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Who is Father of Modern Banking ?

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Alexander Hamilton

Alexander Hamilton is father of modern banking

Alexander Hamilton who was born in Charles Town, Nevis on January 11, 1755 was an American statesman, an influential interpreter who also promoted the Constitution of the USA and one of the founding fathers who also organized the nation’s financial systems. He led the funding of the Federal governments state debt and helped to establish the national bank which supported manufacturing and a strong army. He had a vision that led to the setting up of the tariff system and a trade relationship with Britain that is friendly. He also founded the Federalist Party, the New York Post, the USA Coast Guard. He was the secretary of the Treasury when George Washington was the President. Thomas Jefferson opposed him and argued for smaller government and agrarianism. A Strong Central Government that was led by an executive branch that was very vigorous was organized by him.

Alexander Hamilton Father of American Banking

Alexander Hamilton was not a U.S. president but he became a founding father of the USA even though he was born out of wedlock and he was taken in by a very rich businessman after he became an orphan as a child. As a teen he pursued his education and in 1777 he was in the American army when the American Revolutionary War was fought and after the war, he became a senior aide to George Washington and assisted with the leading of the new Continental Army. He was the person who represented New York in the Congress of the Confederation.

Hamilton was a trusted member of President Washington’s first Cabinet as he led the Treasury Department, he helped to implement the Whiskey Tax that was very controversial after the tariff on imports was not able to fund the National debt, the government backed Bank of America and to assume state debt. The bankers and businessmen became members of the Federalist party after he mobilized them and other friends of a network.
The Jay Treaty that he spearheaded in 1794 is seen as a part of the history of the two-party system that is still alive and well in the US today. The party that he was a part of dominated politics for many years until Jefferson’s Democratic-Republican Party won the election in 1800.

Hamilton was instrumental in ending the International slave trade, he actively sought to change laws and campaigned against Vice President Burr in 1804 as he tried to get elected to be the governor for New York State. Burr was very offended and a duel between the two men left Hamilton badly hurt and he died the following day.
He began developing an interest in life in other places away from the small island where he lived after he started reading many books and he liked writing as well. It was a letter that he wrote to his father about a hurricane that had badly damaged the island that he lived on, that was seen by a very influential Journalist that caused him to be sent to further his education in North America. He wrote about God’s wrath pouring out on the island because of the people’s love for vanity. The journalist thought his letter was a Sermon. It was very impressive, and persons were amazed that young man who had not attended university as yet could have written such a letter.

Beekman and Cruger was an import-export firm, where Hamilton was employed as a clerk in his early years, they traded with New York and New England. He proved to be very capable as a trader, he was left to manage the firm 1771 when his boss went on a sea trip.
He spent time with Hercules Mulligan, who had a brother who did trading in 1772, after he arrived in Boston on a ship before he went to New York. Mulligan assisted him in selling cargo and he earned enough money to pay for his College tuition. It was not long after met William Livingston who was a revolutionary and leading intellectual. He was influenced by Livingston as he stayed with him at his Liberty Hall.

Hamilton was instrumental in ending the International slave trade, he actively sought to change laws and campaigned against Vice President Burr in 1804 as he tried to get elected to be the governor for New York State. Burr was very offended and a duel between the two men left Hamilton badly hurt and he died the following day.
On July 12, 1804 after he resigned and practiced law for a while in 1795 and he also founded the Bank Of New York.

Short Term Finance Examples

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Short Term Finance Examples

In order to have a successful business there needs to be a constant flow for any type of working capital. This is a vital component considering that outflow is going to be a part of each cycle; raw materials must be purchased; wages and salaries need to paid; equipment must be serviced; then funds are necessary for advertising, marketing and other overhead costs as well as the needed reserves until a customer makes a payment. The lifeline of any business is going to be working capital.

One of the biggest questions asked is just “how does a company get those funds for working capital?”. The answer is financing, but there are two types – long-term and short-term financing.

Short-Term Financing
Short-term financing is when a company needs finances for only a short time, which is often under a year. This may also be called financing for working capital.

This can be needed due to seasonal business patterns, cash flows that are uneven, etc. However, there are times when it will be used in order to finance accounts receivable, inventory, etc. Yet, only single orders for specific business will be financed.

