You are on page 1of 16

I want to open a lemonade stand.

I dont have any money, so I want to get it from an investor


To do that, I start a corporation. (pessoa jurdica)
Well start the business with 1000 shares of stock and sell 500 shares more for a dollar each to an
investor.
Well have a 1000 shares for creating the name and the idea, and the investor is gonna own 1/3 of
the business for his $500.
What the business is worth: $1000 (Bill) + $500 (investor) = $1500
Ima need more money, so I borrow $250 from a friend and pay him with 10% interest a year.
Why borrow instead of selling more stocks?
Because we want a larger share for yourselves to make more profit later.
Balance sheet (snapshot)

- assets
- liabilities
- net worth of the company

Fixed asset: investment in physical property used to generate income.

Then we spend $300 to buy a lemonade stand and $200 to buy supply for 800 lemonades (1 year),
which is lemons, sugar, water, cups, napkins.

Income statement: how well the business has performed over time?
To make an income statement, lets make these assumptions:
- Revenue assumptions:
- it takes 1 year to sell 800 cups
- one cup can be sold for $1
- Costs assumptions:
- Costs $530 per year to staff the lemonade stand

(margin = lucro)
Now lets project the next several years.
Operating assumptions:
- All cash flow generated will be used to purchased more stands
- No dividends (company profits paid out to stockholders) will be paid
- Well charge $0.05 more for each cup per year
- Well sell 5% more cups per stand per year

Depreciation: stand expense spread across time because we want accurate operational analysis

Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical
assets such as property, industrial buildings or equipment.
The CFS is to reconcile the profit with the starting and ending cash.
For the Cash Flow Statement, we take the income statements and add back the depreciation to the
profit (because there wasn't actually cash flowing like that), and add the value of the stand in the
form of capital expenses only at the period it was purchased.

Ps: above, its Shareholders Equity instead of Liabilities (I think)

Evaluating value: Good business or bad business?


Analysing the income statements for these 5 years, we conclude:

- Earnings Yield
- The original value was $1500 (100 goodwill + 500 investment)
- As of year 5, the business earned $1502 (net income)
- 100% yield (100 per cent return, quite a high number)
- Return on Capital
- We spent $2100 on 7 lemonade stands
- In year 5 they earned $2336 (earnings before taxes)
- 111% return on capital
- Earnings Growth
- In year 2 earnings per share were $0.06
- In year 5 they achieved $1.00
- 155% compound anual growth rate
- Profitability
- Year 1 margins were 1.3%
- Year 5 margins were 28.6%
Lets compare people who put money on the business:
Lender

Equity investor

Money put up

$250

$500 ($1/share)

Yearly return

$25

$500 (over $1/share)

Return on investment

10%

100%

Risk

Low (paid first if shit happens)

High (gets what is leftover after debt is paid)

We say equity has only a residual claim.


If business grows in value instead, stockholders get the additional value (not lenders)
Equity investors do not get interest, but the potential to receive dividends (profits paid to
stockholders)).

Risk differential:
Senior debt = lower risk = lower return
Junior debt = higher risk = higher return

- Debt has a priority return over equity


- = Debt is senior to equity
- = Debt has a senior claim on the assets of a company
Debt comes in different forms:
- Mortgage debt (loan secured by a house or building)
- Senior debt
- Junior debt
- Mezzanine debt
- Convertible debt
- It is all debt, but it comes in different orders of priority
Equity:
- Preferred equity
- Common equity (common stock)
- Options
You shouldnt worry about the constant fluctuation of stocks.

What matters is: ultimately, will you get your money back or earn a return on your investment?
Government bonds:

- Lowest risk investment


- US Treasury issues as 10, 5 and 3 year debt
- Earn about 3% on 10 year debt (as of 2012)
- give $1000 to the gov, get it back in 10 years
The riskier the business, the higher the rate of return demanded.

How do I take cash out of the business?


Selling the company:

- Good news: cash in your pocket


- Bad news: give up control and future profits
Selling just a piece:

- Find a private investor and share profits


- Go public.
- IPO: Initial Public Offering (event)
- The SEC are gonna study information on your business
- Yields the optimally high price for the company
- You retain part or most of the company
- Push cash in your pocket

Evaluating a business
Comparing it to similar businesses:
Lets assume other lemonade stands in the market have sold in either private or public market for a
price of 10 times earnings:

Suppose other lemonade stands are trading for 20x earnings (per share) in the stock market.

