Open ended and closed-ended funds–Explained

Funds are usually open or closed-ended.

In an open-ended fund, the units are issued and redeemed by the fund, at any time, at the NAV prevalent at the time of issue / redemption. The fund discloses the NAV on a daily basis to facilitate issue and redemption of units.

Unlike open-ended funds, closed-ended funds sell units only at the outset and do not redeem or sell units once they are issued. The investors can sell or purchase units to (or from) other investors and to facilitate such transactions, such units are traded on stock exchanges. Price of closed ended schemes are determined based on demand and supply for the units at the stock exchange and can be more or less than the NAV of the units.

We now examine the different kind of funds on the basis of their investments. Mutual fund investments represented as units in a single portfolio, in real life, fund houses float various schemes from time-to-time, each a constituting a portfolio where inputs translate into units. These schemes are differentiated by their charter which mandates their investment into asset classes. Beyond the type of instruments they invest in, fund houses are also differentiated in terms of their investment styles. The approaches to equity investing could be diversified or undiversified, growth, income, sector rotators, value, or market-timing based.

Each mutual fund scheme has a particular investment policy and the fund manager has to ensure that the investment policy is not breached. The policy is laid right at the outset when the fund is launched and is specified in the prospectus, the ‘Offer Document’ of the scheme. The investment policy determines the instruments in which the money from a specific scheme will be primarily invested. Based on these securities, mutual funds can be broadly classified into equity funds (growth funds and income funds), bond funds, money market funds, index funds, etc. Generally, fund houses have dozens of schemes floating in the market at any given time, with separate investment policies for each scheme.

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things you need to know about a Company Share or Stock

 

Simply put, the shareholders of a company are its owners. As owners, they participate in the
management of the company by appointing its board of directors and voicing their opinions,
and voting in the general meetings of the company. The board of directors have general oversight of the company, appoints the management team to look after the day-to-day running of the business, set overall policies aimed at maximizing profits and shareholder value.

Shareholders of a company are said to have limited liability. The term means that the liability of shareholders is limited to the unpaid amount on the shares. This implies that the maximum loss of shareholder in a company is limited to her original investment. Being the owners, shareholders have the last claim on the assets of the company at the time of liquidation, while debt- or bondholders always have precedence over equity shareholders. At its incorporation, every company is authorized to issue a fixed number of shares, each priced at par value, or face value in India.

The face value of shares is usually set at nominal levels (Rs. 10 or Re. 1 in India for the most part). Corporations generally retain portions of their authorized stock as reserved stock, for future issuance at any point in time. Shares are usually valued much higher than the face value and this initial investment in the company by shareholders represents their paid-in capital in the company. The company then generates earnings from its operating, investing and other activities. A portion of these earnings are distributed back to the shareholders as dividend, the rest retained for future investments. The sum total of the paid-in capital and retained earnings is called the book value of equity of the company.

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Basic Assumptions of Technical analysis of Stocks

Technical analysis is a method of evaluating securities by analysing the past prices (Historical prices) and Volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

1. Market Discounts Everything: A major criticism over technical analysis is that it only considers movement of share price, ignoring the fundamentals of a company. However, technical analysis assumes that, at any given time, a stock’s price reflects everything that has or could affect the company - including fundamental factors. Technical analysts believe that the company’s fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.
2. History Tends To Repeat Itself:  Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyse market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.
3. Price Moves in Trends: In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.

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List of free and premium websites for financial and economic data

Data is so much important for researchers, Investment analyst, Quants and in Academia. We are in information age. Data is everywhere in internet. The thing is it depend for where you look for the data. Here I bring you a list of best websites, free and paid platforms  where you can retrieve Financial and economic (macro and micro) data.

1. Yahoo Finance (free): If you are looking for stock market data like historical share price, ETF, and Mutual funds then Yahoo finance is perfect and free platform. Many Excel sheets and R scripts use Yahoo finance API to get data. To understand how to download read my post DOWNLOADING SHARE PRICES METHOD 1 YAHOO FINANCE TO EXCEL SHEET .
2. Economagic (free): Economagic provides over 400,000 data files, with charts and excel files for economic data related to most of the country around the world. The site was started in 1996 to help students in an Applied Forecasting class. Majority of the data is related to USA macro economic factors.
3. Econstats(free): Econstats holds large source of historical data on US and other economies, both economic and financial data presented in a spreadsheet.
4. Bankscope(Paid): Bankscope specially holds data of almost all banks around the globe. It may be commercial, private, public, central, Islamic, or of any kind. Still the database holds financial details of banks.
5. Worldbank(free): World bank database is named as DataBank that contains collections of time series data on a variety of economic and social data of countries. You can create your own queries; generate tables, charts, and maps; and easily save, embed, and share them.
6. IMF(free): Its a Superb resource for economic data contains 32,000 macro times series covering over 200 countries, and trade stats.
7. WTO(free): If you are looking for trade data then its perfect location that includes exports and imports by product group, trade in services and tariff related data.
8. International Labor Office(free): This website Collects huge amounts of labour related data that includes employment, wages, Child labour stat, labour productivity, income distribution and more.
9. Trading Economics(free): Provides economic data on over 230 countries along with historical data on some 300,000 economic indicatorsincluding bond yields, stock indices and commodity prices.
10. United nations database (free): United Nations has data covering, crime, education, energy, environment, gender, health, population, tourism and trade and much more.

The above mentioned are some of the commonly used database where you can find and retrieve data for your research. Share your list of database in comment section. Subscribe Sulthan Academy for weekly updates. Share with your friends.

