Depreciation and Amortization (DA) is the methods used to pro-rate the cost of a specific type of asset to the asset's life. It "smooths" a large Capital Expenditure (CAPEX) over time rather than recognizing the expense at the specific time of purchase.
According to Economic definition, depreciation is the amount of a company's operating cash flow that must be reinvested in the company to sustain its real cash flow at the current level.
By Accounting definition, it is the amount of the original acquisition cost of an asset that is allocated to each accounting period over an arbitrarily specific life of the asset.
To illustrate the Accounting definition:
Say you are in a business selling drinking water. You bought a cup for $10 and you think that it can last your business for 10 years before it becomes unusable. This cup is classified under Plant, Property & Equipment (PP&E) which is the long term asset that you use to run your business. And the cost incurred to purchase PP&E is classified as CAPEX
In the first year of your business, say you used the cup to make a revenue of $20. Assuming that the operating expenses of your business, which include the water that you are selling and the rental of the stall costs $5. After deducting operating expenses, your Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) would be $15.
Revenue: $20
Operating Expenses: $5
EBITDA: $15
Despite incurring the cost of $10 for the cup upfront, if you charge the expense under Operating Expense, you would severely understate your net profit for the first year because the cup is still usable and still possess some value to your business at the end of the financial year. In the subsequent years, because you no longer need to purchase more cups, you would overstate your profits by not taking into account the cost of the cup that contribute to your revenue. Get the picture?
Hence, DA estimates by Accounting definition contains some major flaws.
Firstly, the per year DA charges is determined based on the accountant or the company's estimate of how long an asset will last, usually over an uncertainly long period of time. If their estimated usable years is too long and the PP&E actually lasted only much shorter, they would have overstated each year's profit up till the point where the asset is no longer usable. Because they would have to incur more CAPEX, earlier than the expected useful period of the previous asset.
Secondly, because DA is based on historical costs rather than the current replacement cost of assets, measured DA in periods of inflation is understated relative to the replacement costs, causing actual profits to be overstated correspondingly.
Thirdly, some assets becomes obsolete much faster than expected and have to be replaced despite being still usable. Examples include computers or technological equipment that are evolving at such rapid rates that not replacing them with newer products simply spell doom for the business. The cost to replace these assets would not be accurately captured in the income statement as the DA estimates for the replacement would be subjected to the same flaws above, resulting in perpetual under or overstatement of actual profits.
Lastly, because of the elasticity in which the expense can be booked, this cost is subjected to earnings manipulation to either help the company pay lesser taxes or to make a bad financial year look less serious.
Hence, Warren Buffett has created a formula called Owner Earnings to address the issue of inaccurate net profit figures reported in the Income Statement.
Monday 31 August 2015
How To Start Investing in the Stock Market [Part 3] Reading Financial Statements
Ever wonder how do fundamental investors determine whether a company is worth buying?
The answer lies in the financial statement of a company's annual report (AR).
After you have learnt how to screen for stocks, the next step is to read these company's financial statements so that you can analyse and find real good companies to buy.
In part 3 of How to Start Investing in the Stock Market series, I am going to share with you some of the really basic but important components in the financial statement.
Finding Annual Reports of Public Listed Companies in Singapore
You can either Google it, or you can use the wonderful database of SGX via this link:
http://www.sgx.com/wps/portal/sgxweb/home/company_disclosure/annual_financial
Select the reporting period, choose to search based on the "Company Name" or the stock code, select "Annual Report" as the report type and click "Go".
Click on Annual Report link in the search result and a window will pop up. By clicking on attachment links, the annual report will be loaded on the web. However, if you would like to save the AR for future reference, you can right click on the link and select "Save link as..."
Now that you have managed to get your hands on your AR, let's take a look at what is inside.
In a typical AR, you can usually find the following components:
1. INCOME STATEMENT
The Income Statement is a summary of the company's profitability over the past 12 months.
Depending on the Accounting firm that does the reporting, as well as a country's generally accepted way of reporting accounts, the terms and presentation method in each company's AR can be very different. Don't worry if you see different terms from those that I have mentioned in the article. Search the term on the internet and you will be able find their equivalent counterpart.
1.1. Revenue
At the top of the statement, you can see the Revenue/Sales which is the total amount of income generate for the whole year. It is said that the Revenue figure is the figure that has the least possibility of being manipulated compared to other figures.