- We earned $1 per share in year 5


- 20x$1 = $20/share
- 1500 shares outstanding = $30,000 in equity
So, to raise $4,000 we could share 200 shares.
- Ou ownership would change

Requirements for selling to the public:

- Board of directors
- Looks after public interest
- Reduced flexibility

Benefits:
- Market liquidity, easy to raise money (selling more stocks)
- Makes exiting the business easier

Being a good investor


If you invest $10,000 at 10% rate of return when youre 22, what would you have in 43 years?
Youd have $602,401 in year 43 (when youre 65).
With a 15% rate of return youd have $4,073,870.
The most valuable asset in investing is time (your youth). You wanna start early so your money can
grow over time.
Warren Buffets rule of investing:
1. Never lose money
2. Never forget rule #1
How to avoid losing money?

- Invest in listed companies, not in startups (not well known prospects)


- they are more stabilized
- stocks are more liquid (you can sell easily, but in startups you might get stuck in bad
investments)

- Understand how the company makes money


- Lot of people thought Enron was great business
- Invest a reasonable price
- no matter how good a business is, paying too much for it doesnt generate good returns
- Invest in a company that could last forever
- You dont want to be constantly shifting from one business to the next
- What can you own forever?
- Coca-cola
- McDonalds
- Businesses that last:
- Sell something people need
- Sell something unique
- Not a commodity everyone else could sell
- Elicit brand loyalty consumers are willing to pay for
- Ex: when it comes to candy, people tend to buy big brands and pay more for that
- Find a company with very little debt
- Too much debt can destroy a company
- Find a company with profits that far outweigh its interest payments
- Look for barriers to entry
- Invest in businesses that is hard for someone to enter and compete easily
- Ex: Coca-Cola (hard for someone else to make a better product that will make people leave
Coca)
- Invest in a company immune to extrinsic factors, such as
- price of certain commodities
- interest rates changes
- currency prices
- Ex: Coca-cola
- Invest in a company with low reinvestment costs
- imagine if you had to build a new factory every time your business grew
- best businesses
- dont require lot of re-investment capital
- generate healthy cash flow to pay out in dividends to shareholders
- Avoid businesses with controlling shareholders
- a business in which one shareholder owns the majority of the stock
Find a business that:

- You understand

- Record of success
- Makes an attractive profit
- Can grow over time

When to invest?
-

When you have money you dont need for 5-10 years
After paying off your credit card
After paying off student loans
After you have 6-12 months of money set aside to live on in case of emergency

The psychology of investing


- All of the above things most investors know and follow. The problem is when there is a panic in
the world, the stock market gets down every day and they watch the value of their investment
account to decline. In that situation, the natural tendency is to do the opposite of what makes
sense
- When the stock market goes down every day, your tendency is to sell
- When it goes up everyday, you tend to wanna buy
- You need a stomach to withstand the volatility of the stock market
How to withstand market volatility

- Be financially secure
- Be comfortable you dont need what you have invested
- Dont get spooked by short term fluctuations
- Do your own work
- Do your own research
- Understand well the business
- Invest at a reasonable price

Other ways to invest


Suppose you dont have the time to do your own research or buying individual stocks seems to
risky for you. Alternatives:
- Outsource your investment
- = hire money manager(s)
- Mutual Funds (most common alternative)
- corporation that you buy a stock from, and it selects a portfolio of stocks
- they pull capital together from many investors (like a billion dollars) and invest in a
diversified collection of securities
- Pros:
- diversified portfolio for even small investments
- managed by pros
- Cons:
- 10,000+ mutual funds to chose from
- significant research is necessary to find a good one
- A good money manager:
- Has a good reputation
- Successful track record for at least 5 years
- Can easily explain strategy to you (in 2 minutes)
- Has value approach

- Has a consistent approach


- Invests his own money in the fund
Book:
The intelligent investor (Ben Graham)
Jean Paul Sartres essays in existentialism

Small cap stocks:

- stocks with market caps between $300mi and $2bi


- usually have hight stock price. Its the n of available shares that make them small
- gives individual investors advantage over institutional investors
- because institutional investors wanna make large investments that would be too big a chuck
of a small cap company and SEC wouldnt allow
- individual investors rarely trigger sec filing requirements because they normally do not buy
large blocks of stock purchased by institutional investors

Dividends:

- A dividend is a cash payment from a company's earnings; it is announced by a company's board


of directors and distributed among stockholders.