Levels of Market Efficiency / EMH

Economists have defined different levels of efficiency according to the type of information, which is reflected in prices. To understand what is efficient market . First, I recommend you to read  EFFICIENT MARKET HYPOTHESIS AND ITS TYPES . There are three levels of market efficiencies, they are discussed below:

Weak-form efficiency

In this form of market the share prices fully reflect all information contained in past price movements. It is pointless to predict share price based on historical share price.

Recommended: How to download historical share price

Semi-strong form efficiency

In this form, All the publicly available information are reflected in Share prices already. This includes not only past price changes but also the earnings and dividend announcements, rights issues, technological advancements, appointments of directors, and more.

This implies that there is no use in analyzing publicly available information after it has been released, because the market has already absorbed and reflected it into the price.

To estimate the intrinsic value of a share the fundamental analyst gather as much relevant information as possible. This may include: macroeconomic growth projections, industry conditions, company accounts and announcements, details of company’s personnel, tax rates, technological and social change and so on.

Strong-form of efficiency

All relevant information, including that which is privately held, is reflected in the share price. Insider trading comes in to play in this form of market.which means few privileged individuals (directors) trade in shares, as they know more than the normal investor in the market. In a strong-form efficient market even insiders are unable to make abnormal profits.

Example: It is well known that it is possible to trade shares on the basis of information not in the public domain and thereby make abnormal profits. In this respect stock markets are not strong form efficient. Trading on inside knowledge is thought to be a “bad thing”. It makes those outside of that charmed circle feel cheated.

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FINANCIAL STATEMENT ANALYSIS- Significance and Limitations

Financial statements includes Trading, Profit and Loss Account and Balance Sheet. Expressing the financial items in these financial statements brings a meaningful information.

Financial statement – Definition:

A process of evaluating the relationship between the component parts of the financial statements to obtain a better understanding of a firm’s position and performance.

Financial statement analysis is an important part of the overall financial assessment. The different users look at the business concern  from their respective view point and are interested in knowing about its profitability and financial condition. A detailed cause and effect study of the profitability and financial condition is the overall objective of financial statement analysis.

Significance of Financial Statement Analysis:

1. Judging the earning capacity or profitability of a business concern.

2. Analysing the short term and long term solvency of the business concern.

3. Helps in making comparative studies between various firms.

4. Assists in preparing budgets.

Limitations of Financial Statement Analysis:

Analysis of financial statements helps to ascertain the strength and weakness of the business concern, but at the same time it suffers from the following limitations.

1. It analyses what has happened till date and does not reflect the future.

2. It ignores price level changes.

3. Financial analysis takes into consideration only monetary matters, qualitative aspects are ignored.

4. The conclusions of the analysis is based on the correctness of the financial statements.

5. Analysis is a means to an end and not the end itself.

6. As there is variation in accounting practices followed by different firms a valid comparison of their financial analysis is not possible.

There are different ways by which financial statement analysis can be undertaken and one important and usual technique used among them is Ratio Analysis.

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Efficient Market Hypothesis and its types

EMH (Efficient Market Hypothesis) elaborates that all relevant information is fully and immediately reflected in market price of a security where an investor will receive stable rate of return. In other words, an investor should not expect to earn an abnormal return (above the market return) through either technical analysis or fundamental analysis.
The efficient market hypothesis (EMH) implies that if new information is revealed about a firm it will be incorporated into the share price rapidly and rationally, with respect to the direction of the share price movement and the size of that movement. In an efficient market no trader will be presented with an opportunity for making a return on a share (or other security) that is greater than a fair return for the riskiness associated with that share (or any other security). The absence of abnormal profit possibilities arises because current and past information is immediately reflected in current prices. It is only new information, which causes prices to change.

Note:  Stock market efficiency does not mean that investors have perfect powers of prediction; all it means is that the current level is an unbiased estimate of its true economic value based on the information revealed. In the major stock markets of the world prices are set by forces of supply and demand. There are hundreds of analysts and thousands of traders, each receiving new information on a company through electronic and paper media. The moment an unexpected, positive piece of information leaks out investors will act and prices will rise rapidly to a level that gives no opportunity to make further profit.

Types of Efficiency

There are Three types of Efficiency such as Operational efficiency, allocation efficiency and Pricing Efficiency. Do not confuse these with the levels of market efficiency such as Weak form, Semi-strong form and Strong form of market efficiencies. Lets discuss the types here

1. Operational efficiency – refers to the cost to buyers and sellers of transactions in securities on the exchange. It is desirable that the market carries out its operations at as low a cost as possible. This may be promoted by creating as much competition between market makers and brokers as possible so that they earn only normal profits and not excessively high profits. It may also be enhanced by competition between exchanges for secondary-market transactions.
2. Allocation efficiency – Our society has a scarcity of resources (that is, they are limited) and it is important that we find mechanisms, to allocate those resources to where they can be most productive. Those industrial and commercial firms with the greatest potential to use investment funds effectively need a method to channel funds their way. Stock markets help in the process of allocating society’s resources between competing real investments. For example, an efficient market provides vast funds for fast-growth sectors such as Information Technology, Automobiles and Banking industries (through IPO, Right issues and etc..,) whereas allocates only small amounts for slow-growth industries.
3. Pricing efficiency – In a pricing efficient market the investor can expect to earn merely a risk-adjusted return from an investment as prices move instantaneously and in an unbiased manner to any news. It is pricing efficiency that is the focus of this section and the term efficient market hypothesis applies to this form of efficiency only.

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