So let's see wherewe left off. We were studying the balancesheet of this Bank A, I think that's what I called it. And we said, OK on the assetsside, had some government bonds, had some AAAcorporate bonds, some commercial mortgages. And then this is the thingthat I really wanted to
highlight, that it also had$4 billion of residential collateralized debtobligations. And I explained little bitabout what those are. And I have several tutorialswhere I explain that in more detail. And how they probably led, ormost definitely led, to the housing bubble. And then we have a little bitof cash on top of that.
On the liability side,the bank just owes a lot of money to people. If this were a commercial bank,kind of your Bank of Americas, or your Chases ofthe world, then one of the liabilities here would have alsobeen the deposits of the people who keep theirmoney at the bank. But we're not goingto assume that. This could be justkind of any bank.
Actually, this could be any typeof financial institution. Frankly, it doesn'thave to be a bank. This could be the balance sheetof a hedge fund, or a private equity firm, or prettymuch any type of financial institution. But anyway, back to wherewe were in the example. We said, and we learned it inthe first tutorial, and we learned it in the balance sheettutorial, that if you take
your assets and you subtractout your liability so you take what you have, you subtractout what you owe, you're left with whatyou're really worth. And that's called your equity. And if you're a publicly tradedcompany, actually you don't have to be publiclytraded, but if you're a corporation, that's called yourshareholders' equity. And what does that meané
Well that means the people whoown a stake in the company, or the shareholders, theyshare this piece. And just to hit the point home,and I think this is an important one because Ifeel like people kind of talk past this. There's two notions, there'syour book value of equity, and that's the value of the equitythat comes out of your balance sheet.
1 Stocks Shares And Equity
Hi guys, Nrupen here and welcome to the firsttutorial of â€œStock Investing Simplifiedâ€� tutorial series. In this tutorial we'll cover somebasic stuff that you need to know before you start investing in stocks. First lets understandwhat are stocks. For example, assume Amit wants Rs. 200 toopen a new Transportation Business. The amount which he doesn't have in his bank account.Amit have two options to raise this money, either to ask for loan from bank, or to gopublic with company and raise capital from investors who see potential of growth andprofit in his business. After going through all necessary processesrequired to go public, Amit gets permission
to sell shares of his company. Shares arenothing but ownership of company divided in parts. Amit sells 100 shares of company for Rs 2each, where each share of company represents 1% ownership of everything in Amit's TransportationBusiness. It includes all assets with future and current earnings. If Bunty buys 10 shares of Amits TransportationBusiness, he will have 10% ownership of company. Which also means Bunty contributed Rs 20 equityand owns 10% stocks of company. In short,Shares are nothing but ownership of company
divided in parts.Equity is nothing but ownership of company represented in form of capital raised frombuying shares. Stocks are nothing but ownership of companyrepresented in percentage. While talking about stocks, we generally assumeall of them same, unless and until assuming other meaning is necessary. Now rather than selling all 100 shares, Amitdecides to buy 10 shares himself, and only intends to sell rest 90 to investors thenwe can say that Amit's Transportation Business have 90 Outstanding Shares.
Which leads us to 2 new definitions. Outstanding Shares are shares which are heldby investors and not by the company. Market Capitalization or market cap is nothingbut current price of company multiplied by number of outstanding shares. In case of Amit's Transportation Businessmarket capitalization will be 90 x 2 = Rs 180. Now that was hypothetical example, in reallife market cap is not as cheap as Rs. 180, it is in 100s to 1000s of crores.
Companies whose market cap is between 100to 1000 crores are known as small cap companies. Companies whose market cap is between 1000to 5000 crores are known as mid cap companies. Companies whose market cap is above 5000 croresare known as large cap companies. Now suppose after one year Amit TransportationBusiness grows and doubles in size, means a company which started with Rs 200 now becomesworth Rs 400. After doubling in size other investors getinterested in buying shares of Amit Transportation Business because they also see potential growthin business. Suppose Chandu is new investor who wants to buy shares and Bunty who owns10 shares of company wants to sell his shares.