What you want to see here is that there is growth in the revenue numbers year-over-year (y-o-y) for the past 5 years.
Different companies have different sources of income stream. Find out what are the sources of income for the company that you are analysing and look at the trend of growth for individual components. If you are looking at 10 years of data, you might find that new sources of income have been added over the years. This may or may not be a good thing. For one, it helps you to identify the institutional imperative tendencies of management to jump into a "hot" sector even though it does not have any expertise or experience at all. Avoid such company at all cost.
However, contrasting from institutional imperative is the ability of management to exit dying sectors and moving on to emerging frontiers of their industry. This continuous improvement process is very important for the sustainability of a company. These are companies that you would want to own.
1.2. Business Expenses
After revenue, comes the expenses incurred for running the business. There are many terms in which expenses is expressed. Some breaks down expenses into Operating and Non-Operating expense, while some differentiates costs by Cost of Goods Sold (COGS) or Selling, General & Administrative Expense (SG&A), or they can be classified as Variable or Fixed Costs.
1.2.1. COGS/Variable Cost
COGS is the sum of the unit cost of each product or service sold, meaning this expense increases in proportion to the revenue number. The more product or services sold, the higher the COGS. They include items like raw materials cost, manufacturing costs, packaging cost, delivery costs, etc. One thing to note is that the guidelines for classifying COGS is very grey, hence, companies can easily manipulate this item.
1.2.2. SG&A / Fixed Cost
SG&A, fixed cost or overhead expense is generally the same regardless of the revenue in the short run. These costs include items such as marketing & advertising, plant property & equipment rental, employee wages, legal & professional fees etc.
What you want to see is that company exercises discipline for their SG&A without increasing the cost by too much. However, some companies may artificially reduce their SG&A to make profit look higher. These are the companies to avoid.
1.3. Charges
One off events to factor for unforeseen circumstances in the business such as write-offs for unsalable inventories or disposal of division, etc. It is reasonable for companies to not include such charges to the expense but you would want to look out for frequent charges that is happening every year. This might be a sign that the company is in trouble. Frequent inventory write offs could be a sign that the company's products are no longer in demand.
1.4. Depreciation and Amortization
After the expenses, comes the term called Depreciation and Amortization. Click on the link to find out more about this item on the Income Statement.
1.5. Interest Expense
After DA is the Interest Expense which is the cost of debt or borrowed money. The more money that a company borrows, the higher the interest expense. As the company is obligated to repay its debts regardless of how well the business has done, when the company is unable to repay or refinance its debts, it will be forced to sell off its assets or forced to become bankrupt.
Companies that have very high level of debt do very well in good economic conditions as they have very high return on equity, but they are affected the most in a rising interest environment or when the economy is slowing down. Hence, interest expense is the greatest risks that can cause an investment to become dust.
1.6. Taxes
Taxes can be quite complicated and tedious to understand, especially if a company has operations or subsidiaries in many countries. What you need to pay attention to is the deferred tax, a decrease in deferred tax could be a sign that the company is not expecting to make profits in future. The tax rate that the company is subjected to can be found in the notes section of the AR.
2. BALANCE SHEET
The Balance Sheet is the statement of the assets, liabilities, and capital of the company at a particular point in time, detailing the balance of income and expenditure over the preceding period.
2.1. Assets
This is what the company owns and is separated into 2 broad categories: Current Assets & Non-Current Assets
2.1.1 Current Assets
These are assets that can be easily converted into cash within 1 year. They include items such as Cash & Cash Equivalent, Marketable Securities, Account Receivables, Inventories.
2.1.2 Non-Current Assets
These are long term assets that the company will own for more than 1 year. They include items such as plant, property and equipment, investments, and intangible assets such as good will, branding etc.
2.2. Liabilities
This is what the company is obligated to repay. Similar to Assets, Liabilities are also separated into Current Liabilities and Non-Current Liabilities
2.2.1 Current Liabilities
This includes items that needs to be repaid within 1 year such as short term debt and current portion of long term debt, Accounts payable, Income tax payable
2.2.2 Non-Current Liabilities
This includes items that does not need to be repaid within 1 year such as long-term debt and deferred taxes.
2.3. Equities
Equity is what the company is worth after deducting all liabilities from all assets. There are 3 types of equity: 1) Preferred stockholders' equity, 2) Common stockholders' equity, 3) Retained earnings.
