Sunday, January 22, 2012

Enterprise Value to EBITDA

EV / EBITDA equals a company's enterprise value divided by earnings before interest, tax, depreciation, and amortization.
Enterprise Value to EBITDA, or EV / EBITDA, is a measure of the cost of a stock which is more frequently valid for comparisons across companies than the price to earnings ratio. Like the P/E ratio, the EV / EBITDA ratio is a measure of how expensive a stock is. It measures the price (in the form of enterprise value) an investor pays for the benefit of the company's cash flow (in the form of EBITDA).
EV/EBITDA values can vary depending on how EBITDA is calculated. EBITDA can vary due to differences in acounting of depreciation and amortization which can be acounted at different rates over time.
Unlike P/E ratios, however, EV / EBITDA ratios can be used to compare a wide variety of companies.
P/E ratios can be an invalid way of comparing different companies for several reasons which are accounted for in EV / EBITDA. Among them:
EV / EBITDA is capital structure neutral
P/E ratios are impacted by a company's choice of capital structure - companies which raise money via debt will have lower P/Es (and therefore look cheaper) than companies that raise an equivalent amount of money by issuing shares, even though the two companies might have equivalent enterprise values (For example, if a company with debt were to raise money by issuing shares of stock, and then used the money to pay off the debt, this company's P/E ratio would shoot up because of the increased number of shares - although nothing about the fundamental value of the business has changed).

This makes it difficult to use P/E ratios to compare different companies with different amounts of leverage.
EV / EBITDA is unaffected by capital structure as enterprise value includes the value of debt, and EBITDA is available to all investors (debt and equity) as it excludes interest payments on that debt.
EV / EBITDA controls for different levels of capital expenditure required in different industries
For companies in industries which require big upfront investments or infrastructure (such as cable companies) and long gestation periods, EBITDA can be a more appropriate measure of the business's underlying profit potential since it excludes the cost of these investments.
Additionally, looking at cashflows prior to capital expenditures may provide a better estimate of 'optimal value', as the capital expenditures may be unwise or earn substandard returns.
EV / EBITDA is a better measure of a company's takeover value
EBITDA can indicate how attractive a leveraged buyout candidate the firm would be. In LBOs, the key factor is cash generated by the firm prior to discretionary expenditures, as it's this cash the buyer will use to pay off the loans he or she used to purchase the company, and EBITDA is the measure of cash flows from operations that can be used to support debt payment at least in the short term.

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Thursday, January 19, 2012

Preferred Shares Vs. Common Stock

Businesses source money for their operations through debt and equity capital. Debt capital is the loan that the company procures from investors. Equity capital affords ownership rights for investors. Equity capital comes in two forms--common stock and preferred stock. The basic function of both these forms of equity is different. The company issues common stock for risk-taking individuals. Every quarter that a business makes profits the common stockholders might receive dividends, after the company discharges all its financial obligations and pays dividends to preference shareholders. Preferred shareholders get preferential treatment over common stockholders in dividend payments and payments when the company is liquidated.

Stockholders may be paid dividend income during a quarter that a company makes profits. The sequence of payments is that the company first pays obligations like interest payments to creditors, tax obligations, and reinvestments back into the business for expansion. The company then pays preferred stockholders before paying common stockholders. The same sequence is followed in case the company is liquidated. Creditors have legal claims on a company’s assets and stockholders can only take what remains after all financial obligations have been met.

Voting Rights
Common stockholders are owners of a company. They have voting rights in the company based on the number of stocks owned. For example, a stockholder who owns 1,000 common stocks out of the total issued 100,000 shares, owns 1 percent of the stock, and thus has 1 percent voting rights. Preferred stockholders do not have any voting rights in the company. Though they, too, are owners of stock, they have no say in the conduct of the business. Preferred stockholders have the option of converting stocks to common stocks whenever they desire.

Preemptive Rights
Common stock holders enjoy preemptive rights in the company. Whenever the company offers newer classes of shares, they first offer the new shares to the common stockholders in proportion to their existing ownership in the company. The stockholders have the right to be offered these shares but are no way obligated to buy them. If they decline the shares, they are then offered to other investors. Preferred stockholders do not have preemptive rights.

Common and preferred stocks have several further classifications. Commonly issued common stock include growth shares, income shares and blue chip shares. Commonly issued preferred stock include participating preferred stocks, cumulative preferred stocks and fixed rate stocks.

Fluctuations in Stock Price
Common stocks are highly volatile in nature. Their prices and the dividends received vary with changes in the external markets, the company's standing and the performance of their products or services. Preferred stock prices usually remain stable. The rate of dividend is fixed at the time of issue, hence the stockholder is paid the same sum whenever the company distributes dividends.

