Marketable Securities

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.

About theory

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

About practice

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

About the author

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

Intangible Assets

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.

About theory

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

About practice

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

About the author

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

Shareholder’s Equity

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.

About practice

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

About the author

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

Technical Analysis

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.

About practice

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

About the author

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

Long-Term Loans

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

This read will help you get started with understanding long-term loans and how it is used in today’s world.

Introduction

A term loan or long-term loan refers to a loan from a bank for a specific amount of
funds with a fixed interest rate or a floating interest rate payable over a specified
schedule. A company uses term loans to fund the purchase of fixed assets, for
instance, manufacturing equipment, property, etc.

The term loans are issued by banks for short-term as well as long-term periods of
time. Depending on the needs of the business, the banks usually have different
types of term loan offerings. These loans differ from each other in their repayment
schedule as well as the type of interest rates.

Main aspects behind facilitating a term loan

1. Collateral:
Nature of term loans are usually very risky for the lender, hence the banks
usually require collateral and a rigorous approval process to grant term loans
to businesses.

2. Repayment schedule:
The repayment schedule is fixed by the bank at the beginning of the term loan
grant process. This is based on various factors that the bank considers about
the risk profile behind the loan. Generally, term loans do not carry any
penalties if they are paid off ahead of schedule. If the company does not pay
the obligations in time based on a pre-decided repayment schedule, the
banks charge a penalty which can be hefty. These repayment schedules can
be monthly, quarterly, or yearly.

3. Interest rates: The term loan bears an interest rate charged by the bank which is pre-decided. This interest rate can be either fixed throughout the tenure of the
term loan period or be a floating rate that fluctuates throughout the period of
the term loan. Let’s understand the types of interest rates to get better
understanding:

● Fixed interest rate:
This is straightforward as it is fixed based on the nature of the loan and
the time period. If the loan is relatively risky, the interest rate fixed will be
higher than that for a loan with low levels of risk.

● Variable interest rates:
The interest rates that differ along the period of the term loan are
referred to as variable interest rate. They are usually attached to the
value of a benchmark rate such as LIBOR (London Interbank Offered
Rate).

This interest can be represented in the following way: LIBOR + 0.5%
Hence, as the value of LIBOR changes, the interest rate also increases
or decreases along with it.

Various types of term loans:

1. Short-term loans: These loans are usually taken by companies for a period of
less than 1 year.

2. Intermediate-term loans: These loans are usually for a period of more than 1
year but less than 3 years. The company usually pays for these loans monthly
through the cash flow it generates through its operations.

3. Long-term loans: Any term loan for a period of more than 3 years can be
defined as a long-term loan. These loans require collateral to be granted by
the bank. The repayment schedule can be monthly, quarterly based on the
agreed terms in the beginning.

Long-term loans are present on the non-current liabilities of the balance of every
firm. Long-term loans cannot be avoided by a company especially when it is starting
out as it is a primary source of funding

You can read more about other forms of liabilities on a firm’s balance sheet.

Relevance to the SimTrade certificate

This post deals with Long-Term loans, which are taken up by companies and indicate their financial health.

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.

About practice

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

About the author

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

Accounts Payable

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

This read will help you get started with understanding accounts payable and its significance.

What are accounts payable?

Accounts Payable appears in the balance sheet of a company when the company purchases goods or services on credit that needs to be paid after a certain period.

Accounts payable arises when the payment for a purchase of goods or services has not been made upfront but will happen in the future at a given date determined at the time of the purchase by the client (sale by the firm). In this case, goods or services are purchased on credit. They are to to be paid back in the short term.

Example

The services that we consume monthly such as electricity or telephone usually must be paid at the end of the month even though the consumption of the month is done before the said payment. This in turn becomes accounts payable. And our failure to meet the payment at the end of the month could lead to default and hence an extra charge.

For businesses the account payable could be when for example they buy a product, but the payment is not done instantly. For instance, Company X buys an AC from company Y but agrees to make the payment after a month. This transaction for Company X will be recorded as accounts payable whereas for Company Y it will be recorded as accounts receivable.

Accounting Treatment

‘Accounts payable’ falls under Liability in the balance sheet under ‘Current Liability’. It is in current liability since it is a form of short-term debt. Failure to meet this payment by the company will lead to a default. For double entry of accounting, the debit of the same is recorded in the expense account as a purchase. For goods like raw materials, there is a variation in inventory in the revenues and an increase in the Asset side under ‘Inventory’.

The increase or decrease in the Accounts Payable of the prior period is recorded in the Cash Flow statement of the entity.

Final Words

Accounts payable are crucial to every economy and it differs based on various factors and is taken in control by policy makers whenever needed. As a student curious about Finance, learning about Repo Rate will go a long way in the future to understand better how liquidity and prices in the economy is maintained.

Relevance to the SimTrade certificate

This post deals with Accounts Payable and how it’s significance in the books of accounts of the companies you would like to invest in as an investor,

About theory

• By taking the SimTrade course , you will learn more about the markets.

About practice

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

About the author

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

Current Assets

In this article, Shruti CHAND (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2022) elaborates on current assets.

This read will help you get started with understanding current assets and how it is used in today’s world.

Introduction

Current asset refers to all the assets of a business that can be converted into cash with ease, usually within 12 months or less. These assets are also referred to as
liquid assets based on their nature and include items such as cash and cash equivalents, short-term investments, etc.

Current assets are important as the company needs liquid assets to pay for ongoing operational expenses.

Current Assets = Cash + Cash Equivalents + Inventory + Accounts receivable +
Marketable securities + Prepaid expenses + Other liquid assets.

