In the financial markets, there is a flow of funds from one group of parties (funds-surplus units) known as investors to another group (funds-deficit units) which require funds. However, often these groups do not have direct link. The link is provided by market intermediaries such as brokers, mutual funds, leasing and finance companies, etc. In all, there is a very large number of players and participants in the financial market. These can be grouped as follows : The individuals: These are net savers and purchase the securities issued by corporates. Individuals provide funds by subscribing to these security or by making other investments. The Firms or corporates: The corporates are net borrowers. They require funds for different projects from time to time. They offer different types of securities to suit the risk preferences of investors’ Sometimes, the corporates invest excess funds, as individuals do. The funds raised by issue of Continue reading
Investment Analysis
The Dow Jones Theory on Stock Market Movements
The Dow Jones Theory The Dow Jones Theory is probably the most popular theory regarding the behavior of stock market prices. The Dow Jones theory has been around for almost 100 years, yet even in today’s volatile and technology-driven markets, the basic components of this theory still remain valid. The theory derives its name from Charles H. Dow, who established the Dow Jones & Co. and was the first editor of the Wall Street Journal — a leading publication on financial and economic matters in the U.S.A. Although Dow never gave a proper shape to the theory, ideas have been expanded and articulated by many of his successors. The Dow Jones theory classifies the movement of the prices on the share market into three major categories: Primary Movements, Secondary Movements and Daily Fluctuations. 1) Primary Movements: They reflect the trend of the stock market and last from one year Continue reading
What is Stock’s Beta?
An investor is concerned with the risk of his entire investment portfolio, and that the relevant risk of a particular security is the effect that the security has on the entire portfolio. By “diversified portfolio” we mean that each investor’s portfolio is representative if the market as a whole and that the portfolio Beta is 1.0. Stock’s Beta indicate how closely the security’s returns move with from a diversified portfolio. A beta of 1.0 for a given security means that, if the total value of securities in the market moves up by 10 percent, the stock’s price will also move up, on the average by 10 percent. If security has a beta of 2.0, its price will, on the whole, rises or falls by 20 percent when the market rises or falls by 10 percent. A share with —0.5 percent beta will rises by 10 percent, when the market falls Continue reading
Gordon Growth Model or Constant Growth Model of Common Stock Valuation
Common stock represents ownership of the corporation. So the common stockholders are the owners of the firm. They elect the firm’s board of directors, who in turn appoint the firm’s top management team. The firm’s management team then carries out the day-to-day management of the firm. A share of common stock is more difficult to value in practice than a bond, for at least three reasons. First, with common stock, not even the promised cash flows are known in a advance. Second, the life of the investment is essentially forever, since common stock has no maturity. Third, there is no way to easily observe the rate of return that the market requires. Nonetheless, as we will see, there are cases in which we can come up with the present value of the future cash flows for a share of stock and thus determine its value. Stock valuation is the process Continue reading