10 Things Highly Successful People Do Before Going to Sleep

Before they close out the chapter on the day, successful people typically have a routine they follow. They have a set of actions that inspires, refreshes, and renews their passion for their business plans and personal life goals. Before you go to bed, try these 10 things so you can wake up ready to tackle the day ahead. 

1. Reflect on the day's successes and failures

Successful people don't get down about any failures. Instead, they reflect on what worked and what did not work. They focus on the positive and use any missed targets as information for success in the future.

2. Express an attitude of thanks

Before you retire for the evening, think about people who helped you succeed in the day. Did you express gratitude? If not, consider ways to thank others.

3. Write down your plans

Although you don't need to reflect on all your goals before bed, do a quick review of your short-term goals. Write down urgent and important plans for the following day.

4. Set your alarm 

Set your alarm so you stay on a regular schedule. People who stick to the same sleep schedule often have more energy to get through their day.

5. Call a good friend

People who stay in touch with family and friends feel more motivated every day. Consider talking to someone you love before retiring for the day.

6. Read a good book

When the last thing you do before bed is exercise your mind, you have the entire night to process the information. Your subconscious mind will help the ideas turn into inspiration in the days and weeks ahead.

7. Tell someone you love them

By expressing love before you go to bed, you have a more positive attitude. People tend to wake up refreshed when they feel loved and secure. Having balance with family and loved ones helps with success in the workplace.

8. Say a prayer or meditate 

Whether you say a prayer to God or meditate, time spent in silence before bed helps you relax so you sleep deep. You can often let go of problems only to wake up with the solutions when you pray or meditate.

9. Eat a light snack

Talk to your personal trainer or nutritionist about the best snack to have before bed. If you go to bed hungry, it could interfere with your sleep schedule. Carefully plan for exercise and a healthy snack before falling asleep.

10. Dream of your best life 

The final thing successful people do before they go to bed is fantasize about their dream life. They also think of people alive or deceased who helped them, loved them, or inspired them.

Good sleep is essential to success. If you get into a good bedtime routine, you'll wake up more refreshed and more focused. 

Source: www.inc.com

Colonel Harland Sanders Biography: Inspiring History of KFC

In this success story we are going to share Colonel Harland Sanders biography and history of KFC, an American restaurant chain that he founded. Enjoy reading a life story about entrepreneurship, delicious food, trials and failures and brilliant success.

Colonel Harland Sanders (September 09, 1890 – December 16, 1980) is an American entrepreneur who founded the Kentucky Fried Chicken (KFC) restaurant chain. KFC (Kentucky Fried Chicken) is one of the oldest fast food restaurant chains in the United States. It is famous for its fried chicken to the whole world.

Contents

• Early Childhood
• Life is Getting Better
• KFC Secret Recipe Sold to Restaurants
• KFC Nowadays

Early Childhood

Harland David Sanders was born on September 09, 1890 on a country road three miles (4.8 km) east of Henryville, Indiana. It must be said that Sanders’ childhood was tough. First, he was not the only child in the family, who was not very rich. He was the oldest of three children born to Wilbur David and Margaret Ann Sanders.

His father worked part time, doing some errands of farmers in Henryville. Mother did not work, as she had to take care of the children.

The problems began when the father of Harland Sanders suddenly died. In 1895 one summer afternoon, Sanders’ father came back home with a fever and died later that day. This occurred when the future founder of KFC was only 6 years old. His life changed dramatically. First, his mother went to work to a tomato-canning factory to feed the family somehow. And Harland Sanders was required to be a babysitter and take care of younger brother and sister at home.

This fact was the key to his life. Since these factors have contributed to the development of Sanders as the chef. All the relatives began to notice that the little boy was a real talent in this case.

