Professional Documents
Culture Documents
- assets
- liabilities
- net worth of the company
Then we spend $300 to buy a lemonade stand and $200 to buy supply for 800 lemonades (1 year),
which is lemons, sugar, water, cups, napkins.
Income statement: how well the business has performed over time?
To make an income statement, lets make these assumptions:
- Revenue assumptions:
- it takes 1 year to sell 800 cups
- one cup can be sold for $1
- Costs assumptions:
- Costs $530 per year to staff the lemonade stand
(margin = lucro)
Now lets project the next several years.
Operating assumptions:
- All cash flow generated will be used to purchased more stands
- No dividends (company profits paid out to stockholders) will be paid
- Well charge $0.05 more for each cup per year
- Well sell 5% more cups per stand per year
Depreciation: stand expense spread across time because we want accurate operational analysis
Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical
assets such as property, industrial buildings or equipment.
The CFS is to reconcile the profit with the starting and ending cash.
For the Cash Flow Statement, we take the income statements and add back the depreciation to the
profit (because there wasn't actually cash flowing like that), and add the value of the stand in the
form of capital expenses only at the period it was purchased.
- Earnings Yield
- The original value was $1500 (100 goodwill + 500 investment)
- As of year 5, the business earned $1502 (net income)
- 100% yield (100 per cent return, quite a high number)
- Return on Capital
- We spent $2100 on 7 lemonade stands
- In year 5 they earned $2336 (earnings before taxes)
- 111% return on capital
- Earnings Growth
- In year 2 earnings per share were $0.06
- In year 5 they achieved $1.00
- 155% compound anual growth rate
- Profitability
- Year 1 margins were 1.3%
- Year 5 margins were 28.6%
Lets compare people who put money on the business:
Lender
Equity investor
Money put up
$250
$500 ($1/share)
Yearly return
$25
Return on investment
10%
100%
Risk
Risk differential:
Senior debt = lower risk = lower return
Junior debt = higher risk = higher return
What matters is: ultimately, will you get your money back or earn a return on your investment?
Government bonds:
Evaluating a business
Comparing it to similar businesses:
Lets assume other lemonade stands in the market have sold in either private or public market for a
price of 10 times earnings:
Suppose other lemonade stands are trading for 20x earnings (per share) in the stock market.
- Board of directors
- Looks after public interest
- Reduced flexibility
Benefits:
- Market liquidity, easy to raise money (selling more stocks)
- Makes exiting the business easier
- You understand
- Record of success
- Makes an attractive profit
- Can grow over time
When to invest?
-
When you have money you dont need for 5-10 years
After paying off your credit card
After paying off student loans
After you have 6-12 months of money set aside to live on in case of emergency
- Be financially secure
- Be comfortable you dont need what you have invested
- Dont get spooked by short term fluctuations
- Do your own work
- Do your own research
- Understand well the business
- Invest at a reasonable price
Dividends:
- The company's board of directors decides what percentage of earnings will be paid out to
shareholders, and then puts the remaining profits back into the company.
- usually dispersed quarterly, but the company is not obligated to pay every single quarter
- the company can stop paying a dividend at any time, but this is rare, especially for a firm with
a long history of dividend payments
How Stocks That Pay Dividends are Quasi-Bonds
- Because public companies generally face adverse reactions if they discontinue or reduce
dividends, investors can be reasonably certain they will receive it as they hold their shares.
- Therefore, investors rely on dividends in like they rely on interest payments from corporate
bonds and debentures.
- From resembling bonds, dividend-paying stocks tend to exhibit pricing characteristics that are
moderately different from those of growth stocks, because they provide regular income.
- A portfolio with dividend-paying stocks is likely to see less price volatility than a growth stock
portfolio. (This is why dividends are often considered to be a good recessionary investment)
Earnings Quality
The quality rather than quantity of corporate earnings is a much better gauge of future earnings
performance. How to measure quality:
- Repeatable Earnings
- Repeatable and fairly predictable earnings that come from sales and cost reductions are what
investors prefer.
