Initial Public Offering (IPO) Phases In an Initial Public Offering (IPO), the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market. Any IPO process goes through the following stages of transformation: The pre-IPO transformation phase can be considered to be a restructuring phase where a company starts the groundwork toward becoming a publicly-traded company. Furthermore, companies should re-examine their organizational processes and policies and make necessary changes to enhance the company’s corporate governance and transparency. Most importantly, the company needs to develop an effective growth and business strategy that can persuade potential investors the company is profitable and can become even more profitable. The IPO transaction phase usually takes place right before the shares are sold and involves achieving goals that would enhance the optimal initial Continue reading
Stock Investments
Risks Associated with Derivatives
Although derivatives are legitimate and valuable tools for hedging risks, like all financial instruments they create risks that must be managed. Warren Buffett, one of the world’s most wise investors, states that “derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” On one hand derivatives neutralize risks while on the other hand they create risks. In fact there are certain risks inherent in derivatives. Derivatives can be dangerous if not managed properly. Numerous financial disasters such as Enron can be related to the mismanagement of derivatives. In the 1990s, Procter & Gamble lost $157 million in a currency speculation involving dollars and German Marks, Gibson Greetings lost $20 million and Long-Term Capital Management, a hedge fund, lost $4 billion with currency and interest-rate derivatives. It is key to consider that it has not been the use of derivatives as a tool which has Continue reading
Risk and Return in Investments
There are different motives for investment. The most prominent among all is to earn a return on investment. However, selecting investments on the basis of return in not enough. The fact is that most investors invest their funds in more than one security suggest that there are other factors, besides return, and they must be considered. The investors not only like return but also dislike risk. So, what is required is: Clear understanding of what risk and return are, What creates them, and How can they be measured? Return: The return is the basic motivating force and the principal reward in the investment process. The return may be defined in terms of (i) realized return, i.e., the return which has been earned, and (ii) expected return, i.e., the return which the investor anticipates to earn over some future investment period. The expected return is a predicted or estimated return and Continue reading
Three Types of Portfolio Investments
Portfolio management is a process encompassing many activities of investment in assets and securities. It is a dynamic and flexible concept and involves regular and systematic analysis, judgment and action. The objective of this service is to help the unknown and investors with the expertise of professionals in investment portfolio management. It involves construction of a portfolio based upon the investor’s objectives, constraints, preferences for risk and returns and tax liability. The portfolio is reviewed and adjusted from time to time in tune with the market conditions. The evaluation of portfolio is to be done in terms of targets set for risk and returns. The changes in the portfolio are to be effected to meet the changing condition. Portfolio construction refers to the allocation of surplus funds in hand among a variety of financial assets open for investment. Portfolio theory concerns itself with the principles governing such allocation. The modern Continue reading
Fama and French Three Factor Model
Capital Asset Pricing Model (CAPM) is the backbone of modern portfolio theory. According to CAPM, the expected return on stock is a function of its relationship with the market portfolio defined by its beta. However, Eugene Fama and Kenneth French (1992) brought together two more factors and found that stock return is based on a combination of not just market beta but also firm size and value. They came up with a new model known as Three Factor Model as an alternative to CAPM. What is Fama and French Three Factor Model? Fama and French three factor model expands on the Capital Asset Pricing Model (CAPM) by adding size and value factors in addition to the market risk factor in CAPM. This model considers the fact that value and small cap stocks out-perform markets on a regular basis. Fama and French attempted to approach and measure equity returns in a Continue reading
Stock – Meaning and Definition
Stock is the share in the ownership of the company. Stock represents the claim on the company’s assets and earnings. In other words, it means, the more the stock, the ownership stake in the company becomes greater. The stock is represented by a stock certificate which is a document that proves the ownership in the company. Few years ago when the person wanted to buy or sell shares, he/she physically took the certificates to the brokerage firm. But now information technology has increased, because of which this stock document is stored electronically. Now trading with a click of mouse or a phone call has made transacting easier. The stock certificate is considered worthless if there is no claim on the ownership of the company’s assets and earnings. Another important feature of stock is its limited liability. It means as the owner of the stock, he/she is not responsible for the Continue reading