Many Things to Know

Posted on February 12, 2012 by Investment Guru

Investing is easy, of course, when you know many things about this process. The important fact is that financial market is always in change and there is no knowledge that would be enough in any situation.

Even if you know everything about investments now, it does not guarantee a bit that you would be an investment expert after twenty years with the same financial knowledge. Well, here is the thing. Evolution of financial situation and investment tools never stays the same and always is evolving way. Let’s think on example: just try to imagine all the range of derivatives and ETFs a two decades ago.

The computerization of the world has also a lot to do with changes in investment. The key is in the mass of information. When earlier it was hard to find any information, now the problem is to filter this information. The news of the companies, valuation multiples and other investment ratios have mass effect to the investors of the world.

Investing knowledge really have to updated consistently. Only investors that manipulate the most fresh information and the most high-end knowledge can beat the market. Well, now everything is about beating the market. If you can’t beat the market and don’t believe in it then better to chose passive investment.

Each class of investments requires different things to know. For example, if you are specialist in stock investing, it may be that you will fail with bonds and most probably will lose in some derivative investment strategies. Every niche needs separate knowledge and investing is not an exception about this rule.

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Are You Ready for Investing

Posted on January 29, 2012 by Investment Guru

Are you ready for investing? Sounds like a strange question, but I think it is completely normal question. And if I would work as an investment consultant this question would be my first questions to every investor that would come to me as a client. Of course I could lose a client with such a questions but sometimes is better to lose a client than suffer consiqunces when it is too late.

Bad client may cost more than no client at all. The thing is that I’m not investment conlsultnat but according my competence I could easily be one. The main problem of investment consultants is that they take client that aren’t ready for investing. It is simple to take people into investing, promise them a lot of gold and profit and drag in into speculation circle untile they finally lose invesed capital.

But this is wrong and not how this system should work. The thing is that people should be ready for investing. Be ready for investing means not only to be ready for profits but to be ready for losses too. Many investors believe that they are ready for losses theoretically but when in happens in reality they understant that this was wrong. They wasn’t ready but now that is too late. So what to do?

Answer is always the same. Sustain from risky investments if you not feeling ready for real risk yet. Losses from investing may bring very bad feelings for you and you should not hurry for that if you feel not ready enough. The time will come, and timing is really important factor for investing.

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More Reading About Investments

Posted on December 19, 2011 by Investment Guru

Market Capitalization and Enterprise Value

Investment Lessons For You: Introduction

Discounted Cash Flow

Does Institutional Investors Invest in Junk Bonds?

M&A and Acqusitions

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Be Bullish

Posted on December 19, 2011 by Investment Guru

Bullish. Be bullish. Why? Be bullish because you will ride on the a horse of trend.

Let’s first explain what ‘bullish’ means. Bullish it is an attitude that means the investor is an optimist and believes in investment market rise in the near future. In simple words, if you are bullish buy some stocks and start in now, because you are bullish.

Well so why to be bullish or bearish? Yes, it can be a wrong attitude because every investor risks its money. If it will be a real crisis ahead and stock markets will start to decrease, then the losses for all the bulls is inevitable. But losses is a natural thing when you are investing in stocks. One time win other time you will, that is how the market works and this is the reality.

The another thing is trend. If you will always be afraid of long positions then you will miss the opportunities and the most important thing here is you will miss the trend. That means you will loose some interests from capital. It is not a secret that capital has to work and that is what capital does.

Trend during long term is natural thing from stocks, real estate or other equity investments. All such investments does increase in value over long term. And only bull can enjoy this trend.  Nor bears nor pigs can do that neither.

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EBITDA margin

Posted on December 19, 2011 by Investment Guru

EBITDA margin is calculated as a ratio between the EBITDA and revenue of the company. It is easier to calculate this ratio than to calculate EBITDA which may be the main task when calculating EBITDA margin.

The meaning of this margin similar to meanings of other similar margins and there are only differences that should be called nuances that critical differences. It is a profit margin and shows how much of profit company earns compared to its sales. And you can calculated any kind of profit you want. There are no strict rules about that. The main rules is to calculate it correctly and to interpret it correctly. To do that of course you need a lot of practice and similar experience.

Well, margin of EBITDA is a profit margin that is more stable and more clear than just a net profit margin. This says us that better to use EBITDA margin for comparison that EBIT or net margins, that also should be calculated to create additional value. Of course calculation should be made not only for analysed company but also for many others in the same sector, particularly for the competitors in the same niche of a business.

