Posts Selected From the Category "Investment Management"

Meaning of Bonus Shares

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issue of bonus shares

Bonus shares (or stock dividends in US parlance) are shares issued to existing shareholders as a result of capitalization of reserves (including share premium account). In the wake of a bonus issue, the shareholders proportionate ownership remains unchanged. The book value per share. The Earnings Per Share (EPS) and the market price per share will decrease, but the number of shares (stock outstanding) will increase.

The underlying reasons for issue of bonus shares are as follows:

  1. The accumulated reserves created out of transfers from profits earned represent an increase in the shareholder’s wealth, which legitimately, belongs to them.
  2. The bonus issue tends to bring the market price per share within a realistic range.
  3. It increases the number of shares outstanding, and promotes more active trading.
  4. The nominal rate of dividend decreases, which dispels the impression of profiteering from the minds of the public at large. ,
  5. The bonus issue decision is taken consciously only when the management feels confident about “servicing” the increased equity, i.e. maintaining the rate of dividend in the long run, and hence shareholders regard the bonus issue as an indication of the financial health of the company.
  6. The issue of bonus shares can be a prelude to issue of convertible debentures when the firm is ready with attractive investment opportunities.

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Formula Plans in Portfolio Management

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The investor uses formula plans to facilitate him in making investment decisions for the future by exploiting the fluctuations in prices. The formula plans have sketched the basic rules and regulations for purchasing and selling of investments. The formula plans make the average investors superior to others. These formula plans are based on the fact that the investors will not have the problem of forecasting fluctuation in stock prices and will continue to act according to formula.

So, formula plans are a type of investment strategy that makes use of pre-determined rules for the nature and timing of change in one’s investment portfolio as the market rises or falls.

Rules for Formula Plans

  • These plans work according to a methodology which is related for the working of each plan
  • These plans cannot be used for short periods of time. The longer the period of holding the investments, the easier for formula plans to work.
  • Generally the formula plans are strict, rigid and straight forward out they are not flexible

    • These plans suggest that there must be two portfolios of an investor, namely aggressive portfolio and conservative portfolio. These plans do not have a selection procedure for the stocks. The methodology adopted by the formula plans is to find out the difference in movements of the aggressive portfolios and the conservative portfolios.…

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    Different Types of Investment Portfolios

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    classification of investment portfolios

    The set of all securities held by an investor is called his investment portfolio. The investment portfolio may contain just one security. However, since in general no one puts all one’s eggs in one basket, it will contain several securities. Such an investment portfolio is knows as a diversified portfolio.

    An investment portfolio can be classified in the light of following factors such as objectives, risk levels and the level of diversification. They are:

    On the basis of objectives sought, a portfolio can be income portfolio, growth portfolio, mixed portfolio, tax savings portfolio or liquidity portfolio.

  • In income portfolio, the objective is maximum current income. Small investors, investors whose current income needs are high like pensioners and unemployed persons, persons with lower tax brackets prefer income portfolios. Here the portfolio generally consist of fixed income securities like debenture/bonds/income mutual fund/equity with continuous dividend-record.
  • Growth portfolio stress on capital gain. Big investors, high earning professionals and persons in the higher tax brackets prefer this portfolio. Growth mutual funds, growth shares, etc. are included in the portfolio.
  • Mixed portfolio give moderate preference for both return and growth. Salaried persons and middle income investors prefer this portfolio. Here the portfolio consists of securities like debentures/bonds, convertible debentures, growth as well as income mutual funds, growth shares and on.…
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    Inputs for Investment Portfolio Construction

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    Investment portfolio is a composition of investments with the purpose, of maximizing return and minimizing risk. What individual investments would constitute the composition depends, in the first place, on the goals of the investment portfolio. One of the goal of the investment portfolio is return maximization. To achieve this, a choice of individual investment securities for inclusion in the portfolio is made. And., the return and risk of such individual investment securities are relevant inputs for investment portfolio construction. Thus, portfolio goal and return and risk of individual securities included in the portfolio are the inputs for investment portfolio constructions.

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  • Portfolio investment process
  • Portfolio construction phase in investment portfolio management
  • Portfolio performance evaluation in investment portfolio management
  • Portfolio selection and revision in investment portfolio management
  • Portfolio analysis in investment portfolio management
  • Security analysis phase in investment portfolio management

    • Investment Portfolio Goals

    As investors differ like cornflakes, their portfolio goals also differ. One investor might prefer a portfolio that gives him maximum tax savings. So, this portfolio would consist of investments that have some tax leverage tagged on them. Housing, Govt. Securities, etc constitute his portfolio. Another investor wants a low, but nonfluctuating return. His portfolio would consist of scrips with stable and unbroken dividend policy and fixed yield giving bonds and the like.…

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    Pricing of Futures Contracts Using Interest Rate Parity in Forex Trading

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    According to the interest rate parity theory, the currency margin is dependent mainly on the prevailing interest rate (for investment for the given time period) in the two currencies. The forward rate can be calculated by the following formula:

    F/S = (1+Rh)/ (1+Rf)

    Where, F and S are future and spot currency rate. Rh and Rf are simple interest rate in the home and foreign currency respectively.

    Alternatively, if we consider continuously compounded interest rate then forward rate can be calculated by using the following formula:

    F = S*e (rh- rf)*t

    Where, rh and rf are the continuously compounded interest rate for the home currency and foreign currency respectively, T is the time to maturity and e = 2.71828 (exponential).

    If the following relationship between the futures rate and the spot rate does not hold, then there will be an arbitrage opportunity in the market. This will force the futures rate to change so that the relationship holds true.

    Let us assume that risk free interest rate for one year deposit in India is 7% and in USA it is 3%. You as smart trader/ investor will raise money from USA and deploy it in India and try to capture the arbitrage of 4%.…

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    Hedging with Foreign Currency Futures

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    Exchange rates are quite volatile and unpredictable, it is possible that anticipated profit in foreign investment may be eliminated, rather even may incur loss. Thus, in order to hedge this foreign currency risk, the traders’ often use the currency futures. For example, a long hedge (i.e., buying currency futures contracts) will protect against a rise in a foreign currency value whereas a short hedge (i.e., selling currency futures contracts) will protect against a decline in a foreign currency’s value.

    It is noted that corporate profits are exposed to exchange rate risk in many situation. For example, if a trader is exporting or importing any particular product from other countries then he is exposed to foreign exchange risk. Similarly, if the firm is borrowing or lending or investing for short or long period from foreign countries, in all these situations, the firm’s profit will be affected by change in foreign exchange rates. In all these situations, the firm can take long or short position in futures currency market as per requirement.

    The general rule for determining whether a long or short futures position will hedge a potential foreign exchange loss is:

  • Loss from appreciating in Indian rupee= Short hedge
  • Loss from depreciating in Indian rupee= Long hedge

    • Short Hedge

    A short hedge involves taking a short position in the futures market.…

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