Derivatives ->product that their value derives from something else 1.futures novation - the counter contract that replace the previous one 2.options and covered warrants call->buy->holding an option put->sell->writing an option strike price -> the price that the parts agree forthe future transaction premium -> the price of selling the option ->can be traded depending on the stock trading price used by : -speculating(gambling) -hedging(protection) 3.swap a way to reduce te borrowing cost variable interest - London Interbank Offer Rate (LIBOR) fixed interest - x% swap banks profit by the fact that its client borrow at different rates Compounding rate concept annual equivalent rate is higher if the interest rate is paid quarterly-> good i f you save and bad if you borrow money using a quarterly rate 1.reinvest your dividents 2.start early 3.keep charges dovn warren buffet investing strategy 1.look for good company at cheap price Good company - high ROCE (return on capital employed=PBIT/debt+equity) + low Deb t 2. look for companies with predictible earnings 3. profits backed by cash flow 4. avoid uncomplicated business if you dont understand them 5. strong brand + pricing power 6. management need to be owners of the business (not 100%)= management needs to be paid by shares Numbers that every investor needs to know reasons to buy a share ->growth(share price goes up)- e.p.s(total profits per sh are- higher the better)+ p/e(price per earnings - lower the better...) - price to book value P/B (l ess than one shows that you pay the correct ammount) - EV/EBITDA (shows if the fi rm is cheap comparing to its competitors) - PEG (p/e rate reported to expected growth rate) ->income(dividents)-yeld - annual income return from a s tock -cover - how many times the dividents
paid are coverd by the profit (higher the better) ->perks(some advantages) 10 signs that a company is doing bad 1. huge goodwill figure 2. current ratio(current assets/current liabilities - lower=bad) 3. gearing(huge leverage/borrowing) 4. off balance sheeet 5. plunging cash flow 6. adjusted EBITDA - this looks better in the papers because they can manipulate it to make the business to look good 7. key management changes 8. directors dumping shares 9. companies with only one customer 10.rapid expansion Starbucks tax case study Declare low profits if you want to pay less taxes to HMRC. corporation tax is paid on profits NOT on sales. Profits= sales-costs -> mask sales or increase costs Increasing cost can be done by : - borrow money from another brench from a diff erent country(with lower tax rates) at a high interest rate - royalties agreements into countries with low t ax rates - bring forward past losses money laundering 1. placement - getting rid of hot money 2. layering - muddying the waters:- u can lend money at a very low interest rate and then asking them lot less than they lend - eurobonds because they belong to the p erson that holds them phisically and can be exchanged quickly 3. integration - spending the clean cash Quantitative easing 2 (QE2) (Gross Domestic Product)G.D.P. = supply X velocity QE2: when velocity drops pump more supply into the market central bank -> can lower interest rate -> buy assets(like bonds)-will increase commodities price -can trigger inflation Structured products dissadvantage Product that its returns are linked to an index(eg FTSE100) 1. 2. 3. 4. 5.
comission x% of sum invested lock up periods are to big money are not back guarantee you loose interest and dividents minimum investment How to beat inflation
Factors that influence inflation 1.Goods & services -demand rises or supply falls 2.Money -inrease in supply -demand for money falling Measuring inflation RPI (retail price index) - unlike CPI includes property costs CPI (consumer price index) Ways to beat the inflation Investor - NSI index linked certificates - blue chip shares (inside an ISA wrapper) - retail bonds - GOLD Borrower - pay off debts The fastest way to value an income stock Model : next divident/expected rate of return-divident growth rate = price Use for : - steady, established stocks - not for fast growing companies 3 ways to value a company BOTTOM UP Asset based approach Net asset (Balance sheet)x$ asset adjustments +/liability adjustments +/revised ===== is applicable for the companies with lots of assests (not internet businesses an d other) TOP DOWN Ratio based(using multiples) Earning based multiples : P/E (price per earnings)ratio Sales based multiples P/S (price per sales) ratio Asset based multiples P/B (price per balance sheet) ratio Rearrange the ratio to find the price P/E=5 => P=5E Discounted cash flow cash flow I/R x% dis cash flow ------------Net present value Investment Banks Bank -> Retail -> iNVESMENT (goldman Sachs, JP Morgan)
5 activities of an investment bank: 1. prop' trading (propriety trading) -currencyes, commodities, bonds 2. market making -not very profitable(spreads) but a gives good PR image 3. Merge and Aquisition Advisory 4. Corporate Events/new issues - might even be involved in underrating(gets a fee for buying shares tha t other investors don't want) 5. Structured products The trick used to turn banking losses into profits Loan loss reserve adjustments profit before llp 150m$ 100m$ 80m$ loan loss provision (50m$) 10m$ 40m$ ----------------------------100m$ 110m$ 120m$ Watch underline cash flow info!!!! INDEXes Financial Times Stock Exchange (FTSE) share price SHARES MARKET CAPITALISATION SHARE PRICE1 M CAP A 1 1000 1000 5 5000 B 2 500 1000 4 2000 C 3 200 600 1 200 ----------------------------------------------------------------------------6 2600 10 7200 1000(START VALUE OF AN INDEX) X 7200/2600=2777 (eg FTSE) 1000 X 10/6 = 1667 (eg DOW JONES) Entry criteria : -size(market capitalisation) - purple book record(accept some rules and regulations) - be prepared to offer lots of shares to the market (free float) FTSE100 FTSE250(NEXT 250!) SMALL CAPS FLEDGINES
IPOs 4 ways to raise money for a company : -organic growth(v slow) -borrow money -issue bonds -share issues ipo ->placement ->public offer COMMODITIES METALS(hard commodities) : LED, COOPER, AL, GOLD, SILVER, PT, PALADIUM AGRICULTURALS (soft commodities) ENERGY : OIL, GAS features: -storage issues(some are perishable)
-delivery(accidents insurance) -politics(read the news from the country from the commodity comes from ) trading commodities: - wholsale :LME, NYMEX, CBOT, CME - retail->phisical trades ->fund-ETFs(exchange trade founds) Hedge founds Strategies 1. 2. 3. 4.
Long/short(130/30=you can invest 160$ per 100) relative value(arbitrage) event driven(m&a-buy target sell the predator, bankrupcy) macro(placing huge bets) GOLD STANDARD
linking currency to commodities 1oz gold = $100 Sheila P/E ratio (cape-ciclicly addjusted pe) Price/One years earnings(last year or a prediction for the future year) cape -> use the avearage earnings over 10years mebanefaber.com Futures