EBITDA margin has a lot of impact to company’s market value. Market value of the company depends mostly on company’s cash flow. EBITDA and cash flow are different things but very closely related. If EBITDA is high then cash flow is also expected to be high and the market value of the enterprise also expected to be high. Those are very related characteristics.

Of course market value depends not only on EBITDA and cash flow. Such indicators as net profit, sales, gross profit, resources, dividends and other also are very important to the is market value but are also related. If there is no EBITDA so it is very hard to expect any net profit or any other kind of profit. The main thing is in here a total profitability and profitability is mirror of EBITDA or the company, which is the mirror of company’s market value.

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Deflation and Stagflation

Posted on December 19, 2011 by Investment Guru

Deflation and stagflation are economical terms that are very important for investors. There may be many different situations over economy and they affect financial market very strongly. And the financial market are everything that matter for a decent investor. For every action there is opposite reaction. And everybody from Newton times is aware about that. But the thing that reaction may even occur without a reaction and nobody is sure that it won’t happen to them. It is how it works and nobody can change that.

Let’s hope everything with financial markets will be ok and lets concentrate on deflation and stagflation. Those terms are very closely related to inflation and both of them are some kind of inflation. Let me remember, that inflation is a indicator that shows the increases in price of goods and services that are mostly used by people.

Deflation is a popular term but not so common situation in reality. It means that inflation is negative, and there are no much of such situations when inflation is negative. Deflation may occur during recessions when everybody stops spending their money and try to keep free funds for themselves as savings or investments. However deflation may occur for many reasons and it is only one of them. Bonds are the best investments that perform quit good because of deflation in real terms. Stocks are quite neutral to inflation and deflation.

Deflation still is not so dangerous as stagflation can be. Stagflation is a combination of high inflation and stagnation of the economy. So the two bad factors come together and that situation isn’t really very favorable to investors. What is favorable to investors is a consistent growth of the economy and stable but small inflation. That are the healthy conditions and everything else can be problematic. But the true is that reality is problematic and the conditions never are perfect. We have just face the reality of the markets and hope they will improve in the future without stagflation. Lets better avoid deflation and stagflation. Of course it doesnt depend of us and are characteristics of the entire economy, but we can choose the markets to invest, market with different currencies and different inflation characteristics.

Investor always can do something to protect investment portfolio. But sometimes he has to sacrifice profits for that and that is very unfavorable condition.

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Diversified Investments and Correlation

Posted on December 19, 2011 by Investment Guru

Diversified investments means an investment portfolio that is very well diversified. Diversification is very important by all means that is the key for successful investment. The first thing to consider when starting investing is a diversification.

Especially is dangerous invest in undiversified single securities as stocks, bonds or similar investments. The thing that results of one investment can be unpredictable. Of course the results of total stock market are not predictable as well but the thing is that such investments are harder predict in single version than total market. Volatility of one security will always be higher that volatility of the total market and it is very imporatant characteristic.

The key thing in diversified investments is the correlation because the correlation says when the investments are well diversified. Diversified investments are okay when correlation in between of investments is very low. The lower correlation is the better because better return on investment may be achieved at the risk level. Risk level is a key parameter because return or riskiness is always chosen according to risk.

So the key parameter is correlation when we want to achieve well diversified investments at our portfolio. Correlation shows how one price of one asset fluctuates together with the price of other asset. Of course, the lower investment correlation is the better because there is a need for better performance of the total investment portfolio. The thing is that we care about results of total investment portfolio but not of the single investment.

We don’t care much how each investment price changes if the value of total portfolio steadily increases. It is the thing for investor despite the fact or he is a retail investor or institutional investor. So the conclusion would be, if you want to achieve well diversified investments at your portfolio then you should concentrate you concerns about correlation between single investments.

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How Dividend Yield Depends on Stock Split

Posted on December 19, 2011 by Investment Guru

Stock investing is not an easy thing to perform. A lot of ratios are used for calculation and are needed to understand. The thing is that when you know those ratios well there is no problem about them anymore, however when you meet them first time they may look really scarry for you.

And this is completely natural at investment or other fields of life. The main thing about ratios that they have strange relations in between that are needed to know. So this time we concentrate on two terms: dividends yield and stock split. Dividend yield is a ratio used for stocks and stock split is more a name of the process than a ratio used in practice.

