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You may find the most fresh information in our investment blog.
You may find the most fresh information in our investment blog.
The First Things: Speculation and Stock Market Crash
When you are ready to invest, everything should start from two things, or would be more exact to say that you should know about two things at the beginning. Not only hear about those two things but really understand what investment speculation differs from investing and what are the biggest threat that investors are facing.
Let me introduce you speculation at first. Well, speculation is a process or maybe more exact an act, which is executed to buy some assets and sell those very soon expecting to receive some profits. Of course profits aren't guaranteed and that is the essence of the speculation. Profits are expected not more than losses or if we will in calculate additional costs then such losses are even more probable than positive return. It is normal that everybody tries to make profit and everybody is the market. Market is equal to everyone and that's why no one has serious advantage against others at lest he is much smarter than all the others. Well it could be the only case. So how to separate investing from speculation. It is not hard at all. The most important thing that speculation is a short term act when investing is a long term process. Long term at investing means not less than three to five years if investing in such risky investments as stocks or other equity investments.
The another thing about speculation is that speculation is based on guess. Lucky or not but it will only a guess of some future event. That means nobody can know it for sure, and if you are putting all the eggs on such guess then you are speculating. One time you will be lucky to win next time you will have to face the losses.
So speculation is a guess of some event when profits are expected to make in short period. Speculation is not a true investment and doesn't provide long term success for investor. The true way is only long term investing.
The another first-have to know thing as I have mentioned before is financial market crash. Another investment guru would say that stock market crash is normal way of the market isn't anything extraordinary important. And maybe it will be true, but the thing is that when you will suffer strong market crash with your own pocket you will never forget it. That's why it is so important to you. You have to be ready for stock market crash, because sooner or later it will come, and you have to be ready for it before it is too late.
Stock market crash is sharp decrease of stocks (almost all of them) in value over short period. It happens usually during bear market when stocks are all ready loosing their value but makes it do much faster. If you will buy any stocks on margin then market crash can make you bankrupt very fast. That would be very hard for to lose every savings of your hard working. You really do not wont that and have to be careful.
What you can do? A lot. At first you should take care of diversification of investment portfolio. That means use a lot diferent investment classes, include investment from different investment regions and sectors. Well balanced investment portfolio is the best way to be ready for crash. It is good thing if you will have some ready cash to acquire more assets during such fast crashes at bottom of the market. Of course it is not easy to see the bottom of the stock market, but it is good think even if it is not the most bottom but some point close to it. The worst thing is to buy stocks at the peak of the market so do not spend all the cash when markets are increasing for a long term.
I hope you have found some help on this article. If you think it is not yet enough try to Google more information.
Let me introduce you speculation at first. Well, speculation is a process or maybe more exact an act, which is executed to buy some assets and sell those very soon expecting to receive some profits. Of course profits aren't guaranteed and that is the essence of the speculation. Profits are expected not more than losses or if we will in calculate additional costs then such losses are even more probable than positive return. It is normal that everybody tries to make profit and everybody is the market. Market is equal to everyone and that's why no one has serious advantage against others at lest he is much smarter than all the others. Well it could be the only case. So how to separate investing from speculation. It is not hard at all. The most important thing that speculation is a short term act when investing is a long term process. Long term at investing means not less than three to five years if investing in such risky investments as stocks or other equity investments.
The another thing about speculation is that speculation is based on guess. Lucky or not but it will only a guess of some future event. That means nobody can know it for sure, and if you are putting all the eggs on such guess then you are speculating. One time you will be lucky to win next time you will have to face the losses.
So speculation is a guess of some event when profits are expected to make in short period. Speculation is not a true investment and doesn't provide long term success for investor. The true way is only long term investing.
The another first-have to know thing as I have mentioned before is financial market crash. Another investment guru would say that stock market crash is normal way of the market isn't anything extraordinary important. And maybe it will be true, but the thing is that when you will suffer strong market crash with your own pocket you will never forget it. That's why it is so important to you. You have to be ready for stock market crash, because sooner or later it will come, and you have to be ready for it before it is too late.