Since size of business doubles the price ofeach shares should be Rs 4 now, but instead of selling share for price it should be, Chanduand Bunty decide to bargain on price. Bunty wants to sell Rs 4 share for Rs 5 whereasChandu wants to buy same share for Rs 3. This bargain battle between buyers and sellersof stocks everyday leads to change of price of stock. As investors our job is to analyzewho will win this battle and bet our money with winning team. Which leads us to our final definition éBook value of share is value for which a share should be sold, or a value which every stockholder will get per share if company decides
Stock Valuation Tutorial in 3 Easy Steps Stock Value Valuing Stocks Finance Stock Valuation
Stock Valuation Tutorial in 3 Easy Steps StockValue, Valuing Stocks, Finance Stock Valuation Alright! Welcome back again to MBAbullshit .So our topic for this tutorial is Stock Valuation or how to value stocks or how valuable isa stock or a share of stock. Remember, you can always go back to MBAbullshit to check out more cool tutorials on these business topics. Before this tutorial, you should alreadyunderstand Future Value, Present Value, Net Present Value, Value of a Perpetuity, andValue of an Annuity. If you don't understand those yet, then you may watch my other freetutorials on these topics above. Alright, let's get down to it.First of all, just a quick overview, a â€œStockâ€�
or a â€œShare of Stockâ€� is a piece of paperwhich says that you own part of a company or corporation, whatever. You can buy thisstock or sell this Stock to somebody else and usually you do this in a â€œStock Exchangeâ€�which is a place where people buy and sell stocks from each other. Or buy from each other,sell to each other. Alrighté Now the â€œStock Valueâ€� which we are goingto compute in this tutorial is different from the stock's â€œMarket Valueâ€� which isthe price that people actually and really pay for. Actually, price at which people actuallybuy and sell stocks in the real stock exchange. So you might wonder why on earth are we goingto compute this if it's different from the
actual â€œMarket Valueâ€� that people buyand sell stocks. And the answer to that is we compute the â€œStock Valueâ€� so that weknow if the Stock Market Value is cheap or expensive at a given time. So if for exampletoday, a stock is being sold in the market for $10, we can first compute the â€œStockValueâ€� so that we know if ten dollars is too expensive or very cheap and a good bargain.Alrighté So that's why you want to compute the â€œStock Value.â€�So now, where does the Stock's value come fromé Where does it come fromé Well, firstof all, it comes from the share of profits that it pays out to you. So if you only sharea stock and the company makes money and you own a part of that company by owning
a share of stock of that company then thecompany will pay you a share of its profits. And this share of profits is called the â€œDividends.â€�Alrighté Now, the second main place where the stock'svalue comes from is the price that you can sell the stock in the future. So remember,I said you can buy this stock and you can also sell it to somebody else if you don'twant to own it anymore or if somebody offers you a good price for it or you can sell itin the stock market or the stock exchange if it's being sold at a good price. AlrightéSo that's where the stock's value comes from.Now let's say a stock is now selling in
the stock exchange at twenty four dollarsper share and it has a dividend of two dollars per year. You plan to sell it after threeyears. In three years, the price of the stock is expected to go up to twenty five dollars.So let's just say that the discount rate, remember Net Present Value and Present Valuewe have a discount rate which is usually the bank rate or the amount of interest you wouldget from the bank. But in terms of stocks, it's not necessarily the bank rate. Justcall it a â€œDiscount Rateâ€� but we use it in a similar way. I will show you in a while.So the discount rate is eleven percent. So now, what is the value of the stockéSo now we use the Net Present Value formula.
The Stock Value is two dollars. Remember you'rekeeping the stock for three years and you earn two dollars every year in dividend. Sothe value of the stock comes from your two dollars in the first year plus your two dollarsin the second year plus your two dollars in the third year. Plus the value of the stockalso comes from the amount of money you will get in the future when you sell it and weknow it is twenty five dollars. You seeé And then remember using Net Present Value formula,we have to discount or we have to bring back the values of these cash flows, okayé Untiltoday so this two dollars you earn one year later, you have to bring it back one year.One. And you bring it back one year using