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Finance Sessions - Post 1

N

Nordicsupreme

New member
Joined
Mar 12, 2025
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68
Dear brothers and sisters in Zev,

Off late I had not been able to decide a topic which I write to help my brothers and sisters in Zev since most of the members here know much more about things and concept than me.
Brother TG Karnannos suggested I a topic which I have studied i.e. Finance. Since these are fairly general topics I will be sharing a series of posts to cover whatever I have learned through my University education. I know most members here might already be aware of these topics and it might not prove of much value to my brothers and sisters.
My intention here is simple - to share whatever little I know about the world and Finance through my posts in anticipation that some of it might prove useful to members here


Dear Brothers and Sisters in Zev,

I am in the process of compiling resources for a study series on Finance, aimed at providing our Zevist brethren with access to the knowledge I gained during my degree in this field. I humbly request that, should there be any inputs, additions, or corrections necessary, you kindly share them with me.

The goal of this series of posts on Finance is to educate and guide our community in understanding financial concepts and practices. Given the breadth of the topic, it would be impossible to cover everything in a single post. Therefore, I plan to address various subtopics over time. If there are any specific areas you would like to explore or learn more about, please feel free to let me know.



Since we are just starting out – I will start with the topic of Selecting Equity Shares and/or how we select the same when we invest.



Baseline Disclosure:
It is important to recognize that there is always someone profiting in the market, whether it is moving upwards, downwards, or remaining stagnant. As an investor, your role is to identify these opportunities and strategically position yourself to benefit from them.



Step 1: Identify the Key Strengths of the Economy You Reside In

To effectively understand the direction of your nation's economy, it is essential to stay informed through reliable news sources. Websites like Yahoo Finance are excellent for research and keeping up with economic trends. If your country publishes an annual budget, it is highly recommended to review this document, as it outlines the government's official budgetary allocations and fiscal priorities. Additionally, in today's digital age, you can upload the budget or other relevant research papers to tools like ChatGPT to receive a detailed summary and gain deeper insights.



Step 2: Finalize and Shortlist an Industry

Once you have a clear understanding of the government's plans regarding tariffs or relief measures for specific industries, the next step is to shortlist a promising sector for investment.

For example, if you learn that your government is focused on promoting exports of auto-ancillary products, such as tires, chassis, or electric vehicle (EV) battery packs, this could be an attractive industry to consider. Additionally, if your country is negotiating Free Trade Agreements (FTAs) with other nations to facilitate the sale of these products, it further enhances the potential for growth within that sector.



Step 3: Shortlist Companies

Once you have identified the industry, the next step is to pinpoint the key players within that sector. You can begin by conducting a straightforward search—such as looking up “Companies listed for trading on the NYSE under the Auto Components industry.” After compiling a list of relevant companies, you can then proceed to analyze their individual performance metrics.

Additionally, I would like to emphasize that the focus here is on the educational process of how to approach such analyses. This discussion is based purely on practical and objective methods, and we are not delving into speculative or intuitive insights.



1) Assess the Nature of Competition within the Industry

Begin by evaluating the competitive landscape of the industry. Is it a monopolistic market? A monopolistic market is characterized by the dominance of a single player that holds significant market share and controls major industry decisions. This company typically leads in both market capitalization and market penetration.

If the industry you have shortlisted operates in this manner, investing in the dominant player can be a prudent strategy, allowing your investment to grow over the long term. Below, I have outlined various market structures with examples (sourced using ChatGPT) to further illustrate this concept.



2) Analyze the Companies’ Performance and Risks

After shortlisting the companies (e.g., the top 5 market leaders within the industry), the next step is to thoroughly examine relevant news and information pertaining to each company. Focus on factors such as their recent performance, financial stability, and any potential risks they may face, including susceptibility to sanctions or regulatory changes.

By staying informed on these key aspects, you can better assess the company’s overall risk profile and growth potential.



A valuable source for analyzing a company’s financial health is its financial statements, which are typically available on the company’s official website. It is highly recommended to download and review at least the last five years' worth of financial reports to gain a comprehensive understanding of the company's performance and trends over time.

The text underneath is directly for ChatGPT-

Financial reports of a company provide a detailed overview of its financial performance, position, and cash flows over a specific period, typically a quarter or year. These reports are essential for investors, creditors, management, and regulators to assess the company's health and make informed decisions.



These financial reports are typically available for free and offer key insights into the company’s strategic direction. They often include the senior management's outlook for the coming years, which may cover plans for business expansion, the development of new verticals, or entry into new industries. Additionally, the reports provide a detailed analysis of the company’s current performance, including explanations for any underperformance, if applicable.

Once you have obtained these financial statements, this is the first step in your analysis. For a thorough review, aim to examine five years' worth of reports for each of the five companies you're analyzing. Of course, you may choose to extend your analysis further as needed.

Thus, for your analysis, focus on five years, five companies, and five financial statements. You may choose to expand your analysis further if desired.



The Financial Statements Consists of the Following Statements that Help us understand the performance of companies in terms on money/numbers.



  • Income Statement
  • Balance Sheet
  • Cash Flow Statement
  • Notes to Accounts
Since analysis of these would require many more posts and discussions I will leave it for the future series.

Basic Definitions taken from Chat GPT for these is as follows:

Purpose of Income Statement: Shows the company’s revenues, expenses, and profits or losses over a specific period (e.g., quarterly or annually).

Purpose of Balance Sheet: Provides a snapshot of the company’s financial position at a specific point in time. It shows what the company owns (assets), owes (liabilities), and the shareholders’ equity.



Purpose of Cash Flow Statement: Shows the company’s cash inflows and outflows during a specific period. It helps assess the company's liquidity and ability to meet short-term obligations.

Purpose of Notes to Accounts in Financial Statements:

Purpose: Provide additional context and explanations for the figures presented in the main financial statements. These notes clarify accounting policies, assumptions, and provide detailed information on specific items (e.g., outstanding debt, pension obligations, and related-party transactions).



For Analysis Financial Statements we use:

1) Horizontal Analysis:

For simplicity, horizontal analysis refers to the year-on-year performance of a company. For example, if a company’s sales/revenue grew from $100 to $140 over two financial years, we use the base year ($100) to calculate the percentage change. The revenue increase can be calculated as follows:

Percentage Increase = ((100/140)/100)×100=40%

2) Vertical Analysis:

Unlike horizontal analysis, vertical analysis is conducted for a single financial year. In this method, the elements of the financial statement are represented as a percentage of the company’s total revenue for that year.

For example, if a company’s revenue for the financial year 2023-24 was $100 and its Profit After Tax (PAT) was $20, vertical analysis would show that the company needs to generate $100 in revenue to achieve $20 in PAT. The corresponding percentage would be calculated as follows:

The percentage thus comes to : 20/100 *100= 20%



3) Financial Ratios:

There are numerous financial ratios used in the analysis of any company. These ratios will be discussed in detail in subsequent topics, as they are extensive and require thorough explanation.



4) Cash Flow Statement Analysis:

Similar to ratio analysis, a detailed discussion on cash flow statement analysis will be provided in future posts. However, the primary purpose of this analysis is to assess how effectively a company utilizes the cash generated from its business operations.

For example, if a company reports a revenue of $100 but the actual cash generated is only $40—due to the accrual accounting method—the company may be experiencing a cash flow shortfall. This indicates that, despite generating significant revenue, the company has limited liquidity, which could require further scrutiny.

I have provided definitions of terms used underneath.

I have taken the liberty to use ChatGPT to define these with Examples.

FREE TRADE AGREEMENT

A Free Trade Agreement (FTA) is a pact between two or more countries that aims to reduce or eliminate trade barriers, such as tariffs, quotas, and other restrictions, to encourage the flow of goods and services across borders. The goal is to promote trade by making it easier and cheaper to do business between the countries involved.

Key Features of an FTA:

  • Tariff Reductions: It typically involves reducing or eliminating customs duties on goods traded between the countries.
  • Market Access: It opens up markets by reducing or removing restrictions on the import and export of goods and services.
  • Investment and Services: Some FTAs also address regulations on investment, intellectual property, and services, offering more comprehensive trade benefits.
Examples of Free Trade Agreements:

  1. North American Free Trade Agreement (NAFTA):
    • Countries Involved: United States, Canada, and Mexico.
    • Purpose: NAFTA, implemented in 1994, aimed to eliminate trade barriers between these three countries, fostering increased trade, investment, and economic integration.
    • Outcome: It led to increased cross-border trade, especially in industries like automotive, agriculture, and electronics. However, it was replaced in 2020 by the USMCA (United States-Mexico-Canada Agreement).
  2. European Union (EU):
    • Countries Involved: Member states of the European Union.
    • Purpose: The EU functions as a single economic entity with a common internal market, allowing free movement of goods, services, capital, and labor across its member countries.
    • Outcome: The EU’s single market boosts trade within Europe and attracts external investment.
  3. Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP):
    • Countries Involved: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.
    • Purpose: Aimed at creating a free trade zone covering a large part of the Asia-Pacific region. It includes measures for tariff reduction, intellectual property rights, and dispute resolution.
    • Outcome: It expands trade relationships among these diverse countries and enhances global supply chains.
  4. Mercado Común del Sur (MERCOSUR):
    • Countries Involved: Argentina, Brazil, Paraguay, Uruguay, and Venezuela (with Bolivia’s recent accession).
    • Purpose: MERCOSUR is a South American trade bloc aimed at promoting free trade and fluid economic integration among member states.
    • Outcome: It facilitates intra-regional trade and has led to policy coordination on issues like agriculture, customs, and finance.
FTAs generally provide mutual benefits, but they can also create challenges, such as increased competition in domestic industries or environmental concerns.



