Changes in money supply and monetary liquidity conditions can highly affect the trend of any financial market. The following analysis investigates this intermarket phenomenon by breaking down the basic components of money supply and liquidity. Later, a hypothetical global liquidity index is constructed to research the correlation between global liquidity and the S&P 500, the US Dollar Index, and Bitcoin.

Highlights:

• Money supply refers to the total amount of money circulating in the economy, while liquidity refers to how easily this money circulates
• Liquidity represents an interplay between the supply of and the demand for money and may be expressed as the difference between the expansion of money supply and the growth of money demand
• Equities are highly correlated to global liquidity conditions, but there can be significant delays (the time lag can be around 20 months)

  Read more: Connecting the Dots Between Money Supply, Liquidity, and the Course of Global Financial Markets

Formulating the Doubling, Tripling, and Quadrupling of Your Capital

The Rule of 72 is a simple method for calculating the time it will take to double your capital through any investment. The only variable you have to determine is the average annual rate of return.

Key Points

• The Rule of 72 determines how long it will take for an investment to double based on a fixed annual rate

• The only calculation required is to divide the number 72 by the annual rate of return

• For example, at a rate of return of 10% per annum, the initial investment doubles in just over seven years

• Correspondingly, there are also Rules 115 and 144 for the calculation of how long it will take to triple and quadruple your initial investment

Read more: The Rules of 72, 115, 144

Warren Buffett is the CEO of Berkshire Hathaway and one of the greatest investors of all time. This article presents some of his methods and the financial indicators he uses when trading stocks. But before moving along, these are some ground rules of the legendary investor.

Warren Buffett’s Ground Rules

• 70/30 Rule (Invest 70% of your money and save 30%)
• Investing requires long-term thinking -Buy only something that you'd be perfectly happy to hold for 10 years
• Don’t try to predict the market -Uncertainty is the friend of the buyer of long-term values
• Focus on the "Deep Value" of businesses and have something to compare it against -Price is what you pay; value is what you get
• Good investment is based on the industry’s prospects and the ability of the management to exploit future opportunities
• Pay attention to the corporate earnings yield and compare it to the bonds yield -Wait for the stock price to reach the desired level of a long-term rate of return

Read more: Warren Buffett Stock Trading Method and Financial Indicators

Financial Ratios and Major Categories

What are the Financial or Accounting Ratios?

Financial or accounting ratios measure the profitability, efficiency, and solvency of a corporate entity. Financial ratios can show how efficiently or poorly a company is managed by its directors. Additionally, these ratios can be used as the basis for comparing the 'fair value' of different companies or entire industries.

• Financial ratios focus on several accounting figures such as revenue, net income, debt, and equity
• When analyzing a particular company, the denominator of a financial ratio can be an individual share price or the company's market capitalization
• Market capitalization is calculated by multiplying the share price by the total number of shares outstanding
• When analyzing general industries, the denominator of a financial ratio can be the aggregate market capitalization of a particular industry {By adding up the individual market caps of all corporations in the market}

Four (4) Major Categories of Financial Ratios

(1) Balance Sheet Ratios –Measuring Financial Stability (Liquidity and Solvency)

Balance sheet ratios deal with the financial stability of a corporation over time and are considered very important for equity investors. These are some important Balance Sheet Ratios:

i) Debt-Equity Ratio

The Debt-Equity Ratio indicates the debt exposure of a company by comparing the company’s liabilities (debt) to what the shareholders have invested in the past in the form of capital (equity).

■ Debt-Equity Ratio = Total Liabilities / Total Equity

These ratios are important too:

■ Debt Ratio = Total Liabilities / Total Assets

■ Equity Ratio = Total Equity / Total Assets

Read more: Financial Ratios