Diversification is the strategy of combining distinct asset classes in an investment portfolio in order to reduce overall portfolio risk. In other words, investment diversification is the process of selecting the asset mix so as to reduce the uncertainty in the return of an investment portfolio. Diversification helps to reduce investment risks because different investments may rise and fall independent of each other. The combinations of these assets will nullify the impact of fluctuation, thereby, reducing risk. Most financial assets are not held in isolation, rather they are held as parts of portfolios. Banks, pension funds, insurance companies, mutual funds, and other financial institutions are required to hold diversified portfolios. Even individual investors – at least those whose security holdings constitute a significant part of their total wealth – generally hold stock portfolios, not the stock of a single firm. Why is it so? An important reason is the lowering Continue reading
Investment Management
How To Dematerialize Your Shares
To dematerialize your share certificates you have to: Fill up a dematerialization request form, which is available with your DP; Submit your share certificates along with the form; (write “surrendered for demat” on the face of the certificate before submitting it for demat) Receive credit for the dematerialized shares into your account in 15 days. Dematerialized shares do not have any distinctive or certificate numbers. These shares are fungible – which means that 100 shares of a security are the same as any other 100 shares of that security. The investor can dematerialize only those certificates that are already registered in his name and belong to the list of securities admitted for Dematerialization at NSDL. Shares held in street name (market deliveries) cannot be dematerialized. If the share certificates that investor wants to dematerialize do not belong to the list of securities eligible for Dematerialization specified by NSDL, he can Continue reading
Risk-Return Trade off
Risk may be defined as the likelihood that the actual return from an investment will be less than the forecast return. Stated differently, it is the variability of return form an investment. Financial decisions incur different degree of risk. Your decision to invest your money in government bonds has less risk as interest rate is known and the risk of default is very less. On the other hand, you would incur more risk if you decide to invest your money in shares, as return is not certain. However, you can expect a lower return from government bond and higher from shares. Risk and expected return move in one behind another. The greater the risk, the greater the expected return. Financial decisions of a firm are guided by the risk-return trade off. These decisions are interrelated and jointly affect the market value of its shares by influencing return and risk of Continue reading
Scope and Objectives of Investment Portfolio Management
Scope of Portfolio Management Portfolio management is a continuous process. It is a dynamic activity. The following are the basic operations of a portfolio management. Monitoring the performance of portfolio by incorporating the latest market conditions. Identification of the investor’s objective, constraints and preferences. Making an evaluation of portfolio income (comparison with targets and achievement). Making revision in the portfolio. Implementation of the strategies in tune with investment objectives. Objectives of Portfolio Management The objective of portfolio management is to invest in securities is securities in such a way that one maximizes one’s returns and minimizes risks in order to achieve one’s investment objective. A good portfolio should have multiple objectives and achieve a sound balance among them. Any one objective should not be given undue importance at the cost of others. Presented below are some important objectives of portfolio management. Stable Current Return: Once investment safety is guaranteed, the Continue reading
Stock Market Terminology
A Absolute Return The return that an asset achieves over a period of time. This measure simply looks at the appreciation or depreciation (expressed as a percentage) that an asset – usually a stock or a mutual fund – faces over a period of time. Absolute return differs from relative return because it is concerned with the return of the asset being looked at and does not compare it to any other measure. Actual Return the actual gain or loss of an investor. Acquisition When one company purchases a majority interest in the acquired. Allotment The number of shares allotted to a participant in IPO against the actual number of securities he had applied for. American Depository Receipt (ADR) A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated Continue reading
Short Selling
Short selling is the selling of a security which is not owned by the seller or any sale that is completed by the delivery of a security borrowed by the seller. It is the process of selling the borrowed stock in the hope that the price of the stock win fall, so that the short seller can buy-back at a profit. In other words short sellers expect to buyback the securities at a lower rate than the price at which they sold. That is, short sellers make profit when the stock price goes down. They involve a lot of risks and pitfalls. Investors purchases stocks from share markets because they believe that a company has good growth prospects, above average management, an advantage on the competition, is undervalued, or for some similar reason. Selling a security short is done for the exact opposite reasons that securities are bought (long). Stated Continue reading