellers (or, for sales, buyers) willing to support that
type of price.

On the other hand, the "limit" price may not allow you to
complete the order if you do not reach the set price or a more
favorable one. On the other hand, it should be noted that the
insertion of offers at their best in periods of very high volatility
and volumes that are also very volatile, may present the risk of
purchases or sales made at "peak" prices (minimum or
maximum absolute or relative). In this case, the system is
independent of any rational assessment, so the order is executed
at any price value on the market.

• Period of validity of the order - An order can be validated until the

end of the stock exchange session (for which, selected this option, the
order is canceled at the end of the stock market day), or it can be
validated up to a certain date ( for which, in case of non-execution on
a given day, the order will be automatically reinstated on the following
day and until execution, with the time limit of the final date, the date
on which the order will be definitively canceled).

The pro of placing an order up to a certain date is represented by the

automation: the investor enters the order only once up to a certain
deadline and waits for the execution of the order. The cons is typically
many events can occur during the stock exchange sessions, so it could
be risky to keep an order alive for a long time, even if it is entered "to
the limit".

Let's take an example: a purchase order with price 10 is entered on

security X, on day 1 and until trading day 15. The current price is 11.
The investor believes that there will be a negative fluctuation in prices,
so in the following days it will be possible to buy, due to normal
volatility, the X security at a more favorable price. On the first day, the
price remained stable around 11. On day 3, news spread that, however,
the dividends for the share will be worse than expected.

What will happen?

The price of the security is very likely to drop to 10, but not due to the
normal volatility of the security, but due to the fact that in the
meantime the structural characteristics of the action are changing. The
issuing company seems to be no longer able to produce sufficient
profits to guarantee the expected dividend.

What will happen in terms of price? It is very probable that not only
the price will drop around the value of 10, but above all it will
stabilize around it or even drop further. Basically, having entered an
order "at the limit" discounted compared to the current price, we are
assuming, in the event that the order is "timed" for a period of time
greater than one day, the risk of "not intercepting" the structural
variations. Therefore, there is the possibility to purchase a security at a
"not fair" or "unprofitable" price when the order is executed.

• Total or partial executed order - It is a parameter that indicates

whether the entered order must be executed for "the total" of the
quantity requested or, alternatively, if the investor is willing to also
 purchase "partial" quantities with respect to the order. entered (in some
applications the option is also called "All or nothing").

In the example shown, the investor who wishes to purchase the 1,000
shares of title X, must select title X from the watchlist (or select it
after having searched for it through the search function), must select
the "Purchase" option and also enter the quantity of "1,000" in the
quantity field. Then he will have to enter the price values ​and validate
the other options previously discussed.

Once the order has been entered, the application requires "confirmation" in
order to proceed. The confirmation is made according to the classic
authentication and digital signature systems (with OTP code, password, etc
...).

Typically, since the trading systems are connected to the user's current
account, they automatically check the availability of the customer, blocking
the amount necessary to perform the transaction on the current account.

The balance that is verified is the "available" one, that is the balance that
takes into account the debits not yet reported in the accounting accounts
(accounting balance) but that are about to be debited (available balance).
Identically, the systems take account of credits in the account in the course
of arrival, but not yet recorded in the accounts.

We go further, assuming that a large amount is available on the current

account and that therefore our investor proceeds with the sending of a
purchase order for 1,000 X shares, at a maximum price ("at the limit") of 10
euros per share, with order that closes at the end of the stock exchange day.
 1.3.3 WHAT HAPPENS AFTER SENDING THE ORDER

As said, once the order has been sent (we assume that the user has clicked
the "execute" button to do this, entered the temporary code received on his
smartphone via message, and further clicked "confirm" on the order
submission form), the trading system proceeds to execute the instructions
received.

Orders have their own life cycle. The moment the order is placed, an instant
after confirmation, it appears in a specific state: the order is "awaiting
execution".

This means that the order is placed on the market and the trading system
tries to find a counterparty willing to conclude the negotiation under the pre-
established conditions, in our case a purchase of 1,000 X shares at the
maximum price of 10 euros per share.

It should be noted that:

Any sales orders entered by counterparties at "limit" prices for values ​

greater than 10 euros (eg: 10.1 or 10.3 etc ...) will NOT match with
respect to our sale.
On the contrary, any sales orders entered by the counterparty at "best"
prices could satisfy our purchase request.

It should be further observed that, obviously, purchase orders prior to ours

and with a price above 10 euros will be satisfied first. When the book (or the
registered list of orders) with purchase prices in excess of the value of "10"
is "exhausted", our order will come into play, so our user can actually make
a purchase of the its actions X.

However, we make some other assessments regarding the behavior that our
order would have had if we had adopted different parameters in the context
of placing the order. We have already said that we have placed the order with
the "limit" option. Now let's see what would have happened if we had placed
our order "at best".

In the latter case, the order just entered would have been instantly executed:
however, in the hypothesis that there were offers to sell the security X at the
price of 10.2, our investor would have purchased the security X at the price
of 10, 2.

We perform a very quick calculation to observe that, for the mere fact of
having used the "best" option, the purchase cost of the shares is 200 euros
higher than the initial investor desired. In fact:

• option "to the limit"

reserve price x quantity = purchase cost for which

10.00 x 1,000 = 10,000

• "best" option

market price x quantity = purchase cost for which

10.2 x 1,000 = 10,200

• Difference (higher cost) = 10,200 - 10,000 = 200

It is therefore easy to observe that the adoption of an "at best" option must
be adopted with real parsimony, since, especially when the quantities to be
purchased start to be relevant, the effect of adopting one or the other choice
it can strongly affect the final result for the investor.

Now let's see what would happen if the total or partial executed was
exercised. Let's assume that the purchase order "at the limit" has been
entered, as already stated, with the "total executed" option.

In this case, either a seller is found willing to sell "at least" 1,000 shares at
the price of 10 euros, or the order is not executed. In the event that,
therefore, there is only one investor available to sell the shares for 10 euros,
but with a quantity equal to 500 (for a moment let's forget about the
minimum lot), the order will not be executed.

Let's assume instead that our investor has entered the same purchase order
but with a "partially executed" option (once again, let's forget about the
minimum lot, or let's pretend for a moment that it is equal to 1 share).

If there is a seller on the market who is willing to sell X shares for 10 euros
and owns only 500 shares, a buy and sell transaction for 500 shares will be
executed. That is, the investor's order will be partially executed, for a total of
500 shares.

"Run and delete" or "all or nothing"?

If we had entered a purchase for the best of 4,000 pieces with the parameter
fill and kill - "execute and cancel" we would have had an execution of 2,000
pieces. The residual quantity of the order (2,000 pieces) would have been
canceled and not executed.

If we had entered a purchase at the best of 4,000 pieces with the fill or kill
parameter - "all or nothing", our order would have been executed at the price
of 5.32 euros, since only at this price level was there a quantity in can fulfill
the order.

Ultimately, the example illustrates how risky it can be to place an order at

best with the "all or nothing" parameter for significant quantities, as the
price paid could be significantly higher than the best available on the market.
For this reason it is advisable to use the "run or delete" parameter together
with a price limit.

Obviously, the procedure and the concepts presented would be applicable in

a similar way to a sale rather than a purchase operation.

1.3.4 THE ORDER STATES

As stated, orders have a specific life cycle. Let's see what are the main states
of the orders on the major trading platforms on the market.

• Draft - An order can be entered and saved, without being validated

by the investor. For example, an investor may have placed orders on
the most profitable short list securities, but needs more reflection to
define the target purchase prices. Therefore, the investor can enter the
orders and save them, to subsequently return to the saved orders in
order to fix the price with which to validate the orders.

• Entered - The validated order assumes the status of "entered", that is

to say that the trading system is proceeding to execute an order that
has been confirmed by the investor.
• Refused for lack of availability - In some cases, the trading systems
perform the check on the capacity of the investor's current account
following the insertion. If the capacity is not sufficient, the order can
be refused (with a specific reason).

It is important to note that the check takes place an instant after the
confirmation of insertion, so the passage of the order from draft to
inserted to rejected is practically simultaneous. The order in this state
never came onto the market.

• Revoked - As long as an order is in an "Inserted or entered" status, it

can be revoked by the investor. The latter can enter the order control
screen and can then select the entered order. By clicking on the order,
a mask will appear in which, if the order has not yet been executed,
the "revocation" button of the order will be present.

By clicking on the "revocation" button, it will therefore be possible, by

entering the authorization codes, to proceed with the revocation of the
order.

