Free Stock Market Investing Tips

If you ever want to double your money according to a certain interest rate, then you should follow the “Rule of 72″. It is the rule at which money will double every 7.2 years at 10%.

Just divide your yearly interest into 72. Let us take an example: if your interest for an investment is a constant 6%, then your money will double in 12 years (72 divided by 6). You can use the same rule the other way round, for example, you can calculate your interest rate based on the knowledge of how many years are required to double your money. Thus, to double your money in 2 years, you will need 36% rate (72 divided by 2).

Of course, and like any rule of thumb, these are approximate results, for to calculate the exact result in the case of a 10% rate, we have to follow the following equation, where “P” is the given principal, “r” is the interest rate in percent per year, “n” is the number of years:

P * (1 + r/100) ^ n = 2P

Please notice that the symbol ‘^’ is used to denote exponentiation (2 ^ 3 = 8).

Since r = 10%, therefore:

P * (1 + 10/100) ^ n = 2P

We cancel the P’s to get: (1 + r/100) ^ n = 2

Continuing:

(1 + 10/100) ^ n = 2
1.1 ^ n = 2

Since in calculus the natural logarithm (”ln”) has the following property:

ln (a ^ b) = b * ln ( a )

 

Thus:

n * ln(1.1) = ln(2)
n * (0.09531) = 0.693147

Finally:

n = 7.2725527

Which means that at 10%, your money will double in nearly 7.3 years, and that is extremely close to the 72% rule.

Penny stocks are the normal stocks which a share can be traded for for less than $5. In the US financial markets, moreover, “penny stocks” are traded outside NYSE, NASDAQ or AMEX and are sometimes looked down upon, hence, considered pejorative.

Nevertheless, SEC defines “penny stock” as the stock that has a low price and a speculative security that matches a small company whether it works through exchanges like NYSE or NASDAQ or the OTCBB and PINK SHEETS (two forms of “over the counter” listing services). “Penny Stocks” are also sometimes referred to as “nano caps”, “microcap stocks” and “small caps” although penny stocks are mostly determined by share price and not listing service or market capitalization.

On the other hand, in the UK, penny stocks- or shares- mean the shares in small cap bodies that have a market capitalization of less than £100 million or whose share price is £1 and whose bid spread more than 10%. The British penny stocks, moreover, are issued with the FSA (Financial Services Authority) warning. In France, the same term refers to risky stocks whose price is lower than 1 Euro.

Having market caps that are less than $500M, penny stocks (especially those trading on low volumes over the counter) are usually considered very speculative. They, moreover, are sometimes difficult to sell due to the fact that it is not always easy to find quotations for certain kinds of them. In other words, if you are thinking of investing in penny stocks, be prepared for the possibility of losing all your investment.

 

Shareholders’ equity is the value of owned stock within a company. It is equal to the firm’s total assets minus its total liabilities. The value of shareholders’ equity is also equal to share capital plus retained earnings less treasury shares. The value of shareholders’ equity is essential when determining the valuation of a publicly traded company.

Different types of shareholder equity include common stock, preferred stock, capital surplus, stock options, retained earnings, and treasury stock. Common stock is the shares normally traded on a public exchange. Preferred stock owners are guaranteed dividend payments before any are paid to common stock holders and also take precedence in case of liquidation. A capital surplus occurs when equity cannot be classified otherwise. It represents a stock issued at a premium over par value (think highly-anticipated IPOs). Stock options are rights by a company’s employees to engage in future transactions for company stock ata historical price. Retained earnings (or losses) are the portion of a firm’s net income (or loss) that is retained by the company rather than distributed to its owners. Finally, treasury stock is company stock that is repurchased by the firm. All of these are reflected within the total shareholder equity on the balance sheet.

The value of shareholders’ equity can fluctuate depending on the firm’s internal policies. Stock repurchases (treasury stock) put a limit on the number of shares available to the public and take some of the value from the shareholders’ hands and return it to the firm’s assets. This is an often-used tactic by firms who feel their stock is undervalued. Shareholder equity can also be radically affected by new accounting rules. This happened most recently in December, 2006 when pension funding and other post-retirement benefits had to be included on corporate balance sheets.

Assets with finite lives lose their value over time. Land is the only asset that is not finite. For all other assets, firms depreciate their value, that is, they attribute the historical cost of the asset over its useful life (the number of years that the asset will be used).

At the end of each fiscal year, firms subtract depreciation claimed to that date from the historical cost of the asset, which results in the asset’s current book value or market value. At the end of the useful life of the asset, the portion left that has not been depreciated is the salvage value of the asset if it were to be sold.

There are two common methods used for determining the value of depreciated assets: the straight-line method and the declining balance method. The straight-line method assumes that the asset loses an equal percentage in value during each year of its useful life. The declining balance method assumes that the asset loses more value (depreciates) during the earlier years of the asset’s useful life by assuming the asset loses an equal percentage of its value every year. An example using both methods is shown below for a $10,000 asset that’s expected to be used for 10 years and then salvaged for $1000.

 

From the table it is easy to see that the straight-line method results in the same deduction every year while the declining-balance yields much higher deductions during the earlier years. An implication of the declining-balance method is that the asset can be sold for a higher value before it is due to be salvaged and pose a greater tax gain for the firm.