What are Company Shares?

What are Company Shares?

What is a share?

For a share to exist, it must have the existence of a company as an antecedent.

Taking shares of a company to the market is one of the most efficient ways that exist at the moment for the initial financing of a company, for its creation, because at the time of creation, there are no real guarantees to be able to request a loan from the bank In addition, if the amount of money is very large, the bank may deny the loan request.

It is also important, after looking at the advantages and disadvantages of all types of companies, to establish a LIMITED COMPANY, the most important reason to create a company of this type and not another is the responsibility for the obligations of the company, that is to say, the shareholders of an anonymous company are not obliged to respond for a greater amount than the one they invested in the event of the company’s failure.

When the company is created, a provisional board of directors is placed, until the first annual meeting of shareholders meets and this elects the final meeting, which is in charge of authorizing the issuance of the company’s shares that were already established in the bylaws. of creation.

Each shareholder owns a part of the company, although the size of that part depends on the number of shares owned.

Assuming that the company obtained almost all the initial capital it needed through equity (contributed by the capitalist partners), what remains to be obtained is requested as a bank loan if it plans to pay it off in the short term; If this is not the case, you could think about issuing bonds, which, since the company is new, probably could not be issued only with the word and the good name of the company (if it were possible, the bonds would be called obligations) and if the company offered some assets in support of those bonds (these would be called mortgage bonds).

IMPORTANCE OF UTILITIES:

Why do people decide to risk their money in a new company, having so many possibilities, such as putting it in the bank where they know nothing is wrong with it and that they also give a return, the answer is very simple because of the profits, because it was seen the possibility of increasing profits in the coming years and why a better return was calculated by investing in a new company than taking the money to the bank.

Earnings per share is the result of the formula earnings after taxes divided by the number of shares outstanding.

Every year the members of the board of directors must decide what to do with the profits of the company if they are reinvested or at least a part of them, or distributed among the shareholders if the company were to distribute profits or a part that cash payment is called dividends.

But if the company takes these profits to reinvest them in increasing the size of the factory, hiring personnel, increasing research and this investment generates a greater dividend for shareholders in the coming years, this process is called internal financing.

SHARE PRICE:

Once the shares have been issued and are in circulation, to determine the market price there is an old saying: “A share is only worth what a person is willing to pay for it” and this saying has some truth for it. that if one is going to sell the shares, they could not be sold except for the price that someone wishes to pay for them.

The main factors that are looked at when negotiating a share, because the price revolves around them are:

  • earnings prospects
  • dividend expectations
  • financial situation

There are two terms used on wall street to evaluate actions:

  • the price/earnings ratio: describes the relationship between the share price and earnings per share, this is calculated by dividing the share price over the earnings figure for each of these.
  • dividend yield: represents the percentage of annual return provided by the dividend, this is calculated by dividing the annual cash dividend per share by the share price.

Why do people buy stocks?

Although each person has a different objective when investing, the shares are bought for a fundamental reason: to earn money.

A person can participate in the stock market in 3 ways:

  • investing: an investor buys shares to own a part of the company and to obtain an adequate return on investment. In this system, time is used as an advantage.
  • Speculating: you want to take a big risk to obtain a big potential reward, for this, it is not important to be the owner of a part of the company since your time horizon is not longer than strictly necessary.
  • Negotiating: tries to benefit from small changes in prices and is less interested in the intrinsic value of the action, these actions are one paper that is sold generating a profit in a short period.

Whether any of the 3 are used, a shareholder earns money by receiving cash dividends from the company and earning capital appreciation if the stock sells for a higher price than the purchase price.

Finally, the stock market is different for each person because what an old person is looking for is a low but safe return, in a young person the objectives are different, in any of the things it is important for an investor to use in the stock market a capital that can be safely disposed of, to identify an investment objective and to know what to expect from each peso invested

HOW WALL STREET WORKS

Introduction: It is the largest financial center in the world and perhaps the most famous street.

Definition of Wall Street This is a street. An address in New York It is a market where traders, agents, and finance clients meet to buy and sell stocks and bonds. It is supervised by the Securities and Exchange Commission-Securities and Exchange Commission. (SEC). Wall Street is made up of the stock exchanges where the values ​​are negotiated in an auction process: the stock market of

New York (NYSE), the American Stock Exchange (AMEX), and regional exchanges; and includes the chain of brokers/dealers known as the over-the-counter (OTC) market.

Wall Street can be defined according to its functions: to provide a primary market and a secondary market. Through the primary market, companies sell their shares and bonds directly to the public, obtaining money to expand. The process of bringing a share to the market for the first time is called: selling shares to the public (going public). After a company has started selling shares to the public. Its shares are traded in the secondary market, which provides the investor with several purchase proposals and sales offers; in this secondary market, the prices of the shares rise or fall according to supply and demand. And everything that uses the Wall Street market has one goal: to make money.

