How to Analyze The Stock Market:Do Your Research

Analyze the Market to Prepare

Man reading the news on the stock market.

How to Analyze The Stock Market:Do Your Research

On my last post I talk about credit cards and how it is important not to go too far into debt. I will talk more about that in a later post but I wanted to switch gears for a moment and talk about how I analyze and conduct my own research and how you can too. I have mentioned before that it is vitally important for teens to invest in stocks because they produce the greatest returns over the long run. Many market experts have even stated that while the market has it’s ups and downs, the younger generations have time to ride out the bumps. While that is true, it is important to know what to do with your money as well. No one is going to have your interest at heart more than you do. That is why I am going to show you how to analyze market trends and how to do research to better understand what investments you should or should not invest in.

 

How to Analyze Stock Levels

How can you predict when the stock market is going to crash? How do you know when you should or should not invest in stocks?

There are several ways and tools that i use to analyze stocks or choose which investments are best. One way I check is to first do a macroeconomic view. What is a macroeconomic view? I look at what’s happening around the world and I look at the valuations of all companies on the stock market. Short note: Valuing a stock is merely looking at the company’s financial statements and income statement and other metrics to see if a company has a higher or lower stock price than it should have. If after doing thorough research you discover a certain company’s stock is valued at $50 a share and the current stock price is $35 then you know the stock is undervalued. If however, the valuation shows the stock is worth $18 a share then you know by the current stock price of $35 that the stock is overvalued.

One way to see the macroeconomic trend is to look at margin debt levels. Margin debt is money borrowed from brokers to buy more shares of a company than otherwise would be possible. If you had $1,000 and wanted to buy shares of a company whose stock price is $50, then you would only be able to buy 20 shares. But if you borrowed money from your broker by opening a margin account you could buy more. Say you borrow $500,so you pay $25 and your broker pays $25. You would be able to purchase 30 shares instead of 20 shares. Your investment is used as collateral on the loan. However, if the stock drops in value after you bought it, you will owe your broker more money. Brokers charge a certain rate of interest to borrow from them so you can end up paying even more than you realize on both collateral, interest and losing your entire investment if the stock tanks. That is why it is important that you understand the risks with margin accounts. For a better understanding see the SEC rules here.

 

Chart of Margin Debt

Analysis Shows Margin Debt Peak

The chart above depicts margin debt over the years 1995 through the present. As you can see, whenever margin debt peaks too far ahead of stock prices it usually coincides with a market crash. What this chart illustrates are the peaks of the 2000 dot com bubble burst, the Housing bubble and crash of 07-08 and we look to be on the verge of another bubble and bust. Now i must say everyone is free to do with their money as they see fit but stocks seem overvalued at this point and time. Another way you can view margin debt is to view http://www.advisorperspectives.com/dshort/updates/NYSE-Margin-Debt-and-the-SPX.php which shows the margin debt levels and updates them every month.

 

Tools to Analyze Individual Stocks

If you don’t completely know how to do in depth research using the financial statements I still highly recommend you learn, however there are tools to help you do research. One such tool to use is http://www.moneychimp.com/articles/valuation/dcf.htm Money Chimp has a calculator you can use to help you determine the share price of a company. To use this tool you would simply start at the top and input the earnings per share of a company which can be found on their financial profile on websites like google finance or my favorite, MarketWatch:http://www.marketwatch.com/ in the search bar type in a company name or ticker symbol. We will use Facebook for the the example. The ticker symbol of Facebook is FB. Now a profile of facebook will appear and if you scroll down the page, on the left hand side you will see overview of things like Market Cap, P/E ratio and Earnings Per Share(EPS), ect. For Facebook the earnings per share is 2.08 as of the latest quarter of 2016. You would input EPS of 2.08 into the Discounted Cash Flow calculator. Next is growth assumptions, the growth rate currently which is usually averaged out over 5 years and the expected growth of the next 5 years. You can find out Facebook’s past growth rate by averaging the net income of the income statement, which is in the “financials” tab on MarketWatch. If you take the net income from the year 2011 (668M) and net income from year 2015 (3.67B) average the numbers over 5 years and you are left with a compounded annual growth rate (CAGR) of 40.60%! (3.67/0.668^1/5)=40.59~40.60%. Since the millions and billions are expressed in decimal form you can just plug in using the same system ie. 1.0 represents 1 billion dollars, half a billion would be expressed 0.5 ect.

