On last month's 12th FORBES cruise for investors--aboard the majestic Crystal Serenity, which sailed from the Pacific to the Caribbean through the Panama Canal--guests got these 2008 stock picks from our expert panel.
Ken Fisher is the founder and CEO of Fisher Investments, which manages $46 billion across 20,000-plus private accounts. Fisher said: "Most see a global recession or slowdown in 2008. I don't, not with strong earnings yields relative to low Treasury yields around the world today. Before others figure out the good news, you'll want to be in on these economic turnaround stocks:--Flextronics International (nasdaq: FLEX - news - people ) (FLEX, $11.53) --Manpower (nyse: MAN - news - people ) (MAN, $57.18) --Allianz (nyse: AZ - news - people ) (AZ, $20.16) --Cascade (nyse: CAE - news - people ) (CAE, $46.80) --Union Pacific (nyse: UNP - news - people ) (UNP, $128.96).
Brian Wesbury is the chief economist for First Trust Advisors, which manages $36 billion for private and institutional accounts. Wesbury said: "Our model shows U.S. stocks to be 25% undervalued even when we use a higher 6% yield for the ten-year Treasury bond." (As this column went to press, the yield was 4.1%.) Wesbury thinks the U.S. and the global economy are in a long boom, fueled by tech-led productivity, easy money and tax competition. He likes chip manufacturers and aerospace parts suppliers:--Sigma Designs (nasdaq: SIGM - news - people ) (SIGM, $62.71) --Nvidia (NVDA, $33.28) --Precision Castparts (nyse: PCP - news - people ) (PCP, $138.39) --Parker Hannifin (nyse: PH - news - people ) (PH, $75.06) --Hasbro (nyse: HAS - news - people ) (HAS, $25.84).
Stephen Biggar is the global director of equity research for Standard & Poor's. He recommended any of the 149 five-star stocks within the 1,550 companies covered by Standard & Poor's. Pressed to name just five stocks, Biggar offered us this broad midcap mix:--Carlisle Companies (nyse: CSL - news - people ) (CSL (other-otc: CMXHF.PK - news - people ), $37.62) --CVS Caremark (CVS, $39.13) --Hologic (nasdaq: HOLX - news - people ) (HOLX, $65.08) --Manitowoc Company (nyse: MTW - news - people ) (MTW, $45.90) --Triumph Group (nyse: TGI - news - people ) (TGI, $75.55).
Charles Payne is CEO of Wall Street Strategies, a firm that develops stock selection services for professional traders and institutional investors. Payne is a frequent guest market analyst on Fox News and Fox Business News. He shared these picks:--Diana Shipping (DSX, $29.29) --MEMC Electronic Materials (nyse: WFR - news - people ) (WFR, $83.42) --Evergreen Solar (nasdaq: ESLR - news - people ) (ESLR, $15.02) --VimpelCom (VIP, $35.74) --Guess (GES, $40.10).
Vahan Janjigian is Vice President and Executive Director of the Forbes Investors Advisory Institute. He is the editor of the Forbes Growth Investor and the Special Situation Survey, investment newsletters that have produced five-year annualized returns of 15.3% and 26.6%, respectively, according to the independent Hulbert Financial Digest. Janjigian is also the host of MoneyMasters with Vahan Janjigian, an Internet video program available on Forbes.com and iTunes, and is the coauthor and editor of the Forbes Stock Market Course, as well. Although Janjigian is an economic and market bear, he likes these stocks:--Johnson & Johnson (nyse: JNJ - news - people ) (JNJ, $67.55) --DRS Technologies (nyse: DRS - news - people ) (DRS, $55.31) --Rock-Tenn Company, Class A shares (RKT, $24.50) --Trinity Industries (nyse: TRN - news - people ) (TRN, $26.07) --Avnet (nyse: AVT - news - people ) (AVT, $34.75).
And for You Bears
Disagree with the bullish forecasts given above? Think bad mortgages will torpedo the economy and stocks? Here are some down-market defensive strategies shared during our investor cruise by longtime FORBES columnist Gary Shilling:
--Short home builders. Whoa! Haven’t the home-builder stocks already fallen hard? Not far enough, says Shilling. Home builders trade at book value today but sold for half of book in 1991.
--Don’t just short home builders; short (or sell) mortgage lenders and mortgage insurers, too.
--Sell any residential real estate or land you don’t intend to keep for the long haul. Take small losses, sure to grow larger soon.
--Short or sell companies that make big-ticket consumer items— like cars.
--Short sub-AA-rated CDOs backed by subprime mortgages.
--Get rid of junk bonds.
--Sell or avoid most commercial real estate.
--Sell or short commodities, including oil. Why? The U.S. recession will damage the global economy and suppress demand for commodities. Shilling’s favorite short: copper.
--Short (or sell) emerging-market stocks.
--Short (or sell) emerging-market bonds.
--Sell U.S. stocks in general.
--Buy the U.S. dollar.
Thursday, July 24, 2008
Best stock 2008
I'll make this simple. Apple (Nasdaq: AAPL) is 2008's best stock because it wallops rival electronics retailers in generating sales per square foot:
Company
Retail Revenue (mil)
Square Feet, Retail (mil)
Sales Per Square Foot
Apple
$4,115
1.5
$2,743.33
Best Buy
$32,222
33.3
$967.63
Circuit City
$11,860
17.6
$675.01 Sources: SEC filings, The Motley Fool estimates.
Impressive, yes? I'll say.
I should point out that these numbers are anything but perfect. Apple's retail revenue includes its small but growing international operation. Not so for Best Buy (NYSE: BBY) and Circuit City (NYSE: CC). Apple also operates on a different fiscal calendar than its electronics-retailing peers.
Still, look at that footprint. With just 1.5 million square feet, spread out across roughly 200 stores around the globe, Apple -- the 30-year-old Mac daddy -- is but a baby when it comes to retailing.
Not for long, though. That 4-T black turtleneck you bought little Stevie for Christmas is already ripping at the seams. Apple plans 40 new stores in 2008, many of which will be planted overseas. Mexico, too, if the rumors are true.
Apple: Netflix killer?Apple can still make billions from retailing. But there's also big money waiting in other areas of its business -- video rentals, for example.
Last week, major media outlets reported that Apple had inked a deal with News Corp. to make video rentals available via iTunes. If true, it would put instant pressure on Netflix (Nasdaq: NFLX) to do more with its fledging "Watch Now" free service.
But the news may be bigger than any single deal. Thanks to Hulu, Watch Now, the SlingBox, and TiVo, we've become accustomed to getting programming any time, anywhere, in whatever form we want. You can be sure that Apple CEO Steve Jobs is keenly aware of this, and that iTunes video rentals are on the way. If News Corp. doesn't provide the content, someone else will.
Apple: Palm killer?Then there's the iPhone. The numbers are staggering. Roughly 1.4 million have already sold, which, by my math, will bring in at least $700 million in new revenue for Apple.
