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Investing, Market News, Options, Retirement, Stock Markets

Expert Daytrader Alerts: Master The Global Financial Markets

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Commodities, Gold, Precious Metals

Commodities Markets: History of Gold Prices

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Why should investors want to know about the history of gold prices?

As a financial investor buying and selling commodities, it is important to understand the market’s underlying trends. Knowing about the history of gold prices will also help investors make better financial decisions — not only in commodities but other markets, as well.

It is important to know more about the history of your business and the industry in which it operates. Over time, these types of practices can help to shed light on how you should invest and when certain mistakes can be avoided.

Gold’s history as a safe-haven asset

In gold, you will know why the prices change the way they changed, which is why investors should consider buying some of the best gold coin inventory. You also know about the high and the low season.

Gold is seen as the most precious metal among the others. Its value is mostly higher than the others. Today, gold is still used as a reliable way to store wealth and this will continue to be the case because of the changing values of fiat and paper currencies.

Gold prices can change but they have historically remained at a reasonable level of value. Therefore, gold is still the best measure of wealth for investors.

History of financial markets

This is a continuation of the traditional norms, as kings and queens have always stored their wealth in the form of gold. Many decades ago, gold was used as money on an everyday basis.

Our forefathers traded products for gold and remnants of these trends still exist today.  In some nations, gold is used in making coins (though in small amount, but it is of great value.)

Invest in Gold Coins

In some museums, you will find a collection of these coins that were fully or partially made of gold. The prices of gold have however faced changes in the recent years.

Today, gold is traded in electronic trading platforms.  In 2011, it managed to rise up to over $1900 before it started declining, and this shows just how much gold is still valued in society.  Gold is making headlines not only in physical form but also virtually as a basis for many cryptocurrencies.

History of gold prices in the United States

Starting in the year 1791, the prices of gold in the U.S experienced changes. In this year, the price of gold was $19.49 per ounce. 43 years down the line, the price went up to $20.69 per ounce (increasing by just $1.20 after 43 years).

In 1928, the Federal Reserve raised its base interest rate levels, which ended in a recession in 1929. These events inspired many people to redeem the normal currency and exchange fiat into gold.  This is largely why gold has more value compared to the U.S. dollar at this time.

Invest in Gold Coins

Due to the high demand for gold, the Federal Reserve was asked to raise the interest rates. In 1931 the value of the dollar increased and there was a decrease in demand for gold. In 1933, a law was stated that did not allow anyone to own bullion and gold coins. 

Ever since then, the history of gold prices in the U.S became more interesting for bullish investors. The strength and weakness of the dollar has contributed to the increasingy bullish price changes for gold.  Before investing in gold, you should be aware of factors that contribute in change of price in gold.

Our analysts will enable you know the best time to invest and when to avoid such markets.  As a result, there are many factors that have contributed to the change of price in gold over time. 

Demand and supply of physical gold

Gold has many uses from making jewelry to being used as a store for wealth. When gold is in high demand and the supply is low, the prices tend to go up. This is one cause of changes in gold prices. It is not different from the other markets.

Any product that has low supply compared to demand increases in price. When gold is in high supply and the demand is low, prices go down. This is because sellers has more than what the market needs. 

Inflation and deflation

This is a sign that the economy is growing. Higher rate of inflation leads to higher prices of gold. Inflation is as a result of stable political factors and motivation in economic growth.

For instance, gold did not perform well during the world war. Before the beginning of World War 1, some nations adopted the Gold Standard, which was used to compare domestic currencies (before setting the prices) to the value of a certain amount of gold.

U.S. Inflation

However, this came to an end when the war begun. During this period, economic growth was not experienced either. Deflation happens when there is no upward growth in the economy. It is a time when there is less employment opportunities and investments. This leads to decrease in gold prices.

Central banks

Central banks are in charge of the amount of money circulating in a country. It also has the mandate to limit the amount of gold in supply. This can lead to change in prices.

Another factor to remember is that when the central bank increases interest rates, the price of gold rises. Central banks therefore play a vital role in changes of gold prices.

Strength and weakness of the U.S. dollar

These days, Gold is denominated in U.S. dollars. When the value of the dollar goes high, the price of gold decreases. It is also true that gold price increases with a weakening dollar value.

U.S. Dollar

Of course, this is because when the dollar becomes weak, the currency in other nations become stronger. When this happens, the demand for products go up, gold is one of them. Its demand goes high leading to raise in its price. 

Conclusion: gold’s long history in financial markets

The history of gold prices starts way back during the B.C era. It was highly valued like today. As time went by, gold coins were used instead of gold bars. Today, gold remains to be a treasure.

If you have gold, you feel that you are rich. This is because of the value it has and how much it is worth. A small piece of gold will go for dollars. Most importantly, people in the buying and selling of gold should not overlook its journey.

Investing, Retirement, Stock Markets

Stock Markets: Understanding the Dow Jones Industrial Average

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One of the most important factors in gauging the stock market is Dow Jones Average; this index was established by a great publishing company that is still trusted by many investors.

Investors can measure the stock movements using this index and it is a trustworthy indicator of potential trends in both stocks and bonds. If you are interested to know more about it, this article is for you!

Introduction: A Brief History

The history of the Dow Jones Industrial Average all goes back to the end of the 1800s. A time the stock market was reaching the public interest. Considering that no TV or internet was available to the people back then, it should be easy to see that Charles Henry Dow and Edward D. Jones came up with a great idea in publishing stock news for the masses.

This financial news publisher was a daily magazine that published the news of 1 major stock back then. They created a chart of 12 houses of these 12 companies. As time went ahead, Dow Jones stock Averages added more and more companies in their charts; they indicate stock substitution, correlated changes and other factors based on divisor.