Now plug in 40.6% into the growth assumptions in the discount cash flow calculator. Leave the future years as 5 years and for any growth over 5 years it is best to keep at 0%. However, many financial analysts use the growth rate of the U.S. economy, which is roughly 3%. (It is worth noting that Warren Buffet uses a future growth rate of 0% beyond the 5 or 10 year initial projection. Using such conservative estimates makes sure he never overpays for an investment.)

Next, you would add in the discount rate. The discount rate is basically the rate of return you would expect or require of such an investment. The discount rate is also thought of as the time value of money and the risks and uncertainty in the market. For example, suppose you have two investment options: 1) You can invest your money in a 10 year treasury bond with a yield of 2% a year. 2) You can invest your money in a stock with a 2% dividend yield but in addition the company’s outlook is stable and has enjoyed compounded annual growth rates in the stock price of 10% a year. You might be better with the stock prospects of asset appreciation vs the guaranteed 2% return. Another scenario is if we were in the same environment of the 70’s where bond yields were 8% and the 80’s when yields were as high as 12%-15%! Compare that to stock holdings with similar returns and you might agree it would be less risky to just hold bonds with that low risk of default with the substantial double digit returns compared to the risk of the stock market. Only you can make that decision about where to put your money given the right return given the risk of capital. But because the market is so overvalued (my opinion) i will say there is a higher risk of downward prices than in the past and will assign the discount rate of 11%.

Wrap-Up

Whether you use 0% or 3%, based on the current earnings per share and the 40.6% growth rate for the next 5 years the valuation of Facebook stock shows a intrinsic value of $83.99 and $109.66 respectively. Both of these numbers is lower than the current price of $130.86 so as of now i would say Facebook is overvalued. Note: This is my opinion based on my facts and research. Just because a stock is overvalued does not necessarily mean it will crash in value. A company can have a lower outlook and perform well over the coming months before going down. Another thing to consider is the average historical value of a company. Depending on industry, a company can have a higher or lower value. A soap company for instance my historically trade at 10-12 times earnings because its a stable industry and business. A tech company however, may historically trade at 20 or 25 times earnings because it is in a high growth industry. These are some things to keep in mind when valuing your investments. As always, hope everyone the best in their financial futures. It is your right to be rich!

Financial Statements: The Income Statement

Before, I talked about the basic layout of the stock app in the iPhone. Keep in mind this information is for the person with little to no experience or knowledge about finances or investing. Now lets continue, the company of discussion was Apple Inc. I talked about the “open”, ” high”, “low” and volume of the stock. I also explained the market cap of a company and what the P/E ratio is as well as the dividend. If you haven’t read the article you can read it here.

Apple Stock

This was the picture in the first post that I was discussing. I’d like to resume with the picture in the middle. The picture is still selected on Apple Inc which shows the share price of the company as well as the decline of the price, indicated by the red, down $8.36 that day. But below this it shows the stock price movement with the chart. The time duration in the picture is two years but the time can be selected anywhere from one day to two years. If the phone is positioned sideways you can see the price movement of five years and ten years respectively.

The last tab on the right shows company news. This tab shows all important company information or related news by industry. It is helpful to look at the news section for any and all important events that are of may take place in the future. Important events that may be shown in this tab include new product developments for the company as well as any acquisitions the company may be involved with as well as lawsuits and other relevant information. Beyond this other helpful websites are:http://www.MarketWatch.com  and http://www.morningstar.com

Financial Statements

Businessman at work in Office

FINANCIAL STATEMENTS

The websites are good for doing further research on companies. As I said in the earlier post, stocks are  peices of a business and the best source of information on a company’s prospects are its financial statements.

What are financial statements? The financial statements are a group of documents that give the financial insight into a company. The financial statements show an in depth view of exactly what’s going on in the business. With the financial statements you can see how profitable a company is, how much the company spends on things like research and development and how much inventory the company has. Needless to say, the financial statements are by far the most important documents for an investor to review before making any decision about putting their money in a particular company’s stock.