But that's a conservative estimate. I'm assuming just $399 per phone, plus $100 for Apple's referral deal with AT&T. We know that many iPhones sold for $600. We also have press reports stating that Apple reaps $18 a month from Ma Bell for each iPhone activated, or $432 over a two-year period.
Do the math with me: 1.4 million multiplied by $831 per iPhone is ... (key-punching sounds) ... $1.16 billion. Apple may have created a billion-dollar business ... in six freakin' months.
It makes me wonder: How can Palm (Nasdaq: PALM) be so slow when the market is moving so fast?
Apple: Windows killer?Finally, let's talk Leopard. No, not the cat; the operating system. The new Mac OS is already a winner, having sold more than 2 million copies in its first weekend of release.
Reviews in my copy of Macworld don't offer breathless praise for the OS, but there's plenty to like, including a very useful new feature called "Time Machine." You select the hard drive you'd like to back up, and the destination for your archived data, and Leopard takes care of the rest.
Elegant system software engineering like this is commonplace for Apple. Before there were retail stores, the iEmpire and its devotees -- yours truly included -- thought superior design would ultimately draw customers away from Microsoft (Nasdaq: MSFT) and Windows. Never happened.
But here's the thing: It still could. Retail stores are as much a showroom for the Mac OS, the iPod, and the iPhone as they are a sales depot. Researcher IDC says that Apple's share of the domestic PC market is climbing as a result.
What's more, with chips from Intel (Nasdaq: INTC), Macs now handle PC programs pretty well. For example, a software application called Crossover allows you to run PC software in the Mac OS without a copy of Windows present. Talk about a rebellion in the making.
Fly the pirate flagNotice the pattern here, Fool. Apple is disrupting every business it enters, and in most cases, doing so successfully. Think about how extraordinary that is. All Microsoft had to do was disrupt the PC business once to unleash billions in market value.
How much more will Apple unleash when it disrupts two? Three? Four? You get the picture. Apple, like so many rebel stocks before it, is a misunderstood multibagger in the making. $200 a share is just the beginning.
But that's my take. If you agree, head over to CAPS to rate Apple "outperform." If not, rate it "underperform." Our editors will tally your votes and, next week, reveal your choice for the best stock of the New Year.
Company
Retail Revenue (mil)
Square Feet, Retail (mil)
Sales Per Square Foot
Apple
$4,115
1.5
$2,743.33
Best Buy
$32,222
33.3
$967.63
Circuit City
$11,860
17.6
$675.01 Sources: SEC filings, The Motley Fool estimates.
Impressive, yes? I'll say.
I should point out that these numbers are anything but perfect. Apple's retail revenue includes its small but growing international operation. Not so for Best Buy (NYSE: BBY) and Circuit City (NYSE: CC). Apple also operates on a different fiscal calendar than its electronics-retailing peers.
Still, look at that footprint. With just 1.5 million square feet, spread out across roughly 200 stores around the globe, Apple -- the 30-year-old Mac daddy -- is but a baby when it comes to retailing.
Not for long, though. That 4-T black turtleneck you bought little Stevie for Christmas is already ripping at the seams. Apple plans 40 new stores in 2008, many of which will be planted overseas. Mexico, too, if the rumors are true.
Apple: Netflix killer?Apple can still make billions from retailing. But there's also big money waiting in other areas of its business -- video rentals, for example.
Last week, major media outlets reported that Apple had inked a deal with News Corp. to make video rentals available via iTunes. If true, it would put instant pressure on Netflix (Nasdaq: NFLX) to do more with its fledging "Watch Now" free service.
But the news may be bigger than any single deal. Thanks to Hulu, Watch Now, the SlingBox, and TiVo, we've become accustomed to getting programming any time, anywhere, in whatever form we want. You can be sure that Apple CEO Steve Jobs is keenly aware of this, and that iTunes video rentals are on the way. If News Corp. doesn't provide the content, someone else will.
Apple: Palm killer?Then there's the iPhone. The numbers are staggering. Roughly 1.4 million have already sold, which, by my math, will bring in at least $700 million in new revenue for Apple.
But that's a conservative estimate. I'm assuming just $399 per phone, plus $100 for Apple's referral deal with AT&T. We know that many iPhones sold for $600. We also have press reports stating that Apple reaps $18 a month from Ma Bell for each iPhone activated, or $432 over a two-year period.
Do the math with me: 1.4 million multiplied by $831 per iPhone is ... (key-punching sounds) ... $1.16 billion. Apple may have created a billion-dollar business ... in six freakin' months.
It makes me wonder: How can Palm (Nasdaq: PALM) be so slow when the market is moving so fast?
Apple: Windows killer?Finally, let's talk Leopard. No, not the cat; the operating system. The new Mac OS is already a winner, having sold more than 2 million copies in its first weekend of release.
Reviews in my copy of Macworld don't offer breathless praise for the OS, but there's plenty to like, including a very useful new feature called "Time Machine." You select the hard drive you'd like to back up, and the destination for your archived data, and Leopard takes care of the rest.
Elegant system software engineering like this is commonplace for Apple. Before there were retail stores, the iEmpire and its devotees -- yours truly included -- thought superior design would ultimately draw customers away from Microsoft (Nasdaq: MSFT) and Windows. Never happened.
But here's the thing: It still could. Retail stores are as much a showroom for the Mac OS, the iPod, and the iPhone as they are a sales depot. Researcher IDC says that Apple's share of the domestic PC market is climbing as a result.
What's more, with chips from Intel (Nasdaq: INTC), Macs now handle PC programs pretty well. For example, a software application called Crossover allows you to run PC software in the Mac OS without a copy of Windows present. Talk about a rebellion in the making.
Fly the pirate flagNotice the pattern here, Fool. Apple is disrupting every business it enters, and in most cases, doing so successfully. Think about how extraordinary that is. All Microsoft had to do was disrupt the PC business once to unleash billions in market value.
How much more will Apple unleash when it disrupts two? Three? Four? You get the picture. Apple, like so many rebel stocks before it, is a misunderstood multibagger in the making. $200 a share is just the beginning.
But that's my take. If you agree, head over to CAPS to rate Apple "outperform." If not, rate it "underperform." Our editors will tally your votes and, next week, reveal your choice for the best stock of the New Year.
What do Value Investors Look for in Stocks?
What factors should you consider when evaluating a value stock? Before we answer that question, maybe we should briefly define value investing.
Value investing is finding a stock that is selling at a discount to its intrinsic value or companies that the market has undervalued for some reason unrelated to its economic fundamentals.
Benjamin Graham pioneered the value-investing concept and recognized the biggest flaw in the strategy: deciding what a company’s intrinsic value is.
Margin of Safety For this reason he always counseled for a margin of safety that provided room should your calculation of the intrinsic value be off.
This is important because the key to successful value investing is buying at the correct price. Graham’s strategy called for a strict discipline on price, which included his margin of safety.
If he could not buy the stock at that price, he would pass.
Many modern stock pickers scoff at the rigidity of his system, yet Graham and his pupils, such as Warren Buffett, have made fortunes sticking to the strategy.