Dividend yield shows how much investors can earn from stock in form of dividends. The higher dividend yield is the better for investors because he receives larger dividends each time when they are paid. Dividend yield can be as as ten percents or sometimes even more. Of course divideds is not the only thing that matters because there are a lot of different other ratios but dividend yield is the first one that on everybody thinks about.

When stocks split is a divided of stocks par value in smaller parts and increase in number of total shares issued by the company. The main thing in here that total amount of company’s value should not change a bit at least theoretically. Practice works always in its own way but this is another topic. For now lets ask what relation can be between dividend yield and stock split.

If everything goes correctly then there is no real connection. Because the value of total stocks or market capitalization does change only insignificantly during stock split and dividend yield depends on capitalization. So theoretically there is no strong affect of stock split to dividend yield. Investors should still receive the same amount of dividends consistently until company’s activity is healthy.

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Return and Profit Margin

Posted on December 19, 2011 by Investment Guru

Profit Margin

Now we will discuss something about the return and profitability. Are those similar or the same? Well, at first it would depends on the type of the profitability and return. It is a very common in investing by investors to confuse and return and profitability, but it should be completely different things. But at first we should know to what we are applying this kind of ratio.

For example such ratio as some profit margin is completely good ratio, but should be applied to company’s profitability. The main profit margins are net profit margin and EBITDA margin. Both margins can be very important when we want to measure real profitability of the companies. However, it may be not enough to have few of such ratios. Profitability is difficult measurement and a lot of analysis have to be done to get correct profit margin.

But return is different thing because return differs a lot from profit margin. Return shows some profit that are based on assets or investment amount. There are two most popular return ratios: ROA and ROE. The third one would be ROI or return on investment. All those are similar but also have their own nuances in calculation and interpretation of the ratios.

ROA and Return on Investment

Lets concentrate on assets return and ROI ratios. The first i return on assets when the second one is return on investment and both are as profit that is gotten from some kind of asset. In the first case that asset is total assets from balance sheet and in the second case is the real amount of investments. Of course real numbers are always better to use for calculation however they harder to. It is easy to calculate ROA because all we need is just to look at the balance sheet and it can take only few minutes to calculate ROA correctly. But ROA even if easy to calculate can be not so much trustful as other ratios especially as return on investment.

But the usage of return on investment also can be different because this ratio can be used not for corporations but for measurement of investment portfolio performance or performance of single investment. It doesn’t matter where you will use it but you have to know how to do it and use it correctly, return on investment may be a great ratio to manipulate.

Of course you have to know that ROE, ROA and return of investments aren’t the only ratios to measure profitability and the return. As I mentioned there are a lot of profit margin and all kind of different ratios around. Some ratios are better for one sector, but for example financial companies do require completely different kind of financial analysis.

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Buying on Margin

Posted on December 17, 2011 by Investment Guru

Operating Leverage

Buying on margin is a very popular tool to make quick money. Of course, who wouldn’t like to make quick cash. But not everything is that simple. The true is much worse. Because you may not only to win quickly but also to lose quckly all the cash of yours.

Buying on margin is very dangerous because such instruments allows to buy investments using a debt capital. To be more exact a financial leverage is used. Fianncial leverage is much different from operational leverage. Operating leverage allows for us not only to increase risk using more debt but is a result from main activity. Operating leverage means that the risk are created naturrally by what company is doing in they activity field.

But financial leverge is completely different. In case of this leverage a debt is used for acquisitions of stocks or other investments. All king of securities may be acquired on margin, but stocks are the most popular for margin trading and it is not doubt about it. Of course all the derivatives may include the financial leverage in themselves but it is allready completely different thing to discuss.

Buying on Margin

The financial leverage and buying stocks on debt is almost the same because in both cases investors must have some capital of his own also called an equity and also use a debt capitals as other part. Sometimes the share of debt capital may be even larger than the share of own capital but it is not necessary so because there may be a lot of niuances in this niche.

The one thing for sure is riskiness of such trading activity. Both financial leverage and margin trading are extremely risky because all the equity capital may be lost very quickly. This is much riskier then simple investing in stocks. And investing in stocks is risky naturally.

Margin Call

The worst thing that can happen about margin trading or buying on margin is margin call. A margin call means that investor has to sell his shares or trow more money in to trading platform (his investment account). If he doesn’t have more free money to invest then it is necessary to sell some securities like stocks, bonds or funds. But most of the times when margin call is received the times in stock market is really bad and nobody wants to sell their shares so cheaply, but the thing that matters is not what investor wants but what margin call will tell to investing person to do.

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