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TSX TODAY: Choosing a Stockbroker

It is true that even though you can choose your own investments you must still use a stockbroker to execute the orders. You do not have to rely in their advice though it may be helpful. You can make your own selections but you will still require their services to invest. There was a time when you had no choice about the type of stockbroker to utilize. There was only one type of broker, the full service brokers, and they controlled the market. The commissions that they demanded for their services were very high but this was the industry standard. This contributed to the notion that the stock market and stock market investment were beyond the means of the average person and only for the very affluent.

The initial loss of control of the market by these full service brokerages occurred in 1975 and discount brokers emerged. They charged a fraction of the fees the full service brokers did and as such were a big hit on the market. They offered the same great services but were affordable to the average individual as the cost were significantly lower. Another great innovation was the introduction of the internet. This was a great innovation as there was greater trading efficiency as a result.

The overall effect of all the changes on the stock market was that individuals now had access to a ton of information that was never accessible to them previously. It is a debate however whether these avenues have in fact enhanced investments and made better investors. In the case of persons that do their homework and seek out the truth behind the hype the answer is a definitive yes. The investors out their can now choose the type of broker they require from the range available.

There are four categories of brokers. These are the discount/online broker, the discount broker that provides advice, the full service broker and the money manager. The discount/online broker is basically an order taker. They do not offer advice and will not tell you when to buy or sell a stock. There may be research available and other account management tools but the choice of investment in the stock market is entirely up to you.

The variation of the discount/online broker that assists customers is the nest type. They do not offer full consultation services but will have more research than order taking sites. They will offer newsletters and investing tips but most likely not recommend particular stocks. You are not totally on your own with this option but you will still need to do a lot in terms of deciding on the best stock investment.

The full service broker will provide recommendations on specific stocks and the broker will also access your financial situation to determine your needs and investment options. This service is suitable for the investor that does not have the interest or time in making their investment decisions.

The money manager is made for the investor with a hefty investment sum. This broker will handle only significant portfolios and will invest and manage the entire account for a percentage of the assets under investment. This option can be expensive but very worthwhile in the long run.

Whichever option that you choose make sure it suits your purpose and that you are covered by the Securities Investor Protection Corporation. Ask about backups and other options in case of technical problems and ensure that your broker has your best interest at heart.

TSX TODAY: Fair Value of A Common Stock

A lot of discussions have been devoted to finding the fair value of an investment. The goal of every investor, especially Value Investors such as Warren Buffett, is to find an undervalued stock and sell it when it reaches fair value. Admittedly, this is the hardest part of investing. The question then naturally arises: what is fair value? Fair value is a point where the price of an investment reflects its earning power.

Fair value is relative and it depends on other factors beyond the investors' control. In here, we will discuss on calculating fair value within our own boundary of control. In short, calculating fair value of an investment depends on the rate of return expected and the risk taken to achieve that return. Higher risk needs higher reward. It is quite simple.

So, what asset constitute lower risk investments? We can only compare. First thing that comes out of my mind is Certificate of Deposit (CD). You are guaranteed certain return (interest rate), if you can hold for a certain pre-determined time frame. You would never lose your principal at the end of the time frame.

The next low risk investment is Treasury Bond. This is the bond issued by the United States government, which is deemed to be safest in the world. There are certain risks associated with the small fluctuation in the bond price. However, if you held the bond until maturity, you are guaranteed certain rate of return. Your rate of return depends to certain extent on the price that you bought the bond at.

The next higher risk investment is buying common stock. This is what we are going to focus more here. It is considered higher risk than the two types of investments mentioned previously because you have a higher chance of losing money on your investments. Earlier, we established that higher risk needs higher reward. Therefore, stock investing requires a higher reward.

So, what does this have anything to do with fair value? Quite simply, the price of a common stock that we buy must gives us a higher annual return than bonds or CD. For example if a CD gives you a 3% return, treasury bonds give you a 4% return, then you would want your stock gives you a higher return of perhaps 6%.

What does it means for a stock to give investor a return of 6%? It never really say it, doesn't it? You are partly right. While it is not explicitly shown, you can do a little digging and find out how much the return of your stock investment would be. For example, if your Certificate of Deposit (CD) gives you a 2% annual return, for $ 100 of investment, you would earn $ 2 every year. Let's assume that you want your stock to give you a return of 6%, which is higher than CD or treasury bond. This implies for every $ 100 invested in common stock, it needs to give us a return of $ 6 annually.

