Friday 24 October 2014

Bacanora Minerals - Hatch Come Onboard

I must confess that when the RNS was released telling us that Hatch are to be the engineering consultants for the Sonora Lithium Project and the Magdalena Borate Project I didn't jump with the same excitement as some regular bulletin board posters did. 


Nevertheless, when I followed the "DYOR" adage and looked into them, I too began to quake with excitement! 


With more than $35 billion in projects currently under management and having operated in 150 countries, Hatch have invaluable experience in both borate and lithium plant design.


Most importantly however, is that the very high speed at which Hatch operates means that the there's the potential for the Lithium plant to be up and running by late 2015 or early 2016.


Now, I refuse to sign up to ShareProphets for a number of reasons, so this would be potential extra reading for some who want to go into more detail, but this is a quote from the article that I've lifted from elsewhere:



"Bacanora, steered by chief executive officer and experienced mining figure Shane Shirclff, has had pilot plants working for a year, according to Orr-Ewing, and, provided an expected £70 million financing can be fixed, hopes to have Sonora, where water is abundant, in production by the end of 2015 at an annual rate of 35,000 tonnes of lithium carbonate, with costs less than a third of recent prices of around $6,000 a tonne.
...
Orr-Ewing says the company will still have cash after the two feasibility studies, but envisages augmenting liquidity with forward sales deal. He adds ‘we may do a placing, in the $3 to $5 million (£3.7 million) range, but not until mid-2015."

http://www.shareprophets.advfn.com/views/8542/bacanora-signs-up-key-consultancy





Further to this, here are some tidbits of a conversation someone had with Kiran Morzaria on Twitter, which effectively follow the same train of thought:



Shane Stephens ‏@Sstephens95 Oct 22

@RareEMplc galaxy res from pfs to construction in under 12 months, shows potential given required urgency


Rare Earth Minerals ‏@RareEMplc 21h21 hours ago

@Sstephens95 Agreed - "Hatch moved this project from a concept design to a completed facility in less than three years".


Shane Stephens @Sstephens95

@RareEMplc hatch have the required experience aswell - hopefully see some big moves in the coming months. Thanks.


Rare Earth Minerals ‏@RareEMplc 20h20 hours ago

@Sstephens95 Yes they do - I know the team well met them at Lithium Conference this year thought they would be ideal for BCN. 



To conclude, it looks like the appointment of Hatch as engineering consultants could well have been the beginning of an accelerated program to deliver production earlier than the 2017 that was expected. Even if this is true, we can't expect the 50,000 tonnes per year that could be processed from a full scale plant, but based on the movements of other companies like Western Lithium Corporation, starting small and working up seems to have become popular within lithium mining.


All the best,

The Masked AIM Trader


UPDATE! 

It transpires that there was a wrongly changed error between the information that I received for an ADVFN bulletin board and the the information actually available on SharePhrophets. The production year is still expected to be 2017.

My apologies,

The Masked AIM Trader

Tuesday 21 October 2014

Learning From the 2008 Financial Crisis:

Good evening,


In order to be able to find points from which we can learn form the 2008 financial crisis, we first need to have a brief coverage of what caused the crisis:


Causes:


In my opinion (and I appreciate that there are many differing opinions regarding this), the crisis was a result of too much leverage fuelling asset bubbles - the root cause of pretty much every financial crisis in history.


The scene was set prior to the financial crisis through very accommodative monetary policy, that helped to make credit widely and cheaply available. Combined with changing and inconsistent capital regulation rules across regulators under the Clinton administration, that allowed banks to acquire more leverage, it created an environment where perpetual upwards market momentum was expected, which ultimately resulted in misguided overconfidence in the financial markets.


I believe that the spark of the crisis however was ultimately within the sub-prime lending, where the decision to grant a mortgage to someone became disassociated with their ability to repay said mortgage. 