Income StatementFinancial Statements: The Income Statement

Let’s begin with the income statement. The income statement is the snapshot of what the company has done over the past year.  The income statement entails how a business incurs its expenses and generates revenue, both from an operating and financing perspective. The above picture is an example of what the income statement will consist of. The income statement starts with the top line or revenues. The revenue is the amount of money from all sales that the company has brought in over a period of time, typically a year. However, financial statements can show the company’s progress on a quarterly basis as well.

After revenue, the expenses must be subtracted to give you gross profit or gross income. The first expenses that are deducted are part of cost of goods sold which may be abbreviated COGS. The cost of goods sold is the cost of raw materials to produce the products. After subtracting COGS including depreciation you get gross profit. After gross profit you have operating expenses or expenses incurred during ongoing business concerns.

We will start with depreciation for operating expenses. Depreciation is a lose in value of assets. It is a non-cash expense but a true economic expense. To understand what depericiation is think of a computer you bought. Technology changes every year and because so, new and better computers are introduced to the market place. Because of this you most likely won’t be able to resell you computer at the same price you bought it at. So you must lower you asking price, it is no different from a company’s perspective. When a company  acquires new computers, buildings, machinery and so forth the management must estimate its life long usefulness. We will say ten years for a building and five years for a computer. So say you purchase a computer for your business and paid $500. It’s brand new and hasn’t been used yet. Because technological advances happen rapidly you would use a lower time frame of five years. So you would spread the cost basis over five years or the asset/computer depreciates in value at a rate of $100 a year.

Other operating expenses are administrative expenses. These typically include manager salaries or payroll for employees as well as rent and utilities on office buildings, basically anything used by  employees or staff. Another key part of expenses are research and development or R&D expense. Research and development is a key part and necessity of every company. Research and development is important for technology companies to innovate and come up with better, more efficient products as well as for oil companies to do research on fracking for oil projects. R&D expenses are not necessarily a bad expense to write off as long as the company is productive and coming out with new and better products. However, if R&D expense keeps increasing without any profitable outcomes then it may be worrisome that a company is misallocating capital.

As you can see from the above example, after you subtract those expenses from gross profit you are left with operating profit. Operating profit, because it is the profit left after deducting operating expenses. The “Other Income and Expense” column shows interest income and interest expense. The interest income is typically interest earned on investments whereas the interest expense is the company’s cost of borrowing funds. After adding and subtracting the appropriate amounts from the “income and expense” column you must pay taxes to the government. The corporate tax rate varies between 15%-39% but the average tax rate is 35%. We will use 35% tax rate for this example. So after you deduct the top line expenses like COGS, selling and general administrative expenses and added and subtracted the income from investments and expense from debt financing you would take the income left, being operating income and subtract taxes. In the above example there is $3,012 left then the $1,084 in taxes that are subtracted which comes out to a 35.9% tax rate.

Conclusion

In closing, the income statement is an important tool investors can use to evaluate a company and find out how profitable a company is. The income statement allows you to see how much money a company makes as well as how the company finances its operations. The income statement further shows important expenses like R&D as well as how much the company pays in taxes. If you want to be a successful investor it is important to understand the financial statements of a company and see how a company is operating. I hope this was a helpful and insightful article, until next time.

Mentally Prepare for Financial Success

How to Mentally Set Yourself Up for Financial Success

Before I jump right into talking about finances and investing let me be clear on one of the most important, if not, the most important thing that comes with setting yourself up for financial success. You must make your mind believe without a doubt that you are capable of succeeding. If you do not believe you will achieve financial success, then your wasting your time, energy, and resources. No matter what happens, if you don’t believe in yourself or your capabilities you will never achieve success.

Changing Your Mindset

The first step to achieving success, whether that means running a successful business or getting your dream job, monetary or otherwise is changing the way you think. Believe it or not, your mindset will be a strong factor and the difference between your success or failure in any endeavor. You must be mentally strong to get you through the trials that are sure to pop up along your journey to success. Through my experience in dealing with people the number one thing that stops people from going out and achieving their dreams is their self doubt.