Sources Types of Short-Term Finance

There is an understanding about why this type of financing is needed. There are different sources to get this type of financing for companies. Each type will have a different type of characteristic and may be used for various situations. Below some of these types discussed:

Examples of short term sources of finance

Trade Credit
This is a type of credit that will be extended by accounts payable. This can be often be split into two types which is paid and free. After a certain amount of days based on the payment terms, suppliers will charge interest for payment delays. If the period happens to be free, once it is delayed it becomes paid.
Free trade credit is what should be used as often as needed, simply due to it being free. How much can this cost? It actually depends buyer’s credit, payment history, business, etc. The higher that the rating is, then this credit will be higher.
Paid trade credit happens to be considered to be short-term, but it should only be used whenever other types of financing are not available and the reason is due to high interest costs that come with it.

Working/Short-term Capital Loans
You can get a working capital loan from a financial institution or bank. A bank will provide this type of loan after the business has been studied, and the cycle of working capital as well as the track record are looked at. Once it has been determined that it is available, then these loans will have to have payments made in small payments or it is paid in full. This will be based on loan terms. It is best that these loans only be used when there is a need permanent capital.

Line of Credit for Business
This is the form of financing that is best for temporary capital. Therefore, when you use this type, a set amount will be approved by a financial institution or bank. Inside of credit line, a business is able to make a payment and then continuously deposit once the customer payment has made their payment. It is similar to using revolving credit. This means that the interest is only for what has been used, but not on what for approved amounts. A business will be able to deposit any unused amount in order keep interest low. This is seen to be the best way to be cost effective when it comes to financing.
Invoice Discounting
This another type of financing where any received invoices are able to be discounted through banks, financial institutions or a third-party. This means that banks will pay the company when you discount the invoiced and then it will collect payment from the customer whenever the invoice is due.

Factoring
This type of financing is almost similar to discounting when an account would be sold to the bank at a lower price than the realizable value for the account. This particular type of purchase is called a factor. A person can get these services at a financial institution and bank. There are various forms of factoring that may be used as well such as recourse, non-recourse, etc.
Another great thing to know is that banks will a great source to gain working capital for short-term time periods.

Overdraft Agreements
Whenever a business goes into overdraft agreements with banks, a bank will let the company borrow up to a set amount without there being any other discussion needed. However, a bank could ask for a type of security and this could be collateral, or it could be interest with variable rates on any outstanding amount. However, if a company believes that they can repay it quickly, then overdraft agreements will be a useful tool for financing. This is a form that is often used by many businesses will go to.

Financing on Accounts Receivable
There are a lot of non-banking and banking institutions that will provide a way to provide financing to any accounts receivable. This means that the institution will purchase the bill and then collect amounts from customers. A company that has large credit terms can continue doing business and not needing to wait to get full payment from a customer.

Customer Advances
Many businesses that state you have to pay before any services are provided or goods are sold. This is a good thing, especially if it is a large order that could take a bit to fulfill. This also helps to make sure that there are funds that can be channeled into operations while the orders are being taken care of.

Installments
Some businesses, especially the ones that sell home appliances like stoves, refrigerators, televisions; businesses that sell electronics like computers, radios, etc., and the ones that sell cars may allow a customer to pay off their bill in installments. Because most items are something that is now considered to be an essential, the customer may not be from a wealthy background and be able to afford an upfront cost. If that is the case, then there is no need to wait for large lump sums, the business will let the customer make small monthly payments until it is paid off. This helps to make sure that there are regular funds coming in and it is not choking up accounts receivable.

Long-term Financing
One thing that many business owners need to know is that when a company relies on short-term amounts to be able to the needs of working capital, it will not always be the best thing, especially for an industry where it actually manufactures the product, which takes a bit of time to do like refrigerators, vehicles, computers, and aircrafts. These companies are the ones that need to have working capital that will be able to be used for extended periods of time, and so they are the ones that often lean towards long term financing.