When his mother remarried, he escaped from home because his stepfather beat him. Sanders falsified his birth date and volunteered for the U.S. Army at the age of 15 years. He served a full term and ended his service in Cuba. During his early years Sanders had to work as a steamboat pilot, insurance agent, farmer and etc. Finally, he found a good regular job as a fireman in the U.S. railway company.

Life is Getting Better

Josephine King Sanders, the 1st wife of Colonel Sanders

In 1908, having stable income Harland Sanders married Josephine King. He had three children, a son, Harland, Jr., who died at an early age, and two daughters, Mildred Sanders Ruggles and Margaret Sanders. After a while he was fired for insubordination. His wife Josephine left him taken the children back to her parents’ home. Her brother later wrote Harland a letter where he said: “She had no business marrying a no-good fellow like you who can’t hold a job”. Over the years he tried a lot of other jobs, but did not find any, which he could work at for a long time.

At 40 years Harland had to change dozens of occupations. One time Harland Sanders was trying to obtain an education enrolling in law courses, but for an unknown reason he did not finish them.

However, when Harland was already in his 40s, he had little capital accumulated over the years. For a long time Sanders was in despair. Most of his life already passed, but he still was a man, who made no difference, did not have enough money to live in pleasure and wealth. He was disappointed in life. And, of course, he wanted to change it.

Harland Sanders bought a service station, motel and cafe at Corbin, a town in Kentucky about 25 miles from the Tennessee border. It must be noted that Harland seriously thought about the location of his service station, selecting the best place for it. Along this road people traveled to Florida and other locations from northern states and the flow of customers was endless.

The restaurant in Corbin, Kentucky where Colonel Sanders developed Kentucky Fried Chicken

Soon, Colonel Sanders began serving meals to his clients in the living quarters, because he did not have a restaurant. He was cooking chicken dishes and other meals such as country ham and steaks in the kitchen. Soon his service station became famous throughout Kentucky. It was called “Kentucky Fried Chicken of Harland Sanders.” All customers noted the quality of its seasoning, which he prepared from 11 different spices. Life began to improve.

Colonel Sanders demonstrates a new-fangled gizmo – the pressure cooker.

In order to increase his income, Harland bought a pressure cooker. It was a time when this type of pans just appeared on the market. He was one of the first chefs assessed the advantages of pressure cookers. Usually it took about 30 minutes to prepare chicken, but now it’s time has been reduced to 9 minutes. That meant that customers did not have to wait so long for a meal and it increased number of orders.

A significant event in the life of Sanders happened in 1935, when the governor of Kentucky, Ruby Laffoon, awarded Harland the title of Kentucky Colonel for services to the state. And indeed, they were great: in fact people all over the county were talking about the “national dish” of the state from Colonel Harland Sanders.

At that time, Sanders realized that he needed to refocus his business from the service station to something bigger. In 1937, he opened the motel Sanders Court &  Café, which was also an independent fast food restaurant. However, fast food restaurant McDonald’s and Sanders Court & Cafe were not comparable. Because Colonel Sanders spent about 10-15 minutes to prepare an order. So it could not be called a fully functional fast food restaurant.

Sanders Court and Café

In 1947, Harland and Josephine divorced. And in 1949, Sanders finally married his secretary Claudia Ledington. In 1949, Sanders was honored once again with the title of Kentucky colonel, this time by Lieutenant Governor Lawrence Weatherby.

Being a Colonel, Harland Sanders developed his appearance starting to wear a white suit and black bow tie. And nowadays Harland Sanders is portrayed on the logos of KFC. This image quickly entered the hearts of ordinary Americans, who loved a small restaurant of Sanders. He had so many clients and net worth as he had never had before. He felt success.

Colonel Harlan Sanders and his wife Claudia

Of course, from time to time there were minor technical difficulties and problems with suppliers. Once even the building of motel burned down. It was built up again quickly and resumed its job within a few months after the accident. In addition, the state government tried to help Harland because his fried chicken was a showplace in Kentucky.

