Free Stock Market Investing Tips

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.

If you want to help in softening the impact of your death on your loved ones, then you should think of “estate planning”. This does not just include previously written wills, the distribution of one’s assets, or ensuring that all your wishes are carried out, for it includes much more.

A major element in estate planning is protecting your belongings from unwanted recipients, such as greedy relatives and strangers or the IRS itself. By carefully planning your estate, you can avoid most of the hustle that results from your death. First of all, in order to do this, you must have someone in your mind to whom will get your things after your death. Through estate planning, you can also ensure that the people you care about are provided for; it will help you find solutions to protect those you love, whether they are humans or even pets. Estate planning, moreover, entails taking care of a limitless number of details regarding you death, such as the location and method of burial.

In addition, such planning encompasses psychological aspects, for it will help you to come to terms with your own mortality and all the issues related to it. Furthermore, estate planning is a way of helping those we leave behind in one of their most chaotic situations, our death.

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Operating expenses are those costs every business has that are not considered directly related to a company’s first line of business. Operating costs include sales and marketing, research and development (R&D), and administrative costs. Investors want to make sure management is doing the best job it can keeping these costs in control. Operating expenses are available on the financial statements that every publicly traded company files with the SEC.

Management also must do a good job turning a profit with its own operations. That means the costs associated with cost of goods sold (COGS), etc. must generate more than those costs. If not, well, the company must be in the wrong line of business. Companies should never be operating at a loss. If a company is operating at a loss exactly why needs to be interpreted by the prospective investor

Operating margins represent the direct relationship between sales revenue and operating income. The operating margin of a firm is the operating income divided by net sales. It shows how much gross profit a company generates before taxes. Well-managed companies should increase these margins from year to year. The higher these margins are the more profits are available to return to shareholders investing in the company. Operating margins can be a useful tool when comparing two prospective stocks that compete within the same market. Higher operating margins represent a company in a better position to generate income. For example, a company with a lower operating margin than a competitor in its market will have less flexibility in determining prices. It’s competitor with higher profit margins will know this about it’s competitor and can “go for the jugular” by slashing prices and stealing market share.