“History: It is so called because the street had a wall that had cows and Indians on one side.

Later it became a center of commercial activity because it connected piers that served the trade and even the possession of George Washington. Wall Street had no stock exchange. The first stock exchange in that country was established in Philadelphia in 1970.

The first order of business was the authorization of the issuance of government bonds to absorb the cost of the war. But there was no organized stock market yet. Investors indicated their interest in any issue available through coffee shops or advertisements in the press.

Then Wall Street businessmen began scheduling stock and bond auctions, then leading merchants organized a central auction where shares were bought and sold daily at noon. Clients of the stock exchange office, or their agents, delivered the shares to the auctioneers, who received a commission for each stock or bond sold.

But some clever people took the auction prices and then offered the same papers but with a lower commission. So in 1792, 24 men signed a document agreeing to trade paper among themselves, to maintain fixed commission rates and avoid further auctions, today they are known as the New York Stock Exchange (NYSE) originators. Only members could be traded and the privilege of sitting at the auction cost US$400. So the NYSE was located in the building where it works today.

But in 1850 gold was discovered in California and the country turned to gold and mining company stocks and railroad shares were popular.

Then, since few could afford an office, they negotiated on the street, and they were called “sidewalk brokers.” But later they were able to rent offices. And there each operator took orders and shouted them to the runners who were on the first floor, but the shouts were useless; they then began using hand signals to convey information about stock price and volume. This exchange today is known as the American Stock Exchange.

The primary market: the investment process begins with a primary market. Its main point is the invasion banker, a member of Wall Street who specializes in obtaining the capital that businesses need. He takes a company to the public market and usually helps with Wall Street negotiations. That banker has to consider several factors such as economic conditions, and the market environment. Particular circumstances of the company, and others to determine an offer price.

The investment banker agrees to buy all the shares to resell them later at a pre-established price, that is, he serves as an underwriter. If the issue were larger, he could call other bankers (union); they can call other dealers and jointly sell the shares to the public at a defined price. The company must comply with the requirements of the SEC. The company fills out a brochure with its financial information, and that brochure is given to the group of the buyer(s). This is the only time a share is priced, after which the shares trade according to a bid and asks in the secondary market.

The secondary market: the main contact in this market is the registered representative, this means that he is registered with the SEC and represents the brokers and dealers of a firm, and is the one who executes a client’s order on the trading floor of a firm.

Stock or an OTC. It is also known as a stockbroker, where they are paid with a brokerage commission. Received each time a share is bought or sold. In the OTC the client can pay a margin upwards (additional commission to the price), downwards (it is the opposite), or a commission. The NASD regulates the OTC market.

Brokerage firm: also called brokerage house, they differ from each other by the service they provide. An NYSE member firm has a trading department. Shares listed on the stock market, various types of bonds, and underwriting departments. It can also be differentiated by analyzing which exchange they are members of and what is the source of their income. For a brokerage firm to become a member of an exchange it has to buy a position, due to this there are an unlimited number of positions that have their own supply and demand market.

Those that do not have a position are called non-members and to trade shares must be understood with a member firm or executed through the tertiary market (OTC). If a member firm has an individual investor as its main client, it is called a retail house, and if it has an institutional investor as a client (mutual funds, insurance companies, pension companies) it is called an institutional house.

• Markets: they also differ in registration requirements and execution methods. When a share is listed, it means that it can be traded there. For example, the NYSE attracts old and large companies, the AMEX attracts smaller and new companies; these two exchanges execute orders through a two-way auction.

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Addresses; and the OTC attracts the newly created and inexperienced ones, which execute the orders by negotiation; where each exchange has its requirements that companies must meet or else their registration will be withdrawn. A company can register on more than one stock exchange. Currently, there are 10 regional stock exchanges (pacific, Boston Midwest), which are connected via computer with the NYSE and AMEX.

*How the system works: After opening an account at a brokerage firm, the investor can buy and sell shares. PE // A grocer in Atlanta decides to buy 100 shares (full lot) in a market order that he gives to his broker, and Company Z places a market order to sell 100 shares. The orders are sent to the respective firms and then transmitted to the 1st trading floor, where the floor brokers who receive the order by tele are located. The floor brokers then proceed to the trading post where shares are bought and sold. At the trading site, the crowd of brokers who have orders to buy shares enter and begin to offer prices. The specialist is the one who directs the price offer to buy the shares.

