Stock Research Pro

How to Calculate a Stock Market Profit

Stock Research Pro — Thu, 19 May 2011 11:00:36 +0000

In order to calculate a profit made in the stock market, you need to look at all of the relevant factors around the purchase, sale, and income (if any) associated with the transaction. Stock market investing has historically proven to provide a greater profit opportunity than most other types of investments, but it is important for investors to track their profits for tax purposes. It can also be helpful to track the annualized returns you are seeing from your stock market investing in order to compare these profits against other types of investment opportunities.

Historic Stock Market Returns

When evaluating stock market returns over time, many investors will look at the annualized returns of the Standard & Poor’s 500 (S&P 500). This index is primarily comprised of 500 large-cap U.S. stocks (a few do have headquarters outside of the United States) and is a well-regarded measure of the overall performance of the market. When analyzing the total return delivered by the S&P 500 index over time, it is important to consider the impact of dividends as these payments have proven to provide a significant contribution to total return (more than 40% over the last 80 years).

The Factors Used to Calculate Stock Profit

The two primary components that factor into profitability include:

Capital appreciation- The rise in stock price during the time you held the stock

Dividends- Any payments the company distributed to you as a shareholder as a means of sharing in company profits

Any costs associated with the buying and selling of the stock should be deducted from your profits in order to capture the real return of the transaction. In addition, it can be helpful to factor in the length of time the stock was held in order to annualize the return for easy comparison to other types of investment options.

The calculator below allows you to analyze a stock transaction on the bases of actual dollar gain (or loss), the total return percentage, and the annualized return.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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Three Basic Financial Concepts for Investors

Stock Research Pro — Mon, 16 May 2011 10:17:44 +0000

The basic financial concepts that investors need to get a handle on in order to be successful are not very complex. For starters, successful financial planning starts with spending less than you earn, minimizing or eliminating debt, building an emergency savings fund, and understanding and planning for future financial needs. With these basic steps in order, investors can develop strategies for building wealth through investing. In achieving these larger, longer-term goals the following three financial concepts should be kept in mind and considered as you implement your investing strategies.

Time Value of Money- The time value of money is a basic financial principle that applies to both personal and corporate finance. This concept says that money you can have right away is worth more to you than the same amount will be in the future. The reason for this is that money you have access to today offers you with potential for earning and growth through investing or paying off debts. The time value of money concept is similar to the idea of opportunity cost which instructs investors to compare an investment opportunity against any opportunity they will have to forego in favor of choosing that investment opportunity.

Risk v. Return- The risk/return tradeoff expresses the idea that rational investors expect to be properly compensated for taking on investment risk. Simply put, the greater the return sought by an investor, the more risk they will likely need to endure. It is important for investors to understand that higher risk only allows for the possibility of higher returns and that these greater returns are not guaranteed. This rule should also serve as a reminder to investors that they need to implement an investment strategy that they are comfortable with in terms of the level of risk they can tolerate.

Quiz: Determine your risk tolerance

Diversification- Diversification is the financial implementation of the idea that you shouldn’t “put all your eggs in one basket”. For investors, diversification is about reducing risk by investing in a number of assets with varying characteristics. Asset classes including stocks, bonds, certificates of deposit, real estate, and more might be included in a well-diversified portfolio that seeks to maximize investment returns while minimizing risk. The precise mix of investment classes will depend upon the investor’s risk tolerance and their investment timeframe.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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Understand an Calculate the Capital Asset Pricing Model (CAPM)

Stock Research Pro — Sat, 14 May 2011 23:47:42 +0000

Investors calculate the capital asset pricing model (CAPM) to analyze the relationship between risk and return when pricing securities. CAPM provides a valuable data point to the investor based on the idea that a certain level of compensation is to be expected given an element of risk. In calculating CAPM, the formula incorporates the time value of money along with the level of risk to arrive at a discount rate for factoring into stock valuation.

How to Calculate CAPM

Simply put, the formula for CAPM can be described as:

Expected Return = Risk Free Rate + Risk Premium

Where the risk-free rate of return accounts for the time value of money and the other component, the risk premium, builds in the level of risk the investor is willing to take on in this investment. The idea behind building in a risk premium is that, even with a well-diversified portfolio, an investor assumes a certain level of risk and rational investors expect to be compensated in a way that is commensurate to that risk level. In other words, unless rational investors believe they are being fairly compensated given the investment risk, they will forego the investment.

