Investing
Net Asset Value & Tangible Net Asset Value
December 24, 2011 | 
Author The Net Asset Value (or “NAV”) of a company is the residual interest in its assets are all its liabilities have been deducted. In other words, the NAV is the company’s equity and is viewed as a buffer against which the company’s market cap should rarely drop below.
“NAV” or “Shareholder Equity / Number of Shares” = “NAV per Share” and should serve as a rough benchmark below which a good company’s share price should not trade. Sometimes, though, shares do trade below this ratio for a number of reasons…not all of them good. Sometimes the market is factoring in a future loss or stream of losses that will knock into the assets of the business, so trading below this ratio is not always a sign of a bargain.
Looking closer at NAV, though, a company’s books often include assets like software, goodwill, and/or capitalized contracts that might not be worth the same monetary value as they were bought for (hence accounted for). The majority of these assets fall under the category of “intangible assets” (as defined by the IFRS) and are excluded from total assets when calculating the Tangible Net Asset Value or Net Tangible Asset Value (“TNAV”).
The TNAV per share is a very harsh measure of the absolute bottom level that any share in a profitable business should trade, as it assumes that all intangible assets are worthless. In a way, the TNAV can be viewed as a liquidation value of a business (except for the accounting limitations explained below).
NAV and TNAV are both balance sheet based ratio’s and are dependent on the reliability of the balance sheet. In turn, the balance sheet is subject to the same limitations and inconsistencies that plague the accounting system that creates it.
Accounting’s inconsistencies are numerous and include the following major ones:
* Some assets are capitalized at historic cost and this differs from both their resale value/fair value and/or their replacement cost. Which one is more important for NAV and TNAV…?
* Some assets are fair valued while others are not. Thus, you are essentially using apples and banana’s in the same ratio.
* Estimates are an inherent risk in accounting. Accountants have to estimate useful lives of assets for depreciation, estimate residual value to depreciate to, estimate warranties and returns for provisions etc. All these estimates are open to both manipulation and/or error, which add to the unreliability of the eventual ratio.
Thus, while NAV and TNAV are useful to look at, their limitations should be understood. Also, although a business’s assets are important, its ability to generate a profit is far more important from an investor’s point of view and should be emphasised over any liquidation values.
By: Keith McLachlan
Posted in Investing | 
Tags: Accounting System, Asse, Balance Sheet, Bottom Level, Good Company, Inconsistencies, Intangible Assets, Liquidation Value, Market Cap, Monetary Value, Nav, Net Asset Value, Profitable Business, Resale Value, Residual Interest, S Books, S Market, Share Price, Shareholder Equity, Tnav | 
No Comments »
Evaluating Stocks: Fundamentals and Technical Analysis
Certainly, a “complete” course on security analysis is well beyond the scope of this text. There are many excellent books devoted to the subject of how to analyze the value of securities – both from a fundamental as well as a technical standpoint. The goal here is simply to provide a basic understanding of the methods and theories behind each type of stock analysis.
It should be pointed out early on that Fundamental Analysis and Technical Analysis of securities are two fairly radically different approaches to determining the correct [or fair] value of a company’s stock. Let’s start with a general overview of each method and then look into the specifics of each area. Again, for a more detailed examination of each type of analysis, we suggest you refer to our book list and/or the books specifically mentioned throughout this document.
The definitive work on Fundamental Analysis is widely considered to be the classic book “Security Analysis” by Benjamin Graham and David Dodd. This book, which was first published in 1934, is considered by most on Wall Street to be the ‘Bible’ of security analysis.
In fact, it was Benjamin Graham that Warren Buffett studied under when he first started in the stock market. Much of Berkshire Hathaway’s success can likely be traced back to the information and ideas provided in the book Security Analysis and by the teachings of Benjamin Graham (although, it’s widely acknowledged that Warren Buffett put his own spin on things over the years as well).
Fundamental Analysis is just as it sounds. It is based on examining the fundamental pieces of a business and its operation. There are no exotic formulas used. You do not need to be a mathematician. Anyone with a simple calculator and some basic information about a business should be able to employ Fundamental Analysis quite effectively.
The basic idea is if you put a dollar into the business (in the form of buying the stock) how much of a return can you expect. How much yield will you likely see and/or how much growth will you experience based on the operation, markets, competitors and costs of the business. Obviously, not all aspects of these fundamentals can be quantified. Areas such as “good will” or changes in the economy or the consumer can be difficult to nearly impossible to calculate. However, to a large degree Fundamental Analysis throws these items out as uncertainties and simply looks at the cold hard facts which you do have available to you. Things such as costs of goods sold, margins, tangible assets, expenses, etc.