But life dealt a blow to Sanders. In 1956, there was completed the construction of Interstate 75, bypassing Corbin. Sanders’ restaurant was out of sight from passing by travelers. The number of customers decreased dramatically. The once-successful business rolled down. He was forced to sell the property for $75,000 to pay his debts. He was almost broke when he was 66 years old, living off a monthly Social Security check of $105 and some savings. After a while Sanders decided to move to Shelbyville, Kentucky.

KFC Secret Recipe Sold to Restaurants

Upon reflection, he came to the conclusion that can sell his recipe to other restaurants. With nothing to lose, Sanders took his spices and pressure cooker and traveled throughout the U.S. in his 1946 Ford.

He started visiting other restaurants of America. When meeting a potential franchisee he talked about the recipe of cooking chicken and its seasoning. It took a long time before he could find the first customer. Under the contract, Sanders received just 5 cents for each of his sold chicken. Not bad, considering that the volume of orders grew steadily. Needless to say that in the early 60’s Colonel Sanders had a few hundred franchisees across the U.S. restaurants.

And after 4 years Kentucky Fried Chicken was at the peak of glory and the old Colonel decided to sell the corporation to a private investor John Y. Brown, Jr. Under the deal, he received $ 2 million in cash and remains the official face of the company for which he was paid about 250,000 dollars a year. Colonel Sanders net worth estimated at $3.5 million. He just had to meet with the media, customers, employees, in general to lead marketing.

In 1980, at the age of 90 years, Harland Sanders died. In recent years he was traveling, playing golf and ran their own restaurant Claudia Sanders’ Dinner House with his wife. He got disappointed at KFC, because he thought that in the pursuit of the lowest price and speed – the owners went to a compromise on the quality of chickens. However, after the death of Colonel the story was not over.

KFC Nowadays

KFC Logo

In 1986, it was acquired, by the famous Pepsi Co. In 2002 the KFC was acquired by Yum! Brands. In addition to KFC, the company owns Pizza Hut and Taco Bell restaurants. David C. Novak is the current Chairman and CEO of Yum! Brands.

The chain of more than 39 000 restaurants operates in more than 50 countries around the world. Yum! Brands prefer to use the strategy of co-branding. There are many varieties of foods such as fried chicken, chicken burgers (chicken sandwiches, US), wraps, French fries, soft drinks, salads, desserts, breakfast and etc.

David C. Novak, Chairman of the Board and Chief Executive Officer of Yum! since January 2001

Currently, Yum! Brands employs more than 1,500,000 employees and the net income as of 2013 amounted to $1.091 billion.

We hope you’ve enjoyed reading Colonel Harland Sanders biography and amazing history of KFC Company and it’s inspired you to new discoveries.

source: www.astrumpeople.com

5 Key Steps Toward Financial Literacy

Financial literacy, financial capability, financial understanding.

Whatever the name, the core idea is the same: being equipped with the knowledge, skills and tools to manage your money and secure your future.

That’s no easy task, but here are five key money topics you’ll need to understand andput into action to make financial literacy a reality:

• Budgeting. Financial security starts with prudently managing your money on a day-to-day basis. That means spending less than you earn and saving consistently. Try to save at least 15% of your gross pay for short-term goals, long-term goals and unexpected expenses. Do it first and not with what’s left of your paycheck. Track all your expenses and set reasonable spending guidelines. Finally, don’t get caught up in how others are spending and undermine your own budget.

• Insurance. With so many different types of insurance — auto, renters, homeowners, life, disability, health and long-term care — and so many variations of each, insurance can appear daunting. But financial pitfalls abound if you’re not adequately covered. Insurance is at the foundation of any good financial plan. Learn the basics and get the coverage you need to protect your financial well-being.

• Emergency reserves. Stuff happens. And one of the best ways to keep that stuff from throwing you off course or burying you in debt is to set aside money in a separate savings account for emergencies.