Market Capitalization

Market Capitalization (Market Cap) refers to the total value of a company's outstanding shares of stock, calculated by multiplying the current share price by the total number of shares in circulation.

Formula:

Market Cap=Share Price×Total Number of Shares Outstanding\text{Market Cap} = \text{Share Price} \times \text{Total Number of Shares Outstanding}Market Cap=Share Price×Total Number of Shares Outstanding

Example:

If a company has 10 million shares outstanding, and the current share price is $50, the market capitalization would be:

Market Cap=50×10,000,000=500,000,000\text{Market Cap} = 50 \times 10,000,000 = 500,000,000Market Cap=50×10,000,000=500,000,000

So, the company's market cap would be $500 million.

Market Cap Categories:

  1. Large Cap: Companies with a market cap of $10 billion or more. These are usually well-established, stable companies.
    • Example: Apple, Microsoft.
  2. Mid Cap: Companies with a market cap between $2 billion and $10 billion. These are typically growing companies.
    • Example: Spotify, Zoom.
  3. Small Cap: Companies with a market cap between $300 million and $2 billion. These are usually newer or smaller companies with higher growth potential but also higher risk.
    • Example: Emerging tech startups.
  4. Micro Cap: Companies with a market cap below $300 million. These tend to be very small companies, often considered highly speculative and volatile.
    • Example: Penny stocks.
Why It Matters:

  • Valuation: Market cap gives investors a quick sense of a company's size and its overall market value.
  • Risk and Stability: Larger companies (large-cap) are generally considered safer investments because they tend to be more stable. Smaller companies (small-cap) have higher growth potential but come with higher risks.
  • Investment Strategy: Investors often use market cap to guide their investment choices, balancing between growth (small/mid-cap) and stability (large-cap).
Essentially, market capitalization provides a snapshot of a company's size relative to others in the market.

Market Penetration refers to the strategy or measure of how much a product or service has gained acceptance in a specific market relative to its potential. It indicates the percentage of the total target market that has purchased or adopted a particular product or service.

Examples of Market Penetration:

  1. Smartphone Industry: Apple, Samsung, and other smartphone manufacturers focus heavily on market penetration by offering new features, discounts, and expanding to emerging markets.
  2. Netflix: In the early years, Netflix worked on penetrating global markets by offering localized content and subscriptions, eventually achieving significant global market penetration.
High vs. Low Market Penetration:

  • High Market Penetration: Indicates that the product is well-established and widely accepted. However, once a product reaches high penetration, growth might slow down, leading companies to focus on market diversification or product innovation.
  • Low Market Penetration: Suggests that the product is still in the early stages of adoption or that the company has room to expand its customer base within the target market.
Types of Market Structures:

  1. Monopoly (Monopolistic Market):
    • Characteristics:
      • A single seller or producer controls the entire market for a product or service.
      • No close substitutes are available for the product, so consumers have no choice but to buy from the monopolist.
      • High barriers to entry prevent other firms from entering the market.
      • The monopolist can set prices and output levels without competition.
      • Often results in inefficiencies, higher prices, and reduced consumer choice.
    • Example: In many countries, public utilities like water, electricity, or natural gas are monopolies, where a single company controls the supply. The United States Postal Service (USPS) holds a government-granted monopoly over letter mail delivery and mailbox access. Saudi Aramco, the state-owned oil company of Saudi Arabia, is a major nationalized monopoly, with its revenues being a primary source of government income
    • Advantages:
      • Economies of scale: Can result in lower costs due to the large scale of production.
      • Innovation in industries with high fixed costs (e.g., pharmaceuticals, technology).
    • Disadvantages:
      • Higher prices for consumers due to lack of competition.
      • Reduced innovation and consumer choice.
      • Inefficiency and potential for exploitation of workers or consumers.
  2. Oligopoly:
    • Characteristics:
      • A small number of large firms dominate the market.
      • These firms often produce similar or differentiated products and have significant market power.
      • High barriers to entry prevent new competitors from entering the market easily.
      • Firms in an oligopoly may engage in price-fixing or collusion, though it is illegal in many jurisdictions.
      • The behavior of one firm can influence the others in the market.
    • Example: The airline industry, automobile manufacturers, and smartphone companies (e.g., Apple, Samsung) are examples of oligopolies.
    • Advantages:
      • Economies of scale, which can lead to lower production costs.
      • Innovation through competitive pressure between firms.
    • Disadvantages:
      • Prices can be high due to limited competition.
      • Risk of collusion between firms to fix prices and reduce competition.
      • Barriers to entry can stifle competition and innovation.
  3. Monopolistic Competition:
    • Characteristics:
      • Many firms sell products that are similar but differentiated enough to avoid perfect competition.
      • Each firm has some market power because consumers perceive their product as unique.
      • There is free entry and exit from the market, which leads to normal profits in the long run.
      • Firms compete based on factors like product quality, branding, and marketing, rather than price alone.
    • Example: The restaurant industry, clothing brands, or cosmetics markets are examples of monopolistic competition, where each company offers a slightly different product but competes within the same industry.
    • Advantages:
      • Variety of products and services for consumers.
      • Competitive pricing within product categories.
      • Encourages innovation and differentiation.
    • Disadvantages:
      • High advertising costs for differentiation.
      • Excess capacity in the market, leading to inefficiencies.
      • Can still lead to higher prices than in perfect competition.
  4. Perfect Competition:
    • Characteristics:
      • A large number of firms produce identical (homogeneous) products.
      • No single firm has control over the market price (price takers).
      • There are no barriers to entry or exit, meaning new firms can enter or leave the market freely.
      • All firms have access to the same information, and consumers can easily switch from one firm to another.
      • There is an equal distribution of resources, and all firms have the same cost structure.
    • Example: Agricultural markets (e.g., wheat, corn) are often cited as examples of perfect competition, where numerous farmers sell nearly identical products.
    • Advantages:
      • Efficient allocation of resources and lower prices for consumers.
      • Innovation occurs due to competition among firms.
      • No single firm can dominate the market.
    • Disadvantages:
      • In reality, perfect competition is rare because it’s hard for all conditions to be met.
      • Lack of product differentiation, leading to little consumer choice beyond price.
 
Good summary, this is great for financial literacy aspects if any members are so inclined. I really hope you continue this series. If we make any platform for this, I will make this a pdf.

NordicSupreme is being a bit modest here, he knows a LOT about finance.
 
Thank you for taking the time to write all this :)
 
I will read through this thoroughly, thank you for sharing your knowledge, Brother! 🙏
 
One important thing to note is that most investors now are really focused on growth stocks or even perceived growth stocks as opposed to "value" plays, furthermore you cannot and must not expect total rationality from the market as it is not totally rational.

Also be very careful around earnings, the market can react very very strangely to earnings and IMO is when the market is most irrational.
 
Nordicsupreme said:
Dear brothers and sisters in Zev,

Off late I had not been able to decide a topic which I write to help my brothers and sisters in Zev since most of the members here know much more about things and concept than me.
Brother TG Karnannos suggested I a topic which I have studied i.e. Finance. Since these are fairly general topics I will be sharing a series of posts to cover whatever I have learned through my University education. I know most members here might already be aware of these topics and it might not prove of much value to my brothers and sisters.
My intention here is simple - to share whatever little I know about the world and Finance through my posts in anticipation that some of it might prove useful to members here


Dear Brothers and Sisters in Zev,

I am in the process of compiling resources for a study series on Finance, aimed at providing our Zevist brethren with access to the knowledge I gained during my degree in this field. I humbly request that, should there be any inputs, additions, or corrections necessary, you kindly share them with me.

The goal of this series of posts on Finance is to educate and guide our community in understanding financial concepts and practices. Given the breadth of the topic, it would be impossible to cover everything in a single post. Therefore, I plan to address various subtopics over time. If there are any specific areas you would like to explore or learn more about, please feel free to let me know.



Since we are just starting out – I will start with the topic of Selecting Equity Shares and/or how we select the same when we invest.



Baseline Disclosure:
It is important to recognize that there is always someone profiting in the market, whether it is moving upwards, downwards, or remaining stagnant. As an investor, your role is to identify these opportunities and strategically position yourself to benefit from them.