Armed with these basic and tangible numbers, one should rather easily be able to calculate the value and profitability of any business (given the numbers available and/or provided are accurate of course). Once a valuation is arrived at, the person performing the valuation can decide whether or not the market place (in this case the stock market) is applying what could be considered a fair market value to the stock. Certainly, when attempting to make a profit on Wall Street, it is advisable to search out stocks which are (or at least appear are) being improperly or undervalued by the market. For the Fundamental Analyst, once an undervalued security is found, it’s simply a matter of buying the stock and waiting for the market to realize the “more accurate” value of the security (assuming of course he/she is correct in their assumptions).
Find a cheap security, buy it and become rich. If only it were that simple. Or perhaps it is? Just ask Mr. Buffett.
If the definitive work on Fundamental Analysis is provided by Graham and Dodd, then perhaps the definitive work on Technical Analysis is provided by Martin J. Pring in his book “Technical Analysis Explained”. To quote this well regarded book on the definition of Technical Analysis:
“The technical approach to investing is essentially a reflection of the idea that prices move in trends which are determined by the changing attitudes of investors toward a variety of economic, monetary, political, and psychological forces. The art of technical analysis — for it is an art — is to identify trend changes at an early stage and to maintain an investment posture until the weight of the evidence indicates that the trend has reversed.”
Technical Analysis is nothing new. It has been used in one form or another for as long as stocks have been traded. In fact, the star character in one of my all time favorite books (“How I made $2,000,000 dollars in the stock market” by Nicholas Darvas) used mainly Technical Analysis principles in his investing – whether he knew it or not. However, “Charting” also commonly called “Chart Reading”, which Technical Analysis is also referred to as, has become much more popular and widely used in perhaps only the last 20 to 30 years on Wall Street. This may be largely due in part to its more wide spread teaching and acceptance in colleges in more recent years.
If, based on my own experience and knowledge of this method of analyzing securities, I had to summarize all of Technical Analysis down into one central idea, I would put it like this:
The corner stone of Technical Analysis is the concept that no single individual can ever hope to know as much about a security as the whole of Wall Street does at any given time. Because “Wall Street” is made up of everyone who is invested in – or may invest in – the stock market, their collective knowledge about any specific stock and/or the market is such that this mass of people and combined knowledge (i.e. Wall Street) can valuate securities nearly instantaneously and far more accurately than any single individual.
As such, in the mind of the Technician, it follows that there must be no need to use something as “archaic” as Fundamental Analysis to value a stock, when everything known about the stock (and this includes the business fundamentals) is nearly instantly reflected in the stock’s price. In this situation, it would make much more sense to use the recent and historical trends and movements of the stock price to deduce not only the current fair market value of the stock, but where the price “may move” in the future. This future price movement is largely extrapolated based on historical chart patterns and how the stock has faired recently in relation to support and resistance levels. Any Technical Analysis book worth its salt will quickly introduce you to chart patterns such as “double tops”, “trend lines”, etc. It is these patterns which are the core of Technical Analysis.
However, the question of whether or not these patterns on charts can always accurately predict future price movements of a stock is (and probably always will be) up for debate between Fundamental and Technical Analysts. If there is one fundamental (again no pun intended) flaw to Technical Analysis, it is perhaps that over the years Technical Analysis has been [incorrectly] extrapolated to mean that the market will “always perfectly” evaluate a security based on all information known by the markets. Unfortunately, that is not “always” the case.
This brings to mind a funny joke I once ran across in a book (I believe the book was by or about Warren Buffett) regarding how Technical Analysis has been elevated to levels beyond its true capabilities:
A Technical Analyst and his friend were walking across the street. His friend noticed a $10 bill laying in the middle of the road and exclaimed, “Look, there is a $10 bill in the road”. At which point the Technical Analyst said “If it were really a $10 bill, it wouldn’t be laying in the road”.
This joke underscores the idea that Technical Analysis may not always evaluate the market without error. However, as long as you keep this point in mind, then Technical Analysis and chart reading can be a helpful tool in both investing and trading.
Finally, we should point out that the term “Quantitative Analysis” on Wall Street simply refers to someone (also sometimes referred to as a “Quant”) who employs a mix of both Fundamental and Technical Analysis in attempting to properly evaluate stocks.
