Financial Markets

Financial Markets — No Comments
4
Sep 10

Why Calculating Beta of a Stock is Helpful

Many people think that calculation of beta of a stock is helpful only for portfolio manager, which is not the case. Knowledge of a beta of a stock can be helpful even for a small investor.

Beta is a term which is used with respect to stock market; it measures the risk which is non diversifiable or systematic risk of the stock in relation to the market. Beta can be calculated as co-variance between security returns and market return divided by variance of market return.

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If beta of stock is more than 1 then it is considered as aggressive or risky security, if it is less than 1 then it is considered as defensive security and if it is 0 then it implies that its price is not at all correlated with the market.

As an investor if one is bullish about the market as a whole then he or she should buy the high beta stock because if market rise by 10 percent then high beta stock will rise more than 10 percent, while low beta stock will rise less than 10 percent. However if an investor feels that market will fall then he or she should buy a low beta stock because they will fall less as compared to high beta stock. In other words, in bull market those investors who invested in high beta stocks will get superior returns while in bear markets those investors who have invested in low beta stocks will be better off.

Financial Markets — No Comments
1
Sep 10

Reasons for Buyback of Shares by Company

Buyback of shares refers to a company’s move to repurchase its own shares from the market. In other words it the opposite of initial public offering where company issues shares to the public. Given below are some of the reasons due to which company go for buyback of shares –

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1. Many companies do buyback of shares to increase the EPS of the company’s shares, as after buyback the number of outstanding shares will decrease it will lead to increase in the earning per share of the company.

2. When company has excess cash reserves but not many new profitable projects to invest in, companies tend to go for buyback of shares.

3. Many times promoter wants to increase the stake in the company and buy back of shares is an ideal way of doing that, in some cases it is done in order to reduce the dilution in promoter holding, when the chances of takeover of the company are increasing.

4. Buyback of shares is mostly done at a higher price than the current market price of the stock in the stock market. Many times by buying their shares at a price higher than prevailing market price, company signals to the market that its share valuation should be higher.

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28
Aug 10

Why Companies do Stock Split

A stock split can be defined as a method through which a company increases or decreases the number of shares it has in the market. After a split, the stock price will be reduced but the number of shares that are outstanding in the market will increase. Hence after stock split the total market capitalization of the company will be same, only the number of shares and price will be affected. There are many reasons due to which companies consider carrying out this corporate action of splitting the shares. Let’s look at some of them -

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1. Many companies do stock split when the price of share has gone to a much higher level. Since as the price of a stock gets higher and higher, some investors may feel the price is too high for them to buy, or small investors may feel it is unaffordable. Splitting the stock brings the share price down to a more attractive level. A lower price change the mind of small investors, and they tend to buy the stock thinking that it is cheap, which in reality is not the case as the value of the share remain same after the stock split. Since value of a stock is affected by earnings of the company and not by stock split.

2. Another reason for splitting a stock is to increase a stock’s liquidity, which increases with the increase in number of outstanding shares. Since after stock split there are many more number of shares it imparts greater liquidity to the stock, as there will that much more number of shares to trade.

3. It also leads to better price discovery of the share of the company, because of more liquidity in the stock.

Financial Markets — No Comments
21
Aug 10

How Strike Price Affect the Premium in Options Market

Strike price is a term which is related to options in derivatives market. It refers to the price at which a specific derivative contract can be exercised. A strike price is generally used in context of either stock or index options, in which strike prices are fixed in the contract. For call options, the strike price is where the security or shares can be bought on or before the expiration date, while for put options the strike price is the price at which security or shares can be sold on or before the expiration date.

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Strike prices are one of the key factors which affect the premium of the options, which represents the market value of an options contract. Other factors which have an effect on the premium of the options include the time until expiration, the volatility of the underlying security and prevailing interest rates.

The strike price determines whether or not an option has any intrinsic value. In case of call options when the underlying security’s price is higher than the strike price a call option is said to be in the money, while in case of put options if the underlying security’s price is less than the strike price, a put option is said to be in the money, which implies that option holder is in profit.

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17
Jul 10

Why Fundamental Analysis is Done

Fundamental analysis is an approach to determine what should to be the price of a stock or intrinsic value which can be determined by various methods and basic assumption of fundamental analysis is that market price and intrinsic value of stock can differ from time to time and comparing both of them so as to decide whether the stock is under priced or overpriced.

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A stock is said to be under priced if its current market price is below the intrinsic value and hence it should be bought while, a stock is said to be overpriced if its current market value is above the intrinsic value and hence it should be sold. So end objective of fundamental analysis is not to make speculative profits rather is to stay away from the risk of buying an overpriced stock and selling an under priced stock.

From the above one can see that person doing fundamental analysis enter the market with a long term view and not for short term because in short term price of stock can differ from its intrinsic value but eventually over a period of time it will be equal to intrinsic value and hence investor will be rewarded from buying an under priced stock.

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