Core concepts
Introduction
To be able to use this program and to invest effectively, it is important to understand some core concepts. These are essential, but relatively simple and just involve very basic maths that anyone can understand. These key concepts will allow you to understand what the different types of numbers are and how this program uses these numbers. The following sections give you an overview of these concepts with some concrete examples.
Assets
This program allows you to track your assets and what you earn from these assets. Assets are things you own, such as shares, funds, bonds, precious metals such as gold and silver, properties that you own either directly or indirectly through REITs.
You can also use this program to track assets such as stocks and shares, as well as assets which are not traded on the stock market, such as buy to let properties.
With this program, assets are identified through identifiers which are just short
names. For regular stocks, you should reuse the official symbols used on the market,
such as AMZN for Amazon. For assets which are not traded on the stock market, you
need to make up your own identifiers. For example you could decide to name your main
residence HOME, and your two buy to let properties BTL1 and BTL2. You should
use a consistent naming convention for all your assets. It is recommended to use
short names in capital letters for all assets.
Units
Many liquid assets such as shares, bonds and funds can be traded on the stock markets. In this case an unit correspond to one share of these investments. Some investment platforms only allow you to buy and sell whole units of these assets. For example you could buy 15 shares of a company, and then you could sell 5 of these shares, and you would keep 10 of these. Nowadays, many investment platforms allow you to buy or sell fractional shares. This allows you to invest in stocks for which one unit is very expensive, such as Berkshire Hathaway which costs thousands of dollars per share. For example you could buy 0.153684 shares of such a stock. Fractional trading is also very common with crypto currencies such as Bitcoin.
For assets that are traded on the stock market, the number of units you own is just
a number of shares. For assets such as physical gold which you buy outside of the
stock market, you need to decide how you define what an unit will be. For example
an unit of physical gold may be one gram of gold, or one coin of a particular size,
depending on the type of gold you buy. For physical properties, one unit of these
assets would just represent the entirety of each property. For example you would
consider that you own 1.0 units of the asset HOME if you own your house. Or you
may have inherited a property with your sibiling, and each of you own half of the
property that you have decided to let to receive an income. In that case each of
you would own 0.5 unit of the asset identified as BTL1.
If you own multiple buy to let properties, you should probably create separate
assets such as BTL1 and BTL2 instead of considering these are two units of
the same asset. You can only use multiple units of the same assets to describe
a situation where of all assets are really identical, are priced on the same market,
and pay the same income. Having two units of the same asset would not work well
if the tenants in your two properties do not pay the exact same rent every month.
Price vs cost
The price of an asset is the amount for which this asset is sold on the market at a specific point in time. The cost of an asset is the total amount you paid to own this asset. The cost includes the price you paid for the units at the time of the purchase, the transaction fees paid when buying the asset, the taxes paid for buying or owning an asset, the transaction fees paid when selling the asset, maintenance fees if applicable (for example on property), regular management fees, storage costs, etc.
For example let’s say you bought a total of 25 units of an hypothetical stock named ABCD:
| Asset | Date | Units | Amount | Fee | Tax | Comments |
|---|---|---|---|---|---|---|
| ABCD | 2022-01-05 | 10 | $100.00 | $5.00 | $2.00 | Bought 10 units at $10.00 each with a fee of $5.00 and a tax of $2.00 |
| ABCD | 2023-02-08 | 15 | $225.00 | $7.00 | $3.00 | Bought 15 units at $15.00 each with a fee of $7.00 and a tax of $3.00 |
In 2022 you paid a total of $107 for 10 units (including the price + fees + taxes) and in 2023 you paid a total of $235 for 15 units. In total you paid $342.00 to own these 25 units. Hence the cost of ownership for these 25 units of this stock has been $342.00, and this corresponds to an average of cost $13.68 per unit. Let’s say the price of this stock keeps going up and is $20.00 per unit as of 2024-03-09. You can see there is a difference of $6.32 per unit between the current price and the cost.
Valuation
This program determines the valuation of your assets at different points in time so you can follow the evolution of your investments and calculate your total net worth.
The valuation is simply calculated by multipling the number of units you own by the price of each unit at a point in time. Both the quantity of units you own, and the price of one unit can change over time.
For example if you owned 10 units of the stock ABCD as of 2022-01-05, and price of one unit was $10.00, then the valuation of your 10 units was $100.00 at that time. If you bought 15 additional units of this stock on 2023-02-08 when its price has gone up to $15 per unit, then the valuation of your 25 stock at that time is $375.
Net-worth
The program calculate the valuation of each asset in each account and the total per category of accounts, at various points in time. The total net-worth is defined as the total value of all your assets, minus the value of your liabilities (such as your debts and mortgages), at a point in time. This program allows you to see the evolution of your total net-worth over time, as it adds up the value of all your assets in all categories.
Capital gains
Capital gains are defined as the difference between the price of an asset and the cost of
this asset. For example if the total cost of ownership for 25 units of the asset ABCD
is $342.00 and the current valuation based on the current market price is $500.00 then
there is a potential capital gains of $158.00. If the price of the asset has gone down since
you bought it, or if the costs are high, the capital gains would be a negative figure,
and it is effectively a capital loss.
There are two types of capital gains or losses. They can be “potential” (or “latent”) when you still own the asset. Capital gains or losses may also have been “realised” (or “crystalized”) when you have actually sold the asset.
Distributions
Some assets produce an income, such as stocks that are paying dividends, or buy to let properties where the tenants pay a rent to the landlord. Some other assets such as gold do not pay any income. The term “distribution” is used to define the event of receiving an income related to the ownership of an asset. For example many stocks pay quarterly dividends. You would then receive incomes four times each year, and these events would need to be recorded as distributions in the data so the program is able to calculate your total income per category per year.
Please note there are two types of funds on the stock market. Distributing funds are the funds that distribute the dividends generated by the stocks owned in the funds, to the owners of the fund. Accumulating funds are types of funds where these dividends are automatically reinvested within the funds and where the owners of the funds to not receive any income, hence there is no distribution for the owner of the fund.