• Executed - An order that has been "completely" executed takes on

the "executed" status. The order that assumes this status CANNOT be
revoked anymore. A "contract" was concluded between two
counterparties (a seller and a buyer). In a short time, the purchased
title will be visible in the buyer's securities custody.

As part of the monitoring systems of the trading application, the most

important data of the order executed are typically recorded and stored,
as well as shown to the investor, namely:

o Date and time of the operation

 o Title code

o Description of the security

o Quantity entered (purchased or sold)

o Price entered (purchase or sale)

or market

o Execution price

o Amount of executed

This information, in particular the prices and quantities carried out,

will be very important for the evaluation of the results achieved with
the portfolio management activity.

• Partially executed - For orders placed according to the "Partially

executed" option. The status indicates that the order has been partially
executed and will remain on the market for the remainder until the
scheduled deadline.

• Expired - An order that has not been revoked, executed in whole or

in part, and which after being validated does not find "valid
counterparties" on the market, with offers capable of matching the
request (purchase or sale), on the expiry date assumes the status of
"Expired". The order is therefore "withdrawn", it is no longer present
on the market. The investor must, if he wishes to carry out the
operation, enter a new equivalent order.

1.3.5 NEGOTIATION FEES

For the realization of the operations of buying and selling securities, the
intermediaries apply commissions. The latter may vary, in the type and
amount, from intermediary to intermediary and depending on whether you
use "self-managed" systems by the user (example: Home Banking) or
whether you use the activity of a consultant at the bank counter for the
realization of the operation.

Generally, trading fees are made up of:

- Trading commissions - They consist of a fixed minimum amount (e.g. 3

dollars per transaction) or a percentage commission on the value of the
transaction or a mix of the two (example: a percentage commission is
applied, with a minimum amount equal to 3 dollars per transaction)

- Recovery of intermediary expenses - They are amounts, generally fixed,

which are charged to the investor for a transaction carried out or for a total
of transactions carried out

There are several comparator sites that can evaluate the type of intermediary
that best suits the investor's operational needs (in particular, due to the
number of transactions that the latter assumes to be required to carry out
over a given period of time). However, it is very important to correlate the
cost data with the level of service that is deemed most appropriate to receive.
For example, if an investor is not particularly well versed in the financial
issue of investments, it may be wiser to spend a higher commission amount
in exchange, however, for an adequate consultancy service and, therefore,
for constant guidance in the realization of the investments. Vice versa, an
investor navigated in the field of business, business in general and finance,
will be able to search for the platform that provides fewer consultancy
services, but more performing for example for negotiation and trading
purposes, while seeking the lowest cost of securities trading.
1.4 ANALYSIS

It is very useful to understand what information is available on the stock

markets in order to make informed choices on the purchase or sale of a
security. There are numerous indicators that are shown on the main financial
information sites.

Let's analyze the main ones.

1.4.1 FUNDAMENTAL ANALYSIS - THE BASICS

ISIN - is the acronym for International Securities Identification Number and

represents an identification code of securities at international level. Through
it it is possible to identify the financial instruments in an unequivocal way.

Sector - Generally, equity securities are classified by sector. Classification is

important as it allows comparisons to be made between securities belonging
to the same group.

Share capital - It is the value of the capital paid by the shareholders and
entered in the balance sheet.

Capitalization - It is the countervalue of the company determined by the

stock market supply and demand. It derives from the product between the
last exchange price for the number of shares in circulation.
Minimum lot - It is the minimum number of shares that can be purchased in
a sale. For example, a minimum lot equal to 1 indicates that the minimum
quantity of shares that can be purchased is equal to 1. If the minimum lot is,
for example, equal to 1,000, at least a minimum number of shares equal to
1,000 should be purchased.

Var% - Indicates the percentage change compared to the last trading date
(i.e. the last price of the last open trading day and, therefore, reference)

Volatility - One of the basic concepts of finance is volatility. It measures the

extent of the price changes of a security in a specific period of time. In other
words, volatility indicates how much the value of a security or portfolio
changes in a given time interval.

There are many volatility measures. One of the most used is the standard
deviation, that is, without going into details, how much the price moves
around the average of the stock price. For example, if a share had a volatility
of 25% over the past year, this means that on average the distance of its
value from the average price of the security was 25 percentage points.

Three basic observations:

1) as you will have noticed, the greater the volatility, the greater the amount,
in the past, of the price changes

2) volatility is calculated on "past" values: a given volatility does not

necessarily repeat itself over time

3) volatility as we said refers to variations: therefore, measures such as

standard deviation can refer to both negative and positive price changes.
In other words, although volatility is often adopted as an instrument for
assessing the "risk" of an action, it is not said that it represents a "certain"
instrument for evaluating an action.

If the past is assumed to be a good predictor of the future, then volatility can
be a good statistical means of assessment. Since, however, as history has
taught us, the past can be modified by events, volatility must be adopted as
one of the instruments and not as the "only" means of risk assessment.

Furthermore, as said, since volatility refers to generic "variations", it is

necessary to have more complex tools to check the riskiness of a security (if
it is adopted for this purpose). For example, some suggest to refer, for risk
assessment purposes, to indicators such as semi-standard deviation, that is,
to consider, for the purpose of risk assessment, only the "negative" part of
the changes recorded over time.

However, volatility is important to define the attractiveness of a security

with respect to a given investor profile. A security that, for example, has very
high volatility could be adequate for those with a high appetite for risk,
while it could be indigestible for investors who want to sleep more
peacefully, having a lower appetite for risk.

Volatility can be calculated on individual securities, however it can also be

calculated on portfolios. Diversification, a fundamental concept in the
financial sector, can lead to important benefits, given by the fact that the
inclusion in the portfolio of securities with different characteristics can lead
to an overall risk reduction. We will return to these concepts later.

ROE - ROE, an English acronym for Return on equity, is one of the most
important indicators for evaluating the performance of a company. It is
calculated starting from the values ​recorded at the balance sheet date, given
by the (net) profits and by the equity, or by the company's own capital (given
by the share capital paid by the shareholders and the reserves).

By comparing the net profits to equity, you get a percentage, or the "return"
that every euro invested, basically, by the company shareholders has
produced over a year.

ROE is particularly important because it expresses the return on risk capital.

It should first be compared with the yield of long-term government bonds
from countries with solid finances. For example, with the yield rates of 10-
year Bunds or multi-year U.S. Government Bonds. If the ROE tends to be
lower than these returns, an investment in the shares of the issuing company
would be "not convenient" for a rational investor. Investment in government
bonds would obviously be convenient.

Secondly, ROE must be compared with the performance of the shares of

issuers in the same sector. Let's take an example. If the ROE of car company
A is 5% and the average return of the automotive sector (considering the
average ROE of the companies in the sector) is 10%, it is clear that company
A is performing worse than the sector . Consequently, the investment in the
share issued by company A is not rational.

The ROE must then be compared with other indicators and, in particular,
with the debt and risk indicators. We will discuss below the Leverage
indicator, i.e. debt with respect to the company's assets. It is clear that a
company that makes an equivalent equivalent to another but with a worse
debt situation, would be rationally discarded by investments, other things
being equal. Let's take an example.

Companies A and B have an ROE of 5%, however company A has a

Leverage of 3, company B has a Leverage of 1.5. All other things being
equal, company A appears rationally preferable, as an equity investment, to
company B, since on the one hand A shows a worse financial situation
(higher debt) than company B and, secondly, because company B is more
performing: it manages to make better use of the available capital, resorting
to less debt and evidently obtaining an equivalent ROE result.

P / E - The Price Earning ratio is one of the most interesting indicators, as it

indicates the relationship between the current price of a share at the time of
calculation and the expected profit for each individual share.

Looking at it in another way, it represents the time necessary, by hypothesis

and if the profits remain constant over time, to cover the purchase cost of a
share by means of the profits which, it is assumed, will be distributed. Put
another way, it represents the time necessary to regain the invested capital.
Let's take an example.

The XYZ company earns € 5,000 in 2019. The company's share capital is
made up of 10,000 shares. Earnings per share are: € 5,000 / 10,000 shares =
0.5 euro / share. The market value of the price is € 5. The P / E is therefore
equal to 5 / 0.5 = 10. If a constant earnings trend is assumed, investors will
have to wait 10 years to recover all the capital invested.

The P / E is often identified with a formula that provides, in the denominator,

as "earning", the EPS value.