Long-term Loans
There are some businesses that will just decide that they rather get a bank loan with long-term repayment options. This will allow the company to have working capital that will be needed for at least 3 years or more.
Retain Profits
Instead of a business providing shareholders with dividend payments or even investing in something new, there are some companies that will retain a certain amount of the profits that they make so that it can be used to create working capital. The businesses do this so that there is nothing to worry about taking out a loan, paying interest, taking a loss for discounted invoices, and they are able to be self-sufficient when it comes to the financing of the company.

Debentures and Issue Equities
There are going to be some cases when a company is extremely low on funds, or whenever a business decides to invest in a new venture to expand, the business could decide that they are going to issue bonds or debentures to the public, then there are cases where they could issue equity stock. This is only done by large conglomerates and it is only really used whenever a necessity for a lot of funds at one time is required.
A company cannot always rely on certain limited sources in order to get working capital. Multiple options need to be used and the needs of the company will always need to be evaluated. This can be done using an analysis of financial ratios and financial statements. The channel where working capital comes from needs to be selected carefully as it will be an ongoing process. Different types are various points in time may be more appropriate. The whole thing is for a company to select the right type of alternative based on the situation that they may have at that particular moment in time. Hopefully, this guide shines a light on what can be done by a company when it comes to meeting the needs of working capital.

Money Management Expert Advisor

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One careful thought as per maybe or not a skillful advice giver can be beneficial in forex trading boils down to the employed money management. Regardless of how improved the logic used is, if what is put into money management are inconsequent, it will fail.
The challenge is that many traders devoid of knowledge of the true meaning of money management, also how to harness it to one’s favor in self-functioning forex trading.

Money care is used in the strategic exploit of position sizes on divers exchange of goods and services to be certain of positive output. With an effective fund care system, more losses and more win are being accounted for, also in sizes shoot up regularly with value rise.
Every skilled advice-giver get more sequence of losses when they arrive and the length of their existence is unknown. Also exist, is profitable sequence of winning. However, sequence losses empty one’s account, and this can be worrisome. In lieu of this, ensure you have fore knowledge of the extent of your sequence loses (losing streaks) prior to setting up your inputs.

Theory

Money Management Expert Advisor Types

1. Fixed percentage:
this is also refered to as standard position sizing approach. In this approach, the trader is the determinant of percentage level of the balance left in his account that can be risked in each transaction. Often, the value in percentage is falls within 1% to 3%. Thus, the magnitude of account depends on the size of the percentage risk.
For instance, if one transact with $11 000, you might risk $1100 per transaction perhaps per transaction, the level of risk increases by one unit in percentage.
Hence, ending the transaction results to lose of $1100. The main challenge of this approach is that same quantity is apportioned to every of your exchange. Thereby, graphically, the account is smoother and stable.

2. Averaging up
This explains that the moment trades shift to gains, the merchant, as price increases also put in more contracts. This is also called scaling into exchange (trade)

The possible losing trades is minute due to the formal point isn’t that huge when accompanying the scaling into trade method. For the trend following approach, averaging up method may be advantageous because it permit the trader to increase the moment the trend strengthens itself.

In quest to get a fair and appropriate price value to put into a position might cause a threat. In furtherance, the moment price shifts, those who gain can be annulled by the losers. To alter this effect as soon as possible, transactioners apply larger position in previous orders, then diminish their magnitude the moment scaling into trade start.
3. Cost Averaging:
This approach often cause controversy among traders. It is totally against averaging up because if one’s trade shift in opposite direction, then the need to make another orders so as to increase your points.

Here, losses can be diminished possibly and the stage of equal cost and income might be reached sooner as soon as trade that shifted against you take a new turn.

This approach is often misused, often by untrained traders, who are emotionally driven because they are at a losing spot. Such do make new order even why sloping down hoping it will turn out in their favour. Due to the lack of effective trading strategies, neglecting the fact that price must turn. The major cause of major loses in the midst of untrained traders are lack of proper application of cost averaging. Hence the approach is not meant for untrained traders or one who is devoid of principles and attach emotion to trade.
4. Martingale
This approach is often the talk of the traders just like averaging cost approach. In hope to get back what was lost, the trader make his position size times two. Together with first winning transaction so as to annul the previous debt or losses.