If there were no offer to sell shares, the specialist would have sold his shares for his account, and if the broker had a sell order, the specialist would have bought the shares for his own account and this is reflected in the specialist’s book. The specialist firm must always have sufficient capital to buy the shares, its responsibility is to keep the market fair and orderly, and it keeps the difference between the SPREAD low and the fluctuations that occur. The specialist is a trader very similar to the OTC market, a specialist is the first figure in a transaction when buying and selling shares, while the broker is a representative of the client.

OTC: if you wanted to buy 100 shares in this market, the order would have been sent to the counter of this firm, the individuals who are at the counter are called: brokers/dealers, since they can act as either of the two, depending on the circumstances. The OTC market is the oldest and largest of the US stock markets, where brokers/dealers intercommunicate through the NASDAQ system and by telephone. Through this market, all federal, state, municipal, and corporate bonds, new issues, and shares of foreign companies are bought and sold.

*Who buys shares?* ownership of common shares is divided into two

owners: individual and institutional It was found that the average shareholder is 50 years old, with a university education and professional and ethical work, and there were more women shareholders than men Institutional investors have been replacing individuals. The largest institutional investors are pension funds, investment companies, nonprofits, insurance companies, trust companies, and mutual banks.

*Future: it is wanted that through computer programs all the markets that are separated today are united, these programs try to submit each order to the best purchase and sale prices, regardless of where they occur.

 

“HOW TO READ THE FINANCIAL PAGES”

The Dow Jones averages: are the indicators of the daily trend of the stock market. It is an important point of reference.

This is divided into 3 which are:

  • Dow Jones Industrial is made up of 30 stocks including Boeing, Coca-cola, DuPont, Exxon, Goodyear, IBM, McDonald’s, Merck, Texaco, and Woolworth.
  • Dow Jones service companies made up of 15 stocks
  • Dow Jones composite is made up of the industrial, transport, and public services (65 companies)

Other averages:

  • Standard & Poor’s
  • New York Stock Exchange Index (NYSE)
  • Major Market Index (XMI)

Sale under the short modality: when the investor believes that the shares of a company are going to fall in price, they sell them at that moment to later buy them at a lower price and earn the difference

Key points that an investor should have

  • Trends in consumer confidence and spending
  • Fed measures to expand or contract money in circulation
  • Interest Rate Trend
  • Indices published by the government on the main indicators
  • Tax increases and cuts
  • Accumulation or liquidation of inventories of companies
  • K investment plans of companies for expansion of plant and equipment
  • Government spending for defense and social needs

 

INVESTMENT AND NEGOTIATION.

“There is no investment that does not involve some risk and that is not something similar to a bet”…Bernard M. Baruch.

Due to the needs and objectives of the investors, the expectations, risks, objectives, returns, and approaches to the markets are different.

Financial advisors recommend against buying common stocks, preferred stocks, or long-term bonds until at least:

  • have a sum of money saved in case of a family emergency.
  • have a health, housing, and life plan.
  • Reserves have been made for obvious needs such as housing, education, and retirement.

Risk Capital = Money set aside for investment.

It is not advisable to invest all at once, only “discretionary” capital should be used. A flexible investment program = Great peace of mind.

In an investment, in addition to money, there is another important factor, which is time, since good portfolio management requires a certain amount of time and effort.

The search for a Stock Broker is similar to the search for a Family Doctor, looking for EXPERIENCE, PERSONALITY, AND REPUTATION. The selection will be made after conducting personal interviews. Other aspects to take into account are the philosophy about investments, the quality of the investigations carried out by the firm, other services, and commission rates. The brokerage firm charges a small commission each time paper is bought or sold.

The selected must be:

  • an employee of a major brokerage firm
  • member of the NYSE and have access to it.
  • Have passed the general exam of the NYSE and the National Association of Securities Dealers.

The rules and code of ethics are strict. The broker is prohibited from guaranteeing a client that they will not make a loss, nor can they share in the profits or losses of a client’s account or reduce commissions to obtain a trade.

The income of a stockbroker is greater if the purchase or sale of papers is increased more frequently. This practice taken to the extreme is known as “exhaustion” (churning) and results in severe fines.

For the most efficient use of a stockbroker, the investor should:

  • be prudent and call only when necessary.
  • listen to the advice of a stockbroker.
  • Be specific when giving an order or when giving instructions to avoid misunderstandings.
  • Consider the corridos as a source of valuable information.
  • Create a library of information at home.

Brokers with reduced commissions. (Discount Brokers)

These services are basically for investors who make between 15 and 20 transactions a year since the commission given to brokers is much lower. It is recommended that you first research the firm and its background.

Opening of an account.