Step 1: Identify the Key Strengths of the Economy You Reside In

To effectively understand the direction of your nation's economy, it is essential to stay informed through reliable news sources. Websites like Yahoo Finance are excellent for research and keeping up with economic trends. If your country publishes an annual budget, it is highly recommended to review this document, as it outlines the government's official budgetary allocations and fiscal priorities. Additionally, in today's digital age, you can upload the budget or other relevant research papers to tools like ChatGPT to receive a detailed summary and gain deeper insights.



Step 2: Finalize and Shortlist an Industry

Once you have a clear understanding of the government's plans regarding tariffs or relief measures for specific industries, the next step is to shortlist a promising sector for investment.

For example, if you learn that your government is focused on promoting exports of auto-ancillary products, such as tires, chassis, or electric vehicle (EV) battery packs, this could be an attractive industry to consider. Additionally, if your country is negotiating Free Trade Agreements (FTAs) with other nations to facilitate the sale of these products, it further enhances the potential for growth within that sector.



Step 3: Shortlist Companies

Once you have identified the industry, the next step is to pinpoint the key players within that sector. You can begin by conducting a straightforward search—such as looking up “Companies listed for trading on the NYSE under the Auto Components industry.” After compiling a list of relevant companies, you can then proceed to analyze their individual performance metrics.

Additionally, I would like to emphasize that the focus here is on the educational process of how to approach such analyses. This discussion is based purely on practical and objective methods, and we are not delving into speculative or intuitive insights.



1) Assess the Nature of Competition within the Industry

Begin by evaluating the competitive landscape of the industry. Is it a monopolistic market? A monopolistic market is characterized by the dominance of a single player that holds significant market share and controls major industry decisions. This company typically leads in both market capitalization and market penetration.

If the industry you have shortlisted operates in this manner, investing in the dominant player can be a prudent strategy, allowing your investment to grow over the long term. Below, I have outlined various market structures with examples (sourced using ChatGPT) to further illustrate this concept.



2) Analyze the Companies’ Performance and Risks

After shortlisting the companies (e.g., the top 5 market leaders within the industry), the next step is to thoroughly examine relevant news and information pertaining to each company. Focus on factors such as their recent performance, financial stability, and any potential risks they may face, including susceptibility to sanctions or regulatory changes.

By staying informed on these key aspects, you can better assess the company’s overall risk profile and growth potential.



A valuable source for analyzing a company’s financial health is its financial statements, which are typically available on the company’s official website. It is highly recommended to download and review at least the last five years' worth of financial reports to gain a comprehensive understanding of the company's performance and trends over time.

The text underneath is directly for ChatGPT-

Financial reports of a company provide a detailed overview of its financial performance, position, and cash flows over a specific period, typically a quarter or year. These reports are essential for investors, creditors, management, and regulators to assess the company's health and make informed decisions.



These financial reports are typically available for free and offer key insights into the company’s strategic direction. They often include the senior management's outlook for the coming years, which may cover plans for business expansion, the development of new verticals, or entry into new industries. Additionally, the reports provide a detailed analysis of the company’s current performance, including explanations for any underperformance, if applicable.

Once you have obtained these financial statements, this is the first step in your analysis. For a thorough review, aim to examine five years' worth of reports for each of the five companies you're analyzing. Of course, you may choose to extend your analysis further as needed.

Thus, for your analysis, focus on five years, five companies, and five financial statements. You may choose to expand your analysis further if desired.



The Financial Statements Consists of the Following Statements that Help us understand the performance of companies in terms on money/numbers.



  • Income Statement
  • Balance Sheet
  • Cash Flow Statement
  • Notes to Accounts
Since analysis of these would require many more posts and discussions I will leave it for the future series.

Basic Definitions taken from Chat GPT for these is as follows:

Purpose of Income Statement: Shows the company’s revenues, expenses, and profits or losses over a specific period (e.g., quarterly or annually).

Purpose of Balance Sheet: Provides a snapshot of the company’s financial position at a specific point in time. It shows what the company owns (assets), owes (liabilities), and the shareholders’ equity.



Purpose of Cash Flow Statement: Shows the company’s cash inflows and outflows during a specific period. It helps assess the company's liquidity and ability to meet short-term obligations.

Purpose of Notes to Accounts in Financial Statements:

Purpose: Provide additional context and explanations for the figures presented in the main financial statements. These notes clarify accounting policies, assumptions, and provide detailed information on specific items (e.g., outstanding debt, pension obligations, and related-party transactions).



For Analysis Financial Statements we use:

1) Horizontal Analysis:

For simplicity, horizontal analysis refers to the year-on-year performance of a company. For example, if a company’s sales/revenue grew from $100 to $140 over two financial years, we use the base year ($100) to calculate the percentage change. The revenue increase can be calculated as follows:

Percentage Increase = ((100/140)/100)×100=40%

2) Vertical Analysis:

Unlike horizontal analysis, vertical analysis is conducted for a single financial year. In this method, the elements of the financial statement are represented as a percentage of the company’s total revenue for that year.

For example, if a company’s revenue for the financial year 2023-24 was $100 and its Profit After Tax (PAT) was $20, vertical analysis would show that the company needs to generate $100 in revenue to achieve $20 in PAT. The corresponding percentage would be calculated as follows:

The percentage thus comes to : 20/100 *100= 20%



3) Financial Ratios:

There are numerous financial ratios used in the analysis of any company. These ratios will be discussed in detail in subsequent topics, as they are extensive and require thorough explanation.



4) Cash Flow Statement Analysis:

Similar to ratio analysis, a detailed discussion on cash flow statement analysis will be provided in future posts. However, the primary purpose of this analysis is to assess how effectively a company utilizes the cash generated from its business operations.

For example, if a company reports a revenue of $100 but the actual cash generated is only $40—due to the accrual accounting method—the company may be experiencing a cash flow shortfall. This indicates that, despite generating significant revenue, the company has limited liquidity, which could require further scrutiny.

I have provided definitions of terms used underneath.

I have taken the liberty to use ChatGPT to define these with Examples.

FREE TRADE AGREEMENT

A Free Trade Agreement (FTA) is a pact between two or more countries that aims to reduce or eliminate trade barriers, such as tariffs, quotas, and other restrictions, to encourage the flow of goods and services across borders. The goal is to promote trade by making it easier and cheaper to do business between the countries involved.

Key Features of an FTA:

  • Tariff Reductions: It typically involves reducing or eliminating customs duties on goods traded between the countries.
  • Market Access: It opens up markets by reducing or removing restrictions on the import and export of goods and services.
  • Investment and Services: Some FTAs also address regulations on investment, intellectual property, and services, offering more comprehensive trade benefits.
Examples of Free Trade Agreements:

  1. North American Free Trade Agreement (NAFTA):
    • Countries Involved: United States, Canada, and Mexico.
    • Purpose: NAFTA, implemented in 1994, aimed to eliminate trade barriers between these three countries, fostering increased trade, investment, and economic integration.
    • Outcome: It led to increased cross-border trade, especially in industries like automotive, agriculture, and electronics. However, it was replaced in 2020 by the USMCA (United States-Mexico-Canada Agreement).
  2. European Union (EU):
    • Countries Involved: Member states of the European Union.
    • Purpose: The EU functions as a single economic entity with a common internal market, allowing free movement of goods, services, capital, and labor across its member countries.
    • Outcome: The EU’s single market boosts trade within Europe and attracts external investment.
  3. Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP):
    • Countries Involved: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.
    • Purpose: Aimed at creating a free trade zone covering a large part of the Asia-Pacific region. It includes measures for tariff reduction, intellectual property rights, and dispute resolution.
    • Outcome: It expands trade relationships among these diverse countries and enhances global supply chains.
  4. Mercado Común del Sur (MERCOSUR):
    • Countries Involved: Argentina, Brazil, Paraguay, Uruguay, and Venezuela (with Bolivia’s recent accession).
    • Purpose: MERCOSUR is a South American trade bloc aimed at promoting free trade and fluid economic integration among member states.
    • Outcome: It facilitates intra-regional trade and has led to policy coordination on issues like agriculture, customs, and finance.
FTAs generally provide mutual benefits, but they can also create challenges, such as increased competition in domestic industries or environmental concerns.



Market Capitalization

Market Capitalization (Market Cap) refers to the total value of a company's outstanding shares of stock, calculated by multiplying the current share price by the total number of shares in circulation.

Formula:

Market Cap=Share Price×Total Number of Shares Outstanding\text{Market Cap} = \text{Share Price} \times \text{Total Number of Shares Outstanding}Market Cap=Share Price×Total Number of Shares Outstanding

Example:

If a company has 10 million shares outstanding, and the current share price is $50, the market capitalization would be:

Market Cap=50×10,000,000=500,000,000\text{Market Cap} = 50 \times 10,000,000 = 500,000,000Market Cap=50×10,000,000=500,000,000

So, the company's market cap would be $500 million.

