What are Financial Assets?
Investing in Penny Stock is a way to success in the stock market. Like I said before on my last article “Emergency Fund”, we touched on what your own personal financial goals are and how you want to achieve them without touching your “Emergency Fund”.
Today we are talking about Financial Assets.
Liquid assets aren’t references to beer or cola… Instead, liquidity refer to how quickly you can convert a particular asset into cash. If you know the liquidity of your assets, including investments, you have some options when you need cash to buy some stock. All too often people are short on cash and have too much wealth tied up in illiquid investments such as real estate. Illiquid is just a fancy way of saying that you don’t have the immediate cash to meet a pressing need. Review your assets and take measures to ensure that you have enough liquid assets.
Listing your assets in order of liquidity on your balance sheet gives you an immediate picture of which assets you can quickly convert to cash and which one you can’t. If you need money now, you can see that cash in hand, your checking account, your saving account are at the top of the list. The items last in order of liquidity become obvious; they are things like real estate and other assets that can take a long time to convert to cash.
Selling real estate, even in a seller’s market, can take months, Investors who don’t have adequate liquid assets run the danger of selling assets quickly and possibly at a loss because they scramble to accumulate the cash for their short-term financial obligations. For stock investors, this scramble may including prematurely selling stocks that they originally intended to use as long-term investments.
Let take a look at the table
Personal Assets as of December 31, 2008
Assets Market Value Annual Growth Rate % Current Assets Cash on hand and in checking $150 0 Banking saving accounts $500 2% Stocks $2000 11% (stockpreacher : at least 500%) Mutual funds $2400 9% Other assets (Collectibles, etc.) $240 Total current assets $5290 Long-term assets Auto $1800 -10% Residence 150000 5% Real estate invest $129000 6% Total Long term Assets $280800 Total assets $286090
The first column of the table describes the asset. You can quickly convert current assets to cash. Long term assets have value, but you can’t necessarily convert them to cash quickly.
Please take note. I have stocks listed as short-term in the table. The reason is that this balance sheet is meant to list items in order of liquidity. Liquidity is best embodied in the question “how quickly can I turn this assets into cash?” Because stock can be sold and converted to cash very quickly, it is a good example of a liquid.
The second column gives the current market value for that item. Keep in mind that this value is not the purchase price or original value; it’s the amount you would realistically get if you sold the asset in the current market at the moment.
The third column tells you how well that investment is doing, compared to one year ago. If they percentage rate is 5 percent, that item increased in value by 5 percent from a year ago. You need to know how well all your assets are doing. Why? To adjust your assets for maximum growth or to get rid of assets that are losing money. Assets that are doing well are kept, and assets that are down in value are candidates for removal. Perhaps you can sell them and reinvest the money elsewhere. In addition, the realized loss has tax benefits
Figuring the annual growth rate as a percentage isn’t difficult. Say that you buy 100 share of the stockpreacher stock picks (GAL), and its market value on dec 31, 2003, is $50 per share for a total market value of $5000 (100 share x $50 per share). When you check its value on December 31 2004 you find our the stock is at $60 per share. The annual growth rate is 20 percent. You calculate this by taking the amount of the gain ($60 per share less $50 per share = $10 gain per share), which is $1000 (100 shares times the $10 gain), and dividing it by the value at the beginning of the time period ($5000). In this case, you get 20 percent ($1000 divided by $5000). What if GAL also generates a dividend of $2 per share during that period; now what? In this case, GAL generates a total return of 24 percent. To calculate the total return, add the appreciation ($10 per share times 100 share equals $1000) and the dividend income ($2 per share times 100 shares equal $200) and divide that sum ($1000 + $200, or $1200) by the value at the beginning of the year ($50 per share times 100 shates or $5000). The total is $1200 ($1000 of appreciation and $200 total dividents), or 24 percent ($1200 / $5000)
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