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Friday, January 13, 2012

Penny Stock Investment Strategies

It is often a difficult proposition for any investor to identify and buy penny stocks that offer the prospects of good returns. Often you cannot use conventional methods of identifying promising stocks because there is little information that is available and there are very few analysts who bother to follow these stocks. Despite this, penny stock investment should form a part of your overall investment portfolio because of the potential to earn higher returns in a short period of time.
However, it is easy to make mistakes and wipe out your invested capital. This means that you have to learn how to control your downside risk while still preserving the upside of capital appreciation. This is possible if you can follow some basic and common sense rules as part of your penny stock trading strategy.
The first thing is to avoid stocks that are trading on OTC markets or on the pink sheets. Stocks in these markets have few or no minimum requirements to meet for listing such as the production of regular financial statements. As a result, you are going to find it difficult to buy stocks that conform to your minimum standard of risk tolerance. You can find penny stocks that trade on reputable exchanges such as NASDAQ and the NYSE which you can be sure we'll meet some fairly stringent listing requirements.
Because you should be investing money that you can afford to lose without hurting you financially, don't expect any returns by way of dividends. It is important to remember that among the many scams that are associated with penny stocks, one involves a manipulation of mathematics with regard to dividends. Often, some kind of one-time payment is made which is annualized in order to make the stock look more attractive. Dividends should not be the basis for your investment even though it is nice to receive them as an extra.
As far as possible, base your research and analysis on hard numbers relating to earnings and whatever input from analysts is available. It is easy to create a buzz on the Internet about the next new biotech stock which is a cure for cancer or a high technology stock that promises to change the world. But you are never going to make a profit from a penny stock unless the business itself is profitable. Focusing on earnings and profitability would help you to avoid becoming a victim of hype. This is why any hard information that you can gather becomes that much more valuable.
Always make use of limit orders in the trading of cheap penny stocks. Market orders are dangerous because prices of these stocks can rise dramatically in the course of a single trading day or even a few hours. Never trade outside trading hours and chose a reasonable entry price say $.15 more than the previous day's closing. This will prevent you from overpaying for a particular stock. Similarly, when you are exiting the stock, chose a selling price which you are comfortable with. If that price is not touched on that particular trading day, carry forward your order to the next trading day.

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Monday, January 9, 2012

Bull Market Vs. Bear Market

A bull market is one in which prices of a certain group of securities are rising or are expected to rise. It is a prolonged period where the investment prices rise faster than their historical average. In such times, investors have faith that the market will continue to rise in the long term. Bull markets can happen as a result of economic recovery, an economic boom, or investor psychology.

A bear market is an opposite of bull market; it is characterized by falling prices and an expectation that they will continue falling. When the market is bearish, it leads to a slow down of economy together with a rise in unemployment and inflation. In both the cases, people invest. Those who invest in a rising market and think that it will continue to be so are called bullish investors while those who trade in falling markets and think that it will continue to be so are known as bearish players.

Though bull and bear market conditions are driven by the direction of stock prices, there are some other associated characteristics of these markets. However, one should remember that the characteristics described in the following paragraphs are not the fixed rules for typifying either bull or bear market and give just a general idea to identify the market. In a bull market there is a low supply of securities and a high demand for the same. This is because few are willing to sell due to the rising trend of the market, expecting it to grow further. As a result, share prices soar high, as investors compete to buy the available equity. In contrast a bear market has more sellers and lesser number of buyers. Bull and bear markets are very much impacted by the investor's psychology. It is the tendency of the investor to buy when the market has a rising trend, hoping to get more profit out of it. This leads to high prices and continuation of the trend. When the market has falling prices, it shakes the investor's confidence and he begins to move his money out of equities and starts selling out. This leads to further falling of prices. As for the economy, stock market and the economy are strongly connected. The businesses whose stocks are trading on the exchanges are the participants of the greater economy. A bear market is associated with a weak economy as most businesses are unable to record huge profits, because consumers are not spending nearly enough-this decline in profits, of course, directly affects the way the market evaluates stocks. In a bull market, the reverse occurs as people have more money to spend and are willing to spend it, which, in turn, drives and strengthens the economy. To qualify as a bull or bear market it is supposed to be moving in its direction for a sustained period. Small, short term movements do not qualify. Bull and bear markets signify long movements of significant proportion.

There are several well known bull and bear markets in American history. The longest duration bull market was the one which began in 1991 and ended in 2000. The best known bear market was of course the Great Depression. The Dow Jones Industrial average lost roughly 90 percent of its value during the first three years of this period.
There are no set rules for investing in the bull or the bear markets, however in a bull market the best thing to do is to take advantage of the rising prices and buy securities early, watch as the prices rise and when they reach their peak sell it .Though its not possible to predict with certainty when the prices will reach their peak or bottom, investors are more likely to make profits in a bull market. This is because on the whole investors have a tendency to believe that the market will rise. As prices are on rise, any losses should be minor and temporary. Portfolios with larger percentage of stock can work well when the market is on rise.

Bear markets are complete opposite of the bull markets. The chances of losses are greater here as prices are continuously falling and the end is not in sight. Investing in bear markets can involve many different strategies. This includes, investing in less volatile securities such as fixed-income bonds or money market securities. Another strategy investors employ is to wait for the downward prices to reverse themselves. Some investors also turn to "defensive stocks" whose performances are only minimally affected by changing trends in the market. The food industry, utilities, debt collection and telecommunications are popular defensive stocks. However, here also there is no guarantee that the defensive stocks will perform well during any market period. Bear markets also characterized by short selling. Short selling occurs when the investor believes that prices of the stocks are going to decline, or he believes the stocks are overvalued or because there is some fundamental problem with the company.

To conclude, there is no sure method to predict bull or bear markets. Investing in both involves risks, and so investors should invest their money based on the quality of their investments. At the same time it is important to have an understanding of the markets and educating yourself to the trends. Since both the bull and bear markets will have a large influence over the investments. There are many investment methods which the investment professionals take advantage of, such as dollar cost averaging, selling short and diversification. Understanding these well founded strategies will surely improve the chances to perform better in both the markets.
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