Moreover, I don't think we can ignore the misuse of the quantitative risk models that took place in the run up to this 2008 sub-prime crisis and especially their utilisation in valuing Collateralised Debt Obligations (CDOs):


These instruments effectively allow groups of mortgages to be traded, but where you can take as much or as little risk as you like and in the case of sub-prime mortgages the system would have initially had very large profit margins to act as a default hedge. However, as the sub-prime lending became more popular and more providers of CDOs became available, this profit margin began to shrink, which in turn increased exposure to risk.


I should clarify here that the fault was not necessarily with the models themselves, but with the use of the models as a fool proof system, combined with certain unrealistic assumptions that existed within the framework of the models:


For example, the great Quant Paul Wilmott uses this equation below to help explain one of the issues with the quantitative finance in the few years prior to the crash.


Prob[TA < 1, TB < 1] = Φ2 (Φ-1 (FA(1)), Φ1 (FB (1)), Υ)


To put this in a less mathematical context, this equation relates the probabilities of defaults happening  in two different things to the behaviour of two companies going independently via something called a correlation.


- Assume that we have a CDO with one-thousand different mortgages and you want to model them.


- In this model there's going to be an assumption for how these mortgages interact with each other, or in other words we can ask the question: how many correlations there are in two by two combinations of these mortgages?


- The answer is going to be:

1000*999/2 = 499500


Now, the problem is that the quantitative assumption that was made was that the correlations between these mortgages were all the same: 0.6


Obviously, this is ridiculous and quantitative traders working within the industry will have known this, but that the renumeration available to them at the time would have made commenting on this a recipe for personal disaster.


This would ultimately have led to the use of "bad" (for want of a better word) or at least highly unrealistic data, from which these highly leveraged institutions would then grant loans that had very low probabilities of ever being repaid, thus assisting in the financial crisis.



To summarise my opinion of the causation of the crisis, increased leverages as a result of borrower accommodative monetary policy, created an environment with unrealistic market interpretations, that was driven forward in part through the misuse of quantitative techniques within institutions with exposure to the mortgage sector. 


Moving Forward:


Since the financial crisis, the Systemic Risk Council in the USA has made significant progress to increase capital levels in banks and in turn reduce risk levels and this combined with tightened mortgage lending standards (borrowers now have to have a proven ability to repay their loan - not so much on the downpayment side to contain borrower leverage, but for the larger institutions) will mean that mortgage led crisis seems more unlikely now than it previously was.


Further steps to react to the financial crisis came from the creation of the Financial Stability Board, which developed four key points for improvement within the US banking sector:


1. Build resilience of financial institutions:


In regards to this point, the maintenance of high capital levels is key and the FSB are encouraging the idea that common equity is loss absorbing, while debt is not. Effectively, the more they fund with equity rather than, debt the more resilient the sector becomes as a whole.


2. Ending the "too big to fail" concept: 


Ironically, the financial institutions at the heart of the financial crisis are bigger today than they were at the time of the crisis, although the FSB would argue that there are better tools in place to resolve issues now than there used to be, with the Federal Deposit Insurance Corporation (FDIC) having a much better understanding of single point of entry systems to prop up large institutions. 


This works on the basis that large institutions issue more long term, unsecured debt at the holding company level, which then becomes loss absorbing in the event of a company failure.


3. Transforming shadow banking to transparent and resilient market based financing 


A lot of work since 2008 has gone into increasing the level of title 1 designations (the extent to which institutions fall under oversight). Sadly, this same level of oversight still doesn't exist within the asset management and hedge fund industry.


4. Making derivative markets safer


Over the counter bilateral debt is now centrally cleared and the majority has become exchange traded. Nevertheless, there is still no strong regulation over clearing houses, which will have to improve in order to truly make the derivative markets safer.


I'll undoubtedly add more to this in good time,

The Masked AIM Trader







Quindell - Summary: Major Insurer RNS

Good morning,


Those of you who were trawling the FCA website yesterday evening, would hopefully have noticed the fall in the Roble short of just over 0.5 percent (incidentally, the FCA spreadsheet is the fastest short tracker available - not the website: www.shorttracker.com).


