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Stocks

Lecture 7

This lecture is part of Chapter 4:

Investing in the Company

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Todays Lecture

What are Stocks

How can we find information about Stocks

How can we use Excel to keep track of our Stocks

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Why Stocks

In order to setup a business or invest into new business

one needs money!

Dont we all .

The natural question is of course: Where can we get that

money for our earth-shattering idea.

One option would be to go to a bank

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Why Stocks

but two problems are immediate.

A) Banks do not really like promises, they like solidityB) Banks charge interest, and that can be very

significant.

Would there be any better ways to get money?

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Why Stocks

If you would want to set up a small company, you could

ask some friends or family members to take a stake in

return for partial ownership of your company.

Hey. Thats quite a good idea! You get money on a

promise and you will not have to pay any interest. In

return, if you are successful, your stakeholders will get

a share of the profits.

Great! A somewhat more formal implementation of this

is the issuance of stock.

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Why Stocks

When a company is setup, one can issue a certain number of

Stock certificates. These certificates represent the partial

ownership of the company.

The certificates then can be sold to investors who hope that

the company (and thus the stock certificate) will increase in

value.

Naturally, the detailed process is quite tricky and there are

many laws governing this but the principle is very simple.

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Why Stocks

Often the founder of a company buys all or a big part of the

issued stock certificates.

The founder then owns the certificates, but the company has

the money.

Theres an important issue here. Companies that issue stocks

are considered legally independent entities. They therefore

act and are treated like they were a thinking person.

We are quite used to this. We e.g. say: I bought this from

Creative (Of course you didnt, you bought it from the sales

person).

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Why Stocks

Just being able to buy the stock certificates when they are

issued is not very practical.

Hence the Stock market was invented so that investors can

trade (or sell/buy) stock certificates. To do so a stock needs

to be listed and fulfill certain conditions (hence this is onlydone for not-so-small companies).

Trading on the stock market can be difficult though which is

why there are brokers who help you do the trading for a

commission.

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Why Stocks

Its interesting to note that stock certificates are actual pieces

of paper. In principle, when you buy a stock certificate you

are entitled to get this piece of paper.

When the company whose stock you are buying is not listed

on any stock market, you will get the certificate.

For listed companies, however, the moving around of the

physical certificates is a big hassle so most investors will

never ask for them and leave them stored in a central place.

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Why Stocks

As always, a great place to find info is on the web:

Exchanges:

http://www.nyse.comhttp://www.nasdaq.comhttp://www.simex.com.sg/

Brokers:

http://www.etrade.comhttp://www.poems.com.sg/

http://www.nyse.com/http://www.nasdaq.com/http://www.simex.com.sg/http://www.etrade.com/http://www.poems.com.sg/http://www.poems.com.sg/http://www.etrade.com/http://www.simex.com.sg/http://www.nasdaq.com/http://www.nyse.com/

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Stocks and Excel

Now let us assume that somehow you can buy and sell stocks

and that you want to keep track of your investments.

Lets start simply.

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Stocks and Excel

A B C D E F G H

2

3 My 1st portforlio Transactions Year 2000

4

5

6 Date Action Stock Quantity Stock Price Total Price Total

7

8 03/01/00 Buy YHOO 2 216 432 432

9 28/02/00 Buy YHOO 2 158 316 748

10 17/04/00 Buy MCD 10 35 350 1098

11 10/10/00 Sell YHOO 3 60 -180 918

12

13

14

15

=IF(C11 = "Buy",E11*F11,-E11*F11)

=SUM($G$8:G11)

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Stocks and Excel

A B C D E F G H

2

3 My 1st portforlio Transactions Year 2000

4

5

6 Date Action Stock Quantity Stock Price Total Price Balance

7

8 03/01/00 Buy YHOO 2 216 432 432

9 28/02/00 Buy YHOO 2 158 316 748

10 17/04/00 Buy MCD 10 35 350 1098

11 04/09/00 Sell MCD 5 28 -140 958

12 10/10/00 Sell YHOO 3 60 -180 778

13

=IF(OR(C8 = "Buy",C8 = "Sell"),IF(C8 = "Buy",E8*F8,-E8*F8),"error")

This is nice, but what if we make a typo in column C?