Financial Statistics Here are some of the financial statistics value investors study, historical and forward:
price to book ratios
price to sales ratios
price to earnings ratios
price to cash flow ratios For an explanation of these ratios, see Tools of Financial Analysis.
The value investor will look for these ratios to be below the S&P 500 benchmarks for a company’s industry group.
However, let’s be clear. Value investors are not looking for companies on the way to bankruptcy. They are looking for companies that have been beaten up by the market for no real fault of their own.
One of the ways you can make sure the company is on solid footing is to look at its financials.
Debt Ratios Look in particular at its debt ratios (debt levels should be low) and look for good cash flow. A company with manageable debt and good cash flow is worth getting to know better, regardless of how the market is treating the stock.
How does a good company become a value stock? Several things can happen.
The company may not have a glamorous product. Some products just don’t get much attention, but still must be produced, for example, those orange barrels you see on highway construction sites.
The growth prospects for the stock may not be high relative to other opportunities in the market. During the dot.com stock frenzy of the late 1990s, almost any stock that wasn’t high tech became a value stock in comparison.
If a stock is selling at below $15 - $20, some investors think there must be something wrong with the company. This is an irrational response, but it happens.
Conclusion Successful value investing depends on identifying a stock that is trading under the intrinsic value of the company and buying with a margin of safety in case you have misjudged the intrinsic value.
Value investing is finding a stock that is selling at a discount to its intrinsic value or companies that the market has undervalued for some reason unrelated to its economic fundamentals.
Benjamin Graham pioneered the value-investing concept and recognized the biggest flaw in the strategy: deciding what a company’s intrinsic value is.
Margin of Safety For this reason he always counseled for a margin of safety that provided room should your calculation of the intrinsic value be off.
This is important because the key to successful value investing is buying at the correct price. Graham’s strategy called for a strict discipline on price, which included his margin of safety.
If he could not buy the stock at that price, he would pass.
Many modern stock pickers scoff at the rigidity of his system, yet Graham and his pupils, such as Warren Buffett, have made fortunes sticking to the strategy.
Financial Statistics Here are some of the financial statistics value investors study, historical and forward:
price to book ratios
price to sales ratios
price to earnings ratios
price to cash flow ratios For an explanation of these ratios, see Tools of Financial Analysis.
The value investor will look for these ratios to be below the S&P 500 benchmarks for a company’s industry group.
However, let’s be clear. Value investors are not looking for companies on the way to bankruptcy. They are looking for companies that have been beaten up by the market for no real fault of their own.
One of the ways you can make sure the company is on solid footing is to look at its financials.
Debt Ratios Look in particular at its debt ratios (debt levels should be low) and look for good cash flow. A company with manageable debt and good cash flow is worth getting to know better, regardless of how the market is treating the stock.
How does a good company become a value stock? Several things can happen.
The company may not have a glamorous product. Some products just don’t get much attention, but still must be produced, for example, those orange barrels you see on highway construction sites.
The growth prospects for the stock may not be high relative to other opportunities in the market. During the dot.com stock frenzy of the late 1990s, almost any stock that wasn’t high tech became a value stock in comparison.
If a stock is selling at below $15 - $20, some investors think there must be something wrong with the company. This is an irrational response, but it happens.
Conclusion Successful value investing depends on identifying a stock that is trading under the intrinsic value of the company and buying with a margin of safety in case you have misjudged the intrinsic value.
Supply and Demand Drive Stock Prices
What can stock investors learn from the credit crisis and the declining values in the housing market?
Aside from the damage caused to stock prices thanks to billions in write downs by major financial services companies, the falling values in the housing market is a good reminder of how supply and demand work.
When you read that home prices are tumbling (after years of rising) in major metropolitan markets, you have to ask why.
Has something changed that makes those houses worth less than a year before?
Markets Change The houses haven’t changed, but the market has. In many major cities, the supply of real estate has been behind the demand.
This created and sustained a sellers’ market, which means if there are more buyers than desirable properties prices will rise.
Those properties are no less desirable than they were a year ago, however the credit crisis has reduced the number of potential buyers.
Tougher lending standards may prevent some from qualifying, while others are just nervous about buying property that may continue to decline in value.
Sellers and Buyers The result is there are now more sellers than buyers, which reverses the relationship. With fewer potential buyers in the market, prices will drop as homeowners compete for the sale.
A note about the buyer-seller relationship: In free markets, you must have a willing buyer and a willing seller. When I say there are more sellers than buyers, I mean that sellers are forced to provide incentives to convert reluctant prospects into buyers.
They do this primarily by lowering the price. A prospect is then converted to a buyer.
This seems simple and obvious, but it is how markets work.
In the stock market, the basic principles of supply and demand are the same.
Attractive Stocks When a stock is attractive for whatever reason (great fundamentals, lock on its market, new patent, and so on), there tend to be more buyers than sellers.
Sellers may be coaxed into parting with their stock by a higher price.
For a stock that is out of favor, prospects must be wooed with lower prices to convert them into buyers.
Supply and demand make sense, but what doesn’t always make sense is what causes investors to favor one stock over another.
However, it ultimately comes down to matching willing sellers and willing buyers at a price both agree on for the sale.
Aside from the damage caused to stock prices thanks to billions in write downs by major financial services companies, the falling values in the housing market is a good reminder of how supply and demand work.
When you read that home prices are tumbling (after years of rising) in major metropolitan markets, you have to ask why.
Has something changed that makes those houses worth less than a year before?
Markets Change The houses haven’t changed, but the market has. In many major cities, the supply of real estate has been behind the demand.
This created and sustained a sellers’ market, which means if there are more buyers than desirable properties prices will rise.
Those properties are no less desirable than they were a year ago, however the credit crisis has reduced the number of potential buyers.
Tougher lending standards may prevent some from qualifying, while others are just nervous about buying property that may continue to decline in value.
Sellers and Buyers The result is there are now more sellers than buyers, which reverses the relationship. With fewer potential buyers in the market, prices will drop as homeowners compete for the sale.
A note about the buyer-seller relationship: In free markets, you must have a willing buyer and a willing seller. When I say there are more sellers than buyers, I mean that sellers are forced to provide incentives to convert reluctant prospects into buyers.
They do this primarily by lowering the price. A prospect is then converted to a buyer.
This seems simple and obvious, but it is how markets work.
In the stock market, the basic principles of supply and demand are the same.
Attractive Stocks When a stock is attractive for whatever reason (great fundamentals, lock on its market, new patent, and so on), there tend to be more buyers than sellers.
Sellers may be coaxed into parting with their stock by a higher price.
For a stock that is out of favor, prospects must be wooed with lower prices to convert them into buyers.
Supply and demand make sense, but what doesn’t always make sense is what causes investors to favor one stock over another.
However, it ultimately comes down to matching willing sellers and willing buyers at a price both agree on for the sale.
What is Best Investment you can Make Today?
What is the best investment you can make?
Here’s a hint: It will earn you a guaranteed return that will beat just about any stock on Wall Street.
