Investment Can You Do Without It

It is hard to imagine if anyone is living without money and it is equally hard to imagine if humans are living without investing in someway or the other. In plain language, investment means the act of investing or laying out money or capital in an enterprise with the expectation of profit. But at the same time the term investment also means money that is invested with an expectation of profit.



Investment is closely related with earning money and employing it to earn more by its virtue of its inherent multiplication factor. It is this character of money (read investment) which drives people invest in various asset types in which they are comfortable with. As a general rule, it is not quite natural for the novice investors to pursue high return investment categories as they perceive the high element of associated risk is beyond their control.



The Big Question: Could You Do Without Investment?

The answer is rather simple as everyone from top down has wanted to invest in one asset or the other. The more conventional the asset type is more the investors and thus investment. Let me detail this out for you.



Traditional investments like investment on gold and land have never let down the investors although rate at which they appreciated was below par till recently. But come to think of it; the simplicity of prediction matrix and non volatile nature of their class made them the darlings of one and all.



Current Investment Scenario

The current investment arena is extremely wide and intricately interdependent. The simplest investment by far, the savings account, contributes to the pool which bank draws from, for advancing loans to a variety investors. Thus the return on your investment (savings) is connected to the return the bank expects. Floating rate of interest is one of the manifestations of this interdependence.



Investment Options for You

It is impractical to attempt to list out all investment types. However the following are the representative types which apply to all economies.

1. Investment on stocks and securities

2. Investment in money market instruments

3. Investment in mutual funds

4. Investment in ventures

5. Investment in insurance



Speculative Investment

It is difficult to foretell how and why people make investment decisions. Also it is not true that investors play safe every time. Speculating a higher than usual and short term profit is none too unusual tendency with some. Such an investment type is classified as speculative investment. Although it beats logic, it goes by gut feeling of investors. Many stock investment and real estate speculators have made big time money taking tremendous risk.





 

Investing In Small Capitalization Companies

The term 'small cap' refers to companies with relatively small market capitalization. Market capitalization is calculated by multiplying the number of outstanding shares of the company by the current price per share. The exact definition of small cap, however, varies among brokerages and fund houses.



Equity investors have a common dream; investing in small-capitalization (small-cap) companies that eventually double or even triple their market capitalization as their share price grows by leaps and bounds. If one invests in such companies during their early days, a modest investment could balloon into a substantial sum.



The beauty of small-cap companies is their size, which allows them to grow at a rate that is almost impossible for larger companies to replicate. Say, the construction firm's shares were around %ARTICLEBODY%.70 at the start of the year. At the end of September, they were trading at slightly over $2. The growth of this particular small-cap company shows that there is substantial profit to be made by investors who acquire fundamentally sound companies at the right price.



There are also opportunities to find small caps trading at a discount. Smaller companies don't always conduct investor's relations activities (to distribute information on its financial performance and activities to potential shareholders) and this makes it hard for analysts to get to know their business. Larger, well-known companies receive much more coverage, so their shares are likely to trade at a fair value. This means that astute investors can make profits once their 'hidden gems' are discovered by the market, especially if institutional investors invest in them. The volume of shares bought can push prices up by 20% to 30% in a single day.



However, generally, investing in small-cap stocks face more risk. There are two major types of risk faced by small-cap companies, which are fundamental and market. Fundamental risk is the possibility that earnings might fail to meet expectations, perhaps due to inexperienced or poor management. Insufficient financial resources, problems with business processes or competitive companies vying for the same customers are other situations that contribute to a small cap's fundamental risk.



Before investing, you need to decide if the company can overcome its hurdles and this can be difficult to do if analysts don't cover it. Moreover, the sheer number of companies in the small-cap universe makes it harder for investors to find hidden gems.



The market risk faced by listed small-cap companies is lack of liquidity. There's a stigma attached to these shares because of the low trading volume. Big funds only dabble in these companies because it can be very hard to exit if you're holding a lot of its shares. However, because the turnover is low, these shares aren't as volatile as some may expect.



In the search for 'hidden gems', investors can turn to brokerage firms that offer their research and investment advice on small-cap companies.



As one can be overwhelmed by the sheer volume of small-cap companies, start with companies in industries that you're familiar with. In periods of uncertainty, most investors prefer to hold blue-chip shares as they offer capital protection.



However, small-cap companies can still play a role in your portfolio, depending on your risk appetite. An investor who can tolerate the risks of small-cap investing and has about 20 years before retirement can invest up to 15% of his portfolio in such companies. The challenge is in finding good companies.



 

Investing Analyzing EPS

 Earnings Per Share (EPS) refers to net income (profit after tax) divided by outstanding shares. Appearing on income statements, it shows us the earnings of the company after all expenses have been paid off and adjustments made for all depreciation of assets.

As a result of accounting gimmicks, the earnings of a company can be easily manipulated. Therefore, if an investor just focuses on EPS, he may misread the value of a stock and end up making bad investment decisions. However, it will be much harder to manipulate the cash flow statement even tough it can still be done.

High quality EPS refers to earnings that are a relatively true representation of what a company actually earns. Increasingly, cash EPS is being used to evaluate earnings. Also known as operating cash flow per share, it gives us the net effect of the inflow and outflow of money in a company's day to day operation. A cash flow statement breaks down cash flow into operation, investing and financing. A good company will normally display a growing trend of higher cash EPS against EPS.

Cash EPS measures the net operating cash flow of a company on a per share basis. A higher cash EPS implies that the business is getting more inflows than outflows. Even tough getting more cash inflows doesn't necessarily mean that the business is making a lot of profit, basically, if a company is consistently getting excess operating cash flow, the business is surely generating extra cash from its sales after deducting all required payments related to the sales. The excess cash can be used to buy new assets, repay shareholders in the form of dividends or reduce outstanding bank borrowings.

Investors need to be extra careful when a company's EPS is positive but has negative cash EPS. A negative cash EPS means the company has more operating cash outflows than inflows. It also implies that the company may have high inventory that isn't selling or receivables that aren't being collected. This requires extra financing either from shareholders' money or banker's loans. If this situation persists for a long period, shareholders or bankers may stop financing and want to be repaid.

Conversely, if a company has negative EPS but has positive cash EPS, investors need not be too worried about the losses incurred. Certain financial experts also define cash EPS as 'EPS plus all non cash items' like amortization and depreciation. Even though a company's income can be affected by depreciation, amortization and other non-cash exceptional items, it can still generate positive cash flow from operations. If the company has zero borrowings, the extra cash flow can be used to reward shareholders with higher dividend payments.

It will be good of can compare a company's cash with its own historical trend or those of other companies. Due to the cyclical nature of certain industries, investors shouldn't be too worried about a temporary negative cash EPS when the whole industry is on a downtrend.

Investors will have a better picture of a company's performance when they analyze the difference between the trend of cash EPS and EPS. If a company's EPS and cash EPS are growing higher and cash EPS is always higher than EPS in most periods, this shows high quality in EPS.

Cash EPS is a powerful tool to use in determining the quality of a company's earnings. Companies with a growing stream of cash EPS are better investments than those with higher EPS growth but negative cash EPS. Investors may be rewarded with higher dividend payments from the excess cash. However, if cash EPS is always lower than EPS, investors need to investigate whether it's only temporary or due to high trade receivables, which may later result in high bad debts.