Marketable Securitites

Marketable Securities

Shruti Chand

In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of marketable securities.

This read will help you get started with understanding marketable securities on the balance sheet of a business.

Introduction

Marketable securities are financial instruments that can be converted into cash easily by the firm. Marketable securities are recorded in the balance sheet along with other current assets because of their nature. You can find marketable securities on a firm’s balance sheet under the Cash and cash equivalents section.

Types of marketable securities:

There are various types of marketable securities available to the firm and that can appear in its balance sheet. The most common ones are:

Bankers acceptances

Bankers acceptance bills can be imagined as an instrument that functions like a post-dated cheque. The business which purchases a banker’s acceptance note can use this instrument to convert it into cash, with the bank guaranteeing the payment. The bank issues these cheques in exchange of a fee, i.e. issues it at a discount to a face value to the company.

Commercial paper

Commercial Paper (CP) bought by a company refers to a short-term and unsecured debt instrument issued by other companies. The maturity of commercial papers can be as short as a few days to 270 days typically. Again, just like banker’s acceptance, commercial papers are issued at a discount on the face value.

Certificate of Deposits

Certificate of Deposits (CD) are issued by banks that provide interest on their value. Most financial institutions offer these certificates with a blocked period in which the certificate holder keeps the certificate untouched. The institution also levies a penalty in case of early withdrawal.

Treasury Bills

Treasury Bills (T bills) are similar to certificates of deposits, but are issued by governments with maturity of one year or less. They are usually issued in fixed denomination at a discount on the face value. They are considered as one of the safest forms of investment and the discount rate is referred to risk free rate of the country.

 

Final Words:

Marketable securities are important as they can be sold on short notice to meet the financial obligation of the firm (to pay salaries to employees, to pay bills to providers, etc.).

 

Relevance to the SimTrade certificate

This post deals with Marketable Securities on the balance sheet, an important tool for investors to take investment decisions.

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Article written by Shruti Chand (ESSEC Business School, Master in Management, 2020-2022).

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Liability

Liability

Shruti Chand

In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of liability

This read will help you get started with understanding liability side of the balance sheet.

Introduction

A liability is an obligation that a company has in return of economic benefits that the company has received in the past. Any kind of obligation or risk that are due to a third party can be termed as liability.

Liabilities are recorded on the balance sheet can be short-term or long-term in nature.

Liability vs Expense

It is important to know that liability is not an expense for the business. An expense is the cost of operation for the business and is recorded on the income statement of a business. Liabilities on the other hand is what the business owes to another party already as the economic benefit has been transferred in the past. It is recorded in the balance sheet of the company.

Liabilities are very important for a business as they finance the daily operations of the business. For expansion activities, for instance if a business wants to expand overseas, liability in form of bank loans will help the business acquire assets to make the move to another location. This loan facilitated by a bank for example will be recorded in the liabilities section in the balance sheet.

Structure of the Liabilities part of the balance sheet:

The Liabilities part of the balance sheet can be structured as follows.

Screenshot 2021-10-25 at 1.24.06 AM

 

Current Liabilities

These are the company’s short-term obligation (Usually financial in nature) that are to be paid within a period of one year. Most noteworthy examples of current liabilities include:

  1. Wages Payable: The total amount of salaries that the company owes to its employees.
  1. Interest Payable: The credit that the business takes to finance short term needs of business operations accrues an interest. This interest in payable by the business in the short term and is recorded in the interest payable section of the balance sheet.
  1. Dividends Payable: The total amount of dividends that the company owes to the investors against the stocks issued to them.

These items help the readers understand the level of obligations on the businesses due in a short period of time.

Non-current liabilities

These are obligations that are owed in a period longer than a year. Long term bonds, loans, etc. are a part of long-term/non-current liabilities. Companies usually issue bonds fulfil their long-term capital needs which are very common type of non-current liability. Other common examples of long-term liabilities include:

  1. Debentures: Type of bond or debt instrument issued by the company unsecured against a collateral.
  1. Bonds Payable: Long term debt instrument issued by companies and government which is a promise to pay at a future date and is issued at a discount in the current period.
  1. Deferred tax liabilities: All that the company owed the government in the form of tax obligation that hasn’t been met yet by the company.