The place where doubling-up depicts risking entire account emerges unavoidably. In a lengthy period of term, every merchants will taste a sequence losses, and just one of such is enough to empty the entire trading account.
If merchants want to requite trade and start trade without suddenly losing after series of losses, then ’Martingale approach’ becomes a great issue, this conditions can totally wipe off account sooner than expected.As corroborated by statistics, series of losing can occur regardless of the expertise of the trader. Hence, it’s just a question of time before one completely explode with this approach.

5. Anti-Martingale:
This approach remove the danger of ’Martingale approach’ Using this method the merchant doesn’t double-up subsequent to a loss, also employ normal risk level. As a result series of losses cannot quickly empty merchant account. Contrastingly, if a merchant has consecutive winning, the merchant doubles-up, also engage in more risk in the subsequent trade. In this method, the main idea is that subsequent to winning transaction, trading is done with extra or say free money.
For instance, a merchant earns $200 profit after risking 1% on $10, 000 account, he’s now having $10, 200 as his new account. In next transaction, he can risk 196% of $10, 200 i.e. $200. if he wins, he gains $400 summing up his account to $10, 600. In his subsequent trade, $600 can be risked amount to 57% of his previous account i.e. $10, 600.

Traders possibly tend to gain more during consecutive winning and never drop the initial account balance

A loss can cancel the initial profits, hence merchants should be mindful doubling-up their stand. Rather should use factor less than 2 in determining his stand subsequent to a win. Doing this make them have a profit even after series of losses.
Account shifts with anti-martingale approach can be obvious due to losses subsequent to consecutive wins that can be huge if the subject cannot cope with the losses. This approach can result to another problems. Hence, a trader should have a predetermine specific level that he doesn’t increase his position size further, but returns to original method to get his profits.

6. Fixed ratio
This approach is predicated on trader profits. So, a trader must of necessity decide a specific amount of gains that enable him to shoot up his delta. For instance, a trader may start trading a single contract, decide his increase position to be around $2, 000. Each time a profit of $2, 000 is realized, by one contract, the position size is increased.

The position size increases only and only if the profit is made. The extent of increase of trader’s equity is controlled by selecting delta. When this delta is high, it only signifies the trader’s is at lower position and vice versa.

Value, and setting of delta preference is not actual science, but subjective.
Position size together with rising account are reduced due to high delta. So also account rises with low delta while the profit is unstable.

7. Kelly’s Criterion:
The objective of this approach is to increase the combined return which can be earned by investing the interest again. Loss as well as win rate are employed to decide the maximum position size.
Mathematically shown in the formula below:

Position size = Winrate – ( 1- Winrate / RRR)

However, the implied position size in this Kelly Criterion usually underestimate the effect of losses also consecutive losses.
Example from mql5.com :
Example:

Last 50 trades :

26 trades were positive ( profitable ) with a total gain of 780 pips
24 trades were negative with a total loss of 600 pips

To get the Kelly ratio:

W = 26/50=0.52
R = (780/26)/ (600/24) =1.2
K% = W – [(1 – W) / R]
K% = 0.52- [(1 – 0.52) / 1.2]
K% = 12%
Goal is to compare various systems to see which system has the smallest risk.

Money Management Expert Advisor – Our Case Study – indicators experts and scripts

We tested several money management mql4 expert advisors.On official Metatrader website mql5.com we can find excellent forex money management ea such as:

1) Money Manager Graphic Tool – indicator for MetaTrader 4

money management graphical tool

Conclusion

Gains and losses don’t usually occur in plane regularities rather as consecutive winning and losses. Having found out that this is inherent. It’s prudent to maintain the line during reductions and as well be moderate during consecutive winnings.

Generally, effective risk control make use of several fragments. There ought to be clarity as well as calculation of the possible losing streak and reduction of the system decided via estimation and back testing. Also there ought to be clarity of the choice maximum risk of the network moving ahead in the sense that there’s no more than 25% reduction. If the history of the network is gotten and the likely reduction, one can then include money management network which can self –manage the lost just to the extent that trade doesn’t go beyond risk percentage. Also, the sequences of losses must not exceed the pre-decided tolerated ultimate risk.
In general, to maintain your system for long time, the size of the transaction account must not go beyond risk of 2%. Except the losing trade on average is too small compare to end loss. Even the minute risk percentage is due more than ten consecutive losing may occur which must be effortlessly survived if transacting with parallel systems. Worthy of note one can run three strategies just with risk of 2% or six plans having 1% risk each. However, it’s dangerous if the risk combine together rise above 10.

