Junk Bonds

Bond market is not as famous as stock market, however is is huge and most of the times even larger than stock market. Bonds look little boring compared to the stocks because cannot bring impressive return on investment and cannot make you rich. And of course everyone wants to get rich fast. Life is a short term opportunity and there is no place for term investing. 

However, bonds also sometimes can offer good returns. But of course not bonds issued by the most stable governments but bonds that are issued by companies that have low credit ratings. Such bonds are called junk bonds and investment in these bonds is quiet risky. Of course not that risky as is risky investment for amateur investors in stocks. Maybe risk of junk bonds is similar to the safest stocks as value stocks of very stable and matured companies. But better stocks and bonds not to be compared and junk bonds are the riskiest in bond asset class. 

Well junk bonds can be especially profitable when market at the real trouble. Because when markets are very low and investors are afraid to risk with their money, high yielding bonds falls in value. When bonds fall in value that means that yield is increasing. The higher is yield of the bond the higher return from the investment can be achieved. The thing about bonds is that also contains some risk even without a case of default because bonds fluctuate in value too.

The longer is the maturity of the bonds the it can be volatile in value. And the junk bonds normally even more volatile than standard bonds. 

So if you will decide to invest in junk bonds you should be really careful about that but it doesn't mean that you should afraid of risk totally. Risk is normal thing in investing just you have to be sure that you are under control. The factor when investing in bonds and especially in junk bonds is diversification. Very wide diversification decreases your investment risk greatly and it is a best tool for this type of investment.

Discounted Cash Flow

Discounted cash flow is very important measure in finance and especially in corporate finance. The thing is that value of money now aren't equal to value of the same amount money in the future. And it is a key for corporate financial calculations. Because all the project that are projected for the future would bring positive cash flow in the future, sometimes very long future and that is why that cash flow should be discounted. 

Discounted means recalculated to the current value and discounted value will always be lower than the value of the future. Discounted cash flow is calculated as sum of every year discounted values. This is used in many financial methods, especially in DCF valuation, NPV calculated also related to IRR calculation. All those methods are based on discounted cash flows of the company. 

Cash flow is determined as positive cash flow less negative cash flow, when positive cash flow comes from income of the company or the investment project, the negative cash flow is equal to expenses of company or mentioned investment project. 

Institutional Investors in M&A

Investment market is very large over the world and a lot of different participants are working under this environment. However, there are two core types of investors: retails investors and large investors. Both these types are very important for the financial markets because retails investors provide more liquidity for the markets when institutional investors provide more stability.

They provide more stability because most of them do less market timing. There is no secret that retail investors are the one that they are starting first screaming that bear market is coming and selling all their stocks immediately and otherwise when stocks are rising for a long term and sometimes are at their peaks they starting to buy stocks heavily. However, that is not a really good way to react to the market. The worst thing is that such actions are destabilizing the market and volatility of investment increases. The true is that everybody pays for that increased volatility including institutional investors. 

Institutional investors are biggest ones and most of the time they care about stability first. However, finances and investment markets aren't the fields that provide the most stability. Even bonds in real terms after inflation can be not as stable as it looks from the first view. But how it all affects M&A markets? 

M&A (mergers and acquisitions) is very known term and this notability comes from the scale of M&A market. It is huge and it is driven by institutional investors. If total investment market is consisted of retail and institutional investors then mergers and acquisitions market is consisted mostly only of institutional investors. 

Larger companies are taking over smaller ones consistently and those companies are institutional investors. They affect this market the most. And we cannot say that they act very stable in here, because M&A market is extremely cyclical and is booming together with economy booms. So is natural that institutional investors also may bring instability and that is proofed by M&A market. 

Speculation in Securities

Securities are most popular investments that is no doubt about speculation or speculating scale in such investing instruments. Such securities as bonds and stocks are the most popular, however, bonds are not so common case for speculation because of relatively low volatile. 

But stocks are completely different. They fluctuate just greatly and are perfect instrument for speculation. Actually there are few best instruments for speculation: stocks, indices, ETFs, commodities and of course currencies (FOREX) if not to mention most extreme investments as futures and options which can be the most volatile. 

The good thing about speculation is that you may see the results fast enough and there is no need for long waiting to see what will happen. But there is bad thing also, and it is more important than a good thing. The bad thing about speculation in securities (non-financial investments) is that there is not much probable to expect good results that bad results because prices does change very often in negative side and another bad thing is fees. When trades are very often it costs a lot of fees and those can make a damage over longer period. 