 

Final Word

Liability section of the balance sheet helps investors to assess the risk profile of a business. It is an important tool to measure the leverage taken by a firm to assess the risk level of the company within the industry and compare it with competitors in the same industry.

 

Relevance to the SimTrade certificate

This post deals with Liability side of the balance sheet, an important tool for investors to take investment decisions.

About theory

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Asset

Asset

Shruti Chand

In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of assets.

This read will help you get started with understanding Assets side on the balance sheet of a company.

Introduction

An asset can be defined as anything that has an economic value or future benefit. Assets are an important part of the balance sheet of a firm as it reports all that a business owns at a given point of time. Assets are economic resources that will generate cash flows in the future. Examples of assets include machinery, building, accounts receivable, etc.

All the value of assets that one sees on the balance sheet are typically recorded on historical cost, adjusted from time to time based on depreciation. The Assets side of the balance sheet states all the assets in the order of their liquidity, i.e., ease with which they can be converted into cash. Hence, current assets such as cash or cash equivalents, short-term investments, etc. are listed first followed by fixed non-liquid assets at the end (with the US and international framework).

Structure of the Assets part of the Balance Sheet

Screenshot 2021-10-25 at 1.24.06 AM

 

Types of Assets on the Balance Sheet:

Current Assets:

Any asset that can be converted into cash with ease (Typically within a timeframe of 1 year) is known as Current Asset.

Most common current assets on a balance sheet include cash and cash equivalents, inventory, accounts receivable, and other prepaid expenses.

Fixed Assets:

Fixed assets are resources that the business owns which cannot be converted into cash immediately. Most noteworthy fixed assets on a balance sheet include plants, buildings, machinery and equipment. There is a constant adjustment that is made to the value of these assets from time to time to reflect their current value.

Financial Assets:

This asset class represents the securities, corporate bonds, preferred equity and all other hybrid equity that is financial in nature that the business owns.

Intangible Assets:

These assets have no physical existence whatsoever, but since they still have value attached to it and generate benefit for the business, they are categorised as Intangible Assets. Examples of intangible assets include patents, copyrights, trademarks, goodwill and other intellectual property owned by the business.

Note that with the French presentation of the balance sheet, the least liquid assets appear in the top while the more liquid assets appear in the bottom of the balance sheet), and similarly the shareholders’ equity and the long-term liabilities appear in the top while the short-term liabilities appear in the bottom of the balance sheet.

Final Word:

Investors use the Assets side of the balance sheet to check the financial health of the business (profitability of the investments). One common way to assess the performance is to find out Asset turnover ratio which measures the revenues generated form the use of assets against sales.

The amount of which type of asset a business owns is dependent upon its area of operations. Some businesses are more capital intensive than others which might require them to have more fixed assets than others. Equipment manufacturers are going to have large number of fixed assets such as machinery while a tech business have almost no fixed assets (except intellectual property assessed over time accounted in intangibles).

Relevance to the SimTrade certificate

This post deals with Asset side of the balance sheet, an important tool for investors to take investment decisions.

About theory

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Article written by Shruti Chand (ESSEC Business School, Master in Management, 2020-2022).

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Cash and Cash Equivalents

 

Cash and Cash Equivalents

Shruti Chand

In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of cash equivalents

This read will help you get started with understanding the concept and its significance in determining financial health of a business.

Introduction

Cash and Cash Equivalents on the assets side of the balance sheet is the total amount of cash or assets that can be converted into cash on an immediate basis. Any bank accounts or marketable securities that a business owns can be categorised as cash equivalents.

What is included in Cash and Cash Equivalents?

Cash equivalents are the assets with short maturities typically 90 days or less. Examples of cash equivalents on a firm’s balance sheet include:

  • Treasury Bills
  • Money market mutual funds
  • Commercial Paper (bought from other firms)
  • Bank Certificates of deposit
  • Repurchase agreements
  • Other money market instruments

Cash on the other hand is not limited to the amount of money in checking and savings accounts (and coins and banknotes). It also includes assets such as cheques received but not deposited.

Cash and Cash Equivalents is recorded in the balance sheet in the “Current assets” section. Cash and Cash equivalents are related to other current assets that will transformed into cash later.