Also, people who were awake this week would have noticed a decent amount of director buys in the company, but in my opinion it's the culmination of all of the above and the information we received this morning from Quindell as per their telematic solutions that seems to be making everything just a bit more rosy for the company than it has been of late.


New Information:


- Quindell have announced a new contract with a major, top three, insurer.

- This is a five year contact.

- The major insurer will have committed to a goal of gathering at least 125,000 customers over the five year period.


Analysis:


- The fact that Aviva Canada is a top three insurer in Canada combined with the them featuring within the investor-teach in in mid January as the lead underwriter for Ingenie Canada, makes me suspect that this is the company in question.


- With Quindell expecting it's average revenue per month to be between $8-9 per customer with strong margins, a goal completion for the major insurer could generate $12-13 million of recurring annual revenues.


- In the event of a 20% take up from the total of the major insurer's customers, this could provide Quindell with as much as $58-65 million in revenues recurring annually.



Sources:

http://www.investegate.co.uk/quindell-plc/rns/major-insurer-5-year-contract-win/201410210700198206U/

http://dcms.canaccordgenuity.com/ResearchNotes/8bb2432340694f95a43ad7f8875bc6b0.pdf







Saturday 18 October 2014

Tom Winnifrith - An open letter to ADVFN

Mr Winnifrith, as many of you will know, is one of the writers of the website www.shareprophets.advfn.com and although I've never met the man in person, I've often felt  through reading his work that there is something strange and unpleasant about the way in which he conducts his online presence. 


In fact, I've begun to seriously question whether he could be contradicting one of the statements on the ShareProphets' "About" page, in regards to being "Keen to maintain high standards" and as ShareProphets is a subsidiary of ADVFN I would have expected them to have either at least disciplined or enforced some form of punishment again Mr Winnifrith, in the knowledge that his work is directly associated with the operations of ADVFN.


Now, I'm not going to directly dispute the comments that Mr Winnifrith makes regarding certain companies being potentially fraudulent (it's something that happens to such an extent that for me to openly rebuttal every comment would require more time than I'm prepared to award such a task) however I will directly remark upon the fact that he ignores article eleven in the Universal Declaration of Human Rights when writing about the companies and board of directors of said companies:

"Everyone charged with a penal offence has the right to be presumed innocent until proved guilty according to law in a public trial at which he has had all the guarantees necessary for his defence."


In referring to companies like Quindell plc as "Quenron" (presumably a take on the American energy commodities and services company "Enron",  that was found in 2001 to have sustained a positive financial position via institutionalised accounting fraud), Mr Winnifrith is intentionally placing both unnecessary negative connotations on Quindell while implying a strong implication of fraud.


Furthermore, revised libel laws have meant that ADVFN are responsible for any content on their site, with ShareProphets being a subsidiary:



In the event of a law suit it would be the defendant (ADVFN and or ShareProphets) who would have to prove that the categorically stated remarks regarding the companies that ShareProphets comment on are correct. Also the owners of websites who allow unmoderated individuals to conduct their actions, will be considered under the law to be co-conspirators and also to be fully liable.


In additon to this, the new laws outlined on the 19th October to protect against internet abuse also have the potential to have an impact on ShareProphets if a law suit were to be pursued:


It is an offence to send another person a letter or electronic communication that contains an indecent or grossly offensive message, a threat or information which is false and known or believed by the sender to be false with more serious cases potentially going to the crown court under the new proposals, where the maximum sentence would be extended. 


Sadly, only a small proportion of his comments are implicit references to company fraud, with an explicit reference to him referring to the company Quindell as a fraud being available below. This is a Tweet from the account he uses often to promote ShareProphets in reference to Quindell plc:

Tweet text


Extra to Mr Winnifrith's open and continued accessions of fraud, never before have I witnessed an individual write such toxic personally directed material at others. Presuamably this is in an attempt to undermine the supposed quality of the companies that they represent or own shares in. 