Fortunately the formula can be improved.

What a Monster! No, actually its quite straightforward.

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Stocks and Excel

I guess buying Yahoo during the internet bubble was not

such a good idea. This reminds me of:

A reporter asks Richard Branson (the flamboyant founder of

Virgin):

How do you become a Millionaire?

What do you think?

And he replies .

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Stocks and Excel

Start as a Billionaire and buy an Airline!

Perhaps I should paraphrase

Start as a Billionaire and become an Investor

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Stocks and Excel

The spreadsheet we just made can neatly keep

track of our transactions but of course it

doesnt reflect at all the current value of ourportfolio. In that sense its a rather useless

spreadsheet.

So, lets add a second sheet to keep track ofthis.

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Stocks and Excel

A B C D E F G H I J K

2

3 My 1st portfolio Valuations

4

5 Total6 Date Qty Price Value Qty Price Value

7

8 03/01/00 2 216 432 432

9 28/02/00 4 158 632 632

10 17/04/00 4 123 492 10 35 350 842

11 04/09/00 4 104 416 5 28 140 556

12 10/10/00 1 60 60 5 28 140 200

13

14

15

YHOO MCD

On this sheet we can enter the valuation of the portfolio.

This hurts!!!But how much?

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Stocks and Excel

On the one hand we can of course say it hurts

by 778 200 = 578 dollars.

True but since weve been buying and

selling stocks, the absolute amount doesnt

necessarily mean much.

Somehow, it would be good if we could keep

track of our performance more accurately so

that we can compare ourselves to others. May

be we didnt do so badly

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Stocks and Excel

Solution:

We could treat our portfolio like a mutual fundand work with virtual shares.

Sounds complicated! But as previously,

perhaps with Excel, taking things step by stepit wont be so bad.

Lets start.

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Stocks and Excel

A B C D E F G H I J K L M N

23 My 1st portfolio Valuations

4

5 Total

6 Date Qty Price Value Qty Price Value Qty Value

7

8 03/01/00 2 216 432 432 1000 0.432

9 28/02/00 4 158 632 632

10 17/04/00 4 123 492 10 35 350 842

11 04/09/00 4 128 512 5 28 140 652

12 10/10/00 1 60 60 5 28 140 200

13

14

YHOO MCD V-shares

Virtual Shares: Cool!

The beginning is easy: Lets assume we have 1000 v-shares

The key thing to realize is that if we add or withdraw

money, the value per v-share should remain the same.

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Stocks and Excel

A B C D E F G H I J K L M N O

2

3 My 1st portfolio Valuations

4

5 In/Out Total

6 Date Qty Price Value Qty Price Value Qty Value

7

8 03/01/00 2 216 432 432 432 1,000.00 0.432

9 28/02/00 4 158 632 316 632 2,000.00 0.316

10 17/04/00 4 123 492 10 35 350 350 842 3,422.76 0.246

11 04/09/00 4 128 512 5 28 140 -140 652 2,817.73 0.231

12 10/10/00 1 60 60 5 28 140 -180 200 1,483.02 0.135

13

14

YHOO MCD V-shares

Lets try this

= N10+(K11*N10)/(L11-K11)

Wait a moment! Why are O8 and O9 not the same?

