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Why Market Capitalization Is The True Measure Of A Companys Value

Posted Sunday, October 12, 2008 (1 year 27 days ago.) Viewed 275 times.

Why is a stock that costs N50 considered cheaper than another stock priced at N10? This question opens a point that often confuses beginner investors: the per-share price of a stock is thought to covey some sense of value relative to other stocks. Nothing could be farther from the truth. In fact except for its use in some calculations, the per-share price is virtually meaningless to investors doing fundamental analysis. If you follow the technical analysis route to stock selection, it's a different story, but for now let's stick with fundamental analysis.

The reason we aren't concerned with per-share price is that it is always changing and, since each company has a different number of outstanding shares, it doesn't give us a clue to the value of the company. Gone are those days when Nigerian Breweries in the brewery subsector was the most capitalized company listed on the floor of the Nigeria Stock Exchange. In the market now the banks are in a tussle over which of them will emerge the most capitalized bank because of the measure of their value.

For that number, we need the market capitalization or market cap number. Find below current StockPicks' 40 most capitalized stocks.

The market capitalization is calculated by multiplying the per share price by the total number of outstanding shares. This number gives you the total value of the company or stated another way, what it would cost to buy the whole company on the open market.

Here's an example.

Stock price = N50

Outstanding shares: 50 million units

Market Cap:N50 x 50,000,000 = 2.5billion.

To prove my opening statement, look at this second example:

Stock price : N10

Outstanding shares: 300 million units

Market Cap: N10 x 300,000,000 = N3billion

This is how you should look at these two companies for evaluation purposes. Their per share prices tell you nothing by themselves.

What does market capitalization tell you? First, it gives you a starting place for evaluation. When reviewing a stock, it should always be in a context like .. how does the company compare to others of similar size in the same industry? The market generally classifies stocks into three categories:

Small cap under N1billion units

Mid cap N1- N10 billion units

Large cap N10 billion units Plus

Some analysts use different numbers and others add micro caps and meg caps, however, the important point is to understand the value of comparing companies of similar size during your evaluation.

You will also use market cap in your screens when looking for a certain size company to balance your portfolio.

As I conclude this week, don't get hung up on the per-share price of a stock when making your evaluation. It really doesn't tell you much. Focus instead on the market cap to get the picture of a company's value in the market place.

http://capitalmarketnigeria.com/archives/32

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Benefits and Risk Associated with Bonds.

Posted Wednesday, September 24, 2008 (1 year 45 days ago.) Viewed 28 times.

While bonds traditionally earn lower than stocks, that does not mean there isn't a place in your portfolio for bonds. The most common reasons for investors to purchase bonds are below:

1) Diversification: Bonds tends to be less volatile than stocks and can therefore stabilize the value of your portfolio during times when the stock market struggles. Having a combination of both types of investments over the long term can often provide comparable returns with less risk than a portfolio devoted to only one type of investment.

2) Stability: If investors knows they will need access to large sums of money in the near future- for example, to pay for college, a home, etc- then it does not make sense to place that money in a highly volatile investments like stocks. Because the majority of the return on bonds comes from the interest payments (the Coupon payment), fluctuations in the price of a bond will h8ave little impact on the value of the investment.

3) Consistent Income: Unlike stock dividends, coupon payments are consistently distributed at regular intervals. Individuals seeking this consistent income mighty find bonds a better alternate than the dividend payments some stocks offer.

Bonds are often called " Fixed Income " investments, but don't let term fool you. Bonds are not risk less investments. While they are usually considered much safer than stocks, bonds can still lose value while you hold them. Here is a brief look at some of the risk associated with bonds:

I) Interest rate risk: Bond prices are inversely related to interest rates, so if interest rates increase, the price of the bond will decrease. The interest rate on a bond will decrease; the price of the bond will decrease. The interest rate on a bond is set at the time it is issued. Generally, the coupon will reflect interest rates at the time of issuance. However, if interest rates increase, people will be unwilling to purchase the bonds in the secondary market at the earlier rate. For example, if the coupon is set at 6% and the interest rates in the market are at 7%, the interest rate on the bond is well below what you could get from a different investment. Therefore, the price of the bond will decrease so that the capital appreciation will make up for the difference in interest rates. (For this reason, it can be risky to buy long-term bonds during periods of low interest rates)

II) Inflation risk : with few exceptions, the interest rate on your bond is set when it is issued, as is the principal that will be returned at maturity. If there is significant inflation over the time you held the bond, the real value (What you can purchase with the income) of your investment will suffer.

Further reading:

10 reasons why you should invest in stock market--http://retirementsketch.com/archives/11

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Using Retirement Flowchart to track your plans

Posted Monday, September 08, 2008 (1 year 61 days ago.) Viewed 64 times.