• Debt and credit. Debt can be a useful tool, but it can also be a dangerous trap that undermines your financial health. Minimize your use of debt and understand the world of credit and credit scoring.

• Investments. Stocks, bonds, mutual funds, CDs, annuities — the universe of potential investments is massive. Not to mention the dizzying array of account types: taxable, IRAs, Roth IRAs and company retirement plans like 401(k)s. But, confusing as this may appear, investing is not rocket science. Read and learn. And remember, it’s never too early to start investing.

This isn’t a comprehensive list, but if your goal is financial literacy, it pays to gain a basic grasp of these five elements. If you’re not there yet, keep working toward the goal. If you have gaps, find a person or organization you trust to help close them.

Most importantly, turn your knowledge into action.

The USAAVoice Team is committed to providing information that helps to facilitate the financial security of the military community. The advice in our content is grounded in the principles of sound money management and covers a range of topics, including personal finance, retirement, investments, auto, home, life, health and other areas relevant to our business and the audience we serve.

Investing in securities products involves risk, including possible loss of principal.

Views and opinions expressed by members are for informational purposes only and should not be deemed as an endorsement by USAA.

This document is not legal, tax, or investment advice.  It is only a general overview under the federal tax laws.  The law concerning retirement plans is complex, the penalties are severe, and the laws of your state may differ.  Consult your tax and legal advisers regarding your specific situation.

USAA means United Services Automobile Association and its affiliates.

Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.

Source : www.forbes.com

The basics for investing in stocks

Over the long run, stocks have beaten the performance of any other major asset class by a wide margin (refer Box 1). Stocks have proved their worth and deserve a prominent place in any long term investment plan, such as a retirement account. Yet as stocks are volatile which means that by their nature value rises and falls invest with caution. Ideally, stocks should be held to meet medium and long term goals. In other words, money invested in stocks should not be money that you might need in three to five years.




Stocks tend to deliver handsome returns over the long run, but volatile markets may not cooperate with your short-term cash needs. Ordinary shares represent a share of ownership in the company that issues the shares. Stock prices move according to how a company performs, how investors perceive the company’s future and the movement of the overall stock market. The following is a guide to understand stocks and how to invest in them.

Different flavours of stocks


Growth stocks
Growth stocks are shares of companies with the potential to consistently generate above average revenues and profit growth. These companies tend to reinvest most or all of their earnings in their businesses and pay out little or none of their profits to share holders in the form of dividends.Growth companies expand faster than the overall economy, yet you can sometimes find these companies in mature industries. Note that even fast-growing companies are not necessarily good investments if their shares are overvalued.

Cyclical stocks
Cyclic stocks are shares of companies whose sales and earnings are highly sensitive to the ups and downs of the economy. When the economy is performing well, cyclical companies tend to shine.Acontracting economy typically hammers the sales and profits of these companies and hurts their stocks.

Defensive stocks
Defensive stocks describe shares of companies whose sales of goods and services tend to hold up well even during economic downturns. Examples of industries that are substantially insulated from the business cycle are government contractors and producers of basic consumer products, such as food, beverages and pharmaceuticals.

Income stocks
Income stocks pay out a relatively high ratio of their earnings in the form of dividends. The companies that issue them tend to be mature and have limited opportunities for reinvesting their profits into more attractive opportunities. Stocks that pay large dividends are usually less volatile because investors regularly receive cash dividends, regardless of market gyrations.

Small company stocks
Small-company stocks have generated better returns over time than stocks of large companies. Young, small companies tend to grow faster than their larger brethren. But there’s a tradeoff: Small-company stocks are much more volatile than shares of big companies. There are a number of ways of defining what constitutes a small company.

Diversification means spreading your money among many investments to lessen risk. The idea is to avoid a situation in which your investments are concentrated in a few stocks that big declines in the value of just one or two of them wreck your portfolio. You might strive for a mix of stocks that tend to fare well in different economic environments, such as strong, stagnant and inflationary economies.

