Financial Markets

Financial Markets — No Comments
16
May 12

Why Brent is More Expensive

Crude oil is always a serious concern for economies all over the world because when the price of this commodity rises it leads to inflation which ultimately hurts the growth of a country. Previously all people used to concentrate on Nymex crude price but in the past one year brent crude is gaining more attention and all investors are asking why there is such a big difference between the price of brent and nymex. Given below are some of the reasons for it

  1. Nymex is of high quality grade whereas brent is of slightly lower grade when it comes to quality and in many developing and underdeveloped countries people use this rather than nymex which leads to rise in demand for brent.
  2. Due to conflict in Arab countries the supply of brent has deteriorated leading to sharp rise in price as compared to nymex.
  3. Speculation is another reason because from past 1 year there has been a consistent difference of over $15 between the price of brent and nymex which used to be between $2 to $5.
  4. Some refineries can process only high quality crude only and therefore they cannot take advantage of high price of brent, because had they been able to refine low quality crude than gap between supply and demand could have been reduced leading to convergence between the price of both.
Financial Markets — 1 Comment
1
May 12

GAAR Meaning

GAAR is the word which is haunting the foreign institutional investors for past few days, the full form of GAAR is general anti avoidance rules. According to it FII who are making profit from stock markets will be taxed and it may also be done retrospectively which is the reason why foreign players are extremely cautious and are not in a hurry to invest into the secondary equity markets. Clarity on General anti avoidance rules provisions would certainly be better for stock markets because for past 1 month it has been a big overhang on equities. 7th may will tell us whether GAAR provisions are good or bad for foreign investors and also for equities.

Financial Markets — No Comments
10
Apr 12

Benefits of Stock Split

Stock split refers to increase in number of shares of a company which are outstanding in the open market in the hands of public. Stock split results in increase in number of shares but decrease in share price which results in market capitalization keeping remain the same as it was before the stock split. Given below are some of the advantages of stock split –

  1. It results in share price coming down which in turn results in stock price getting attractive for retail investors. Consider an example where there are 2 companies A and B having same fundamentals and if the price of A is $100 and B is $10 than a normal would buy 1000 shares of A rather than buying 100 shares of company B.
  2. It also increases the liquidity for a stock because after stock split number of shares which are there in open market increases and It leads to better price discovery because in market liquidity plays a key role when it comes to discovery of correct price.
  3. In the minds of investors it gives them immense satisfaction because after the split the number of shares in their online trading account becomes double or even triple. Though there is no rationality behind it but market and market participants does not always act rationally.
  4. Stock split can also result in the increase in the stock price, which many happens normally after the announcement is made.
Financial Markets — No Comments
1
Apr 12

The Rule of 72

How many times one see advertisements in newspapers and also on various internet sites that double your money in few days or years, and majority of people ask this question how to double money but the fact is there is no magic formula or way to double your money. In finance there is a formula for calculating the period after which the money is doubled if you know the interest rate, that formula is called rule of 72.

Rule of 72 is the simplest way of knowing the period after which your money will be doubled, and that is why it is also called rule of thumb, the formula for rule of 72 is = 72/rate of interest. So for example if the rate of interest is 6 percent than time for your investment to be double will be 72/6 = 12 years, and if rate of interest is 10 percent than it will take 7.2 years (72/10) for your investment to be double.

As one can see from the above that rate of interest play very important part in determining the time frame during which the investment will be twice from current levels and higher the interest rate the more quickly the money will be doubled.

Financial Markets — No Comments
26
Mar 12

Difference between Investment and Speculation

There is a thin line between investment and speculation and when it comes to money most people tend to cross the line and start speculating instead of investing which eventually may lead to disastrous results. In order to know whether you are the crossing line you must know the differences between the two, given below are some of the differences between investment and speculation –

  1. While investment is a well thought process where the person making investment has look into various factors and understood the risk and return associated with such investment, whereas speculation is impulsive and person doing it performs the action first and then worry (in case of loss) or enjoy (in case of profit)
  2. Investment is not only done for earning money but also for variety of reasons like to save taxes, to insure, to plan for future and so on, whereas speculation is done only to earn money in shortest possible time.
  3. Time horizon for investment is long which usually last from 3 years to 15 years whereas the time horizon of speculation is short it usually lasts from 1 day to 1 month.
  4. Investment is never done with leveraged money which involves taking debt at higher levels of interest, while most speculators take leverage while doing speculation.
  5. Investing requires patience and discipline while speculating is all about timing and willingness to take high amount of risk.
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