2.3.1 Preferred Stockholder's Equity
Capital that is raised from the sale of preferred share is classified under this category. Preferred share
is a combination between a bond and a common stock. It has a fixed dividend payout that is similar to interest paid on bonds and each preferred share does not have any voting rights, however unlike bonds, if a company is not doing well and is unable to pay out any dividends, it can choose to withhold the dividend until its business improve again.
2.3.2 Common Stockholder's Equity
These are capital raised from shareholders of common stock either through IPOs, or the exercise of options issued by the company. If you bought shares from the secondary market, you become a common stockholder but what you paid for the share merely goes to the previous owner of the shares rather than the company.
2.3.3 Retained Earnings
This form of capital is the accumulated profit that the company retains after distributing dividends each year. A growing trend of retained earnings is a sign that the company is truly profitable.
3. CASH FLOW STATEMENT
The Cash Flow Statement measures the cash generated or used by a company in a given period. It has 3 main components: 1) Cash flow from Operating Activities, 2) Cash Flow from Investing Activities, 3) Cash Flow from Financing Activities
3.1 Operating Cash Flow
This is the cash flow from the main business itself. Starting from the net income, several adjustments from the income statement is worked backwards to arrive at the actually cash flow that is generated from the business. As some of the adjustments such as depreciation and amortization are non-cash charges, adding them back to the net profit figure and deducting the real costs from capital expenditure (CAPEX) can give you a better picture of how much money that company actually made after cost.
It is important to analyse the changes in working capital to determine how a company is managing its operating cash flows. If inventory is increasing y-o-y, it could be a sign that there is poor inventory management or that the company simply could not sell its goods. If account receivables are increasing, although this translates into increasing revenue, it could also mean that the company could be too aggressive with its sales and could potentially not be able to collect the money from its customers.
3.2 Investing Cash Flow
This is the cash flow that is used for making purchases of capital assets (also known as CAPEX). Purchases made under Capex adds to the plant, property and equipment on the balance sheet after deducting the depreciation and amortization cost. Increase in Capex can be a sign that the company is expanding, which usually translates into higher revenue. By comparing depreciation and amortization against Capex, we can get a sense of whether the company has been overly devaluing their assets to report lower earnings in order to pay lower taxes.
3.3 Financing Cash Flow
This is the cash flow that is for the financing of the company's capital structure. It could be cash raised from issuance of more common shares or the increase in bank borrowings vice versa. Dividends paid to shareholders also falls under this category.
4. NOTES TO FINANCIAL STATEMENT
This section contains very detailed breakdowns, justifications, assumptions, and rates that the company used to derive the financial statement report. Notice that there are some small numbers beside some of the items on the financial statement which denotes that there are notes available. These notes provides further explanation of how the figure is obtained. Do spend some time to study the notes as they often provide insights on how candid is the management on reporting their business to shareholders.
CONCLUSION
Fundamental investors look at the figures reported in the financial statement to help them paint the picture of a company's health. This article had shown you how to find annual reports of companies and introduced the more important components to study. By looking at the 3 different statements and making assessment based on the trend of the numbers or the ratios that various item derives, one can compare between companies and determine the better company to invest in.
Once you are comfortable in navigating the financial statement, let us move on to the next stage where we can make more sense of these numbers. Stay tuned for the next part where I will be going through some of the basic financial ratios that tells a story about the company.
Thank you for reading. If you have any comments or feedback, please post them in the comment section below or drop me an email at ohhanwee@gmail.com.
<< Part 2: Screening Stocks
Disclaimer
I do not own any of the images used in this article.
This publication is for general reading only. The information and materials contained on this web site are subject to change without notice, are provided for general information only and should not be used as a basis for making investment decisions. It does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents. I am not liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this web site, howsoever arising, including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, omission, mistake or inaccuracy with this web site, its contents or associated services, or due to any unavailability of the web site or any part thereof or any contents or associated services.
The answer lies in the financial statement of a company's annual report (AR).
After you have learnt how to screen for stocks, the next step is to read these company's financial statements so that you can analyse and find real good companies to buy.
In part 3 of How to Start Investing in the Stock Market series, I am going to share with you some of the really basic but important components in the financial statement.
Finding Annual Reports of Public Listed Companies in Singapore
You can either Google it, or you can use the wonderful database of SGX via this link:
http://www.sgx.com/wps/portal/sgxweb/home/company_disclosure/annual_financial
Select the reporting period, choose to search based on the "Company Name" or the stock code, select "Annual Report" as the report type and click "Go".
