Pike and Gregory, Why Stocks Go Up and Down

William Pike and Patrick Gregory, who have taught investment courses at the college and professional level, have done the would-be retail investor (and even some experienced investors) a great service by writing Why Stocks Go Up and Down, now in its fourth edition. Naturally, the question posed by the book’s title remains unanswered (and fundamentally unanswerable except at the most obvious level of supply and demand). Instead, the authors direct their attention to the various ways a company can raise capital and the metrics that can be used to assess a company’s financial well-being.

This book starts at the very beginning, with the formation of a private company, and explains the ways the company funds itself and some ratios its investors keep an eye on. It then moves on to the IPO process, explaining primary offerings, secondary offerings, public offerings, private placements, and follow-on offerings.

If the company wants to raise additional funds it might consider issuing bonds. The authors ease the reader into this often ill-understood field before proceeding to more advanced topics, such as “call” and “refunding” provisions and covenants. They also describe convertible bonds, preferred stock, convertible preferred stock, and hybrid preferred securities. By the end of this discussion the reader will probably know more about bonds than 75% of retail investors do.

The third part of the book deals with accounting principles necessary to understand a company’s fundamentals. Although the authors explain such concepts as depreciation, cost versus expense, capitalizing assets, and write-offs, their major focus is cash flow. And wisely so, since it is the key metric for many valuational models.

Finally, the authors relate a company’s stock price to its fundamentals, describing a set of commonly used ratios, including price/earnings, price/cash-flow, and price/sales.

Everyone who buys even a single share of stock should be familiar with the material covered in this book. It provides a necessary foundation for becoming an informed investor. Pike and Gregory are to be commended for writing what they describe as “the book you need to understand other investment books.” Or, as I would suggest, the book you need to read (or some of the stuff you need to know) before you commit hard-earned dollars to the markets.