Financial Statements: Demystifying the Basics

Some things in life appear more difficult than they actually are. Analyzing a company's financial performance is simply one of them. Many a time we come across people who completely depend on others for their investment decisions, which can have far serious implications. Though it seems like an uphill task to many, company analysis is actually no rocket science. A little understanding of the fundamentals and an elementary logic is all it takes to identify the potential of the companies.

Firstly, you should be aware of the business of the company you have invested your money in or intend to invest. Its history, vision, products and services and its business model will give you necessary details regarding the functioning of the company. A thorough study of its introduction in the annual report, company's website and of course the internet will easily furnish you loads of information. So, if you are unable to grasp the way the company operates or its growth prospects, it is better to stay away from the stock. Herd mentality is definitely not advisable for a long-term investment.

Once you have a sound understanding of the company's operations and revenue earning methodology, turn to its financial statements. Again, this can be easily accessed from the company's website. There are three financial statements which are the Comprehensive Income statement, Balance Sheet and Cash Flow.

The Income Statement shows the revenue earned for the period, the expenses incurred for earning the revenue and the resultant after meeting statutory obligations is known as the net profit/ retained earnings or loss. It is on this amount that the company declares a dividend to the shareholders. The comparative analysis with past period statement helps you to analyze how the company is performing. The most important areas of focus in the statement are the ratio between net profit and sales (also known as the net margin) as well the gross profit and sales (also known as the gross profit margin). The higher they are, the better it is. Furthermore, other areas that deserve a check are the direct cost components, which imply the major costs driving the business. This will differ for each company, according to the industry it operates.

Then it's the Balance Sheet, which is a statement of the sources and application of funds as on the last day of the period. As a rule of thumb, the sources of funds must be equal to the application. You can ascertain the financial position of the company by examining various ratios like the Debt-Equity ratio and Debt-Asset ratio. A high proportion of debt implies that the company is financing its growth by borrowing aggressively. This is only justified if the revenue of the company also shows a significant growth. More debt also implies increased interest expense, thus the quantum of growth in revenue should be more than that of interest, or else it will lessen the earnings. Also, this ratio depends on the sector which the company belongs to. Manufacturing companies usually are more leveraged than service oriented companies. Meanwhile, the ratio between the current assets and current liabilities, ascertains the liquidity of the company.

The last one is the Cash Flow Statement. Showing the movement of cash for the period, this statement is divided into three sections which are cash from operating activities, cash from investing activities and cash from financing activities. You can very easily comprehend the cash positioning of the company with respect to the three main activities. The strong company derives more cash flow from operations than from investment or financing activities. The operational cash is the direct indication of the organic growth of the company.

Lastly, it is imperative to compare the financials of the target company with other companies in the same industry. Only then will you have a lucid idea about the performance of the company. Whether the change in financials is due to industry related factors or specific to the company can be easily determined.

While, there are other parameters to judge the overall performance of the company, a strong hold on its financial performance is the first and major step in this direction. By unearthing the stories behind these numbers you can truly empower yourself to judge the prospects of your portfolio.

By: Samory Borry On 7:15 AM

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How to Read Stock Quotes

Until recently, investing in the stock market was not something "average" people did to increase their wealth and savings. Investing in stocks was something only the very wealthy could afford to do. Investment firms and stockbrokers charged high fees and commissions, draining modest accounts of any profits. With the introduction of online trading platforms and discount brokerage forms, as well as the wide variety of financial information available online and on television and the radio, anyone with some money can invest in stocks, bonds, and mutual funds. While many investors utilize and leverage the information and analysis available when they invest with a full service brokerage form, many investors opt for a less expensive alternative; and, with the some basic information, they can be just as successful as the professionals.

First, you need to understand that a stock represents your share in the ownership of the company and it is your claim on any future earnings and dividends. Buying stock in a company shows that you are interested in its long-term success. Profits are eventually paid out in dividends, and the more stock you own, the more dividends you receive. Choosing a successful stock means that an investor should have a basic understanding of basic business principles and models.