Stock market crash is sharp decrease of stocks (almost all of them) in value over short period. It happens usually during bear market when stocks are all ready loosing their value but makes it do much faster. If you will buy any stocks on margin then market crash can make you bankrupt very fast. That would be very hard for to lose every savings of your hard working. You really do not wont that and have to be careful.
What you can do? A lot. At first you should take care of diversification of investment portfolio. That means use a lot diferent investment classes, include investment from different investment regions and sectors. Well balanced investment portfolio is the best way to be ready for crash. It is good thing if you will have some ready cash to acquire more assets during such fast crashes at bottom of the market. Of course it is not easy to see the bottom of the stock market, but it is good think even if it is not the most bottom but some point close to it. The worst thing is to buy stocks at the peak of the market so do not spend all the cash when markets are increasing for a long term.
I hope you have found some help on this article. If you think it is not yet enough try to Google more information.
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Return On Investment and Diversified Investments
Return On Investment
At first let's just say that every investor is trying to maximize his return of investment portfolio. It is completely normal that every investing person would try to get higher profits, of course at reasonable risk level. Everything in investing is spinning about return and risk. Lower risk lower return and otherwise. So what, everybody knows about that. The challenge in here is how to measure real return on investment.
It just sounds very easy but in reality it may be much more difficult. The thing is that return from investment (ROI) is equal to income that comes from investment dividend by initial capital amount that was spent for investment or investments (investment portfolio). In any case the should be some exact term for measurement because a return income in short period would be not equal to the same return on investment in long period. The thing that return from investment should be measured in percents, and the best way to measure it use percents for the same period. It is not only length of the period but periods also should match, because it is natural that during one period all stock market will boom and during another period will go in another direction. So how is that? If you will compare different periods then it will look that one stock is much better than another, but that will not be true, because it will be only different periods of different success in the market. That how it goes and that how it has to measured.
OK, this is clear about periods but there is another thing. What is that return when calculating return on investment? The return should calculated as the sum or total amount or capital increase, dividends payments, interests received and similar payoffs. All that financial income should be considered as return from investment. To calculate it as a next level we should divide that amount by the initial value of the investment. This is the simplest way to get return on investment.
Diversified Investments and Diversification
There are few important things about investment if not including return on investment. On of such things is diversification. Diversification is key when forming a good investment portfolio. I have talked before how important is diversification and that is all about diversification of investments: investing for beginners.
How to know if investments are well diversified investments. Well, it is not easy to see that until your portfolio did not collapsed yet. The problem that correlation may be hidden and you will see it only after big stock market crash. Why is that. It is just a way which in market works. The thing is that stock market is unpredictable. If during one cycle stocks looked like with very low correlation the next time it will turnaround and go down in the same speed.
It is the hardest thing about diversification. It means if you are looking for good diversification you need to find some stocks that would keep up when the market is falling apart. That is not easy because everybody is looking for such investments which means if everybody can find it then everybody will have it and if everyone will have it, it means it will correlate with investments because all investors hold that stock. And they start to sell, which means they aren't well diversified investments.
So how to reach that proper diversification? The only one thing is sure. If I knew it (maybe I know it) I could not tell you, because then everybody would know about this and after some time this diversification rule would not work anymore. That's why the best way for good fundamental diversification can be discovered only by yourself.
Of course you have to follow suggestions of other professional investors, but don't trust in them too much, because it may bring you not the expected value. Even can be much worse when they will try to sell their shares or other investments to you only to get rid of it. That is what big investment banks sometimes are doing. You have to keep in mind that investment banks or other large investment firms can face problems with market liquidity and try to sell their securities by all means and possibilities like that was in a movie Margin Call.
Just let to expect that everything is going to be fine and yours investment portfolio will be as well diversified investments. But don't concentrate only on fundamental diversify and correlation because those aren't the only possibilities. Don't forget classical diversification between asset classes. Such diversification will be very useful if you will equivalents to cash and hold it until the bottom of stock market crash. It opens hands for you in the periods when everybody are saying that cash is the king. And sooner or later comes the moment when that saying comes true. And you will regret if won't have any liquid assets like cash.
ROE and ROA Compared to Profit Margin
Profit Margin
When we are talking about investment, almost all the questions touch some kind of a profitability. But now we will talk not about the profitability of the stocks or other investments (then we should discuss return on investment) but now we will discuss the profitability of the companies.