Speculation in securities may be fun, but not necessary profitable thing to do. A lot of experience is needed to do that properly. But the funny thing is that the more experience you will have the less attraction for speculation will left in you.

The experience and wisdom investor have the less he is attracted to speculating in securities. Long term investing is more reasonable than jumping through the stocks or derivatives with high costs until money  disappears. Exactly that happens in most cases of speculation over some period, but it is like gambling and hard to forget bad habits.

Correlation of Stagflation and Inflation

Lets talk now more about economical things as statistical correlation, stagflation and inflation. Of course  financial markets are the key but they needs the door and the door is the economy. What I want to say by that is that correlation between financial markets and economy is inevitable. If economy will suffer a downturn then financial markets are necessary to feel it. If a fall in economy will be very strong then affect to stock market and other capital markets will be dramatic. And otherwise, if economy will grow rapidly then stocks also will rise very fast, especially investments in growth stocks. 

So this true, that every investment depends on many economical factors, as GDP growth, retails sales and many others. One of key economical factors also is inflation which shows the price increase for goods and services during some period. The period usually is one month or one year. Inflation is not too much important in practice as long as it is kept in normal boundaries, but if it would turn to hyperinflation the meaning could be catastrophic and the is the answer to ECB (European Central Bank) fears which are ignored by US Central Bank. But in other hand inflation is very important because it determines the actions of the central banks and central banks have critical impact to the financial markets including stocks, bonds and other investments. 

The true about inflation is simple. It is good as long as inflation of prices is under control, but if control will be lost then real damages can happen. In reality some moderate inflation is much better than deflation. The worst things that can happen is hyperinflation and stagflation. There is no correlation among these two because they are opposite. 

Stagflation means that economy is in stagnation which means there is no growth for a long term and there is high inflation. Both factors factors are very negative and it is a worst thing for the correlation. If those two factors are correlating then economy is in real trouble. 

Well, economy is consistently changing thing and there are no constant rules. However, is very probable that high inflation will make a lot of problems for the economy of the country and that will hurt the business, which would drive to the stagnation and it is only one step till stagflation, so we can say that such correlation is probable. 

Stock Split Effect to Market Capitalization

Many investors are confused by stock splits effect to the value of their stocks and value of the company that they are investing in. In reality there is nothing mystical about stocks. However, I have noticed many times by my self that after share split total market capitalization had increased in reality even if theoretically it should have not. 

Theoretically everything is in this crystal clear and simple. After stock split number of sharer outstanding increases but the price of one stock decreases proportionally, but the total value of shares which is represented by market capitalization should not change. That's the theory. 

Of course practice bring all kind of results and those might be very different. The main thing that if even sometimes it does not work, that means about market inefficiency. Market efficiency is a very lot discussed theme how does it work, do you believe in it or not and all the talks like this. I say it now, this is the proof of markets inefficiency. 

Especially in less developed market proofs are more significant because in emerging market after strong stock split value in few days or weeks gets most of the time higher that before which means stock market cap increases. Market capitalization represents the value of all shares (stock). 

I'm not sure about how many times it happens from all the events, but the thing that even sometimes it does says some things to us about market inefficiency. Take that in mind when you'll be ready.

Dividend Yield

Every investor knows how important dividends are. No need to say about it, of course stock buybacks are important as well. Dividends are payments to shareholders from profit that company has earned. Unprofitable company may also could pay dividends but those won't be very significant and such occasions are rear. It is better for unprofitable companies to thing how to turn in to profits than how to pay out the dividends. 

There are two main ratios when we talk about dividends: dividend yielding and dividend payout ratio. Bot are very useful to know and important. 

Dividend Yield

Dividend yield mostly depends on dividend policy of the company and may very from 0% to 10%. Sometimes it can be even more than 10% but it will more rear occasions that more often occur only in unstable emerging market or during turmoils in financial markets.

Too high dividend yield is also not necessary good thing because usually stocks that pay high dividend yield have very low potential for future growth. Otherwise stocks would cost much more and dividend yield would decrease, because it depends on stock price that is on exchange. 

However, dividend yield is especially important for value investors. It even may be the main ratio for them because it is the yield of their return. Dividend yield shows how much of money investors will receive compared to the value of shares. It is similar to yield of bonds because both yields including bond yield to maturity and dividend yield represent annual return that is highly expected from the investment if everything will go without unexpected circumstances.  