Where can we get this information? You can get it on Yahoo! Finance or other financial publications. All we need to do is find the share price of a common stock and the profit per share (also known as earning per share) of that particular stock. Let's use an example to illustrate my point. Magna International Inc. (MGA) is expected to post a profit of $ 6.95 per share for fiscal year 2005. Recently, the share is trading at $ 73.00. The annual return of buying Magna stock is therefore $6.95 divided by its share price $ 73.00. This gives us a return of 9.5%.

Will Magna continue to give investors a 9.5 % return year after year? It depends. If the stock price rises, Magna will return less than 9.5 % annually. What else? Well, Magna might not constantly produce the same amount of profit year after year. It might even produce a loss! So, you see, stock investing is inherently risky because there are two moving part in the equation. Price of the common stock and the profits produced by the company itself. That is the reason why investor need to aim for higher return when choosing their stock investment.

All right. So, let's move on to the crucial thing in investing in common stock. What is the fair value of Magna stock assuming a constant profit of $ 6.95 per share? Personally, I assign fair value of a common stock to be at least 2% above the rate of Treasury bond. Please note that I am using the 10 year bond here. Recently, treasury bond can give us a 4 % return. Therefore, the fair value of Magna common stock is when it can give me a return of 6%

So, what is the fair value of Magna common stock in this case? For a profit of $ 6.95 per share, the fair value of Magna common stock is $115.80 per share. That's right. At $ 115.80 per share, Magna common stock will return investors 6% annually. Having said that, we should never buy a common stock at fair value. Why? Because our investing purpose is to make money. If we buy stocks at fair value, then when do we profit from it? Do we expect to sell it when it is overvalued? Sure, it would be nice if we can do that all the time. But to be conservative, let's not bank on our stocks reaching overvalued level.

There you go. I have explained how to calculate fair value in a common stock. Of course, the $ 6.95 per share profit figure is the expectation of profit compiled by Yahoo! Finance. It is not in any way an endorsement to buy Magna common stock. You should do your own calculation to verify that number.


TSX TODAY: Canadian Coalbed Methane Stocks: 7 Things to Know Before Investing

More investors are now inquiring about Coalbed Methane exploration companies. Just as uranium miners were flying well below the radar screen in early 2004, coalbed methane exploration may very well be the next very hot sector later this year and next. Historically, coalbed methane gas endangered coal miners, resulting in alarming fatalities early in the previous century. This is the fate suffered today by many Chinese coal miners in the smaller, private coal mines. Typically, the methane gas trapped in coal seams was flared out, before underground mining began, in order to prevent those explosions. Rising natural gas prices have long since ended that practice.

Today, coalbed methane companies are turning a centuries-long nuisance and byproduct into a valuable resource. About 9 percent of total US natural gas production comes from the natural gas found in coal seams. Because natural gas prices have soared, along with the bull markets found in uranium, oil, and precious and base metals, coalbed methane has come into play. It is after all a natural gas. But because it is outside the realm of the petroleum industry, coalbed methane, or CBM as many industry insiders call it, is called the unconventional gas. It may be unconventional today, but as the industry continue to grow by leaps and bounds, on a global scale, CBM may soon achieve some respect. Please remember that a few years ago, there was very little cheerleading about nuclear energy. Today, positive news items are running far better than ten to one in favor of that power source.

CBM is the natural gas contained in coal. It consists primarily of methane, the gas we use for home heating, gas-fired electrical generation, and industrial fuel. The energy source within natural gas is methane (chemically, it is CH4), whether it comes from the oil industry or from coal beds.

CBM has several strong points in its favor. The gases produced from CBM fields are often nearly 90 percent methane. Which type of gas has more impurities? No, it isn’t the natural, or conventional, gas you thought it might be. Frequently, CBM gas has fewer impurities than the “natural gas” produced from conventional wells. CBM exploration is done at a more shallow level, between 250 and 1000 meters, than conventional gas wells, which sometimes are drilled below 5,000 meters. CBM wells can last a long time – some could produce for 40 years or longer.

Natural gas is created by the compression of underground organic matter combined with the earth’s high temperatures thousands of meters below surface. Conventional gas fills the spaces between the porous reservoir rocks. The coalification process is similar but the result is different: both the coalbed and the methane gas are trapped in the coal seams. Instead of filling the tiny spaces between the rocks, the coal gas is within the coal seams.

One of the past problems associated with CBM exploration was the reliance upon expensive horizontal drilling techniques to extract the methane gas from the coal seams. Advanced fracturing techniques and breakthrough horizontal drilling techniques have increased CBM success ratios. As a result, a growing number of exploration companies are pursuing the early bull market in CBM. Market capitalizations for many of these companies mirror similar “early plays” we mentioned during our mid 2004 uranium coverage (June through October, 2004). Industry experts told us there would be a uranium bull market. Now, we are hearing the same forecasts about CBM.