It is almost the same as opening a bank account. The person must show a satisfactory history of credit utilization, and certain financial responsibilities must be met.

Gallery = Area in the brokerage office where clients can see what’s going on.

Quotron = Machine that shows the latest stock prices.

Broad tape = serves to know the latest news.

Trade Date = the day on which the shares are bought or sold.

Settlement Date = deadline to deposit the cash and/or required papers into the account before or on the 5th business day after the transaction is completed.

Once the brokerage firm has been paid for the purchase of the shares, the investor can request any of these 3 procedures:

  • shares can be transferred or shipped: the owner’s name is transferred to the share certificate.
  • shares can be transferred and held in custody: same as 1 but the certificate is kept in the safe of the brokerage firm.

Stock Power = power that the owner must sign to transfer the certificate to a new shareholder in case the shares are sold.

3. The shares can be kept in custody in “street name”: the shares are in the name of the broker.

The client is sent an extract similar to the one sent by banks.

The shares that are owned at the date of the statement are called “long” and those that the client owes to the account are “short”.

There are 2 basic types of accounts:

Cash Accounts: Used when the paper is bought or sold in a direct cash transaction. Transactions end before or on the settlement date. If the shares have been purchased, it means that the client has paid in full for them, the client’s broker has paid the seller’s broker and the shares have been credited to the buyer’s account. All in 5 business days.

Surplus Account: allows the client to borrow from the broker part of the amount needed to buy or sell securities. The minimum required by the NYSE is $2,000. It also requires that all transactions close on the settlement date. The broker will lend the client an amount based on the number of securities or cash in the account at that time. For this service, the client pays interest to the broker. As it says in the book: “later we will explain more in detail about this account”

Another issue… the opening of accounts is limited to adults, minors can hold securities in special custody accounts.

Professional advice.

This advice is for people with large sums of money. The commission is generally between 1 and 1 and a half% in portfolios up to U$D 200,000. from then on the cost decreases proportionally. The investor also has to pay brokerage commissions.

Custody functions such as the protection of papers and the collection or disbursement of dividends and accounting interests are handled more than all by banks. For those using professional services, a “non-discretionary” account is recommended with the understanding that the adviser has some freedom in managing the portfolio.

Investment Objectives.

Portfolios are generally managed for income, capital appreciation, security, or some combination of these.

Risk and profitability.

“The higher the expected return, the higher the risk of the investment”… Main concept of all wall street. The RISK/RETURN ratio establishes the desire to maintain capital at one end of the spectrum and the desire to maximize return at the other end.

Investors respond to changes in interest rates or inflation.

Selection and Programming.

To be successful, a successful combination must be made between these two variables: the selection of the investment and the programming of the moment in which it must be carried out. Poor timing can be very costly.

As a general rule, the selection and timing of when to invest are inversely important, which means that when the investment horizon is longer, the selection is more important than timing and vice versa.

Total profitability.

Securities analysts generally shop for investment opportunities by estimating the total capital appreciation and dividends that each investment can offer annually. This calculation is a percentage.

It is difficult to estimate the future valuation of a stock, analysts assume that for the calculation of total return, current price/earnings ratios will not change in the future. This means that the estimated growth rate of earnings per share can be used instead of the capital appreciation estimate.

When the total return approach is used, an investor can immediately see what each investment offers.

When comparing stocks of similar quality and offering the same returns, investors should realize that a high-valuation stock likely represents higher initial market risk and higher long-term return than a low-valuation stock, and higher dividend yield.

Account with Surplus

It is a tool that provides flexibility for the serious investor.

When opening this account, the investor is asked to sign a guarantee agreement and credit consent, in addition to the above requirements, there is also an initial amount of guarantee required by the Federal Reserve Board (FRB) maintenance requirements required by the signature brokerage.

There is an easy way to calculate the amount that can be purchased with a specified amount of available cash:

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“add 2 zeros and divide by the percentage required as overage”

The investor is charged an interest rate that slightly exceeds the prime rate of the banks.

A surplus account offers leverage, which can quickly expand or contract an investor’s capital.

In most brokerage firms, the surplus account is the responsibility of a centralized department, called the surplus department, which keeps clients informed about the status of their accounts. If the amount claimed as a surplus by the FRB has fallen below the normal amount, the account is considered restricted and the investor loses purchasing power and can only withdraw more than 30% of any earnings earned.

If the principal falls below the maintenance requirement, the account is said to be below surplus and the client will be required to post more money as collateral. If it does not, the papers are sold.

Guys, Any other concerns about these accounts, write to:

New York Stock Exchange

11 Wall Street

New York, New York 10005

Playing in the Market.

