Thursday, October 21, 2010

Leverage (in edit)

1. What is financial or investment leverage?

Leverage is attained when you borrow money to fund the ownership of something. For example, your house and its mortgage. You want to buy a $100,000 house but only have $25,000, so you borrow the rest of the money from the bank in the form of a mortgage. You are then able to pay the bank back the borrowed amount in monthly payments over time.

2. How am I leveraged?

Normally, the average person would set aside a portion of their income that they want to invest each month. They would use that money to reinvest in the same security, or pick a new one each month. To be leveraged, you would instead choose to borrow a large amount of money (called a margin) to invest immediately, and gradually pay off the amount with your portion of monthly income and returns on your investment. If your investment is highly successful, you can pay off the margin easily. If your investment fails, though, you will still have to pay off the margin.

3. How are companies leveraged?

A company can similarly be leveraged by borrowing money to finance operations without increasing company equity. The company would borrow money and use it to expand, increase production, or buy fixed assets to reduce their operations costs.



WARNING

Being leveraged can be very risky. There is potential for higher gains, but there is equal potential for higher losses. Always do strong analysis before investing, and always manage your risk according to your financial stability and preferences.
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Monday, October 18, 2010

Why Would A Company Buy Back Stock?

Written by Daniel Guttridge

A buyback is when a company buys shares of their own stock on the open market, which reduces the number of shares issued, or the float.

1. SHARE PRICE INCREASE

The laws of supply and demand take effect here. Since the supply of shares is more limited, the price is likely to rise. With the expectations of a price increase, demand usually increases and fuels the price increase.

2. SIGN OF CONFIDENCE

Also, since the company is buying their own shares, it shows that they have confidence in their future. Investors see that the company has confidence and they expect the value of the shares to increase in the long term.

3. AN ALTERNATIVE TO DIVIDENDS

1. Tax issues: Buybacks allow the share owners to pay the taxes on the stock whenever they choose to sell. They only recognize profits when they sell. When you receive a dividend, you have to pay taxes on it by the tax year-end.

2. Dividends are hard for companies to reduce. When a company decreases it's dividend per share, it can be a sign that the company is going through financial trouble. Buybacks can be more opportunistic by having an extended time frame to buy the shares back, which allows the company to choose how much they will buy back at different times.

WARNING

Not every buyback is a good thing, though. Companies sometimes announce buybacks to hide other issues within the company. Some aggressive growth companies will issue large amounts of stock, which will dilute the individual share value. Buybacks can then counter the large issuance of stock and increase the share value.

Generally, a buyback has positive effects on the company's shares, but investors should do strong research (just like with any other investment) before investing in a buyback.

Edited by David Neubert
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Monday, October 11, 2010

Tax Credits

1. What is a tax credit?

It is a dollar for dollar discount on the total taxes an individual or entity may owe.

2. What do you get tax credits for?

Sometimes the government will give businesses tax credits for including non-petroleum gas usage, motor vehicle alternatives, welfare relief employment, and rising research expenses in their operations. The government may also give tax credits for disaster relief or property development for certain buildings. There are also some other non-standard reasons tax credits may be given.

Individuals may also receive tax credits for some similar activities as businesses, such as adoptions and using solar panels to power their homes. They are given these credits to directly reduce their tax amount, dollar for dollar. If you made $100,000 and your tax rate is 20%, you would owe $20,000 dollars. If you received a tax credit of $5,000 for using solar panels, you could reduce your total tax amount to $15,000.

The main difference between individuals and businesses, though, is that an individual can only use tax credits for the following year. Businesses, though, are able to use any tax credits at any time.

3. How does it affect the company's shares?

Tax credits are added to the balance sheet, usually in footnotes. When performing fundamental analysis, they will affect the book value of the shares.

For example, if you leave the tax credits out of your analysis and the market share price matches the book price, adding the tax credits will leave the market share price undervalued. If you are a value investor, this is exactly what you are looking for in your analysis.
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