Perhaps you will want to blend growth and income stocks in the portfolio. The appropriate blend of stocks depends on personal circumstances, including your time horizon (when you’ll need to spend the money) and your tolerance for risk and volatility (your ability to sleep at night when stock prices fall).

How to pick stocks
Broadly speaking, there are two basic approaches to stock picking: one based on an assessment of economic and market factors (known as a top-down approach) and one based exclusively on analysis of individual stocks (a bottom-up approach). Investors— including professionals such as fund managers sometimes combine both approaches in selecting stocks.

Top-down approach
The investor begins with an analysis of the economy, markets and industries. Trends in the economy (employment and interest rates) substantially influence company earnings. As some companies operate all over the world, the analysis must often be global in scope. Stocks tend to perform differently at various points in an economic cycle. For instance, financial companies often do well early in an economic recovery or even in anticipation of a recovery. Commodities-related companies often perform well in the late stage of an economic cycle.

Bottom-up analysis
There are numerous ways to pick individual stocks, some of them quite complex. In general, though, investors prefer companies that deliver solid earnings growth or those whose share prices are cheap relative to the perceived value of the company. Finding the best of both worlds is an even better formula for successful stock picking.

Of course, that is much easier said than done. It’s crucial to understand how stocks are valued. By itself, a stock’s price tells you nothing about its value. A stock that trades for a nickel a share can be expensive, while a stock that trades for Rs 500 per share can be cheap. As mentioned earlier, what matters is how much the share price compares with a fundamental measure, such as a company’s profits or sales. The article published on the 23rd of February 2015 discussed important elements of Fundamental Analysis.

Finding growth
There are many ways to find great growth stocks. Perhaps the simplest is through your own observations. You may dine at a restaurant chain with an interesting new concept that seems to be opening a new facility every week.

Your teenage kids may tip you off to a new store that all their friends are patronizing. Or it could be a technology company that turns out one blockbuster product after another. As a rule, you should invest only in companies that you can understand. You can find past growth rates and estimated future growth rates for earnings and sales in brokerage reports and on the internet.

When to sell
The decision of when to unload a stock is as important as deciding which stocks to buy in the first place. But the decision to sell is often harder than the decision to buy. That’s because once you own a stock, emotional factors come into play. If you own a stock that falls in value, you may want to hold on to it whether you should or not because by selling and locking in the loss you confirm that you made a bad decision. If you own a stock that performs exceedingly well, you may want to hold on because it has treated you so well, even if the stock has become overvalued. The refusal to sell whether due to unrealistic expectations, stubbornness, lack of interest or mere inattention is the downfall of many investors.

As a long-term investor, you don’t want to cash in every time your stock moves up a few dollars. Commissions and perhaps taxes would cut into your gain, and you’d have to decide where to put the proceeds. By the same token, you don’t want to bail out in a panic in the aftermath of a steep market decline. Here are some clues that will tell you when it is time to consider selling a stock, whether or not you’ve made money on it:

Fundamentals change
Whether you own shares in a blue chip company or a company most people have never heard of you need to follow the corporation’s prospects, its earnings progression, and its business success as reflected in such things as its products and services, market share and profit margins. Annual reports, news stories, research reports from brokerage houses and independent analysts, the Colombo Stock Exchange website and investment newsletters are fertile sources of such information. If a company’s basic, fundamental measures start to weaken, it’s time to reconsider your investment. An example might be a fast expanding retail chain whose sales per store suddenly decline after rising for years. Or here’s a more obvious case: Suppose you bought a stock because you had high expectations for a new product. If the product turns out to be a dud, sell.

Dividend is Cut
The progression and security of the dividend are important to any stock’s prospects. A dividend cut or signs that the dividend is “in trouble” meaning that analysts or money managers are quoted as saying that they don’t think the company can maintain its payout to shareholders can undermine the stock price.

