Equity Valuation The security analyst when faced with the problem of a buy or sell decision must first evaluate the past performance of the security, and then coupled with his personal experience predict the future performance of the security and the relative market position. The amount of data available to him far exceeds his potential and therefore he has to base his predictions on several basic attributes and modify the results in the light of intuitive beliefs. While the process may be successful, its intuitive segments make the evaluation of errors and improvements of this technique very difficult, if not impossible. Equity valuation is difficult in comparison to valuation of bonds and preference shares. This is because benefits are generally constant and reasonably certain. Equity on the other hand involves uncertainty. It is the size of the return and the degree of fluctuations, which in togetherness determine the values of Continue reading
Investment Options
Industry Analysis and Investment Decision
An investor must examine the industry in which a company operates because this can have a tremendous effect on its results, and even its existence. A company’s management may be superior, its balance sheet strong and its reputation enviable. However, the company may not have diversified and the industry within which it operates may be in a depression. This can result in a tremendous decline in revenues and even threaten the viability of the company. The first step in industry analysis is to determine the cycle it is in, or the stage of maturity of the industry. All industries evolve through the following stages: The Entrepreneurial or Nascent Stage: At the first stage, the industry is new and it can take some time for it to properly establish itself. In the early days, it may actually make losses. At this time there may also not be many companies in the Continue reading
Mutual Fund NAV Calculation
The net asset value is the market value of the assets of the scheme deducting its liabilities. Simply put, the NAV is what investors are required to pay to buy or sell one share of the mutual fund. Keep in mind any additional fees are not included in this amount. In accounting terms, NAV is also known as the book value of the mutual fund. The net asset value per mutual fund unit on any business day is computed as follows: NAV = (Market value of the fund’s investments + Receivables + Accrued income -Liabilities -Accrued expenses)/Number of units outstanding Rules Governing the Mutual Fund NAV Calculation Accrued Income and Expenses: The correct accrual of all incomes and expenses is a requirement for computing NAV. In practical terms these are just estimates. For example, the investment manager’s fees has to be accrued everyday for computing NAV but the fee is Continue reading
Foreign Currency Futures Contract
Market Background In 1972 the International Monetary Market (IMM), a division of the CME, was formed to offer futures contracts in foreign currencies: British pound, Canadian dollar, West German mark, Japanese yen, Mexican peso, and Swiss franc. In 1973 Western economies allowed currency exchange rates to float free. Trading in foreign currency futures contracts became even more attractive. Currency Future markets developed at Philadelphia (Philadelphia Board of Trade), London (London International Financial Futures Exchange (LIFFE)), Tokyo (Tokyo International Financial Futures Exchange), Sydney (Sydney Futures Exchange), and Singapore International Monetary Exchange (SIMEX). Definition of Foreign Currency Futures Contract Foreign Currency Futures Contract refers to standardized and easily transferable obligation between two parties to exchange currencies at a specified rate during a specified delivery month; standardized contract on specified underlying currencies, in multiples of standard amounts. Purchased and traded on a regulated exchange on which margins are posted. Foreign Currency Futures Contract Continue reading
Investments when entire Stock Market is Under or Over Valued
Should management proceed with investing in a project with a satisfactory NPV (Net Present Value) if it has sufficient funds to do so, and if (a) the entire stock market is significantly undervalued and may well rise by 25 or 30% over the next year, or (b) the entire stock market is significantly overvalued and may well fall by 25 or 30% over the next year? In case (a), it could be argued that management should postpone the investment for a year, and invest the cash in a general portfolio of shares, realize them after a year, then take up the postponed investment, and use the capital gain either for future investment or a special dividend payment to shareholders. However, most shareholders do not expect or want the company to use their money for speculative share investments since most companies are unlikely to possess the appropriate skills to do so. Continue reading
Strategies of Options Contracts
Options are of two types – calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. We look here at some Strategies of options contracts. We refer to single stock options here. However since the index is nothing but a security whose price or level is a weighted average of securities constituting the index, all strategies that can be implemented using stock futures can also be implemented using index options. Hedging: Have underlying buy puts Speculation: Bullish security, buy calls or sell puts Speculation: Bearish security, sell calls or buy puts Hedging: Have underlying buy puts Owners of Continue reading