Can I get a dumbed down explanation of risk measures used for evaluating stocks?
"Standard deviation from Wikipedia : In statistics and probability theory, the standard deviation   (represented by the Greek letter sigma, σ) shows how much variation or   dispersion from the average exists.1 A low standard deviation   indicates that the data points tend to be very close to the mean (also   called expected value); a high standard deviation indicates that the   data points are spread out over a large range of values. In the case of stock returns, a lower value would indicate less volatility while a higher value would mean more volatility, which could be interpreted as high much change does the stock's price go through over time. Mean would be interpreted as if all the figures had to be the same, what would they be? So if a stock returns 10% each year for 3 years in a row, then 10% would be the mean or average return. Now, it is worth noting that there are more than a few calculations that may be done to derive a mean. First, there is the straight forward sum and division by the number of elements idea. For example, if the returns by year were 0%, 10%, and 20% then one may take the sum of 30% and divide by 3 to get a simple mean of 10%. However, some people would rather look at a Compound Annual Growth Rate which in this case would mean multiplying the returns together so 1*(1+.1)*(1+.2)=1.1*1.2=1.32 or 32% since there is some compounding here. Now, instead of dividing a cubic root is taken to get approximately 9.7% average annual return that is a bit lower yet if you compound it over 3 years it will get up to 32% as 10% compounded over 3 years would be 33.1% as (1.1)^3=1.331. Sharpe Ratio from Investopedia: A ratio developed by Nobel laureate William F. Sharpe to measure   risk-adjusted performance. The Sharpe ratio is calculated by   subtracting the risk-free rate - such as that of the 10-year U.S.   Treasury bond - from the rate of return for a portfolio and dividing   the result by the standard deviation of the portfolio returns. Thus, this is a way to think about given the volatility how much better did the portfolio do than the 10 year bond. R-squared, Alpha and Beta: These are all around the idea of ""linear regression"" modelling. The idea is to take some standard like say the ""S & P 500"" in the case of US stocks and see how well does the portfolio follow this and what if one were to use a linear model are the multipliers and addition components to it. R-squared can be thought of it as a measure as to how good is the fit on a scale of 0 to 1. An S & P 500 index fund may well have an R-squared of 1.00 or 0.99 to the index as it will track it extremely closely while other investments may not follow that well at all. Part of modern portfolio theory would be to have asset classes that move independently of each other and thus would have a lower R-squared so that the movement of the index doesn't indicate how an investment will do. Now, as for alpha and beta, do you remember the formula for a line in slope-intercept form, where y is the portfolio's return and x is the index's return: y=mx+b In this situation m is beta which is the multiple of the return, and b is the alpha or how much additional return one gets without the multiple. Going back to an index fund example, m will be near 1 and b will be near 0 and there isn't anything being done and so the portfolio's return computed based on the index's return is simply y=x. Other mutual funds may try to have a high alpha as this is seen as the risk-free return as there isn't the ups and downs of the market here. Other mutual funds may go for a high beta so that there is volatility for investors to handle."