EPS - It is the English acronym for Earning per share and indicates the profit
generated for each share: for simplicity it is often assimilated to the
distributed dividends (the effective formula is given by the net profits
distributed minus the dividends of the preferred shares, the all divided by the
number of shares). The approximation is absolutely valid where the number
of preference shares is negligible and the net profits are fully distributed.
P / BV - It is the indicator, also deriving from an English acronym,
consisting of the relationship between the Price, the price of a share, and the
BV, the book value, or book value of a share. This is given by the book value
of the shares. While the Price (P) is updated daily and incorporates market
information, the BV is entered in the accounting books with a basically fixed
value. As a result, a very high ratio indicates that the share (and the issuing
company) has grown according to market valuations. On the other hand, a
ratio lower than one unit identifies an effective value and perceived by the
market lower than the moment in which the action was entered, with its
value, in the financial statements.

EBIT - It is an "economic" indicator, taken from the income statement of the

companies. It is representative of the result before financial charges (or even
corporate operating income) and is the expression of the corporate result
before taxes and financial charges. The EBIT acronym derives from the
expression Earnings Before Interests and Taxes.

It is very important as it indicates the trend of the "characteristic

management" of the company. A positive EBIT and a negative post-tax profit
indicates that the company is able to produce profit with its core business;
however, this profit is "burned" by the other cost items produced by the
company (example: non-characteristic management costs)

EBITDA - It is an "economic" indicator, taken from the companies income

statement. It is representative of the so-called "gross operating margin" and
highlights the income that the company is able to produce based on its
"pure" characteristic management, that is, without considering interests,
taxes, depreciation of assets and depreciation.

FINANCIAL LEVERAGE - Financial leverage (or from English

"leverage") is an indicator used to measure a company's debt. Basically, it is
calculated as the ratio between long-term debt and company assets. These
values ​are taken from the balance sheets.

It is very important to note that EBIT, EBITA, Net Profit (i.e. the final result
of the activity), the FINANCIAL LEVERAGE, must be considered jointly.
This is because in order to understand the goodness of a company and
therefore of the related action, it is necessary to verify that the operating
results are positive and that the financial situation is solid.

A company with high leverage, which has made losses and which has
negative EBIT and EBITDA results, is clearly doomed to fail if it continues
to do so. A company that, on the contrary, has a leverage ratio that is not
excessive (for example not higher than the value of 2), with a positive EBIT
and EBITDA, will be adopting the debt correctly, producing profits.
The indicators we have discussed so far relate to the so-called "fundamental
analysis", that is, the analysis deriving from long-term assessments, where
long-term means a time interval of more than 3 or 5 years. We speak of
fundamental analysis in that we observe the "fundamentals", that is the
structural elements of societies.

On the basis of these, the so-called "long term stockholders", or those who
invest in a security with the prospect of long-term earnings, against the
obtaining of dividends and the long-term growth of the share price.

There is nothing wrong with being a long term stockholder. The prospect is
that of the investment that provides over time, against a correct "asset
allocation", that is, the allocation of resources, of investments, in assets, a
good return.

Since the long term stockholders basically hold the shares for a long period
without making continuous exchanges (what is the characteristic of the
"traders"), they must aim for an optimal "diversification" of the portfolio.
This is because, since it is not possible for anyone to predict the future, the
portfolio must be immunized from losses. An evidently well diversified
portfolio between sectors, shares with different characteristics, volatility,
offers greater chances of reducing risks.

The reason is obvious. A "bet" in a single security can take only 2 directions:
the loss of part of the capital or the gain, depending on the direction that the
action will have taken, with high potential volatility.

A portfolio made up of dozens or hundreds of shares, on the other hand,

allows you to reduce the risk: some shares will lose, others gain, and the
result will be offset. In the long run, the likelihood of making a profit in this
case will be higher. Also in this case, it is good to reiterate it, there is
obviously no certainty of the result.

Mutual funds often adopt "long term stockholder" strategies. Identified a

benchmark, or a reference point for the construction of the asset allocation
(example: MSCI Word index, or replica of an index made up of x%
American stocks, x% European stocks, x% Asian stocks, etc ... ), the fund
manager carries out the so-called "picking", ie the selection of the shares in
which to invest to cover the%, or slices, of the portfolio, relying on medium
/ long-term forecasts.

In this case, the manager relies on "fundamental" analyzes to make his

investments. Prospective P / E is one of the indicators used. Prospective
earnings values ​are certainly a distinctive factor for companies. The trend
over time of the profits recorded can constitute a discriminating factor, for
example, in the choice of the shares in which to invest.

Obviously, it is not enough to rely only on the indicators previously analyzed

to be able to make prudent investment choices. In order to evaluate the
"prospective" ability to produce positive results of some equities, it is
necessary to carry out very complex and articulate analyzes, which take into
account both the indicators previously analyzed and numerous other
fundamental analysis indicators.

Financial analysts are professionals who carry out specific analyzes on

equity securities, based on the logic of fundamental analysis and on the
review of results, as well as on the re-elaboration of balance-sheet indices.

Financial analysis is generally offered by financial advisors (from Banks,

Fund Managers, etc ...). However, it is possible to read interesting analyzes
also in independent analyst sites or in the most important financial
information newspapers.

1.4.2 THE RISK ASSESSMENT

It is possible to include the riskiness of a share security within the context of

the fundamental analysis, since in order to determine the riskiness itself, first
of all, analysis tools related to the analysis of the financial statements, the
corporate structure and other elements are adopted. which are based on the
"structural" elements of the company issuing the share.

We have already shared the notion of risk intended as the probability of

negative price swing. However, there are several "versions" for this type of
risk. Without wanting to go into technicalities, it is possible to distinguish
two main types of "triggers", of triggers for the activation of negative risk
variations. Generally, the "market risk" and the "credit risk".

Market risk is the risk associated with negative price changes determined by
the economy of the specific market (understood both as a geographical area
and as a sector) to which the share is connected.

Let's take an example: the FIAT stock is clearly connected to the car stock
market. If the car market collapses, the probability that the FIAT stock will
also collapse is very high. Market risk can be measured with different
instruments; in general, statistical tools are used to determine the
measurement (e.g. standard deviation, VaR, C-VaR, etc ...)

Credit risk is the risk of loss of value of a security deriving from the
possibility that the company goes into default, or that it goes bankrupt, not
honoring its debts. Credit risk is a specific risk for each type of company,
although it is still possible to identify elements of correlation between the
credit risks of similar companies operating in the same geographical area.

It is possible to measure, also in this case, credit risk by means of statistical

indicators (e.g. Expected Shortfall).

It is clear that the securities subject to credit risk are "bond" securities, or
"loan" securities issued by companies. It is equally evident that, in the event
that a company issuing bonds does not honor its debts, this will result in an
immediate reduction in the share value. Who would want to own shares in a
company unable to honor their debts?

Statistical risk indicators are particularly complex to calculate and monitor.

To overcome the complexity of the calculation, on the one hand, once again,
specialized companies of financial analysts have been able to calculate these
indicators "daily", on the other synthetic indicators of risk have been defined
, in particular as regards the so-called credit risk, by the so-called Rating
Companies.

The latter periodically screen listed companies, assigning a reference value

(the so-called rating) which, briefly, identifies the level of risk of "default"
associated with the issuing companies.

It should be noted that, since the ratings are produced periodically and not on
a daily basis, they tend to be less "reactive" than other statistical indicators
(indicators based on the statistical calculation based on time series or
sampling methodologies, on a daily basis).

The most famous rating companies are S&P, Moody's and Fitch. Below is a
summary indication of the ratings, shown schematically:
RATING Risk assessment

Moody’s Standard & Fitch

Poor’s
Aaa AAA AAA Maximum degree of reliability and
extremely low credit risk. Issuer with
a high ability to pay interest and
repay principal.

Aa1 AA+ AA+ Very low credit risk. Issuer with a

Aa2 AA AA repayment ability not sensitive to
economic changes.
Aa3 AA- AA-
A1 A+ A+ Strong ability to pay interest and
principal. Issuer sensitive to the
A2 A A
unfavorable effects of changing
A3 A- A- economic conditions.

Baa1 BBB+ BBB+ Currently, the issuer's ability to meet

Baa2 BBB BBB its financial commitments is
adequate, but the company is
Baa3 BBB- BBB-
sensitive to changes in the economic
situation.

Ba1 BB+ BB+ If the economic situation is not

favorable, in the medium term there
Ba2 BB BB
is a real possibility of insolvency by
Ba3 BB- BB- the issuer.

B1 B+ B+ Highly speculative investment.

Although there is significant credit
B2 B B risk, there is still a limited safety
margin. Issuer to be considered
B3 B- B- speculative and not suitable for a
good family man.