Factoring Stock Beta into the CAPM Calculation

Stock beta is the measure of how volatile a stock is compared to the overall market. When determining beta, the beta of the market as a whole is set to 1.0 and individual stock beta will vary according to their deviation from the movements of the market. Any stock that proves to be more volatile than the market is assigned a beta that is greater than 1.0 and those stocks are assumed to be more risky. Stocks that demonstrate less of a swing than the overall market would carry a beta that is less than 1.0. Those stocks are generally seen as less risky.

Guidelines for Using the CAPM Calculator

The rate available from U.S. treasury bills is often used as the baseline for an available risk-free rate of return

To find a stock’s beta, got to Yahoo! Finance, enter the stock symbol in the Get Quotes window and click on the Key Statistics on the left-hand side. You will find the stock beta on the right under the Stock Price History

The expected return from a broad market index, like the S&P 500 often serves as the expected market return for the CAPM calculation

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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Calculate Your Retirement Savings Requirements

Stock Research Pro — Fri, 13 May 2011 01:30:34 +0000

Anyone who is interested in retiring comfortably someday should calculate the retirement savings they will need to have in order to live the lifestyle they desire after they stop working. While it is best to start retirement planning as your career begins, even those who get a late start can take action to set themselves up for a comfortable retirement. The key is in knowing what your retirement goals should be and the options available to you in achieving those goals. It is also helpful to gain an understanding of the implications that taxes and inflation can have on your success.

Investing for Retirement

When you put money into a retirement account, you can choose among a number of options for investing. Most financial advisors will encourage you to create a diversified portfolio in order to enjoy capital appreciation while building in a degree of protection against market uncertainties. Stocks, bonds, mutual funds, and certificates of deposit (CDs) can all play a role in your planning. The right mix of these will depend on your tolerance for risk and your timeframe to retirement.

Types of Retirement Accounts

The details regarding three of the most popular types of retirement accounts, a traditional IRA, a Roth IRA, and a 401(k) are outlined below.

Traditional IRA- A traditional IRA (Individual Retirement Account) is a vehicle for retirement savings that provides retirement investors with the opportunity to contribute some of their pre-tax income into investments. While the IRS set limits regarding the amount of money an individual may contribute annually, the money in IRA investments grow on a tax-deferred basis (taxes are paid at the time of withdrawal). Stocks, bonds, and mutual funds are typical IRA investments. Individuals can begin to withdrawing as early as age 59 and ½.

Roth IRA- Unlike a traditional IRA, the money contributed to a Roth IRA is after-tax income, but the funds from a Roth IRA are not taxed at the time of withdrawal. And unlike a traditional IRA, Roth IRA investors do not have to wait until they retire to start withdrawing money (although penalties are incurred if the investor makes a withdrawal within five years of the contribution date.

401(k)- A 401(k) provides employees with a pre-tax investment option for retirement savings purposes. While the IRS imposes limits as to the percentage of salary the employee is allowed to contribute, many employers offer matching contributions, making 401(k) investing a particularly attractive option. 401(k) earnings grow on a tax-deferred basis and employees are allowed to begin penalty-free withdrawals at age 59 and ½. Some hardship exemptions can apply for early 401(k) withdrawals.

To use the Retirement Savings Calculator

(1) Enter the first year you expect to be retired
(2) Enter your current annual income
(3) Enter your inflation rate assumption
(4) Enter the percentage of your annual income you will need to have available to you in order to live your desired lifestyle in retirement

The calculator returns the amount of money you will need to have available to you each year and the total for the twenty year period.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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The Basics of Stock Market Futures Trading

Stock Research Pro — Wed, 11 May 2011 01:57:07 +0000

Stock market futures, like all futures contracts, are financial products that are used to trade against the future price of the underlying asset. Traditionally, futures contracts have been used to trade on commodities like oil and grains but in recent years, the use of futures contracts with financial instruments like stocks and bonds serving as the underlying asset have has expanded.

What are Stock Index Futures?

Stock index futures are futures instruments that use a stock index (like the DJIA) as the underlying instrument. Since stock indexes are not directly traded, index futures serve as the principal means for trading stock indexes. The settlement of index futures usually involved the exchange of cash rather than actual delivery of the underlying stocks. So at expiration, the holder of a futures contract can calculate their profit or according to the settlement price as determined by the exchange.

