assets – Miro Zecevic

Liquidity

April 1, 2022 mirozecevicmmg

The ease with which you may sell an investment or asset at a reasonable price is referred to as liquidity.

Liquid assets are those that can be exchanged for cash:

Quickly and easily
With little or no transaction fees
At their current market prices (i.e., without having to entice a buyer with a big discount)

Something is more liquid in general if:

Many individuals would be interested in purchasing it;
It’s simple to determine its value;
It’s simple to transfer ownership from one person to another;
The object or investment is more standardized (i.e., less unique)

A share of Apple stock, for example, is liquid because it’s simple to buy and sell, and many people would want to possess it at the proper price. You can figure out how much it’s worth by looking at the stock market’s current pricing. Furthermore, the corporation has billions of outstanding shares, therefore it isn’t unique.

A piece of custom-designed luxury real estate, on the other hand, is illiquid since there may be only a few potential purchasers, it’s difficult to agree on exactly how much it’s worth, and the transfer procedure can take a long time.

Liquid

Stocks
Bonds
Mutual funds
Exchange-traded funds (ETFs)

Illiquid

Real estate
Art
Antiques
Collectibles, like coins, stamps, or baseball cards

Because you may easily convert cash into other assets, it is the most liquid asset.
Money market accounts and funds, savings accounts, and various forms of very short-term debt investments are all examples of “cash equivalent” investments. (Certificates of Deposit or CDs are a little less liquid since they lock your money up for a certain length of time and charge a fee if you need to withdraw it early.)

While there’s nothing wrong with retaining illiquid assets, people and businesses both benefit from having some liquidity.

For day-to-day needs or unexpected obligations, you’ll need some liquid assets. If your sole asset is a house, selling it immediately for a fair price to fund a car repair would be difficult.
Liquidity is required by businesses to fund short-term costs and maintain financial stability. If the company’s revenues are hit hard by a sudden economic downturn, having adequate cash on hand might help it get through it.

Liquidity refers to how quickly and easily an item may be sold for a reasonable price. Stocks, bonds, and ETFs (exchange-traded funds) are all liquid assets that are simple to sell. Real estate and fine art, for example, are illiquid assets that are more difficult to convert into cash. It is critical for both individuals and businesses to have sufficient liquid assets in order to pay short-term payments and cover any unforeseen expenses or financial difficulties.

Key points:

Liquidity refers to how quickly and easily an item may be sold for a reasonable price.
Although cash is the most liquid asset, equities, bonds, mutual funds, and exchange-traded funds (ETFs) are all considered extremely liquid. Houses, coin collections, and art are all illiquid because finding a buyer willing to pay a fair price takes time.
While having some illiquid assets is acceptable, you should balance them out with liquid assets that you can sell quickly if you need cash.

Liquidity text on wood block with a pile of coins on a blue and white background

What Are Financial Derivatives?

March 22, 2022 mirozecevicmmg

What is a derivative?

A financial instrument based on another asset is known as a derivative. Stock options and commodities futures are two of the most common examples of derivatives, and you’ve definitely heard of them but aren’t sure how they operate.
Derivatives allow consumers the option — but not the duty — to acquire or sell an underlying asset at a later date. The underlying asset and the period until the contract expires determine the derivative’s value.

How Financial Derivatives Work

Financial derivatives are financial products whose value is determined by one or more underlying financial assets, such as stocks, bonds, commodities, currencies, or interest rates.

Investors engage in contracts with stated terms, such as the period of the contract and the consequent values and definitions of the underlying assets, to purchase and sell derivatives.

Futures, options, swaps, and forwards are examples of financial derivatives. Futures and options are often traded on the CME, which is one of the world’s major derivatives marketplaces. Swaps and forwards are traded on an over-the-counter (OTC).

Derivative Regulations

The SEC and the CFTC regulate financial derivatives in the United States. FINRA regulates the parties engaged in financial derivative contracts.

Ways Derivatives Are Used

Derivatives are rarely used as part of a long-term buy-and-hold strategy due to their complexity.

Derivatives are used for:

Hedging: To limit losses, an investor can use derivatives. For example, if an investor is concerned about a rapid drop in the price of security they own, they can buy put options, which can benefit if the price of the security drops, thereby offsetting the loss of the other asset.

