Saturday, April 15, 2017

What Is The Market Peak?

When considering the most effective way to refine the process of component valuation as well as market valuation, an investor can easily manage this by theoretically understanding what these valuations entail.

Firstly, there is the market price. This market price is set through contractual terms, either verbal or written, where two parties exchange; once they decide to act on their desired value subjectively itemized on their value scale.

Secondly, there is the process of gauging this rate of return, the difference between buying and selling prices which occurs over time. As well, this is a subjective decision. You purchase something at one point in time, and sell this good or set of goods at a later point in time.

The process of price discovery is using the available information to then purchase goods based upon their price, whilst also measuring the mark up you will offer to generate the proper amount of sales. This difference, or net amount, is a rate of return.

The best examples of rates of return are the Sales (Top Line) of the Income Statement, and all of the costs which are then subtracted in a descending fashion until one arrives at what is Net Income (Bottom Line). Net Income can be considered a Rate of Return.

Another Rate of Return would be more abstract, that which is the asset price. Assets include Securities (Stocks and Bonds) as well as Real Assets (Land, Edifices or Machines). Each of these has future value, or better stated, can generate a rate of return. This means that the price will be different in the future as compared to it's current price. Indeed this is subjective.

Liabilities are obligations, simply put, anything that is owed. Moreover, anything that does not belong to you and which you are obliged to pay back in installments over time. The net amount, Assets minus Liabilities, is the value of the company or market capitalization. It is in other words the Net Worth; that which is what the claimants own.

Solvency is arrived at subjectively for a company. Corporate owners must manage their obligations, and allocate their funds to the proper returning assets. If Stockholder's Equity is elevated far above real value (overvalued), corporate owners presume the value of their company places them in a position of solvency. They therefore mismanage expenses.

The rate of interest (when this reference point is monopolized) creates a large amount of debt issuance due to their supposed ability to borrow cheaply. This is how entrepreneurs are deceived. Furthermore, lots of Credit Money (obligations) bid up prices during this speculative process. As it is an obligation for one, it becomes an asset for another.

Rates of return, as constantly mentioned, are everywhere. Thus, purchasing power itself is a rate of return. As more money enters the system (by issuing more Credit Money as well as Fed asset purchases), the rate of return shrinks.

The market sell-off occurs once investors realize their rates of return dwindling near zero. This is in actuality a shifting of money to a different sector. Systematic risk is this apogee in the market, a herd movement out of one group of securities into another. Many times it is a desperation by investors to preserve rates of return from diminishing during this process (shrinkage in value).

Conclusively, withholding consumption is this notion of which the mainstream economists over explicate as demand to hold. A ceasing of consumption, or consumption at a lesser rate, is the holding of money. It is, to chiefly reiterate, subjective.

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