This cannot be represented better in my opinion than via his "Quindell Bulletin Board/Twitter moron prize competition", which seems like a direct attempt to provoke shareholders and further illustrates an apparent desire to undermine those who hold opinions contrary to his own.


Furthermore, his Twitter account which he uses to promote ShareProphets shows an equal amount of bitterness, with the very recent Tweets being good examples of this:



yes as I admit fully in the bearcast. I do not hide my errors. so what point are you making motherfucker?


Morons & - again you are not tweeting me re share price of the fraud Quindell, anything wrong chaps?


Morons 8.30 AM ANOTHER Red Flag bombshell on Quindell for you. Blatant fraud to be revealed


I have and will continue to ignore the comments from many of my contemporary investors that Mr Winnifrith should be judged on his past performance as a fund manager, because I feel that people should not be heavily judged on their past actions. Nevertheless, I implore individuals such as Mr Clem Chambers to re-consider whether Mr Winnifrith is contributing positively to the ethos of ADVFN and further to this to re-think if he is behaving in a way that would suggest that he is "Keen to maintain high standards" within his writings on the ADVFN subsidiary that is ShareProphets.


All the best,

The Masked AIM Trader





Friday 17 October 2014

Bacanora Minerals - Effects of Higher Lithium Prices

Good evening,


I'm going to re-run some old numbers and use the world's oldest and crudest method for showing resource deposit potential. This is not a look at OPEXs, but if you want an analysis of this, then I suggest you look through Okenia's posts over on the LSE bulletin board for Bacanora Minerals.


Some points will undoubtedly be repeated across older posts of mine, but don't be put off by this. 


The data that I will be using will have come from these websites: 


http://www.bacanoraminerals.com


http://www.mining.com/web/batteries-leave-lithium-hydroxide-facing-tight-supply/


Numerical Analysis:


All of these figures are obviously estimates and should not be used as trading or investment advice.


- The RNS entitled "Expansion Plans for Sonora Lithium Project" told us that the plant and mine would be capable of processing up to 50,000 tonnes of LCE per year (an upgrade from the 40,000 we previously knew of).


- Taking the price of lithium as it currently stands (~$6,500/tonne) you would expect a project value over the lifetime of the mine of $13,000,000,000 in revenue terms and $10,000,000,000 in profit terms at an average production cost of $1,500 per tonne.



50,000 tonnes * $6,500 

=$325,000,000 (Production revenue per year).



50,000 tonnes * $1,500 

=$75,000,000 (Production cost per year).



50,000 tonnes * $6,500 - $1500 

= $250,000,000 (Production profit per year)



$325,000,000 * 40 year mine life 

=$13,000,000,000 (Revenue over the mine's 40 year life span).



$250,000,000 * 40

= $10,000,000,000 (Profit over the 40 year mine lifetime).



Using the revised figure from mining.com of ~$8,000/tonne for 2015 and beyond at the same extraction cost (although this may not be realistic now the company has confirmed that they will be providing for the lithium hydroxide and lithium carbonate market) gives the following figures:



50,000 tonnes * $8,000 

=$400,000,000 (Production revenue per year).



50,000 tonnes * $1,500 

=$75,000,000 (Production cost per year).



50,000 tonnes * $8,000 - $1500 

= $325,000,000 (Production profit per year)



$400,000,000 * 40 year mine life 

=$16,000,000,000 (Revenue over the mine's 40 year life span).


$325,000,000 * 40 year mine life

= $13,000,000,000 (Profit over the 40 year mine lifetime).

                                                     

We must remember that these numbers are only estimates and I implore people to look through the RNS releases and do their own numerical analysis on this company. I still find it hard to believe that such "telephone-esque" numbers are appearing in my calculations, but the more I look at this company the more I come to the conclusion that it's staggeringly undervalued in the market. 


The Masked AIM Trader


The Fur Industry - A Valuation and Discussion

I've always been fascinated with the fur industry and although I don't actually wear real furs myself I've always been intrigued by the history and evolution of the industry.