This investment doesn’t require more than two minutes of research and you have everything you need to begin right now.
I’m not talking about a stock, bond or mutual fund, but an investment in lowering your personal debt.
High Interest DebtToo much high-interest credit card debt is never a good idea and considering the economy remains unstable, now is a good time to reduce those balances.
Start with your highest interest debt (probably a credit card). If you have been a good customer and your interest rate is more than 12 percent, ask the issuer to lower it.
If the issuer won’t give you a break, consider switching the balance to an existing card with a lower interest rate (don’t get a new card just to get a new rate).
Make up your mind to pay off all the high interest debt as soon as possible. This may mean giving up some luxury or skipping expensive presents until the job is done.
Try to avoid adding to any balances and pay as much as you can (at least three times the minimum payment).
Investment ProgramIf you have to slow your investment program (not your retirement account, such as a 401(k)), do so as long as the money goes to pay down your debt.
What about the guaranteed return? How is paying off debt going to earn you a return?
Consider it interest avoidance.
If you are paying 12 percent (or more) on your credit cards or other debt, you are unlikely to earn that level of return on a consistent basis.
So, for every dollar you don’t pay in interest on personal debt, you are effectively paying yourself.
Those unspent interest dollars can go to reduce your debt even more and, best of all, when you pay off your personal debt, the cash flow that you were paying to debtors is now yours to keep.
In any economy, but especially when things a slowing, cash is king and you will have more cash to do with as you please when you aren’t paying off your personal debt.
Once you get out of debt, put away all of your credit cards except one and pay of the balance each month.
Here’s a hint: It will earn you a guaranteed return that will beat just about any stock on Wall Street.
This investment doesn’t require more than two minutes of research and you have everything you need to begin right now.
I’m not talking about a stock, bond or mutual fund, but an investment in lowering your personal debt.
High Interest DebtToo much high-interest credit card debt is never a good idea and considering the economy remains unstable, now is a good time to reduce those balances.
Start with your highest interest debt (probably a credit card). If you have been a good customer and your interest rate is more than 12 percent, ask the issuer to lower it.
If the issuer won’t give you a break, consider switching the balance to an existing card with a lower interest rate (don’t get a new card just to get a new rate).
Make up your mind to pay off all the high interest debt as soon as possible. This may mean giving up some luxury or skipping expensive presents until the job is done.
Try to avoid adding to any balances and pay as much as you can (at least three times the minimum payment).
Investment ProgramIf you have to slow your investment program (not your retirement account, such as a 401(k)), do so as long as the money goes to pay down your debt.
What about the guaranteed return? How is paying off debt going to earn you a return?
Consider it interest avoidance.
If you are paying 12 percent (or more) on your credit cards or other debt, you are unlikely to earn that level of return on a consistent basis.
So, for every dollar you don’t pay in interest on personal debt, you are effectively paying yourself.
Those unspent interest dollars can go to reduce your debt even more and, best of all, when you pay off your personal debt, the cash flow that you were paying to debtors is now yours to keep.
In any economy, but especially when things a slowing, cash is king and you will have more cash to do with as you please when you aren’t paying off your personal debt.
Once you get out of debt, put away all of your credit cards except one and pay of the balance each month.
Expectations of High Returns May Lead to Disappointment
Did you buy a stock to turn $10,000 into the $30,000 you need for Junior’s next year in college?
If so, you’re not investing, you’re gambling, and, unless you are incredibly lucky, you will not meet your goal.
The expectation of a high return in a short time frame is not realistic. Do stocks every shoot up like rockets?
Risk
Yes, some do. However, you must understand that the market works on a rigid risk-reward basis. If there is little risk to the investor, there will be a lower potential reward.
Investments that offer an extremely high potential reward invariably come with a high level of risk.
For the investor, this means if you are after the big returns, you must be prepared to suffer more losses than rewards.
As an investment choice, stocks have historically returned 10 to 12 percent. Does that mean that every stock should return in that range?
Average
Not at all – that is simply an average. You need to assess the risk of investing in a particular stock before deciding what an acceptable return is.
An investment in a young high tech company should have a higher potential payout than putting your money in a “blue chip” company that posts modest growth and pays a regular dividend.
What would be the risk factor for a stock that could potentially triple in price over a short period? The answer is very high – in fact, so high that the odds of it succeeding would be very slim.
There is no safe (or legal) way to earn a very high return on your money over a short period.
Conclusion
Investing in stocks is best done as a long-term effort, which allows your money to grow and permits time for course corrections and adjustments.
If so, you’re not investing, you’re gambling, and, unless you are incredibly lucky, you will not meet your goal.
The expectation of a high return in a short time frame is not realistic. Do stocks every shoot up like rockets?
Risk
Yes, some do. However, you must understand that the market works on a rigid risk-reward basis. If there is little risk to the investor, there will be a lower potential reward.
Investments that offer an extremely high potential reward invariably come with a high level of risk.
For the investor, this means if you are after the big returns, you must be prepared to suffer more losses than rewards.
As an investment choice, stocks have historically returned 10 to 12 percent. Does that mean that every stock should return in that range?
Average
Not at all – that is simply an average. You need to assess the risk of investing in a particular stock before deciding what an acceptable return is.
An investment in a young high tech company should have a higher potential payout than putting your money in a “blue chip” company that posts modest growth and pays a regular dividend.
What would be the risk factor for a stock that could potentially triple in price over a short period? The answer is very high – in fact, so high that the odds of it succeeding would be very slim.
There is no safe (or legal) way to earn a very high return on your money over a short period.
Conclusion
Investing in stocks is best done as a long-term effort, which allows your money to grow and permits time for course corrections and adjustments.
Tuesday, July 22, 2008
Benefits of ownning commonstock
What Are the Benefits of Owning Common Stock?
News channels, the internet and even newspapers are always bombarding us with common stock prices, telling the world if a determined share went up or down. But, what is common stock? Is the only kind of stock that exists in the market? Or are there other ones? And which one is the best for investing? Let's find out more the true common stock definition and how they can improve your future.What Is Common Stock?
Common stock is the most basic kind of stock that a company can emit. Owning common stock from a company means that the stockowner owns a piece of the company. This ownership can be executed through his voting rights: one share, one vote. Proprietors of common stock can choose the members of the board and even decide determined policies.Besides the voting rights, there are occasions in which common stock owners have pre-emptive rights. These rights permit common stock owners the possibility of owning the same percentage of the company in case the organizations emits new stock. So, any common stock owner can buy, if he chooses to do so, an additional percentage of stock in order to maintain his level of ownership of the corporation.
Finally, common stock owners can receive dividends for their shares. If the board of directors approves common stock dividends, a determined amount of money is distributed among the thousands of people who have bought common stock. For example, let's say that the board of directors decided to pay $0.01 per share and that a determined individual owns 10,000 shares. That means that he will receive dividends for $100.
What Is The Difference Between Common Stock And Preferred Stock?