Investors should pay attention to earning statements, sales numbers, debt, and equity, and be familiar with annual reports, quarterly reports filed with the Securities and Exchange Commission (SEC) and any third party publications like the Wall Street Journal. There are a number of sites dedicated to providing research and analysis into the stocks trading on any of the major market exchanges.

Once you have decided to invest, you should understand how to read a stock quote, so you can make informed decisions about buying or selling your stock. The price of any stock is quoted on an exchange (like the New York Stock Exchange or the Japanese Nikkei). A basic quote for a stock provides information about the stock's activity, like bid price, ask price, last traded price, and volume traded.

Many online sites provide more detailed information about the stock. This information helps the investor see a bigger picture.

• 52 Week High and Low: The highest and lowest price at which the stock has traded over the past year. These are the first two columns in a stock quote, and generally don't include the previous day's trading.
• The third column indicates whether the stock is general or preferred stock.
• The Ticker symbol is identified in the fourth column.
• Column 5 notes the dividend paid per share. If the column is blank, the company is or does not pay dividends. This information is followed by the dividend yield, the percentage return on the dividend.
• Price to Earnings Ratio (P:E) is an important figure for investors. It represents the stock prices divided by the earnings per share and a healthy P:E represents a solid company.
• The trading volume shows the number of shares traded for the day.
• The Daily High and Low identifies the highest and lowest prices paid during that trading session.
• Column 11 shows the price at which the stock closed for the day. If the closing price is up or down by 5% or more, the closing price will be bolded.
• The net change shows the dollar value change in the stock price from the previous day's price.

Before executing a trade, it is important to get a real time stock quote. Most free financial sites and online resources provide a delayed stock quote, which may be as old as 20 minutes. Brokers have access to real time quotes, as do investors who subscribe sites with members only areas.

By: Samory Borry On 9:56 AM

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Why the Federal Reserve Bank Has a Near Zero Interest Rate Policy

Before everyone celebrates the stock market at all time highs maybe they should ask why the Federal Reserve Bank has overnight rates at 0.25%.

The financial calamity of 2008 relieved the global banking system of around one trillion U.S. dollars. Therefore, in order to recapitalize itself, the global banking system needs to make around 1 trillion US dollars.

The Federal Reserve has made a dramatic, concerted effort to help the global banking system recapitalize itself principally by keeping rates at near zero. The current estimates place the recapitalization in the $300 to $400 billion range. While that is a wonderful gain by any measure, $300 to $400 billion is woefully short of the $1 trillion hole, over $500 billion short.

The next $500 billion will be much more difficult for the banks to recapitalize due to the new rules and regulations. While the Dodd/Frank and the Volker rule were created with very good intentions, as so many laws and rules and regulations are, the real impact of these new rules and regulations will be on the bank's bottom lines.

Both Dodd/Frank and the Volker Rule severely limit the businesses banks can pursue. This will create a difficult environment for banks to earn profits and thus, will only increase the time it will take for the global banking system to completely recapitalize itself. Therefore, the Federal Reserve will be obligated to continue the current near zero interest rate policy for a longer period of time than people have projected in order to continue assisting the global banking system to get closer to recapitalizing itself.

Now lets talk about the current U.S. government debt problem. The current U.S. deficit is now over 16.5 Trillion and growing every second. Even with the fiscal cliff being averted and the sequester, the U.S. government continues to operate in the red for Fiscal year 2013 by an estimated $800 billion. The CBO has similar projected deficit estimates for fiscal years 2014-16. These deficits will take our national debt to at least the 20 Trillion dollar level. TWENTY TRILLION DOLLARS!

At some point in the near future, the United States government will minimally have to balance the annual budget deficits in order to stop the total debt expansion, as well as make a real concerted effort to bring down the total national deficit in order to balance itself. This means the US will need to take $500 to $800 billion of government spending out of the U.S. economy. This spending hole is going to result in many quarters of negative growth. This is certainly not good for the U.S. stock markets or the global stock markets for that matter.