Market Cap Categories:

  1. Large Cap: Companies with a market cap of $10 billion or more. These are usually well-established, stable companies.
    • Example: Apple, Microsoft.
  2. Mid Cap: Companies with a market cap between $2 billion and $10 billion. These are typically growing companies.
    • Example: Spotify, Zoom.
  3. Small Cap: Companies with a market cap between $300 million and $2 billion. These are usually newer or smaller companies with higher growth potential but also higher risk.
    • Example: Emerging tech startups.
  4. Micro Cap: Companies with a market cap below $300 million. These tend to be very small companies, often considered highly speculative and volatile.
    • Example: Penny stocks.
Why It Matters:

  • Valuation: Market cap gives investors a quick sense of a company's size and its overall market value.
  • Risk and Stability: Larger companies (large-cap) are generally considered safer investments because they tend to be more stable. Smaller companies (small-cap) have higher growth potential but come with higher risks.
  • Investment Strategy: Investors often use market cap to guide their investment choices, balancing between growth (small/mid-cap) and stability (large-cap).
Essentially, market capitalization provides a snapshot of a company's size relative to others in the market.

Market Penetration refers to the strategy or measure of how much a product or service has gained acceptance in a specific market relative to its potential. It indicates the percentage of the total target market that has purchased or adopted a particular product or service.

Examples of Market Penetration:

  1. Smartphone Industry: Apple, Samsung, and other smartphone manufacturers focus heavily on market penetration by offering new features, discounts, and expanding to emerging markets.
  2. Netflix: In the early years, Netflix worked on penetrating global markets by offering localized content and subscriptions, eventually achieving significant global market penetration.
High vs. Low Market Penetration:

  • High Market Penetration: Indicates that the product is well-established and widely accepted. However, once a product reaches high penetration, growth might slow down, leading companies to focus on market diversification or product innovation.
  • Low Market Penetration: Suggests that the product is still in the early stages of adoption or that the company has room to expand its customer base within the target market.
Types of Market Structures:

  1. Monopoly (Monopolistic Market):
    • Characteristics:
      • A single seller or producer controls the entire market for a product or service.
      • No close substitutes are available for the product, so consumers have no choice but to buy from the monopolist.
      • High barriers to entry prevent other firms from entering the market.
      • The monopolist can set prices and output levels without competition.
      • Often results in inefficiencies, higher prices, and reduced consumer choice.
    • Example: In many countries, public utilities like water, electricity, or natural gas are monopolies, where a single company controls the supply. The United States Postal Service (USPS) holds a government-granted monopoly over letter mail delivery and mailbox access. Saudi Aramco, the state-owned oil company of Saudi Arabia, is a major nationalized monopoly, with its revenues being a primary source of government income
    • Advantages:
      • Economies of scale: Can result in lower costs due to the large scale of production.
      • Innovation in industries with high fixed costs (e.g., pharmaceuticals, technology).
    • Disadvantages:
      • Higher prices for consumers due to lack of competition.
      • Reduced innovation and consumer choice.
      • Inefficiency and potential for exploitation of workers or consumers.
  2. Oligopoly:
    • Characteristics:
      • A small number of large firms dominate the market.
      • These firms often produce similar or differentiated products and have significant market power.
      • High barriers to entry prevent new competitors from entering the market easily.
      • Firms in an oligopoly may engage in price-fixing or collusion, though it is illegal in many jurisdictions.
      • The behavior of one firm can influence the others in the market.
    • Example: The airline industry, automobile manufacturers, and smartphone companies (e.g., Apple, Samsung) are examples of oligopolies.
    • Advantages:
      • Economies of scale, which can lead to lower production costs.
      • Innovation through competitive pressure between firms.
    • Disadvantages:
      • Prices can be high due to limited competition.
      • Risk of collusion between firms to fix prices and reduce competition.
      • Barriers to entry can stifle competition and innovation.
  3. Monopolistic Competition:
    • Characteristics:
      • Many firms sell products that are similar but differentiated enough to avoid perfect competition.
      • Each firm has some market power because consumers perceive their product as unique.
      • There is free entry and exit from the market, which leads to normal profits in the long run.
      • Firms compete based on factors like product quality, branding, and marketing, rather than price alone.
    • Example: The restaurant industry, clothing brands, or cosmetics markets are examples of monopolistic competition, where each company offers a slightly different product but competes within the same industry.
    • Advantages:
      • Variety of products and services for consumers.
      • Competitive pricing within product categories.
      • Encourages innovation and differentiation.
    • Disadvantages:
      • High advertising costs for differentiation.
      • Excess capacity in the market, leading to inefficiencies.
      • Can still lead to higher prices than in perfect competition.
  4. Perfect Competition:
    • Characteristics:
      • A large number of firms produce identical (homogeneous) products.
      • No single firm has control over the market price (price takers).
      • There are no barriers to entry or exit, meaning new firms can enter or leave the market freely.
      • All firms have access to the same information, and consumers can easily switch from one firm to another.
      • There is an equal distribution of resources, and all firms have the same cost structure.
    • Example: Agricultural markets (e.g., wheat, corn) are often cited as examples of perfect competition, where numerous farmers sell nearly identical products.
    • Advantages:
      • Efficient allocation of resources and lower prices for consumers.
      • Innovation occurs due to competition among firms.
      • No single firm can dominate the market.
    • Disadvantages:
      • In reality, perfect competition is rare because it’s hard for all conditions to be met.
      • Lack of product differentiation, leading to little consumer choice beyond price.
Click to expand...
Thank you. I will read it.
 
WoadWarrior said:
One important thing to note is that most investors now are really focused on growth stocks or even perceived growth stocks as opposed to "value" plays, furthermore you cannot and must not expect total rationality from the market as it is not totally rational.

Also be very careful around earnings, the market can react very very strangely to earnings and IMO is when the market is most irrational.
Click to expand...
Yes!
Economics considers most people as Rational Individuals, like the go through the analysis of all the alternatives to before they make any financial decisions.
This is far from the Truth as we all have experienced. I can also make a series in this series itself to include the fallacies in Investing that people have and how behavioral economics comes into play in all this. But yes, thank you for bringing this up.
How I like to view it is: Your money stays idle, while companies work. Real people get up and go work 12-14 hour days in companies. Plus the economy to keep growing needs to print money there by causing inflation which will end up reducing the value of your money which is "staying idle".It is very tough in most cases for people to outwork this machine and their money starts losing value. This series is only so people get a basic knowledge of things and can make "informed decisions" rather than impulsive decisions. Having informed decisions gives you confidence to stay when things in the market go against you.
 
Thank you everyone for the kind comments!
I was very scared for someone as to not post these things since Spiritual development can even without this knowledge push you to greater heights
Thanks to TG Karnonnos, I have started this series and aim to share *everything* I learned through the years with my brothers and sisters here!
I will also share links of courses are brothers and sisters can do in case they wish to pivot to accounting/finance as a career
 
MWENE NYAGA said:
Thank you for sharing your knowledge, Brother!
Click to expand...
Ofcourse brother!
I will be posting one topic everyday now even if it covers only a few basic concepts of Finance!
I never knew people would be so much interested in the topic of Finance here; for many years I felt I had nothing to add of value here!
I can even do a country specific or continent specific post like for Africa which might prove fruitful in Activism

Hail Zev
 
Nordicsupreme said:
Dear brothers and sisters in Zev,

Off late I had not been able to decide a topic which I write to help my brothers and sisters in Zev since most of the members here know much more about things and concept than me.
Brother TG Karnannos suggested I a topic which I have studied i.e. Finance. Since these are fairly general topics I will be sharing a series of posts to cover whatever I have learned through my University education. I know most members here might already be aware of these topics and it might not prove of much value to my brothers and sisters.
My intention here is simple - to share whatever little I know about the world and Finance through my posts in anticipation that some of it might prove useful to members here


Dear Brothers and Sisters in Zev,

I am in the process of compiling resources for a study series on Finance, aimed at providing our Zevist brethren with access to the knowledge I gained during my degree in this field. I humbly request that, should there be any inputs, additions, or corrections necessary, you kindly share them with me.

The goal of this series of posts on Finance is to educate and guide our community in understanding financial concepts and practices. Given the breadth of the topic, it would be impossible to cover everything in a single post. Therefore, I plan to address various subtopics over time. If there are any specific areas you would like to explore or learn more about, please feel free to let me know.



Since we are just starting out – I will start with the topic of Selecting Equity Shares and/or how we select the same when we invest.



Baseline Disclosure:
It is important to recognize that there is always someone profiting in the market, whether it is moving upwards, downwards, or remaining stagnant. As an investor, your role is to identify these opportunities and strategically position yourself to benefit from them.



Step 1: Identify the Key Strengths of the Economy You Reside In

To effectively understand the direction of your nation's economy, it is essential to stay informed through reliable news sources. Websites like Yahoo Finance are excellent for research and keeping up with economic trends. If your country publishes an annual budget, it is highly recommended to review this document, as it outlines the government's official budgetary allocations and fiscal priorities. Additionally, in today's digital age, you can upload the budget or other relevant research papers to tools like ChatGPT to receive a detailed summary and gain deeper insights.