"You should spend zero on your stock research company.  If the management of the company actually had persistent skill in picking stocks, they would not be peddling their knowledge to the retail market for a few hundred dollars.  They would rake in millions and billions by running a huge hedge fund and buy themselves a private island or something.  Unfortunately for them, hedge fund investors are not as gullible as retail investors and are more likely to sue when they discover they have been lied to. Many stock ""research"" companies are trying to manipulate you into paying too high a price for stocks.  They buy a small stock, recommend it, and then sell it at the artificially (and temporarily) high price.  Others are simply recommending stocks pretty much at random. You could do that just as well as they can, and for free. Portfolio performance evaluation is a complex problem.  The research company knows that its recommendations will ""make good money"" about half the time and that's enough to bring in a lot of uninformed people.  To know whether your portfolio actually did well you need to know how much risk there was in the portfolio and how a competing ""dumb"" portfolio with similar characteristics fared over the same time period.  And you need to repeat the experiment enough times (or long enough) to know the outcome wasn't luck.  I can say confidently that your portfolio performance doesn't back up the claim that the research company has skill above and beyond luck.  Much less $599 worth of skill. I can also say very confidently that there are no investors with a total of 20 thousand dollars to invest for whom purchasing stock recommendations is worth the cost, even if those recommendations do have some value.  Real stock information is valuable only to large investors because the per-dollar value is low. Please do not give money to or otherwise support a semi-criminal ""stock research"" enterprise." What are the risks pertaining to timing on long term index   investments? The risks are countless for any investment strategy.  If you invest in US stocks, and prices revert to the long term cyclically adjusted average, you will lose a lot of money.  If you invest in cash, inflation may outpace interest rates and you will lose money.  If you invest in gold, the price might go down and you will lose money.  It's best to study history and make a reasonable decision (i.e. invest in stocks). Here are long term returns by asset class, computed by Jeremy Siegel:  $1 invested in equities in 1801 equals $15.22 today if was not invested and $8.8 million if it was invested in stocks.  This is the 'magic of compound interest' and cash / bonds have not been nearly as magical as stocks historically. 2) How large are these risks? The following chart shows the largest drawdowns (decreases in the value of an asset) since 1970 (source):  Asset prices decrease in value frequently.  Financial assets are volatile, but historically, they have increased over time, enabling investors to earn compounded returns (exponential growth of money is how to get rich).  I personally view drawdowns as an excellent time to buy - it's like going on a shopping spree when everything in the store is discounted. 3) In case I feel not prepared to take these risks, how can I avoid   them? The optimal asset allocation depends on the ability to take risk and your tolerance for risk.  You are young and have a long investment horizon, so if stocks go down, you will have plenty of time to wait for them to go back up (if you're smart, you'll buy more stocks when they go down because they're cheap), so your ability to bear risk is high.  From your description, it seems like you have a low risk tolerance (despite a high ability to be exposed to risk).  Here's the return of various asset classes and how the average investor has fared over the last 20 years (source):  Get educated (read Common Sense on Mutual Funds, A Random Walk Down Wall Street, etc.) and don't be average! Closing words: Investing in a globally diversified portfolio with a dollar cost averaging strategy is the best strategy for most investors.  For investors that are unable to stay rational when markets are volatile (i.e. the investor uncontrollably sells their stocks when stocks decrease 20%), a more conservative asset allocation is recommended.  Due to the nature of compounded interest, a conservative portfolio is likely to have a much lower future value. "Can everybody just sit back and grasp the concepts flying around this topic for a moment?  The *federal government* wants to tell broadcasting networks what kind of compression chain to use for their commercials. How the flying fuck does one *comply* with this kind of regulation? Will networks need to abandon hard-limiting compressors in favor of volume normalization? (Meaning: the government will require networks to favor one brand of compression product, creating an unfair competitive disadvantage for those companies who make simpler, more reliable compression gear sans the algorithmic audio ducking engines). What constitutes a breach of said regulation? How does the federal government measure compliance?  If anybody could provide a source for the actual regulations from the FCC itself, that would be great. We should really be picking *that* apart as opposed to the dumbed-down ""Today Show"" version of the regulation.   But right now, I see no way to combat the claim that this is a fucking idiotic and completely impractical legislation that no networks will actually comply with. There's just no way, from my experience as a audio broadcasting engineer, that this can be enforced. If networks *do comply* voluntarily, it will end up being an enormous burden, both cost-wise and logistically, to implement effectively.   