Furthermore, money management is like rendering powerless the dragon- so far you are sure of escaping its claws. Also the fire coming out its mouth which is synonymous to manipulating oneself against a consecutive loss.
If you are careful with your strategies, you can escape risk and gallantly have more wins. However, if you allow greed to rule you and aim huge while setting your risk inputs, you may likely lose your account.

Megaphone Chart Pattern Success Rate – case study

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Megaphone pattern (well known term) or Broadening formation (term from books) are synonyms and point to well known trading chart pattern.

How to trade Megaphone chart pattern ?

Another chart pattern employ in technical analysis is megaphone pattern. The wide formation is a good hint into the risen risk that accompany change.
The stock market comprises of two giants, that is, buyers and sellers. The contest between the duo forms patterns in the market. To know and identify what patterns stand for is very important.

Megaphone patterns

The way megaphone patterns form earns it a name, ‘broadening formation.’ Stock do migrate without a definite direction due to high volatility. Thus formed megaphone patterns. Higher gets high and lower gets low simultaneously as a result.
Nevertheless, using a megaphone pattern one can get both lower lows and the higher highs. As a result, there is no direction. Important aspect of this pattern are trend lines.
Example : Bullish trend megaphone chart pattern:
megaphone chart pattern bullish
Due to this one must be good at joining the dots, else it assumes the shape of a triangle pattern. This will end up change the way one trade.
Example : Berish trend megaphone chart pattern :
bearish megaphone chart pattern example
The process of forming broadening formation is by using the trend line to link the higher highs and lower lows. The shape of megaphone patterns is just like a reverse triangle.

BREAKING DOWN THE BROADENING FORMATION PATTERN

When market starts having higher risk for a long period of time then megaphone patterns starts forming. One of the key factors contributing to megaphone formation is election. The reason being that electing a particular leader can change the affair of things in a country. Which later have effect on the market. Since the political clime is not stable then the market keeps on fluctuating.
Megaphone pattern also forms as a result of earnings season. Earning report from companies have effect on stock. Earnings may have both good and bad side. And this cause different reactions. One of such reactions results in broadening formation.

Megaphone patterns are usually seeing as bearish pattern. This is because it is a reverse symmetrical triangle. Whereas normal symmetrical triangles are neutral.
Swing as well as day trading both capitalize on volatility. Single direction has always been suitable path that long term investors want to trade.
To successfully trade various patterns, our course on day trading will be helpful. In volatile pattern it is better to trade around the trend lines. All base on one style, while hitting angular support it’s very much best to go long. Also, while hitting angular resistance, go short.

Broadening formation or megaphone formation

A food megaphone pattern formed on the one-minute chart by PTI. Either swing or day trader, the best time to buy is when the trend lines are hit. Angular support while long and the angular resistance while short.

The significant part of technical analysis are trend lines. This result into swing and day traders off profit from the change of a broadening formation.
Up to 2 weeks, Swing trading holds overnight. It’s all has to do with one risk management. Technical pointers are in place to assist one get in and out of trades as soon as possible. The trend lines can be used as entry and exit points also as stop losses. The broadening of megaphone patterns indicates the potential to profit is higher. This can also be indicative of the potential for loss is higher.
Thus, there’s need to trade with effective risk management. Use the technical pointers to self-advantage. The small candlestick 2 to 3 patterns are also useful. The combination of these can provide great entries as well as exits.

Megaphone chart pattern case study

Methodology : In our research we tried Pointzero Megaphone indicator (very good megaphone chart indicator) and test last 10 years for EURUSD, GBPUSD, USDCAD, AUDUSD, NZDUSD on H1, H4 and Daily chart.

