There are numerous ways to evaluate stocks. Later in the future, we will cover several financial models to calculate intrinsic value of stock, which require you to read and analyze financial statements. But for now, let us examine basics to get the idea. In a broad perspective, there are two approaches to evaluate stock. One is called fundamental analysis and the other is technical. The difference between the two is not as obvious as there will be some overlaps and one thing performed in fundamental analysis can also be performed in technical. When it comes to investment, it can be classified into either "value" or "growth" investing. This is the most basic division between investors. One of the most well known investor, Benjamin Graham, is considered to be the father of value investing. On the other hand, there are plenty of great investors who made fortunes through growth investing, such as William O'Neil and Gary Pilgrim.
So what's the difference between the two? Growth investor looks for a company that is rapidly expanding in sales and earnings. Most likely, such companies are young and has a potential to become a "major stream" of industry in which the company operates. Such potential or growth may come from a new high-tech product, patent, oversea expansion, or even excellent management. Major components of growth investing are earning and stock price. On the contrary, dividend is not important because most growing companies will waive dividend and use the retained earning to expand its business. For growth investors, intrinsic value of stock is not important. This means you, as a growth investor, do not see the importance of stock price in relation to earning or book value. What is more important is earning growth and stock price momentum. In this case, buy low sell high is not your objective but rather it will be buy high and sell higher.
Value investing, on the other hand, look for stocks that are undervalued. In other words, you are looking for cheap/inexpensive stock. Note stock being cheap is not good enough. Even if a share of stock is trading at $1, it would be worthless if the company is on the verge of breaking-down. What I mean by cheap is undervalued stock in comparison with its market value. Value investing compares stock price (market value) to different measures of business such as earnings, sales, assets and cash flow (intrinsic value). Most of times, value investing require investor to carefully examine financial statements and compute intrinsic value of a company. Then one can determine whether the stock is under or overvalued. In both cases, investor looks for companies with bright prospect.
As mentioned, there are two approaches to evaluate stock. One is fundamental and the other is technical. In the fundamental approach, investor examines company information and evaluate its future success. Here, you will have to pay attention to financial statement including income statement, balance sheet, cash flow and other company released documents such as management note, company related news, etc. In contrary, technical analysis examines the past movement of stock price to predict its future behavior. Here you will analyze how the stock price moved in different market condition (bull/bear) and predict the stock's future movement based on current and projected market condition. It will require lots of charts and graphs to figure out pattern of stock price movement. The catch is that technical analysis focus on market demand and supply rather than intrinsic value of stock.
Wednesday, August 11, 2010
Stock Splits
A stock split occurs when a company increases the number of its stock shares without increasing the total value of equity. This means that you will own a larger number of shares but the total value of investment remains the same. For instance, let's say you have 100 shares of a stock trading at $100. Then your total investment value is $10000. If the stock splits 2 for 1, you will own 200 shares of stock trading at $50. Still, your total invest is worth $10000. What's the catch here? Mathematically, stock split does not affect the value of stock and is completely irrelevant to investors. However, stock splits tends to occur when a company has done well and expect to continue in the future. From the company perspective, a point of stock split is to make its shares available to more investors. If you are investing on a budget, you might hesitate to invest in stock trading at $100 but $50 may sound affordable. Through the stock split, a company can gather more capital and make its stock shares more active in market. Stock splits were very common in the 1990s during the bull market. IMB split twice while Oracle split five times. Microsoft split seven times and Cisco split eight times. One thing that you must note in stock split is the lowered price of stock. Initially, stock split itself does not have impact on the value of stock but it will affect the price movement. Generally, lowered priced stock tends to move quicker than the higher priced ones. In addition, fluctuation or dollar movements of lowered priced stock has a greater % impact on return. For instance $5 increase is a 10 % gain for a $50 stock whereas it is only a 5 % gain for a $100 stock.
Tuesday, August 10, 2010
Asset classes and financial instruments
As mentioned in previous post, there are many different types of investments. They are traded on various markets and distinct natures of each type must be considered when you invest. Hence, investor needs to think about his/her investment goal/objective in order to make proper investments and wisely use their resources.
Major Classes of Financial Assets or Securities include,
Money market
Bond market
Equity markets
Indexes
Derivative markets
In this blog, I will solely focus on equity markets, covering basics of stock.
To briefly go over each market, let us take a look at the money market first.