Beware, of stocks that give unusually high yields relative to their history or to their industries. The yield may be high because the share price has dropped a lot. This often indicates that investors believe a company will cut its dividend.

You reach your target price
Many investors set specific price targets, both up and down, when they buy a stock; when the stock reaches the target, they sell. Such guidelines can prompt you to take your gains in a timely fashion and to dump losers before the damage gets too painful. Take the simple step of setting a “mental protective stop.” Watch the stock listings and sell any stock that hits your mental stop point.

You can set your sell level anywhere, be it above the current share price or below the current share price. Once you’ve reached your objective, take the money. If the goals you set are very conservative, you might miss some gains from time to time, but that’s better than holding on too long and falling victim to the Wall Street saying: “Bulls make money. Bears make money. Pigs get slaughtered.”

What’s your return?
With any investment, you should judge performance by total return essentially, the change in price plus any dividends you receive while holding the stock. For example, if you purchase a stock for Rs 40, sell it a year later for Rs 50 and receive a Rs2 dividend distribution during the year, your total return is 30% (a 25% capital gain plus a dividend yield of 5%).

Wrap up
Stocks merit a substantial place in your portfolio. Because stocks are volatile assets, they are more suitable for portfolios invested for medium- or long-term goals. Be sure you have a diversified blend of stocks that includes a helping of foreign shares. Do your homework to ensure that you aren't overpaying for the stocks.

http://www.dailymirror.lk/65109/the-basics-for-investing-in-stocks

Before You Invest A Cent, Do This

How can you retire on time and be comfortable in retirement? By saving and investing, of course. But before you put away money in your retirement accounts, you absolutely need to build up your emergency savings account.

More than eight in 10 households (82%) experienced a financial shock in the past year according to new data from the Pew Charitable Trusts. Typical problems included an unexpected decline in income, a hospital visit, the loss of a spouse or a major house or car repair.

More than half of those folks said the resulting financial damage made it hard to make ends meet. Pew talked with 7,000 households and focus groups in three large U.S. cities for the study.

Meanwhile, nearly six in 10 say they are unprepared now for a financial emergency, yet they say retirement remains a major concern.

Here’s the thing: Financial emergencies happen. You will lose the use of your car for some reason. You or a member of your family will end up in an emergency room and need costly care. Somebody will lose a job.

Optimism is great, but at some point in the next five or seven years something could happen. I hope your life is a easy-sailing breeze forever, but you know you will, at some point, have to come up with a few thousand dollars on the spot.

If you have no cash in the bank, that money will come from a relative or from selling something or in the form of a loan you probably don’t want to take out at unfavorable terms. It will hurt you financially and mentally.

If you have already started saving into a 401(k), chances are you will raid the account to get the cash by taking a loan out or by simply emptying it and paying the penalties. That’s what is known in the benefits world as “leakage.”

Be prepared

According to one study, leaks from plans amounted to 40% of our own contributions. That’s real pain over the long term. Aside from the cost of the taxes and penalties, you lose the ability to compound money into a retirement in the future. Time is what you really lose.

How hard would it be to prepare yourself for a nearly inevitable problem? It might take a few months to cobble together the cash, but imagine how much better you would feel sitting on $1,000 in a savings account. Or $2,000.

Keep on going. Before you invest a cent, get your balance up to the equivalent of six month’s salary if you can. Now you’re bulletproof. Your retirement plan or IRA can take in every cent you save and you can rest assured that a short-term emergency isn’t going to demolish your long-term goal — a safe and comfortable retirement.

source: www.forbes.com

7 Things Smart Investors Always Keep in Mind

By Sarika Periwal

1. Have preset goals

Investing your money is a serious business and deserves a well thought out plan. While saving money is always a good idea, you should also know what you are saving money for, and how much you will need to meet that goal. Usual financial goals could include saving enough to buy a home, or planning for investments to supplement your pension, or even having ready access to a certain amount of money in case of medical emergencies. The goals must be set before you can save money for them.

