Answers to these questions truthfully:
1). Is your spouse or partner complain that you take too much money?
2). Are you surprised each month when your credit card bill comes, how much you pay as you thought you had?
3) Do you have more shoes and clothes in your closet than you ever possibly wear?
4) Do you have any new gadget before it has time to dust on a shelf of the dealers?
5) Buy things that you do not know you wanted until you saw them on the display in a store?
If you answered "Yes" to two of the questions above, you are a donor pulse and get in retail therapy.
This is not a good thing. It will prevent you from saving for important things like a house, a new car, a vacation or retirement. You must meet certain financial targets and against money for items that really do not matter in the long run.
Impulse spending will not only be a burden on your finances but your relationships as well. To address the problem, the first thing to do is learn to separate your needs from your wants.
Advertisers blitz us Hawking their products at us 24 / 7 The trick is to find yourself a cooling-off period before you buy something that you have not already planned.
When you go shopping, make a list and take only enough money to pay for what you have planned to buy. Have your credit cards at home.
If you see something you think you really need, give you two weeks to decide whether it is really something you need, or you simply can not. With this simple solution, you will mend your financial fences and your relationships.
Sunday, April 26, 2009
Friday, January 12, 2007
Historical vs projected earnings
A distinction has to be made between the fundamental (or intrinsic) P/E and the way we actually compute P/Es. The fundamental or intrinsic P/E examines earnings forecasts. That is what was done in the analogy above. In reality, we actually compute P/Es using the latest 12 month corporate earnings. Using past earnings introduces a temporal mismatch, but it is felt that having this mismatch is better than using future earnings, since future earnings estimates are notoriously inaccurate and susceptible to deliberate manipulation.
On the other hand, merely because a stock is trading at a low fundamental P/E is not an indicator that the stock is undervalued. A stock may be trading at a low P/E because the investors are less optimistic about the future earnings from the stock. Thus, one way to get a fair comparison between stocks is to use their primary P/E. This primary P/E is based on the earnings projections made for the next years to which a discount calculation is applied.
Dividend Yield
Publicly traded companies often make periodic quarterly or yearly cash payments to their owners, the shareholders, in direct proportion to the number of shares held. According to US law, such payments can only be made out of current earnings or out of reserves (earnings retained from previous years). The company decides on the total payment and this is divided by the number of shares. The resulting dividend is an amount of cash per share. The dividend yield is the dividend paid in the last accounting year divided by the current share price.
If a stock paid out $5 per share in cash dividends to its shareholders last year and its price is currently $50, then it has a dividend yield of 10%.
Historically, at severely high P/E ratios (such as over 100x), a stock has NO (0.0%) or negligible dividend yield. With a P/E ratio over 100x, and supposing a portion of earnings is paid as dividend, it would take over a century to earn back the purchase price. Such stocks are extremely overvalued, unless a huge growth of earnings in the next years is expected.
The P/E & Inflation
There is evidence that the P/E of the market has more to do with changes in consumer prices than any other factor. From 1900 to 2005, the highest average P/E occurred when the average change in consumer prices was 2.6%. In general, the P/E ratio is inversely proportional to the absolute value of the change in prices, in other words, the higher the price change, the lower the P/E. so inflation is directly affected by this.
Some claim that the P/E ratio is mostly dictated by interest rates, but the level of correlation of P/E ratios to interest rates is much lower versus that to the magnitude of price change.
Some claim that the P/E ratio is mostly dictated by interest rates, but the level of correlation of P/E ratios to interest rates is much lower versus that to the magnitude of price change.
Market P/E Ratio
To calculate the P/E ratio of a market index such as the S&P500, it is not accurate to take the "simple average" of the P/Es of all stock constituents. The preferred and accurate method is to calculate the weighted average. In this case, each stock's underlying market cap (price multiplied by number of shares in issue) is summed to give the total value in terms of market capitalization for the whole market index.
