World of "FINANCE"
In simple words, Arrangement of funds is called FINANCE. All organizations need finance for operating its different activities. So, we can say finance is just like blood for survival the business in changing economic environment. Fund, money, saving, cash, reserves and assets are the basics of finance. Finance word is very deep and in modern age, this word is also known Business Finance...:)
Monday 20 May 2013
Friday 5 October 2012
How Is Sensex Calculated?
The Sensex was initially calculated based on the “Full
Market Capitalization” methodology but was shifted to the “Free-float
methodology” with effect from September 1, 2003.
As per the Free-float Market Capitalization methodology,
the level of index at any point of time reflects the Free-float market value of
30 component stocks relative to a base period. All major index providers like
MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float methodology.
The calculation of Sensex involves the following steps
broadly:
1. Calculate the
market capitalization of each of the 30 companies in the index by multiplying
their stock price by the number of shares issued by that company.
2. Multiply the
market capitalization by the free-float factor to determine the free-float market
capitalization.
Free-float factor of a company is a multiple with which the
total market capitalization of that company is adjusted to arrive at its
Free-float market capitalization. It is determined by BSE based on the
information submitted by the companies. The value of Free-float factor lies
between 0.05 and 1.00. A Free-float factor of say 0.55 means that only 55% of
the market capitalization of the company will be considered for index
calculation
.
3. Divide the free-float market capitalization
of the Index constituents by a number called the Index Divisor. The Divisor is
the only link to the original base period value of the Sensex. It keeps the
Index comparable over time and is the adjustment point for all Index
adjustments arising out of corporate actions.
The base period of Sensex is 1978-79 and the base value is
100 index points.
An Example
Suppose the Index consists of only 2 stocks: Stock X and
Stock Y. Then, the table below shows the SENSEX calculation:
Understanding the result:
Step 1 and Step 2 are self-explanatory. Lets understand the
Step 3.
The year 1978-79 is considered the base year of the index
with a value set to 100. What this means is that if at that time the market
capitalization of the stocks that comprised the index was 60,000, then the
index-value at that time would be 100. So, using simple unitary method, we can
find the corresponding present value of the SENSEX.
The factor 100/60000 is called the index divisor.
What are the 30-benchmark stocks?
The 30-benchmark stocks are given below, along with their
Free-float factor:
Note : This above list keeps on changing from time to time,
based on the various guidelines that BSE follows for the selection of benchmark
stocks.
Thursday 10 May 2012
ROE (Return On Equity)
A small try on a vital aspect of finance not only for the shareholders but also for the students as well i.e. Return on Equity (ROE) which is a measure of a
corporation's profitability that reveals how much profit a company generates
with the money shareholders have invested.
ROE is calculated as:
The ROE is useful for comparing the
profitability of a company to that of other firms in the same industry.
Investors wishing to see the return on common equity may modify the formula
above by subtracting preferred dividends from net income and subtracting
preferred equity from shareholders' equity, giving the following:
Return on common equity (ROCE) =
Net income - preferred dividends / Common equity
Wednesday 18 April 2012
Advanced Trailing Stop Loss Methods
In this article we will look at taking this one step further
and using stop losses not just to limit risk and lock in profits but also to
enable you to produce even more profit but increasing the level of risk you are
in the trade at the appropriate time.
This does not mean that you trade at a more risky level – remember this is a
cardinal sin for traders. It does mean, however, that you take on more risk at
a time in a trade that is already in profit. This way, you can be assured that
the trade will never lose you money but you will be able to give it more freedom
to develop without being stopped out too early!
Non-fixed Average True Range (ATR) Based Stop Losses
The average true range is an indicator that takes into account the volatility of a stock. The more volatile a stock, the more room is required for a stop to prevent the trade from being stopped out too early intraday. ATR takes into account the volatility of a stock unlike other more basic forms of stop loss such as a trailing percentage or point stop loss. For a more detailed discussion of ATR (and other indicators)
As an example, it is possible for you to set your initial
stop loss to 2*ATR below the low of the day and then increase the stop loss to,
for example, 3*ATR once the stock is in profit. This will allow your trade a
little more room to breathe with very little chance of losing any money.
The chart below demonstrates this principle:
The red line is the stop loss that is not based on the
traditional approach of trailing behind a fixed ATR while the blue line is a
stop loss that is based on a fixed ATR. The trade was entered on the 19th
September and it can be seen that, in this case, the blue stop loss is
activated much quicker than the red stop loss. In other words, in this case, a
non-fixed ATR produced much more profit than the fixed ATR based stop loss.