Step 2: Finalize and Shortlist an Industry

Once you have a clear understanding of the government's plans regarding tariffs or relief measures for specific industries, the next step is to shortlist a promising sector for investment.

For example, if you learn that your government is focused on promoting exports of auto-ancillary products, such as tires, chassis, or electric vehicle (EV) battery packs, this could be an attractive industry to consider. Additionally, if your country is negotiating Free Trade Agreements (FTAs) with other nations to facilitate the sale of these products, it further enhances the potential for growth within that sector.



Step 3: Shortlist Companies

Once you have identified the industry, the next step is to pinpoint the key players within that sector. You can begin by conducting a straightforward search—such as looking up “Companies listed for trading on the NYSE under the Auto Components industry.” After compiling a list of relevant companies, you can then proceed to analyze their individual performance metrics.

Additionally, I would like to emphasize that the focus here is on the educational process of how to approach such analyses. This discussion is based purely on practical and objective methods, and we are not delving into speculative or intuitive insights.



1) Assess the Nature of Competition within the Industry

Begin by evaluating the competitive landscape of the industry. Is it a monopolistic market? A monopolistic market is characterized by the dominance of a single player that holds significant market share and controls major industry decisions. This company typically leads in both market capitalization and market penetration.

If the industry you have shortlisted operates in this manner, investing in the dominant player can be a prudent strategy, allowing your investment to grow over the long term. Below, I have outlined various market structures with examples (sourced using ChatGPT) to further illustrate this concept.



2) Analyze the Companies’ Performance and Risks

After shortlisting the companies (e.g., the top 5 market leaders within the industry), the next step is to thoroughly examine relevant news and information pertaining to each company. Focus on factors such as their recent performance, financial stability, and any potential risks they may face, including susceptibility to sanctions or regulatory changes.

By staying informed on these key aspects, you can better assess the company’s overall risk profile and growth potential.



A valuable source for analyzing a company’s financial health is its financial statements, which are typically available on the company’s official website. It is highly recommended to download and review at least the last five years' worth of financial reports to gain a comprehensive understanding of the company's performance and trends over time.

The text underneath is directly for ChatGPT-

Financial reports of a company provide a detailed overview of its financial performance, position, and cash flows over a specific period, typically a quarter or year. These reports are essential for investors, creditors, management, and regulators to assess the company's health and make informed decisions.



These financial reports are typically available for free and offer key insights into the company’s strategic direction. They often include the senior management's outlook for the coming years, which may cover plans for business expansion, the development of new verticals, or entry into new industries. Additionally, the reports provide a detailed analysis of the company’s current performance, including explanations for any underperformance, if applicable.

Once you have obtained these financial statements, this is the first step in your analysis. For a thorough review, aim to examine five years' worth of reports for each of the five companies you're analyzing. Of course, you may choose to extend your analysis further as needed.

Thus, for your analysis, focus on five years, five companies, and five financial statements. You may choose to expand your analysis further if desired.



The Financial Statements Consists of the Following Statements that Help us understand the performance of companies in terms on money/numbers.



  • Income Statement
  • Balance Sheet
  • Cash Flow Statement
  • Notes to Accounts
Since analysis of these would require many more posts and discussions I will leave it for the future series.

Basic Definitions taken from Chat GPT for these is as follows:

Purpose of Income Statement: Shows the company’s revenues, expenses, and profits or losses over a specific period (e.g., quarterly or annually).

Purpose of Balance Sheet: Provides a snapshot of the company’s financial position at a specific point in time. It shows what the company owns (assets), owes (liabilities), and the shareholders’ equity.



Purpose of Cash Flow Statement: Shows the company’s cash inflows and outflows during a specific period. It helps assess the company's liquidity and ability to meet short-term obligations.

Purpose of Notes to Accounts in Financial Statements:

Purpose: Provide additional context and explanations for the figures presented in the main financial statements. These notes clarify accounting policies, assumptions, and provide detailed information on specific items (e.g., outstanding debt, pension obligations, and related-party transactions).



For Analysis Financial Statements we use:

1) Horizontal Analysis:

For simplicity, horizontal analysis refers to the year-on-year performance of a company. For example, if a company’s sales/revenue grew from $100 to $140 over two financial years, we use the base year ($100) to calculate the percentage change. The revenue increase can be calculated as follows:

Percentage Increase = ((100/140)/100)×100=40%

2) Vertical Analysis:

Unlike horizontal analysis, vertical analysis is conducted for a single financial year. In this method, the elements of the financial statement are represented as a percentage of the company’s total revenue for that year.

For example, if a company’s revenue for the financial year 2023-24 was $100 and its Profit After Tax (PAT) was $20, vertical analysis would show that the company needs to generate $100 in revenue to achieve $20 in PAT. The corresponding percentage would be calculated as follows:

The percentage thus comes to : 20/100 *100= 20%



3) Financial Ratios:

There are numerous financial ratios used in the analysis of any company. These ratios will be discussed in detail in subsequent topics, as they are extensive and require thorough explanation.



4) Cash Flow Statement Analysis:

Similar to ratio analysis, a detailed discussion on cash flow statement analysis will be provided in future posts. However, the primary purpose of this analysis is to assess how effectively a company utilizes the cash generated from its business operations.

For example, if a company reports a revenue of $100 but the actual cash generated is only $40—due to the accrual accounting method—the company may be experiencing a cash flow shortfall. This indicates that, despite generating significant revenue, the company has limited liquidity, which could require further scrutiny.

I have provided definitions of terms used underneath.

I have taken the liberty to use ChatGPT to define these with Examples.

FREE TRADE AGREEMENT

A Free Trade Agreement (FTA) is a pact between two or more countries that aims to reduce or eliminate trade barriers, such as tariffs, quotas, and other restrictions, to encourage the flow of goods and services across borders. The goal is to promote trade by making it easier and cheaper to do business between the countries involved.

Key Features of an FTA:

  • Tariff Reductions: It typically involves reducing or eliminating customs duties on goods traded between the countries.
  • Market Access: It opens up markets by reducing or removing restrictions on the import and export of goods and services.
  • Investment and Services: Some FTAs also address regulations on investment, intellectual property, and services, offering more comprehensive trade benefits.
Examples of Free Trade Agreements:

  1. North American Free Trade Agreement (NAFTA):
    • Countries Involved: United States, Canada, and Mexico.
    • Purpose: NAFTA, implemented in 1994, aimed to eliminate trade barriers between these three countries, fostering increased trade, investment, and economic integration.
    • Outcome: It led to increased cross-border trade, especially in industries like automotive, agriculture, and electronics. However, it was replaced in 2020 by the USMCA (United States-Mexico-Canada Agreement).
  2. European Union (EU):
    • Countries Involved: Member states of the European Union.
    • Purpose: The EU functions as a single economic entity with a common internal market, allowing free movement of goods, services, capital, and labor across its member countries.
    • Outcome: The EU’s single market boosts trade within Europe and attracts external investment.
  3. Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP):
    • Countries Involved: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.
    • Purpose: Aimed at creating a free trade zone covering a large part of the Asia-Pacific region. It includes measures for tariff reduction, intellectual property rights, and dispute resolution.
    • Outcome: It expands trade relationships among these diverse countries and enhances global supply chains.
  4. Mercado Común del Sur (MERCOSUR):
    • Countries Involved: Argentina, Brazil, Paraguay, Uruguay, and Venezuela (with Bolivia’s recent accession).
    • Purpose: MERCOSUR is a South American trade bloc aimed at promoting free trade and fluid economic integration among member states.
    • Outcome: It facilitates intra-regional trade and has led to policy coordination on issues like agriculture, customs, and finance.
FTAs generally provide mutual benefits, but they can also create challenges, such as increased competition in domestic industries or environmental concerns.



Market Capitalization

Market Capitalization (Market Cap) refers to the total value of a company's outstanding shares of stock, calculated by multiplying the current share price by the total number of shares in circulation.

Formula:

Market Cap=Share Price×Total Number of Shares Outstanding\text{Market Cap} = \text{Share Price} \times \text{Total Number of Shares Outstanding}Market Cap=Share Price×Total Number of Shares Outstanding

Example:

If a company has 10 million shares outstanding, and the current share price is $50, the market capitalization would be:

Market Cap=50×10,000,000=500,000,000\text{Market Cap} = 50 \times 10,000,000 = 500,000,000Market Cap=50×10,000,000=500,000,000

So, the company's market cap would be $500 million.