SEVEN TIPS BY DR. DAVID MARCHIONI

We asked Dr. David Marchioni to provide our subscribers with his 7 Tips to help investors better understand what to look for, before investing in a CBM play. Dr. Marchioni helped co-author the CBM textbook, An Assessment of Coalbed Methane Exploration Projects in Canada, published by the Geological Survey of Canada. He is also president of Petro-Logic Services in Calgary, whose clients have included the Canadian divisions of Apache, BP, BHP, Burlington, Devon, El Paso Energy, and Phillips Petroleum, among others. He is also a director of Pacific Asia China Energy and is overseeing the company’s CBM exploration program in China.

Our series of telephone and email interviews began while Dr. Marchioni sat on a drill rig in Alberta’s foothills, the Manville region, until he finished outlining his top 7 tips, or advices, on how to think like a CBM professional.

1) COAL SEAM THICKNESS

Is there a reasonable thickness of coal? You should find out how thick the coal seams are. With thickness, you get the regional extent of the resource. For example, there must be a minimum thickness into which one can drill a horizontal well.

2) GAS CONTENT

Typically, gas content is expressed as cubic feet of gas per ton of coal. Find how thick it is and how far it is spread. Then, you have a measure of unit gas content. Between coal seam thickness and gas content, you can determine the size of the resource. You have to look at both thickness and gas content. It’s of no use to have high gas content if you don’t have very much coal. The industry looks at resource per unit area. In other words, how much gas is in place per acre, hectare, or square mile? In the early stage of the CBM exploration, this really all you have to work with in evaluating its potential.

3) MATURITY LEVEL OF THE COAL

This is the measure of the stage the coal has reached between the mineral’s inception as peat. Peat matures to become lignite. Later, it develops into bituminous coal, then semi-anthracite and finally anthracite.

There is a progressive maturation of coal as a geological time continuum and the earth’s temperature, depending upon depth. By measuring certain parameters, you can determine where it is in the chemical process. For instance, the chemistry of lignite is different from that of anthracite. This phrasing is called “coal rank” in coal industry terminology.

4) PERMEABILITY

When you are beginning to think about CBM production, this and the next item must be evaluated. How permeable is the CBM property? You want permeability, otherwise the gas can’t flow. If the coal isn’t permeable at all, you can never generate gas. The gas has to be able to flow. If it is extremely permeable, then you can perhaps never pump enough water. The water just keeps getting replaced from the large area surrounding the well bore. The water will just keep coming, and you will never lower the pressure so the gas can be released.

5) WATER

In a very high proportion of CBM plays, the coal contains quite a lot of water. You have to pump the water off in order to reduce the pressure in the coal bed. Gas is held in coal by pressure. The deeper you go, typically the more gas you get, because the pressure is higher. The way to induce the gas to start flowing is to pump the water out of the coal and lower the “water head” of pressure. How much water are we going to produce? Are we going to have to dispose of it? If it’s fresh, then there may be problems with regulatory agencies. In Alberta, the government has restrictions on extracting fresh water because others might want to use it. One could be tapping into a zone that people use as water wells for farms and rural communities. Both water quality and water volume matter. For example, Manville water is very salient so nobody wants to put it into a river; this water is pushed back down into existing oil and gas wells in permeable zones (but which are also not connected to the coal).

6) FUNDING

To be able to access land and do some initial drilling, i.e. the first round of financing, it would cost a minimum of C$4 million. This would include some geological work and drilling at least five or six wells. In Horseshoe, that would cost around C$4 million (say 1st round of finance); in Manville, about C$9 million. This is under the assumption that the company doesn’t buy the land. The land in western Canada is very expensive and tightly held. Much of the work is done as a “farm in” drilling on land held by another for a percentage of the play. (Editor’s note: During a previous interview, Dr. Marchioni commented about his preference for Pacific Asia China Energy’s land position in China because comparable land in western Canada would have cost “$100 million or more.”

7) INFRASTRUCTURE

The geology only tells you what’s there, and what the chances of success are. You then have to pursue it. Can we sell it? Gas prices are “local,” meaning they vary from country to country, depending whether it is locally produced and in what abundance (or lack thereof). How much can we extract? How much is it going to cost us to get it out of the ground? Are there readily available services for this property? Will you have to helicopter a rig onto the property at some incredible price just to drill it? Will you have to build a pipeline to transport the gas? Or, in China as an example, are there established convoys for trucking LNG across hundreds of kilometers?