Long position- If the price futures is less than the liquidation price, the buyer realizes a profit; if the converse is true, the buyer has a loss

Short position- If the futures price is greater than the liquidation price, the seller realizes a loss

How Traders Use Stock Market Futures

Many short-term traders are active in stock market futures as they provide for a high degree of leverage as the market realizes price changes. The trading costs are relatively low and the market is active 24 hours a day, which adds an element of convenience. Some specific uses of stock futures can include:

Investing- Gaining access to a sector or market without making a direct purchase of shares

Trading- Seeking gains by exploiting market volatility

Hedging- Using stock index futures to hedge against losses in a stock portfolio

In addition, stock investors can monitor futures prices during the hours when the market is closed in order to have a sense what the market will do when it opens again.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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How to Calculate Internal Rate of Return (IRR)

Stock Research Pro — Sun, 08 May 2011 11:24:04 +0000

Knowing how to calculate internal rate of return (IRR) can benefit both investors and business people as it provides a measure of investment performance expressed as an annual return. By definition, the IRR is the annualized rate of return that brings the net present value of a future payment stream to zero. The IRR measure provides a means of evaluating multiple investment options and, while it is used most often in the world of corporate finance, individuals can use it when evaluating various personal financial opportunities.

The Use of IRR in Personal Finance

When making personal financial and investment decisions, the IRR measure provides for the comparison of investment returns. When tracking portfolio performance, the internal rate of return can be particularly useful as it computes an annualized rate of return as it considers both the amount of money invested and the timeline for the investment. The IRR offers an indication as to how quickly you will realize returns. When evaluating investment products like certificates of deposit (CDs) or savings bank accounts, the IRR is referred to as the annualized percentage yield (APY).

The Mathematics of the Internal Rate of Return

In mathematical terms, the IRR represents the interest rate or the “discount rate” that brings the present value of a series of future cash flows to zero. The IRR is useful when there is a need to analyze a number of equal investments that occur over regular intervals or for the returns on any series of investments. When evaluating a complex series of cash flow streams (both inbound and outbound) it is often helpful to look at these activities in what is known as a “cash flow diagram”, which simply represents these activities on a timeline. Cash out is shown as negative and cash in is shown as positive. The calculator below provides a simple, but useful, tool for this.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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How to Calculate Earnings per Share

Stock Research Pro — Sat, 07 May 2011 13:00:47 +0000

Stock analysts and investors calculate earnings per share (EPS) as a means of conducting an “apples to apples” comparison among company performances. A company’s earnings per share is the portion of its profits allotted to each individual share of outstanding common stock. The earnings per share measure provides for an indication of company profitability and can help analyze and compare stock investment opportunities.

The Earnings per Share Formula

The formula to calculate earnings per share can be written as:

EPS = (Net Income – Dividends on Preferred Stock) / Average Number of Shares Outstanding

Because the number of shares outstanding can change over the reporting terms, the EPS calculation uses a weighted average in order to achieve the greatest possible accuracy.

The earnings per share measure is used extensively in fundamental analysis as it demonstrates the earnings a company is generating for its shareholders and tracking it over time lets investors know whether the company is headed in the right direction. While newer and smaller companies may show negative earnings as they seek to grow, larger and more established companies are evaluated largely by the earnings they generate. Companies that show decreased EPS over time will likely see their stock prices suffer.

The Various Earnings per Share Measures

Please note that when reviewing a company’s EPS, there are three types you might see:

Trailing Earnings per Share- EPS from the previous year (provides for an actual measure; most EPS quotes are based on trailing numbers)

Current Earnings per Share- Projected EPS for the current year

Forward Earnings per Share- Projected EPS into the future

The earnings per share can also be basic or diluted with diluted EPS offering a full reflection regarding the impact of dilutive securities or “convertible” securities.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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What the Par Value of a Stock Means

Stock Research Pro — Thu, 05 May 2011 02:06:02 +0000

The par value of a stock, also referred to as the ‘face value’ is the value that is printed on the face of a stock certificate to represent the minimum value at which the company can issue each share of common stock. The par value is set at the time the business is incorporated and isn’t necessarily meant to reflect the real value of a share (it’s typically set to a much lower value). The company may sell shares to initial shareholders at the par value or greater and the price must be consistent for all shares.

What is Common Stock?

Common stock is a security that represents company ownership. Owners of common stock are responsible for electing the company board of directors and are entitled to a share of company assets if the company were to be liquidated (only after bond holders, preferred stock holders and other holders of debt have been satisfied in full).