Market Cap Categories:

  1. Large Cap: Companies with a market cap of $10 billion or more. These are usually well-established, stable companies.
    • Example: Apple, Microsoft.
  2. Mid Cap: Companies with a market cap between $2 billion and $10 billion. These are typically growing companies.
    • Example: Spotify, Zoom.
  3. Small Cap: Companies with a market cap between $300 million and $2 billion. These are usually newer or smaller companies with higher growth potential but also higher risk.
    • Example: Emerging tech startups.
  4. Micro Cap: Companies with a market cap below $300 million. These tend to be very small companies, often considered highly speculative and volatile.
    • Example: Penny stocks.
Why It Matters:

  • Valuation: Market cap gives investors a quick sense of a company's size and its overall market value.
  • Risk and Stability: Larger companies (large-cap) are generally considered safer investments because they tend to be more stable. Smaller companies (small-cap) have higher growth potential but come with higher risks.
  • Investment Strategy: Investors often use market cap to guide their investment choices, balancing between growth (small/mid-cap) and stability (large-cap).
Essentially, market capitalization provides a snapshot of a company's size relative to others in the market.

Market Penetration refers to the strategy or measure of how much a product or service has gained acceptance in a specific market relative to its potential. It indicates the percentage of the total target market that has purchased or adopted a particular product or service.

Examples of Market Penetration:

  1. Smartphone Industry: Apple, Samsung, and other smartphone manufacturers focus heavily on market penetration by offering new features, discounts, and expanding to emerging markets.
  2. Netflix: In the early years, Netflix worked on penetrating global markets by offering localized content and subscriptions, eventually achieving significant global market penetration.
High vs. Low Market Penetration:

  • High Market Penetration: Indicates that the product is well-established and widely accepted. However, once a product reaches high penetration, growth might slow down, leading companies to focus on market diversification or product innovation.
  • Low Market Penetration: Suggests that the product is still in the early stages of adoption or that the company has room to expand its customer base within the target market.
Types of Market Structures:

  1. Monopoly (Monopolistic Market):
    • Characteristics:
      • A single seller or producer controls the entire market for a product or service.
      • No close substitutes are available for the product, so consumers have no choice but to buy from the monopolist.
      • High barriers to entry prevent other firms from entering the market.
      • The monopolist can set prices and output levels without competition.
      • Often results in inefficiencies, higher prices, and reduced consumer choice.
    • Example: In many countries, public utilities like water, electricity, or natural gas are monopolies, where a single company controls the supply. The United States Postal Service (USPS) holds a government-granted monopoly over letter mail delivery and mailbox access. Saudi Aramco, the state-owned oil company of Saudi Arabia, is a major nationalized monopoly, with its revenues being a primary source of government income
    • Advantages:
      • Economies of scale: Can result in lower costs due to the large scale of production.
      • Innovation in industries with high fixed costs (e.g., pharmaceuticals, technology).
    • Disadvantages:
      • Higher prices for consumers due to lack of competition.
      • Reduced innovation and consumer choice.
      • Inefficiency and potential for exploitation of workers or consumers.
  2. Oligopoly:
    • Characteristics:
      • A small number of large firms dominate the market.
      • These firms often produce similar or differentiated products and have significant market power.
      • High barriers to entry prevent new competitors from entering the market easily.
      • Firms in an oligopoly may engage in price-fixing or collusion, though it is illegal in many jurisdictions.
      • The behavior of one firm can influence the others in the market.
    • Example: The airline industry, automobile manufacturers, and smartphone companies (e.g., Apple, Samsung) are examples of oligopolies.
    • Advantages:
      • Economies of scale, which can lead to lower production costs.
      • Innovation through competitive pressure between firms.
    • Disadvantages:
      • Prices can be high due to limited competition.
      • Risk of collusion between firms to fix prices and reduce competition.
      • Barriers to entry can stifle competition and innovation.
  3. Monopolistic Competition:
    • Characteristics:
      • Many firms sell products that are similar but differentiated enough to avoid perfect competition.
      • Each firm has some market power because consumers perceive their product as unique.
      • There is free entry and exit from the market, which leads to normal profits in the long run.
      • Firms compete based on factors like product quality, branding, and marketing, rather than price alone.
    • Example: The restaurant industry, clothing brands, or cosmetics markets are examples of monopolistic competition, where each company offers a slightly different product but competes within the same industry.
    • Advantages:
      • Variety of products and services for consumers.
      • Competitive pricing within product categories.
      • Encourages innovation and differentiation.
    • Disadvantages:
      • High advertising costs for differentiation.
      • Excess capacity in the market, leading to inefficiencies.
      • Can still lead to higher prices than in perfect competition.
  4. Perfect Competition:
    • Characteristics:
      • A large number of firms produce identical (homogeneous) products.
      • No single firm has control over the market price (price takers).
      • There are no barriers to entry or exit, meaning new firms can enter or leave the market freely.
      • All firms have access to the same information, and consumers can easily switch from one firm to another.
      • There is an equal distribution of resources, and all firms have the same cost structure.
    • Example: Agricultural markets (e.g., wheat, corn) are often cited as examples of perfect competition, where numerous farmers sell nearly identical products.
    • Advantages:
      • Efficient allocation of resources and lower prices for consumers.
      • Innovation occurs due to competition among firms.
      • No single firm can dominate the market.
    • Disadvantages:
      • In reality, perfect competition is rare because it’s hard for all conditions to be met.
      • Lack of product differentiation, leading to little consumer choice beyond price.
Click to expand...
Thank you , I found this very helpful
 
Nordicsupreme said:
Dear brothers and sisters in Zev,

Off late I had not been able to decide a topic which I write to help my brothers and sisters in Zev since most of the members here know much more about things and concept than me.
Brother TG Karnannos suggested I a topic which I have studied i.e. Finance. Since these are fairly general topics I will be sharing a series of posts to cover whatever I have learned through my University education. I know most members here might already be aware of these topics and it might not prove of much value to my brothers and sisters.
My intention here is simple - to share whatever little I know about the world and Finance through my posts in anticipation that some of it might prove useful to members here


Dear Brothers and Sisters in Zev,

I am in the process of compiling resources for a study series on Finance, aimed at providing our Zevist brethren with access to the knowledge I gained during my degree in this field. I humbly request that, should there be any inputs, additions, or corrections necessary, you kindly share them with me.

The goal of this series of posts on Finance is to educate and guide our community in understanding financial concepts and practices. Given the breadth of the topic, it would be impossible to cover everything in a single post. Therefore, I plan to address various subtopics over time. If there are any specific areas you would like to explore or learn more about, please feel free to let me know.



Since we are just starting out – I will start with the topic of Selecting Equity Shares and/or how we select the same when we invest.



Baseline Disclosure:
It is important to recognize that there is always someone profiting in the market, whether it is moving upwards, downwards, or remaining stagnant. As an investor, your role is to identify these opportunities and strategically position yourself to benefit from them.



Step 1: Identify the Key Strengths of the Economy You Reside In

To effectively understand the direction of your nation's economy, it is essential to stay informed through reliable news sources. Websites like Yahoo Finance are excellent for research and keeping up with economic trends. If your country publishes an annual budget, it is highly recommended to review this document, as it outlines the government's official budgetary allocations and fiscal priorities. Additionally, in today's digital age, you can upload the budget or other relevant research papers to tools like ChatGPT to receive a detailed summary and gain deeper insights.



Step 2: Finalize and Shortlist an Industry

Once you have a clear understanding of the government's plans regarding tariffs or relief measures for specific industries, the next step is to shortlist a promising sector for investment.

For example, if you learn that your government is focused on promoting exports of auto-ancillary products, such as tires, chassis, or electric vehicle (EV) battery packs, this could be an attractive industry to consider. Additionally, if your country is negotiating Free Trade Agreements (FTAs) with other nations to facilitate the sale of these products, it further enhances the potential for growth within that sector.



Step 3: Shortlist Companies

Once you have identified the industry, the next step is to pinpoint the key players within that sector. You can begin by conducting a straightforward search—such as looking up “Companies listed for trading on the NYSE under the Auto Components industry.” After compiling a list of relevant companies, you can then proceed to analyze their individual performance metrics.

Additionally, I would like to emphasize that the focus here is on the educational process of how to approach such analyses. This discussion is based purely on practical and objective methods, and we are not delving into speculative or intuitive insights.



1) Assess the Nature of Competition within the Industry

Begin by evaluating the competitive landscape of the industry. Is it a monopolistic market? A monopolistic market is characterized by the dominance of a single player that holds significant market share and controls major industry decisions. This company typically leads in both market capitalization and market penetration.

If the industry you have shortlisted operates in this manner, investing in the dominant player can be a prudent strategy, allowing your investment to grow over the long term. Below, I have outlined various market structures with examples (sourced using ChatGPT) to further illustrate this concept.



2) Analyze the Companies’ Performance and Risks

After shortlisting the companies (e.g., the top 5 market leaders within the industry), the next step is to thoroughly examine relevant news and information pertaining to each company. Focus on factors such as their recent performance, financial stability, and any potential risks they may face, including susceptibility to sanctions or regulatory changes.

By staying informed on these key aspects, you can better assess the company’s overall risk profile and growth potential.



A valuable source for analyzing a company’s financial health is its financial statements, which are typically available on the company’s official website. It is highly recommended to download and review at least the last five years' worth of financial reports to gain a comprehensive understanding of the company's performance and trends over time.