These Average signs facts are to show the Average prices of each stock on a daily basis. Dow Jones Industrial Average or DJIA is now based on 30 different stocks on an industrial basis. There are other stocks, they cover as well; Dow Jones transportation stocks, Utility Composite and several; bod Averages along with that. Here is a total list of Dow Jones Average magazine covers;

  • Dow Jones Industrial Average or DJIA- stock of 30 companies in total
  • Dow Jones Transportation Average or DJTA- stock of 20 transportation companies in total
  • Dow Jones Utility Average or DJUA- stocks of 15 Utility companies in total
  • Dow Jones Composite Average or DJIA- this Average considered the total composite of DJAI DJTA DJUA put together
  • Bond Shares

This magazine is the leading stock magazine for decades for an investor who we trying to measure their markets. Although other popular scales of the stock market in American Securities Market are: the S&P 500 Index and the Russel 2000 Index.

As one of the area’s most favored stock advisors, this publishing service has done great services for investing public. The most interesting aspect was that this magazine was a market analyst journalist rather than investors.

When this magazine started to publish, it was the blooming years of the stock market. Some even believe it was the effect of Dow Jones Average journal that led to much great marketing minds to jump-start their activity.

As the economy grew, many companies added to the stock market Average. However, from there, is only one local company that has been a part of Dow Jones’s Average magazine from the beginning; this magazine was named General Electric that has seen more than a century together with Dow Jones Average publisher.

Annual Dow Jones Average Trends

This magazine has always stood proud in the hallmarks of stock history. Although experts mark the 2008 financial crisis that was a widespread low time for many, it also affected Dow Jones’s Average publishing.

This hallmarks are concentrated on a market’s doomsday; 29th of September in the year 2008. Dow Jones Average loss was to a point that was recorded in the whole history of the stock market.

It was technically the third-ranking the history of stock loss registration. On the contrary, the golden year for stock ranking registration was the year 1915; a value increase of 81.66 increase.

Mutual funds in Dow Jones Average Publishing

If you are fascinated by the magnificence stock sharing company. you can invest it. The easiest way to get in the game with Dow Jones Average is to make an indirect investment; you can invest by buying index fund shares.

However, any of the index funds such as mutual funds and exchange-traded funds are replicable. That means they can replicate before fees and expenses; by holding similar stocks in the exact same proportions.

Downfalls and setback of Dow Jones Average magazine

Some expert believes that Dow Jones Average offers an inaccurate representation of overall market performance. According to Eric Edelman, one of the greatest and most accurate stock critics, S&P 500 and Russ3l 300 indexes are much more accurate when it comes to stock predictions.

Some other critics have pinpointed to price based criteria of their index; they claim that Dow Jones Average magazine gives a higher price to some stocks; these stocks are usually are given a higher influence to compare to their cheaper counterparts.

This is for their lack of comprehension of the stock’s price relativity to a particular company’s size and market capitalization. This way of calculation affects the price of the stock percentage. It results in showing a company’s stock market a lot weaker in the size is much smaller.

The same counter effect causes the large stocks to decide for Dow Jones Average magazine total index; that is the reason many smaller companies have been unhappy with the relevant results. For instance, being and UnitedHealth Group have the largest stock on Dow Jones Average’s Index.

The method of their calculation makes these two giant shareholders the most influential factor over the index data of this publishing.

Conclusion

Dow Jones Average magazine is one of the leading and oldest magazines in the stock market. While there are many who subject to this magazine’s function, others have been their loyal customers. As it goes for every system, there are advantages and disadvantages in any given system; and Dow Jones Average is not exempt from this fact.

Recently there has been a study conducted on the correlation facts in Dow Jones Average publishing data. This comparison has taken place between index movements. The result has revealed that these correlation compounds are higher at the time of the market including cycle; similarly, when there is a flat effect in the market, this correlation rises.

Economy, Market News

Eurozone: Central Banks Continue to Guide Economic Outlook

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Central Banks Continue to Guide Economic Outlook

Federal Reserve policy measures have recently shown various ways central banks are currently guiding the global economic outlook.  According to Ask Traders, markets have reacted favorably with the stock market hitting fresh record highs after the Federal Reserve decided to cut interest rates by 25 basis points. Central bank members in the Eurozone have adopted a similar stance policy metrics, which include a monetary union of 19 out of the 28 countries in the EU (European Union) and is the second largest economy (both in nominal terms and purchasing power parity or PPP), after the United States. Eurozone GDP was estimated to be around $18.8 trillion in 2018 and the Eurozone economy holds great weight for world economists because the region also produces 22% percent of global GDP each year.

Future Economic Outlook

For the most part, the Eurozone kept pace with the central banks around the world in 2019, although its growth has not quite matched prior highs. The incomes underpinned by unplanned but healthy consumer spending but restrained by some well-directed investments and activities with an unsupportive external backdrop. There’s obviously a drop in the economy as the Brexit event has taken its toll on consumers. Britain is one of the world’s top GDP producers, and political analysts have said that the conservative party’s victory in UK elections will create a clearer roadmap ahead, reducing uncertainties. 

Global Marketplace

Recently, the European Commission reproached France, Italy, and Spain for not procuring meaningful fiscal management measures and exposing themselves to potential economic shocks.  The European Union contains the internal elements of mixed economies, based on the free market principles and advanced social models. Euronext is the prime stock market of the Eurozone, which is also the 6th largest stock market in the world. European Union maintains a content relationship with other major economically developed countries (United States, China, Switzerland, Russia, Turkey, Japan, Norway, South Korea, India, and Canada which are also the highest trading partners of EU). The subtotal amount of the trades made in the Eurozone by foreign countries is $5.1 trillion in 2012. In comparison, the EU traded around $9.1 trillion over foreign countries across the globe, which is one of the highest domestic and foreign investment levels currently visible in the world economy.

