In the decade of 1990’s revolutionary changes took place in the institutional infrastructure in India’s equity market. It has led to wholly new ideas in market design that has come to dominate the market. These new institutional arrangements, coupled with the widespread knowledge and orientation towards equity investment and speculation, have combined to provide an environment where the equity spot market is now India’s most sophisticated financial market. One aspect of the sophistication of the equity market is seen in the levels of market liquidity that are now visible. The market impact cost of doing program trades of Rs.5 million at the NIFTY index is around 0.2%. This state of liquidity on the equity spot market does well for the market efficiency, which will be observed if the index futures market when trading commences. India’s equity spot market is dominated by a new practice called ‘Futures — Style settlement’ or Continue reading
Stock Investments
Technical Analysis of Stocks
Definition of Technical Analysis Technical analysis is the process of utilizing past trading information and stock price trends related to a specific security, and then equating those to how other likewise investments have responded throughout history to similar patterns. Further, when a pattern is identified, the investor can predict that the future pricing of the target investment is likely to respond in a similar manner to patterns observed earlier. Technical analysis of stocks assumes that current prices should represent all known information about the markets. Prices not only reflect intrinsic facts, they also represent human emotion and the pervasive mass psychology and mood of the moment. Prices are, in the end, a function of supply and demand. However, on a moment to moment basis, human emotions,fear, greed, panic, hysteria, elation, etc. also dramatically affect prices. Markets may move based upon people’s expectations, not necessarily facts. A market “technician” attempts to Continue reading
Sources of Buy Back of Securities
A company can Buy Back its own shares or other specified securities out of three sources: Free reserves Securities premium account Proceeds of an earlier issue of shares or other specified securities. [Section 77A(l), The Company’s Act 1956]. Buy back of any kind of shares is not allowed out of the proceeds of any earlier issue of the same kinds of shares. 1. Free reserve The term free reserve has been defined to carry same meaning as has been assigned in clause (b) of Explanation to section 372A of The Company’s Act 1956. For the purpose of section 372A the term ‘free reserve’ has been defined as those reserves which as per the latest audited balance sheet are free for distribution as dividend and it includes balance of securities premium account. Free reserve means the balance in the share premium account, capital and debenture redemption reserves shown or published Continue reading
Some Inhibiting Factors that Affect the Derivative Instruments
Though derivatives are very useful for managing various risks, there are certain inhibiting factors which stand in their way. They are as follows: (i.) Misconception of Derivatives: There is a wrong feeling that derivatives would bring in financial collapse. There is an enormous negative publicity in the wake of a few incidents of financial misadventure. For instance, Barings had its entire net worth wiped out as a result of its trading and options writing on the Nikkie index futures. There are some other similar incidents like this. To quote a few: Procter and Gamble, Indah Kiat, Showa Shell etc. However it must be understood that derivatives are not the root cause for all these troubles. Derivatives themselves cannot cause such mishaps. But, the improper handling of these instruments is the main cause for this and one can not simply blame derivatives for all these mishappenings. (ii.) Leveraging: One the important Continue reading
Risk and Return in Portfolio Investments
Risk in Portfolio Investments The Webster’s New Collegiate Dictionary definition of risk includes the following meanings: “……. Possibility of loss or injury ….. the degree or probability of such loss”. This conforms to the connotations put on the term by most investors. Professional often speaks of “downside risk” and “upside potential”. The idea is straightforward enough: Risk has to do with bad outcomes, potential with good ones. In considering economic and political factors, investors commonly identify five kinds of hazards to which their investments are exposed. The following are different components of risks associated with portfolio investments: A. Systematic Risk Systematic risk refers to the portion of total variability in return caused by factors affecting the prices of all securities. Economic, Political and Sociological changes are sources of systematic risk. Their effect is to cause prices of nearly all individual common stocks or security to move together in the same Continue reading
Behavioral Finance – Definition, Meaning, and Characteristics
Traditionally, economics and finance have focused on models that assume rationality. The behavioral insights have emerged from the application of insights from experimental psychology in finance and economics. Behavioral finance is relatively a new field which seeks to provide explanation for people’s economic decisions. It is a combination of behavioral and cognitive psychological theory with conventional economics and finance. Inability to maximize the expected utility (EU) of rational investors leads to growth of behavioral finance within the efficient market framework. Behavioral finance is an attempt to resolve inconsistency of Traditional Expected Utility Maximization of rational investors within efficient markets through explanation based on human behavior. For instance, Behavioral finance explains why and how markets might be inefficient. An underlying assumption of behavioral finance is that, the information structure and characteristics of market participants systematically influence the individual’s investment decisions as well as market outcomes. Investor, as a human being, processes Continue reading