As a business owner of your Online Business, it is important that you know What is Securities Investment. This will help you to raise funds to finance your new business development if you decided to go big.
There are two common methods to raise your business capital:
- Equity Financing – by issuing new shares or equity securities to new/existing investors. You are actually giving up some of your ownership to others, especially if the newly issued shares are huge.
- Debt Financing – by issuing new bonds or debt. Normally the bank will require your hard assets for collateral and you need to make payment regularly.
- Bond prices move inversely to the interest rate. When the interest rate comes down, the bond price goes up. Bonds with longer-term is riskier than bond with a shorter term.
The reason why investors buy securities are:
- it offers a higher return than a bank deposit, especially now the cost of borrowing is cheaper than in the past
- it allows diversification of their assets
- the security market is well regulated by most governments
- it is liquid and quick to cash out if the investor need emergency cash
- for insurance, savings, retirements, or even financial education
Investing in securities is not only for individuals, big companies like Insurance companies, Pension Funds, Institutional Investors also invest widely in the securities market. This helps them to generate a better return for themselves. There are professionals like Investment Management Companies (also known as Asset Managers or Fund Managers) in the market that will help you to generate a better return with their specialized financial knowledge.
Another group of highly sophisticated investors is the Sovereign Wealth Fund (SWF). These are funds managed by the country for a very huge amount of money hold by the country.
- Capital Appreciation – For example, when you buy 100 shares of a company at $0.80 per share and later you sell those shares when it raises to $1.60 per share., you will have a capital gain of $80. As for bond investment, your bond price increases when the interest rate decreases.
- Income Payments – As a share investor, you may entitle any profit if the company you invest in decided to give a dividend when approved by the company directors. For a bond investor, you will be paid a fixed rate of interest (called a coupon) at fixed intervals throughout the period of the loan.
Exchange-Traded Funds (ETF)
Exchange-Traded Funds are getting popular as a new kind of investment. It allows an investor to buy an entire basket of stocks through single security that tracks the return of a stock market index. For example, you can buy an ETF that tracks global indices like FTSE1000 or S&P500.
ETFs have lower costs than conventional mutual funds or unit trusts and are usually not tax by the government. It provides diversification and traded like a stock on a major exchange.
Real Estate Investment Trusts (REITs)
As the population of a country go up, the real estate price usually follows. By investing in real estate (property), it gives you the diversification of your portfolio. Historically, real estate has a low or negative correlation to other financial asset classes.
You can derive your income from the rental of your property. It also allows you to hedge against inflation because real assets tend to appreciate during times of greater-than-expected inflation.
REITs are stock exchange quoted trusts which invest in income-producing (like commercial properties – offices, retail malls, hotels) real estate properties. Most of the taxable income is distributed back to the shareholders, through the dividends as the trust is exempted from corporate tax.
There are 3 types of REITs:
- Equity REITs – this kind of REIT normally owns commercial, industrial, or residential properties. Income is mainly derived from the rentals of the properties.
- Mortgage REITs – it invests in real estate directly by lending them money for construction or mortgages.
- Hybrid REITs – combining the features of equity and mortgage REITs.
Benefits of Investing in REITs
- give you the bond-like dividend and provide equity upside
- traditionally REITs has a low correlation with other assets
- the exposure to the real estate market is small with the amount of capital you have invested
- the rental income acts as a hedge against inflation
Want To Learn More About REITs
Although you can always google the internet and learn about REIT, but the best method I recommend, is learn from the expert and master.
Financial Horse is a website which has a lot of investment knowledge you can refer often. I learn my REIT knowledge from there. They have masterclass specializing on REIT topics. Feel free to check it out at their website.
Time Value of Money
A dollar received today is worth more than one dollar received in the future due to Interest. It is important that we understand the difference between Present Value and Future Value. The future value is found by applying compound interest over a specified period.
Take for example, if you decided to renew your bank deposit of $10,000 for a second year at the same interest rate of 4% p.a. Your future value at the end of Year 2 is $10,816.
Compound Interest is interest earned on principal plus all previously accumulated interest. It takes into consideration the earning of interest on interest.
If we apply this concept of compound interest to our Online Business effort, we can see that our reward is being compounded with the effort we put in at the initial period. Therefore, think long-term when you do your first initial step and work towards your long-term goal.
How To Find Intrinsic Value Of A Stock
Investing in company stock is a big investment and you need to know whether the share you are buying is worth the value. One very important figure you need to look at is the intrinsic value of the stock. Warren Buffett will look at the company’s free cash flow and the weighted average cost of capital (WACC).
Learn how to calculate the Intrinsic Value and it will reward you abundantly when you have made the right investment.
One common method is using the Discounted Cash Flow (DCF) Analysis. Follow the following 3 steps:
- Estimate all the future cash flows
- Calculate the present value of each of these future cash flows
- Add up all the present values and you will have the intrinsic value of the company share
Another easy method of finding the Intrinsic Value of company stock is using a financial metric like the price-to-earnings (P/E) ratio.
Intrinsic Value = Earnings per share (EPS) x (1+r) x P/E ratio
where r = the expected earning’s growth rate
If you find that the above 2 methods are too complex for you to handle, you may use the below method instead:
Intrinsic Value = (Sum of the company’s assets – Sum of the company’s liabilities)
Importance of Knowing P/E Ratio of Your Stock Investment
P/E ratio is one of the ways to determine whether a stock is undervalued or overvalued.
In general, value stock has a low P/E ratio whereas growth stock has higher P/E ratio.
You can calculate the P/E ratio using trailing earning from the past 4 quarters, or you can use expected earnings, based on the forecasts of the upcoming year’s earnings.
If your stock is currently trading at 11 times earning, and its earning last year is $2.51; the stock should trade at $27.61 (11 x $2.51).
The lower the better for P/E ratio because when earning become higher, the ratio will become smaller.
Rising P/E ratio usually link to higher stock price.
One particular tip you may want to consider, Value investor look for stock with P/E multiple times less than their expected long-term growth rate. Therefore, do your research and look out for this kind of stock.
How Important Is P/B Ratio
Book Value = Assets – Liabilities
If the stock price is too much higher than the book value per share, don’t buy.
Check the P/B ratio, this is the Price-to-Book ratio. 10 times is too high but 4 times is comfortable.
One of the techniques taught by popular investment course – Dividend Machines (by The Fifth Person), is buying stock with below historical P/B ratio for safety margin.
You will gain more when you follow this guideline in selecting which stock to purchase.
The amount of effort and investment you put into your Online Business is not going to be lesser than a traditional brick-and-mortar business. Therefore, be serious about the way you handle your Online Business and make it your success story.
Recently I come across a new source of investment knowledge which you may want to explore too. It is the Investment Quadrant by Fifth Person. They have some case studies and review which are helpful in enhancing your investment knowledge. As a business owner, you ought to know investor mindset in order for you to attract them to invest in your company too.
Before you take up the course offer by them, I suggest you do your own research first. Investment knowledge takes time and effort to accumulate. One of the ways which I used to learn a new knowledge and skill, is actually doing it myself. The best method is creating your own content online and review it often.
If you wish to create your own website and put your own content online (you may share it with others too, which can be very rewarding at times), visit my Online Business For 50 Home Page and sign up for the Free Membership and create your First Article Online today. Within 5 minutes, you will see your content Online.
Take action at the Present Moment. This is how I learn everything.
Wish you All The Best in your Investment Journey!