Click on Annual Report link in the search result and a window will pop up. By clicking on attachment links, the annual report will be loaded on the web. However, if you would like to save the AR for future reference, you can right click on the link and select "Save link as..."
Now that you have managed to get your hands on your AR, let's take a look at what is inside.
In a typical AR, you can usually find the following components:
- Company's performance in a snap shot
- Chairman's Statement
- Financial Statements
- Notes to Financial Statement
- Shareholding Information
I recommend that you invest some time to read the entire report of a company just to get a feel of what information is available inside. Do this for a few different companies. Compare a company's past year AR and see if you can get a feel of whether the reporting format has dramatically changed. Read what the chairman said about the direction of the company 10 years ago and compare it with today to see if what he said actually happened. This gives you a sense of how credible is the management of the company.
What I am going to focus on in this article will be the "Financial Statement" portion of the AR and a little of the Notes to Financial Statement.
Do bear in mind that I will not be able to cover in detail the entire financial statement, but can only help you get started on navigating it.
The financial statement consists of many components. What you need to focus on is just 4 parts:
- Income Statement
- Balance Sheet
- Cash flow Statement
- Notes to Financial Statement
The Income Statement is a summary of the company's profitability over the past 12 months.
Depending on the Accounting firm that does the reporting, as well as a country's generally accepted way of reporting accounts, the terms and presentation method in each company's AR can be very different. Don't worry if you see different terms from those that I have mentioned in the article. Search the term on the internet and you will be able find their equivalent counterpart.
1.1. Revenue
At the top of the statement, you can see the Revenue/Sales which is the total amount of income generate for the whole year. It is said that the Revenue figure is the figure that has the least possibility of being manipulated compared to other figures.
What you want to see here is that there is growth in the revenue numbers year-over-year (y-o-y) for the past 5 years.
Different companies have different sources of income stream. Find out what are the sources of income for the company that you are analysing and look at the trend of growth for individual components. If you are looking at 10 years of data, you might find that new sources of income have been added over the years. This may or may not be a good thing. For one, it helps you to identify the institutional imperative tendencies of management to jump into a "hot" sector even though it does not have any expertise or experience at all. Avoid such company at all cost.
However, contrasting from institutional imperative is the ability of management to exit dying sectors and moving on to emerging frontiers of their industry. This continuous improvement process is very important for the sustainability of a company. These are companies that you would want to own.
1.2. Business Expenses
After revenue, comes the expenses incurred for running the business. There are many terms in which expenses is expressed. Some breaks down expenses into Operating and Non-Operating expense, while some differentiates costs by Cost of Goods Sold (COGS) or Selling, General & Administrative Expense (SG&A), or they can be classified as Variable or Fixed Costs.
1.2.1. COGS/Variable Cost
COGS is the sum of the unit cost of each product or service sold, meaning this expense increases in proportion to the revenue number. The more product or services sold, the higher the COGS. They include items like raw materials cost, manufacturing costs, packaging cost, delivery costs, etc. One thing to note is that the guidelines for classifying COGS is very grey, hence, companies can easily manipulate this item.
- Gross Profit = Revenue - COGS
- Gross Profit Margin = Gross Profit / Revenue
*I will be going through more in depth about the ratios and what they mean in the next article of this series
1.2.2. SG&A / Fixed Cost
SG&A, fixed cost or overhead expense is generally the same regardless of the revenue in the short run. These costs include items such as marketing & advertising, plant property & equipment rental, employee wages, legal & professional fees etc.
What you want to see is that company exercises discipline for their SG&A without increasing the cost by too much. However, some companies may artificially reduce their SG&A to make profit look higher. These are the companies to avoid.
1.3. Charges
One off events to factor for unforeseen circumstances in the business such as write-offs for unsalable inventories or disposal of division, etc. It is reasonable for companies to not include such charges to the expense but you would want to look out for frequent charges that is happening every year. This might be a sign that the company is in trouble. Frequent inventory write offs could be a sign that the company's products are no longer in demand.
1.4. Depreciation and Amortization
After the expenses, comes the term called Depreciation and Amortization. Click on the link to find out more about this item on the Income Statement.
1.5. Interest Expense
After DA is the Interest Expense which is the cost of debt or borrowed money. The more money that a company borrows, the higher the interest expense. As the company is obligated to repay its debts regardless of how well the business has done, when the company is unable to repay or refinance its debts, it will be forced to sell off its assets or forced to become bankrupt.