Dividend Payout Ratio

Another ratio is profit payout ratio which is important as well when we talk about dividends. The main thing about payout ratio is that dividend payout ratio depends on dividend policy of the company and may very from 0% to 100%. Sometimes it can be even more than 100% but dividend payout ratio won't be very consistent ratio over long term and is probably to decrease in the future.

It is true that dividend payout ratio is also not necessary good thing because may rise such questions as is it healthy for the company? What is the future? What are investments in production capacities and etc. All those answer are important and can be a part of a strategy how to maximize stockholders value.

Difference in Market Value and Par Value

Investment sometimes may be a confusing thing, especially when we talk about value and price. There may be many kinds of value but none if it should be always equal to value. Price and value are different things and every man/woman should know that, especially if he is investing in any kind of investment. 

There are two main values in investment: market value and par value. Let's read about each of them. 

Market Value 

Real value is the value set by market or other valuations methods that represent the market value the best. Of course market can represent the self the best, at least in most cases because it is an equilibrium of many participants between supply and demand. 

The thing about market value is that sometimes market conditions maybe ruined by some unnatural intrusion which would make significant affect to the value and in that case it could be important in market value determination. 

Par Value

In any case market value doesn't mean the same as book value (nominal value) also most commonly called par value. Par value is more accounting meaning than practical for stocks because do not have a lot of influence for such value formatting. 

However, nominal value is very important characteristic for bonds because shows the price of the redemption if there will be no default of a issuer of the bond. But for stocks it is not an even necessary attribute. There are much more important characteristics to look, as market capitalization, valuations multiples for relative valuation, value of discounter cash flows and etc. 

The most important thing is not to mix value and price. You have to know the value before determining the price for selling or buying of any object!

Got a Margin Call when Buying on Margin?

Buying on Margin

There is a lot to say about trading in margin, and there is a lot already said about that. But in never be too much because these lesson are always tend to be forgotten. And investors do the same mistakes again and again. Why is that will you ask, well the answer is very simple. The greed. Greed makes financial markets the way they are now. And don't be surprised, because they are completely normal. 

Well buying on margin from the first look doesn't seem to a lot different than regular investing, but this may be wrong impression, because it is not just little bit riskier but it is pure speculation. The thing about buying on margin is that financial leverage is used, and that means borrowed money are used. 

If borrowed capital is used it means not only that interest must be paid but the worst is that investors who is investing in stocks (normally stocks are bought on margin more common that other investments) do not control the situation any more. He does not control the investment portfolio because investment market do it for him. He is just a play doll of the market since started buying on margin. 

Margin Call

Why investor does not control the situation any more since buying on margin? Because any time he can get the margin call. Yes, the margin call for a stock trader. Does not sound very pleasantly? That means you already have heard of it. Especially if you would have received already such margin call you could not say about this one any good. 

Margin call is a provided by the investment bank or broker to the client, when he has to say that client needs more funds or sell some securities. Or maybe all of them, who knows, it depends on the situation of financial markets. But one thing is for sure, that margin call or financial market now controls the situation. Because if market falls down, investor might forced to sell all the securities in his portfolio. 

Stock Market Crash

It will be not that bad if investor is investing in flat times or when markets are decreasing slowly if he is buying stocks on margin. But things may get much worse if he will suffer big fall or real stock market crash. Not every market decrease is very painful, but stock market crash is situation in the market when the decreases in value are very sharp and very sudden. And worst thing that can happen at investing is to be buying on margin during stock market fall.

If the crash will be very strong the you will necessary receive the margin call and this one will be unforgettable one for you. You won't be happy about it for sure. Because most probably you won't have free funds to add and you will be forced to sell yours stocks at low prices. Nobody wants that, but you won't control the situation anymore, because the Mrs. Market does that for you now. Relax and give up, the best you can do.

If market will continue to fall, you may be forced to sell all securities of yours. You might left with a zero of capital, or even worse - with a debt to buying on margin service provider. That is the margin call during stocks market crash. I wish you not to experience that, and never twice!

Investment in Stock Market

Hello World! 

For the introduction I would like to say just one thing. Investment in stock market is not very easy, and especially can be complicated if you are lacking of knowledge about this process. You have to read more about stocks and other investments and try to understand the mechanics of the markets. 

We will provide in here some specific information, that may be not the most pleasant but is needful in investment process to know. Hope it will be an important help for you!