Caa CCC+ CCC High risk of insolvency and of losing

capital. Issuer to be considered highly
Ca CCC
RATING Risk assessment

Moody’s Standard & Fitch

Poor’s
C CCC- speculative and not suitable for a
good family man.
D DDD The insolvency of the issuer is highly
probable.
 1.4.3 INVESTING WITH FUNDAMENTAL ANALYSIS

As previously stated, to be able to make investments in shares you need a lot

of experience, as well as a thorough knowledge of market dynamics. Now
that we have introduced, however, the previous fundamental concepts, it is
possible to identify the logical scheme that is generally followed by
professionals who carry out equity investment operations based on the
fundamental analysis.

Recall that, in this text, we are exposing basic concepts and, consequently,
we will ignore the techniques of selecting model portfolios and
benchmarking. We will limit ourselves to saying that, in an early analysis
phase, investors define with mathematical models, even complex ones, the
"references" and the perimeter of their portfolio.

What is being done? The appetite for risk is identified and the set of stakes
and constraints that must be followed to respect this appetite for risk is
defined. In particular:

- the minimum ratings that must be owned by the securities in the portfolio
will be identified

- the geographical area of ​reference and the currency or the investment

currencies will be identified (this will determine the assumption or not of the
exchange risk). To understand the scope of this choice, consider that, for
example, if an Italian investor (current currency: Euro) decides to invest in
American securities (reference current currency: Dollars), he will assume, in
addition to the typical risks of the shares that the risk of the devaluation of
the dollar against the euro will also acquire (market, credit). For example, if
the investor buys the Amazon security, and it appreciates by 10%, but the
exchange rate of the Euro depreciates against the Dollar by 20%, the net
effect will be a loss of value of 10%.

- the model equity portfolio or the related benchmark will be identified, in

order to have a constant reference for the composition of the invested
portfolio.

This first phase of asset modeling / asset allocation therefore identifies a

primary "theoretical" type of activity, to identify "the playing field".

This phase is followed by asset picking, i.e. the selection of the equity
securities that will make up the equity portfolio. Let us remember that in this
text we are talking about equity investment, but, in general, an investor will
compose his own portfolio also diversifying in terms of investment assets.

The investor will select, for the component of his wealth invested in the
equity portfolio, the equity securities, for the component of his wealth
invested in the bond portfolio, the bonds, and so on, until he builds his
overall invested portfolio.

It should be noted that financial tools reason for "overall wealth": the so-
called wealth management is the science that aims at the best investment of
wealth, represented by all the forms of investment available for an investor
(thus including the equity portfolio, the bond, government bonds, mutual
funds, ETFs, certificates, third-party policies, pension funds, etc ...).

Returning to the equity portfolio only, and assuming that you have an equity
model portfolio (with its constraints), the steps that will be followed to make
the investments will tend to be the following:
1) extraction of the perimeter of securities in which, based on the
constraints, it is potentially possible to invest - let's take an example. We
assume that an investor wants to invest only in securities of companies with
AAA rating and currency denominated in Euro.

The investor will extract from the investment sites the list of available equity
securities denominated in "Euro" and rated "AAA", excluding all others, and
therefore identifying a first list of securities. This first operation already
determines a first sorting in the universe of equities.

2) identification of the short list of best performing shares - identification

of the "potentially" best performing shares is a very complex operation. As
can be guessed, there is no single rule for picking. The most advanced
investment software can guarantee filters on the lists due to the settings set
by the investors.

It is very important to note that the most advanced software performs these
operations by balancing the choices of investors with the constraints dictated
by the regulations protecting the investors themselves.

However, leaving aside for a moment, only for simplifying purposes, these
aspects, the process followed for the selection of the short list is as follows:

a. the list referred to in point 1 is sorted by historical and current

ROE.

b. shares with a P / E lower than a given level (example less than 2)

are discarded

c. shares with a very low EPS are discarded

d. shares with a high P / BV are discarded

 e. Shares with a Leverage greater than 3 are discarded

The application of the above process leads to the extraction of a list of

shares, potentially, with high growth potential. It is always useful to
remember that this is only one of the methodologies used for the selection of
the short list. Obviously this methodology does NOT guarantee certain
results.

The short list is then further analyzed on the basis of the other financial
statement analysis information (example: EBIT and EBITDA).

The investor at this point actually makes the investments, building the
portfolio through a percentage breakdown of the investments that, if
possible, diversify by sector (for example by investing 10% of the portfolio
in equity in the automotive sector, 10% in equity in the banking sector and
insurance, 10% in the share of the agri-food sector and so on).

The investments made according to the fundamental analysis are therefore

made with a "long term stockholder" perspective, keeping the portfolio
unchanged for a few years and intervening only in the following cases:

1) sale of a security, to achieve a certain percentage of earnings on it (eg: we

have set ourselves the goal of achieving a gain in absolute value of 20% on
the initial investment. We have invested in a security a value of € 20,000 and
after 2 months there is a leap that brings the title to € 24,000. The title is
sold.)

2) sale of a security, to achieve a loss greater than a given percentage (so-

called "stop loss"). The stop loss is generally not applied to investments with
a long term stockholder perspective, since in the long term statistically
equity investments tend to perform positively.
3) sale of the portfolio to achieve the "target" horizon and overall review of
the portfolio. When building the portfolio, it is appropriate to set "targets" to
which the investment is dedicated. Example: 3 years or 5 years. At the end of
the reference period, the results of the investments are taken into account, in
order to review the portfolio, take the gains and losses home or decide to
renew the portfolio and investments.

1.4.4 MORNINGSTAR 5 STAR SHARES

Among the many services offered, the Morningstar company also has a
particularly accurate and content-rich financial information portal. One of
them, evidently of interest for the accurate assessment of the shares
according to the principles of fundamental analysis, is the "Shares" section.

Morningstar provides stock selection tools according to filters. The company

carries out share classifications with its own analyzes and according to its
own metrics. They are awarded "Stars" to identify the greater or lesser
probability of being profitable for investors.

The Morningstar methodology uses a prudence-oriented approach and, as

required by fundamental analysis techniques, aims to identify securities that
have a much lower price than that which should derive from the corporate
structural analysis.

It seems that the statistics prove Morningstar right, as prices tend to

converge towards the estimated value for more than 50% of the cases.

Shares with four and five stars are exchanged at "discounted" prices and,
according to the Morningstar methodology, should therefore be convenient
for the purchase and establishment of an equity portfolio.

On the contrary, shares with one or two stars would be "overvalued"

compared to the values ​deriving from fundamental analyzes. Therefore, they
should not be purchased and, if held in the portfolio, it may be appropriate to
reduce their weight.

In evaluating the shares, the analyzes, as mentioned, have a prudential

attitude: they are based on the analysis of the macro-economic context,
placing the companies within this context and therefore evaluating strengths
and weaknesses based on the context trend where they fit.

Based on this premise, the analyzes try to estimate the influence of the
context on company performance, in the short and long term, also
considering the factors that may affect the volatility of the securities.

The analysts, through the stars, consequently provide assessments in terms

of convenience in making purchases or sales.
Not all Morningstar services are free, so in order to take advantage of some
of them you need to subscribe. It is therefore important to inquire, checking
on the Morningstar website, about the cost of the service, if you decide to
use it.
1.5 TECHNICAL ANALYSIS

When we talk about online trading we refer to the realization of stock market
operations carried out relatively quickly by means of one's own personal
computer, adopting one of the platforms available on the net to be able to
carry out the operations, based on the information and strategies of the
technical analysis.

The term technical analysis means the study of the performance and
behavior of a share by analyzing the historical series of prices and volumes,
in order to predict the future trend of the price to define the purchase and
sale of the security itself.

The technical analysis began with Charles Dow, the founder of the Wall
Street Journal and inventor of the famous "Dow Jones" index, the index of
American industrial stocks. Dow defined the principles of technical analysis
at the beginning of the 1900s, affirming their basic principles and
identifying, through the use of graphs and statistics, the fundamental theories
of technical analysis.
Without going into too much detail, the technical analysis starts from a basic
assumption: the "price" of an action discounts everything. That is, the price
incorporates all the information and "anticipates" what will happen within a
company. Based on this assumption, through the collection of historical price
data, or through the so-called "historical series", it is possible to develop
short-term assessments on the performance of the securities themselves.

In particular, it is possible to identify the so-called "trends", or the trends that

characterize a given period. On the Stock Exchange, therefore, markets in
the Bull (Toro) or Bear (Bear) trend are identified: the first is the positive
trend, desired by all investors. During the Bull phase the shares "tend" to
rise. There may be a few closing days in the negative, but the trend is
tendentially positive, so those who previously bought "earn".