2. Invest first then play
If you clear all your bills before you set aside some amount to invest, you will never have any money left over. What you need to do in a very disciplined manner is to invest regularly in a couple of options and then use the remaining money for your regular expenditures. That way you will always have enough to invest and will work out the difference in your current lifestyle. Skipping a movie a month is a small price to pay for a good investment portfolio.

3. Spread it out over different heads
Just like putting all your eggs in a single basket is ill advised, your investment strategy should also not concentrate only on a single investment option. There are some savings options that you will always find easier to invest in. They are like your comfort zone and if you are not careful you may over invest in an area that does not offer you the best possible returns. Or you may risk much more by investing in a single company’s stocks. Use a commodity trading company after conducting diligent research. That way a single crash in the financial world won’t clean you out completely.

4. Understand your investment
If you are paying a portfolio manager to handle your investments, it is even more important for you to ask what he is doing with your money. You must always understand what you are investing in and the possible risks that you are taking. Yes it is not the most entertaining of subject matters, but financial investments work much better for you if you know exactly what you are investing in. So break out that portfolio and get a gleaning of what every single investment line stands for.

5. Rebalance your portfolio every year
Just as your needs change each year, the focus of your investments may also need to change each year. If you are investing in mutual funds, stocks, or commodities, take time out once a year to see if they are the best performing ones in the field. If they are doing well, leave them alone. If you feel that others are offering better opportunities go ahead and make the change. By simply being aware of what is going on in the market you will be a wiser investor.

6. Pay off loans as fast as you can
A loan is simply making money for the creditor. So you need to ensure that you pay no more interest than is due. If you can collect an annual corpus through wise investing to pre-pay portions of your loans, it is actually a very wise investment in your future.

7. Trust your gut
Though you may not be the best financial wizard in town, you must also trust your own instinct when it comes to taking up investment plans. Just because it sounds good when your broker is hard selling something, is no reason to invest in it. Take a look for yourself. Ask others for their opinion and always trust your gut before making an investment decision.

 

Source:http://www.selfgrowth.com/

Stock Beta and Volatility

Perhaps the single most important measure of stock risk or volatility is a stock's beta. It's one of those at-a-glance measures that can provide serious stock analysts with insights into the movements of a particular stock relative to market movements.

In this article, we're going to first attempt to define the concept of beta values, including some of the theory upon which it's based. Next, we're going to talk about the pros and cons of the measure, while providing insights into the correct use of beta values when analysing a stock.

Beta Values
The concept of beta is fairly simple; it's a measure of individual stock risk relative to the overall risk of thestock market. It's sometimes referred to as financial elasticity. The measure is just one of several values that stock analysts use to get a better feel for a stock's risk profile. As we'll see later on in our discussion, the beta value is calculated using price movements of the stock we're analyzing. Those movements are then compared to the movements of an overall market indicator, such as a market index, over the same period of time.

Beta Rules of Thumb
Beta values are fairly easy to interpret too. If the stock's price experiences movements that are greater - more volatile - than the stock market, then the beta value will be greater than 1. If a stock's price movements, or swings, are less than those of the market, then the beta value will be less than 1.

Since increased volatility of stock price means more risk to the investor, we'd also expect greater returns from stocks with betas over 1. The reverse is true if a stock's beta is less than 1. We'd expect less volatility, lower risk, and therefore lower overall returns.

CAPM Theory and Beta
During our discussions of calculating stock prices, and our follow up discussion of the capital asset pricing model, or CAPM, we explained how we could calculate the expected return on an investment by examining risk-free investments, expectations of the stock market, and stock betas.

For example, by using the following CAPM formula we can calculate the expected rate of return on an investment as:

Expected Rate of Return = r = rf + B (rm - rf)

Where:
• rf = The risk-free interest rate is the interest rate the investor would expect to receive from a risk-free investment. Typically, U.S. Treasury Bills are used for U.S. dollars and German Government bills are used for the Euro.