This seems like a gradual step towards regulating the dynamic levels on the side of the commercial developers themselves. After the voting public forgets that the FCC implemented this regulation, they're going to say: now that this is a matter of the federal government, we *need* to control the commercial producers themselves because the previous efforts failed." "Note: the answer below is speculative and not based on any first-hand knowledge of pump-and-dump schemes. The explanation with spamming doesn't really makes sense for me. Often you see a stock jump 30% or more in a single day at a particular moment in time. Unlikely that random people read their emails at that time and decide to buy. What I think happens is the pumper does a somewhat risky thing: starts buying a lot of shares of a stock that has declined a lot and had low volumes during the previous days. As the price starts to increase other people start to notice the jump and join the buying spree (also don't forget that some probably use buy-stop orders which are triggered when the price reaches a particular level). Also there should be some automatic trading involved (maybe HFT firms do pump-and-dumps) as you have to trade a big volume in a relatively short time span. I think it is unlikely to be done by human operators. Another explanation would be that there is a group of pumpers (to spread the risk so to speak). Update: As I think more of it, it is not necessary to buy ""a lot of shares"". You could buy some shares, sell them to another pumper and buy from them again at a higher price in several iterations. I think this could also work if you do it fast enough. These scheme makes sense only you previously bought many shares at the low price, possibly during several weeks. Once the price is pumped high enough you can start selling the shares you previously bought (in the days preceding the pump)." This is only a rule of thumb. Peter Lynch popularized it; the ratio PE/growth is often called the Lynch Ratio. At best it's a very rough guideline. I could fill up this page with other caveats. I'm not saying that it's wrong, only that it's grossly incomplete. For a 10 second eyeball valuation of growth stocks, it's fine. But that's the extent of its usefulness. The point of that question is to test if the user can connect shares and stock price.  However, that being said yeah, you're right. Probably gives off the impression that it's a bit elementary. I'll look into changing it asap. "If you are looking for numerical metrics I think the following are popular: Price/Earnings (P/E) - You mentioned this very popular one in your question.  There are different P/E ratios - forward (essentially an estimate of future earnings by management), trailing, etc..  I think of the P/E as a quick way to grade a company's income statement (i.e: How much does the stock cost verusus the amount of earnings being generated on a per share basis?). Some caution must be taken when looking at the P/E ratio.  Earnings can be ""massaged"" by the company.  Revenue can be moved between quarters, assets can be depreciated at different rates, residual value of assets can be adjusted, etc..  Knowing this, the P/E ratio alone doesn't help me determine whether or not a stock is cheap. In general, I think an affordable stock is one whose P/E is under 15. Price/Book - I look at the Price/Book as a quick way to grade a company's balance sheet.  The book value of a company is the amount of cash that would be left if everything the company owned was sold and all debts paid (i.e. the company's net worth).  The cash is then divided amoung the outstanding shares and the Price/Book can be computed.  If a company had a price/book under 1.0 then theoretically you could purchase the stock, the company could be liquidated, and you would end up with more money then what you paid for the stock. This ratio attempts to answer: ""How much does the stock cost based on the net worth of the company?"" Again, this ratio can be ""massaged"" by the company.  Asset values have to be estimated based on current market values (think about trying to determine how much a company's building is worth) unless, of course, mark-to-market is suspended.  This involves some estimating.  Again, I don't use this value alone in determing whether or not a stock is cheap. I consider a price/book value under 10 a good number.   Cash - I look at growth in the cash balance of a company as a way to grade a company's cash flow statement.  Is the cash account growing or not? As they say, ""Cash is King"".  This is one measurement that can not be ""massaged"" which is why I like it.  The P/E and Price/Book can be ""tuned"" but in the end the company cannot hide a shrinking cash balance. Return Ratios - Return on Equity is a measure of the amount of earnings being generated for a given amount of equity (ROE = earnings/(assets - liabilities)).  This attempts to measure how effective the company is at generating earnings with a given amount of equity.  There is also Return on Assets which measures earnings returns based on the company's assets. I tend to think an ROE over 15% is a good number. These measurements rely on a company accurately reporting its financial condition.  Remember, in the US companies are allowed to falsify accounting reports if approved by the government so be careful.  There are others who simply don't follow the rules and report whatever numbers they like without penalty. There are many others.  These are just a few of the more popular ones.  There are many other considerations to take into account as other posters have pointed out." How you use the metric is super important.   Because it subtracts cash, it does not represent 'value'.  It represents the ongoing financing that will be necessary if both the equity plus debt is bought by one person, who then pays himself a dividend with that free cash.   So if you are Private Equity, this measures your net investment at t=0.5, not the price you pay at t=0.  If you are a retail investor, who a) won't be buying the debt, b) won't have any control over things like tax jurisdictions, c) won't be receiving any cash dividend, etc etc .... the metric is pointless.