Stocks

1
Stocks

• Lecture 7
• This lecture is part of Chapter 4 Investing in
  the Company

2
Todays Lecture

• What are Stocks
• How can we find information about Stocks
• How can we use Excel to keep track of our Stocks

3
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
4
Why Stocks

• but two problems are immediate.
• Banks do not really like promises, they like
  solidity
• Banks charge interest, and that can be very
  significant.
• Would there be any better ways to get money?

5
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.
6
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.
7
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).
8
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.
9
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.
10
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/

11
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.
12
Stocks and Excel
IF(C11 "Buy",E11F11,-E11F11)
SUM(G8G11)
13
Stocks and Excel
This is nice, but what if we make a typo in
column C? Fortunately the formula can be improved.
IF(OR(C8 "Buy",C8 "Sell"),IF(C8
"Buy",E8F8,-E8F8),"error")
What a Monster! No, actually its quite
straightforward.
14
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 .
15
Stocks and Excel
Start as a Billionaire and buy an Airline!
Perhaps I should paraphrase Start as a
Billionaire and become an Investor
16
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 our
portfolio. In that sense its a rather useless
spreadsheet. So, lets add a second sheet to
keep track of this.
17
Stocks and Excel
On this sheet we can enter the valuation of the
portfolio.
This hurts!!!
But how much?
18
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
19
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
wont be so bad. Lets start.
20
Stocks and Excel
The beginning is easy Lets assume we have 1000
v-shares
Virtual Shares Cool!
The key thing to realize is that if we add or
withdraw money, the value per v-share should
remain the same.
21
Stocks and Excel
Lets try this
N10(K11N10)/(L11-K11)
Wait a moment! Why are O8 and O9 not the same?
22
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.
Indeed, the value of the v-shares before and
after the transaction are the same
23
Stocks and Excel
Excellent, but this formula .
N10(K11N10)/(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
24
Stocks and Excel
Excellent, but this formula .
N10(K11N10)/(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
25
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!
26

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 exceeded expectations by a
whopping 6! Message be critical always know
what the numbers say!
27
Stocks and Excel
On this sheet we can enter the valuation of the
portfolio.
Indeed! These two graphs look completely
different.
28
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 doesnt mean I
recommend them.
29
Stocks and Books
This is quite a good book I think.
30
Stocks and Books
Another good book. Though, it looks quite flashy.
How do you know that this one is OK? Make your
own judgment!
31
Stocks and Books
Well, this book looks similar to the one by Lynch.
The topics appear sound enough!
32
Stocks and Books
The book reads reasonable enough until you
consider what he doesnt tell you. But this gives
him away!
33
Stocks and Books
But heres a book I fully recommend!
34
Stocks and Books
The best and worst performance of stock, bond,
T-bills for various holding periods.
35
Stocks and Books
Be aware! This is the nominal chart. I.e.
inflation and taxes are not accounted for.
36
Stocks and Books
While less than the nominal numbers, the
difference between the various classes is clear.
37
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 better not let me manage your money!

Think for yourself!