A lot of people talk themselves out of doing something because they fear that they aren’t good enough. In other words, they have a low self-esteem. To demonstrate this, I had a friend back in high school that would say to himself that he was “stupid” because he didn’t understand the material being taught. It bothered me deeply and I told him not to talk about himself like that again. I don’t know if it is because of the way he was raised or other factors but you have control of your own thoughts. Everything else around you may change, circumstances that happen in your life are out of your control but you can control how you respond to them. Out of everything in this world the one thing we have complete control of is our thoughts. As Bruce Lee once said, “As you think so shall you become”. To build yourself up for success you must have positive thoughts.

‘You Must Think of Yourself As On The Threshold of Unparralelled Success’

One of the greatest books I had the fortunate chance of reading was “Think and Grow Rich” by Napoleon Hill. (I am receiving no compensation in any way, shape or form for mentioning this book) The book came about by a conversation he had with the great philanthropist and steel magnate, Andrew Carnegie. The book is comprised of insights and traits upon which the likes of great men like Henry Ford, John D. Rockefeller, Thomas Edison, and Theodore Roosevelt rose to extraordinary heights.

Andrew Carnegie once said, “Think of yourself as on the threshold of unparalleled success. A whole, clear, glorious life lies before you. Achieve! Achieve!” In his book, Mr. Hill talks about the importance of thoughts. He explains that thoughts are physical. They are not just intangible thoughts but physical, if you recognize the opportunity to turn your thoughts, your dreams into its physical equivalents. The very first page of “Think and Grow Rich”  begins as “Truly, ” thoughts are things”, and powerful things at that, when they are mixed with definiteness of purpose,persistence, and a burning desire for their translation into riches or other material objects.” By this bold statement Mr. Hill is saying, if you have an idea or thought you should act on it. Do not wait! Do not let opportunities pass you by.

Conclusion

That book was written so that the future generations of people could have the know-how to change their lives by learning from people who had achieved success! This message can be conveyed to everyone but more so to the younger generation because you/ we have nothing but time. If you are not where you want to be financially, you have the power to change that!

Don’t think that just because someone else has more money than you that they are better than you. Prepare yourself for financial seccess! Use the resources you have presently at your disposal to reach your financial goals. The use of the internet alone has all the information you need to get you started. Learn all you can and apply the information to start benefiting yourself today!

(Note: Napoleon Hill, Think and Grow Rich)

Get on the Right Track by Investing

GETTING STARTED: Money and Investing

Hello, and welcome to www.investing4teens.com. With this being the first post I want to help explain something that will benefit you in the long run and throughout life.  Your teenage years (This site is geared towards teens and millennials)  is the best time to start investing! Take advantage now, save and invest your money! It is not enough to just save money, you must invest it. There are two good reasons to save money: to build an emergency fund and for investing.

For most teens, you are just starting to think about money. Maybe you just started your first job and you have your whole life ahead of you, regardless,  its never too early to start thinking about retirement. For most people they start too late and by the time they reach their fourties or fifties they haven’t saved enough money for retirement and they are forced to continue working to pay off their bills or to add more money to their IRA as ironic as that is.

survey-of-retirees-and-workers http://www.gavinjensen.com/money/

As you can see from this graph, 55% of people wished they had saved more. With personal encounters I have had with older indivduals, most always say they wish they could turn back the clock and  invest at a younger age. These are not just your prime earning years, this time in your life is also your prime investing years! Starting at a young age is a great way to set yourself up for a good future but, having great information on how to do so will set you up for financial success! Let compound interest work in your favor (I will talk more about compound interest in a later post).

Working a day job will help provide you with some money while investing will provide a  “financial cushion” or “financial freedom” later on down the road. By working a day job, you are only earning money during the time you are at work. By investing, your money is earning you money six and a half hours a day,  five days a week, all year-round. (I will talk about the stock exchanges in a later post). There are so many benefits of investing that they out weigh the risks. Don’t get me wrong, there are risks with investing but it mainly comes from investors not understanding the market or knowing how to diversify properly, among other things. But I will educate you on how to correctly make money in stocks without having to worry about your money or timing the market or day trading. If there is one thing I leave you with it is this: start investing and saving early while you are young now, that way you can enjoy financial freedom later on in life. Happy investing!