Companies that have very high level of debt do very well in good economic conditions as they have very high return on equity, but they are affected the most in a rising interest environment or when the economy is slowing down. Hence, interest expense is the greatest risks that can cause an investment to become dust.
1.6. Taxes
Taxes can be quite complicated and tedious to understand, especially if a company has operations or subsidiaries in many countries. What you need to pay attention to is the deferred tax, a decrease in deferred tax could be a sign that the company is not expecting to make profits in future. The tax rate that the company is subjected to can be found in the notes section of the AR.
2. BALANCE SHEET
The Balance Sheet is the statement of the assets, liabilities, and capital of the company at a particular point in time, detailing the balance of income and expenditure over the preceding period.
2.1. Assets
This is what the company owns and is separated into 2 broad categories: Current Assets & Non-Current Assets
2.1.1 Current Assets
These are assets that can be easily converted into cash within 1 year. They include items such as Cash & Cash Equivalent, Marketable Securities, Account Receivables, Inventories.
2.1.2 Non-Current Assets
These are long term assets that the company will own for more than 1 year. They include items such as plant, property and equipment, investments, and intangible assets such as good will, branding etc.
2.2. Liabilities
This is what the company is obligated to repay. Similar to Assets, Liabilities are also separated into Current Liabilities and Non-Current Liabilities
2.2.1 Current Liabilities
This includes items that needs to be repaid within 1 year such as short term debt and current portion of long term debt, Accounts payable, Income tax payable
2.2.2 Non-Current Liabilities
This includes items that does not need to be repaid within 1 year such as long-term debt and deferred taxes.
2.3. Equities
Equity is what the company is worth after deducting all liabilities from all assets. There are 3 types of equity: 1) Preferred stockholders' equity, 2) Common stockholders' equity, 3) Retained earnings.
2.3.1 Preferred Stockholder's Equity
Capital that is raised from the sale of preferred share is classified under this category. Preferred share
is a combination between a bond and a common stock. It has a fixed dividend payout that is similar to interest paid on bonds and each preferred share does not have any voting rights, however unlike bonds, if a company is not doing well and is unable to pay out any dividends, it can choose to withhold the dividend until its business improve again.
2.3.2 Common Stockholder's Equity
These are capital raised from shareholders of common stock either through IPOs, or the exercise of options issued by the company. If you bought shares from the secondary market, you become a common stockholder but what you paid for the share merely goes to the previous owner of the shares rather than the company.
2.3.3 Retained Earnings
This form of capital is the accumulated profit that the company retains after distributing dividends each year. A growing trend of retained earnings is a sign that the company is truly profitable.
3. CASH FLOW STATEMENT
The Cash Flow Statement measures the cash generated or used by a company in a given period. It has 3 main components: 1) Cash flow from Operating Activities, 2) Cash Flow from Investing Activities, 3) Cash Flow from Financing Activities
3.1 Operating Cash Flow
This is the cash flow from the main business itself. Starting from the net income, several adjustments from the income statement is worked backwards to arrive at the actually cash flow that is generated from the business. As some of the adjustments such as depreciation and amortization are non-cash charges, adding them back to the net profit figure and deducting the real costs from capital expenditure (CAPEX) can give you a better picture of how much money that company actually made after cost.
It is important to analyse the changes in working capital to determine how a company is managing its operating cash flows. If inventory is increasing y-o-y, it could be a sign that there is poor inventory management or that the company simply could not sell its goods. If account receivables are increasing, although this translates into increasing revenue, it could also mean that the company could be too aggressive with its sales and could potentially not be able to collect the money from its customers.
3.2 Investing Cash Flow
This is the cash flow that is used for making purchases of capital assets (also known as CAPEX). Purchases made under Capex adds to the plant, property and equipment on the balance sheet after deducting the depreciation and amortization cost. Increase in Capex can be a sign that the company is expanding, which usually translates into higher revenue. By comparing depreciation and amortization against Capex, we can get a sense of whether the company has been overly devaluing their assets to report lower earnings in order to pay lower taxes.
3.3 Financing Cash Flow
This is the cash flow that is for the financing of the company's capital structure. It could be cash raised from issuance of more common shares or the increase in bank borrowings vice versa. Dividends paid to shareholders also falls under this category.
