Beginner Stock Market Investing

In the United States, companies whose stock is publicly held need to file financial statements that periodical intervals with the Securities and Exchange Commission (SEC). The most important statements are the following:

• The annual report comprising of audited financial statements, management discussion and analysis and the relevant schedules within 60 days of the fiscal year ending.

• The quarterly report which consists of an audited financial statements and the management discussion and analysis. This has to be filed within 35 days of the fiscal quarter closing.

The SEC controls the content of the statements and has, in turn, authorized the Financial Accounting Standards Board (FASB) to update accounting rules as and when it is required. FASB is an independent non-governmental body and, whenever a rule change is considered, they consult a wide range of accounting professionals. Once a rule change has been notified, it becomes mandatory and forms part of the Generally Accepted Accounting Principles (GAAP).

Generally Accepted Accounting Principles (GAAP) a complete set of accounting standards that provides the basis for the preparation of financial statements. They take into account such key issues as materiality (which indicates how important any particular transaction is in the overall context) and verifiability (which means how experts agree to measure the transaction). The objective of GAAP is to provide all concerned (which includes investors and the public) with “relevant, reliable and useful” information. Because it is a general framework, it needs to be modified continuously in the light of prevailing business conditions.

Clearly, what are important for everyone concerned are both the relevance and the reliability of the information. Often it is difficult to achieve both in full measure. For instance, take the case of real estate which is carried on the balance sheet. Real estate is shown at historical cost (in other words the price paid to acquire it) because this value is both relevant and reliable. Clearly the current market value would be both more useful and relevant but such value would be less reliable. One of the problems faced in modern-day accounting is this move from the more reliable historical costs to the less reliable current market value. You should also note that GAAP varies from country to country and you should keep this in mind while analyzing the financial statements of companies outside the US.

The other accounting problem arises because the financial statements have to relate to the operating performance for a particular fiscal period (whether year or quarter) and a number of adjustments have to be carried out in order to accomplish this. For instance, fixed assets have been depreciated at a certain rate to show the effect of usage and wear and tear on the historical cost of these assets. A number of these adjustments have to be based on judgment and it is anybody’s guess as to how accurate and reliable this judgment is in the absence of an objective outside measure. The preparation of a reliable and relevant set of financial statements will always have to be a trade-off between what an ideal statement is and what is practicable in the real world.

Online Stock Market Investing

Like every other investor, you are looking for the best possible returns for the lowest possible risk. You would naturally like to do better than the current interest rates on certificates of deposit but you would not wish to increase your risk exposure significantly. You are faced with a bewildering array of investment products that you cannot really understand or comprehend. All these products have in common seem to be uncomfortably high fees as well as high volatility. If possible, you would not wish to dabble in hedge funds or derivatives because you see these as high risk investments that you cannot possibly control. Here are a few tips on building up a sensible portfolio.

One of the first choices that you will have to make is between equities and bonds. Despite the ups and downs of the stock market, equities have outperformed bonds over the last 10 years but they do carry a higher risk… A combination of the two forms of investment can produce acceptable returns while carrying risk that is consonance with your risk appetite. If you look at equities for the period 1926 to 2010, the S&P 500 index produced an annual return of 9.9% while long-term US government bonds produced 5.5% for the same period. If you take into account the common measure of inflation which is the Consumer Price Index which averaged 3% for the same period, the real rate of return (adjusted for inflation) would work out to 6.9% and 2.5% respectively. Inflation can erode the purchasing power of your capital and equities are a good way of offsetting this erosion.

Another choice that you will be faced with in making your equity investments is whether you should invest in large companies or in small ones. If you look at the historical data, you will find that both domestically and internationally, small cap companies have outperformed large companies. Small companies are definitely riskier investments than large companies. This is because they are less well established, find it more difficult to secure debt and funding, have a higher mortality rate (though in the recent past, we have seen the collapse of some giant corporations) and so on. However the same historical data suggests that an investment portfolio with a bias towards smaller companies would have produced a higher return than a portfolio of large companies alone. In the US, the data from 1926 onwards shows that small companies have outperformed large ones producing average returns that are 2.1% higher annually on average. The figure for international companies is 5.8%.

Another factor to be considered in managing your portfolio is the management of your costs and expenses. You can opt for either active management or passive management. Active management will cost you more because an active manager will need to employ analysts and investment experts in order to plan and execute strategy. They also need to recoup their marketing costs which are also done through the load on the fund. Passive managers, on the other hand, tend to be cheaper because the benchmark themselves on selected stock-market indices so that they do not really need to worry about stock analysis and market timing. It all comes down to deciding whether the added expenses of active management actually produce higher returns.