Leverage: Financial leverage may be achieved by using derivatives to boost the returns of an underlying asset or index.

Speculation: If an investor feels the price of an asset will move dramatically in one way, they can utilize a derivative to profit from the projected price movement.

Access to complex assets: Financial derivatives can give an investor indirect access to assets or markets that would be difficult to access otherwise.

4 Derivative Investment Types

The four main types of derivatives are futures, options, forwards, and swaps. Common types of underlying assets within these derivative types include stocks, bonds, commodities, bonds, interest rates, currencies, and cryptocurrency.

The four main types of derivatives are:

Futures
Futures are financial derivatives that include a contract between two parties to exchange an asset at a certain price and date in the future. Regardless of the prevailing market price at the time the contract expires, the buyer of the futures contract must purchase (and the seller must sell) the specified asset at the price indicated in the contract
Options
Options are financial derivatives that involve a contract that provides the buyer the right to purchase or sell the underlying asset but not the obligation to do so.
The call option and the put option are the two types of options available.
– A call option allows an investor to purchase a stock at a specific price by a specific date.
– A put option allows an investor to sell a stock at a specific price by a specific date.
Forwards
Forwards, also known as forward contracts are financial derivatives that involve two parties entering into a tailored contract to purchase or sell an asset at a specific price on a specific future date.
Swaps
Swaps are financial derivatives that include a contract that permits two parties to exchange cash flows for a certain period of time. An interest rate, currency exchange rates, or the price of a stock or commodity may all influence cash flows.

Advantages

Hedging: Derivatives can be used by investors to hedge an existing asset position. The derivative contract’s earnings may be used to cover losses in the underlying asset.
Financial leverage: It’s possible to utilize it to boost the returns of an underlying asset like a commodity or an index.
Access to unavailable markets: Derivatives can provide investors access to assets or markets that would otherwise be difficult to reach.

Disadvantages

Complexity: Derivatives and associated methods can be difficult to grasp for many investors since they frequently need extensive investment expertise and understanding.
Risk: Derivatives can expose investors to losses that are greater than those incurred by the underlying asset.

Financial Ratio for Stock Picking

February 8, 2022 mirozecevicmmg

Liquidity Ratio

This ratio indicates how rapidly a corporation can turn its present assets into cash in order to pay down its liabilities on time. Liquidity and short-term solvency are frequently used simultaneously.

Current Ratio

The current ratio compares a company’s capacity to pay down current obligations (those due within one year) with its total current assets, which include cash, accounts receivable, and inventory. The better the company’s liquidity condition, the higher the ratio:

Current Ratio = Current Liabilities / Current Assets

Quick Ratio

The quick ratio, which removes inventory from current assets, assesses a company’s ability to satisfy short-term obligations with its most liquid assets.

Quick ratio= (C+MS+AR) / CL

C – cash & cash equivalents
MS – marketable securities
AR – accounts receivable
CL – current liabilities

Another way is: Quick ratio = (Current assets – Inventory – Prepaid expenses) / Current liabilities

Efficiency ratio

The efficiency ratio is commonly used to assess how well a corporation manages its assets and liabilities inside the organization.

Asset Turnover Ratio

The asset turnover ratio compares the value of a company’s assets to the value of its sales or revenues. The asset turnover ratio is an indicator of a company’s ability to earn revenue from its assets.

Asset Turnover = Total Sales / (Beginning Assets + Ending Assets) / 2

Total Sales – Annual sales total
Beginning Assets – Assets at start of year
Ending Assets – Assets at end of year

Inventory Turnover Ratio

The pace at which a corporation replaces inventory owing to sales in a particular period is known as inventory turnover. Inventory turnover calculations assist companies in making better pricing, production, marketing, and purchasing choices.

Inventory Turnover Ratio = Cost Of Goods Sold / Average Inventory

Average Collection Period

In terms of accounts receivable (AR), the word average collection period refers to the time it takes for a firm to obtain payments due by its customers. The average collection period is used by businesses to ensure that they have enough cash on hand to satisfy their financial obligations.

Average collection period = (AR * Days) / Credit sales
AR – average amount of accounts receivable
Credit sales – total amount of net credit sales in the period