We created test using Visual Testing tool in Metatrader :
Megaphone chart pattern case study test

Results :

Currency pairsH1 chartH4 chartDaily chart
EURUSD51%54%55%
GBPUSD45%48%47%
USDCAD47%49%51%
AUDUSD50%53%51%
NZDUSD45%49%52%

Discussion :
Results were very bad. We tried to see at least 1:0.8 risk reward ration. For 1 risk and 1 reward test results will be worse than in our research.
Our tests are made by visual and manual observations so we accept any critique.

How to trade megaphone patterns

Megaphone patterns are often most suitable for day and swing traders. It can also be used by long term investors to use as a sign to support their investments. Just like with any style of trading, it’s better to study and learn the different patterns and what they stand for.

Practice trading account begins with opening paper trading account. As a result, you’ll get good at drawing trend lines and linking the dots to arrive at different patterns; which is a crucial part of trading. In personal opinion, success rate, based on our tests, is bad and we avoid to use this pattern in trading decision for smaller time frames. Of course, weekly and monthly chart can be interesting for this pattern.

How to Use NAV and RNAV (Revalued Net Asset Value) to Value Real Estate Stocks

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There are multiple ways that retail investors are able to determine the market value for each property held by a real estate developer. These include Net Asset Values (NAV), and Revalued Net Asset Value (RNAV). The following will explain them, and how to value real estate stocks.

What is RNAV?

This method is conducted after each property projects’ market value has been determined. The RNAV method is more complex as it requires using the net asset value (NAV), deducting the liabilities to find the Revalued Net Asset Value of the real estate developer.

The process:

1. Value changes within the company’s held investment property
2. Surplus value of held property for development
3. Company’s NAV shown on the balance sheet.

Therefore, the only surplus and change values considered are the properties book values within the portfolio. These are the figures shown on the balance sheet, used for adding the NAV of the company to calculate the Revalued Net Asset Value of the company.

Additionally, some may refer to RNAV as “Revised Net Asset Value”. In either case, there will typically be a premium or discount added to the RNAV, which accounts for factors including the management size, quality and the company’s overall track record, business risk and reputation.

Below is an example RNAV calculation:

Surplus Value: Property 1 ($$ m) 20.0
Surplus Value: Property 2 ($$ m) 10.0
Surplus Value: Property 3 ($$ m) 5.0
Total Surplus 35.0
+ Company Nav ($$ m) 210.0
+ Shareholders Funds ($$ m) 700.0
RNAV ($$ m) 945.0
Discount to RNAV 20%
Discounted RNAV 756.0
Number of Outstanding Shares (m) 800.0
RNAV per share ($) 0.95

What is NAV?

In theory, any type of financial product or business entity with operations of asset and liability accounting can have a Net Asset Value (NAV). When discussing business and company entities, the gap that exists between the asset and liabilities are commonly referred to as the company’s capital, net worth, or net assets.

NAV has become a popular industry trend associated with fund pricing and valuation, which is calculated by dividing difference of company assets and their liabilities by the total number of units or shares that investors hold. Therefore, the NAV of funds reflect the value per share. This is a simple method to use to value and transact shares of the fund.

NAV Formula

Calculating the Net Asset Value of a mutual fund is simple, for example:

Meanwhile, the funds’ asset and liabilities should include the proper qualifying items.

Using NAV with Mutual Funds

While common stock prices are constantly changing one second to the next, mutual funds are not priced in real-time, but based on the assets and liabilities when the day ends. Therefore, the mutual fund assets include the total market value when combining the mutual fund’s cash, investments, accrued and receivables income and cash equivalents. Meanwhile, the market value is determined daily depending on the closing price of securities held within the portfolio.

Because funds can have a specific amount of capital as liquid and cash assets, those are calculated under the heading of cash or cash equivalents. Accrued income includes money earned, but not received by the fund. Receivables refers to items such as interest payments or dividends applied during that day. Finally, all these and the qualifying variations are combined to determine the sum of the fund’s assets.

Generally, mutual fund liabilities include pending payments, a range of fees and charges owed to different associated entities, or money owed to banks. In addition, funds can have foreign liabilities which could include dividends or income to non-residents which are pending, or shares held by non-residents, along with proceeds that are pending repatriation. These can be classified further as short-term or long-term liabilities based on the length of payment.

For calculating NAV for a certain day, all the different items are categorized as assets or liabilities.