The same method is computed for each stock's underlying net earnings (earnings per share multiplied by number of shares in issue). In this case the total of all net earnings is computed and this gives the total earnings for the whole market index. The final stage is to divide the total market capitalization by the total earnings to give the market P/E ratio.
The reason for using the weighted average method rather than 'simple' average can best be described by considering a recessionary period of the economic cycle, where a number of stocks would be reporting a loss. For example, a company with a share price of $100, may have made a slight loss of say 10 cents giving a P/E ratio of -1000 (100/0.1). In another case, a company with a share price of $1 may have made a serious loss of 50 cents giving a P/E ratio of - 2 (1/0.5). This mathematical anomaly would create a misrepresentation of the underlying company losses on the overall market index.
The same method is computed for each stock's underlying net earnings (earnings per share multiplied by number of shares in issue). In this case the total of all net earnings is computed and this gives the total earnings for the whole market index. The final stage is to divide the total market capitalization by the total earnings to give the market P/E ratio.
The reason for using the weighted average method rather than 'simple' average can best be described by considering a recessionary period of the economic cycle, where a number of stocks would be reporting a loss. For example, a company with a share price of $100, may have made a slight loss of say 10 cents giving a P/E ratio of -1000 (100/0.1). In another case, a company with a share price of $1 may have made a serious loss of 50 cents giving a P/E ratio of - 2 (1/0.5). This mathematical anomaly would create a misrepresentation of the underlying company losses on the overall market index.
Determining Share Prices
Share prices are determined by market supply and demand, and thus depend upon the expectations of buyers and sellers. Among these are:
-The company's future and recent performance
-New product lines
-Prospects for companies of this type, the "market sector"
-Prevailing moods & fashions.
By dividing the price of one share in a company by the profits earned by the company per share, you arrive at the P/E ratio. If earnings move up in line with share prices (or vice versa) the ratio stays the same. But if stock prices gain in value and earnings remain the same or go down, the P/E rises. For example, if a stock price was $70 per share and it got $2 in earnings, the P/E is 35, historically high.
The price used to calculate a P/E ratio is usually the most recent price. The earnings figure used is the most recently available, but this figure is often a year old and does not necessarily reflect the current position of the company. Many times, you will hear this referred to as a trailing P/E, because it involves taking earnings from the last four quarters.
It is possible, however, to use the earnings estimate for the next four quarters. When doing so, the ratio is referred to as a projected or forward P/E.
-The company's future and recent performance
-New product lines
-Prospects for companies of this type, the "market sector"
-Prevailing moods & fashions.
By dividing the price of one share in a company by the profits earned by the company per share, you arrive at the P/E ratio. If earnings move up in line with share prices (or vice versa) the ratio stays the same. But if stock prices gain in value and earnings remain the same or go down, the P/E rises. For example, if a stock price was $70 per share and it got $2 in earnings, the P/E is 35, historically high.
The price used to calculate a P/E ratio is usually the most recent price. The earnings figure used is the most recently available, but this figure is often a year old and does not necessarily reflect the current position of the company. Many times, you will hear this referred to as a trailing P/E, because it involves taking earnings from the last four quarters.
It is possible, however, to use the earnings estimate for the next four quarters. When doing so, the ratio is referred to as a projected or forward P/E.
P/E Ratio
The P/E ratio of a stock ("earnings multiple", or simply "multiple", "P/E", or "PE") is used to measure how cheap or expensive its share price is. The lower the P/E, the less you have to pay for the stock, relative to what you can expect to earn from it. It is a valuation ratio included in other financial ratios.
P/E=Price Per Share/Earning Per Share
The price per share (numerator) is the market price of a single share of the stock. The earnings per share (denominator) is the net income of the company for the most recent 12 month period, divided by number of shares outstanding. The EPS used can also be the "diluted EPS" or the "comprehensive EPS"
For example, if stock A is trading at $24 and the Earnings per share for the most recent 12 month period is $3, then the P/E ratio is 24/3=8. Stock A said to have a P/E of 8 (or a multiple of 8). Put another way, you are paying $8 for every one dollar of earnings.
