Archive for December, 2008

Hedge Strategies for the Individual Investor

For investors, hedging is the practice of purchasing securities in a combination that reduces portfolio risk. Under most hedging strategies, the investor will take two positions with negative correlations. The two most common financial instruments used for hedging are options and futures. While there is no way to completely eliminate market risk, proper execution [...]

Growth Investing and Small-Cap Stocks

Small-Cap stocks (stocks with small market capitalization) are generally defined as companies with a market capitalization of between $300 million and $2 billion (although the small-cap classification can vary among brokerage houses). While these securities trade with higher risk profiles than larger-caps, they can offer greater upside potential and may be appealing to investors [...]

Value Investing and a Margin of Safety

Investing with a margin of safety is a principle conceived of by Benjamin Graham, who is considered by many to be the “father of value investing“. Under this principle, the investor looks to purchase when the actual or “intrinsic” value of the stock is believed to be significantly above the market price. The [...]

A Bond Equivalent Yield Calculator

The Bond Equivalent Yield (BEY) is a formula for describing the yield on a bond while taking into consideration multiple factors regarding the interest on the bond. The BEY enables the comparison of fixed-income securities whose payments are not annual against securities with annual yields. The bond equivalent yield is the yield that is [...]

The Basics and Valuation of Preferred Stock
(includes calculator)

Preferred stock is a class of stock ownership in a corporation that offers a higher claim on the assets and of the earnings of the corporation than common stock. Preferred shares pay a fixed dividend and are sold in par value amounts. Often, these preferred stocks are convertible to common stock, and are callable by [...]

A Gordon Growth (Constant Growth) Model
Calculator for Stock Valuation

The Gordon Growth Model (or Constant Growth Model) is a financial model used to determine the “intrinsic” value of a stock, based on future dividends, which are assumed to grow at a constant rate. Named after Myron J. Gordon and originally published in 1959, the model values a business as the present value of all [...]

Dividend Payments and Total Return on Stock Investments (includes calculator)

When measuring the performance of a stock investment, your total return is comprised of capital gains and any dividend distributions realized. Dividend income is, in fact, a critical consideration when calculating total return and it is unfortunate that many investors mistakenly believe that total return consists merely of any stock price appreciation during the [...]

The Income Statement and Fundamental Analysis

A company’s income statement is a record of its earnings or losses for a given time period. It shows the revenues and expenses for the company for this time period. The income statement is the one of the three primary financial statements, the others being the balance sheet and the statement of cash flows. [...]

Investing in Gold in an Uncertain Economy

People invest in gold for many reasons, including as a method of diversification against stock market fluctuations. In fact, for centuries gold has attracted investors as a means of protecting their wealth in troubled or uncertain times. While this appeal is as compelling for many of today’s investors, there are a number of additional [...]

Working with a Discounted Cash Flow Calculator
for Stock Valuation

In using the Discounted Cash Flow (DCF) approach for stock valuation, the investor recognizes that a company is worth the total amount of cash it will generate over its lifetime. Those cash flows, however, must be discounted to their present value in order to assign a current, “intrinsic” value to the company and, by extension, [...]