Good luck in the markets!
No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and hot links included. Questions and comments can be sent to Ray at articles@daytraders.com.
By: Ray Johns
Posted in Investing | Tags: Benjamin Graham, Berkshire Hathaway, Bible, Calculator, David Dodd, Definitive Work, Excellent Books, Fundamental Analysis And Technical Analysis, Fundamental Pieces, Mathematician, Scope, Security Analysis, Specifics, Stock Analysis, Stock Market, Stocks Analysis, Technical Standpoint, Wall Street, Warren Buffett | No Comments »
Rouble Devaluation Creates Foundation For Russian Equity Market Rebound
January 2009 was possibly the bleakest beginning to the year that financial markets have seen since the end of the Second World War. Many developed market benchmark indices fell between 6 and 10% as a stream of terrible economic data points confirmed the severity of the global slowdown. The continuing de-leveraging meant the usual January liquidity boost was completely absent , Russia suffered even more as a nasty combination of depressed commodity prices, contracting domestic liquidity and concerns over the level of the Rouble all undermined sentiment. Russian equities fell by more than 15%, which is disappointing, but given the risk profile, not unexpected.????
The situation with the value of the Rouble has become of central focus in the market and one which deserves further comment. Although the recent fall in the Rouble has been seen amongst investors as a major negative, in 1998 the dramatic fall in the value of the Rouble laid the foundations for the recovery of the Russian economy in the following decade. The recent fall in the currency will have a similar, albeit less pronounced, benefit for Russian industry in the coming years. It is fairly clear that many Russian commodity producers have earnings denominated in US$ and costs in Roubles, so it is logical that their future profitability will be increased by the fall in the Rouble. In the bigger picture it would appear that the Russian authorities have made the decision to burn currency reserves in order to give the Russian middle class and Russian businesses time to switch out of roubles and into dollars and Euros in an orderly fashion. In our view Prime Minister Putin, who cherishes his legacy above all, was prepared to do this to avoid the dramatic fall in the real value of savings that Russians suffered in the crisis of 1998. From a purely economic viewpoint this may seem a poor decision – as reserves have fallen from over $500 billion to $380 billion in order to achieve a staggered devaluation .Of course the benefits from the political and social stability which resulted are less tangible, but will likely bare fruit in time. The Rouble has found a level, at around 35 roubles to the US$, that is sustainable and compatible with $30-40 per barrel oil. ?A more stable Rouble could signal better times for the battered Russian equity market, with the removal of currency uncertainty allowing the focus to shift to the improvement in profitability for $ exporting Russian producers.
?
Sentiment towards Russia continues to be excessively pessimistic, with almost all news portrayed in the western press as negative. We disagree. Although the oligarchs have skewered themselves by foolishly leveraging themselves at cyclical highs, causing vast amounts of their stock to swamp the stock market, the overwhelming majority of Russians are not hamstrung by heavy debts on credit cards or mortgages. Additionally although sovereign reserves are lower, they are still amongst the highest in the world. This lays the basis for a continued orderly rebuilding of dilapidated infrastructure from budget surpluses, not additional debt as in the west. Russia continues to have, and to extract, vast reserves of resources that the world continues to find essential- not just oil and gas, but coal, steel, nickel, fertilizer and much more besides. All of these businesses are being priced as almost worthless- fertilizer stocks for example trade on less than 2x earnings- and as long as Russia does not return to the ‘kleptocracy’ which marred the Yeltsin years, these should prove to be exceptional bargains.
By: Jeffrey F. Combs
Posted in Investing | Tags: Central Focus, Commodity Prices, Commodity Producers, Currency Reserves, Domestic Liquidity, Dramatic Fall, Economic Viewpoint, Global Slowdown, Market Rebound, Orderly Fashion, Poor Decision, Prime Minister Putin, Risk Profile, Roubles, Russian Authorities, Russian Businesses, Russian Economy, Russian Equities, Russian Industry, Second World War | No Comments »
Investing – Economic Value Added
Price-Earnings-Ratio (PER) is a simple and familiar method of valuing a stock among investors. However, there are many other ways to value a stock that can be quite complicated and require a technical expertise. It’s impossible to say that any one method is better than others. Therefore, it’s common for analysts to use several valuation methods and come up with different fair values.
Recently, the Economic Valued Added method has gained attention worldwide. This method is intuitively appealing and measures profitability in the way shareholders define it.