It is probably the single most consistent red flag to excessive optimism and over-investment. It also serves, regularly, as a marker of business problems and opportunities. By relating price and earnings per share for a company, one can analyze the market's valuation of a company's shares relative to the wealth the company is actually creating.
One reason to calculate P/Es is for investors to compare the value of stocks, one stock with another. If one stock has a P/E twice that of another stock, it is probably a less attractive investment. But comparisons between industries, between countries, and between time periods may be dangerous. To have faith in a comparison of P/E ratios, one should compare comparable stocks.
P/E=Price Per Share/Earning Per Share
The price per share (numerator) is the market price of a single share of the stock. The earnings per share (denominator) is the net income of the company for the most recent 12 month period, divided by number of shares outstanding. The EPS used can also be the "diluted EPS" or the "comprehensive EPS"
For example, if stock A is trading at $24 and the Earnings per share for the most recent 12 month period is $3, then the P/E ratio is 24/3=8. Stock A said to have a P/E of 8 (or a multiple of 8). Put another way, you are paying $8 for every one dollar of earnings.
It is probably the single most consistent red flag to excessive optimism and over-investment. It also serves, regularly, as a marker of business problems and opportunities. By relating price and earnings per share for a company, one can analyze the market's valuation of a company's shares relative to the wealth the company is actually creating.
One reason to calculate P/Es is for investors to compare the value of stocks, one stock with another. If one stock has a P/E twice that of another stock, it is probably a less attractive investment. But comparisons between industries, between countries, and between time periods may be dangerous. To have faith in a comparison of P/E ratios, one should compare comparable stocks.
Friday, January 5, 2007
Dividends
Dividends are payments made by a company to its shareholders.
When a company earns a profit, some of it is reinvested in the business and called retained earnings, and some of it can be paid to its shareholders as a dividend. The frequency of these varies by country. In the United States dividends are usually declared quarterly by the board of directors. In some other countries dividends are paid biannually, as an interim dividend shortly after the company announces its interim results and a final dividend typically following its annual general meeting. In other countries, the board of directors will propose the payment of a dividend to shareholders at the annual meeting who will then vote on the proposal.
In the United States, decisions regarding the amount and frequency of dividends is solely at the discretion of the board of directors. Shareholders are explicitly forbidden from introducing shareholder resolutions involving specific amounts of dividends.
Where a company makes a loss during a year, it may opt to continue paying dividends from the retained earnings from previous years or to suspend the dividend. Where a company receives a one-off gain, e.g. from the sale of some assets, and has no plans to reinvest the proceeds, the money is often returned to shareholders in the form of a special dividend.
When a company earns a profit, some of it is reinvested in the business and called retained earnings, and some of it can be paid to its shareholders as a dividend. The frequency of these varies by country. In the United States dividends are usually declared quarterly by the board of directors. In some other countries dividends are paid biannually, as an interim dividend shortly after the company announces its interim results and a final dividend typically following its annual general meeting. In other countries, the board of directors will propose the payment of a dividend to shareholders at the annual meeting who will then vote on the proposal.
In the United States, decisions regarding the amount and frequency of dividends is solely at the discretion of the board of directors. Shareholders are explicitly forbidden from introducing shareholder resolutions involving specific amounts of dividends.
Where a company makes a loss during a year, it may opt to continue paying dividends from the retained earnings from previous years or to suspend the dividend. Where a company receives a one-off gain, e.g. from the sale of some assets, and has no plans to reinvest the proceeds, the money is often returned to shareholders in the form of a special dividend.
Mutual Fund
A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager trades the fund's underlying securities, realizing capital gains or loss, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value (NAV), is calculated daily based on the total value of the fund divided by the number of shares purchased by investors.
