Indian investor community has undergone sea changes in the past few years. India now has a very large investor population and ever increasing volumes of trades. However, this continuous growth in activities has also increased problems associated with stock trading. Most of these problems arise due to the intrinsic nature of paper based trading and settlement, like theft or loss of share certificates. This system requires handling of huge volumes of paper leading to increased costs and inefficiencies. Risk exposure of the investor also increases due to this trading in paper. Some of these risks are : Delay in transfer of shares. Possibility of forgery on various documents leading to bad deliveries, legal disputes etc. Possibility of theft of share certificates. Prevalence of fake certificates in the market. Mutilation or loss of share certificates in transit. The physical form of holding and trading in securities also acts as a bottleneck Continue reading
Stock Investments
Introduction to Common Stock or Ordinary Share
Stocks or securities are generic terms that stand for instruments of ownership like shares, as well as instruments of lending like debentures, which are issued publicly. Just as a share represents the smallest unit of ownership, a debenture or a bond represents the smallest unit of lending. Shares and debentures may be of various kinds. An ordinary share represents the form of fractional ownership in which a shareholder (one who holds ordinary shares), as a fractional owner, undertakes maximum entrepreneurial risk associated with a business venture. This risk has several dimensions. During the life of a business, in general, an ordinary shareholder receives dividends out of operating surplus. This surplus is the residual from the revenue, after subtracting all the operating expenses, the interest charges on all kinds of borrowing, various taxes, and dividends due to the non-ordinary shareholders. Now, various economic factors, government policies, Continue reading
Portfolio Construction Phase in Investment Portfolio Management
Investment portfolio construction refers to the allocation of funds among a variety of financial assets open for investment. Portfolio theory concerns itself with the principles governing such allocation. The objective of the theory is to elaborate the principles in which the risk can be minimized subject to desired level of return on the portfolio or maximize the return, subject to the constraint of a tolerate level of risk. Thus, the basic objective of portfolio management is to maximize yield and minimize risk. The other ancillary objectives are as per the needs of investors, namely: Safety of the investment Stable current returns Appreciation in the value of capital Marketability and Liquidity Minimizing of tax liability. In pursuit of these objectives, the portfolio manager has to set out all the various alternative investment along with their projected return and risk and choose investment with safety the requirement of the individual investor and Continue reading
Emergence/History of Derivatives
The history of derivatives is so vast and is interesting to know that derivatives dated back to 16th century. Like forward delivery contracts, where the asset is to be delivered on specific date and time for an agreed fixed rate existed in the ancient Greek and Rome times, where the emperors of that time entered into these kind of contracts to overcome the foreseen problems, like falling short of grains required at the times of masses. Interestingly they worked out and thus gave a pavement to the new way of trading between farmers and merchants. Due to the uncertainty of prices and supply merchants started entering into the futures contracts with the farmers which was termed as “to-arrive” contract which allowed trader and farmer to trade with lock – in price. This made sense as it was safe for both the farmers and traders, from the farmer’s point of view Continue reading
What is Investment Portfolio?
Meaning of Investment Portfolio A portfolio is a collection of securities. Since it is rarely desirable to invest the entire funds of an individual or an institution in a single security, it is essential that every security be viewed in a portfolio context. An investment portfolio comprising of different types of securities and assets. As the investors acquire different sets of assets of financial nature, such as gold, silver, real estate, buildings, insurance policies, post office certificates, NSC etc., they are making a provision for future. The risk of each of such investments is to be understood before hand. Normally the average householder keeps most of his income in cash or bank deposits and assumes that they are safe and least risky. Little does he realize that they also carry a risk with them — the fear of loss or actual loss or theft and loss of real value of Continue reading
Financial Derivative Types: Swaps
Swap is yet another exciting trading instrument. In fact, it is a combination of forwards by two counter-parties. It is arranged to reap the benefits arising from the fluctuation in the market — either currency market or interest rate market or any other market for that matter. Features of Swap The following are the important features of swap: Basically a forward: A swap is nothing but a combination of forwards. So, it has all the properties of a forward contract discussed above. Double coincidence of wants: Swap requires that two parties with equal and opposite needs must come into contact with each other. As stated earlier, it is a combination of forwards by two counterparties with opposite but matching needs. For instance, the rate of interest differs from market to market and within the market itself. It varies from borrowers to borrowers due to the relative credit worthiness of borrowers. Continue reading