Economic Value Added calculates the actual dollar amount of a business’s wealth created or destroyed in each reporting period. It takes into account the opportunity cost (the minimum acceptable compensation for investing in a risky asset as opposed to a less risky market instrument like government bonds) of the company’s capital investment and measures the excess returns over this charge.
A positive Economic Value Added indicates that value is being created; so adding to the intrinsic value of the company by that amount. A negative Economic Value Added, on the other hand, indicates that value is eroded and the company is now worth less than the initial capital employed.
There are eight steps involve in applying Economic Value Added to value a company:
Step 1: Determining a period of financial projection. To calculate returns on capital employed, we first need to estimate the company’s earnings; for instance, in the next five years to 2011. The earnings projection is based on a set of assumptions for future volume sales growth, finished product prices, government duties and inflation.
Step 2: Net operating profit after tax (Nopat) Net operating profit after tax is equivalent to the after tax earnings generated by the company (excluding interest expense). The financing of asset (interest expense) is assumed to be independent of operating results and is instead reflected in the company’s cost of capital.
Step 3: Initial capital employed The total capital employed at the beginning of each year is the assets base from which earnings for the year are generated.
Capital employed = Net fixed assets + Working capital
Step 4: Return on capital employed (ROCE) The yearly returns on capital employed are determined by dividing Nopat by capital employed at the beginning of each year.
ROCE = Nopat ? Capital employed
Step 5: Weighted average cost of capital (WACC) After calculating the Returns On Investment (ROI), match them to the cost of capital. The most commonly used cost of capital is the WACC, which is based on the company’s debt equity capital structure.
WACC = Weighted cost of equity + Weighted after tax cost of debt
After tax cost of debt = [Interest payment x (1-tax rate)] ? Total borrowings
How big a risk premium required for investing in a company is dependent on how risky the stock is relative to the broad market; which known as correlation beta. A high beta implies the stock price is more volatile than the broad market. Therefore, an investor should require a higher than market average return to compensate for the additional risks.
Conversely, a low beta implies that the stock returns will lag a market rally but will be more resilient during a sell down.
Step 6: Excess returns over cost of capital
Excess returns (ER) = ROCE – WACC
Step 7: Economic Value Added and Market Value Added (MVA)
Economic Value Added = ER x Capital employed
Beyond the projected period of 2011, you impute a terminal value (perpetuity); on the basis that the company is an ongoing business concern (for the stream of future Economic Value Added, assuming a constant yearly growth of 1%).
The stream of Economic Value Added is then discounted back to present day values using the WACC calculated previously, the sum of which is the positive value created by the company’s business operations.
MVA = Sum of present value of Economic Value Added stream.
Step 8: Intrinsic value and shareholder value The intrinsic value for the company is its initial capital employed enhanced by the positive value created.
Intrinsic market value = Initial capital employed + MVA
And finally,
Shareholder value = Intrinsic market value – Net debt
Fair value per share = Shareholders’ value ? Number of shares
The company’s primary objective would be to maximize Economic Value Added; which is not necessarily the same as maximizing profits. If the return on an investment is below its cost of capital, then the company prefers not to make the investment at all (even if the absolute magnitude of profit is increased).
By: Michael Russell
Posted in Investing | Tags: Capital Investment, Economic Value Added, Eight Steps, Excess Returns, Fair Values, Financial Projection, Government Bonds, Government Duties, Initial Capital, Interest Expense, Intrinsic Value, Next Five Years, Operating Profit, Opportunity Cost, Price Earnings Ratio, Risky Asset, Tax Earnings, Technical Expertise, Valuation Methods, Volume Sales | No Comments »
Techniques in Market Timing – Price Time Squaring I
In this article I will discuss a technical analysis technique used for forecasting a change in market trend called Price/Time Squaring. It is a technique that many associate with the late great W. D. Gann.
The idea here is to start from a major market top or bottom price and to calculate its ‘square’. At first glance you might think this means to simply square the price by multiplying it with itself. Close, but not exactly.
First, to solve for the ‘time’ itself, you would actually take the ‘square root’ of the starting price. Take for example the weekly chart of Soybeans. Week of December 5, 2008 put in a major market bottom. Using the low of that week (my charts are reverse-adjusted, so your price may differ somewhat) at 626, you take the square root to arrive at 25.02. Because the result is just above 25, it is now inside the 26th square. To understand this, think of the first square to be from 0 to.99. The second square would then begin at 1 to 1.99, etc.