Legally known as an "open-end company", a mutual fund is one of three basic types of investment companies available in the United States. Outside of the U.S. (with the exception of Canada which follows the US model), mutual fund is a generic term for various types of collective investment. In the UK and western Europe (including offshore jurisdictions), other forms of collective investment are prevalent including unit trusts, Open-Ended Investment Companies (OEICs), SICAVs and unitized insurance funds.
In Australia the term "mutual fund" is not used, the name "managed fund" is used instead.
However this term is somewhat generic as the definition of a managed fund in Australia is any vehicle where investors' money is managed by a third party (NB: usually an investment professional or organisation). Most managed funds are open-ended, however this need not be the case. Additionally the Australian government introduced a compulsory superannuation/pension scheme which although strictly speaking is a managed fund, is rarely identified by this term and called a "superannuation fund" instead due to its special tax concessions and restrictions on when the money can be accessed.
Legally known as an "open-end company", a mutual fund is one of three basic types of investment companies available in the United States. Outside of the U.S. (with the exception of Canada which follows the US model), mutual fund is a generic term for various types of collective investment. In the UK and western Europe (including offshore jurisdictions), other forms of collective investment are prevalent including unit trusts, Open-Ended Investment Companies (OEICs), SICAVs and unitized insurance funds.
In Australia the term "mutual fund" is not used, the name "managed fund" is used instead.
However this term is somewhat generic as the definition of a managed fund in Australia is any vehicle where investors' money is managed by a third party (NB: usually an investment professional or organisation). Most managed funds are open-ended, however this need not be the case. Additionally the Australian government introduced a compulsory superannuation/pension scheme which although strictly speaking is a managed fund, is rarely identified by this term and called a "superannuation fund" instead due to its special tax concessions and restrictions on when the money can be accessed.
Investment Advisor
An investment advisor (or investment adviser) is an individual or firm that advises clients on investment matters on a professional basis.
They tend to fall into two distinct categories:
investment advisors offering direct financial advice to individuals or businesses, or investment advisors offering asset management for (typically) corporate clients, hedge funds and/or mutual funds. Depending on the nature of the relationship, investment advisors charge fees calculated as a percentage (e.g., 1%) of assets under management, on an annual basis, an hourly or on a "flat fee" basis.
They tend to fall into two distinct categories:
investment advisors offering direct financial advice to individuals or businesses, or investment advisors offering asset management for (typically) corporate clients, hedge funds and/or mutual funds. Depending on the nature of the relationship, investment advisors charge fees calculated as a percentage (e.g., 1%) of assets under management, on an annual basis, an hourly or on a "flat fee" basis.
Stockbrokers
Stockbrokers are people who deal with stock & bonds.
A stock broker sells or buys stock on behalf of a customer. The stock broker works as an agent matching up stock buyers and sellers. A transaction on a stock exchange must be made between two members of the exchange - a typical person may not walk into the New York Stock Exchange (for example), and ask to trade stock. Such an exchange must be done through a broker.
In addition to actually trading stocks for their clients, stock brokers may also offer advice to their clients on which stocks, mutual funds, etc. to buy.
A stock broker sells or buys stock on behalf of a customer. The stock broker works as an agent matching up stock buyers and sellers. A transaction on a stock exchange must be made between two members of the exchange - a typical person may not walk into the New York Stock Exchange (for example), and ask to trade stock. Such an exchange must be done through a broker.
In addition to actually trading stocks for their clients, stock brokers may also offer advice to their clients on which stocks, mutual funds, etc. to buy.
Stock Picking
Although many companies offer courses in stock picking, and numerous experts report success through Technical Analysis and Fundamental Analysis, many economists and academics state that because of Efficient market theory it is unlikely that any amount of analysis can help an investor make any gains above the stock market itself. In a normal distribution of investors, many academics believe that the richest are simply outliers in such a distribution (e.g. in a game of chance, they have flipped heads twenty years in a row).