Unless you understand the real meaning of retirement planning, that is when you can say that it is the right plan for you. You need to know in time when there is a need for further change in plan. In this world, we need each other for a successful future plans. In what ever we are doing, we should know the benefit we will get at the end. Try to ask yourself these questions because it's very important.

Most Companies nowadays offers some sort of retirement plan to their staff. This means that some individual or group of people are responsible for management of these plans. For retirement planning to be successful, one has to follow the rules of retirement.

Retirement Plan Flow chart Retirement plan flowchart is one of the ways of tracking your retirement plans. The flowchart gives you the graphical illustration of all the activities that take place during the retirement planning process.

This will show you the workability of the plan and your total amount of money before your retirement age set in. To get this perfectly, there are some special softwares you can buy, that will draw it graphically and it will also answer all your retirement questions.

Some things you need to know Some of the things you need to keep in mind are as follows:

1) Always be ready

2) Start your retirement planning as early as possible (at the age of 25 years)

3) Set aside some money, even if you not sure of which retirement plan to carry out.

4) Tax-Sheltered Plan, this can be called 401(K) plans. Its wise to join such a plan or program and put as much money as you can possible afford in it. Your employer is allowed to put extra money on top of the portion you put in. They will get a tax deduction for this as well, so everybody will be happy with this type of plan.

5) Investing your money: The way you save is as important as how much you save.

In conclusion, most people wish that they could have started their retirement planning at the age of 25. This might seem to be laughable to you but the idea is not strange. The younger you start, the more you will achieve.

No matter how much you save, you need to put some amount aside if you want to enjoy this golden days.

Remember, Tomorrow belongs to people who prepares for it today. Happy Retirement.

Further Reading: Benefit and Risk associated with Bond:

http://retirementsketch.com/archives/8

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12 Retirement Plans You Must Carry Out At 50 Years of Age

Posted Thursday, August 21, 2008 (1 year 79 days ago.) Viewed 41 times.

It is no more news in this part of the world to read or listen to media reports of frustrations and uncertainty facing retirees, but it is always a big news to see retirees confessing about prompt payment of pension and gratuities.
Day in day out, media reports are focused on the plights of retires, or the woes befalling retrenched employees from their places of work but majority of those who are hit by this abnormal situations are mostly those in the age grade of 50's and above.
50 years of age meant many things to many people but it must be a time to reassess on the past life mistakes and it must be a time to set target for life's last lap.
Because there are three segments in every man's life – the age of growth (between 1 – 25 years old as the first phase; the second phase of life is between 26 – 50 years and third phase is between 50 – 75 years.

At your fifty-five years of age, before you roll out drums to celebrate your golden anniversary, these are the fundamental things you must do to retire right; it is never too late to make adjustment on your retirement plan:

a) Set up a retirement goal: if you already have a retirement target it will seem very nearer now, because the closer you are to your retirement should not be closer to the grave if you plan well.

b) Re-plan your Family Finance: Set a financial plan for your dependants because whatever you mistakenly spend out of your nest egg will be accounted for from your future expenses.

c) Get a thorough financial planning: Some don't visit a financial Planner in the first 50 years of their existence; it is a must now, you must see a financial adviser to do a thorough financial check up for you.

d) Get a permanent residence: Every responsible man must give his family and himself decent accommodation but for retires it must be valued assets manageable in sizes.

e) Re-active and re-balance your portfolio: At this point in your life, you must clearly define your investment goal, tract your investment and identify a strategy you want to adopt. And retirees should beware of high yield investment schemes.

f) Free your self from debt hold: One of the most nagging problems facing retirees in this part of the world is the inability to solve financial commitments and debt is the major obstacle that can encroach on your gratuity. But now that you still have few years to retire, free yourself from the stronghold of debt.

g) Update your health plan or buy annuity / policy: Sign up for a health plan from one of the existing health management companies because if you don't take care of your health, your health will be at risk.

h) Write a will: At this age you must be prepared for your transition by getting administrator or trustee for your estate, so that your dependants and loved ones will be legally and adequately protected.

i) Discover a great second career: Your Second career in this phase of life may be your extra-curricular activities, like investment clubs or professional career mentoring. Many retirees had turned their hobbies to a money – making ventures at retirement. Look out for job you can do from the comfort of your home.

j) Join a recreation club or investment club: Joining these clubs will remove idleness from your life but it is more advisable you join an association which could boost your earnings than joining a club that will reduce your nest egg.

k) Groom or Mentor a successor: If you are an entrepreneur try and prepare a successor to run the business after you.

l) K-I- S: Remember Rules A-L and ‘Keep it simple'.

Further Reading : http://retirementsketch.com

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