- an investor's share of a company's profits


- Aside from option strategies, dividends are the only way for investors to profit from ownership of
stock without eliminating their stake in the company.

- When a company earns profits from operations, management can:


1. retain them - essentially reinvesting them into the company with the hope of creating more
profits and thus further stock appreciation
2. distribute a portion of the profits to shareholders in the form of dividends
- A company must keep growing at an above-average pace to justify reinvesting in itself
rather than paying a dividend
- Generally speaking, when a company's growth slows, its stock won't climb as much, and
dividends will be necessary to keep shareholders around
- This growth slowdown happens to virtually all companies after they attain a large market
capitalization. A company will simply reach a size at which it no longer has the potential to
grow at annual rates of 30-40% like a small cap, regardless of how much money is plowed
back into it. At a certain point, the law of large numbers makes a mega-cap company
and growth rates that outperform the market an impossible combination. (see
Microsoft ex below)
- At a certain point, management feels that reinvesting profits to achieve further growth
will not offer the shareholder as high a return as a distribution in the form of
dividends.
- Another motivation: a steadily increasing dividend payout is viewed as a strong indication of
a company's continuing success
- Dividends cant be faked (unlike earnings, which are basically an accountant's best
guess of a company's profitability, and often are reported aggressively)
3. repurchase some of its own shares - a move that would also benefit shareholders
When Microsoft started paying dividends
The changes witnessed in Microsoft (Nasdaq:MSFT) in 2003 are a perfect illustration of what can
happen when a firm's growth levels off. In January 2003, the company finally announced that it
would pay a dividend: Microsoft had so much cash in the bank that it simply couldn't find
enough worthwhile projects to spend it on - you can't be a high-flying growth stock forever!

Who Determines Dividend Policy?

- The company's board of directors decides what percentage of earnings will be paid out to
shareholders, and then puts the remaining profits back into the company.

- usually dispersed quarterly, but the company is not obligated to pay every single quarter
- the company can stop paying a dividend at any time, but this is rare, especially for a firm with
a long history of dividend payments
How Stocks That Pay Dividends are Quasi-Bonds

- Because public companies generally face adverse reactions if they discontinue or reduce
dividends, investors can be reasonably certain they will receive it as they hold their shares.
- Therefore, investors rely on dividends in like they rely on interest payments from corporate
bonds and debentures.
- From resembling bonds, dividend-paying stocks tend to exhibit pricing characteristics that are
moderately different from those of growth stocks, because they provide regular income.
- A portfolio with dividend-paying stocks is likely to see less price volatility than a growth stock
portfolio. (This is why dividends are often considered to be a good recessionary investment)

Earnings Quality
The quality rather than quantity of corporate earnings is a much better gauge of future earnings
performance. How to measure quality:
- Repeatable Earnings
- Repeatable and fairly predictable earnings that come from sales and cost reductions are what
investors prefer.
- Controllable Earnings
- Bankable Earnings

GENERAL CONCEPTS:
- Coupon yield = 1 year of payments / Par Value
- Ex: CY = $50/$1,000 = 5%
- Par Value = Face Value = Nominal Value = Original Value
- it is the original value of a bond when it was first issued
- the amount of money to be paid to the purchaser at bond maturity
- for a bond it is typically $1,000 or 100
- Bond value = Par Value + a promise of yield?
- One of the main factors to the market price of a bond:
- If interest rates are at 5% and a bonds yield is 4%, the bond will trade at less than its
par value, because investors could buy other bonds that have 5% yield.
- The bonds price declines to offer the same 5% yield to investors.
- A bond trading above par is trading at a premium
- A bond trading below par is trading at a discount
Q: Can I sell a bond back to its issuer before it matures?

- It is the percentage which a coupon yields.


Taxable Bond

- A debt security whose return to the investor is subject to taxes at the local, state or federal level,
or some combination thereof.
- The majority of bonds issued are taxable bonds.