Money Market Instruments include but are not limited to,
Treasury bills
Certificates of deposits
Commercial Paper
Bankers Acceptances
Eurodollars
Repurchase Agreements (RPs) and Reverse RPs
Brokers’ Calls
Federal Funds
LIBOR Market
Money market instruments are generally considered low risk; hence their returns are low accordingly. They provide liquidity to companies and can be good investment option for those who are risk-aversive.
Here's the chart illustrating rates on money market.
Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity).
Bond Market includes but are not limited to,
Treasury Notes and Bonds
Federal Agency Debt
International Bonds
Inflation-Protected Bonds
Municipal Bonds
Corporate Bonds
Mortgages and Mortgage-Backed Securities
Maturities for bonds:
Notes – maturities up to 10 years
Bonds – maturities in excess of 10 years
Par Value - $1,000
Quotes – percentage of par
The picture below shows the list of treasury issues.
Municipal bonds are the ones issued by state and local government. They can be classified into general obligation and revenue bonds Their maturities range up to 30 years. Interest income on municipal bonds is not subject to federal and sometimes state and local tax. To compare yields on taxable securities, a Taxable Equivalent Yield is constructed.
Corporate bonds are issued by private firms. Most likely, they pay semi-annual interest payments and are subject to larger default risk than government securities. Some of the options in corp bonds are callable and convertible. The chart below shows the investment grade bond list.
Mortgages and Mortgage-backed Securities are developed in the 1970s to help liquidity of financial institutions. Investors have proportional ownership of a pool or a specified obligation secured by a pool. The market has experienced very high rates of growth and has been a hot issue past few years during the financial crisis.
Equity Markets include,
Common stock, which is a residual claim and has limited liability.
Preferred stock, which has fixed dividends and priority over common stock.
Stocks are traded on the markets such as NYSE, AMEX and NASDAQ.
Stock market indexes represent the stocks in the market and show their movement as well as their returns.
There are several indexes worldwide such as Dow Jones Industrial Average (DJIA) and Nikkei average of Japan. They offer ways to compare performance. Several factors must be taken into account when constructing stock indexes. Some of the questions that must be answered are: Are the representative? Broad or narrow? How is it weighted?
Stock indexes can be weighted in various ways. For instance, DJIA is price weighted whereas SP 500 and NASDAQ are market weighted. Let's look at the data below to compute price weighted average.
Using data from Table
Initial value = $25 + $100 = $125
Final value = $30 + $ 90 = $120
Percentage change in portfolio value =
Initial index value = (25 + 100)/2 = 62.5
Final index value = (30 + 90)/2 = 60
Percentage change in index =
-2.5/62.5 = -.04 = -4%
Using data from Table, ABC would have five times the weight given to XYZ.
Graph below shows the comparative performance of different market indexes.
Major Classes of Financial Assets or Securities include,
Money market
Bond market
Equity markets
Indexes
Derivative markets
In this blog, I will solely focus on equity markets, covering basics of stock.
To briefly go over each market, let us take a look at the money market first.
Money Market Instruments include but are not limited to,
Treasury bills
Certificates of deposits
Commercial Paper
Bankers Acceptances
Eurodollars
Repurchase Agreements (RPs) and Reverse RPs
Brokers’ Calls
Federal Funds
LIBOR Market
Money market instruments are generally considered low risk; hence their returns are low accordingly. They provide liquidity to companies and can be good investment option for those who are risk-aversive.
Here's the chart illustrating rates on money market.
Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity).
Bond Market includes but are not limited to,
Treasury Notes and Bonds
Federal Agency Debt
International Bonds
Inflation-Protected Bonds
Municipal Bonds
Corporate Bonds
Mortgages and Mortgage-Backed Securities
Maturities for bonds:
Notes – maturities up to 10 years
Bonds – maturities in excess of 10 years
Par Value - $1,000
Quotes – percentage of par
The picture below shows the list of treasury issues.
Municipal bonds are the ones issued by state and local government. They can be classified into general obligation and revenue bonds Their maturities range up to 30 years. Interest income on municipal bonds is not subject to federal and sometimes state and local tax. To compare yields on taxable securities, a Taxable Equivalent Yield is constructed.
Corporate bonds are issued by private firms. Most likely, they pay semi-annual interest payments and are subject to larger default risk than government securities. Some of the options in corp bonds are callable and convertible. The chart below shows the investment grade bond list.
Mortgages and Mortgage-backed Securities are developed in the 1970s to help liquidity of financial institutions. Investors have proportional ownership of a pool or a specified obligation secured by a pool. The market has experienced very high rates of growth and has been a hot issue past few years during the financial crisis.