One of the earliest recognisable signs of the fur industry we know today was the Russian fur industry, which developed during the Early Middle Ages and went on to be the largest exporter of fur between the 17th and 19th centuries. Initially, the Russians would export their furs from ports around the Black and Baltic seas and send the majority to the German city of Leipzig.


This industry began to explode worldwide during the 1500s with the beginning of North American and Canadian exports, which anthropologists claim was initially sparked by the trade of lives for pelts between Native Americans and the American colonisers.


Since 2000 the industry has seen a new revival, with the rise of the Chinese middle classed combined with an increase in domestic Russian demand.Now, there are over 6,000 fur farms in the European Union (EU), with the EU accounting for more than 60% of the global mink production and almost exactly 70% of the global fox production, with Denmark being the leading mink producing country (creating around 28% of the global production) while Finland picked up the winning spot for exporting fox pelts globally.


In terms of putting a value on the fur industry, the International Fur Federation (IFF) suggested that the global value of the industry is about $40 billion, which is about the same as the global Wi-Fi market or about half the value of annual renewable energy expenditure  in the USA.


Personally, I'm not a fan of wearing real furs. This isn't to say that I'm wholly against wearing it and I'll more than happily wear vintage furs, but I just don't feel comfortable with the killing of animals for use as clothing when I live in the South of England, where it never gets cold enough to warrant real furs. This could possibly be seen as somewhat ironic though, as I still love a good steak! 


Furthermore, I feel that there are certainly inevitable animal welfare issues and this combined with certain inherent inefficiencies within the fur industry, such as the use of the remaining carcasses (granted, in the EU, some are used in the manufacture of cement and used for heating) where more regulation is needed to reduce the amount that are just discarded. This sadly means that I'm reluctant to allow my personal fashion decisions to stray down this alley, especially when faux fur is so much easier to work with as a material in comparison to animal pelts.


Coat with white faux fur collar
This does however lead me interestingly to discuss the alternative faux furs currently in the market place: 


For the past two years, I've made myself a new coat annually (exhibit the two somewhat ridiculous coats to the left and below) and both of these have used faux fur that I purchased from a company called FauxThrow (http://www.fauxthrow.com/index.php), that specialise in providing realistic and warm faux furs. 


Now, this isn't a post to advertise, faux fur companies, but I cannot recommend a better company: the faux furs are stunningly beautiful, realistic, easy to work with and the range of choice is unimaginably high. 


Grey faux fur coat
Faux fur has been commercially available since 1950 and was introduced to the fashion world as early as 1929. Brands like Chanel and Ralph Lauren still actively promote the use of fur alternatives in their collections and this is a trend that still has a large prominence in US teen fashion brands such as Abercrombie and Fitch. 


It's much harder to estimate the value of the faux fur industry, probably because the supply chains are much longer and more complicated, but also because the understandable lack of regulation in comparison to the fur industry makes it much harder to track the movements of money in and out of this industry. 


I should however state that this doesn't mean that the fur farmers are part of an evil, overlording industry, as there are arguably many positive aspects to the industry:


It has long been argued that natural furs are more sustainable than their petroleum based faux equivalents and most mink farms recycle abattoir and other food industry by-products. Furthermore, there's an emerging argument relating to second generation biofuels (more efficient and environmentally friendly than their primary equivalents), which can be made from mink oils. 


However CE Delft recently released a study suggesting that even a low-impact mink’s effect on the environment was more detrimental then the creation of faux fur. This paper specifically examined the manufacturing, cold storage, cleaning and life of real fur garments, with the result being that faux fur was supposedly five times more environmentally friendly than a single mink.


Food for thought,


The Masked AIM Trader

Thursday 16 October 2014

Quindell - Results Projections and EBITDA/Revenue Analysis

Good afternoon,


I've been luck enough to have been given permission to do my own, slightly condensed, spin on this excellent QPPSAG post:


http://qppsag.wordpress.com/2014/10/16/revenue-kpis-and-cash-after-quindells-q3-2014-trading-update/


I'm going to go into a little more detail regarding the visual trends that are now pretty strong within Quindell's results and as per usual, I have a long position in this company and believe that it will go on and continue to achieve great things in the immediate and longer term future.