They are instruments that allow versatility to an investment program such as:

Order types

  • market order to buy or sell is the most used.
  • A limit order is to buy or sell a certain number of shares at a specific price.
  • stop order, or stop loss order, is designed to protect a profit or prevent further loss if the stock starts to move in the wrong direction. As they say on Wall Street “let your profits grow continuously, cut your losses immediately”

With exceptions only to situations where technical analysis is being performed, the stop price should not be set too close to the current market price as many stocks can fluctuate in either direction by 15% or more in a short period. time frame. Long-term investors do not need this tool.

  • stop order with limit, is a combination of the previous 2 that requires extreme care.

The average cost is in dollars.

It involves buying shares for the same dollar amount, at regular intervals, regardless of price. As a result, more shares are bought at low prices than at high prices. This dollar-cost average formula works when the investor:

  • It has an investment horizon of several years.
  • Select high-quality, dividend-paying stocks.
  • Select a company with high growth expectations.
  • You can invest at least US$1,000 per year.
  • you want to continue the program without a break. Except for a substantial change in the company.

Strategies for a price market with downward trends.

As a general rule, the fall in prices is always faster than the rise.

Bear market = falling price markets. In a market with these characteristics, the majority is trying to maintain capital, a risk-oriented investor sees the weakness of the market as an opportunity to obtain a profit as important.

There are several ways to make money in a falling market:

  • buy actions that behave against the market (counter market stocks ): usually an industrial group is presented that for some reason has attracted special attention. When the others go down, these go up. The investor should research the company before buying shares. NOTE: it is not recommended to buy shares simply because their price is increasing when the prices of other shares are falling.
  • Buy stock put options (put option): A put option is a contract to sell 100 shares at a specified price with a time limit. The buyer of a put option buys the right to sell the shares to someone else under the terms of the contract. There are 2 reasons to buy this type of stock:
    1. as a high-risk, financed means of quickly earning a capital gain

2. as a hedge against the risk of fluctuations in the prices of shares that the investor does not want to sell for various reasons. (usually taxes)

  • Extend “naked” purchase options (call option): it is a contract to buy 100 shares at a certain price with a time limit. The buyer acquires the right to purchase the shares.

When a call option is extended without owning the shares, it is called a “naked call option” Whoever extends an option of this type is running a great risk, since they are speculating that the price of the share will not rise in the specified time.

  • sell under the short modality.

When shares are shorted, the stock is loaned or borrowed from someone by the brokerage firm and then sold, eventually repurchased, and returned to the lender. If the repurchase price is lower, the seller will make a profit.

A person who makes a sale under the short mode must know 3 things to calculate the current amount of capital in the surplus account:

  • initial credit or deposit
  • the market value of the shares at that time
  • net proceeds from the short sale.

Taxes.

Tax laws are complicated and are always changing. Active investors are constantly faced with tax decisions.

If a person wishes to continue investing in the stock market and wants to establish a loss for tax purposes, they must do 3 things:

  • sell the shares completely and buy them back 31 days later or later.
  • buy an equivalent number of shares and 31 days later sell the shares you originally held
  • sell all shares and immediately replace them with others.

Shorting in a hurry = shares held in the account rather than borrowed.

For the profits to be included in the fiscal report, the shares must be sold for at least 5 business days.

Arbitration.

It refers to the simultaneous purchase and sale of different papers that have a close relationship with each other to benefit from price parity. It can be applied to papers with convertibility characteristics or papers related to mergers.

Anyone wishing to take the risks of merger arbitration should establish a list of personal criteria and focus only on mergers that meet those requirements.

Because the risks in arbitration in cases of company mergers are high, the investor has 2 options: either become an expert on the companies involved or avoid this type of arbitration.

Investment Clubs.

Investment clubs can be held among friends, they meet, and money is given to buy highly valued shares using the average cost system in dollars.

Investment companies: owning part of a portfolio is a good alternative for people who:

  • they have no interest in stock analysis or the time to manage their own portfolio,
  • They don’t want to pay an investment adviser.
  • They are willing to sacrifice part of the capital appreciation to achieve portfolio diversification.

There are 2 funds managed by investment companies:

  • funds without unit limits (open-end funds) or mutual funds. In this class of funds, you are in direct contact with the investor and are always willing to buy or sell units at the value of the net assets at that time.
  • funds with a limit of units (close-end funds). Here you have a fixed number of units outstanding and investors buy and sell them on the market like any other paper.

A mutual fund can be a “peen-loaded fund” or a no-peen-loaded fund.

Mutual funds.

A mutual fund is an investment company, generally organized by an advisory firm, whose purpose is to offer a specific investment objective.

This fund must be ready to repurchase or sell shares at net asset value at any time.

