![Market Capitalization = “Value” of Company
• Market Cap is how we refer to the markets valuation of a company
• It is simply the shares outstanding multiplied by the currently traded value
• Just because a stocks value is higher than another does not mean that company is
worth more than the other
• Companies are often segregated by their “cap size”
• We generally use Small, Medium, or Large cap although there are more subsections
• [Reference: http://www.investopedia.com/articles/basics/03/031703.asp]](https://image.slidesharecdn.com/thebasics-140918114808-phpapp02/85/The-Basics-2-0-3-320.jpg)
![Trading vs Investing
• Investing
• Long-term in nature
• Utilizes a Buy-and-Hold strategy
• More focused on buying fundamentally sound investments with a perceived longevity
• Trading
• Jumps in and out, trying to feel out market highs and lows
• Relies on “timing the market”
• More focused on short-term pricing movements than if a company will exist in 20 years
[Reference: http://www.investopedia.com/ask/answers/12/difference-investing-trading.asp]](https://image.slidesharecdn.com/thebasics-140918114808-phpapp02/85/The-Basics-2-0-5-320.jpg)
![How do we value stocks?
• Through Fundamental Analysis, many investors seek to find a company’s “Intrinsic Value”
• Accounting Numbers: Revenue Increase = Growth
• Macroeconomic Factors: What does this industry look like 10 years down the road?
• ‘Value’ comes from current cash flow, expected growth, and the riskiness of expected future cash flows
• Financial models [Often Excel spreadsheets] can be developed to calculate these values
• DCF Model: Discount cash flows to the present value and divide by the outstanding shares to find the “true value” of a
stock
• Complexity and results can range by the analyst
• Ultimately, we never know exactly why a stock is trading at x value one day and y value the next.
There are simply too many market forces at work to truly understand all pricing movement.
• With FA we are looking at firm viability and not trying to time the market
• [Reference: http://www.investopedia.com/terms/f/fundamentalanalysis.asp]](https://image.slidesharecdn.com/thebasics-140918114808-phpapp02/85/The-Basics-2-0-8-320.jpg)
The Basics 2.0
- 1. The Basics September 16th, 2014
- 2. A Stock/Share • Represents a piece of a company • Your % ownership depends on how many shares you own and how many shares are outstanding • Why does it have any value? • Companies own assets and (generally) bring in revenue • If you own part of that company, you have a right to those assets/revenues • And, if you want a right to that wealth, you have to pay, thus establishing the value
- 3. Market Capitalization = “Value” of Company • Market Cap is how we refer to the markets valuation of a company • It is simply the shares outstanding multiplied by the currently traded value • Just because a stocks value is higher than another does not mean that company is worth more than the other • Companies are often segregated by their “cap size” • We generally use Small, Medium, or Large cap although there are more subsections • [Reference: http://www.investopedia.com/articles/basics/03/031703.asp]
- 4. Efficient Market Reminder • The Efficient Market Hypothesis is the idea that share prices generally reflect all relevant information and therefore, it is impossible to consistently “beat the market” • While it is highly unlikely that the markets are perfectly efficient, research has shown that over long enough time horizons, trying to consistently beat the market is folly • This was discussed in our summer reading “A Random Walk Down Wall Street”
- 5. Trading vs Investing • Investing • Long-term in nature • Utilizes a Buy-and-Hold strategy • More focused on buying fundamentally sound investments with a perceived longevity • Trading • Jumps in and out, trying to feel out market highs and lows • Relies on “timing the market” • More focused on short-term pricing movements than if a company will exist in 20 years [Reference: http://www.investopedia.com/ask/answers/12/difference-investing-trading.asp]
- 6. The E-Trade Account • Every year students come to us asking how they can start “Investing” • Usually entails using an online discount broker • Discount brokers, while “cheap”, eat away your money • Each trade reduces your return • We suggest starting a Roth IRA, although most require a minimum deposit
- 7. Growth vs Value Growth • Substantial potential for growth • Expected to grow faster than the market • Baidu • Most of revenue is reinvested to fund growth • Generally reside in the technology & alternative energy sectors • Are more volatile and risky Value • Companies that are currently undervalued and are “due for a market correction” • Less risky and more-established • McDonalds • Money is distributed to shareholders in the form of dividends • Seen as stable “blue chips”
- 8. How do we value stocks? • Through Fundamental Analysis, many investors seek to find a company’s “Intrinsic Value” • Accounting Numbers: Revenue Increase = Growth • Macroeconomic Factors: What does this industry look like 10 years down the road? • ‘Value’ comes from current cash flow, expected growth, and the riskiness of expected future cash flows • Financial models [Often Excel spreadsheets] can be developed to calculate these values • DCF Model: Discount cash flows to the present value and divide by the outstanding shares to find the “true value” of a stock • Complexity and results can range by the analyst • Ultimately, we never know exactly why a stock is trading at x value one day and y value the next. There are simply too many market forces at work to truly understand all pricing movement. • With FA we are looking at firm viability and not trying to time the market • [Reference: http://www.investopedia.com/terms/f/fundamentalanalysis.asp]
- 9. Value Tools: Style Box • Segregates by cap size and style • Used to determine: • Asset Allocation • Risk-Return structure
- 10. Value Tools: Economic Moat • The competitive advantage that one company has over other companies in the same industry. • Coined by renowned investor Warren Buffett. • The wider the moat, the more sustainable the advantage
- 11. Additional Information • You will need to familiarize yourself with security statistics. FIN 300 covers most of these • Some statistics include: P/E, EPS, P/B, PM, OM, Etc. • If you’re feeling up to it, we also suggest revisiting variance & standard deviation
Editor's Notes
- #4: Mega-cap: Over $100 billion[9] Large-cap: Over $10 billion Mid-cap: $2 billion–$10 billion Small-cap: $250 million–$2 billion Micro-cap: Below $250 million[10] Nano-cap: Below $50 million[11] Pico-cap: Below $10 million
- #7: Min Deposit ranges: Usually at least $500
- #9: We discount future cash flows to find a present value, which is used to find a fair value estimate. The rate which we use to discount takes into account time value of money and riskiness of said cash flows. Tesla had a FV of 179 and opened yesterday at 274, fell to 253. Will it continue to slide?
- #10: Go over what we are going to use when looking at companies When you are designing a portfolio, style selection is a way of tracking the type of portfolio you will have
- #11: Note Tesla had no moat by morningstars ratings
- #12: P/E is often used as a quick/easy way of seeing if a company is over/undervalued