On the contrary, the bear markets tend to lose. The share price is reduced and
those who have previously bought have certainly purchased at a price higher
than the current one.
According to Dow's theory, trends can be broken down into three types. The
primary, which lasts at least a year, the secondary, lasting a few weeks and in
the opposite direction to the primary, and the minor, lasting less than three
weeks and in the same direction as the primary.

Each primary trend has three phases: accumulation, public participation and
distribution. During the accumulation phase, the equity securities are
purchased by the "precursors", ie by those who anticipate the mass
movements and invest when the market has not yet perceived the upward
movement.

In the public participation phase, when the news of the "goodness" of the
investment has spread, the "mass" enters, investing large amounts of capital
and making the price of the share rise. Finally, the distribution phase,
represented by the entry on the stock of the last investors and by a
decreasing rise in the price. The trend in this phase is reversed: it goes from
an increasing phase to a decreasing phase. It is the end of the growth of the
price of a security.

An important observation is related to the "volumes", that is the quantities of

"money" and the number of exchanges that take place on a given security.
Dow points out that a trend, to be such, must be confirmed by the
"volumes", ie by "substantial" capitals and by a copious number of
exchanges.

According to Dow, an "Uptrend" phase, that is, a rise in prices, to be

confirmed, must be accompanied by increasing volumes. On the contrary, a
phase of price growth accompanied by a drop in volumes indicates a
probable fall in prices and a reversal of trends.
Again according to Dow, history repeats itself, so that a certain pattern, or a
certain trend (also graphical) of prices and volumes that occurred in the past,
will repeat itself where the conditions exist, consisting of an equivalent trend
of prices and volumes.

1.5.1 HOW TO FIND A TREND

In order to identify trends, it is important to identify the minimum and

maximum points, absolute and relative, or the "peaks" (minimum and
maximum values) of the share prices. Growing trends are identified by a
series of subsequently increasing peaks and troughs, with increasing
volumes. On the other hand, decreasing trends are identified by the opposite
condition. In some cases, however, the price values ​remain stable within a
"channel": in this case there is the so-called "lateral" market or "lateral"
trend. The lateral trend is one of the most complex phases: the market could
go up or down and it is up to the technical analyst to decide what to do.

Graphs and statistics meet the technical analyst in the analysis. In fact, the
technical analyst adopts both linear and more complex graphs, such as
Japanese candles, in order to identify their trends and reversals. It is clear
that the goal of each technical analyst is to "buy" at the beginning of a
bullish trend and sell at the end of it, that is, before a bearish trend
"destroys" the price of a share.

1.5.2 TECHNICAL ANALYSIS GRAPHS

By plotting the graphs of price trends and trends, it is possible to make
interesting observations and hypotheses on the future trend of prices. The
history of a security often shows that, around certain price values, purchases
or sales are concentrated and, in particular, around certain levels it becomes
difficult to go up in price or go down in price. Hence the concepts of support
and resistance.

A support is a price in which the demand is particularly strong and the sellers
are unable to prevail, therefore at this price level it will be difficult to slide
towards lower levels. Where the support is violated, the price will drop
violently and will be in an area between this support and the lower support.

The moment a support is passed, it is called "breaking the support". A

historical low represents, for example, an interesting level of support. A
value which, even psychologically, is fixed in the mind of investors; a price
below which it is difficult to sell.

On the contrary, a resistance, on the other hand, is the price for which the
offer is particularly strong; consequently, as soon as the purchase price
reaches this threshold, there are sellers willing to sell the security.

A historical maximum is, for example, a classic example of resistance. Also

in this case, the "break", with substantial volumes, of a resistance,
determines the "positioning" of the price between the resistance overcome
and the next.
Often an exceeded resistance turns into a support.

It is possible to distinguish between two main types of support and resistance

levels: dynamic and static ones.
Static supports and resistances are those defined by precise "points" and
punctual "prices" (example: the historical minimum and maximum prices,
previously mentioned). Graphically, static supports and resistances can be
represented by a "straight line" that crosses them.

Then there are dynamic supports and resistances, that is marked by

ascending or descending trends. These levels are determined by the trend of
the trend and are "tracked" by the union of successive maximum points or
subsequent minimum points. The straight line joining these points, projected,
can determine a hypothetical future price fluctuation.
Dynamic supports and resistances are therefore represented as a straight line,
but not a horizontal one. This line is evidently called dynamic, in that it
adjusts and updates with changes in prices and with the passage of time.

The technical analyst carries out continuous evaluations: by means of

software, the historical price series is analyzed and updated continuously,
adding minute by minute or second by second, during the trading sessions,
the data of the last prices. The graphic technique used, as mentioned, can be
different.
Previously we referred to the "linear" graphs. However, it is also possible to
refer to bar charts or the so-called "Japanese candles".

The latter are characterized by a vertical rectangular structure (body or body)

followed by lines (shadow). The rectangular structure and the lines are
positioned on a Cartesian plane, where the following are highlighted:

1) on the abscissa axis (x) the closing dates

2) the closing prices on the ordinate axis

Candles assume the four price values ​(opening, closing, minimum and
maximum), and on the basis of these values ​they assume the following
colors:

1) red, in the event of a bearish close

2) green in the event of a bullish closure

To date, most trading software allow the simultaneous use of all the types of
graphs previously listed.
The main difference between linear and multidimensional graphs (bar or
candlestick) consists in the wealth of data represented by the graph.
Candlestick and bar graphs represent, in a single graph, not only the final
price (like the linear graphs) but also the opening prices, the minimum and
maximum points.

Candlestick charts, in particular, thanks to a particular "coloring", allow you

to identify at a glance the positive and negative days of the Stock Exchange.
 1.5.3 MOBILE AVERAGES

As we have already said, the technical analysis adopts so much analysis that
make use of graphs, when statistical evaluations. The family of technical
indicators most used is in fact that of the so-called moving averages, that is,
calculations of averages capable of "cushioning" the effect of fluctuations
outside trends, anesthetizing misleading price movements.

How are moving averages calculated? Moving averages are rolling averages,
ie averages calculated by identifying the latest measurements in a given time
interval. For example, a 15-day moving average is calculated daily using the
prices of the last 15 closings (precisely, the sum of the prices of the last 15
sessions divided by 15).

As can be seen, the average updates daily and allows you to identify trends.
The succession of the moving averages, or the historical "series" of the
moving averages, allows us to highlight the movement that tends to rise or
fall in prices.

Typically, moving averages are compared: different ones are calculated, over
different time intervals, to better understand short and long-term movements.
For example, a quarterly and a fortnightly moving average can be calculated.

The second, more reactive, will be able to better grasp the trend changes and
short-term movements, the first, more static, will be able to grasp the
primary trend and the variations of it.

There are, however, different types of moving averages. The simplest is the
arithmetic one, constructed according to what has already been explained:
summation of the detections divided by the number of detections.
Another type of moving average is the weighted one. The latter attributes
increasingly growing weights to the most recent surveys. In fact, if we start
from the assumption that prices discount everything and that, therefore, the
most recent prices are more suitable to actually represent what is the correct
evaluation of a security, then it makes sense to attribute greater weight to the
latest findings and a lower weight to previous surveys.

Past price fluctuations are therefore dampened, while more recent price
fluctuations are accentuated.
It will be evident that regardless of the type of moving average calculated
(the exponential moving average has been omitted specifically for reasons of
simplicity), what interests the trader is the detection of a "signal": purchase
or sale. The trader analyzes the trend of the averages, compares them, and
tries to understand, title by title, if it is time to buy or sell.

If, for example, a long-term moving average, with a downward trend, starts
to be disproved by a short-term average, this may indicate a signal for the
trader to evaluate a cautious entry on the security that presents these
movements of the average. The simplest method with which averages are
used is in fact their evaluation with a "trendline" design.
Together with the supports and resistances, the static and dynamic trends, the
trends of the moving averages are drawn. The joint analysis of the
information provided by these tools constitutes the basic paraphernalia of the
trader, for a purchase or sale evaluation.

The trader, remember, generally operates with a short-term perspective.

Fundamentals are not assessed, while the possibility of certain price
movements determined by trends is assessed.

Technical analysts have devised mathematical tools that speed up the

analysis activity, directly providing synthetic "signal" indicators. This is the
case, for example, of the MACD, an acronym in English of "Moving
Average Convergence / Divergence".