Besides common stock, there is another type of shares that is called preferred stock. The difference between common and preferred stock is that preferred stock has additional benefits. Maybe the most important one is that the dividends obtained by a company are distributed, first, among owners of preferred stock.But, there is an additional plus. In case the company goes through a process of insolvency or bankruptcy, the first stockowners who are going to receive a payment for their shares are the ones who own preferred stock. Meanwhile, common stock owners have to wait until the end and hope that there is some money left for them (which, in the majority of cases, doesn't happen). In this case, common stock prices won't be enough to save the capital that has been invested by the shareholder.
The second big difference is that the dividends paid by preferred stock are much bigger than the ones paid by common stock. Preferred stock owners receive pre-defined payments, while common stock owners depend on the decision of the board of directors. As a consequence, preferred stock owners can use their shares as a fixed-income security.
There are many kinds of preferred stock. For example, there is the Convertible Preferred Stock. In this kind of stock, the stock owner has the option of converting his preferred stock into common stock at a determined price. Another type of preferred stock is the Perpetual Preferred Stock, where the owner of the stock hasn't a set date for receiving their invested capital. The dividends on this type of preferred stock simply accumulate over each other until the board of directors makes a decision.
Benefits of ownning commonstock
What Are the Benefits of Owning Common Stock?
News channels, the internet and even newspapers are always bombarding us with common stock prices, telling the world if a determined share went up or down. But, what is common stock? Is the only kind of stock that exists in the market? Or are there other ones? And which one is the best for investing? Let's find out more the true common stock definition and how they can improve your future.What Is Common Stock?
Common stock is the most basic kind of stock that a company can emit. Owning common stock from a company means that the stockowner owns a piece of the company. This ownership can be executed through his voting rights: one share, one vote. Proprietors of common stock can choose the members of the board and even decide determined policies.Besides the voting rights, there are occasions in which common stock owners have pre-emptive rights. These rights permit common stock owners the possibility of owning the same percentage of the company in case the organizations emits new stock. So, any common stock owner can buy, if he chooses to do so, an additional percentage of stock in order to maintain his level of ownership of the corporation.
Finally, common stock owners can receive dividends for their shares. If the board of directors approves common stock dividends, a determined amount of money is distributed among the thousands of people who have bought common stock. For example, let's say that the board of directors decided to pay $0.01 per share and that a determined individual owns 10,000 shares. That means that he will receive dividends for $100.
What Is The Difference Between Common Stock And Preferred Stock?
Besides common stock, there is another type of shares that is called preferred stock. The difference between common and preferred stock is that preferred stock has additional benefits. Maybe the most important one is that the dividends obtained by a company are distributed, first, among owners of preferred stock.But, there is an additional plus. In case the company goes through a process of insolvency or bankruptcy, the first stockowners who are going to receive a payment for their shares are the ones who own preferred stock. Meanwhile, common stock owners have to wait until the end and hope that there is some money left for them (which, in the majority of cases, doesn't happen). In this case, common stock prices won't be enough to save the capital that has been invested by the shareholder.
The second big difference is that the dividends paid by preferred stock are much bigger than the ones paid by common stock. Preferred stock owners receive pre-defined payments, while common stock owners depend on the decision of the board of directors. As a consequence, preferred stock owners can use their shares as a fixed-income security.
There are many kinds of preferred stock. For example, there is the Convertible Preferred Stock. In this kind of stock, the stock owner has the option of converting his preferred stock into common stock at a determined price. Another type of preferred stock is the Perpetual Preferred Stock, where the owner of the stock hasn't a set date for receiving their invested capital. The dividends on this type of preferred stock simply accumulate over each other until the board of directors makes a decision.
How To Do A Stock Market Research
If you have been considering investing in stocks, you have likely heard a lot about stock market research. In fact, the most common advice that new investors are given is that they need to do stock market and investment research. This article throws light on:
It is not enough to just find a share to buy, however. You will also want to find out as about a company before you actually buy shares from the company. This is because when you buy shares in a company, you buy part ownership of the company. The company's reputation, business practices, and reliability can dramatically affect your investment portfolio and your profits. Luckily, there are a few ways that you can determine whether a company is worth investing in
Finding the Company
Find out about the company by reading news items about the company and by reading the company profile online. Also visit the company's web site to read about the company.
Consider the Company's Size
A larger company may be more stable, especially today, when larger companies tend to outsmart smaller companies easily. A large company such as IBM or Corel, for example, can buy computer start-ups. If you want to invest in the long term, a smaller amount of shares from larger companies may make sense. If you want a fast turn-around and faster profits and are willing to take some risk, a smaller company may be right for you.
Consider the Company's History
How long a company has been in business is a reflection of its overall stability. Consider that the majority of new businesses close within a year and consider that companies with a long history have withstood market depressions in the past also experience dealing with problems and so may overcome them in the future as well. A company with a history as a publicly owned company has also been satisfying investors long enough to stay in business. A company's history of profits, popularity, and market consistency is not a sure indicator of future success, but it is generally a good guide.
Consider the Company's Product or Service
A company that offers a good or unique product or service is likely to create demand which might result in decent profits. When considering a company's product or service, be sure to consider market position as well. Is the company a leader in the industry? In general, companies offering quality products that lead the market are promise great profits.
Consider the Company's Earnings
A company should enjoy consistent growth in terms of earnings. These earnings should not only offer you good dividends, but should also be enough to reinvest in the company for future growth.
How to Increase Earning Per Share
Once you have some shares in a company, you will of course want to make as great a profit as possible from the investment. In general, there are not many things that you can do to increase share price - after all, share prices are determined largely by exchange and by market demand. There are ways that you can increase your earnings on each share that you have. Some of them are as follows:
Invest for the Long Term
If you buy shares only to sell them as soon as their price increases, you stand to lose money on long-term increases in price. Most investors suggest that you plan to keep your shares for a long time to let them accrue value.
Invest Wisely
If you choose shares haphazardly, you are unlikely to profit them. Never buy in a panic or in a rush. Instead, consider all your purchases carefully well in advance.
At Least Consider Compounding Your Investment
If you want to get wealthy from shares, you need to compound your investment. This means that when you get your dividends; reinvest them in more shares rather than spending. Over time, reinvesting has been proven to dramatically increase profits.
Invest Regularly
You will make a lot more money by regularly investing just $1000 than investing $10 000 once or twice in your life. The more you invest, the more you stand to profit.
How To Find the Right Stock Market To Do Trade With
If you are just starting to invest your money, one of the best investments you can make is quality expert advice. A full-service investment advisor can not only help you realize your investment goals, but they can also help you actually invest your money. A good investment professional can also help you avoid investment mistakes.
In general, you will want to select a market that has the stocks you want. If you want to invest in the tech sector, you will want to select a market that offers a good selection of these company stocks, for example. You will also want to select a market that offers you the size of companies you want.
- Which are the online sources for getting online stock quotes?
- What are the ways in which you can find whether a company is worth investing in?
- What are the factors that are capable of affecting your investment?