Equity Markets include,
Common stock, which is a residual claim and has limited liability.
Preferred stock, which has fixed dividends and priority over common stock.
Stocks are traded on the markets such as NYSE, AMEX and NASDAQ.
Stock market indexes represent the stocks in the market and show their movement as well as their returns.
There are several indexes worldwide such as Dow Jones Industrial Average (DJIA) and Nikkei average of Japan. They offer ways to compare performance. Several factors must be taken into account when constructing stock indexes. Some of the questions that must be answered are: Are the representative? Broad or narrow? How is it weighted?
Stock indexes can be weighted in various ways. For instance, DJIA is price weighted whereas SP 500 and NASDAQ are market weighted. Let's look at the data below to compute price weighted average.
Using data from Table
Initial value = $25 + $100 = $125
Final value = $30 + $ 90 = $120
Percentage change in portfolio value =
Initial index value = (25 + 100)/2 = 62.5
Final index value = (30 + 90)/2 = 60
Percentage change in index =
-2.5/62.5 = -.04 = -4%
Using data from Table, ABC would have five times the weight given to XYZ.
Graph below shows the comparative performance of different market indexes.
Stock return
Here's the bottom line of stock investment. How do you make profit off the stocks?
There are basically two ways. One: Through the dividends. Second: Through the capital appreciation.
When you own a share of stock, you are partial owner of the company and you might share some of the company's profits in form of dividend. Companies report their earnings every quarters and decide whether to pay a dividends or not. Small companies, which is still growing, would not pay dividends most likely. Instead, they will use the retained earning to keep the company grow via investing in project, buying more equipments, hiring more skilled workers, etc. Bigger companies, which are more financially stable and have less room to grow, will return some of their profits back to investors in dividends. To receive a dividend, you must own the stock by the ex-dividend date, which is four business days before the company looks at the list of shareholders to see who gets the dividends. Note that most publications report a company's annual dividend, not the quarterly. In addition to dividend, investor profits off the capital appreciation. The capital appreciation is profit that you earn after buying stock and selling it at a higher price. Buy low and sell high is a basic paradigm of stock investment but buy high and sell higher is as legitimate.
So the total return of stock investment would be, (P1-P0+D1)/P0.
P1 is selling price of stock whereas P0 is purchasing price and D1 is the dividend you received.
If dividend has not paid, then total return would be simply, (P1-P0)/P0.
For instance,
Ending Price = 24
Beginning Price = 20
Dividend = 1
HPR = ( 24 - 20 + 1 )/ ( 20) = 25%
There are basically two ways. One: Through the dividends. Second: Through the capital appreciation.
When you own a share of stock, you are partial owner of the company and you might share some of the company's profits in form of dividend. Companies report their earnings every quarters and decide whether to pay a dividends or not. Small companies, which is still growing, would not pay dividends most likely. Instead, they will use the retained earning to keep the company grow via investing in project, buying more equipments, hiring more skilled workers, etc. Bigger companies, which are more financially stable and have less room to grow, will return some of their profits back to investors in dividends. To receive a dividend, you must own the stock by the ex-dividend date, which is four business days before the company looks at the list of shareholders to see who gets the dividends. Note that most publications report a company's annual dividend, not the quarterly. In addition to dividend, investor profits off the capital appreciation. The capital appreciation is profit that you earn after buying stock and selling it at a higher price. Buy low and sell high is a basic paradigm of stock investment but buy high and sell higher is as legitimate.
So the total return of stock investment would be, (P1-P0+D1)/P0.
P1 is selling price of stock whereas P0 is purchasing price and D1 is the dividend you received.
If dividend has not paid, then total return would be simply, (P1-P0)/P0.
For instance,
Ending Price = 24
Beginning Price = 20
Dividend = 1
HPR = ( 24 - 20 + 1 )/ ( 20) = 25%
Basics of stock trading
Let us cover the basics of stock trading.
When stocks are bought and sold, it's called "trading." When a person says MSFT is trading at $40, that means Microsoft stock is selling at $40 and you will have to pay $40 to buy a share of MSFT stock. Every company listed on the stock market has a ticker symbol, which is the unique code used to identify its stock. For example, IBM is IBM on New York Stock Exchange and Microsoft is MSFT on NASDAQ.
A $1 move in stock price is called a "point." For instance, if MSFT move from $40 to $45, then you'd say it increased 5 points. Commonly, individual investors purchase stocks in block of 100, which is called a "round lot." This facilitate investors to control their stocks and monitor their profits/loss because a one point move up/down adds or subtract $100 from the value of his/her investment.