Sectors of the Economy

The four main industry sectors in the EU include services, agriculture, tourism, and energy. However, the services sector holds the highest importance in the EU economy as it produces 70% of the region’s total GDP figure. That’s quite high in comparison to other sectors, as the agriculture sector holds just 1.8% of total GDP.  In 2013, the EU spent approximately $45 billion which is 33 percent of its total budget of $148 billion. The Eurozone is also a major tourist zone, so the EU emphasizes tourism an important sector continued growth. London and Paris were recently the most visited places with 16.9 and 16 million visitors, respectively. Additionally, the Eurozone has uranium, coal, oil and natural gas reserves for its energy production. The EU is the 2nd largest consumer and the 19th in oil production, as the region produces 1,241,370 (2013) barrels a day.

The Eurozone is a highly developed union but still faces many of the same challenges other economies around the world. The EU thrives more and more every year by its significant contribution to the world economy. The member states play the role of them by growing economically. Bulgaria, Czech Republic, Estonia, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, Poland, Romania, etc. are some of the growing GDPs.  Besides these, there are already some economic giants in the Eurozone. Austria, Belgium, Finland, France, Germany, Ireland, UK, Spain are the top countries based on per capita income.

Labour Market and Economic Growth

In the Eurozone, the unemployment rate was 8.1%. Among the member states, the Czech Republic had the lowest with 2.3% and Spain with the highest of 14.9%.  The momentum is not on the EU’s side. Slow global growth, uncertain external backdrops will reduce investment and export activity. Lower job gains due to hard labor markets in important countries will somehow resist consumer spending. But the political uncertainties of Spain and Italy summing up with Brexit (described below) already clouds the outlook. Growth is at 1% in 2020 which looks shacky but despite these, economists are positive about its longevity in terms of growth.

Brexit Factors

Brexit simply refers to Britain’s exit from the EU. It is a major turnoff for Eurozone economics as Britain is one of the most significant country let alone the EU but also in the world. After winning the elections the new PM proposes a new Brexit deal with new customs arrangements. Brexit means that UK will be out of the EU with financial, economic, and political relationships. 

Eurozone Economy after Brexit

Though all the dark clouds, the eurozone economy keeps growing at a modest pace. But sooner or later a slowdown is expected in the eurozone economy because of trade tensions and Brexit uncertainty.  The Eurozone economy expanded 0.2 percent in the three months to September. According to Eurostat, the annual growth rate is 1.1 percent. The current situation states that fears are there that it could slow down. Economists expect the growth to fall to 0.1 percent in the next quarter.

Global Economic Barriers

The EU has many barriers both externally and internally. Research from 1999 to 2003 by examining 166 manufacturing industries in 11 EU members, barriers still remain. Apart from transportation costs, the most damaging is the technical barriers.  In numeric terms, the costs associated with geography and transport explain only 25 percent of the trade integration variation. And the distance between the origin and destined shipments are at 5 percent. The policy factors can explain only 7 percent of the variation. Technical barriers at 5 percent is another major issue that the EU must deal consider going forward.  Apart from all the chaos and difficulties in trade and business which defines the economy, Economists are still hopeful. Some minor and major changes in the policies, agreements, and contracts, along with some enforced initiatives can clear all the clouds and EU will hold its significance, nevertheless.

 

 

Dividend Stocks, Investing

Pros and Cons of Discounted Cash Flow Valuation

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Pros and Cons of Discounted Cash Flow Valuation

Most investors care about one thing when it comes to choosing a company to put their investment: cash. The cash flow of a company is important for investors because it is the basis for the possible amount of money they are going to receive. For that reason, an appropriate approach has to be followed to devise a sensible investment decision. 

Discounted Cash Flow Valuation is a mathematical technique in gauging the appeal of an investment on a company based on its potential cash flows in the future. This evaluation method helps to determine the value of a company today which must be derived from the capability of a company to continuously generate cash stream in the coming years. Analysts exert efforts to construct projections on the financial performance of a company with the aim of weighing up its value. Aside from the individual investments, discounted cash flow valuation scrutinizes the projects that the investors or the company can maneuver. 

The present value of projected future cash flows requires a discount rate for discounted cash flows valuation. The company’s estimated present value is needed in order to thoroughly assess a possible investment. The potential investment could be taken into account once the present value computed using the discounted cash flows analysis is proven to be greater than the cost of the investment today.

The discounted cash flow valuation is advantageous for investors from the fact that the present value of a company can be used for them to estimate the future cash flows that an investment or a project can bring. Investors must consider not only the investment but also the ending value of pieces of equipment and other assets for them to accurately appraise the potential cash flows in performing the discounted cash flow valuation. 

But before you depend on this valuation method, we are going to discuss the advantages and disadvantages of using discounted cash flow valuation. This is for you to determine if this method is appropriate for the company and to assess the extent to which you can rely on this valuation method.

Discounted Cash Flow Advantages:

  • A Practical Instrument to Back Up Value Prices Issued by Analysts

There are a lot of aspects that influence discounted cash flow analysis such as profit margins and future sales growth. The valuation method takes account of the discount rate affected by the risk-free rate of interest. Discounted cash flow analysis regards the company’s cost of capital and potential risks to its share prices as essential steps from this valuation method. For you to estimate the company’s share price precisely, these factors cannot be overlooked because these will give ideas about the different elements that influence a company’s value. 

  • Dependability and Precision

According to corporate finance textbook authors Peter DeMarzo and Jonathan Berk, “the most accurate and reliable” valuation method for constructing a sensible investment decision is by using discounted cash flow analysis to decrease investments to net present value. Although some results on computing using this process are doubtful, there is no existing valuation technique that can be as reliable as the discounted cash flow analysis in assessing the investment which provides the greatest value for the company. 

  • Focuses on a Single Figure

One of the benefits of applying the discounted cash flow model is that it uses a particular value to represent an investment. This valuation method aids to rationally decide upon different investments. If the discounted cash flow model concluded a negative result, the company can have a possibility to incur losses due to the investment; if it leads to a positive outcome, the investment has the capability to bring successful cash inflow and can be considered by the company. The analyst shall forecast the cash flows from the investment, discount it to the present value, combine them all, and systematically weigh them up. The most lucrative choice is the one that has the greatest present value.