How to Find Share Price and What to Look In For a Company When Purchasing Shares
The first thing you will want to do in researching stocks is to look at stock prices and companies. You can easily find stock quotes in your newspaper or on the stock tickers available on the news and on online financial websites such as CNNMoney.com and Yahoo! Finance. The prices you see per share can tell you how many shares you can buy with your budget.It is not enough to just find a share to buy, however. You will also want to find out as about a company before you actually buy shares from the company. This is because when you buy shares in a company, you buy part ownership of the company. The company's reputation, business practices, and reliability can dramatically affect your investment portfolio and your profits. Luckily, there are a few ways that you can determine whether a company is worth investing in
Finding the Company
Find out about the company by reading news items about the company and by reading the company profile online. Also visit the company's web site to read about the company.
Consider the Company's Size
A larger company may be more stable, especially today, when larger companies tend to outsmart smaller companies easily. A large company such as IBM or Corel, for example, can buy computer start-ups. If you want to invest in the long term, a smaller amount of shares from larger companies may make sense. If you want a fast turn-around and faster profits and are willing to take some risk, a smaller company may be right for you.
Consider the Company's History
How long a company has been in business is a reflection of its overall stability. Consider that the majority of new businesses close within a year and consider that companies with a long history have withstood market depressions in the past also experience dealing with problems and so may overcome them in the future as well. A company with a history as a publicly owned company has also been satisfying investors long enough to stay in business. A company's history of profits, popularity, and market consistency is not a sure indicator of future success, but it is generally a good guide.
Consider the Company's Product or Service
A company that offers a good or unique product or service is likely to create demand which might result in decent profits. When considering a company's product or service, be sure to consider market position as well. Is the company a leader in the industry? In general, companies offering quality products that lead the market are promise great profits.
Consider the Company's Earnings
A company should enjoy consistent growth in terms of earnings. These earnings should not only offer you good dividends, but should also be enough to reinvest in the company for future growth.
How to Increase Earning Per Share
Once you have some shares in a company, you will of course want to make as great a profit as possible from the investment. In general, there are not many things that you can do to increase share price - after all, share prices are determined largely by exchange and by market demand. There are ways that you can increase your earnings on each share that you have. Some of them are as follows:
Invest for the Long Term
If you buy shares only to sell them as soon as their price increases, you stand to lose money on long-term increases in price. Most investors suggest that you plan to keep your shares for a long time to let them accrue value.
Invest Wisely
If you choose shares haphazardly, you are unlikely to profit them. Never buy in a panic or in a rush. Instead, consider all your purchases carefully well in advance.
At Least Consider Compounding Your Investment
If you want to get wealthy from shares, you need to compound your investment. This means that when you get your dividends; reinvest them in more shares rather than spending. Over time, reinvesting has been proven to dramatically increase profits.
Invest Regularly
You will make a lot more money by regularly investing just $1000 than investing $10 000 once or twice in your life. The more you invest, the more you stand to profit.
How To Find the Right Stock Market To Do Trade With
If you are just starting to invest your money, one of the best investments you can make is quality expert advice. A full-service investment advisor can not only help you realize your investment goals, but they can also help you actually invest your money. A good investment professional can also help you avoid investment mistakes.
In general, you will want to select a market that has the stocks you want. If you want to invest in the tech sector, you will want to select a market that offers a good selection of these company stocks, for example. You will also want to select a market that offers you the size of companies you want.
Monday, July 14, 2008
Is canada gtetting ready for the i60s?
One of the most efficient investment products for passive investors is the so-called index participation unit (IPU). IPUs are exchange-traded securities that represent a basket of stocks, which in turn replicates a specific underlying market index. IPUs trade on exchanges just like stocks, at a specific designated IPU-to-index ratio.
After some false starts in the United States, the first successful IPU saw its debut in March 1990. It was the Toronto Stock Exchange's Toronto Index Participation Shares (TIPS), based on the Toronto 35 Index. This early success was followed by another IPU, originally named HIPS and based on the TSE 100 Index. The products were subsequently renamed TIPS 35 and TIPS 100 respectively.
The TIPS structure has served as a prototype for subsequent IPUs, including SPDRs based on the Standard & Poor's 500 Composite, and WEBS based on individual Morgan Stanley Capital International indices.
Something NewA new Canadian IPU debuted in September 1999. Based on the S&P/TSE 60 Index, this new IPU--called iUnits S&P/TSE 60 Participation Units (or i60s)--trades on the Toronto Stock Exchange under the trading symbol XIU.
The S&P/TSE 60 share index, introduced Dec. 31, 1998, is a capitalization-weighted index comprised of 60 of Canada's largest companies, including the big five Canadian banks. The S&P/TSE 60 Index is scheduled to replace the Toronto 35 and TSE 100 indices over the next year or so.
In April 1999, the S&P/TSE Canadian Mid-cap and S&P Canadian Small-cap indices were introduced as well.
All of the TSE indices, including new and existing transitional ones, will be calculated and maintained by Standard & Poor's. Instead of a 100-company arbitrarily chosen and rounded index, the new S&P/TSE 60-share index is designed for institutional investors--since it contains stocks institutions actually want to invest in. The emphasis is on liquidity.1
A More Representative IndexAs a more representative index, it should foster more interest in derivatives trading.2 This is turn could mean improved liquidity for the Canadian index derivatives market.3 Furthermore, since the indices are managed by Standard & Poor's, it will mean the separation of the listing and indexing functions.
The i60s are almost identical to TIPS. It trades at approximately one-tenth the value of the S&P/TSE 60 Index. If, for example, the S&P/TSE 60 Index is quoted at 404.19, the IPU will trade at about $40.42.
Any tracking error (deviation of the IPU from one-tenth of the index), will reflect rounding effects due to index adjustments, accrued dividends, accrued management expenses and impending takeovers.
Like TIPS, the new IPU will collect dividends on the underlying companies as paid, but will pay quarterly dividends to unit-holders. The management expense ratio (MER) will be 17 basis points; thus there will be a small tracking error.
TIPS, in contrast, have covered their expenses through security lending and the dividend float--operating with virtually no expenses and maintaining a near perfect tracking record as a result. Nevertheless, 17 basis points is a competitive MER.
The new product will be RRSP-eligible. If the IPU is not approved by U.S. regulators for ownership by U.S. residents, Barclays intends to produce a U.S. version and list it on the American Stock Exchange.
What Happens Next?What will happen to the existing TIPS 35 and TIPS 100? There are three possibilities. First, the existing TIPS could be merged into the new S&P/TSE 60 Index. Since TIPS have historically had virtually no tracking error, and assuming that the new IPU is maintained in the same manner (except for the MER), such a merger could be performed in a perfectly seamless manner. Second, the Toronto Stock Exchange may choose to list and quote the Toronto 35 and TSE 100 indices for the indefinite future and allow the two TIPS products to continue to trade. Third, the TSE may choose to de-list the two TIPS products, as per the trust agreement, by selecting a specific date at which all TIPs are closed in a manner similar to the expiration of a cash-settled futures contract. Given the near zero tracking error of the product, this approach should work in an equitable manner.
