Sunday, October 30, 2016

3 Reasons why Future Cash flows are worth less than Cash Flow today:

I have developed immense love for Valuation and have pledged to follow closely to works of my hero and mentor, Aswath Damodaran, Valuation Expert and Professor at NYU. The Little Book of Valuation is the first of his books I'm reading. I can't wait to start with the rest.
Below are his views on the above topic.

The Intuitive Basis for Present Value by Aswath Damodaran.

There are three reasons why a cash flow in the future is worth less than a similar cash flow today.

1. Individuals prefer present consumption to future consumption.
People would have to be offered more in the future to give up present consumption. If the preference for current consumption is strong, individuals will have to be offered much more in terms of future consumption to give up current consumption, a trade-off that is captured by a high real rate of return or discount rate. Conversely, when the preference for current consumption is weaker, individuals will settle for much less in terms of future consumption and, by extension, a low real rate of return or discount rate.

2. When there is monetary inflation, the value of currency decreases over time.
The greater the inflation, the greater the difference in value between a nominal cash flow today and the same cash flow in the future.

3. A promised cash flow might not be delivered for a number of reasons: 
The promisor might default on the payment, the promisee might not be around to receive payment, or some other contingency might intervene to prevent the promised payment or to reduce it. Any uncertainty (risk) associated with the cash flow in the future reduces the value of the cash flow.

The process by which future cash flows are adjusted to reflect these factors is called discounting, and the magnitude of these factors is reflected in the discount rate. The discount rate can be viewed as a composite of the expected real return (reflecting consumption preferences in the aggregate over the investing population), the expected inflation rate (to capture the deterioration in the purchasing power of the cash flow), and the uncertainty associated with the cash flow.

Tuesday, October 18, 2016

Private Financing of Public Infrastructure, A way For West Africa (UGBS Public Lecture)

You are all invited to a very important Public Lecture to be delivered on Oct. 25th @ UGBS by Prof John Macomber, Professor of Finance at Harvard business School.  

ABSTRACT 

Africa and the world face three large trends:  rapid and massive urbanization; current and worsening resource scarcity; and the apparent inability of national governments to mobilize investment in urban infrastructure to get ahead of these problems.  At the same time, the world is awash in liquidity as trillions of dollars realize close to zero yield in the global capital markets.  How can thoughtful private investment and delivery of public infrastructure be attracted and channelled to address this “infrastructure paradox”?  This lecture provides an opportunity to discuss the broader opportunities available for private financing of public infrastructure, and then explore how these opportunities might be exploited and accomplished in western Africa.

Speaker profile

Professor John Macomber Lectures in Finance at the Harvard Business School, where his research and teaching focuses on exploring opportunities for private financing of public infrastructure in cities in the Global South.  He has undertaken field research in Latin America, Africa, and South Asia, and his sectors of interest include power, transportation, water/sanitation, and waste.   Prof. Macomber’s professional background is in construction and real estate before joining the HBS faculty.  He is a member of the Executive Committee of Harvard’s Center for African Studies.

Wednesday, October 5, 2016

UT Bank remains the Driver of GSE Financial Stock Index

The GSE Composite index recovered from Tuesday's loss to close the midweek's trading at 1,773.77 points; 0.16 points higher than the previous closing. This brings the year-to-date yield to -11.09%

Price appreciatioin in UTB pushed the GSE financial stocks index to 1,682.66 points, up 1.16 points from 1,681.50 points. The year-to-date return on financials stocks is -12.82%.

0.04 million shares were exchanged for a sum GHS0.02 million. Compared to the previous, the trade volume and value declined by 94.48% and 58.00% respectively. UTB had the lion's share of the turnover, accounting for 50.42% of the traded volume. On the other hand, GCB was responsible for 58.00% of the traded value.

UTB gained GHS0.01 to close trading at GHS0.05. BOPP lost a pesewa to fall to a year-low of GHS2.42.