4. NOTES TO FINANCIAL STATEMENT
This section contains very detailed breakdowns, justifications, assumptions, and rates that the company used to derive the financial statement report. Notice that there are some small numbers beside some of the items on the financial statement which denotes that there are notes available. These notes provides further explanation of how the figure is obtained. Do spend some time to study the notes as they often provide insights on how candid is the management on reporting their business to shareholders.
CONCLUSION
Fundamental investors look at the figures reported in the financial statement to help them paint the picture of a company's health. This article had shown you how to find annual reports of companies and introduced the more important components to study. By looking at the 3 different statements and making assessment based on the trend of the numbers or the ratios that various item derives, one can compare between companies and determine the better company to invest in.
Once you are comfortable in navigating the financial statement, let us move on to the next stage where we can make more sense of these numbers. Stay tuned for the next part where I will be going through some of the basic financial ratios that tells a story about the company.
Thank you for reading. If you have any comments or feedback, please post them in the comment section below or drop me an email at ohhanwee@gmail.com.
<< Part 2: Screening Stocks
Part 4: Understanding Financial Ratios (Coming soon...)>>
Disclaimer
I do not own any of the images used in this article.
This publication is for general reading only. The information and materials contained on this web site are subject to change without notice, are provided for general information only and should not be used as a basis for making investment decisions. It does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents. I am not liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this web site, howsoever arising, including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, omission, mistake or inaccuracy with this web site, its contents or associated services, or due to any unavailability of the web site or any part thereof or any contents or associated services.
Tuesday 11 August 2015
How To Start Investing in the Stock Market [Part 2] Screening Stocks
To find a needle in a haystack, you need to at least know how the needle looks like. Alternatively, you can use a really powerful magnet, assuming the needle is made of iron.
Why am I talking about needles? More specifically, I am talking about finding something in a really really big place.
There are more than 700 companies that are listed on the Singapore Exchange (SGX), so how do we differentiate these companies from one another?By using the stock code of course!
When a company is listed on SGX, it is assigned a stock code. Unlike America's Stock Exchange where the stock codes sometimes bear semblance to the Company's name (AAPL for Apple Inc, MSFT for Microsoft), SGX stock codes can be quite non-intuitive.
So how do you know what is the stock codes of a public listed companies?
You can use a relatively new feature on SGX's website known as Stockfacts. It is a stock search engine cum screener that allows you to filter out companies based on customised criteria. SGX Stockfacts can be accessed via this link: http://www.sgx.com/wps/portal/sgxweb/home/company_disclosure/stockfacts
Once you access the link, you will see the Search function where you can enter the company's name and begin your search. Go ahead and input a public company that you can remember off hand.
If I search for the word "Singapore", Stockfacts will return all companies that has the word "Singapore" in their name.
Go ahead and click on one company. A company snapshot will be loaded. (Note: If your search keyword returns only 1 result, the company snapshot will be automatically loaded instead of the search result page above)
You will be able to find many useful information on this page such as Historical Share Price, Latest news on the company, Overview, Company Description, Valuation, Financials, Dividend history, Substantial Shareholders, Consensus recommendation & Target Share Price, and also SGX's new product called Capital IQ.
As a word of caution, do not take the consensus price too seriously. Although they are the consensus of what many industry experts think about the value of the company, do bear in mind that the livelihood of these so called experts depend on how credible they appear to be, so expect them to be part of the herd and provide estimates not too far from the current price.
If the consensus price is so accurate, the market would no longer be required.
Earlier, I talked about searching for a needle in a haystack, so now I am going to show you how to use a magnet to find the needle.
Go back to the Stockfact main menu and take a look at the interactive Search Criteria box.
You will be able to customise your search criteria to filter out companies that are not worth your time. Depending on your investment strategy, your search criteria can be very different from the next person beside you.
One of the limitations of this screener is that I am only able to use the slider instead of entering a round figure. Another limitation is that you are only able to select up to 5 criteria.
Below is the search criteria that I use.
- 5-Year Revenue Growth of more than 5%
- Return on Equity of more than 15%
- Debt to Equity Ratio of less than 50%
Based on just the 3 criteria alone, Stockfact screener has managed to narrow down the 700+ companies to 23 companies.
This not only makes the task of finding a good company much easier, it also saves me a lot of time and effort
Now you can go ahead and play around with the screener and explore the company snapshot page.
If you would like to explore other stock screeners, you can check them out at the Useful Links page.
Stay tuned for the next part where I will be going through the basics of how to read the Financial Report.