The text underneath is directly for ChatGPT-

Financial reports of a company provide a detailed overview of its financial performance, position, and cash flows over a specific period, typically a quarter or year. These reports are essential for investors, creditors, management, and regulators to assess the company's health and make informed decisions.



These financial reports are typically available for free and offer key insights into the company’s strategic direction. They often include the senior management's outlook for the coming years, which may cover plans for business expansion, the development of new verticals, or entry into new industries. Additionally, the reports provide a detailed analysis of the company’s current performance, including explanations for any underperformance, if applicable.

Once you have obtained these financial statements, this is the first step in your analysis. For a thorough review, aim to examine five years' worth of reports for each of the five companies you're analyzing. Of course, you may choose to extend your analysis further as needed.

Thus, for your analysis, focus on five years, five companies, and five financial statements. You may choose to expand your analysis further if desired.



The Financial Statements Consists of the Following Statements that Help us understand the performance of companies in terms on money/numbers.



  • Income Statement
  • Balance Sheet
  • Cash Flow Statement
  • Notes to Accounts
Since analysis of these would require many more posts and discussions I will leave it for the future series.

Basic Definitions taken from Chat GPT for these is as follows:

Purpose of Income Statement: Shows the company’s revenues, expenses, and profits or losses over a specific period (e.g., quarterly or annually).

Purpose of Balance Sheet: Provides a snapshot of the company’s financial position at a specific point in time. It shows what the company owns (assets), owes (liabilities), and the shareholders’ equity.



Purpose of Cash Flow Statement: Shows the company’s cash inflows and outflows during a specific period. It helps assess the company's liquidity and ability to meet short-term obligations.

Purpose of Notes to Accounts in Financial Statements:

Purpose: Provide additional context and explanations for the figures presented in the main financial statements. These notes clarify accounting policies, assumptions, and provide detailed information on specific items (e.g., outstanding debt, pension obligations, and related-party transactions).



For Analysis Financial Statements we use:

1) Horizontal Analysis:

For simplicity, horizontal analysis refers to the year-on-year performance of a company. For example, if a company’s sales/revenue grew from $100 to $140 over two financial years, we use the base year ($100) to calculate the percentage change. The revenue increase can be calculated as follows:

Percentage Increase = ((100/140)/100)×100=40%

2) Vertical Analysis:

Unlike horizontal analysis, vertical analysis is conducted for a single financial year. In this method, the elements of the financial statement are represented as a percentage of the company’s total revenue for that year.

For example, if a company’s revenue for the financial year 2023-24 was $100 and its Profit After Tax (PAT) was $20, vertical analysis would show that the company needs to generate $100 in revenue to achieve $20 in PAT. The corresponding percentage would be calculated as follows:

The percentage thus comes to : 20/100 *100= 20%



3) Financial Ratios:

There are numerous financial ratios used in the analysis of any company. These ratios will be discussed in detail in subsequent topics, as they are extensive and require thorough explanation.



4) Cash Flow Statement Analysis:

Similar to ratio analysis, a detailed discussion on cash flow statement analysis will be provided in future posts. However, the primary purpose of this analysis is to assess how effectively a company utilizes the cash generated from its business operations.

For example, if a company reports a revenue of $100 but the actual cash generated is only $40—due to the accrual accounting method—the company may be experiencing a cash flow shortfall. This indicates that, despite generating significant revenue, the company has limited liquidity, which could require further scrutiny.

I have provided definitions of terms used underneath.

I have taken the liberty to use ChatGPT to define these with Examples.

FREE TRADE AGREEMENT

A Free Trade Agreement (FTA) is a pact between two or more countries that aims to reduce or eliminate trade barriers, such as tariffs, quotas, and other restrictions, to encourage the flow of goods and services across borders. The goal is to promote trade by making it easier and cheaper to do business between the countries involved.

Key Features of an FTA:

  • Tariff Reductions: It typically involves reducing or eliminating customs duties on goods traded between the countries.
  • Market Access: It opens up markets by reducing or removing restrictions on the import and export of goods and services.
  • Investment and Services: Some FTAs also address regulations on investment, intellectual property, and services, offering more comprehensive trade benefits.
Examples of Free Trade Agreements:

  1. North American Free Trade Agreement (NAFTA):
    • Countries Involved: United States, Canada, and Mexico.
    • Purpose: NAFTA, implemented in 1994, aimed to eliminate trade barriers between these three countries, fostering increased trade, investment, and economic integration.
    • Outcome: It led to increased cross-border trade, especially in industries like automotive, agriculture, and electronics. However, it was replaced in 2020 by the USMCA (United States-Mexico-Canada Agreement).
  2. European Union (EU):
    • Countries Involved: Member states of the European Union.
    • Purpose: The EU functions as a single economic entity with a common internal market, allowing free movement of goods, services, capital, and labor across its member countries.
    • Outcome: The EU’s single market boosts trade within Europe and attracts external investment.
  3. Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP):
    • Countries Involved: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.
    • Purpose: Aimed at creating a free trade zone covering a large part of the Asia-Pacific region. It includes measures for tariff reduction, intellectual property rights, and dispute resolution.
    • Outcome: It expands trade relationships among these diverse countries and enhances global supply chains.
  4. Mercado Común del Sur (MERCOSUR):
    • Countries Involved: Argentina, Brazil, Paraguay, Uruguay, and Venezuela (with Bolivia’s recent accession).
    • Purpose: MERCOSUR is a South American trade bloc aimed at promoting free trade and fluid economic integration among member states.
    • Outcome: It facilitates intra-regional trade and has led to policy coordination on issues like agriculture, customs, and finance.
FTAs generally provide mutual benefits, but they can also create challenges, such as increased competition in domestic industries or environmental concerns.



Market Capitalization

Market Capitalization (Market Cap) refers to the total value of a company's outstanding shares of stock, calculated by multiplying the current share price by the total number of shares in circulation.

Formula:

Market Cap=Share Price×Total Number of Shares Outstanding\text{Market Cap} = \text{Share Price} \times \text{Total Number of Shares Outstanding}Market Cap=Share Price×Total Number of Shares Outstanding

Example:

If a company has 10 million shares outstanding, and the current share price is $50, the market capitalization would be:

Market Cap=50×10,000,000=500,000,000\text{Market Cap} = 50 \times 10,000,000 = 500,000,000Market Cap=50×10,000,000=500,000,000

So, the company's market cap would be $500 million.

Market Cap Categories:

  1. Large Cap: Companies with a market cap of $10 billion or more. These are usually well-established, stable companies.
    • Example: Apple, Microsoft.
  2. Mid Cap: Companies with a market cap between $2 billion and $10 billion. These are typically growing companies.
    • Example: Spotify, Zoom.
  3. Small Cap: Companies with a market cap between $300 million and $2 billion. These are usually newer or smaller companies with higher growth potential but also higher risk.
    • Example: Emerging tech startups.
  4. Micro Cap: Companies with a market cap below $300 million. These tend to be very small companies, often considered highly speculative and volatile.
    • Example: Penny stocks.
Why It Matters:

  • Valuation: Market cap gives investors a quick sense of a company's size and its overall market value.
  • Risk and Stability: Larger companies (large-cap) are generally considered safer investments because they tend to be more stable. Smaller companies (small-cap) have higher growth potential but come with higher risks.
  • Investment Strategy: Investors often use market cap to guide their investment choices, balancing between growth (small/mid-cap) and stability (large-cap).
Essentially, market capitalization provides a snapshot of a company's size relative to others in the market.

Market Penetration refers to the strategy or measure of how much a product or service has gained acceptance in a specific market relative to its potential. It indicates the percentage of the total target market that has purchased or adopted a particular product or service.