Stock

- stock = shares = equity


- a share in the ownership of a company.
- a claim on the company's assets and earnings
- your claim on assets is only relevant if a company goes bankrupt
- in case of liquidation, you'll receive what's left after all the creditors have been paid
- limited liability: you are not personally liable if the company is not able to pay its debts. The
maximum value you can lose is the value of your investment (which doesnt happen in
partnerships)
- one vote per share to elect the board of directors at annual meetings
- individual investors like you and I don't own enough shares to have a material influence on the
company. It's really the big boys like large institutional investors and billionaire entrepreneurs
who make the decisions.
Why does a company issue stock?
Why share their profits with shareholders?
- At some point every company needs to raise money. They can do so with:
- debt financing: taking a loan from a bank or issuing bonds (borrowing from banks or investors)
- equity financing: issuing stocks
- Answer: Issuing stock does not require the company
- to pay back the money
- or make interest payments along the way.
Ps: There used to be stock certificates

- piece of paper proving your ownership of stock


- today you won't actually get to see this document because your brokerage keeps these records
electronically (also known as holding shares "in street name)

To Hedge (or make a hedge investment):


Protect an asset from a risk.
Offset the risk from another investment.
A perfect hedge would be 100% inversely correlated with the original investment (if one
depreciates, the other rises). It is like taking out an insurance policy.
To reduce risks it often reduces potential profits.
Derivatives are a popular instrument to hedge against an underlying asset.
Diversifying a portfolio is another way of hedging.

Derivative:
https://www.youtube.com/watch?v=5uTeOEBIcpw
Contract whose value is derived from an underlying asset.
Asset could be: share, commodity, currency, even the weather
Changes in value of the asset has an effect in the value of the contract (not always directly
proportional)
Example 1:
Price of Gold today is $29,000/10g
If price rises, you pay me the difference.
If price lowers, I pay you the difference.
This is derivative contract, because the value of the contract derives from the value of gold.

Example 2:
Suppose youre a farmer and produce wheat.
You will crop your wheat in 3 months.
Wheat price today: $20/kilogram
Cost of production: $15/kilogram
Profit is then $5/kilogram.
In 3 months, 2 possibilities:
Price 1: $24 per kilo

Price 2: $16 per kilo

Profit: $9 per kilo

Profit: $1 per kilo

Suppose Im a flour producer.


I need to buy wheat.
I have to buy wheat at $20/kilo
Cost of production: $5/kilo
Total cost: $25
Flour price today: $30/kilo
Profit: $5/kilo
In 3 months, 2 possibilities:
Wheat price 1: $24 per kilo

Wheat price 2: $16 per kilo

Cost of flour: $29 per kilo

Cost of flour: $21 per kilo

Profit: $1 per kilo

Profit: $9 per kilo

So, to reduce risk, you (wheat producer) come to me and say:


Lets agree in advance for a price on wheat in 3 months:
I will charge you $20 per kilo in spite of market price.
This way both parts locks their profits at $5 per kilo and eliminate the uncertainty.
In 3 months, contract of $20 per kilo of wheat
Cost of flour: $25 per kilo

Cost of wheat: $15 per kilo

Selling price: $30 per kilo

Selling price: $20

Profit: $5 per kilo

Profit: $5 per kilo

Purpose of derivative is to eliminate, reduce or transfer risk.

Example 3:
Car insurance.
You (car owner) pay a premium (contract value) to an insurance company.
If car is damaged or stolen the insurance company pays the amount for which the car was insured.
You pay for a promise of protection for an underlying asset, the car.
So, the premium price is dependent on, the asset (value of the car), the time period (Ex: 1 year),
the probability of accident, the interest rate, etc.