Starting from the December 5, 2008 weekly price bar as bar zero, you start to count 26 price bars to the right. We arrive at June 5, 2009, which turned out to be one weekly price bar from the major top of week June 12, 2009. In the world of market timing, getting to within a single price bar of a major market trend change is quite the edge to have.
Another misconception that some have is that when you are calculating for Price/Time that when ‘time’ arrives the ‘price’ would be at exactly square of the original price. In reality, however, while this may occur at times it is not what should be expected. Rather, when ‘time’ nears the trader should then be looking at price to reach one of the ‘square’ levels for which there will be more than one.
Using our original Soybeans example on a weekly chart, if we were to calculate price levels based on 360 degrees (that of a circle), we would take the square root value of our starting price (25.02), then add 2 to arrive at 27.02. Why 2? The complete reason is beyond the scope of this article. But if you want to solve for 1 complete cycle revolution as on a Square of Nine (aka Gann Wheel), get the square root of any number, add 2, then re-square it and you will arrive at the next 360 degree value that on the wheel. In other words, you would have gone around the wheel and arrived right back to where you started, but the next cycle level up in value.
Anyway, we now re-square 27.02 and arrive at about 730. Therefore, the first 360 degree level is at 730. The second would be at around 834. The third at 939, etc.
The market topped within a few ticks of the 5th level (1146). On a weekly chart, that’s extremely razor sharp.
By: Rick Ratchford
Posted in Investing | Tags: Bar Zero, Bottom Price, First Glance, Market Bottom, Market Timing, Market Trend, Misconception, Soybeans, Square Root, W D Gann, World Market | No Comments »
Calculating Your Equity Release – What Does the Number Crunching Entail?
The lack of a retirement plan or difficult circumstances can make many people thankful for the option of having a home that they can use to tide over financial difficulties. And an equity release helps you do just that. However, in order to ensure that the deal is worth it, you need to ensure you understand exactly what you are getting, and also what you are giving up for it. An equity release calculator will help you do just that.
Most websites that offer you quotes from loan providers will also give you an equity release calculator that you can use to figure out how much you stand to get. This is cheaper than a financial advisor and also very easy. Before you start, you need to understand a few factor that will affect the equity that you release from your home as well as the income that arises from that equity.
• At any given point, the equity of your home will depend considerably on the market value of your home, its age, its condition and any other mortgage you have.
• Lifetime Mortgages will typically bring in more equity than Home Reversions.
• You will not receive all of the value of your house as a loan, you will usually only get a proportion of it.
When using an equity release calculator, you will be asked to pick from a number of options. It’s good to find out how each of these options affects your income.
If you are picking a Lifetime Mortgage, you get these options on your equity release calculator:
1. Roll Up mortgage: No regular payments. The interest is ‘rolled up’ into the loan amount and repaid when the house is sold. If interest rates rise, or if you considerably outlive your expectance, it can mean that the amount to be repaid is much more than what comes from the sale.
2. Fixed Repayment Mortgage: The interest doesn’t ‘rolll-up’ nor do you make regular payments for interest. Instead you and the provider decide on a repayment amount which is fixed and paid when the house is sold. This is usually a better deal, however, you get the loan as a lumpsum only. Also, since the amount to be repaid is higher than the lumpsum, if you end up selling the house very quickly, it may not be a very good deal.
3. Interest Only Mortgage: Where you only pay the interest monthly and the principal amount is recovered from sales proceeds. Not such a good option if interest rates are flexible and rise faster than your income.
If you are choosing a Home Reversion you stand to get anywhere between 20 to 60% of your property value as a lumpsum or income, the older you are the more you get. However while using an equity calculator, bear in mind that:
1. You may have to make some monthly payment in order to continue living.
2. You have already sold the home, so don’t stand to make any profits or pass anything on after your death or when you move out.
3. You will still be expected to maintain and keep the house.
To all of these costs, you will need to add legal fees, arrangement fee & advisor’s fee.
Thus, with an equity release calculator, also ensure you have a good website that gives you lots of options and helps you find the best quotes from providers.
By: Mrunmai Menon
Calculate Net Present Value
Net Present Value (NPV) refers to the sum of a series of cash flows in and out. NPV takes into account the series of cash paid or received in today’s value. This is different from a layman calculation of cash flows which only takes into account the dollar value of the cash flows. Take for example we take out $1000 from our pockets to invest in a business venture. In one year’s time, the business venture pays out $1,100 and we put this money into our pocket.