 

Measure of liquidity:

Cash and Cash equivalents are used to measure the liquidity of the firm. For example, in financial analysis, it enters the computation of liquidity ratios.

 

Final Words:

Cash and Cash equivalents may be a small part on the balance sheet of a firm but have a lot of impact as it is used to pay day-to-day operations of the firm on a very frequent basis.

 

Relevance to the SimTrade certificate

This post deals with Cash and Cash equivalents that helps investors study the liquidity state of company they would like to invest in.

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Long term securities

Long term securities

Shruti Chand

In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of long term securities.

This read will help you get started with understanding long term securities.

Introduction

Long-term assets on a balance sheet represent all the assets of a business that are not expected to turn into cash within one year. They are represented as the non-current part of the balance sheet. These are a set of assets that the company keeps for a long-term and is not likely to be sold in the coming years, in some cases, may never be sold.

Long-term assets can be expensive and require huge capital which might result in draining cash reserves or increasing debt for the firm.

The following category of long-term assets can be found in the balance sheet:

Investments:

These are all the long-term investments by a company in securities, real estate and other asset classes. Even the bonds and other assets restricted for long-term value are treated as investments by the company.

Property, plant and equipment:

Property that the company owns associated with the manufacturing process or other business operations. An important aspect about this asset class is the depreciation associated with the value of the asset over time.

Typically, you can find the following items disclosed as property, plant and equipment on the balance sheet:

  • Land
  • Land improvements
  • Buildings
  • Furniture
  • Machinery

(Less: Depreciation)

Intangible assets

Intangible assets are the assets without a physical existence. These items represent the intellectual property of a business acquired through their operations, marketing and other efforts to create value. The most notable intangible asset on a balance sheet is Goodwill.

Other intangible assets found in the financial statements are:

  • Copyrights
  • Trademarks
  • Patents

Other assets: All the assets of non-current nature that can not be liquidated easily.

 

Final words:

Since a company holds the long-term assets for a long period of time, the changes in the long-term assets can be a sign of liquidation in some cases. When investors study the balance sheet of a company, they can see if the company often sells its long-term assets then it can be a sign of financial difficulty.

 

Relevance to the SimTrade certificate

This post deals with Long term securities.

About theory

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Intangible Assets

Intangible Assets

Shruti Chand

In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of Intangible Assets

This read will help you get started with understanding intangible assets on the balance sheet of a company.

Meaning:

An intangible asset is an asset that has no physical existence. Such assets are identifiable when it is separable, or when it arises from contractual or other legal rights. These intangible assets can be sold, transferred or even licensed.

Most notable examples of intangible assets include:

  • Goodwill: Goodwill is an intangible asset that is the premium in excess to the purchase price of the company. Goodwill of a company can include intellectual property and brand value, which is not easily quantifiable.

 

  • intellectual property: The intellectual property owned by a company as a result of creativity, such as patents, copyrights, etc.

 

  • Patents: A license issued to a company conferring a right or title for a set period to exclude others from using, selling or making an invention.

 

  • Trademarks: Words, symbols legally registered by a company representing a product owner by them.

 

  • Copyrights: Rights that the creators of a product have created so that other makers don’t mimic/copy their work

Software and other computer-related assets outside of hardware also classify as intangible assets.

 Real life example: For instance, Company A purchases a patent from Company B for an agreed amount of 1 million, then Company A would record in its intangible assets 1 million under long term assets.

 

How can you value Intangible Assets?

 Businesses can create intangible assets in cases where it pays more than the book value of an asset and records it at a higher value on the Balance Sheet. This premium paid is an intangible asset on the books of the company.

 

Some important things to remember:

Financial assets are not intangible because they derive value from the contractual claims backing them.

Intangible assets contribute to the value of the company only through its presence on the balance sheet. Its measurement is essential to the company while assessing the state of the company’s resources.

Relevance to the SimTrade certificate

Intangible assets are an important factor to assess the value of companies investors want to invest in.

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Fixed Assets

Fixed Assets

Shruti Chand

In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of balance of trade.

This read will help you get started with understanding balance of trade and how it is practiced in today’s world.