Although i60s are almost identical to TIPS, there is an interesting difference. TIPS 35 and TIPS 100 are both based on passively-managed indices--i.e. inclusion in the index is subject to a set of specific inclusionary ranking rules that are not subject to interpretation. On the other hand, the S&P/TSE 60 is an actively-managed index. An S&P selection committee manages the inclusion of companies in the index using fundamental valuation criteria. The key criteria are size (assets and market capitalization), liquidity and sector leadership.
Only time will tell whether the active approach to index management will prevent Bre-X and YBM Magnex-type scandals passing through the analytic screen and making it into the index.
Endnotes1. Since there will be a single large cap index instead of both the Toronto 35 and TSE 100, liquidity will be consolidated.
2. The Montreal Exchange, to which all Canadian derivative trading will be transferred by Nov. 1999, unveiled its S&P/TSE 60 share index derivatives products in early September.
3. A number of index derivatives have been introduced and subsequently de-listed in Canada over the past 15 years. Canada's index derivative trading volume and open interest in both absolute and relative terms has been much smaller than expected, given the size of Canada's equity market.
Buying shares for the first time?
Got your first paycheck and can't wait to buy your first lot of shares?
Hold on!
Before you start investing in the stock market, you have to get certain basics in place.
Follow this checklist to ensure you are on track.
1. Get a broker
People like you and me cannot just go to a stock exchange and buy and sell shares.
Only the members of the stock exchange can. These members are called brokers and they buy and sell shares on our behalf.
So, if you want to start investing in shares, you can do it only through a broker.
Every stockbroker has to be registered with the Securities and Exchange Board of India, which is the stock market regulator.
You can either choose a broker (who is directly registered with SEBI) or a sub-broker (people licensed by brokers to work under them).
The Bombay Stock Exchange directory or the National Stock Exchange Web site will give you a list of brokers affiliated to them. Most of them entertain retail clients.
If you want an online broker, you can start by looking at the Web sites of some well-known online players: Sharekhan, Kotak Securities, ICICI Direct, 5paise and India Bulls.
2. Get a demat account
Gone are the days when shares were held as physical certificates.
Today, they are held in an electronic form in demat accounts.
Demat refers to a dematerialised account.
Let's say your portfolio of shares looks like this: 40 shares of Infosys [Get Quote], 25 of Wipro [Get Quote], 45 of HLL [Get Quote] and 100 of ACC.
They will show in your demat account. You don't have to possess any physical certificates showing you own these shares. They are all held electronically in your account.
Periodically, you will get a demat statement telling you what shares you have in your demat account.
How to get a demat account
To get a demat account, you will have to approach a Depository Participant.
A depository is a place where an investor's stocks are held in electronic form.
There are only two depositories in India -- the National Securities Depository Ltd and the Central Depository Services Ltd.
The depository has agents who are called Depository Participants. In India, there are over a hundred DPs.
Think of it like a bank. The head office, where all the technology rests and the details of all the accounts are held, is like the depository. The DPs are like the branches of banks that cater to individuals.
A broker, however, is not similar to a DP. A broker is a member of the stock exchange and he buys and sells shares for his clients and for himself. A DP, on the other hand, gives you an account where you can hold those shares.
To get a list of the registered DPs, visit the NSDL and CDSL Web sites.
3. Get a PAN
The taxman demands that you get yourself a Permanent Account Number.
This is a unique 10-digit alphanumeric number (AABPS1205E, for example) that identifies and tracks an individual in the taxman's database.
Almost every money transaction demands the use of a PAN. These include:
~ When you get a job
~ When you file an income tax return
~ When you open a bank account
~ When you deposit cash of Rs 50,000 or more in a bank
~ When you open a bank fixed deposit of Rs 50,000 or more
~ When you open a post office deposit of Rs 50,000 or more
~ When you buy/ sell shares and mutual funds
~ When you buy/ sell property
~ When you buy a vehicle
~ When you take a loan: home/ personal/ other
~ When you install a telephone (or buy a cell phone)
~ When you pay in cash to hotels and restaurants against bills for an amount exceeding Rs 25,000 at a time
~ You also need to mention it in every transaction you have with the tax officials.
If you are going through a tax consultant, you need not worry. He will supply you with Form 49A (the application form for the PAN number) and give you a list of the documents he needs.
However, if you believe in doing things on your own, the process is really not that tedious.
You could visit the official Web sites of the Income Tax department or UTI Investor Services Ltd or National Securities Depository Limited.
Download Form 49A from any of these sites and follow the instructions.
You should get your PAN in the form of a laminated card within a month.
4. Check if you need a UIN
This depends on how much you plan to invest.
The Unique Identification Number is the identification an investor needs to buy and sell shares or mutual fund units.
It is part of the Security and Exchange Board of India's attempt to create a database of all Market Participants and Investors, called MAPIN.
Who needs a UIN?
An investor who is involved in a single transaction of Rs 1,00,000 or more will have to quote his/ her UIN.
If you plan to be a prominent stock market player or a mutual fund investor and expect to deal with such huge amounts in the near future, you should get a UIN.
SEBI has appointed the National Securities Depositories Ltd that, in turn, has appointed Points Of Service agents. The NSDL Web site has a list of the POS agents.
Visit the office of a POS agent. Make sure you take an appointment before you go. As part of the application process, your fingerprints will be scanned and a photograph taken.
All you have to do is fill and submit an application form (there are separate forms for corporates and individuals). You can also download the form for an individual at the NSDL Web site.
Incidentally, the UIN is totally different from a PAN. The Permanent Account Number is an identification number for filing your income tax returns.
Now that you have all this in place, you're ready for the stock market. All the best!
Why mid-caps are hot!
he other day I was with some people when everyone began discussing mid-caps. They seemed unanimous on the fact that it was the best way to make money in today's stock market.
They are the next blue chips, said the person next to me. In four to five years, all those who invested in mid-caps will be reaping big gains, he concluded.
Or big losses, he forgot to add.
Here's a look at mid-caps, the season's new flavour.
Tomorrow's blue chips?
If the number of shares in a company is multiplied by its current price, the result is market capitalisation.
Blue chips are the largest companies in their sectors; the ones with the largest market cap.
If you can identify tomorrow's blue chips today, you could make a pile of money.
That's because these stocks, with smaller market caps, are usually priced low, since investors have not yet discovered their potential.
In the mid-cap segment, you may find such companies.
In fact, big investors, like mutual funds and Foreign Institutional Investors, have started investing in mid-caps in recent months, because the price of large caps has increased.
That has led to a big rally in small and mid-caps, with their prices climbing upwards steadily.
The mid-cap segment of the stock market is, thus, being increasingly perceived as an attractive investment segment with high growth potential.
What is a mid-cap stock?
Consider the National Stock Exchange's Mid-Cap Index. This defines a mid-cap stock as having an average six months market cap between Rs 75 crore (Rs 750 million) and Rs 750 crore (Rs 7.5 billion).