  • Reliability on Free Cash Flows

For investors, discounted cash flow analysis is the only valuation method that depends on free cash flows. Free cash flows are the cash of a company gained from its operation, decreased by the cost of expenditures on assets that is why it is a reliable measurement of money allotted to the investors. It is also a good basis of valuation because it disregards the independent accounting policies and manipulation of financial statements related to reported earnings. Free cash flow is essential for the discounted cash flow valuation since it helps to determine the companies that have high open costs that have a probability to impact earnings today but has the capability to escalate earnings eventually. In addition to that, free cash flow exposes the capacity of a company to satisfy its obligations, stabilize its growth, and distribute dividends. 

  • Validation Purposes

The discounted cash flow method is commonly used to easily assess whether the current share price is reasonable or not. As an alternative to approximating the intrinsic value, the current stock price is applied upon the discounted cash flow valuation model. By working in reverse, the valuation model will reveal if the company stock price is overvalued or undervalued. 

  • Business Strategy Construction

Other valuation techniques have limited data that restrain them from being exploited by devising business strategies. Investors can maximize the use of the discounted cash flow model by considering it as one of the bases for significant alterations to the business strategy.

Discounted Cash Flow Disadvantages:

  • Complexity 

The risk in employing the discounted cash flow model is deciding what cash flows to be discounted while the investment is complicated and substantial, or the unfamiliarity of the investors about the future cash flows. This valuation method is important for investors since it is based on cash flows offered for the new shareholders. A weak value is constantly implied when the method is based on the distributed dividends to a small group of shareholders.

  • If Widely Employed 

If the discounted cash flow is used excessively and outside its coverage, it may lead to unreliable presumptions. Continuously fluctuating amounts relevant to the valuation method may nullify the analysis once an investment or a project has commenced.

  • If Relevant Data are Inaccessible

As minority shareholders, they lack information about a company’s cash flows and projects needed to form assumptions for the discounted cash flow valuation since they don’t have any control from it. Therefore, this valuation method will not be beneficial for these investors. 

  • Susceptible to Appraisal Mistakes

The discounted cash flow valuation is a powerful instrument from the fact that it covers a broad range that covers the data for estimation. The model is prone to different kinds of errors. If estimated figures are fallacious, the net present value might be erroneous as well. Therefore, the model is impractical to use since it may cause an investor to form poor investing assessments and decisions. The valuation method is achieved by constructing forecasts. The cash flow of a company is required to be forecasted by an analyst. But that process cannot be attained only by just guessing because the data will be unreliable. The cash flow projection must still be based on significant pieces of evidence. In addition to that, the discount rate on the discounting formula must be estimated. The specific total cash changes periodically have to be presumed in order to get the discounted rate. 

If the discounted cash flow valuation is too complicated for the investors to understand and to maximize as a basis for their investment decisions, the method will not be significant. Hence, alternative techniques have to be utilized. But if you try to study the method with the help of qualified valuation accountants, you can thoroughly scrutinize companies for long-term investing. 

 

Economy, Investing, S&P 500, Stock Markets

Stock Markets: Q3 Earnings Season Update

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Stock Markets: Q3 Earnings Season Update

Uncertainties concerning the US and China trade negotiations remain an issue affecting business performance in the US. Out of this concern, the Fed cut interest rate in October 2019 by 0.25 percent. In terms of growth, the US GDP grew at a rate of 1.9 percent against a market expectation of 1.6 percent. The growth is a slight decline from 2.0 percent realized in Q2 of 2019. However, consumption by households grew to 2.9 percent while government spending increased by 2 percent.

The US economy performed better in Q3 compared to the rest of the world, as both the fixed income and equities earning were positive. Below are two highlights from the US third-quarter earnings results.

Stock Market Earnings Were Better Than Expected

Many analysts had expressed reservations regarding the third-quarter performance due to the current global economic slowdown and the China-US trade wars. The actual results from the Q3 period indicate that the markets have appreciated. An Increase in consumer spending resulted in a better than expected GDP for the third quarter

The S& P 500 is considered a good indicator of US stocks and business performance. To date, 91 percent of companies in the S&P 500 have reported their earnings. Seventy-three percent of these companies have reported better than expected per share. Historically, an average of 56 percent of companies usually achieves better than expected EPS. In terms of sales, 60 percent of the companies have reported figures above estimates, which is above the five-year average. The S&P 500 is on an uptrend throughout the third quarter. It gained 1.7 percent in that period. The index is now up by 20.9 percent in 2019; it’s the best-run since 1997.

Despite the positive earning, some analysts viewed the earning as a mixed bag. The aggregate net income for the companies that have reported so far is lower than in the net income of the same companies in previous periods. However, revenue growth is in a range previously achieved by this group of companies. For these companies, net income is down by 0.6 percent, while revenues are up by 4.9 percent.

US Economy Resilience to Tariffs and Wage Inflation

Trade wars between china and the US have seen the two countries impose steep tariffs upon each other. The depreciation of the Chinese Yuan countered a recent decision by the US to apply tariffs on more Chinese imports. The twists and turns that have characterized trade negotiations with China have not impacted the Q3 earnings significantly as initially feared. Although manufacturing dipped in Q3 2019, businesses still reported increased revenues.

For several months, the average hourly rate has been increasing steadily. While unemployment at its lowest level in decades, the wage rate is rising at a faster pace than inflation. For Q3, the annualized weekly wage rate rose to 3.3 percent. The rise was an improvement of a 2 percent increase in the second quarter. The increase in wages has not affected profits and earning to warrant a freeze on employment or layoffs.

Conclusion

In Q3, the earnings in the US appreciated. A Majority of companies forming the S&P 500 have reported a higher than expected EPS, better sales than the forecasts, or both. Businesses have proved resilience to rising wages, and the uncertainty brought about China and US trade wars.