1. Revenue Guidance and Cash Flow:


Some people in the market (mostly journalists) seem to have decided that revenue was a company selected Key Performance Indicator (KPI). Well, it wasn't, so that's that. Please feel free to correct me though if you can find a direct RNS quote that says otherwise.


Secondly, we saw a fall in revenue guidance and I hate to adopt a heated attitude, like a certain other blogger, but this point winds me up. If the market supposedly wasn't happy with the net cash position and wanted the growth rate of the company to fall, in order to allow a stronger net cash position to come through, then what else did they think was likely to happen to revenue? 


I think it's highly unfair to demand something that you know will likely impact revenues and then complain about it! This is especially annoying when you consider that the business model works on the basis that revenues were always likely to fall and investors were made aware of this many times in RNS':


“The Group continues to be successful in driving down the cost of claims for the insurance industry through programs such as its collaboration protocol with at-fault insurers, which in turn drive down turnover for the Group whilst maintaining or improving the Group's margins


Now, this doesn't mean that the company is self-discriminated for failure (as some have alluded to), but that the group's total revenue will fall while its EBITDA, cash and profit positions (all going to plan) will rise. 


Quindell do also have a very strong track record of over-exceeding their own estimations, so I would likely point out that if they go down their usual route, investors will probably still see this lowered revenue guidance being beaten and as the QPPSAG point out:


"if some NIHL cases settle earlier than the 18 months or so assumed in guidance and at higher fee settlements, which appears to be happening. That'll mean they can both book the full revenue for those cases and have more funds for taking on other work."



2. Projections: 


It's for points like this where I feel I ought to remind people that everything I write is not to be taken as investment advice, I'm not FCA registered, etc.


In many respects, this graph is not designed to actually tell you anything, but to give you an idea of where Quindell is headed in the future.


This graph below is what we get if we plot some of Quindell's past revenue data with their adjusted EBITDA margins. Now, there could well be a some human error here and people who are maths savvy will notice that I've multiplied up the EBITDA margin by ten in order to display the pattern clearer (really I suppose I should have logged this data, but I'm saving myself time before I go out).


Therefore, when you read this you should divide the EBITDA margin by ten and that will give you the actual figure at that point in time. 


Some of you will also notice that I've skipped some data, this was not because I have a data-snooping bias, but because I was finding it difficult to find the exact data (later reports are much more organised) and I was also trying to save myself time.
































Analysis: 


Now, I should point out that financial data of this type is horrible to find strong mathematical correlations in, because it's so volatile in nature and this is why I haven't bothered to give or explain any Pearson Coefficient values for this graph (for those interested if you ran it you would get a very weak negative correlation of -0.0012). Therefore, we shall resort to using visual trends on this graph (a ruler may come in handy here). 


The really important point though is that although we don't have a lot of data to work from, there is a clear visual trend to the upside for revenue, which even if you just follow linearly upwards over the full year results gives you a strong impression of the future (at least over the next year or two - I would never be so arrogant as to rule out potential problems). 


However, as we discussed earlier on, the business model itself will mean that revenue figures will inevitably begin to fall at some point over the longer term, which is why I've put Adjusted EBITDA margins on this graph, so that we can perhaps get a better idea of what will eventual go on:


- Currently, EBITDA margins are following a very gradual uptrend, while revenues are following a strong uptrend.


- As the business model furthers itself, we should see this trend reverse with Adjusted EBITDA following the stronger uptrend while revenues form a weaker trend (probably either at a more flattened level or slightly to the downside). Personally, I think that we're not likely to see year on year falling revenues for a long time, but that we should not rule out a slowing of revenue growth - it is after all part and parcel of the business!