Mixed Stop Loss Methods
It is also perfectly possible for you to mix the initial stop loss method with a totally different method of stop loss calculation later on. For example, the initial stop loss can be based on a 2*ATR and then be trailed based on the low of the past “X” number of days. So, if we take X to be 40 days, then as soon as the low of the past 40 days is greater than the initial stop loss, the stop loss is trailed to the newly calculated method and so on.
Summary
The above state two methods of advanced stop loss calculation. There are a number of different other methods and you will need to find a method that is suitable for you. Remember, there is no method that is ideal in all situations and you may find that one method may be better in one stock and not another. It is therefore important that you back test your method on different stocks to ensure that the method, in general, works. Above all, keep it simple and manageable. Without sounding too harsh remember the following pneumonic - KISS – Keep It Simple Stupid!
Monday 16 April 2012
Intra-Day Trading v/s Delivery Based Trading
While doing stock market investment you can trade in two
different ways. You can either do intraday trading or can opt for delivery
based investment. Intraday trading is typically completed within a day that
means you have sell the stocks that you have purchased that day before the
closing of the exchange. Even if you do not sell the stocks by yourself, they
will automatically square off before the closing of the exchange. In case of
delivery based investment or long term investment, you can sell the stocks as
and when you wish to sell or buy them. Both these types of stock trading have
its pros and cons.
Advantages of Intra-Day Trading
- In day trading you can buy stocks without paying for the full price of the stocks. The market makers allow you pay only a part of the price to hold the shares. So, you can gain more by investing less.
- In day trading you can always short sell the stocks that mean you can always sell the stocks before buying them and then buy the stocks before the closing of the market. This is one benefit that can give you profit even when the price of the stock is sure to fall.
- The brokerage of the intraday trading is always lower than the delivery trading.
- In day trading you are getting the profit on the very day. So, you investment is for a few hours only. Therefore, even if the stock price rises, a little your profit percentage is significant.
- You get back the money each day after the market closes and hence you can always start afresh the next morning.
Disadvantages of Intra-Day Trading
- The biggest disadvantage of intraday trading is the time frame. You have to sell the stocks within a day. So, if the stock loses price you are sure to lose money
Advantages of Delivery Based Trading
- With delivery based trading, you can always hold a stock till it reaches the expected price.
- The long term investment can always get you dividend.
- You can also benefit from split shares, bonus stocks and other benefits that the company announces.
Disadvantage of Delivery Based Trading
- In delivery trading you pay higher brokerage.
- Your investment is always susceptible to market crashes, business cycles and other factors.
- Whatever it is, as an investor, you should know which stock is for intra-day trading and which one is to hold as long term investment.
Wednesday 11 April 2012
What is the opening price of a stock? Is it same with the closing price of the previous day????????
That’s like asking how long a piece of string is. The answer is as Chandu Sir says ‘it depends.’
Once a stock moves out of the IPO stage and into the open market, there are a number of factors that go into setting the price.
Opening Price
For example, Infosys closes on Tuesday at 2776.80; what will it open at on Wednesday morning?
The answer is :
who knows. Most likely, it will open somewhere around 2776.80; but as you can see over here the current day opening price is 2765.00 which is less than 11.80 from the previous day closing price. Any number of things might cause it to open higher or lower. Before the market opens on Wednesday:
- FDI in retail Sector
- Budget of 2012-13
- Monetary policy set by RBI
All of these circumstances and many others could influence the price up or down. In the end, it remains a question of what a buyer is willing to pay and a seller is willing to take.
The swirl of market, political, and industry news influences whether there are more buyers or sellers for a particular stock in the market at any one time.
Tuesday 10 April 2012
Have Some Fun!
Murphy's Laws:
What do both stock markets and women have in common?
They both go Up and Down...
Stock Market Day Trader:
The Pessimist sees the glass as half empty.
The Optimist sees the glass half full.
The Stock Market Day Trader JUST ADDS WHISKEY ...
A Stockbroker:
There was a tremendous turnaround in the market today:
A stockbrocker who jumped out of a window on the twelfth floor, saw a computer screen on the seventh floor and did a U-turn.
Stockbroker eligibility:
QUESTION: When does a person decide to become a stockbroker?
ANSWER: When he realizes he doesn't have the charisma to succeed as an undertaker.
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