One addition, which we have mentioned in previous articles, and especially in the Market Outlook Journal, “Quality of Management Attracts PR,” it is important that the CBM company have experienced management. This would mean a management team that includes those who have gotten results, not only a veteran exploration geologist but a team that can sell the story and bring in the mandatory financing to move the project into production.

There are two primary reasons why many of these coalbed methane plays are being taken seriously. First, the macroeconomic reason is that rising energy costs have driven companies in the energy fields to pursue any economic projects to help fill the energy gap. Coalbed methane has a more than two decades of proof in the United States. The excitement has spread to Canada, China and India, where CBM exploration is beginning to take off. Second, the fundamental reason is that exploration work has already been done in delineating coal deposits. There are, perhaps, 800 coal basins globally, with less than 50 CBM producing basins. In other words, there is the potential for growth in this sector.


TSX TODAY: Are Stock Market Prices an Accurate Reflection of the Value of Your Stock Portfolio?

The usual description of any market assumes that every trader wishes to purchase or sell a known quantity at each possible price. All the traders come together, and in one way or another price is found that clears the market – that is, makes the quantity demanded as close as possible to the quantity supplied.

After all it has been said by the authoritative stock trader W. Haddad of B.K. Labovitch that ultimately economics is supply and demand.

This may or may not be an adequate description of the markets for consumer goods, but it is clearly inadequate when describing security markets. The value of any capital asset depends on its future prospects, which are almost always uncertain. Any information that bears on such prospects may lead to a, which s we know are always uncertain. Any information that depends on its future prospects may lead to a revised estimate of value. The fact that a knowledgeable trader is willing to buy or sell some quantity of a security or commodity at a particular price is bound to be information just of that sort. Offers to trade May this affect other offers. Prices may, therefore, both clear markets and covey information.

The dual role of prices has a number of implications. For example, it behooves the liquidity motivated trader to publicize his or her motives and thereby avoid an adverse effect on the market. Thus, an institution purchasing securities for a pension fund that intends, simply to hold a representative cross section of securities should make it clear that it does not consider the financial interments under priced. On the other hand, any firm trying to buy or sell al large number of shares that it considers wrongly underpriced should try to conceal its motives, its identity or both (and may try). Such attempts may be ineffective, however, as those asked to take the other side of such trades try very hard as you know to find out exactly what is going on and many do well succeed in these days of rapid communications and access to many sources of information succeed.

Most securities are sold in very standard ways which requires payment and electronic notification of delivery within the standard settlement period (standard is three Business as opposed to calendar days). On rare occasions, a sale may be made as a cash transaction requiring payment immediately on receipt. Sometimes as a reward or as in effect a marketing or sales promotion payment may be extended over a longer time period – usually 15, 30 or 60 days.

Sometimes in the case of new issues a payment extension period is also granted for the same reasons as above.

It would be extremely insufficient if every securities transaction had to end with a physical delivery of transfer of actual share certificates from seller to buyer. A brokerage firms might well sell 1000 shares of ABC Co. for one client. , Mr. Stevens to another client and later that day buy 1000 shares for Mr. Felon obtained by accepting delivery from her seller. Mr. Stevens’s shares could be delivered to his buyer, and Mr. Felon’s shares could be obtained by accepting delivery from her seller.

However, it would be much easier to transfer Mr. Steven’s shares to Mr. Felon and instruct Felon’s seller to deliver the 1000 shares directly to Mr. Steven’s buyer.

This would be especially helpful if the brokerage firm’s clients Mr. Felon and <r. Stevens held their securities in street name. Then, the 1000 shares they traded would not have to be physically moved and then the ownership would not even have to change at ABC Company.

As you can see valuation of your portfolio of stocks and securities are not always indicative of the true and exact value of your securities. Actual logistics, human emotion and even greed play major and ongoing roles.


What is S&P/TSX Composite Index?

S&P/TSX Composite Index

The TSX stock exchange defines an index as a statistical measure of the state of the stock market, based on the performance of certain stocks. The performance of the index is typically viewed as a broad indicator of the direction of the economy. Originally known as the TSE 300 the composite index was created in 1977, with a base level of 1000 as of 1975. Through the years the index consisted of a sample of 300 companies, though the companies that comprised the index varied from year to year. Stocks were dropped when they no longer met exchange requirements for size and liquidity.

Effective May 1st, 2002 the index has been managed by Standard & Poor's Corp. of New York. The name was changed from the TSE 300 to the S&P/TSX Composite Index. Along with the S&P branding came new rules. Tougher criteria for meeting size and liquidity standards were imposed and there is now no fixed number of companies in the index. Since May 2002 the number of companies has dropped from 300 to 212 as of November of 2003.

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