Why Stocks Have Low Par Values

Companies issue stock with low par value (usually below one dollar) as a means of safeguarding the company against liability to shareholders. In fact, companies will often issue stock with no par value or par value of just one cent. The reason for this is that when and if the stock price were to decline, a high par value could present a liability to the company. Again, the par value has no relation to the market value of the stock. A stock with no par value could trade for hundreds of dollars if the market chose to value it that way.

The Impact of Par Value on the Company Balance Sheet

As far as the company is concerned, its share capital is the number of shares multiplied by the par value of the stock. If the company issues shares at a value greater than the par value, the surplus is included in the share premium reserve reflected on its balance sheet.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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Bond Value Calculator

Stock Research Pro — Mon, 02 May 2011 12:23:06 +0000

The bond value calculator below will help you determine the value of a bond given its annual interest payments, the discount rate, the number of years it has until maturity and its par value at maturity. Personal financial advisors often recommend bond investing as a means to diversify a portfolio and add an element of stability with the mix of bonds, stocks, cash, and other assets of a portfolio varying depending on the needs and risk profile of the investor. Including bonds can also provide an income stream to the investor.

The Basics of Bond Investing

A bond is a debt security issued by a corporation or a government as a means for them to borrow money. Bond investing can be a good choice for risk-averse investors and for those investors who want to build an income stream. Many people are retired or approach retirement age look to bond investing as a means of protecting their capital and providing a reliable income stream to help fund their lifestyle. Younger investors often include bonds in their portfolio as a means to provide balance and manage overall portfolio risk. Each bond is issued for a specific time period known as the “maturity” (which can be anywhere from several months to 30 years or longer). At maturity, the issuer redeems the face value of the bond to the bond holder.

The Different Types of Bonds

Generally speaking, there are three types of bonds available to investors. Treasury bonds, issued by the federal government, are the lowest-risk option available. Municipal bonds or “munis” are offered by state and local government entities and typically provide a lower yield but do offer tax-exemption. The third type is corporate bonds which companies will issue to raise money for funding expansion and growth.

Additional Points for Bond Investors to Consider

While bonds are considered to be a safe, low-risk alternative to stock investing, there are times when bonds provide greater returns than stocks.

You can lose money investing in bonds as the issuing organization can default on its obligation. Bonds usually offer a greater return than savings banks or certificates of deposit to account for this added risk.

Bond prices change in response to interest rate change with bond prices moving in the opposite direction of interest rates.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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Some Basic Forex Trading Tips

Stock Research Pro — Sun, 01 May 2011 19:42:47 +0000

Good forex trading tips can benefit both new and experienced foreign exchange market (“forex”) investors by providing new ways to manage trades and implement profitable long-term trading strategies. Greed and a failure to properly manage risk are often cited as two of the most common reasons that forex traders lose money. The tips outlined below are provided to help you develop a solid forex trading strategy and stay on track.

What is Forex Trading?

Forex trading is simply the trading of the currencies of different countries against one another in an effort to make a profit. The forex market is made up of a network of financial institutions and dealers that serve to connect currency buyers and sellers with market participants consisting of everyone from governments to large corporations and banks all the way down to individual traders. Forex market participants leverage this network to state their currency needs and conduct market transactions. An example forex trade would be the buying of U.S. Dollars (USD) with Euros (EUR). In this case, the trader is looking to go long on U.S. Dollar and the transaction would be expressed as USD/EUR.

Some Basic Tips for Successful Forex Trading

The following tips can help new forex investors devise a trading strategy and can assist more seasoned investors in staying on a profitable course:

Manage your expectations- Most forex traders should not expect too much from the forex market as it is typically not a path to making millions overnight. Successful forex trading can be extremely difficult and challenging and some of the most knowledgeable forex traders see it simply as a means for supplementing other sources of income.

Launch a forex expectancy calculator

Try not to trade excessively- Many newer forex traders falsely believe that trading more means working harder and will lead to greater profits. In reality, “less is often more” when it comes to devising a profitable forex strategy and taking on more risk than is necessary can be detrimental to your success.

Beware of automatic trading tools- Most successful forex traders do not rely solely on automated tools but have instead developed a good understanding of the forex market and are able to make their own decisions based on any given circumstances. In other words automated tools can have their place as part of your trading strategy, but good market knowledge is of greater importance.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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