There are 5 basic types of mutual funds.

  • funds with investment in common shares. They invest almost exclusively in common stocks. Within this class, there are subdivisions: growth funds, aggressive growth funds, growth/income funds, special purpose funds, and index funds.
  • funds seeking short-term income; made up of bonds and common stocks and preferred stocks.
  • Funds with investment in bonds seek high income and maintain capital by investing especially in bonds by selecting the appropriate mix between bonds with short, medium, and long-term maturities.
  • Funds with balanced investments buy both common stocks and bonds.
  • Funds with money market investments include certificates of deposits, treasury bills, and commercial paper.

As a general rule of thumb, the larger the mutual fund, the lower capital appreciation can be expected relative to the market.

The optimal size of a fund with investment in common stocks is between USD 50 and 1000 million. The larger the fund, the more difficult it is to manage. The challenge for the mutual fund investor is to select an investment company capable of superior results given the objectives.

“Research before investing”

 

GROWING COMPANY SHARES

 

Investment in shares of growing companies has been going on since the 30s; Investing in companies with higher profit and dividend increases than those of the general economy are companies that can be financed internally with their retained earnings.

Initial/ They have a higher risk than the others due to their price/utility indices, but if they know how to evaluate them, they can protect the ever-increasing cost of living.

They are companies that have a growth in compound interest, thus with a growth of 15% per year, doubles its size in 5 years, triples it in 8…

As the earnings per share grow each year, and each time the dividends represent a greater proportion of the original investment, then when the earnings and dividends grow in line, the profitability will be even higher.

The long-term investor has more and more income from his investment. Each time they get a higher dividend, for example, someone at IBM since 1953, today has a higher dividend than all the original investments. You are with the advantages of compound interest and the shares of growing companies.

How to measure growth. For a growing company to be successful it must have a high return on equity and much of the profit must be reinvested in the company.

Return on Investment: average equity at the beginning and end of a given year.

Some companies manage external capital well and grow and do not manage internal capital very well. (Hewlett).

Rate of return of returns on equity retention rate profits

Retained earnings:

Net income * earnings per share – dividend

%shareholders earnings

potential growth rate = 16% * 4-1/4

internal = 12%

It will not grow more than 12% per year without taking on debt or selling new shares (it must decrease the dividend or increase the return on equity).

It should look good because there may be companies with high return on equity, just because it is small compared to profit, due to its low growth year after year; This can lead to confusion and that is why it is better to look at the retention rate of the utility. The internal growth rate is used to compare companies in the same industry

HOW TO LEARN FROM THE PAST?

  • An investment in growing companies can be very good if you are patient if you do not pay an excessive price and if you buy the right shares.
  • For such an investment to have good results, great progress in the profits and dividends of each company is required.
  • For an investor, it is very important to see the big picture and control the 2 variables of investing in shares of growing companies: “Profitability and progress.” To improve profitability, the results of the Investment can help a lot.
  • To have growing profitability, profits can be retained and additional debt can be used to finance LP

CHARACTERISTICS GROWING COMPANIES

  • They have a product or service with high demand and are profitable to finance internally / for growth. (can retain profits).
  • The expectation of higher performance in retained earnings, the stable growth trend
  • Competent and imaginative management that can turn promises into reality.
  • See if that company has:
  • Record growth in the last 5-10 years
  • A solid balance sheet with low or well-used debt.
  • Ability to market and provide services.
  • Ability to add new or improved agreements to existing lines.
  • Position in the market that allows for flexibility in the price of the agreements.
  • Good labor relations.
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WHAT PRICE SHOULD BE PAID?

How much is a share worth?

In the CP (days, weeks, months), the price of the shares fluctuates depending on a consensus on the expectations of profits and dividends. (They may change gradually or immediately.)

In the LP (years) the share price will tend to increase or decrease according to the real profits, dividends, and financial situation of the company (general / in a growing company).

Valuing a stock is very difficult for an investor because they always have other investment alternatives (bonds, savings accounts…).

Thus, an investor must decide on 3 levels:

  • Medium in which the investment is made: profitability: potential action vs. Other investments.
  • Share value vr. other opportunities
  • Share value according to individual merits.

The investment environment has changed a lot since 1929, trading in stocks has fallen and trading in bonds has risen.

A variable investment environment can affect p/u ratios.

Growth companies have higher p/u (dividend yields) and lower returns than ordinary ones

Table, page 129, was created to cross prevailing interest rates with growth expectations for 7-10 years and thus find the p/u, and for that, there is also a formula:

p/u = 5 + 3g / i; g = % growth

x – y: constant values ​​according to experience.