The current hope is that the U.S. will grow its way out of this debt problem. All I have to say about that is hope is not a viable plan. Therefore, the Federal Reserve will be forced to continue the current zero interest rate policy to help alleviate the spending void in order to keep the US economy from once again, slipping back into a recession.

While the stock market is trading near all time highs, the Federal Reserve must continue its near zero interest rate policy to recapitalize the World Banking system and to support the economy as spending cuts and tax hikes remove money from the economy to help stem the threat of another recession.

By: Samory Borry On 9:53 AM

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Stock Markets Of The World

“Stock Market” is a term that is used to refer both to the physical location for buying and selling stocks, and to the overall activity of the market within a certain country. When you hear “The stock market was down today,” it refers to the combined activity of many stock exchanges.

The major exchanges in the US are the New York Stock Exchange (NYSE), the American Stock Exchange (Amex), and NASDAQ.

The correct term for the physical location for trading stocks is the “Stock Exchange.” A country may have many different stock exchanges. Usually a particular company’s stocks are traded on only 1 exchange, although large corporations may be listed in several.

Investing Around The World

There are stock exchanges located throughout the world, and it is possible to buy or sell stocks on any of them. The only restriction is the oparating hours of each exchange. Both the NYSE and NASDAQ, for example, operate from 9:30 am to 4:00 pm Eastern Time, Monday through Friday.

Other exchanges have similar opening hours based on their local time. When you trade on the Hong Kong Stock Exchange, your order will be executed sometime between 9:30 pm and 4:00 am New York time.

The locations of the major stock exchanges of the world are:

Japan (Tokyo Stock Exchange)

India (Bombay Stock Exchange)

Europe (London Stock Exchange, Frankfurt Stock Exchange, SWX Swiss Exchange)

the People’s Republic of China (Shanghai Stock Exchange)

United States.

Stock Market Fluctuations

The economic health of a country will strongly influence its stock market. When the economy is doing well the market is bullish. Bull markets occur during times of high economic production, low unemployment and low inflation. Bear markets, on the other hand, follow downturns in the economy. When inflation and unemployment are rising, stock prices are usually falling.

Stock price fluctuations are also driven by supply and demand, which in turn are dependent to a great degree on investor psychology. Seeing a stock price rise rapidly can cause investors to jump on the bandwagon, and this rush to buy drives the price up even faster. A falling price can have a similar effect in the other direction. These are short-term fluctuations. Stock prices tend to normalize after such runs.

The stock exchange is only 1 of many opportunities for people to invest. Other popular markets include the Foreign Exchange Market (FOREX), the Futures Market, and the Options Market.

FOREX: World’s Largest Market

The FOREX is the biggest (in terms of value) investment market in the world. FOREX traders buy 1 currency against another and can profit from small changes in currency value. Most FOREX trades are entered and exited in 1 24-hour span, and traders have to keep a close watch on the market in order to make profitable trades.

The Futures Market

The Futures Market is a market of contracts to buy and sell certain goods at specified prices and times. It exists because buyers and sellers of goods wish to lock in prices for future delivery, but market conditions can make the actual futures contract fluctuate considerably in value.

Most investors in the futures market are not interested in the actual goods — only in the profit that can be realized from trading the contracts.

The Options Market

The Options Market is similar to the Futures Market in that an option is a contract that gives you the right (but not the obligation) to trade a stock at a certain price before a specified date. These options can be traded on their own or purchased as a form of insurance against price fluctuations within a certain time frame.

Stocks: Low Risk, Long-Term

All 3 of these markets are considered quite risky without considerable knowledge and experience. They also require close monitoring of market movements. Stocks, on the other hand, are less risky because movements of the market are usually more gradual. Although short-term investment strategies are possible, most people view stocks as long-term investments.

By: Samory Borry On 9:29 PM

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