To a layman, the net investment gain is $100 ($1,100 – $1,000). Using NPV, the amount is smaller. This is because we take into account what our $1,000 initial amount would have earned us if we put it in the bank. Assuming that the interest rate is 5%, our $1,000 would have earned us $1,050. Therefore the net investment gained would have been $50 ($1,100 – $1,050). That’s not all. The amount is what we gained in one year’s time. But in today’s time, that $50 would have worth less today. That means if we put less than $50 into the bank, we would have gotten that $50 in one year’s time. The exact amount is $47.62($50 / 105%). This amount is the Net Present Value of our cash out flow of $1,000 (denoted by a negative sign) and a cash inflow of $1,100 in one year’s time (denoted by a positive sign).
Sounds complicated? Here’s another way of looking at it. That $1,100 in one year would have a present value of $1,047.62 ($1,100 / 105%). Since we took out $1,000 to gain that $1,100 (which has a present value of $1,047.62), the NPV is $47.62.
After you have understood the concept, you would not have to subject yourself to this kind of calculation. You can use a time line to present the above concept and an Excel Formula to calculate the Net Present Value.
By: Jason Khoo
Posted in Investing | Tags: Business Venture, Cash Flows, Cash Inflow, Dollar Value, Excel Formula, Interest Rate, Investment Gain, Layman, Money, Net Present Value, Npv, Pockets, Present Value Of 1, Time Line | No Comments »
What Does Value Stock Mean?
Value stock refers to those investment securities that trade at lower prices regardless of their composition. Composition refers to the underlying factors like dividends, earnings and sales among others. They are considered to be undervalued, so that by the time the investor decides to sell them off, they will have added some value.
The other definitions of value stock that investors may be aware of are; an investment that represents a company that is considered to be lowly priced, mostly because of limited growth prospects. The other definition which closely related to the above is; a security sold by a company whose earnings are in sync with the economy and with the waning of that industry in which the company is based.
In addition to being undervalued, value stocks have characteristics that are attractive to many investors like high dividend yield, low price to book ratio as well as a low price to earning ratio, which is directly derived from the ratio of the price and the returns. The concept behind the low value of the stocks is that there are some companies that choose to trade for less than they are worth.
Value investing was started a long time ago by Benjamin Graham and David Dodd in the early 1900. The concept attracted many investors and it has expanded to become what it is today. It is deemed successful and has added value into the investment habits of many investors. There is need, however, for investors to be on the look out for the future performance of these securities because they are bound to be affected by changing market conditions.
By: Peter Gitundu
Posted in Investing | Tags: Benjamin Graham, Book Ratio, Composition, David Dodd, Definitions, Dividends, Earnings, Economy, Growth Prospects, High Dividend Yield, Investment Securities, Investor, Investors, Long Time, Price To Earning Ratio, Sync, Undervalued Stocks, Value Investing, Value Stock, Value Stocks | No Comments »
Stocks – Buying and Selling Basics – Or What the Heck am I doing in the Stock Market?
When you are looking to purchase shares of stock, there are a few ways to do that. Whether you are talking to your broker, or doing the trading on-line these same terms apply.
The first term is buying at Market. This means you are willing to pay the current price of the stock, as determined by current demand. If you really want to purchase shares at any price and right now, this is the way to do it. You are relinquishing control to the market. You broker, or program will snatch up the shares you desire at the current market price. For example, you want to buy 200 shares of XYZ at market price. When you were initially looking at the company, doing your Due Diligence, the price was at 5 dollars. That seemed like a good entry point, so the next day you put in your Market order. Unknown to you, a few other people saw the same stock and also placed orders. The price was driven up to 7.50, so that is where you purchased your shares. Total cost, $7.50 X 200 shares plus transaction fee of $10 = $1510. If you really wanted the stock, and $7.50 also fit into your model of a good price, you are the proud owner of 200 shares. If you didn’t want to spend $7.50, too bad, you still own the shares. How could you have avoided this?