Stock Market Investing Books

If your new to the world of passive income or a beginner investing for the first time, then it would behoove you take a few hours to sit down and read Rich Dad Poor Dad. Experienced investors and/or those raised under an entrepreneurial roof may already be introduced to most of these concepts, but nearly everyone will still find something new in these pages.

Robert Kiyosaki’s tale is that of his childhood and how he found himself torn between his own hard working college professor father and the father of his best friend, a self made multi-millionaire. This tale details more than just the struggles to balance the different viewpoints of the two male role models, it lovingly walks the reader through the major points that lead Robert Kiyosaki to his own successes in life.

Many of these ideologies and concepts were denied to the general population. Most of you will encounter the concepts of a ‘cash-machine’ for the first time and find your very beliefs challenged when Robert Kiyosaki breaks down the misconceptions about what wealth really means, and how one truly attains it.

The Cons:

As with all ‘guru’ literature, the details are sparse. Instead, this book weighs heavily in on the broad concepts while glancing over the details through examples that the reader is left to infer and relate with their own lives and experiences.

Robert Kiyosaki suffers from the ‘guru’ recipe. Meaning, he happened to make some hefty investments during a very fortunate time for investors and fell into huge profits through real estate appreciation. As with most gurus, if you believe you can mimic his footsteps to find formulaic success, you are most likely wrong. However, you can learn from those steps and apply them in different ways to help you find your own success.

The Pros:

Robert Kiyosaki spins a great tale in a very easy to read and comprehend manner. This book is very heavy with concepts for the unenlightened while maintaining a very entertaining and pleasant story. The sheer potential for this book to change your life outweighs any lack of detail or supposed recipe to riches.

The Conclusion:

Rich Dad Poor Dad stands a very strong chance to change your life for the better. Even if you are aware of most of the concepts, there is a real probability that you will still encounter something new and valuable. In short, if you have not read this book, do it. The sooner the better.

Stock Market Investing Strategies

Like every other investor, you are looking for the best possible returns for the lowest possible risk. You would naturally like to do better than the current interest rates on certificates of deposit but you would not wish to increase your risk exposure significantly. You are faced with a bewildering array of investment products that you cannot really understand or comprehend. All these products have in common seem to be uncomfortably high fees as well as high volatility. If possible, you would not wish to dabble in hedge funds or derivatives because you see these as high risk investments that you cannot possibly control. Here are a few tips on building up a sensible portfolio.

One of the first choices that you will have to make is between equities and bonds. Despite the ups and downs of the stock market, equities have outperformed bonds over the last 10 years but they do carry a higher risk… A combination of the two forms of investment can produce acceptable returns while carrying risk that is consonance with your risk appetite. If you look at equities for the period 1926 to 2010, the S&P 500 index produced an annual return of 9.9% while long-term US government bonds produced 5.5% for the same period. If you take into account the common measure of inflation which is the Consumer Price Index which averaged 3% for the same period, the real rate of return (adjusted for inflation) would work out to 6.9% and 2.5% respectively. Inflation can erode the purchasing power of your capital and equities are a good way of offsetting this erosion.

Another choice that you will be faced with in making your equity investments is whether you should invest in large companies or in small ones. If you look at the historical data, you will find that both domestically and internationally, small cap companies have outperformed large companies. Small companies are definitely riskier investments than large companies. This is because they are less well established, find it more difficult to secure debt and funding, have a higher mortality rate (though in the recent past, we have seen the collapse of some giant corporations) and so on. However the same historical data suggests that an investment portfolio with a bias towards smaller companies would have produced a higher return than a portfolio of large companies alone. In the US, the data from 1926 onwards shows that small companies have outperformed large ones producing average returns that are 2.1% higher annually on average. The figure for international companies is 5.8%.

Another factor to be considered in managing your portfolio is the management of your costs and expenses. You can opt for either active management or passive management. Active management will cost you more because an active manager will need to employ analysts and investment experts in order to plan and execute strategy. They also need to recoup their marketing costs which are also done through the load on the fund. Passive managers, on the other hand, tend to be cheaper because the benchmark themselves on selected stock-market indices so that they do not really need to worry about stock analysis and market timing. It all comes down to deciding whether the added expenses of active management actually produce higher returns.