The profitability of the companies is as well or maybe even more important than sales of the company. Anyone who invest in stocks that stock prices depends on many factors, but the most important is profit and future expectations of those profits in coming years. Of course such estimations are only predictions and nobody can be sure what profits will the investment bring, however, it is the only thing that can give any clue about futures value. Investment market and investment in stocks is very dependable on profitability.
The key way to measure profitability is to measure financial profitability margin. Profit margin some percentage that shows the profitability of the company's sales. To calculate profit margin, profit has to be divided by sales of the company. There can be many kinds of profit margins and it depends on profit which was taken for calculation. For example, if net profit margin was taken for calculation, then we will have a profit margin which will be called net profit margin or just a net margin. In any case it will show the sames thing. This measure is a common ration used in practice by professionals and amateurs in investment and finance fields.
EBITDA Margin
EBITDA profit margin is another ratio that is very commonly used in practice for financial investments. Stock analysis and analysis of other investments requires a lot of calculation, and profitability margins are one of those important calculations that are needed to be done. EBITDA margin is very similar to net profit margin, the only difference is that EBITDA is used for calculation instead of net profit. EBITDA is earnings before interests taxes amortization and depreciation or in simple words it is one kind o a profit that are more stable than just a net profit. The stability and the university of the EBITDA are the main reasons why this ratio is used so often in practice, especially by professionals.
EBITDA margin is also similar to EBIT margin, but it is wider and most cases better to use. When investor chooses some stocks for investment he should calculate EBITDA of the company and as well EBITDA margins of competitor companies. Any big differences in EBITDA margin should be analyzed and reasons have to found.
ROA and ROE
ROE and ROA also show a profitability but they are completely different from net margin and EBITDA margin. The thing is that ROA and ROE are calculated based on assets and equity, that means from balance sheet ratio. ROE and ROA are very similar and the calculation of those also is similar.
ROE (Return on Equity) is return on equity and is calculated as a ratio between net profit and equity. Well, equity is a shareholders value or in other words is a book value. Book value is some kind of capital (investment) in the company but only according the accounting terms which may be completely different from real market value. Book value can never be trusted too much, but sometimes it is the only thing that we have for comparison. Market values can be not accessible for investors so easily, or if they want to measure the market value of investment they have to do a lot of work by themselves and spend a lot of time for it. But of course in current life style nobody has that much of a free time that they could spend so much of it for this purpose.
The meaning of ROE is the profitability of company's equity, which is very important. Especially is important if that ROE can be maintained from new projects - investments of the same company. Just try to imagine the company that has 30% ROE, and if that company may get such ROE from new projects. If the number of such investments with such ROE would be unlimited, then such company would be pure gold mine with unlimited gold resources. High ROE is very good thing, but of course everything has its price and value.
ROA is very similar to ROE but also different in some way. If ROE was based on shareholders equity then ROA is based in on assets of the company. ROA is a profit margin divided by assets. There are many modifications of ROA, when in some all the assets are used for calculation in the others only tangible assets are used.
It is not difficult to calculate ROA is more difficult to know what to do with the results. ROA is little bit less important than ROE but just says different thing. ROA is a profitability of the assets and shows what return is made by assets. The higher the return of the assets is the better because less investments are needed to produce the same profit. The higher ROA is the more profitable investment projects should be.
Usually ROE and Return on Assets (ROA) correlates a lot and if ROA is high then ROE is also expected to be high. ROA can be higher that ROE only in cases when costs of debt capital are very high. But normally if company is profitable then ROE will be higher that ROE, in case of healthy capital structure. If ROA is higher than ROE it is something not right with company. Stocks of companies with high ROE normally should bring higher return than companies with low ROE and ROA, but of course if aren't overpriced. Overpriced investments even with the best profitability margins can strongly under-perform the market.
Remember one thing: there is no single ratio for successful investment that would provide all the information. There should be calculated many ratios and they should be carefully compared to the context of the economy and financial markets.
When we are talking about investment, almost all the questions touch some kind of a profitability. But now we will talk not about the profitability of the stocks or other investments (then we should discuss return on investment) but now we will discuss the profitability of the companies.