There are two types of stocks. First type is preferred and the other one is common. Both represent equity/ownership in a company. Basic characteristic of preferred stock is that it has a fixed dividend that does not fluctuate, Those who own the preferred stock receive their dividends before common stock holders. Because of its nature, preferred stocks can be thought of as a bond. It is more similar to liability than the equity. Thus, when the company fails and is liquidated, preferred stock holders are paid before common stock holders. Common stock is what most of individual investors own. Common stocks are available for trading on the market. When you buy a share of common stock, it entitles you to voting right and dividends will fluctuate based on profit/loss of the company.
When stocks are bought and sold, it's called "trading." When a person says MSFT is trading at $40, that means Microsoft stock is selling at $40 and you will have to pay $40 to buy a share of MSFT stock. Every company listed on the stock market has a ticker symbol, which is the unique code used to identify its stock. For example, IBM is IBM on New York Stock Exchange and Microsoft is MSFT on NASDAQ.
A $1 move in stock price is called a "point." For instance, if MSFT move from $40 to $45, then you'd say it increased 5 points. Commonly, individual investors purchase stocks in block of 100, which is called a "round lot." This facilitate investors to control their stocks and monitor their profits/loss because a one point move up/down adds or subtract $100 from the value of his/her investment.
There are two types of stocks. First type is preferred and the other one is common. Both represent equity/ownership in a company. Basic characteristic of preferred stock is that it has a fixed dividend that does not fluctuate, Those who own the preferred stock receive their dividends before common stock holders. Because of its nature, preferred stocks can be thought of as a bond. It is more similar to liability than the equity. Thus, when the company fails and is liquidated, preferred stock holders are paid before common stock holders. Common stock is what most of individual investors own. Common stocks are available for trading on the market. When you buy a share of common stock, it entitles you to voting right and dividends will fluctuate based on profit/loss of the company.
Monday, August 9, 2010
Most Recent H-1B Visa Cap Count
The most recent H-1B visa update was on July 30, 2010. It can be read at:
www.uscis.gov/h-1b_count
As of July 30, 2010, U.S. Citizenship and Immigration Services (USCIS) reports that approximately 27,300 H-1B cap-subject petitions out of 65,000 visas available, and approximately 11,600 petitions qualifying for the advanced degree cap exemption out of 20,000 visas available have been filed.
www.uscis.gov/h-1b_count
As of July 30, 2010, U.S. Citizenship and Immigration Services (USCIS) reports that approximately 27,300 H-1B cap-subject petitions out of 65,000 visas available, and approximately 11,600 petitions qualifying for the advanced degree cap exemption out of 20,000 visas available have been filed.
What is stock or equity?
According to the dictionary definition, stocks are capital paid into or invested in the business by its founders. For exmaple, if you wish to found your own company to sell newspapers, you will have to gather investors, who will inject capital into your company so that you can start to buy equipments, rent office, hire employees, etc. Those people, who buy shares of stocks, are the owners of the company. So what's the difference between stock and equity? Equity in finance refers to the value of an ownership interest in property, including shareholders' equity in a business. In other words, equity means claim on ownership. Stock can be classified into equity but equity does not neccessarily mean stock. For example, equity can be home equity, which is the difference between the fair market value and unpaid mortgage balance on a home. Now that you know what the stock is, let us look at the reasons why you should invest in stock. There are quite a number of financial securities out there including but are not limited to bonds, stocks, derivatives, treasury bills/notes and real estates. All those various fiancial securities have unique characters, which require careful examination of each investment class. Here in this blog, I will soley focus on stocks, which I think is the best investment out there. The reasons are simple. First, stocks have been the best performer over the decades. Let us look at the hard numbers and see what the statistical data tells us. The stock market has returned approximately 10.5 % in comparison with corporate bond's 4.5 %. More over, U.S. treasury returned 3.3 % while inflation also grew at around 3.3 %. So that means if you invested in treasuries, you got nothing after the inflation. Second reason is that investment in stock wiill give you further insight onto derivatives and other complex financial instruements. Although derivatives such as options, futures and swaps require in-depth analysis, they can be used to speculate, which will give higher return than stock. But more importantly, they can be used to hedge. Note that hedging does not mean reduction in risk. Rather it aligns the level of risk with your risk tolerance. In addition to that, there are theoritic artibrage opportunites, which can be exploited to gain risk-free return. All those derivatives will be explored later on this blog. However, let us focus on stocks for now.
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