Those who use the tables should think about making adjustments, because for example 2 companies = with an interest = and a growth rate =, they would have the same p/u in the table, but in reality, the return on equity of one is better than the other, they should not be valued equally; The same goes for things like management, product quality, solidity against the competition, patents. Some do not use 7 years but 5 or some 10 or 12.

To make an objective analysis of growth companies, time is required to cover two business cycles and for the company to grow.

However, time must also be short for the investor to estimate future values ​​without much blue sky.

According to the DJIA (industrial Dow), there has been a 4-year average for buying stocks, by coincidence, politics, or who knows what every 4 years are great for buying stocks, from 1914 to 1986.

A period of 3 cycles (12 years) seems to be appropriate because in the USA the great events have had intervals of 12 years between them.

The present value method for 12 years is based on finding the present value of future profits, and relative values ​​of the shares are compared for 12 years, dividends must also be seen at that time.

To truly be successful in a stock investment in a growing company, good research and proper analysis of earnings growth potential must be done.

OTHER METHODS

BENJAMIN GRHAM

The approach to common actions:

  • The company sells shares for less than working capital. (net current assets).
  • Do not pay more than 7 times the profits reported in the last 12 months.
  • Current dividend yield requirement. Minimum 7%
  • Companies with a book value greater than 120% of the share price

PERSPECTIVE

Care should be taken with new Investments that show apparent growth and are only for 2 years and make believe that they are in real growth.

You can avoid cheating by identifying the solid and unstable aspects of the industry, understanding business economics, and having a long-term perspective.

 

BONDS, PREFERRED STOCKS, AND THE MONEY MARKET

BONUSES:

It is considered the most conservative of all investments because generally, they do not experience dramatic changes in daily prices. However, the bond market is much larger than the stock market.

THE BONDS ARE ISSUED BY: The companies, the govt. State, local or their agencies, the govt. In the US, the Govt. Aliens and federal agencies.

But in general, the issuance of bonds is corporate, municipal, government, and agency.

BONUSES IN GNAL HAVE A BASIC FUNCTION:

They are formal / IOU (I owe you “I owe you”), in which the entity that issues them promises to pay the amount borrowed on a certain date. In addition, for the use of money, the issuer will always pay compensation to whoever owns the bond during the year, general/with semi-annual payments at a fixed rate.

AMOUNT TO BE PAID: Q PPAL, NOMINAL VALUE, PAR VALUE

PAYMENT DATE: DUE DATE

INTEREST RATE: COUPON

TERM: PAYMENT

THE BONDS MAY BE ISSUED IN THE FORM:

REGISTERED: The owner’s name is registered with the company and interest payments are sent directly to him.

TO THE BEARER: It is presumed that the bond belongs to whoever has it in their possession.

  • A bond certificate is a debt certificate that explains the terms in which the issuer agrees to pay.

Sometimes this promise is reinforced by a real guarantee, eg: equipment or property, but generally / the bonds offer only / the total confidence and credit of the lender.

  • Whoever owns a bond cannot participate in the growth of the company and can only expect the NV and annual fixed interest to be paid.
  • There is no fixed interest rate, but several rate #s:

PRIME RATE: The interest rate that banks charge their most accredited borrowers.

INTEREST RATE OF FEDERAL FUNDS: It is the one that is charged on the loans that are made between the member banks of the fed system.

FED DECT RATE: These are the rates that member banks pay on the funds they borrow from the Fed.

MONEY MARKET RATE: Includes issues made by the government.

YIELD:

New bonds are issued at rates governed by economic conditions and expectations. When rates change, the returns that investors expect from bonds already on the open market must adjust if they are to remain competitive.

  • The adjustment must be made for the price of the bond because the interest is fixed.
  • The yield on a bond is obtained by dividing the annual interest rate by the price.
  • When a bond is bought at its NV, it will be = at its yield, which is = at its interest rate.
  • If it is bought at another price its yield. It can be more or less than the coupon.
  • To your VN = Rend. Of the bond = Yield. Until the victory plus the coupon.
  • At any price # to your BV, the Rend. Until victory is not only # but more accurate than its performance up to that point
  • BONUS WITH DCTO: Yield. Until victory, greater than Rend. Whenever.
  • BONUS WITH PREMIUM: Yield. Until the minor victory.

RESCUE (CALLING)

Calling a bond means that the issuer uses a right that is written in the certificate of the bond and that allows you to withdraw it before its expiration date.

This right gives the issuer greater flexibility to respond to changes in interest rates.

  • Most bonds are not callable until a certain # of years have elapsed, such as 5 or 10 years. After this period the bonds can be redeemed at any time at a specific $ or stipulate a scale of $s
  • Bonds and preferred stock are also retired through “a sinking fund.” Through this, the issuer must place a certain amount of money per year to meet its periodic withdrawals.
  • When new bonds are issued, general/investment bankers say another issue is “available for sale” (floating).