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Stocks and Excel

A B C D E F G H I J K L M N O

2

3 My 1st portfolio Valuations4

5 In/Out Total

6 Date Qty Price Value Qty Price Value Qty Value

7

8 03/01/00 2 216 432 432 432 1,000.00 0.432

9 28/02/00 2 158 316 316 1,000.00 0.316

10 28/02/00 4 158 632 316 632 2,000.00 0.316

11 17/04/00 4 123 492 492 2,000.00 0.246

12 17/04/00 4 123 492 10 35 350 350 842 3,422.76 0.246

13 04/09/00 4 128 512 10 28 280 792 3,422.76 0.23114 04/09/00 4 128 512 5 28 140 -140 652 2,817.73 0.231

15 10/10/00 4 60 240 5 28 140 380 2,817.73 0.135

16 10/10/00 1 60 60 5 28 140 -180 200 1,483.02 0.135

17

YHOO MCD V-shares

Perhaps we should do this in two steps. One line for the

valuation of the portfolio before the transaction and one line

for the value after the transaction.

Indeed, the value of the v-shares before and after the transaction

are the same

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Stocks and Excel

Excellent, but this formula .

= N10+(K11*N10)/(L11-K11)

the current number of v-shares.

The current value of the portfolio

the current value of the v-shares

= N10 + K11 / ( (L11-K11) / N10 )

divided by

equals

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Stocks and Excel

Excellent, but this formula .

= N10+(K11*N10)/(L11-K11)

the current value of the v-shares

= N10 + K11 / ( (L11-K11) / N10 )

The added amountdivided by

the additional number of v-shares

equals

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Stocks and Excel

Phew youre right, this is actually quite difficult!

The point Im making is:

Its neither the math nor the programming of Excel thats

a problem here. We all can multiply and add. The

problem is: we have to know what we want to do.

This is very typical of financial analysis so focus on

understanding of the problem and dont be scared by the

prospect of complicated math since usually it isnt!

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Now back to our portfolio:

From the transactions sheet we know that we lost

778 200 = 578 dollars or 74%

From the v-shares we know that we lost

0.432 0.135 = 0.297 per v-share or 68%

Relief, like a good financial commentator Ill now claim that

I exceededexpectations by a whopping 6%!

Message: be critical always know what the numbers say!

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Stocks and Excel

2

3 My 1st portfolio - Performance4

5

6 Date Value V-shares

7

8 03/01/00 432 0.43

9 28/02/00 632 0.32

10 17/04/00 842 0.25

11 04/09/00 556 0.23

12 10/10/00 200 0.1413

14

15

0

200

400

600

800

1000

03/01/00 28/02/00 17/04/00 04/09/00 10/10/00

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

03/01/00 28/02/00 17/04/00 04/09/00 10/10/00

On this sheet we can enter the valuation of the portfolio.

Indeed! These two graphs

look completely different.

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Stocks and Books

There are all kinds of books be aware of their

quality!

On a related note. Financial Planners are all the ragenow. It is surprising to see how many (intelligent)

people entrust their money to often poorly qualified

individuals.

In case of doubt, always go with simple, big,well-known, trustworthy like e.g. NTUC, DBS,

Schroders.

The following three books represent certain types of

books. That doesnt mean I recommend them.

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Stocks and Books

This is quite a good book I think.

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Stocks and Books

Another good book. Though, it looks quite flashy.

How do you know that this

one is OK?

Make your own judgment!

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Stocks and Books

Well, this book looks similar to the one by Lynch.

The topics

appear

sound

enough!

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Stocks and Books

The book reads reasonable enough until you consider

what he doesnt tell you. But this gives him away!

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Stocks and Books

But heres a book I

fully recommend!

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Stocks and Books

The best and

worst

performance ofstock, bond, T-

bills for various

holding periods.

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Stocks and Books

Be aware!

This is the

nominalchart. I.e.

inflation and

taxes are not

accounted

for.

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Stocks and Books

While less than

the nominal

numbers, thedifference

between the

various classes

is clear.

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Key Points of the Day

Stocks play a key role in business

Excel is a great tool to keep track of financial data

Be critical of data as presented know what they mean

Youd betternotlet me manage yourmoney!