Fixed Assets:

A fixed asset on a balance sheet is any asset that has a useful life greater than one year. Typically, a fixed asset is not intended to be resold within a short period of time. Fixed assets can also be understood as any non-current asset are recorded on the Balance Sheet with other assets.

Examples of Fixed assets on a Company’s balance sheet:

  1. Property
  2. Building
  3. Machinery
  4. Land

 

The fixed assets are usually recorded at the net book value, which is nothing but the price at which it was acquired. Over time, all the lost value in the fixed assets arising out of holding these assets is recorded as impairment charges and depreciation in the balance sheet.

Out of intuition, it is fair to assume that Fixed costs are large assets which are immovable, but that is not true. An office equipment such as Office Computer can also be a fixed asset if it exceeds the capitalization limits of the concerned business.

Depreciation of fixed assets:

Fixed assets can not be converted into cash easily. It is usually acquired by the company to produce more goods and services, hence the use that the fixed assets are put into can lead to its depreciation in value.

This decrease in value is recorded as depreciation in the books of accounts (Balance Sheet). Depending on the company, the depreciation methods vary. For instance, if the company uses a straight line method, the same amount of depreciation is recorded every year for a fixed period of time until the value of the asset is zero.

Example of depreciation: Let’s say a company purchases machinery and plants for $100000 and the useful life of the asset is fixed at 10 years, then every year $10000 will be recorded as depreciation in the books of accounts for the next 10 years and at the 10th year, the value of the asset in the book finally will be 0.

 

Relevance to the SimTrade certificate

This post deals with Fixed Assets on the Balance Sheet of the companies investors might be assessing to understand the financial health of the company.

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Article written by Shruti Chand (ESSEC Business School, Master in Management, 2020-2022).

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Balance Sheet

Balance Sheet

Shruti Chand

In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of balance sheet

This read will help you get started with understanding balance sheet and what it indicates when studying a company.

What is a balance sheet?

Balance Sheet is one of the most important financial statement that states business’ assets, liabilities and shareholders’ equity at a specific point of time. It is a consolidated statement to explain what an entity owns and owes to the investors (both creditors and shareholders).

Balance sheet helps to understand the financial standing of the business and helps to calculate ratios which better explain the liquidity, profitability, financial structure and over all state of the business to better understand it.

Structure of the balance sheet:

Screenshot 2021-10-25 at 1.24.06 AM

 

Use of the balance sheet in financial analysis:

In financial analysis, the information from the balance sheet is used to compute ratios: liquidity ratios, profitability ratios (especially the return on investment (ROI) and the return on equity (ROE)) and ratios to measure the financial structure (the debt-to-equity ratio).

 

Final Word

Balance Sheet is one of the most important financial statement for fundamental analysis. Investors use Balance Sheet to get a sense of the health of the company. Various ratios such as debt-to-equity ratio, current ratio, etc can be derived out of the balance sheet. Fundamental Analyst also use the balance sheet as a comparison tool between companies in the same industry.

Relevance to the SimTrade certificate

This post deals with Balance Sheet and its importance in the books of accounts of a company that investors might want to assess.

About theory

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About practice

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Article written by Shruti Chand (ESSEC Business School, Master in Management, 2020-2022).

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Shareholder’s Equity

Shareholder’s Equity

Shruti Chand

In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of Shareholder’s equity.

This read will help you get started with understanding shareholder’s equity and its meaning on the books of accounts of companies.

Shareholders Equity:

Shareholders equity on the Balance Sheet is the amount that the owners of the company have invested into the business.

Shareholders equity = Money invested by owners + Retained earnings deferred over time.

The three categories of shareholders equity are:

  • Money invested by the shareholders:
  1. Common Shares: These shareholders are last in line when it comes to claims in case of dissolution of the company. They fall behind all the other dues of the company such as creditors, bond holders and preferred shareholders.
  2. Preferred Shares: These shareholders have a priority over the earnings of the company. What this means for the shareholders is that they are paid dividends before the common shareholders.
  3. Retained Earnings: is the percentage of net earnings that was not paid to the shareholders as dividends.