Thank you for reading. If you have any comments or feedback, please post them in the comment section below or drop me an email at ohhanwee@gmail.com.
<< Part 1: Opening a Shares Trading Account
Disclaimer
I do not own any of the images used in this article.
This publication is for general reading only. The information and materials contained on this web site are subject to change without notice, are provided for general information only and should not be used as a basis for making investment decisions. It does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents. I am not liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this web site, howsoever arising, including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, omission, mistake or inaccuracy with this web site, its contents or associated services, or due to any unavailability of the web site or any part thereof or any contents or associated services.
Monday 10 August 2015
How To Start Investing in the Stock Market [Part 1] Opening a Shares Trading Account
Learn to make money work for you, or you will forever be working for money.Sounds easy? But how?
Making money work for you so that it may create more money is known as Investing.
Here is my article on the definition of Investing
So how do I start learning about investing?
You can read books, attend free seminars, pay for courses sold during the free seminars, or watch TV. In essence, you just need to keep a look out for any avenue where you can learn about investing and actively stick yourself out to learn about it.
Check out how I started investing
Personally, I find that buying shares is the most affordable option to invest my money. With as little as $1,000, I can easily buy a piece of a company that I want.It is also the option that can allow the most diversification. I can buy Real Estate Investment Trusts (REITs) if I want to have exposure in the real estate market. I can buy Exchange Traded Funds (ETFs) if I want to follow a benchmark index like the Straits Times Index (STI); or I can buy an ETF that tracks commodity prices without actually owning any commodity.
Buying shares is easy and convenient. I can complete a transaction within minutes while I am on my way to work.
To start buying shares, you need a direct securities account.
In Singapore, the account where the shares that you own is held, is known as the Central Depository (Pte) Ltd account (CDP account). The market where you buy or sell shares is the Singapore Exchange (SGX). You can find out more about SGX and how it works here.You will also need a broker to buy or sell shares on your behalf.
If you are picturing yourself picking up a phone and talking to a well dressed gentleman over at the other end of the line while you place your order, it is time to update that image.In this age of information technology, human brokers are slowly becoming extinct! Where are the human rights group lobbying for brokers?!
In their place is the more efficient, more accurate, more convenient, and most importantly, more cost effective intermediary (middleman): the Electronic Broker!
You can choose to transact either over an online platform or through a smartphone application.
In Singapore, there are many such brokers to choose from. You can easily find many articles comparing the different account types and the cost involved.
Personally, I am using iOCBC trading platform and for 2 reasons:
1) It is linked to one of my OCBC savings account so the payment of share purchase, proceeds from sale of shares, dividends etc is automatically credited into my account.
2) It is the first account that I have opened and since the minimum commission among all similar platform are the same, I have no motivation to change (I will switch if the minimum trading commission is lower than $25 per transaction)
If you want to choose iOCBC as your broker, simply walk into any OCBC branch and tell them you want to open a stock trading account.
Or you can visit http://portal.iocbc.com/Accounts/basic-securities-trading-account.html
So what about the CDP account previously mentioned?
Worry not, you will be asked to create a CDP account when you apply for a stock brokerage account for the first time. You can have many brokerage accounts but you will only need 1 CDP account.
It may take up to a week for your account to be ready. You'll be receiving many letters with lots of redundant messages and brochures and passwords etc. What happened to going electronic?
Once your account is ready, you can start placing your first trade and be on your way towards becoming a millionaire!
You can check out the next article in this series of How to Start Investing in the Stock Market where I will be talking about finding good stocks among many.
Thank you for reading. If you have any comments or feedback, please post them in the comment section below or drop me an email at ohhanwee@gmail.com.
Disclaimer
I do not own any of the images used in this article.
This publication is for general reading only. The information and materials contained on this web site are subject to change without notice, are provided for general information only and should not be used as a basis for making investment decisions. It does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents. I am not liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this web site, howsoever arising, including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, omission, mistake or inaccuracy with this web site, its contents or associated services, or due to any unavailability of the web site or any part thereof or any contents or associated services.
This publication is for general reading only. The information and materials contained on this web site are subject to change without notice, are provided for general information only and should not be used as a basis for making investment decisions. It does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents. I am not liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this web site, howsoever arising, including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, omission, mistake or inaccuracy with this web site, its contents or associated services, or due to any unavailability of the web site or any part thereof or any contents or associated services.
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