Investing, Stock Markets

Enterprise Valuation Techniques: Determining a Company’s Total Worth

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Enterprise Valuation Techniques: Determining a Company’s Total Worth

The companies that have the potential to be successful entice investors to venture their capital to them. Although, a slothful evaluation with these robust companies always comes with a price. Investors must scrutinize thoroughly if these companies are worth buying for.

Company Valuation is an overall system of thoroughly appraising the economic value of an entire business. Company Valuation is used in order to estimate the fair market value of a business for several purposes. Aside from buying and selling shares, the process in determining an enterprise’s value is also beneficial in settling disagreements concerning taxation, distribution of business acquisition value with business assets, shareholder or partnership interests, and divorce proceedings. There are several useful techniques that can be utilized for company valuation depending on what aspect of that company you want to focus on such as: discounted cash flow valuation, times revenue method, market capitalization, liquidity valuation, valuation by share price, valuation by comparing companies, valuation through financial ratios, asset-based valuation, and earnings-multipliers.

Company valuation is a complicated financial evaluation that must be done by qualified valuation accountants awarded with a professional designation. This process will give aid especially to owners who are reaching a deal in selling their company and investors who are willing to buy a business. In this article, we are going to discuss the different methods in calculating an enterprise’s worth to raise awareness on how and why these methods are used. 

Discounted Cash Flow Valuation

Discounted Cash Flow is a method of appraising the worth of a company through forecasting its forthcoming cash flows. Through this valuation technique, sequences of assumptions are used in concluding cash flows forecasts regarding the potential performance of a company. Subsequently, the projected company performance will be interpreted to forecast the possible cash flow provided as a result of the operations of the company. 

This technique estimates the enterprise’s value by means of the Net Present Value method. NPV method is a contemporary way of assessing investment offers. This technique is based on the time value of money which estimates the return on investment by considering the factor of the time element. Using the NPV method, cash flows of the investment projected must be logically assumed. Correct discounts are recognized in the NPV method in order to mark down cash flows. For you to calculate the present value of cash flows, the opportunity cost must be considered as the discount rate.

Discounted Cash Flow has been used in most situations because it calculates the company’s value with accuracy. Therefore it is the most reliable valuation technique that exists today. Despite all of that, the DCF method also comes with some risks.

Why Discounted Cash Flow Should Be Analyzed

Valuation through the use of the Discounted Cash Flow method is beneficial for the owners since the cash of a company is what they are mainly concerned about. The DCF method help makes assumptions regarding the future cash flow to be generated by a company. Despite the affirmative earnings, a company that has unstable liquidity will not be attractive for investors since it is unable to pay off its obligations. 

Valuation Methods: Revenue Multiples

The Times Revenue method is a business valuation technique useful for estimating a company’s worth. For this method, the basis of verifying the highest value of a company is the multiple of the current revenue in which affected by a variety of factors such as the status of the industry in which the company belongs and its macroeconomic setting. Under this method, a company is valued on the range between 2 revenue multiples.

For example, a company that gained revenue worth $2 million for the current year is valued between 2x to 4x revenue. Therefore, it will have a total value of between $4 million to $8 million. 

Why Revenue Multiples Should Be Analyzed

The Times Revenue method may appear for some as an unreliable valuation technique in determining the current value of a company. The reason behind the doubt in using this method is that the continuous revenue growth does not indicate profitability growth. Despite its undependability, this method is advantageous for financial analysis in which the revenue is used as an independent variable and its limitations are manageable for complex analysis purposes. Thus, the Times Revenue method is still favorable for buyers because it estimates the purchase price offered by them.

Market Capitalization

Market Capitalization is the most uncomplicated and the easiest method you can understand since this determines the worth of a company based on the total value of all the company’s stocks. This technique is used in estimating a company’s value by simply multiplying the company’s number of outstanding shares to the price per share. For instance, a company is selling 100,000 outstanding shares for $50 per share. Therefore, the company could be appraised at $5 million.

Why Market Capitalization Should Be Analyzed

If you want to compare companies, this valuation method will be reliable in evaluating their relative size because it measures its value on the open market. In addition, it allows predicting its potential growth in the future and helps to determine risks in obtaining which makes the method a dependable basis for investors who are interested in buying shares of stock. 

Risks Using Market Capitalization

Although the Market capitalization is the simplest method, this is not the most effective way to appraise a company’s value because the share price is only based on the declared value in which the real value of the company may not be considered. Your evaluation of business might be put in jeopardy if you rely exclusively on this valuation technique. These are the reasons why depending on the Market Capitalization alone will bring uncertain company valuation results:

  1. The share price is constructed through the foreseeable positive outcome of an upcoming set of products of a company. These newly-launched products might end up as a failure and will result in a decrease in the share price.
  2. The share price might be based on an inaccurate forecast about the development of the company. The mistakes on the company’s projection might be the result of taking it as an insignificant part of the valuation. 
  3. The share price is based on the historical growth in which the company expects to continue. Using solely the past development of a company is a slothful way of estimating a company’s value.
  4. The share price is being relied on news reports or rumors that are unnecessary in completing the company valuation. 
  5. The share price is irrelevant to the company’s value if it is being traded inactively. 

Liquidation Value

Liquidation Value is a way of measuring the value of a company once it is bankrupt or shutting down its business. An enterprise’s worth is determined using this valuation technique by getting the amount of its cash after selling off all its assets and settling all its obligations. However, Liquidation Value is against the going concern principle which is about the presumption that a business has to continue its operation for the foreseeable future or at least 12 months.

Why Liquidation Value Should Be Analyzed

If a company is projected or planning to wind up in a span of 12 months, the Liquid Valuation is a reliable and acceptable method from the fact that it does not violate the going concern principle. 