Stock Market Investing Strategies

Like every other investor, you are looking for the best possible returns for the lowest possible risk. You would naturally like to do better than the current interest rates on certificates of deposit but you would not wish to increase your risk exposure significantly. You are faced with a bewildering array of investment products that you cannot really understand or comprehend. All these products have in common seem to be uncomfortably high fees as well as high volatility. If possible, you would not wish to dabble in hedge funds or derivatives because you see these as high risk investments that you cannot possibly control. Here are a few tips on building up a sensible portfolio.

One of the first choices that you will have to make is between equities and bonds. Despite the ups and downs of the stock market, equities have outperformed bonds over the last 10 years but they do carry a higher risk… A combination of the two forms of investment can produce acceptable returns while carrying risk that is consonance with your risk appetite. If you look at equities for the period 1926 to 2010, the S&P 500 index produced an annual return of 9.9% while long-term US government bonds produced 5.5% for the same period. If you take into account the common measure of inflation which is the Consumer Price Index which averaged 3% for the same period, the real rate of return (adjusted for inflation) would work out to 6.9% and 2.5% respectively. Inflation can erode the purchasing power of your capital and equities are a good way of offsetting this erosion.

Another choice that you will be faced with in making your equity investments is whether you should invest in large companies or in small ones. If you look at the historical data, you will find that both domestically and internationally, small cap companies have outperformed large companies. Small companies are definitely riskier investments than large companies. This is because they are less well established, find it more difficult to secure debt and funding, have a higher mortality rate (though in the recent past, we have seen the collapse of some giant corporations) and so on. However the same historical data suggests that an investment portfolio with a bias towards smaller companies would have produced a higher return than a portfolio of large companies alone. In the US, the data from 1926 onwards shows that small companies have outperformed large ones producing average returns that are 2.1% higher annually on average. The figure for international companies is 5.8%.

Another factor to be considered in managing your portfolio is the management of your costs and expenses. You can opt for either active management or passive management. Active management will cost you more because an active manager will need to employ analysts and investment experts in order to plan and execute strategy. They also need to recoup their marketing costs which are also done through the load on the fund. Passive managers, on the other hand, tend to be cheaper because the benchmark themselves on selected stock-market indices so that they do not really need to worry about stock analysis and market timing. It all comes down to deciding whether the added expenses of active management actually produce higher returns.

Various Investment Information

Off balance sheet entities are set up by many companies for different reasons and often involve a set of highly complicated transactions. The reasons for their existence vary from planning to save taxes to avoiding honest and transparent disclosure of financial information (as in the case of Enron). If you have to understand how these work, you will need to have a basic understanding of balance sheets. The balance sheet is the statement of financial affairs of the company and includes a full account of all company assets and liabilities as well as the shareholders equity (which is also called net worth).

Prospective investors use the balance sheet of the company to establish its financial condition and its health. In theory, in accordance with the demands of financial and accounting regulation, the balance sheet provides an honest and transparent look at the state of affairs of the company and is a reliable document for evaluation. The investor is also able to compare the position with that of the competition or similar companies which may be used as a benchmark to see if it matches up favorably. Naturally the more the excess of assets over liabilities, the higher will be the net worth and the stronger the position of the company.

In financial theory, an off balance sheet entity as an entity that is set up to hold either assets or liabilities of a company and not be required to be reported on the company’s own balance sheet. To give you an example, because the oil exploration business is a high risk business, oil companies will often set up off-balance-sheet entities to finance individual oil exploration projects. This means that the debt raised in these off-balance-sheet companies do not appear on the parent company balance sheet. As a result even if the project fails, it does not impair the health of the parent company balance sheet. Another example is where the company spins off business or an operating unit into another company with the intention of selling it. The advantages are that the company receives cash for the sale and transfers the risk of the business being sold to a set of new investors.

The above are honest and legitimate uses of off-balance-sheet entities but, sadly, they are often misused for more dubious purposes. They can sometimes be used to inflate profits of the parent company and make it look more profitable than it actually is. They can also be used to hide debt by using complex financial instruments such as credit default swaps to transfer debt to the off balance sheet entity. The balance sheet of the parent will not therefore disclose its true financial obligations and the balance sheet will as a result look healthier.

The prolonged and extensive misuse first came to light when the Enron scandal surfaced and the company collapsed leaving millions of investors in the lurch. For instance, the company would build a power generation plant and immediately book the projected profit on the project even though not one cent had started coming in. If the true earning from the power plant was less than the projected earnings, the company would not book the loss but instead transfer the asset to an off-balance-sheet entity which was not required to report the loss to the shareholders of Enron