STOCK TOUCH:
Business model in 2011
https://www.quora.com/What-is-StockTouchs-business-model/answer/Jennifer-Johnson
StockTouch is the first of a series of iOS financial data visualisation apps by Visible Market http://
visiblemarket.com.
The business model consists of
- basic apps at $4.99
- pro-user enhancements through in-app upgrade/subscription (in development), and
- enterprise-level versions which blend client/market data (in development)
2012:
http://1080.plus/9KEgf4Fnu-I.video
2-20k users/month and up to 4k users/day
Many business use data visualisation as the final step of development, we use it as the foundation
- Our client is built in openGL, using a 30fps animation
- Our data is processed in the cloud, in EC2 and S3
If you check a stock on yahoo finance, it loads an 800k file. The same quote on stock touch uses
only a 2k file.
Our technology is patent pending.
Team of 7 combines experience of software, algorithmic trading, science, mobile games, 3D
animation and applied mathematics. (Fintech innovation lab)
Many companies are pushing for real time data visualisation on the desktop space. We
differentiate ourselves by implementing it on mobile, even though our platform is adaptable to Mac
and Windows as well.
Other software may be able of capturing and displaying the image itself, but our user experience is
what makes the data navigation insightful, fun, fast, which is what defines our unique approach.
2012:
http://www.slideshare.net/tabbforum/how-to-build-financial-mobile-apps-in-record-time-v60515

OpenFins HTML5 Toolkit helps build, host and deploy financial industry applications.

Feature-rich vs Simple:
objective is customer engagement and employee productivity
keep it simple
deliver first version, then get feedback and iterate
narrow vs broad functionality

- We launched StockTouch 10 months ago


- Over 35,000 people spend more than 700,000 minutes per month on StockTouch
- We have 3,000-5,000 users per day
- Our average use is 3 minutes
- 4 people built our app in 4 months
- The reason for such active use is that
- we started from scratch
- built specifically for touch
- started with the visuals
- Platform
- First to apply a game engine to visualise statistical data
- We parallel process all our analytics on AWS EC2
- and combine that with live market data feeds
- then we use a proprietary compression technology that transmits the information at around
20x faster than comparable apps (makes it fluid and helps understand the data)

- Than we vendor all that contextual market data at once and that provides a completely fluid
user experience

- Front end: heat map divided into sectors. Back end: delivered from AWS, cloud based inmemory data base.

- Because of memory capabilities of devices we had to do it native.


- Our roadmap is evolving into
- on-the-go financial users and investors
- personalised data
- social
- deeper analytics
- basically what theyre gonna be needing for meetings, lunch, on the go
- One thing that costs companies a lot of time is focusing on back-end first while they should be
thinking about moving as much as that to the cloud.
- Any time spent on market data infrastructure or backend infrastructure that you
could spend making the app more unique is wasted.

Sept 2013 - on tech


http://www.wallstreetandtech.com/infrastructure/why-stocktouch-moved-gamer-mechanics-ontonasdaqs-finqloud/d/d-id/1268431?
StockTouch,
- a heat map application that tracks stock market activity
- is now reliant on the cloud ecosystem to feed the data for 5,000 stocks and an expanding
number of information sets.
- The java run tool, declared the #1 financial iPad app by Apple and
- used by over 400,000 users per month on mobile and desktop devices
- relies on a gaming engine to visualise statistical data.
Earlier this summer,
- in anticipation of company growth and expanded offerings,
- StockTouch moved over from a standard AWS to Nasdaq's FinQloud on the advice of one
of its colleagues and users who thought the platform had great future for institutions.
FinQloud
https://www.cloudfastpath.com/case-studies/citrix-sharefile-migration-17a4-complianceaccelerated-capital-group/

- NASDAQ OMX developed FinQloud, running on Amazon Web Services (AWS), to provide its
-

clients with efficient storage and management of financial data.


When we were looking at potential cloud platform providers to deliver FinQloud, AWS became
the clear choice due to their trusted, enterprise capabilities.
digital storage that is compliant with SEC Rule 17a-4 for long-term, nonmodifiable,
nonerasable data archives
discontinued!
They discovered Citrix ShareFile also 17a-4 compliant
There are very few 17a-4 compliant cloud storage services out there, and fewer still that are high
quality at a fair price. Fortunately ACG was able to find an alternative in Citrix ShareFile.

CLOUD COMPLIANCE
The SEC requires that broker-dealers preserve electronic records exclusively in a non-rewriteable
and non-erasable format. SEC rules 17a-3 and 17a-4 require:
- Written, enforceable retention policies
- A searchable index of all data stored
- Viewable and readily retrievable data
- Offsite storage of data
- Storage of data on write-once, read-many optical media