Company Stock Comparisons

Comparing companies within the same industry is one of the useful techniques in measuring a company’s value. Considering the share price of the companies sold before is an effective way to estimate your price per share. On the other hand, applying this company valuation method also has drawbacks:

  1. You may find comparing indistinguishable companies complicated from the fact that modification on the calculations has to be done in order to identify their distinctions.
  2. The sales of a company are not equivalent to another company.
  3. The sales report of the companies has to be up to date in order for the current fair market value to be concluded.

Share Prices and Financial Ratios 

The shares undervalued by the market are attractive for value investors. They are executing this kind of game plan because they think that the underpriced valuation of the market is its exaggerated response from either good or bad news. Therefore, companies trade their shares less than intrinsic or book value. The underestimated shares by the market give value investors an opportunity to buy the shares of a company because of the shares’ future earnings power. Here are the practical financial ratios that will provide aid for company valuation:

  1. Price-Earnings Ratio – This ratio reveals the link between the fair market value per share and the earnings per share. It is also known as the Earnings- Multiplier method. Since a company’s profit is a more precise basis of financial performance than sales revenue, this method is frequently used to get the exact company value than the Times Revenue method. It is calculated as market value divided by the earnings per share.
  2. Price-Book Value Ratio – This ratio reflects the relationship between the market value and the book value per share. It is computed as market value divided by the book value per share.
  3. Price-Sales Ratio – The price to sales ratio determines the percentage appraised by the company per dollar of the sales. It is computed as market capitalization (or the number of outstanding shares multiplied by the price per share) divided by the total sales over the past 12 months. 
  4. Price-Cash flow Ratio – This ratio measures the correlation between the market value per share and the generated cash flow. To calculate the ratio, get the company’s market capitalization and divide it by the operating cash flow for the past 12 months. 
  5. Price/Earnings-Growth (PEG) Ratio – The PEG ratio finds out the proportion between the Price/Earnings Ratio and the projected earnings growth of a company for the given years. To get the ratio, take the Price-per-Earnings ratio and divide it by the expected earnings-per-share growth. 

Asset-Based Valuation Using the Going Concern Approach

Just like the Liquidation Value, this method uses a simple formula in order to get the value of a company. The only difference is that the going concern approach supposed that the company will continue its operation without being at risk of liquidation. This method calculates the fair market value of the total assets including intangible assets such as trademarks and patents. 

However, the way how intangible assets are being measured is different from the valuation of the other assets. The value of marketable securities already has a determined fixed value. The intangible assets are appraised under the discretion of the company which might result in overvaluation.  The techniques mentioned are the commonly-used company valuation method in the present day. These methods are known from their dependability towards precise valuation. The methods that are also useful include breakup value, replacement value, and a lot more.

 

Dividend Stocks, Investing, Retirement

Stock Trading Strategy: Appropriation of Retained Earnings

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Stock Trading Strategy: Appropriation of Retained Earnings

After a successful performance of a corporation, the shareholders are expecting to receive something in return from their capital contribution. However, the board of directors will still discuss if it is the right time to distribute the retained earnings through dividends. Some corporations are still facing problems that hinder them to repay their shareholders. But some are just establishing their priorities in order to fuel their expansion. If the board decided not to pay out dividends or will distribute only a part of the profits, a portion of the retained earnings will be appropriated for a specific purpose. These are the commonly created appropriations:

Appropriation for Contingencies

Corporations allocate their retained earnings to reserve their resources if in case they fail on a pending lawsuit which will result in charges to be incurred. The amount of the liability to be charged on a company regarding a lawsuit is uncertain. A corporation that is unprepared for future losses might end up struggling with bigger problems. Therefore, it is a sensible decision for the board of directors to designate a portion of its retained earnings for emergency purposes. 

Appropriation for Plant Expansion

If a corporation has decided to acquire land and build plant facilities, it will surely allocate its retained earnings for such a project. As a project concerning plant expansion continues, a substantial amount of expenses will persist to be incurred to the company as time goes by. Thus, the designation of the retained earnings is reasonable since this is for the benefit of all the shareholders in the future. 

The appropriation for contingencies and plant expansion is called voluntary appropriations because these are established by the board of directors at the same time permitted by the shareholders.

Appropriation for Bonds and Stock Redemption

Retained earnings are often reserved with the intention of guaranteeing the disbursement for the bonds or redemption of the stocks. This retained earnings allocation is also known as contractual appropriation.

Appropriation Reserve for Treasury Shares

If a corporation is planning to reacquire outstanding shares from its shareholders, it will retain its profits instead of giving it out through dividends. Since it is covered by the law, the appropriation is also called as legal appropriations.

For readers to get the point of view of the corporation, an example is cited below:

Company XYZ has obtained retained earnings of $4 million. The board has appropriated an amount of $1.5 million from the retained earnings with the purpose of building plant facilities which the shareholders approved. The journal entry for the appropriation is recorded as follows:

Retained Earnings  1,500,000

   Appropriation for Plant Expansion 1,500,000

The appropriation for plant expansion is still a retained earnings account but it will not be taken for the payment of dividends. As a result, the unappropriated retained earnings worth $2.5 million is the maximum amount available for paying out dividends. 

Once the goal in appropriating the retained earnings has already been achieved, the appropriation can now return as unappropriated retained earnings. As a result, it can be used to distribute dividends or appropriate it again for some other purpose. A journal entry using the foregoing example will be prepared as:

Appropriation for Plant Expansion 1,500,000

    Retained Earnings  1,500,000

Aside from distributing dividends, corporations will not restrict a portion of their retained earnings for the intention of supporting their regular operations. The appropriations will be reflected in the statement of retained earnings in order to maintain the trust of the shareholders since some are skeptical that the appropriated amount might go to the pockets of the board of directors. 

 

Dividend Stocks, Investing, Options

What’s The Difference Between Cash Dividends And Stock Dividends?