This indicator is calculated by subtracting a 12-period moving average from

an exponential moving average of 26 measurements. The MACD is then
compared to a 9 period exponential moving average. If the MACD exceeds
the 9 period moving average, there is a clear bullish signal. Conversely, there
are sales signals.
Although complex indicators such as MACD (also called "oscillators") have
been developed, several studies over time have found that the best
"forecasters" are represented by simple averages, especially where trading
periods of more than eight weeks are considered.

It is important to note that technical analysis and its theory derive only from
"empirical" evaluations: technical analysis is in fact not demonstrable, in its
validity, on a scientific level, as as already observed there is no "natural law"
that you say that the past must necessarily repeat itself (assumed basis of
Dow's teria).
1.6 THE MOST IMPORTANT TECHNICAL ANALYSIS PATTERN

We have previously talked about the main elements characterizing the

technical analysis, i.e. the linear and candlestick charts, the statistical
analyzes on the moving averages, the oscillators such as the MACD.

We are sure that we have aroused a lot of curiosity on the topic of technical
analysis, so, after having strongly advised NOT to make rash investments,
based on the knowledge acquired, we want to provide, as a starting point for
a more advanced phase of study, a section dedicated to the most important
patterns, or to the main movements that can be deduced from the "graphs".

The trader typically uses software specifically set up to identify these

patterns, reporting them where they occur. Based on them, the trader is then
able to decide whether to make purchases or sales, whether to lighten or
strengthen positions, etc ...

We are sure that this section will increase the curiosity of all those who have
seen a thousand times, on television, on the pc or in newspapers, the images
of traders in front of multiple colored screens. Well, those screens show
technical analysis in all its glory.

It is very important to make a clarification once again: the technical analysis

can provide signals, however there is NO certainty that the result is actually
the one identified by the technical analysis itself.
 1.6.1 HARAMI AND ENGULFING

Harami, Engulfing and Tweezer are three fundamental patterns, which

should be known by any trader. They highlight reverse trend movements and
typically very short-term trends. They are easily recognizable and allow the
trader a quick recognition of the situation.

Haramis occur when a candle has a body that contains the body of the next
candle. Shadows, or shadows of the candle, should not be considered in
order to highlight the pattern. Where the Harami manifests itself and is
accompanied by significant volumes, at the end of a trend, it provides a clear
signal of a probable reversal of a bullish (bearish harami) or bearish (bullish
harami) tread.
A movement opposite to the Harami is the Engulfing Pattern. An Engulfing
Pattern is characterized by a small-bodied candle contained by a subsequent
candle from the opposite trend. This type of pattern also anticipates a trend
reversal, the more evident the greater the volumes involved.

1.6.2 TWEEZER

Another figure very similar to the previous ones is given by the Tweezer: the
latter is made up of two following candles (or sometimes even three) of
opposite sign and with equivalent minimum or maximum points (top or
bottom price).
The bottom tweezer can anticipate a bearish movement, while the top
tweezer can anticipate a bullish trend.

1.6.3 HEAD AND SHOULDERS

The head-shoulders is one of the most well-known and interesting technical

analysis figures. It is outlined by the mobile trend lines and is therefore
identifiable through an analysis of movements over a reasonable period of
time (several stock market sessions).

The figure is completed in several stages and it is necessary to distinguish

between the ordinary and the reverse version. Let's see what are the
characteristic phases of the ordinary head and shoulders:
1) Bullish trend: a maximum is formed which will constitute the so-called
"left shoulder". Immediately afterwards there is a downward correction and
a reduction in volumes.

2) After a short lateral phase and then ascent, a second maximum is formed,
higher than the previous one, with a contextual increase in volumes. The
latter, however, are lower than the previous ones. At this point there is a new
downward correction and a new reduction in volumes. The new high is the
"head" of the head and shoulders figure.

3) After this phase, a further maximum (so-called right shoulder) is

generated, lower than the maximum constituted by the head and with
volumes still decreasing compared to the previous ones.

4) The figure is completed when the neckline is perforated. The latter is the
line that connects the minimum points of the shoulders and head. After this
phase, reminding us that we were in a bullish phase, we determine a bearish
or lateral phase, below the previous levels.
The ordinary (bearish) head and shoulders pattern also determines an
interesting indication. The trend of the last high, of the right shoulder,
identifies in fact, the potential price target of the bearish movement.

Specularly to the bearish head and shoulders, the bullish head and shoulders
is determined by opposite movements to what was previously described. The
logic is the same.
 1.6.4 INVESTING WITH THE TECHNICAL ANALYSIS

The investments made through technical analysis are based on the

interpretation of the signals that prices and volumes provide as negotiations
follow one another on the markets. Traders build portfolios based on signals:
they buy on signs of price growth, sell against signs of trend reversal and so
on.

We have previously mentioned some technical analysis tools. The goal was
to provide a very first preview of the technical equipment. In reality, the
patterns are many, the rules to be followed almost infinite and each technical
analyst follows his specifications.

The suggestion for those who want to undertake the specific study of
technical analysis is to study, in addition to manuals, also and above all
through simulators.
There are several on the market. Use them. The investment process for
traders is, paradoxically, simpler than for the long term stockholders:
compared to the amount available, you buy on the strong signals of growing
trends, you sell on the signals (even weaker) of downward trends.

We have not talked about another practice, very risky, which should be
mentioned, which professional traders can have: short selling. Going short of
an equity position means selling securities that you do not own at a given
price (evidently borrowing them from third parties), and then buying them
back later.

Let's take an example. A trader predicts that General Electric stock will drop
20% in 3 days. How can you make money based on this forecast? Selling the
action today to buy it back in three days! That is, by selling the stock that it
does not have in its portfolio today (at today's price, going short of GE
shares), to buy them back at the lowest price in 3 days. The price difference
constitutes the gain or gain for the trader.

It must be said that the short sale was ironically regulated after the world
financial crisis of the second millennium, so today the realization of short
selling operations tends to be feasible only in specific regulated cases.
1.7 SIMPLE ALTERNATIVES TO INVEST IN SHARES

1.7.1 INVESTMENT IN MUTUAL FUNDS

We have analyzed the rudiments of fundamental analysis and technical

analysis. The greatest difficulty that will have been noticed is the need to
constantly monitor the performance of equities. In fact, it must not have been
overlooked that, in the first phase, that of the investment, it is necessary to
be equipped with analysis tools deriving from constant monitoring: time
series, financial statements, information that allow the extraction of data and
the processing of the same, in order to arrive to the selection of the short list
of shares to bet on.
In the case of technical analysis, it will certainly be necessary to start from
historical data, from the last x stock market sessions, in order to identify the
patterns and to be able to spot the shares on which it is possible to activate a
growing trend.

Once the investment has been made, monitoring must continue, especially in
the case of an investment activity of the "trading" type. In fact, it is
necessary to proceed constantly with the continuous processing of data, the
analysis of the answers provided by the algorithms and the constant decision
on what to do. Buy, sell, overweight or underweight? These are the questions
that plague traders day by day. Without time interruptions, continuously.

For the same long term stockholders, who hold substantial portfolios, life is
no less hard. In the text, we have probably taken the concept of the duration
of the investment to the extreme, stating that once the stock picking has been
carried out, the long term stockholder operator basically waits for the target
date to draw conclusions. It is useless to observe that in reality the dressers
monitor, at regular intervals, the progress of their investments.

Certainly, an infra-daily update of the portfolio is not carried out, however

with constant periodicity, monthly or weekly, a trend analysis is certainly
carried out. And a rebalancing of the portfolio with respect to the benchmark
becomes a natural activity.
As can be seen, investing in equity securities requires, in order to increase
risk immunization, the application of the diversification principle, but as the
number of securities in the portfolio increases, the complexity of monitoring
also increases.

However, we have not talked about a very important investment factor:

timing. The timing of the investment, or the time when the investment is
made, is very important, since the price at which you buy can determine the
result in terms of profits and losses of the investment itself.

The choice of the wrong moment in which a security is purchased, therefore

becomes a prerogative for the loss of capital or for a lower profit for the
investor.

Since nobody has a crystal ball, it will be clear that an investment made
entirely in a given instant has a very low probability of "hitting" the peaks of
minimum or maximum, absolute or relative, in the trend of the share price.
Yet most non-professional investors persist in pursuing the right timing. Let's
take an example that will clarify the problem in a very simple way.

An investor has 10,000 euros and is, we assume, completely unaware of the
issue of diversification. He wants to invest in stocks because he has "heard"
around that the stock market makes a lot.
What will the investor do? He will invest in the action that is "on the
shields", or in the action that, on the day or days prior to his investment,
seems to have performed better and has been "mentioned" by all the
financial newspapers. The investor therefore typically enters a positive trend
in the action itself.