Courtesy: CAL Brokers Ltd.

Tuesday, October 4, 2016

How to Trade in the Regular & Odd Lots Market

It's great most young investors are getting a chance to trade their own shares at the comfort of their homes or offices without heavily relying on stock brokers  (although there's still some amount of reliance).
In order to fully and easily trade on Ghana Stock Exchange (GSE), one must understand the necessary areas of the market and that brings me to the two kinds of markets - REGULAR and ODD LOTS Markets.

The Regular Market:
When trading on the exchange with the various trading platforms (e.g. iBroker trading platform ) you will come across "REG" & "ODL" .

REG: represents 'Regular market'. In this market you can only trade lots in 100s. Like 900, 500, 1000, 10,000 etc.

ODL: represents 'Odd Lots market'.In this market, you can only trade lots which are not in 100s. (Or better still let me say, lower than 100). Like 99, 45, 60, 75, etc.

How it works:
If you want to trade (buy or sell) 678 shares of any company, you will buy 600 shares in the Regular Market and then buy the remaining 78 shares from the Odd lots market (ODL) provided those number of shares are available on the various markets at the price you prefer.

Now you know. Keep investing.

Monday, October 3, 2016

Financing Your Investments Using Borrowed Money: Margin Trading on GSE

image credit: claytrader.com
I am still deeply concerned about the speed of growth of the Ghana Stock Exchange. Market players are blaming it on the low level of activities on the market because investors are few and hence ‘Ghanaians do not invest enough’.  The question then is, do the few investors we have, get the necessarily tools, options and systems to facilitate the investment process? In cases where investors want to buy more stocks but short of funds, what happens next? Is that the end?
That brings me to the concept of Buying Stocks on Margin. When are we reaching a point where we can buy stocks and other securities on margin? Every time I interact with my colleagues in the market, I hear the response that, it’s in the pipeline. Truly, this pipeline is really long.

What Does Buying on Margin Mean?
Simply put, it is borrowing part of the total purchase amount of a position using loan from a broker. Margin trading allows you to buy more shares from a listed company with the financial help from your broker than you can normally buy. With Margin trading on Ghana Stock Exchange, the market doesn’t only increase in activities but also gives brokerage firms a lot of opportunities to grow bigger. 
Investor who trades on Margin vrs one who does not:
Margin is a double edge sword. As much as margin trading of stocks can bring some good things into the market, so is the risk and let’s see how bad it is.

Here is an example:  Imagine Investor A & B has Ghc 50,000 each worth of stock in their brokerage accounts and this allows them a margin debt of Ghc 50,000 to buy extra stocks (let’s say in a company priced at Ghc 1 per). If Investor A takes the margin available and buys more stocks at the said price, he gets Ghc 100,000 worth of stocks whiles Investor B only has Ghc 50,000 in his / her account. If the share price appreciates to Ghc 2 (100% increase), Investor A will now be worth Ghc 200,000 whiles Investor B will be worth Ghc 100,000. In this case, Investor A can then pay his debt of Ghc 50,000 to his brokers leaving him / her Ghc 150,000 which is Ghc 50,000 more than Investor B who never took the margin available.
On the other side of the coin, when share price in the said company falls to 0.50p, (50% lower), Investor A will get a Margin Call from his brokers requesting him top up his account with more money. In this case, the investor does not only lose 50% of his initial portfolio value but also has a debt of Ghc 50,000 to pay.
It’s always good to take advantage of the money available from your brokers but you need to be aware you stand a chance of wiping out all your equity, leaving you broke or bankrupt.
The beauty of margin trading in the Ghanaian market is that, you cannot wake up over night and see prices of stocks deep so low as a result of any news as it happens on the advanced stock exchanges. Thus if you do your homework well enough, you stand a chance of making a lot more than you equity will allow you. This obviously can create a lot more activity on the Ghana Stock Exchange.

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