I'm beginning a series on a topic called value investing
What is value investing?
Simply put, it is the buying of stocks/securities that appear to be undervalued.
When we say undervalued what do we mean? What's the standard?
In short, there are evaluation methods of valuing a stock that are used as a measurement tool when looking at the price of a stock on the market compared to it's value in the company. However there's a lot I've just said which I know is confusing so I will start right from the basics of commerce.
Background
A couple of years ago when I got hold of the principles applied in value investing I began buying stocks in though my local stock exchange the Zimbabwe Stock Exchange. Through these strategies I have made consistent returns and have yet to make a loss. I'm here to show everyone how.
The beginning- What is a stock?
A stock is simply a share/part of a company which one owns by purchasing a portion of the company.
Once you own shares you are said to be a shareholder because you share in the profits of the company.
Why, when and how do companies sell shares?
Most companies begun small, owned by a single person who puts money into the business. The money put into the business is called capital. Such an individual is called a sole trader meaning this person takes all the risks of running their business on their own and as a result bear alone the burden of loss (if and when there are losses) and win all the profits alone (if and when there are profits)
The individual may find the business growing to a level that requires more than they are able to feed into their business or may find a need to inject more capital than is available to them. In such a case they may solicit the help of other individuals To inject money into the company with the promise of sharing in the profits according to agreements they will make, the most common being proportional sharing meaning if 2 partners each put 50% of the total capital they share profits the same way. Each partner is said to be a shareholder. Such a company is called a Private Limited company. Commonly you see it written following a company name as Pvt Ltd.
Features of a Private Limited Company
1) A Private Limited Company is one formed with a certificate of incorporation as spelled out by a relevant company licensing body.
2) Commonly such a company can have up to 50 shareholders
3) As the selection of partners is limited by number and by the shareholder(s) discretion the company is private.
4) As the company is legally incorporated it stands as a legal entity separate from an individual an therefore all losses are limited to the company and each shareholder is not personally responsible for the company's liabilities.
Use Case
Let's say Jack and John start a company each having put US$1000 such that the total company is worth $2000. Assuming everything they buy and own as company assets came from the $2000 then the company is valued at $2000 we could say Jack owns a 50% share of the company valued at $1000. That would be the book (what would be written in the books) value of his share. This of course is an over simplification of what book value actually is but for the purpose of this article we will restrict ourselves to this use case. In articles to follow we will build on our definition of book value.
Book value is the centre of valuing a company and automatically a share. This is where we begin to evaluate a stock and from this baseline begin talking about the value of a stock (whether it is fairly, over or under valued)
In the next article we will talk about public companies and the purchase of shares on the stock exchange
Keep engaged as I take you on a journey of discovery and enlightenment. The principles I will talk about can be applied to a number of investing disciplines besides stocks
Signing out
Victor
Very important for those who want to do share business...