What if the trend is in its terminal phase? The investor sees his investment
grow for a short period, even if, unbeknownst to him, the "peak" is close ...
Once the maximum is reached, the price of the security will begin to fall ...

What will the investor do now? He will think that it is a phase of settling,
that the stock will go back up and will wait for a later moment to sell ... But
maybe this will not happen and the stock will continue to go down ... In the
best case, the inexperienced investor at this point sells, accumulating the
loss.

In the worst ... The investor will adopt the fateful thought "It won't be worse
than this." And it will try to obtain other savings to invest on the same
security. Unfortunately, in these cases the stories are not with a happy ending
and soon the investor will find himself with a handful of flies in his hand.
We specifically exaggerated in the narrative to explain one of the typical
non-professional investor behaviors that follow the "timing". That is, they
tend to never sell when the stock grows, as they "fear" not to benefit from
further appreciation.

Likewise, they do not sell when the accumulated loss exceeds significant
percentages, in the hope that the stock itself will rise. In summary, these
investors tend to "fall in love faithfully" with the security they invested on.

From what has been said, it can therefore be easily concluded that
"professional" monitoring and the choice of timing represent a serious
problem for those who want to face the world of investment in stocks. How
to overcome these limits?

A first "professional" investment tool capable of allowing investment in

"shares", overcoming the problems of monitoring and choosing the timing, is
represented by mutual investment funds.
A Mutual Fund is an investment instrument, managed by a professional
operator called "Asset Management Company (AM)", consisting of a set of
financial assets managed according to predefined rules. Mutual funds collect
the assets of a set of investors who decide to invest in the fund's holdings.

What is one of the fundamental characteristics of the Fund? Having to

comply with the "predefined investment rules". The regulations of each fund
contain, in particular, the rules in terms of the presence or absence of the
"Benchmark" to be followed, the risk limits to be respected, the reference
time horizon.
Why then can investing in a mutual fund be a valid alternative to direct
investment in shares? The answer is most rational.

It is possible to choose, based on one's own attitudes and appetite for risk,
the "equity" fund, basically 100% made up of shares, which "replicates" the
investor's will, respecting his will and allowing, however, to increase the
probability of obtaining optimal results in terms of diversification, selection
of the most profitable titles and with the best timing.

For what reason does this happen? Because mutual funds are managed by
managers who operate professionally, day by day, working towards the best
result of investments in shares. The asset management companies evidently
adopt the best performing software aimed at the most profitable manager of
the collected assets.
It is in everyone's interest, Managers and AM, to perform at their best. The
asset management companies earn from the investment in the funds. Indeed,
customers and investors pay commissions for managing the investment
made. But it is clear that the commission is typically commensurate with the
very important work done.

The monitoring, it will be evident, is carried out constantly. On the

investments made, on the market potential and on the respective threats. The
invested portfolio is subject to continuous processing for compliance with
the "underwritten" constraints in the regulatory environment and for the
search for the best profit.
At the same time, the software favors such monitoring. But there is an
additional aspect to consider. Timing. By investing, even on the same
security, as investors subscribe for units, the fund accumulates capital on
securities at "different" prices. The timing problem is therefore overcome by
subscribing at different prices, as subscriptions and investments take place
continuously.

As a result, the funds obtain "average" or "average" prices over time, thus
reducing, in fact, the risk of price volatility and the choice of a timing, so to
speak, wrong.

Although therefore each investor who makes a single investment will see the
investment take place on a certain date, what will count for the evaluation of
his investment will be the fund's NAV, or the Net Asset Value of the fund
itself. This is given by the averaged values ​of the fund's investments in
securities. This is not the place to go into detail about these concepts and
how NAV is calculated.

The message that should however be passed is that the mutual fund allows
you to "mediate" the prices, in the face of continuous investments of your
collected assets, reducing the possibility that "all" the assets are invested in a
given moment and eliminating, in fact , the possibility that the Fund invests
at the maximum (or even minimum) price of a security.

There is therefore a valid alternative to direct investment in a portfolio of

shares: the purchase of units of mutual funds that "approach" the investor's
desire, removing the latter from the hindrance of becoming a trader or a
stock exchange player. In fact, the investor has only to express his
"constraints" and manifest his characteristics as an investor.

The investor will then be able to choose from a "range" of different Funds,
of different investment houses and with different Benchmarks. Furthermore,
the investment in Funds has an additional advantage: for each fund and, in
an almost equivalent way, for each manager, it is possible to identify the
track record of the results obtained and measure the ability to "beat" the
benchmark.

In fact, there are finance sites specialized in funds that allow the definition of
a ranking, a ranking, of funds by category. Those who want to invest in
shares, through the funds, can therefore inquire by "reading" the rankings
and analyzing the results obtained by each fund.

Once you have chosen the Fund and made your investment in it (through
Home Banking or in a Bank Branch, with the support of your trusted
Financial Advisor), the Fund Manager will take care of allocating the best of
the capital in shares, to monitor the trend with respect to the benchmark and
to make purchases, sales and any other operation aimed at making the
portfolio result more efficient, in compliance with the previously stated
constraints.

A particularly important site in this area is Morningstar. The Morningstar

company publishes on-line a very detailed analysis of the Funds present on
the market, of the classifications of the same (for example Geographical
Funds exist, such as Global Equity Funds, European Equity Funds, etc ...,
Sector Funds, such as Technological Equity Funds , Pharmaceutical Equity
Funds, etc ...) and, more importantly, comparison sheets are published,
which report performance and risk data.

Without, even in this case, wanting to go into detail, it is sufficient to note

that there is a very useful screening tool on the site, in order to be able to
orientate oneself within the universe of the offer existing on the market. It
can be really useful to learn how to use the information offered by the site,
getting deeply into the metrics used.
Compared to the Funds, an investment instrument that follows a similar
logic is represented by ETFs, i.e. exchange-traded funds. These tools aim to
replicate "Benchmarks", carrying out minimal interventions in the purchase
and sale policies of the underlying the fund itself.

Although they have the advantage of having much lower costs

(commissions), at the same time, by replicating indices, they have the
disadvantage of being "unmanaged" or "passively managed" investment
instruments. The manager, where present (in some cases "software" manages
the investment policy), is limited to carrying out operations that bring the
invested assets as close as possible to the asset allocation of the Benchmark.
On the contrary, the managers of the Funds, in compliance with constraints
and also with a benchmark, still have degrees of freedom within which to
move, consequently trying to do the best interest of the investor.

For those who want to make equity investments indirectly, it is therefore

preferable to rely on the action of the Managers, who exercise the picking on
the shares based on their potential and not with the ultimate goal of
replicating a basket of a Benchmark.
 1.7.2 THE IMPORTANCE OF BENCHMARK

We have talked several times about the benchmark and its importance. Let's
try to show, in concrete terms, an example of applying the benchmark. To do
this we will use a mutual fund as reference. The reader is cautioned that the
choice is absolutely random and is independent of any invitation to invest in
this fund. Having carried out this necessary premise, let's analyze the
benchmark using a common investment mutual fund: Anima Europa class A.
The information that we will analyze is present on the AM Anima website,
as well as on the fund's reference documentation (in particular, on the KIID
document and on the regulation). It is possible to read the Benchmark. In
this case it is composed of two indices:

- 95% MSCI Europe (reference index for the European market)

- 5% ICE BofA Euro Treasury Bill in Eur - Gross Total Return - a reference
index of the money market / short-term bonds denominated in Euro

Note that the fund adopts an active investment policy: it says that the fund
does not aim to "passively replicate" the indices, and uses the latter to
"compare the results obtained". The investment policy is equipped with
degrees of freedom, which provide the manager with the ability to graduate
the riskiness of the portfolio as well as the exposure to exchange rates.
Although the portfolio tends to be exposed to 100% in shares, the degrees of
freedom define, by constraint, the minimum investment in shares
denominated in European currencies for at least 70%. The manager,
therefore, can calibrate the composition of the portfolio, deciding to
overexpose itself in shares or underexpose due to this constraint and the
benchmark.

Incidentally, the possibility of being exposed to exchange rate risk (currency

risk) is also expressed. This factor is also particularly important, highlighting
a basically active policy of the fund with respect to the reference benchmark.

But let's go back to the benchmarks. The references for the fund in question
are the two indexes previously listed. Let's see how they are composed.

The MSCI Europe index, at the end of 2019, consisted of a basket of

medium and large capitalization companies in 15 developed market
countries (DM) in Europe. With around 440 stocks, the index covers around
85% of the free float market capitalization in European developed markets.