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What Are The Differences Between Cash Dividends And Stock Dividends?

A dividend is the distributed profit by a corporation to its shareholders. This is how corporations give back to their investors as they contributed capital to its successful performance, and maintain a good rapport between them. Periodically, a corporation pays dividends with an amount that depends on each shareholder’s investment to the company. The decision in allocating a portion of retained earnings is developed by the Board of Trustees. The management shall agree to a decision if there must be an appropriated budget for the dividend payment or what kind of dividends shall be distributed.

Most corporations usually issue two types of dividends: cash dividends and stock dividends. Therefore, investors must familiarize themselves with these types of dividends because they will surely encounter both in the future. In this article, we are going to specify the distinctions on every aspect of these dividends in order to bring awareness of why corporations pay a particular dividend. Consequently, this will eventually help you utilize the knowledge to your advantage towards a successful investment experience.

What are Cash Dividends and Stock Dividends?

A cash dividend is a regular payment in the form of money taken from the retained earnings of the company. Normally, cash dividends are distributed quarterly after prioritizing the payment for the company’s outstanding debts. 

A stock dividend, which is also called as scrip dividend, is an allocation of a company’s additional shares originating from unissued shares. This type of dividend is being distributed instead of paying cash dividends to the shareholders if the company’s liquidity is low. Companies distribute stock dividends in order to repay their shareholders without spending cash. Therefore, companies are able to retain their assets and appropriate them for expansion purposes. 

Stock Market Calculations

The amount of cash dividend to be given on a shareholder is different from another shareholder depending on their number of shares since it is issued on a per-share basis. For example, if the Board of Directors declared $20 per share, an investor that owns 10,000 shares will receive $200,000 worth of cash dividend. Even if the cash dividend is stated at a specific percentage, the result will always be the same. Let’s say 10% is issued as a dividend on a $200 par value per share. The investor on the preceding example will still get the same amount of $200,000. 

The amount of cash dividend that investors will periodically acquire depends on how many times the company will issue annually. Using the previous example, the company pays cash dividends quarterly. Therefore, shareholders will receive $5 per share every 3 months. 

With the allocation of stock dividends, the retained earnings are being capitalized while shareholder’s equity stays unchanged before and after its declaration and distribution. The allotment of the stock dividend only expands the number of shares but does not affect the benefits nor the ownership of its shareholders. For instance, a corporation that has 300,000 shares declares a 20% stock dividend. As a result, a shareholder that possesses 3,000 shares from that corporation will gain 600 more shares. The shareholder that owns 10% from the shareholder’s equity will maintain its portion from it after earning a 20% stock dividend and the market price of the stock remains the same. 

A small stock dividend considers the distribution of additional shares of less than 25% chargeable to retained earnings at the market value. While the additional share of 25% is considered as a large stock dividend that must be charged at the par value. 

Advantages of Cash and Stock Dividend Acquisitions

Obtaining cash dividends will benefit investors whose goal is to earn cash regularly. Cash dividend-paying companies are obliged to pay cash to their shareholders regardless of the companies’ financial status. Therefore, investors must carefully pick the cash-dividend paying companies to invest in for them to ensure a permanent source of passive income. 

Through cash dividend, investors are also given the freedom not only to spend it for personal use, but they can also buy more shares from the same company and buy shares to another company concurrently. Shareholders who are willing to reinvest their cash dividend must undergo on a dividend reinvestment plan. Buying more shares is a wise way to earn more money in the future if you believe that the company and economy have the potential to grow. 

The advantage of gaining stock dividends instead of the cash dividend is that investors will not incur tax from its acquisition. However, receiving a stock dividend with a cash dividend option included is subject to tax. Investors can sell their stock dividends in exchange for cash. Due to the sale of the stock dividend, it will not be exempted from tax anymore.

Disadvantages of Cash and Stock Dividend Acquisitions

The liabilities of a company increase because it is paying out cash dividends to its shareholders. The companies that distribute cash dividends may either have enough cash flow to support its growth or just feel obliged to give back to its shareholders in order to gain their trust. If a company still pays out cash dividends while still having losses and outstanding debt, that’s already a sign of its financial instability. Instead of distributing cash dividends, companies could have allocated their cash for expansion purposes which may result in market price appreciation. Aside from that, the cash dividends earned by shareholders are subject to tax based on the amount received. 

Stock dividends don’t have any value for investors who are expecting cash from the company they capitalized on. For that reason, they are pressured to sell it even for an amount lower than the dividend’s market price. In addition to that, shareholders will incur costs and taxes from selling their stock dividends. 

Reasons Companies Issue Dividends

Cash dividends are issued by companies because they already obtained ample earnings. It is predicted that giving back to their shareholders will not affect long-term financial strength. These cash-dividend paying companies pay out cash because they might have a good financial position but has a limited capability to venture on expansion to spend their cash up.  Companies tend to issue stock dividends to their shareholders when it is not yet the right time to exhaust assets just to repay shareholders. These stock-dividend paying companies are just taking safety measures because they don’t want to inflict any harm to their liquidity.

 

Retirement, Stock Markets

Financial Planning: Choosing Between Stocks or Bonds for Your Retirement Account

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Financial Planning: Choosing Between Stocks or Bonds for Your Retirement Account

“Behold the turtle. He makes progress only when he sticks his neck out.” — James Bryant Conant

If you are planning for retirement, you have probably felt the pressures involved when looking at all of the different places to park your money.  The financial landscape can be a complicated place, and the task of choosing between asset classes can seem daunting during the early stages of the process.  Two of the most popular asset classes are stocks and bonds, and many newer investors often wonder which is best for a long-term retirement portfolio.

In any retirement portfolio, investors must understand the concept of market risk as it relates to their positions.  This essentially refers to the possibility of losses relative to the potential for reward (gains) in the investment. These factors work hand-in-hand, but a seasoned financial advisor can help understand the nuances which are present when planning for retirement.  We sat down with Adam Anderson, CEO of MRA Capital Partners to identify new strategies to turn the odds into our favor on the path toward building wealth. Below, we can find some tips we uncovered along the way.