For this reason most academics and economists recommend that investors invest in funds that follow an index in the market, i.e. long-term and well-diversified investments.
For this reason most academics and economists recommend that investors invest in funds that follow an index in the market, i.e. long-term and well-diversified investments.
Stock Trader
Stock Trader or a stock investor is an individual or firm who buys and sells financial instruments (such as stocks or bonds) in the financial markets.
The difference between stock traders and stock investors is that stock investors tend generally to buy great companies (blue chips). They tend to invest for the long-term and count upon compounded business growth to provide their returns. Stock traders, on the other hand, usually try to profit from short-term price volatility. Sometimes they try to rely upon the psychology of other investors.
Individuals or firms trading as their principal capacity are called stock traders or simply traders. The stock trader is usually a professional. Many people across the world can call themselves stock traders/investors or part-time stock traders/investors, despite having another profession in parallel with their regular trading activities in the financial markets. When a stock trader/investor has clients, and acts as a money manager or adviser with the intention of adding value to his clients finances, he is also called a financial adviser or manager. In this case, the financial manager could be an independent professional or a large bank corporation employee. This may include managers dealing with investment funds, hedge funds, mutual funds, and pension funds, or other professionals in equity investment and fund management. A very active stock trader who holds positions for a very short time and makes several trades each day is a day trader. Other broad or specific designations for different kinds of stock traders include the terms: speculator, hedger, arbitrageur and market maker.
The difference between stock traders and stock investors is that stock investors tend generally to buy great companies (blue chips). They tend to invest for the long-term and count upon compounded business growth to provide their returns. Stock traders, on the other hand, usually try to profit from short-term price volatility. Sometimes they try to rely upon the psychology of other investors.
Individuals or firms trading as their principal capacity are called stock traders or simply traders. The stock trader is usually a professional. Many people across the world can call themselves stock traders/investors or part-time stock traders/investors, despite having another profession in parallel with their regular trading activities in the financial markets. When a stock trader/investor has clients, and acts as a money manager or adviser with the intention of adding value to his clients finances, he is also called a financial adviser or manager. In this case, the financial manager could be an independent professional or a large bank corporation employee. This may include managers dealing with investment funds, hedge funds, mutual funds, and pension funds, or other professionals in equity investment and fund management. A very active stock trader who holds positions for a very short time and makes several trades each day is a day trader. Other broad or specific designations for different kinds of stock traders include the terms: speculator, hedger, arbitrageur and market maker.
Stock Price Fluctuation
The price of a stock fluctuates fundamentally due to the theory of supply and demand. Like all commodities in the market, the price of a stock is directly proportional to the demand. However, there are many factors on basis of which the demand for a particular stock may increase or decrease. These factors are studied using methods of fundamental analysis and technical analysis to predict the changes in the stock price.
Selling Stocks
Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high, if not in that order (short selling); although a number of reasons may induce an investor to sell at a loss, e.g., to avoid further loss.
As with buying a stock, there is a transaction fee for the broker's efforts in arranging the transfer of stock from a seller to a buyer. This fee can be high or low depending on which type of brokerage, discount or full service, handles the transaction.
After the transaction has been made, the seller is then entitled to all of the money. An important part of selling is keeping track of the earnings. Importantly, on selling the stock, in jurisdictions that have them, capital gains taxes will have to be paid on the additional proceeds, if any, that are in excess of the cost basis.
As with buying a stock, there is a transaction fee for the broker's efforts in arranging the transfer of stock from a seller to a buyer. This fee can be high or low depending on which type of brokerage, discount or full service, handles the transaction.
After the transaction has been made, the seller is then entitled to all of the money. An important part of selling is keeping track of the earnings. Importantly, on selling the stock, in jurisdictions that have them, capital gains taxes will have to be paid on the additional proceeds, if any, that are in excess of the cost basis.
Subscribe to:
Posts (Atom)