• B = A stock beta is used to mathematically describe the relationship between the movements of an individual stock versus the market itself. Investors can use a stock's beta to measure the risk of a security versus the market.

• rm = The expected market return is the return the investor would expect to receive from a broad stock market indicator such as the S&P 500. For example, over the last 17 years or so, the S&P 500 has yielded investors an average annual return of around 8.10%.

If we were to translate this CAPM formula into words, we'd say the following:
"The expected return on an investment is equal to the return on a risk-free investment plus the risk premium that's associated with the stock market itself, adjusted for the relative risk of the common stock we've chosen."

Stock beta values are a key element when using the CAPM.

Advantages and Disadvantages of Beta

In the next two sections, we're going to discuss the advantages and disadvantages of betavalues. The outcome of this discussion should be an overall understanding of how to use this measure in practice. For example, you may want to look at a stock's beta before making a purchase decision. That's a good step to take as part of your stock research, as long as you understand what the value is telling you.

Advantages of Beta
The calculation of beta is based on extremely sound finance theory. The CAPM pricing theory is about as good as it gets when it comes to pricing stocks, and is far easier to put into practice when compared to the Arbitrage Pricing Theory, or APT. If you're thinking about investing in a company's stock, then the beta allows you to understand if the price of that security has been more or less volatile than the market itself. That's certainly a good factor to understand about a stock you're planning to add to your portfolio.

If we understand the theory behind beta, then it's easy to understand how emerging technology stocks typically have beta values greater than 1, while 100 year-old utility stocks typically havebeta values less than 1. In fact, in March 2007 Priceline.com had a beta of 3.4 while Public Service Enterprise Group had a beta of 0.57. It's nice when theory seems to work in the real world.

Disadvantages of Beta
We're an advocate of value investing, which includes conducting stock research that focuses on a company's fundamentals and an understanding of financial ratios before investing in a stock. Unfortunately, if you're calculating stock beta values using price movements over the past three years, then you need to bear in mind that the "past performance is no guarantee of future returns" rule applies to beta values.

Beta is calculated based on historical price movements, which may have little to do with how a company's stock is poised to move in the future. Because the measure relies on historical prices, it's not even possible to accurately calculate the beta of newly issued stocks.

Beta also doesn't tell us if the stock's movements were more volatile during bear markets or bull markets. It doesn't distinguish between large upswing or downswing movements. So while betacan tell us something about the past risk of a security, it tells us very little about the attractiveness or the value of the investment today or in the future.

Beta Calculations
You'll find calculated values of beta on all of the major stock reporting websites: Yahoo Finance, MSN Money, and Google Finance all report stock beta values. You can also calculate beta yourself using a fairly straightforward linear regression technique that's available in a spreadsheet application such as Microsoft's Excel or OpenOffice Calc.

In fact, to calculate a stock's beta you only need two sets of data:
• Closing stock prices for the stock you're examining.
• Closing prices for the index you're choosing as a proxy for the stock market.

Most of the time, beta values are calculated using the month-end stock price for the security you're examining, and the month end closing price of the stock exchange.

The formula for the beta can be written as:
Beta = Covariance (stock versus market returns) / Variance of the Stock Market


Alpha Values
Finally, in our spreadsheet we also included a calculation of alpha values. Alpha is a measure of excess returns on an investment, which has been adjusted for risk. It's commonly used to assess the performance of a portfolio manager (such as the case with a mutual fund) as it's an indicator of their ability to provide returns in excess of a benchmark such as the S&P 500.
For example:
• If alpha < risk-free investment return, then the fund manager has destroyed value;
• If alpha = risk-free investment return, then the fund manager has neither created nor destroyed value; and
• If alpha > risk-free investment return, then the fund manager has created value.
Edited Article from moneyzine

 

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