- Controllable Earnings
- Bankable Earnings
GENERAL CONCEPTS:
- Coupon yield = 1 year of payments / Par Value
- Ex: CY = $50/$1,000 = 5%
- Par Value = Face Value = Nominal Value = Original Value
- it is the original value of a bond when it was first issued
- the amount of money to be paid to the purchaser at bond maturity
- for a bond it is typically $1,000 or 100
- Bond value = Par Value + a promise of yield?
- One of the main factors to the market price of a bond:
- If interest rates are at 5% and a bonds yield is 4%, the bond will trade at less than its
par value, because investors could buy other bonds that have 5% yield.
- The bonds price declines to offer the same 5% yield to investors.
- A bond trading above par is trading at a premium
- A bond trading below par is trading at a discount
Q: Can I sell a bond back to its issuer before it matures?
- A debt security whose return to the investor is subject to taxes at the local, state or federal level,
or some combination thereof.
- The majority of bonds issued are taxable bonds.
Stock
Derivative:
https://www.youtube.com/watch?v=5uTeOEBIcpw
Contract whose value is derived from an underlying asset.
Asset could be: share, commodity, currency, even the weather
Changes in value of the asset has an effect in the value of the contract (not always directly
proportional)
Example 1:
Price of Gold today is $29,000/10g
If price rises, you pay me the difference.
If price lowers, I pay you the difference.
This is derivative contract, because the value of the contract derives from the value of gold.
Example 2:
Suppose youre a farmer and produce wheat.
You will crop your wheat in 3 months.
Wheat price today: $20/kilogram
Cost of production: $15/kilogram
Profit is then $5/kilogram.
In 3 months, 2 possibilities:
Price 1: $24 per kilo
Example 3:
Car insurance.
You (car owner) pay a premium (contract value) to an insurance company.
If car is damaged or stolen the insurance company pays the amount for which the car was insured.
You pay for a promise of protection for an underlying asset, the car.
So, the premium price is dependent on, the asset (value of the car), the time period (Ex: 1 year),
the probability of accident, the interest rate, etc.
STOCK TOUCH:
Business model in 2011
https://www.quora.com/What-is-StockTouchs-business-model/answer/Jennifer-Johnson
StockTouch is the first of a series of iOS financial data visualisation apps by Visible Market http://
visiblemarket.com.
The business model consists of
- basic apps at $4.99
- pro-user enhancements through in-app upgrade/subscription (in development), and
- enterprise-level versions which blend client/market data (in development)
2012:
http://1080.plus/9KEgf4Fnu-I.video
2-20k users/month and up to 4k users/day
Many business use data visualisation as the final step of development, we use it as the foundation
- Our client is built in openGL, using a 30fps animation
- Our data is processed in the cloud, in EC2 and S3
If you check a stock on yahoo finance, it loads an 800k file. The same quote on stock touch uses
only a 2k file.
Our technology is patent pending.
Team of 7 combines experience of software, algorithmic trading, science, mobile games, 3D
animation and applied mathematics. (Fintech innovation lab)
Many companies are pushing for real time data visualisation on the desktop space. We
differentiate ourselves by implementing it on mobile, even though our platform is adaptable to Mac
and Windows as well.
Other software may be able of capturing and displaying the image itself, but our user experience is
what makes the data navigation insightful, fun, fast, which is what defines our unique approach.
2012:
http://www.slideshare.net/tabbforum/how-to-build-financial-mobile-apps-in-record-time-v60515
OpenFins HTML5 Toolkit helps build, host and deploy financial industry applications.
Feature-rich vs Simple:
objective is customer engagement and employee productivity
keep it simple
deliver first version, then get feedback and iterate
narrow vs broad functionality
- Than we vendor all that contextual market data at once and that provides a completely fluid
user experience
- Front end: heat map divided into sectors. Back end: delivered from AWS, cloud based inmemory data base.
- NASDAQ OMX developed FinQloud, running on Amazon Web Services (AWS), to provide its
-
CLOUD COMPLIANCE
The SEC requires that broker-dealers preserve electronic records exclusively in a non-rewriteable
and non-erasable format. SEC rules 17a-3 and 17a-4 require:
- Written, enforceable retention policies
- A searchable index of all data stored
- Viewable and readily retrievable data
- Offsite storage of data
- Storage of data on write-once, read-many optical media