Hedge funds are pools of investment that invest in almost any opportunity in any market where they foresee impressive gains at reduced risk. Hedging refers to implementing strategies that manage or protect against an identified risk exposure. They take leveraged positions in publicly traded equity, debt, foreign exchange and derivatives. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions. Derivatives provide institutions the opportunity to break financial risks into smaller components and then to buy or sell those components to manage risk. Hedge funds hold a number of assets; they use derivatives to protect against the adverse price movement of these assets. Hedge funds play more of the role of speculators than of hedgers. They use derivatives when buying and selling assets and by putting long-short positions, they seek to hedge themselves against Continue reading
Financial Management Concepts
Role of Financial Statements Analysis in Making Investment Decisions
One of the most important long-term decisions for any business is investment with the aim of making gains in the future. Investment decisions are concerned with the use of funds including buying, holding or selling and each decision could be vital to a firm. A careless decision may result in a long-term loss or even worse, bankruptcy. Therefore, an in-depth understanding and analysis is necessary for a high quality investment decision process. This is also even more critical to investors who invest in stock of company or shareholders. Financial statement analysis is critical in making effective stock investment decisions. By study the balance sheet, income statement, cash flow statement and statement of owners’ equity separately and combined, an analyst might have a good sense of a company’s overall financial picture; therefore, the investment decisions are likely to be reasonable and profitable. Financial Statements Analysis In order to understand the analysis Continue reading
Financial Management Decisions
Financial Management is concerned with the acquisition and utilization of capital funds in meeting the financial needs and overall objectives of a business enterprise. Thus the primary function of finance is to acquire capital funds and put them for proper utilization, with which the firm’s objectives are fulfilled. The firm should be able to procure sufficient funds on reasonable terms and conditions and should exercise proper control in applying them in order to earn a good rate of return, which in turn allows the firm to reward the sources of funds reasonably, and leaves the firm with good surplus to grow further. These activities viz. financing, investing and dividend payment are not sequential they are performed simultaneously and continuously. Financial Management Decisions – Three Major Decisions in Financial Management The Financial Management can be broken down in to three major decisions or functions of finance. They are: (i) the investment Continue reading
Areas and Scope of Financial Management
Financial management, at present is not confined to raising and allocating funds. The study of financial institutions like stock exchange, capital, market, etc. is also emphasized because they influenced under writing of securities & corporate promotion. Company finance was considered to be the major domain of financial management. The scope of this subject has widened to cover capital structure, dividend policies, profit planning and control, depreciation policies. Some of the functional areas covered in financial management are discussed as such- Determining financial needs:- A finance manager is supposed to meet financial needs of the enterprise. For this purpose, he should determine financial needs of the concern. Funds are needed to meet promotional expenses, fixed and working capital needs. The requirement of fixed assets is related to types of industry. A manufacturing concern will require more investments in fixed assets than a trading concern. The working capital needs depend upon scale Continue reading
Qualitative Characteristics of Financial Information
Qualitative characteristics are the attributes that make financial information useful to users. The qualitative characteristics of financial information can be categorized as fundamental (relevance and faithful representation) or enhancing (comparability, verifiability, timeliness and understandability) based on how they influence the usefulness of financial information. Fundamental Qualitative Characteristics of Financial Information 1. Relevance Relevant financial reporting information means the ability of users (shareholder) to make a difference in their decision. Information regarding to economic phenomenon will help the users make a difference decision if it included predictive value and confirmatory value. Predictive Value: Information has predictive value if the value can be useful to the shareholder in predicting certain things that is related to future. Information which is highly predictable does not necessary has predictive value. For instance, depreciation of plant and equipment by using straight line method can be highly predictable every year, but it cannot assist in evaluating the Continue reading
Stakeholder Capitalism Model
Stakeholder capitalism model says that company should make decisions by taking into account the interests of all the stakeholders in the firm. Stakeholders include all individuals or groups who can significantly affect the welfare of the firm in the aspects of not only the financial claimants, but also employees, management, customers, local community, supply chain members, local or national government and creditors. One of the important variables in this model is considering all stakeholders’ interest as they are people who support and sustain the company. In the stakeholder capitalism model, it is argued that firms should pay attention to all their supporters that can affect the firm. Managers and boards of directors of company have vital roles on making decisions that suit multiple competing and inconsistent constituent interests. However, there are different demands and interests from stakeholders. Customers want low prices, high quality, expensive service and so on. Employees want Continue reading