Conclusion:

I hope that I've been able to at least partially clear up any outstanding issues to do with revenue and EBITDA correlations and the business model itself. I also hope that cash flow worries are reduced - this being said I don't think that it's ever been the bulls who've doubted the cash position!


All the best,

The Masked AIM Trader



Wednesday 15 October 2014

Quindell - Dun & Bradstreet Report

Good afternoon,


I was just given this Dun and Bradstreet report, which I feel would help to clean up certain cash related content that other prolific bloggers are spouting (along with a lot of other content as well I imagine):



Quindell plc Dun and Bradstreet Report


Here is a competitor report regarding Quindell:




Within the clairvoyant vibrations of my office, I'm sensing a trend appearing in this data...
Cheers,

The Masked AIM Trader

What is a financial index?

Today we're going to have brief a look at indices in financial markets.



What are they?


Effectively an index is something that takes daily financial data from companies and then processes it all to give a figure, which will then change in-line with the performance of these companies intra-daily.



What are they used for?


- Benchmarking funds

- Derivative and spread bet traders 



E.G.



The Masked AIM Trader's Index has three companies in it:


Date = 14/10/2013

   

Share Price       Shares In Issue       Market Cap   

1. £0.10                   10                            £1

2. £0.20                    5                             £1

3. £0.30                    2                             £0.60

=  £0.60                                                  =£2.60



Now, in order for this information to be useful we have to compare it with some more data, let's assume that none of these companies have issued more shares and jump a year into the future:


Date = 14/10/2014

   

Share Price       Shares In Issue       Market Cap   

1. £0.50                   10                            £5

2. £0.40                    5                             £2

3. £0.10                    2                             £0.20

=  £1.00                                                  =£7.20



So far, so what?


Now, most indices (like the UK ones) work off of market capitalisation; so the indices are size weighted.


Let's pretend that I started my index a year ago at 1000 points (conveniently this is where the FTSE started at in the 1980s):


To calculate the value of this index in points, we would now have to do the following:


 - 1000 is the starting value in points 

 - 7.20 is the new market capitalisation

 - 2.60 was the old market capitalisation


1000* 7.20/2.60 = 2769 Points 


So, using market capitalisation the index has almost trebled in a year. 



Is there another way?


Well, in the US they do things a little differently and for the Dow Jones 30 they base things on share price weightings, so for my index we would look at it like this:


 - 1000 is the starting value in points 

 - 1.0 is the new share price 

 - 0.6 is the old share price 


1000*1.00/0.60 =1666


Well, using share prices you can clearly see that the index doesn't go up nearly as much this way, because under a market capitalisation weighted system, the smaller companies like company 3 don't have as much effect on the overall index.



Problems:


You'll find that there are plenty of boring people (like me) who'll debate the merits of both of these systems, but it's worth pointing out that most indices globally are market capitalisation weighted. 


This also means that you can't compare the FTSE 100 directly with the DOW 30, because they each have different numbers of component stocks and they're calculated differently (this being said they'll still roughly track each other).


Also, when looking at these indices over long periods of time you need to remember that a reasonable amount of the change you'll be looking at will be inflation.


Further to this, companies move in and out of indices in the UK every quarter, so you may not even be looking at the same companies as before. 



Index Entry Criteria:


1. Size:


- For entry into the FTSE 100, for example, you would need to be within the top 100 companies in the UK based on your market capitalisation.


2. Purple Book Rules:


- This is based around the idea that you need to provide more information than other companies and that you're subject to providing that information more often than non-listed companies are.


3. High Free Float 


- This works on the basis that you can't float a company if no one can buy shares in it, so in the UK for example you're required to have a free float of at least fifty percent of your total shares in issue. 



Construction:

Logically, you'll see that if you can map the top one hundred companies by market capitalisation, you can in theory map other ones based on their size and this is how we get the FTSE 250 (the next 250 companies after the FTSE 100 by market capitalisation - not the  FTSE 100 plus another 150 companies), FTSE 350 (FTSE 250 + FTSE 100), AIM, etc.



All the best,

The Masked AIM Trader