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Stocks

Lecture 7
This lecture is part of Chapter 4:
Investing in the Company
Today’s Lecture
What are Stocks
How can we find information about Stocks
How can we use Excel to keep track of our Stocks
Why Stocks

In order to setup a business or invest into new business


one needs money!

Don’t 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 …


Why Stocks

… but two problems are immediate.

A) Banks do not really like promises, they like solidity


B) Banks charge interest, and that can be very
significant.

Would there be any better ways to get money?


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. That’s 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.
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.
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.

There’s 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 didn’t, you bought it from the sales
person).
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 only
done 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.
Why Stocks

It’s 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.
Why Stocks

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

Exchanges:
• http://www.nyse.com
• http://www.nasdaq.com
• http://www.simex.com.sg/

Brokers:
• http://www.etrade.com
• http://www.poems.com.sg/
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.

Let’s start simply.


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)
Stocks and Excel
This is nice, but what if we make a typo in column C?
Fortunately the formula can be improved.
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")

What a Monster! No, actually it’s quite straightforward.


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 ……….


Stocks and Excel

“Start as a Billionaire and buy an Airline!”

Perhaps I should paraphrase …


“Start as a Billionaire and become an Investor”
Stocks and Excel

The spreadsheet we just made can neatly keep


track of our transactions but of course it
doesn’t reflect at all the current value of our
portfolio. In that sense it’s a rather useless
spreadsheet.

So, let’s add a second sheet to keep track of


this.
Stocks and Excel
On this sheet we can enter the valuation of the portfolio.
A B C D E F G H I J K
2
3 My 1st portfolio Valuations
4
5 YHOO MCD Total
6 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

This hurts!!!
But how much?
Stocks and Excel

On the one hand we can of course say it hurts


by 778 – 200 = 578 dollars.

True … but since we’ve been buying and


selling stocks, the absolute amount doesn’t
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 didn’t do so badly…
Stocks and Excel

Solution:

We could treat our portfolio like a mutual fund


and work with ‘virtual shares’.

Sounds complicated! But as previously,


perhaps with Excel, taking things step by step
it won’t be so bad.

Let’s start.
Stocks and Excel
The beginning is easy: Let’s assume we have 1000 v-shares
Virtual Shares: Cool!
A B C D E F G H I J K L M N
2
3 My 1st portfolio Valuations
4
5 YHOO MCD Total V-shares
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

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


money, the value per v-share should remain the same.
Stocks and Excel
Let’s try this…

A B C D E F G H I J K L M N O
2
3 My 1st portfolio Valuations
4
5 YHOO MCD In/Out Total V-shares
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

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

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


Stocks and Excel
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.
A B C D E F G H I J K L M N O
2
3 My 1st portfolio Valuations
4
5 YHOO MCD In/Out Total V-shares
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 0.231
14 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

Indeed, the value of the v-shares before and after the transaction
are the same
Stocks and Excel

Excellent, but this formula ….


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

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

The current value of the portfolio


divided by

the current number of v-shares.


equals
the current value of the v-shares
Stocks and Excel

Excellent, but this formula ….


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

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

The added amount


divided by
the current value of the v-shares
equals
the additional number of v-shares
Stocks and Excel

Phew… you’re right, this is actually quite difficult!

The point I’m making is:

It’s neither the math nor the programming of Excel that’s


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 don’t be scared by the
prospect of complicated math since usually it isn’t!
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 I’ll now claim that


I exceeded expectations by a whopping 6%!

Message: be critical – always know what the numbers say!


Stocks and Excel
On this sheet we can enter the valuation of the portfolio.
2
3 My 1st portfolio - Performance
4
5 0.5
0.45
6 Date Value V-shares 0.4
7 0.35
0.3
8 03/01/00 432 0.43 0.25
9 28/02/00 632 0.32 0.2
0.15
10 17/04/00 842 0.25 0.1
11 04/09/00 556 0.23 0.05
0
12 10/10/00 200 0.14 03/01/00 28/02/00 17/04/00 04/09/00 10/10/00
13
14
15
1000

800

600

400

200

Indeed! These two graphs


0
03/01/00 28/02/00 17/04/00 04/09/00 10/10/00

look completely different.


Stocks and Books

There are all kinds of books … be aware of their


quality!
On a related note. Financial Planners are all the rage
now. 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 doesn’t mean I recommend them.
Stocks and Books

This is quite a good book I think.


Stocks and Books

Another good book. Though, it looks quite flashy.

How do you know that this


one is OK?
Make your own judgment!
Stocks and Books

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

The topics
appear
sound
enough!
Stocks and Books
The book reads reasonable enough… until you consider
what he doesn’t tell you. But this gives him away!
Stocks and Books

But here’s a book I


fully recommend!
Stocks and Books

The best and


worst
performance of
stock, bond, T-
bills for various
holding periods.
Stocks and Books

Be aware!
This is the
nominal
chart. I.e.
inflation and
taxes are not
accounted
for.
Stocks and Books

While less than


the nominal
numbers, the
difference
between the
various classes
is clear.
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


You’d better not let me manage your money!