Measuring Potential Returns

As a general rule, greater potential for gain tends to be associated with larger levels of risk.  These factors can be understood when comparing the historical returns generated by investments in both stocks and bonds.  When a retirement portfolio is designed by an industry expert and assets are properly allocated, risk is generally a short-term phenomenon.  The potential for returns differs when we are comparing the advantages of stocks and bonds, and the appropriate selections for your retirement portfolio will depend heavily on your individual goals and needs.

Over the last century, U.S. Treasury Bills have acted as a proxy for money market accounts (generating yields of roughly 3.7% annually).  Longer-term government bonds returns about 5.7% over the same period. Put in simple terms, if you invested $1 in long-term bonds in 1926 your investment would be worth about $100 in 2008.  Stock investments, on the other hand, would have produced very different results (generating annual returns of 9.6% during these same periods). In this case, a $1 investment in large-cap stocks in 1926 would be worth about $2,000 just prior to the financial turmoil of 2008.

Stocks and Bonds

In the chart above, we can see the more recent trends in stock markets as they relate to the bond markets.  Interestingly, there are some cases where the traditional correlations to not match the current tendencies. These asset classes have had periods characterized by similar returns (both small and large).  This is precisely why retirement investors will consult an experienced financial advisor, so that it is easier to spot the differences in any given market climate. 

“As a CFP and Financial Planner, I’ve practiced the principles of asset allocation and diversification through both bull and bear market cycles as well as expansion, contraction, and recessionary economic climates.  Diversification between asset classes is paramount to a successful investment strategy,” Mr. Anderson explained. 

“At the most broad level, the mix between stocks and bonds is most commonly debated especially among retail investors and their advisors.  In my opinion, the most heavily overlooked asset class for individual investors are alternatives.  Alternatives can be commodities, futures, real estate, private equity, art and other non stock or bond investments. Alternatives should make up between 10%-20% of a well diversified portfolio for the average investor but is much higher for some institutional investors, endowments, pensions and high net worth individuals. While I don’t personally endorse this, some even choose to invest only in non market based alternatives ignoring stocks and bonds completely,” Mr. Anderson explained.   

“The benefit to alternatives is that when managed correctly, they should be non-correlated to stocks or bonds. Private equity and Real Estate tend to do a very good job at this. The challenge is finding the right managers and strategies that fit the investors goals and comfort level. Another challenge is investment minimums are generally very high and transparency is generally low when investing directly in real estate for example,” Mr. Anderson explained. 

MRA Capital Partners seeks to remove these barriers by offering limited partnership interests in a variety of single asset real estate investments as well as its Lighthouse Fund which is a diversified pool of high yield asset backed loans.  The individual accredited investor can access these private non-correlated investments for as little as $50,000 and has full transparency via our secure investor portal at www.mracapitalpartners.com.

Limiting Risk in Retirement Portfolios

More broadly, stock markets have generated much higher average returns, and this is why retirement portfolios tend to be more heavily-centered in these areas.  Of course, this added potential for return comes with added risk for the investment. But since the stock market tends to post positive results during the vast majority of market scenarios, any losses tend to be removed over time.

These are all risks which must be understood but when we have a well-constructed investment portfolio it becomes possible to turn the odds in our favor.  Markets will always experience -boom-and-bust type periods in the broader economic cycle. But when a retirement portfolio is well-constructed and diversified, these risks can be mitigated and substantially reduced.  Stock markets move higher during the vast majority of the time, and this is why buy-and-hold strategies tend to work best in generating returns and investment income.

“Heading into 2019, it’s no secret we are in the later stages of the current economic expansion and the federal reserve has made it very clear they plan to continue on their current path of raising rates.  This along with the uncertainty surrounding the current political and trade headline risk is likely to continue to cause volatility in the stock and bond markets,” Mr. Anderson explained. 

“If rates rise more rapidly than anticipated, bonds may prove to be less of a safe haven or diversifier than investors expected.  Additionally, as the world economy continues to become more integrated, many of the more liquid asset classes like stocks, bonds, REITS, and even liquid alternatives like those access via ETFS or Mutual Fund may prove to be more correlated to each other then they have been in the past. In my opinion, carefully selected privately held investments are the best way to gain non-correlated exposure,” Mr. Anderson explained. 

Understanding Time Horizons

Time is another important factor in any investment.  Will you be retiring 10 years from now? Twenty years?  Maybe much sooner? It is never too late to start planning your retirement portfolio.  But the time you have until you stop working your regular job can be an important factor in determining which types of assets to include in your investment portfolio.  If you have an extend time period before your retirement, there is often better opportunity for capital growth through stock investments. Conversely, if you are looking for short-term stability and income, bonds may offer advantages given your individual needs.

“There are risks associated with all investments.  At MRA Capital Partners, we focus on privately held investments back by the hard asset of real estate.  While these types of private equity and debt investments are not immune recessions, rising rates and other market forces, they very rarely behave like traditional stocks or bonds which may be a great complement to a balanced portfolio. Additionally, investments offered by MRA Capital Partners have a strong income component, many distributing 10% or more annually which make them a great complement or even alternative to bonds,” Mr. Anderson explained. 

Of course, these are all factors which should be discussed with your investment advisor, and the answers will differ depending on your individual needs and goals.  There is no substitute for individual attention and it must always be understood that “patience pays” in any financial markets investment.  As the sage wisdom of James Bryant Conant tells us “Behold the turtle. He makes progress only when he sticks his neck out.” This suggests a certain level of risk can be taken, as long as those risks are measured and characterized by patience that is well-researched in the current market environment.

For this article, we interviewed Adam Anderson, CFP®, CRPC® CEO – Managing Partner of MRA Capital Partners.