The profitability of the companies is as well or maybe even more important than sales of the company. Anyone who invest in stocks that stock prices depends on many factors, but the most important is profit and future expectations of those profits in coming years. Of course such estimations are only predictions and nobody can be sure what profits will the investment bring, however, it is the only thing that can give any clue about futures value. Investment market and investment in stocks is very dependable on profitability.
The key way to measure profitability is to measure financial profitability margin. Profit margin some percentage that shows the profitability of the company's sales. To calculate profit margin, profit has to be divided by sales of the company. There can be many kinds of profit margins and it depends on profit which was taken for calculation. For example, if net profit margin was taken for calculation, then we will have a profit margin which will be called net profit margin or just a net margin. In any case it will show the sames thing. This measure is a common ration used in practice by professionals and amateurs in investment and finance fields.
EBITDA Margin
EBITDA profit margin is another ratio that is very commonly used in practice for financial investments. Stock analysis and analysis of other investments requires a lot of calculation, and profitability margins are one of those important calculations that are needed to be done. EBITDA margin is very similar to net profit margin, the only difference is that EBITDA is used for calculation instead of net profit. EBITDA is earnings before interests taxes amortization and depreciation or in simple words it is one kind o a profit that are more stable than just a net profit. The stability and the university of the EBITDA are the main reasons why this ratio is used so often in practice, especially by professionals.
EBITDA margin is also similar to EBIT margin, but it is wider and most cases better to use. When investor chooses some stocks for investment he should calculate EBITDA of the company and as well EBITDA margins of competitor companies. Any big differences in EBITDA margin should be analyzed and reasons have to found.
ROA and ROE
ROE and ROA also show a profitability but they are completely different from net margin and EBITDA margin. The thing is that ROA and ROE are calculated based on assets and equity, that means from balance sheet ratio. ROE and ROA are very similar and the calculation of those also is similar.
ROE (Return on Equity) is return on equity and is calculated as a ratio between net profit and equity. Well, equity is a shareholders value or in other words is a book value. Book value is some kind of capital (investment) in the company but only according the accounting terms which may be completely different from real market value. Book value can never be trusted too much, but sometimes it is the only thing that we have for comparison. Market values can be not accessible for investors so easily, or if they want to measure the market value of investment they have to do a lot of work by themselves and spend a lot of time for it. But of course in current life style nobody has that much of a free time that they could spend so much of it for this purpose.
The meaning of ROE is the profitability of company's equity, which is very important. Especially is important if that ROE can be maintained from new projects - investments of the same company. Just try to imagine the company that has 30% ROE, and if that company may get such ROE from new projects. If the number of such investments with such ROE would be unlimited, then such company would be pure gold mine with unlimited gold resources. High ROE is very good thing, but of course everything has its price and value.
ROA is very similar to ROE but also different in some way. If ROE was based on shareholders equity then ROA is based in on assets of the company. ROA is a profit margin divided by assets. There are many modifications of ROA, when in some all the assets are used for calculation in the others only tangible assets are used.
It is not difficult to calculate ROA is more difficult to know what to do with the results. ROA is little bit less important than ROE but just says different thing. ROA is a profitability of the assets and shows what return is made by assets. The higher the return of the assets is the better because less investments are needed to produce the same profit. The higher ROA is the more profitable investment projects should be.
Usually ROE and Return on Assets (ROA) correlates a lot and if ROA is high then ROE is also expected to be high. ROA can be higher that ROE only in cases when costs of debt capital are very high. But normally if company is profitable then ROE will be higher that ROE, in case of healthy capital structure. If ROA is higher than ROE it is something not right with company. Stocks of companies with high ROE normally should bring higher return than companies with low ROE and ROA, but of course if aren't overpriced. Overpriced investments even with the best profitability margins can strongly under-perform the market.
Remember one thing: there is no single ratio for successful investment that would provide all the information. There should be calculated many ratios and they should be carefully compared to the context of the economy and financial markets.
And one more thing that is really important. The first losses doesn't mean the end of investing. It may be only the beginning of real investing.
More blogs for reading:
http://investmentsinstocks.blog.com
http://investmentinstockmarket.blogspot.com
More blogs for reading:
http://investmentsinstocks.blog.com
http://investmentinstockmarket.blogspot.com