All the current asset’s values are added up and recorded under the current assets the section on the balance sheet. Let us understand the following items represent the part of the current assets:

Cash, and cash equivalents

Are all the cash and its equivalents such as marketable securities, short term treasury bills/bonds.

Accounts receivable

It is the money due to a company for goods/services already delivered but not yet paid for. It is treated as current assets because they are expected to be received within a year. In case the money is never received/collected by the company, such entries are noted down as bad debts and are still recorded in the current assets section of the balance sheet.

Stock Inventory

This represents all the finished products or the lying raw materials with a firm. The company holds them until they are sold and is expected to be sold in the near future. There can be instances though, when inventory is not sold and the company’s inventory can be backlogged.

Prepaid Expenses

These represent the advance payments made by a firm for goods/services that it will receive in the future. Since the payment is already made, it allows the firm to free up capital for other uses, which is why they are recorded as current assets. These expenses usually include payments to insurance companies or service providers.

Marketable securities

These are liquid financial instruments that can be easily converted into cash. These short-term securities can be bought or sold on public stock exchanges. It includes common stock, treasury bills, and money market instruments.

Final Words

It isn’t necessarily a good thing to have a lot of cash on the balance sheet. If the company has debt and is sitting on a large amount of cash, it can portray an the unhealthy state of business or bad financial management.

Current assets allow the management of the company to make necessary arrangements to continue business operations. As an investor, one needs to keep an eye on the current assets to assess the risk in the business operations of the firm. You can use a variety of financial ratios related to liquidity to do the same, for example, current ratio, quick ratio, and cash ratio.

Related posts on the SimTrade blog

   ▶ Shruti CHAND Balance Sheet

   ▶ Shruti CHAND Accounts Receivable

   ▶ Shruti CHAND Current Assets

Relevance to the SimTrade certificate

This post deals with Current Assets which are used by various investors to study the financial health of a business:

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.

About practice

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

About the author

Article written by Shruti CHAND (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2022).

Repo Rate

In this article, Shruti CHAND (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2022) elaborates on the concept of repo rate.

This read will help you get started with understanding repo rate and its significance.

What is Repo?

Repurchase rate is the rate at which the financial institutions in a country borrow and lend assets amongst themselves for a short-term. In the interbank market, the underlying security is sold by a bank to another in exchange of buying it the next day at a higher price on the following day usually. This exchange of the asset is facilitated by a contract known as “Repurchase agreement at a rate” or more commonly referred to “Repo”.

This agreement is similar to a loan agreement where the borrower of the loan pledges collateral with the lender for the time it borrows money and claims it back when the loan agreement is fulfilled. The underlying asset is usually a money market instrument such as Treasury bills and Treasury bonds. The main criteria to qualify as a collateral is that it should be liquid so that it can be sold in the open market if required.

Let us understand how a repurchase agreement works in detail:

The party of the contract who lends money in exchange of interests is known as the “repo seller”.

The borrower of the loan is known as the “repo buyer”.

The rate of the loan at which the lending is facilitated is known as the “repo rate”.

The collateral allows the lender to be protected against counter-party risk of the borrower. The value of the collateral is always higher than the amount lent to provide protection against market risk associated with collateral value. This additional amount is known as “haircut”.

Example

Let us illustrate this concept with an example:

Let us say Bank A (the borrower) is in dire need of liquid cash to facilitate an important transaction. In this scenario, it will turn to the Bank B (the lender) and request an amount of $100 m in cash.

Both banks decide to sign a repurchase agreement to facilitate this request. Bank B agrees to lend $100 m to Bank A and in return, Bank A agrees to pledge to Bank B Treasury bonds of a value higher than the value lent. This additional amount is known as ‘haircut’ as mentioned above. Let us assume in this case the haircut is $20 m, then the value of collateral that Bank A will keep for Bank B is equal to $120 m.

On day one, a repurchase agreement is signed between both banks. Bank A facilitates the agreement by holding the asset collateral with itself and Bank B lends cash to Bank A for its operations.

On day two, Bank A repays to Bank B the borrowed amount of $100 m and interests computed with the repo rate over one day. Let us assume the repo rate is equal to 5%. In this case, Bank A will pay $13,888 of interests to Bank B on day two and Bank B will free the collateral to Bank A.

Now that you understand a repo transaction, what is important also is to understand that a repo is one of the very important sources of funding for financial institutions in an economy. Central banks in every country use repurchase agreements to maintain liquidity level in the economy.

For example, the European Central Bank (ECB) sets three rates to keep the prices stable in the Euro zone. One of these rates is known as Refinancing option or Repurchasing option, which is an agreement to repurchase the collateral that the banks keep with the ECB of the country to borrow money for a very short period of time. Banks keep their Treasury bills or eligible securities with the Central Bank in exchange of money, they buy it later at a fixed price. ECB sets this rate every six weeks. This is how the policy makers for the Euro zone control the inflation level within the economy. On the other hand, opposite measures will be taken when the Central Bank needs to pump money in the economy.

Final Words

Repo rates are crucial to every economy and it differs based on various factors and is taken in control by policy makers whenever needed. As a student curious about Finance, learning about Repo Rate will go a long way in the future to understand better how liquidity and prices in the economy is maintained.

Relevance to the SimTrade certificate

This post deals with Repo Rate and how it is managed in the EU zone context.

About theory

• By taking the SimTrade course , you will learn more about the markets. It’s important to remember that lending is a crucial part for investing.

About practice

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

About the author

Article written in August 2021 by Shruti CHAND (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2022).