Example:

If a mutual fund has $200 million in total investments across multiple securities, based on the closing price for each asset that day. Additionally, it holds $8 million in cash or cash equivalents, $5 million receivable, and the days accrued income was $100,000. Meanwhile, the mutual fund also has $3 million long-term and $14 million short-term liabilities, while the days accrued expenses was $12,000 with 6 million outstanding shares. The following formula is used to calculate the Net Asset Value:

NAV = [($200,000,000 + $8,000,000 + $5,000,000 + $100,000) – ($14,000,000 + $3,000,000 + $12,000)] / 6,000,000 = ($213,100,000 – $10,988,000) / 6,000,000 = $33.69

How is RNAV Different from NAV?

The RNAV is a more complex calculation requiring knowledge of additional company information. Whereas, NAV is a simpler calculation that just divides company assets and liabilities by the number of outstanding shares held by investors.

The RNAV method requires knowledge of the development property or company value, revaluation surplus, and outstanding shares held by investors. Additionally, any RNAV discounts are needed to correctly calculate the Revalued Net Asset Value.

Generally, because of the information requirements a retail investor cannot easily use the RNAV method for valuing real estate developments. Furthermore, acquiring the data to calculate each property’s market value a developer holds, can be costly. Therefore, analyst reports remain the best approach for retail investors when analyzing the developer because the already have access to the information.

How to Value Real Estate Stocks?

Prior to purchasing a property, it is recommended to figure out the value to ensure a fair price and transaction. This rule applies with real estate stock as with any other. There are three methods of analyzing real estate, depending on the property type and data availability.
1. Income
This method is used for estimating property value depending on the revenue generated. This method is frequently useful for properties that are producing income. This approach uses capitalization rates – which is the real estate property’s potential ROI – along with net operating income for estimating the property’s value. Additionally, discounted cash flow is a factor that can help derive property value.
The following is a basic example of the capitalization approach.
a. To find the property value based on capitalization rates, first determine what the net rentals realized, or net operating income is. Then, operating costs (minus monthly mortgages) are deducted from the total rental revenue to determine the net operating income.

b. Figure out the ROI you would like, along with the expected monthly rental. Then, using the following formula we can determine the property value:

Thus,

For example:
If you’re looking to purchase a condo and use it for a rental property that rents for $1,100/month and generates a 5% ROI, you would use the following to calculate the amount to purchase the property at (or below).
($1,100 x 12) / 5% = $264,000

2. Market or Sales Comparison Method
This method estimates the property value by evaluating the recent sell price of other similar properties within the area. The sales comparison method is often used to determine the value for family homes. Although, two different properties will never be the same. Therefore, adjustments will be required for ensuring the sell prices are similar to that of the property features. When a property offers features not available on the comparison properties, the sell price is adjusted upward, or downward when the subject property lacks a feature of a comparison property.
To determine real estate value using the market method:
a. Locate similar properties in the area sold recently.
b. Adjust based on differences in quality, quantity, size, location, etc.

3. Cost Method
This method estimates property value based around the costs for building or replacing the property. The cost method is frequently for purchasing recently constructed properties, which requires knowing the cost for materials and construction. In addition, the method is frequently used for purchasing properties that have hard to find comparisons sold recently, while not currently generating an income. Typically, the cost method considers the land value while including cost to build structures, while subtracting cost of depreciation.

Reproduction refers to the expenses to fully duplicate the property’s structure.
Replacement refers to the cost to build similar structure with updated materials and construction methods. Therefore, replacement costs are more common due to being based around current construction costs.
To estimate the replacement or reproduction cost, there are three common approaches:
1. Comparison or Square-foot approach is based on comparing recently developed properties based on cost per square-foot, multiplying it by the subject property’s total square footage.

2. Unit-in-Place approach is a modified version of a quantity survey. However, rather than analyzing the costs for every item used in construction, it calculates costs of materials, labor, entrepreneurial profit, and overhead for each section of the property. For instance, cost per sq. ft. of walls and roofs.

3. Quantity Survey approach combines the total cost of itemized materials, labor, entrepreneurial profit, and overhead. Appraisers rarely use this approach due to the time and in-depth work required.