The next term is called a Limit order. This works similar to the market order, in that you are still saying you want the 200 shares, but you are calling the price. If you put in the order and said 200 shares Limit $5 per share, then $5 is the maximum price you will pay. You are limiting the price. If the price has risen, you will not get the shares. You can also make this have a defined term by saying the order is good until you cancel it, or until the end of the day. You can define the time line you are willing to enact that trade. With the limit order, your cost will be $5 X 200 shares plus transaction fee of $10 = $1010. However, the trade may never take place if the stock doesn’t see the $5 price again. On the other side, if the price is below $5 when you place the order, you will get the lower price and the total cost will be lower. Limit doesn’t say, “I will pay $5.” It sets the maximum you are willing to pay.
The flip side of this is, of course, selling stocks. You must first realize that there are two categories of sells. The first is short term and the second is long term. This is strictly a factor of the time you hold a stock. The dividing line is 365 days. The difference between the two is the tax rate of your gain. If you keep a stock less than a year, the gain (assuming you have a gain) gets taxed at your current bracket. If you hold a stock for more than a year it gets taxed at around 15%. This was put in place to add stability to the market. If people didn’t have this tax rate in the back of their mind, the market would be a lot more unstable. For more on short and long term gains check out This
Another thing you need to keep in mind is the fees that are involved with your buying and selling. If you are a small time investor, especially, this can whack you pretty good. For this discussion, I’m going to take taxes out of the equation. If you buy stock A for $10 a share, and get 10 shares; your total cost is $100. (I realize this is a low number, but it is for illustration purposes only.) Now you add the trade price; on E-trade that is $12.99. So instead of $10 per share, you have paid $11.29 per share.
Cost Breakdown
$100/10 shares = $10 per share
($100 + 12.99)/10 shares = $11.29 Per share
So here you are a year later deciding to sell this stock, and the price is $12.50 per share. That is a 25% gain. Nice trade, smart move. Or is it?
When you sell the stock, you get hit with the same trade cost of $12.99. So we actually paid $11.29 per share, so the gain is not $2.50 but only $1.21 per share. When you add in the cost of the sale, it is even lower. Check out the table.
Buy price
($100 + 12.99)/10 shares = $11.29 Per share
Sell Price
($125 – 12.99/10 Shares = $11.20 per share
Gain/Loss
$112 – $112.90 = – $.90
So after a year you have $99.10 instead of $100. This is obviously an exaggerated case. But even if you would add another 90 shares and say you bought 100 shares, the impact dollar wise is still the same. You r profits are minimized by the cost of the trades. The only difference is in the percentages. In the “buy” portion, the added trade cost makes the price per share $10.13 ($1012.99/100 = 10.129) and likewise on the sell. The sale price is $12.37 per share. The profit in the 100 share scenario is $224.01.
This is a pretty simple concept, but one that people can overlook when they are trying to make “quick cash.” Last year I paid $467 in trade fees. If I had a small portfolio, that could be a huge percentage, and could wipe out any profits I might have made.
By: Robert Britt
Posted in Investing | Tags: Cancel, Control, Current Market, Desire, Driven, Due Diligence, Limit Order, Market Order, Maximum Price, People, Proud Owner, Purchase Stock, Shares, Snatch, Stock Market, Stocks, Time Line, Transaction Fee, What The Heck, Xyz | No Comments »
Penny Stocks Basics for Beginners
Penny stocks are those that are sold for less than $5 per share, although it has many types of definition as based on the market value. Some of the definitions indicate that these are ones that are traded on the pink sheets or over the counter (OTC). The basis is that those companies that have lower value and cannot make it to the stock market trade them.
For beginners, the best thing they can do is to find out adequate information on the trading of these penny stocks. They will be informed in how to select the best types to invest in and the strategies they can use when trading them. These strategies are useful when it comes to selecting the type of brokers they can work with. They need to know that not all brokers and companies are legitimate and they should be careful when selecting them. Finding out information about these brokers and the financial information of the companies they want to deal in will help them in making the right type of decisions.
They will also need to enlighten themselves on the different risks that are associated with trading in this market and the kinds of scams they will be exposed to and how to avoid them. Though not all brokers are bad and fraudulent, the beginners should ensure that they have selected the best ones in terms of the services offered as well as the commissions and other related costs. The most common type of scam the investor should be aware of is the pump and dump scam and the beginners should be careful with this because they will end up with inexpensive shares that no one is willing to purchase. This information is available in different places including online sites that deal with the stocks as well as other literature in investment.
By: Jessica N King
Posted in Investing | Tags: Commissions, Decisions, Definitions, Different Places, Financial Information, Investor, Literature, Otc, Penny Stocks, Pink Sheets, Scams, Stock Market, Trading Stocks | No Comments »