It should be remembered that the MSCI indices were built by Morgan

Stanley Capital International, and represent baskets of securities taken as a
reference starting from a specific historical moment, built according to
specific rules (so that securities can enter or leave the MSCI indices due
compliance or otherwise with the aforementioned rules). The indices are
used precisely as a Benchmark and as "sectoral" market references.

As an example, the cumulative and annual performances, the related risk

indices, of some of the most important MSCI indices are reported:

• MSCI Europe

• MSCI World

• MSCI ACWI IMI

Each index therefore has underlying assets. In the case of MSCI Europe, the
major underlyings are represented by the following:
As you can see, the index is made up of particularly important companies:
Nestlè, Roche, Novartis, etc ..., real giants of the European economy.

In the case of the MSCI Europe index, as mentioned, the constituents are
439 shares. The diversification within the index is generally very high, the
entire panorama of sectors constituting the economy of the European
continent being represented.
The index is updated continuously with the daily prices of the underlying
securities and with the percentage of the weight of the constituent within the
index (index w.%).

The index then becomes a "reference" for many funds, ETFs, etc ... that
invest in similar instruments or similar to European equities. Beating it is a
challenge for the manager and it is the rationale that should push an investor
to choose a Fund (tendentially active investment policy) to an ETF
(tendentially passive investment policy).
Incidentally, the other index will not be discussed here, as it is representative
of another type of financial instrument and this text is dedicated to equities.

Benchmarks are therefore fundamental tools of comparison, to guide the

investor's choices and, at the same time, to guide the management policies of
the fund managers. As a direct consequence, most of the finance sites and, at
the same time, the same asset management companies, favor the comparison
of data, in particular the following data are compared:

• fund performance vs benchamrk performance

• fund risk vs benchmark risk (expressed in terms of volatility)

• risk / return of funds vs. risk / return of benchmarks

If the first two comparisons are immediately understandable, the third
typology will appear rather difficult for a novice investor, therefore it
deserves a minimum depth.

Over the course of time, many economists have wondered how to

simultaneously "grasp" two dimensions of the same phenomenon: yield and
risk.

Let's take an example to understand the problem.

An investor may be offered the choice between two equity investments.

Action X, with an average yield of 5%, and action Y, with an average yield
of 10%. Which title is "better" between the two? If we consider the only
average yield factor, the best security is clearly the second, the Y security.
But we are talking about average returns, so of returns with volatility over
the time of the investment. How would the choice change if it were said that
the first security, X, has a volatility (on average, therefore positive and
negative) of 5% and the second security, Y, has a volatility of 50%?

From the example, it should now be understood that risk and return should
be assessed together, using a photographic metaphor, captured with a single
"snapshot".

Some economists have therefore built indicators that keep risk and return
factors together and allow you to evaluate the "goodness", at least historical,
that is based on historical series, of investments.

A very famous reference index of mutual funds, or an indicator of risk-return

performance, is given by the so-called "Sharpe index". The index was
created by the Nobel Prize winner for economics William Sharpe and is used
to evaluate the performance of a securities portfolio.
It is therefore particularly suitable for evaluating the performance of both the
portfolios contained in a mutual fund and for evaluating the performance of
the portfolio underlying an index.

The Sharpe ratio is calculated as the ratio between the Return on the
portfolio (net of the investment rate of risk-free securities, now close to zero)
and the riskiness of the portfolio itself, measured in terms of the portfolio's
standard deviation.

The higher the index, the more the portfolio is performing well. There are,
however, numerous other risk-adjusted performance indicators, that is, risk-
adjusted performance indicators. It is very important not to refer to a single
indicator but to multiple, in order to have an effective comparison in the
different results. Each index has its own peculiarities.

This text is not specifically dedicated to risk-adjusted performance metrics,

so the reader is invited to carry out further research on the subject, if
interested. It is anticipated that the calculation logics are often quite
complex, as they are developed according to mathematical / financial
theories of not simple approach.
To demonstrate the importance of the benchmark, the graph of the
comparison between the benchmark and the performance of the fund is
given below as an example, once again taking the Anima Europa fund as an
absolutely random reference:
As you can see, taking as a reference a 5-year analysis period, the fund
obtained performances (not adjusted for risk) that tended to be equivalent to
the benchmark for the whole period from January 2015 until May 2016. It is
noted that the performance graph between the Fund and the Benchmark
(omit the graph of the further Category Benchmark) overlaps.

As of September 2016, the Fund appears to have performed differently than

the Benchmark of reference. Movements and trends appear similar, but
performance is different. It does not matter, for educational purposes, to
evaluate who has performed better or worse.

As stated, for the purpose of a complete assessment, it is also necessary to

introduce information regarding risk and calculations relating to "risk
adjusted" performance. However, the importance of the benchmarks in the
evaluation field must be evident.
 1.7.3 INVESTMENT IN COMMON FUNDS WITH
ACCUMULATION PLAN

The purchase of mutual funds has already been mentioned. Purchases can be
made through a "one-off" investment, or at a given time by means of the
payment of a single capital in units of funds, or by means of the subscription
of the so-called accumulation plans.

The accumulation plans are contracts that provide for the periodic
subscription over time, according to a "plan", of units of mutual investment
funds. By way of example, an investor can then decide to subscribe to an
accumulation plan in a European Equity Fund for 60 installments, for a
monthly amount of 100 euros.

By subscribing an accumulation plan, the investor further reduces the effect

of investment timing. In fact, the investor buys units in the fund at different
"fund prices". Be careful not to get confused. The Fund averages the prices
of the underlying assets. The investor can mediate the prices of the fund, by
purchasing units at different times. In short, a double mediation of prices.
Without wanting to go into detail, the subscription of mutual funds through
accumulation plans allows to significantly reduce the risk of the timing of
the investment for the investor.

Accumulation plans typically have one advantage: they can be suspended.

Consequently, the investor can decide not to proceed with the payment of all
the shares, initially envisaged in the plan, if he wishes to adopt the capital
elsewhere. At the same time, the accumulation plans allow the shares already
subscribed to be divested as the plan progresses. For example, at the end of
the 24th month, an investor might decide to divest the shares purchased up to
then, instead proceeding from that moment on with the rest of the
accumulation plan payments.

From what has been stated, it is therefore evident how flexible the adoption
of a tool such as the accumulation plan for the acquisition of Funds with
underlying securities is. Especially in the early stages of a positive trend, the
purchase of an equity fund in the form of the accumulation plan allows you
to approach the positive market phase without the fear of losing the train on
the run or not hitting the most appropriate moment of investment.

We repeat again that, while the investor continues to underwrite units of the
fund over time, the fund manager proceeds continuously with asset
management, making purchases and sales of securities based on monitoring
and prospective market assessments.
1.8 CONCLUSION

If you got this far, it means that you are really interested in the topic of
investing in stocks. You will probably have grown the urge to invest. You
decide what to do. But I would like to give you some advice.

DO NOT move with the DIY. Especially at this early stage. If you are a
neophyte, reading this book will have given you an incredible charge. You
will seem to be able to match the best traders and you would immediately
like to transform a nest egg into a huge capital.

Stop and reflect. It cannot be a simple reading that can transform you into an
equity investment professional. What you are missing is experience.

Once again, what I want to advise you is to entrust yourself to a professional,

be it a bank or an independent consultant or a trading company. It is
important that you avoid dispersing your capital in rash moves. The equity
investment, I repeat from the first page, is risky. So it is good that someone
who already has experience behind him and a certification guides you in this
incredible world.

However, I can invite you to use a simulation tool (there are really many on
the market) to practice and see how you can get by, for example, with
trading on fictitious capital. It may seem like a trivial exercise, but it is not at
all. In a short time, first of all, you can check how disruptive the trends are
and how important is the analysis of the fundamentals. Try playing with
simulations, for example, by replicating a market benchmark.
You could try to build two portfolios: one widely diversified and the other
concentrated on a few stocks, checking not only the performance of the two,
but also the effects in terms of risk.

It takes months before you learn the basics of the equity technique, so
gradually approach the market itself through simulation and, at the same
time, be accompanied by some expert for the management of your capital. In
this phase of "school", I am sure that you will be fascinated by the many
aspects that characterize the stock market and that we have only mentioned
by means of this book that, I hope, has given you passion and interest.

Since we have reached the conclusions, I thank you for having the desire to
apply yourself in this certainly fascinating but not without difficulty
material. I am sure you will have appreciated its beauty and sensed its
vastness.

Thanks once again for choosing my text. I would be grateful if you would
like to release a review on Amazon. It is a source of pride for me to receive
suggestions. The latter encourage me to improve and show me that there is
attention to the work I have done.