Owner’s claim:

One can further understand the shareholders equity by thinking of it as the difference between what the business owns and owes, i.e.: Total Assets – Total Liabilities. If one sums the total assets on a balance sheet and subtracts all types of liabilities, what remains is the sum of money that the business owes to its shareholders.

Understanding Shareholders equity:

If the value of Shareholders equity is positive, it means that business is in a healthy state and has enough assets to cover its liabilities. On the other hand, if the Shareholders equity is negative, then the business owes more in liabilities than the assets it holds to back the claims.

Relevance to the SimTrade certificate

Understanding shareholder’s equity structure of a company is an important indicator of the health of a company and can help investors make better investment decisions.

  • By taking the market orders course , you will know more about how investors can use various strategies to invest in order to trade in the market.

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Article written by Shruti Chand (ESSEC Business School, Master in Management, 2020-2022).

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Technical Analysis

Technical Analysis

Shruti Chand

In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of technical analysis.

This read will help you get started with understanding technical analysis and how it is practiced in today’s world.

What is technical analysis?

Technical analysis is a tool used to predict future price movements and trends of security. This type of analysis is based on historical market data (both transaction prices and volumes) using various methods to help traders and investors in their decisions to buy and sell securities.

Investors perform technical analysis because sometimes, fundamental analysis may not always reflect the market price. In other words, the market may not be efficient from an informational point of view. Since technical analysis uses statistical and behavioral economics, it guides traders to what is most likely to happen. Hence, in real-life scenarios, investors usually use both technical and fundamental analysis to make decisions.

While fundamental analysis involves evaluating the intrinsic value of a company based on external events, market study, financial statement analysis, industry trends to name a few. Technical Analysis, on the other hand, relies on market movement more than the intrinsic value of the investment.

How is Technical Analysis different from Fundamental Analysis?

Unlike fundamental analyst, the overvaluation and undervaluation of a stock does not influence the behaviour of a technical analyst. Since Technical Analysis is concerned with price action, all decisions are based on the market movements rather than considering industry trends and company performance as technical analysts are really looking to
make money based on the stock market performance of a stock based on price trends.

Since technical analysis is statistical in nature, it is based on various
assumptions. It is very important to keep these assumptions in mind to
be able to perform technical analysis for investing:

  1. Market discounts itself: All the prices in the markets are a reflection of known and
    unknown information present with the investors in the stock
    market. The market takes into account all these factors and hence, price
    is always a reflection of this information.
  2. History repeats itself: Technical Analysis is a historic representation
    of price movements. It assumes that the history of the previous record
    of prices will be repeated in the future. It is based on the actions
    that investors take in an upward trending market, people tend to go
    long and vice versa.
  3. Trend influences price: Technical analysis studies and identifies
    trends in the market on the basis of which decisions are made.
    Since it is assumed that these trends will be reflected in the price,
    only then does technical analysis and its actions make sense.

How can you start Technical Analysis?

A lot of you all might wonder how can you start and eventually make money while practicing technical analysis. These simple steps can help any beginner:

There are various technical indicators that help technical analysts to identify market trends:

Charts:

While it is important to keep in mind that no technical analysis is perfect, there are some tried and tested common charts that Investors use various charts to help them predict future market movements, some of the most common ones are:

1.  Line Chart
2. Bar Chart
3. Candlestick Chart
4. Renko Chart etc
And many more…

Moving Averages:

Moving average is a technical analysis tool that helps investors smoothen the price movements data by a frequently updated average price. Since minor and major movements in stocks over a really brief period of time can influence technical analysis results, a moving average is calculated to better predict actions.

MA are customizable and the time frame is based on the discretion of the analyst. The most common time frames that investors use are 15, 20, 30, 50, 100, 200 days.

Relevance to the SimTrade certificate

With basic technical analysis, you can start trading in the markets through Online Brokers or through the Simtrade Platform to enhance your learnings.

About theory

  • By taking the market orders course , you will know more about how investors can use various strategies to invest in order to trade in the market.

Take SimTrade courses

About practice

  • By launching the series of Market maker simulations, you can extend your learning about financial markets and trading approaches.

Take SimTrade courses

About the author

Article written by Shruti Chand (ESSEC Business School, Master in Management, 2020-2022).

Posted in Contributors | Leave a comment