Examples of Market Penetration:

  1. Smartphone Industry: Apple, Samsung, and other smartphone manufacturers focus heavily on market penetration by offering new features, discounts, and expanding to emerging markets.
  2. Netflix: In the early years, Netflix worked on penetrating global markets by offering localized content and subscriptions, eventually achieving significant global market penetration.
High vs. Low Market Penetration:

  • High Market Penetration: Indicates that the product is well-established and widely accepted. However, once a product reaches high penetration, growth might slow down, leading companies to focus on market diversification or product innovation.
  • Low Market Penetration: Suggests that the product is still in the early stages of adoption or that the company has room to expand its customer base within the target market.
Types of Market Structures:

  1. Monopoly (Monopolistic Market):
    • Characteristics:
      • A single seller or producer controls the entire market for a product or service.
      • No close substitutes are available for the product, so consumers have no choice but to buy from the monopolist.
      • High barriers to entry prevent other firms from entering the market.
      • The monopolist can set prices and output levels without competition.
      • Often results in inefficiencies, higher prices, and reduced consumer choice.
    • Example: In many countries, public utilities like water, electricity, or natural gas are monopolies, where a single company controls the supply. The United States Postal Service (USPS) holds a government-granted monopoly over letter mail delivery and mailbox access. Saudi Aramco, the state-owned oil company of Saudi Arabia, is a major nationalized monopoly, with its revenues being a primary source of government income
    • Advantages:
      • Economies of scale: Can result in lower costs due to the large scale of production.
      • Innovation in industries with high fixed costs (e.g., pharmaceuticals, technology).
    • Disadvantages:
      • Higher prices for consumers due to lack of competition.
      • Reduced innovation and consumer choice.
      • Inefficiency and potential for exploitation of workers or consumers.
  2. Oligopoly:
    • Characteristics:
      • A small number of large firms dominate the market.
      • These firms often produce similar or differentiated products and have significant market power.
      • High barriers to entry prevent new competitors from entering the market easily.
      • Firms in an oligopoly may engage in price-fixing or collusion, though it is illegal in many jurisdictions.
      • The behavior of one firm can influence the others in the market.
    • Example: The airline industry, automobile manufacturers, and smartphone companies (e.g., Apple, Samsung) are examples of oligopolies.
    • Advantages:
      • Economies of scale, which can lead to lower production costs.
      • Innovation through competitive pressure between firms.
    • Disadvantages:
      • Prices can be high due to limited competition.
      • Risk of collusion between firms to fix prices and reduce competition.
      • Barriers to entry can stifle competition and innovation.
  3. Monopolistic Competition:
    • Characteristics:
      • Many firms sell products that are similar but differentiated enough to avoid perfect competition.
      • Each firm has some market power because consumers perceive their product as unique.
      • There is free entry and exit from the market, which leads to normal profits in the long run.
      • Firms compete based on factors like product quality, branding, and marketing, rather than price alone.
    • Example: The restaurant industry, clothing brands, or cosmetics markets are examples of monopolistic competition, where each company offers a slightly different product but competes within the same industry.
    • Advantages:
      • Variety of products and services for consumers.
      • Competitive pricing within product categories.
      • Encourages innovation and differentiation.
    • Disadvantages:
      • High advertising costs for differentiation.
      • Excess capacity in the market, leading to inefficiencies.
      • Can still lead to higher prices than in perfect competition.
  4. Perfect Competition:
    • Characteristics:
      • A large number of firms produce identical (homogeneous) products.
      • No single firm has control over the market price (price takers).
      • There are no barriers to entry or exit, meaning new firms can enter or leave the market freely.
      • All firms have access to the same information, and consumers can easily switch from one firm to another.
      • There is an equal distribution of resources, and all firms have the same cost structure.
    • Example: Agricultural markets (e.g., wheat, corn) are often cited as examples of perfect competition, where numerous farmers sell nearly identical products.
    • Advantages:
      • Efficient allocation of resources and lower prices for consumers.
      • Innovation occurs due to competition among firms.
      • No single firm can dominate the market.
    • Disadvantages:
      • In reality, perfect competition is rare because it’s hard for all conditions to be met.
      • Lack of product differentiation, leading to little consumer choice beyond price.
Click to expand...
Thank you very much for this post.Will you post book recommendations about finance too?
 
Probably one of the most helpful posts here. Excellent introductionary post of financial literacy.
Im interested in market disruptions caused by language modules.
 
Eligos Devotee 666 said:
Thank you very much for this post. Will you post book recommendations about finance too?
Click to expand...
Hi! I am really sorry for the late response dear brother.
What we should understand is finance is a sub-topic of Economics.
If you try and learn Marco Economics even from a free source of Youtube or free pdfs available online (Really any) then understanding company wise/Industry wise becomes automatic. Once you understand the basics of economics, understanding accounts of the company involved is the next step.

Markets are only an indicator of the value produced by the participants in the Economy. If you look at the market capitalization of Major companies on your listed stock exchange you are to find companies whose products you use on a daily basis. That is these companies produce value and are an integral part of supporting the economy. The market is just a platform where people buy and sell an ownership/part of the company. Example - Ford Motors. If you start looking at finance/performance of companies as a factor of the participants dependent on it - Employees, Customers, Suppliers, Distributors, Retailers, After market participants you will start seeing the bigger picture. Where many new people fail is that they try to break Finance away from other disciplines and the stresses of life make it seem like it is something which is very tough to understand. The Business Channels also do very little justice on the topic - many throw around big terms which I am not sure if they understand too making people freeze and trust blindly on their judgement. There are also political aspects involved in who gets contracts ( This became apparent in the US Elections with many funding the Presidential Candidates in anticipation of getting funds/grants/contracts at a later date). Then there are concepts of Internal Business involved like Free Trade Corridors between nations that might make multi-baggers of under-performing stocks. Computer Science/Information Technology/Artificial Intelligence for example are fields where the conventional finance concepts don't make much sense. But an engineer will understand rather easily what things can act as breakthrough technology in that Industry. As a respect to your own existence - it is best to focus on your own sector where you work, with whom you have companions.

In the long run common sense investing triumphs all. There are many stories of people whose parents/grandparents bought shares of companies they knew (With little to no knowledge about Economics) and forgot about it and when the son/grand child learns about it, they realize they are already a millionaire.
 
Nordicsupreme said:
Hi! I am really sorry for the late response dear brother.
What we should understand is finance is a sub-topic of Economics.
If you try and learn Marco Economics even from a free source of Youtube or free pdfs available online (Really any) then understanding company wise/Industry wise becomes automatic. Once you understand the basics of economics, understanding accounts of the company involved is the next step.

Markets are only an indicator of the value produced by the participants in the Economy. If you look at the market capitalization of Major companies on your listed stock exchange you are to find companies whose products you use on a daily basis. That is these companies produce value and are an integral part of supporting the economy. The market is just a platform where people buy and sell an ownership/part of the company. Example - Ford Motors. If you start looking at finance/performance of companies as a factor of the participants dependent on it - Employees, Customers, Suppliers, Distributors, Retailers, After market participants you will start seeing the bigger picture. Where many new people fail is that they try to break Finance away from other disciplines and the stresses of life make it seem like it is something which is very tough to understand. The Business Channels also do very little justice on the topic - many throw around big terms which I am not sure if they understand too making people freeze and trust blindly on their judgement. There are also political aspects involved in who gets contracts ( This became apparent in the US Elections with many funding the Presidential Candidates in anticipation of getting funds/grants/contracts at a later date). Then there are concepts of Internal Business involved like Free Trade Corridors between nations that might make multi-baggers of under-performing stocks. Computer Science/Information Technology/Artificial Intelligence for example are fields where the conventional finance concepts don't make much sense. But an engineer will understand rather easily what things can act as breakthrough technology in that Industry. As a respect to your own existence - it is best to focus on your own sector where you work, with whom you have companions.

In the long run common sense investing triumphs all. There are many stories of people whose parents/grandparents bought shares of companies they knew (With little to no knowledge about Economics) and forgot about it and when the son/grand child learns about it, they realize they are already a millionaire.
Click to expand...
That was really helpful and explanatory thank you.

Though, there's two things I'm curious about your opinion:
Wealth of nations (what do you think about the book as an Economy major?)

How much necessary is it to learn economics if its not your Job?
 
Eligos Devotee 666 said:
That was really helpful and explanatory thank you.

Though, there's two things I'm curious about your opinion:
Wealth of nations (what do you think about the book as an Economy major?)

How much necessary is it to learn economics if its not your Job?
Click to expand...
In terms of classical approach to investing and understanding how value is generated in a production (Manufacturing) based economy this book is great.
In the modern world, many of its concepts don't hold well. Especially when it comes to things like Crypto-currency and the entire Investment Banking industry with its bloated valuations is a joke to classical economists. However, given we have limited life spans and need to make money in this time frame, I will strongly recommend you skim through Wealth of Nations (even an Audiobook without dwelling too much into the quantitative implications of the book) while also recognizing things like cryptocurrency or Artificial Intelligence. Even with heavy manipulation and interference of the enemy, these industries are a result and tool for the development and evolution of society as a whole. The reason I ask you to skim or prefer an audiobook is so that you don't miss out on the advancements of this day and age. Lastly it also holds good to remember that nobody can exactly predict by how much a commodity will move, there can be projections but even they don't have 100% certainty. You can learn a lot from free audiobooks than any "guru" selling you their course online, with "secrets of investing". We live in an age where retail investors have brought down major Investment Banks (In terms of costing them too much money) which are filled with "experts".

Economics affects the job availability in your economy, it is highly intertwined with politics and generally where the money flows is where growth is (Financially) for the person. Economics/Finance is an indispensable part of everyone's life. I know of many people who are very smart in their fields earning really big bucks but have no idea of what to do with their money, more often than not they entrust the money to someone else or just let it stagnate. You don't need to be an Economics/Finance Wizard to be finally stable/safe in an everchanging world but it serves you good to know at least the basics. Investing long term helps you not lose out on the potential of the money that you work hard for (Slogging hours everyday for years of your life). If your money is in an investment vehicle, there can be ups or downs but in the long run you will have beat inflation by a decent margin.
 
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