The Bombay Stock Exchange Mid-Cap Index has 231 companies, with the highest average market cap at the time of starting the index at Rs 2,476 crore (Rs 24.76 billion) and the lowest Rs 418 crore (Rs 4.18 billion).
There have also been plenty of mid-cap mutual funds lately. Each one defines its own criteria in the offer document.
The BSE Small-Cap Index has 425 companies, with the highest average market capitalisation at around Rs 417 crore (Rs 4.17 billion) and the lowest at Rs 53 crore (Rs 530 million).
Are they worthwhile investments?
Undoubtedly, mid-caps have the potential to deliver very high returns. But, it is important to realise that high returns always come with high risk.
The mid-cap (especially the small-cap), companies are more susceptible to the vagaries of the business cycle than larger companies. So their profits and earnings could really dip.
Also, since they are smaller, it is difficult for large investors to get in (buy) and out (sell) of them. If you want to sell, you may not get a good price. Ditto if you want to buy.
Some of these stocks are rigged by promoters and brokers acting in collusion. They may buy and ensure the price goes up. And, suddenly, when it has reached the target they are looking at, they sell and the price begins to tumble.
A small investor who bought the shares when they were at a high will be caught unawares when the price tumbles.
You can make money. In fact lots of money. But how much you invest in mid-caps depends on how much of risk you are willing to take.
Remember, all mid-caps are not tomorrow's large-caps.
Want to check on a stock? Here's how
n Want to buy a stock? we explained what a Profit and Loss Account is all about and what it tells you about the company. Now it's time to turn to the balance sheet.
Unlike the P&L account, which measures a company's performance over a period, a balance sheet is a snapshot of the company on a particular date.
It will tell you what the company owns (assets), what the company owes (liabilities) and how much the company is worth in its books of accounts (net worth).
A sample balance sheet
The balance sheet is divided into two main sections: the source of funds (from where the money has come) and its application (what it has been used for).
| 2004 | 2003 |
Source of Funds | | |
Shareholders' Funds | | |
Capital | 50 | 50 |
Reserves & Surplus | 200 | 150 |
Loan Funds | | |
Secured Loans | 100 | 115 |
Unsecured Loans | 30 | 40 |
Total | 380 | 355 |
Application of Funds | | |
Gross Block | 150 | 140 |
Less: Depreciation | 50 | 40 |
Net Block | 100 | 100 |
Capital work-in-progress | 20 | 10 |
Investments | 100 | 120 |
Current assets, loans & advances | | |
Inventories | 80 | 75 |
Sundry Debtors | 55 | 50 |
Cash and Bank balances | 30 | 20 |
Other current assets | 25 | 25 |
Loans and advances | 20 | 10 |
Less: Current liabilities and provisions | | |
Liabilities | 40 | 45 |
Provisions | 10 | 10 |
Net current assets | 160 | 125 |
Total | 380 | 355 |
Balance Sheet as on March 31. All figures in Rs/lakh.
Sources of Funds
Capital
From where does a company get its money? Share capital is one obvious source.
Capital is the amount that the owner has in the business. As the business grows and makes profits, it adds to its capital.
This capital is subdivided into shares.
So if a company's capital is Rs 10 crore (Rs 100 million), that could be divided into 1 crore (10 million) shares of Rs 10 each.
Some of the shares are held by the promoters (people who started the business) and the rest by the investors (people like you and me or mutual funds and other financial institutional).
Note that share capital has remained the same in the above example for 2004 and 2003, which means that the company did not raise capital (issue fresh shares) in 2004.
Reserves
When a company makes profits, it can either hold back the profits or distribute it as dividends to its shareholders.
Let's say a company earns a profit of Rs 1 crore. It could deploy half the money for buying new machinery and raw materials and paying back some of the loans. The rest can be distributed as dividend.
A company's retained profits (profits that do not go out as dividend) is transferred to Reserves. This is why the Reserves in the balance sheet keep on rising every year for profitable companies. If the company makes a loss, however, reserves go down.
The company's capital and retained profits together make up shareholders' funds in the business. This is also known as net worth. When net worth is divided by the number of shares the company has, we get the Net Asset Value per share.
Loans
Loans are another source of funds.
Secured loans are where the lender has a charge over the company's assets. Loans from banks fall in this category. So if the company has no money to pay back the loan, the bank can take away, say, the machinery or land and sell it to regain its money.
Unsecured loans are those which do not have a specific charge over the company's assets. Fixed deposits taken by companies are an example of unsecured loans. If the company cannot repay the investors of fixed deposits their money, they lose it totally and cannot claim anything back.
Application of Funds
This part of the balance sheet tells you how the money has been utilised.
Gross Block
The company generally will use the bulk of its money to buy assets.
Gross block is the sum total of all the assets of a company valued at the cost of acquisition.
Depreciation
Fixed assets are those that will be around for a long time - they include plant and machinery, buildings, land and patents and trademarks.
Over time the value of certain fixed assets - equipment and machinery - dips as it is being utilised. The estimated wear and tear of the equipment is referred to as depreciation.
Net Block
When you deduct the depreciation on those fixed assets, you get net block.
Current assets
Current assets are those that will be utilised soon and have a shorter life span - stocks of raw materials or finished goods (inventory), sundry debtors (those who owe money to the company), cash balances.
Current liabilities are the sundry creditors (those to whom the company owes money) and provisions (expenses for which the company has set aside a sum of money, eg for income tax, dividends, rent etc, but for which payments have not yet been made).
You will have to deduct current liabilities from current assets to arrive at net current assets.
Capital work-in-progress
This could be some construction, installation or expansion programme going on for which work is not yet completed.
Investments
The company also uses surplus funds to make investments - these could be in group companies or in mutual funds or in bonds or any other avenue.
Compare figures
The way to read the balance sheet is to compare the figures with that of the previous year. Let's take a look at some of the changes in the example given above.
Observation: Loans have come down.
Implication: The company repaid some loans in 2003-04.
Observation: Gross block and capital work-in-progress has increased.
Implication: The company added to plant and machinery in 2003-04 and is continuing with capital expenditure (as shown by the capital work-in-progress). It has funded that work by drawing down its investments.
Observation: The company's shareholders' funds, or its net worth, has increased during the year.
Implication: Which means the company is making profits and retaining a part of them.
Observation: Inventories and debtors have risen.
Implication: This could mean either that the company has increased its scale of operations - sales have gone up - or it has become less efficient with its working capital, leading to a pile-up of goods and debtors. Perhaps it is having a tough time selling its goods.
The Director's Report in the Annual Report and the P&L account will tell you whether the company's sales have indeed increased.
Stay informed
Reading the balance sheet will enable you to ask the right questions about a company's performance. And, together with the Annual Report and the P&L account, it gives a fair picture of the company's health.
Don't forget to check out the Auditor's statement and the Notes to the Accounts. These will tell you whether an attempt has been made to dress up the accounts to show a better picture.
Based on all this knowledge, you can then make an informed decision as to whether or not you should buy or even hold on to the company's stock.
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