THE SELECTION OF A BONUS MUST INCLUDE:

    • The analysis of the entity that issues it.
    • Expiration
    • Coupon
    • Performance
    • bailout clauses
    • Rating

CLASSIFICATION (RATING)

It measures the probability that an entity that issues bonds will pay the value of these at maturity and comply with interest payments.

In another way, the classification is made according to the perception of default risk and is calculated and published by objective and independent entities. Ex:

Standard & Poros, Moody’s investor service, generally/ they do it through letters that go from the highest quality to the lowest.

CONVERTIBLE BONDS (CONVERTIBLE BONDS)

    • General/ are subordinated to another debt
    • They have a VN, coupon, maturity, and redemption, but they differ from other bonds in that they can be converted into a specific # of common shares that are part of the K of the issuing company.
    • Those who own convertible bonds participate directly in the changes that occur in the company’s business.
    • Firms decide to issue convertible bonds to get extra K for several reasons:
    • Avoid the issuance of new shares that limit the dilution of shareholders’ Pt.
    • They offer tax savings to the issuer, since interest payments on all types of bonds are deductible before Tx, while cash dividends are subtracted from earnings after Tx.
    • Convertible bonds have lower interest rates than non-convertible bonds.

MUNICIPAL BONDS

They are issued by States, cities, political subdivisions, or authorities related to housing, bridges, and tunnels. General/ are issued to finance new construction for #s purposes.

      • Municipal bonds differ from corporate bonds in 3 aspects:
      • The interest of the BM is exempt from Tx on the income.
      • The BM general/ are issued with “serial” maturities of # of the term maturities of corporate bonds. Serial maturity means that a portion of the total issue matures annually/until it is withdrawn.
      • Most of the BM are issued in nominal Q of US$5000 per bond and the BC in VN= US$1000. In addition, the BM is sold totally / in the OTC market.
      • The BM have lower interest rates than the BC because they offset the Tx exemption.

PREFERRED STOCK:

They might look like undated bonds for:

        • They offer Rend. Relative/ attractive.
        • they have ransom
        • They can be converted into common stock.
        • are classified
        • They are issued at a determined BV

But they have some differences:

      • DIVIDENDS: Although they are agreed upon at a fixed annual rate, the company that issues them can change them at any time. This is why most investors look for a “cumulative preferred stock” that allows them to accumulate dividends to pay you when $ is available.
      • CLAIMS: A preferred stock has preference over common stock to receive dividends and in the event of dissolution of the company has priority over residual assets after creditors, but the creditor just like the owner of a bond can sue for default of interest, while the owner of preferred shares cannot claim in the event of a missed payment of dividends.
        • Firms have used more bonds than preferred stocks because preferred stock dividends are paid out of earnings after Tx while bond interest is paid out of earnings before Tx.

GOVERNMENT PAPERS. FROM THE USA

Those that are used according to their expiration date are:

      • PAPELES DEL TESORO (TREASURY BILLS) = expires up to 1 year
      • TREASURY NOTES = 1 TO 7 years
      • US TREASURY BONDS = 7 to 25 years
        • The papers of the Gob. They offer the investor:
        • Max security of the inverted Q since they are supported by the Govt.
        • Competitive returns
        • The high degree of liquidity (they are traded on the stock exchange and OTC)
        • limited tx

TREASURY NOTES

They have become more popular due to:

        • They are issued in denominations of US$1,000 which can be paid more easily/ (treasury papers = US$10,000 min)
        • They have longer-term victories, therefore higher Rend.

THE MONEY MARKET

It is made up of several individual mcdos. One for each of the credit instruments to CP

          • Investors are drawn to the money market for 3 reasons:
        • It is a liquid market capable of handling trillions of US$ with slight effects on the Rend rate.
        • They offer a high degree of security because the issuing entities generally have great prestige.
        • The victories of the money market are at a very CP and therefore there is a low risk of obtaining losses due to interest rate fluctuations.

CDT’S

            • They are issued by banks.
            • They are issued on the funds that are deposited in a specific period and on which the bank pays an interest rate.
            • They deliver to their owner the K + the interests although they can be negotiated in the secondary mcdo.

COMMERCIAL PAPERS

It is a CP promissory note used by prestigious companies instead of requesting a bank loan that is much more expensive.

MONEY MARKET INSTRUMENTS

        • Tx Advance Certificate
        • Acceptances
        • Bank loans
        • treasure papers
        • CDT’S
        • Commercial papers.

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