ETFs - Exchange Traded Funds
What are ETFs?
Exchange traded funds (ETFs) are investment tools much like stocks. They often follow an index, and offer benefits such as their tax efficiency, low-costs, and their stock-like attributes.
Wednesday, May 6, 2009
Mutual Funds
Mutual Funds refer to funds which collect money from investors and put these money in stocks, bonds and other securities to gain financial profit. Persons whose money is used by the Mutual Fund Manager to buy stocks, bonds and other securities, get a percentage of the Profit earned by the mutual fund in return of their Investments. In this way, mutual funds offer benefits to the both parties.
The mutual fund organization earns profit by using people's money for investment and the persons who invest in mutual fund acquire financial Profit without going into intensive analysis and research on bonds and stocks. The work of stock and bond Market Analysis, Market Research and Market Speculation is done by the mutual fund managers.
The people who invest in Mutual Funds are generally exposed to much lower Risk compared to those who directly invest in bonds and stocks. Mutual Fund Investment involves lower Risk as the investment is diversified in to different bonds and stocks. So, if at any time Market Value of one particular bond or value of the stocks of any particular company drops, then the loss incurred by the mutual fund can be offset by the Market Gain of any other bond or stocks.
There are different types of Mutual Funds available in the market, which are Equity Funds, Exchange Traded Funds, Open End Funds, Money Market Funds, Bond Funds and Hedge Funds.
Index Fund
What is an Index fund?
An index fund is an investment mechanism designed to be used by a multitude of investors, which seeks to follow or shadow the performance of a certain financial market.
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Examples of index funds are the FTSE 100, the Dow Jones Industrial Average, the Standard & Poor's 500, and the Wilshire 5000.
Commodity - Commodities
What are Commodities?
Commodities are items of similar value that are often traded, such as precious metals, crops and grains, and other items that are usually universally of a similar quality.
Items which have brand value are not commodities, such as cars, electronics, clothing or other similar manufactured goods. This content is part of the extensive resources on investing featured in EconomyWatch.com.
Commodities can be graded. For example, gold has grades such as 24, 22, 18, 14, 12 and other karats.
Bond, Bonds
Bonds are debt instruments that are issued by companies, municipalities and governments to raise funds for financing their capital expenditure. By purchasing a bond, an investor loans money for a fixed period of time at a predetermined interest rate. While the interest is paid to the bond holder at regular intervals, the principal amount is repaid at a later date, known as the maturity date. While both bonds and stocks are securities, the principle difference between the two is that bond holders are lenders, while stockholders are the owners of the organization.
Types of Bonds
The main types of bonds are:
# Government Bonds: These are fixed-income debt securities issued by the government. Government bonds are further categorized on the basis of the term (maturity duration). (a) Government Bills: These are government bonds with a maturity period of less than one year. (b) Government Notes: These are government bonds with a maturity period from one year to ten years. (c) Government Bonds: These are government bonds with a maturity period that exceeds ten years.
# Municipal Bonds: These are debt securities issued by state governments and their agencies. The interest is exempt from federal income tax or local tax.
# Corporate Bonds: These are debt instruments issued by a company and backed by its ability to generate profits or by the current value of its physical assets.
How Bonds Trade
Bond trading is usually done through bond dealers and can take place anywhere where a buyer and seller strike a deal. Unlike for equities, there is no exchange for bond trading, which mostly takes place in an “over-the-counter” market. The exceptions for this are certain corporate bonds, particularly in the US, that are listed on an exchange. Moreover, derivatives, such as bond futures and certain bond options, are traded on exchanges.
Bond Price Variations
A bond's price refers to the amount investors are willing to pay for an existing bond. The bond’s price is important if you wish to trade the bond with another investor. The main factors that impact bond prices are:
* Interest rate: When interest rates in the market rise, newly issued bonds become more lucrative (offer higher yields). This makes existing bonds less competitive and exerts pressure on the price of existing bonds. Thus interest rates and bond prices move in opposite directions.
* Inflation: High inflation erodes the value of the return that is earned when the bond matures. Thus inflation and bond prices also move in opposite directions.
* Financial health of the issuer: The financial health of the company or government that has issued the bond impacts bond prices. If the issuer is financially healthy, investors have greater confidence in receiving the interest payments and principal amount at maturity. Investors typically stay in touch with the ratings issued by reputed credit rating agencies, such as Moody’s and Standard & Poor’s.
Options
Overview of Options
In finance, options are a form of contract that gives the buyer the right (or option) to purchase an asset at a future date at a particular, pre-agreed value or price.
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Options are often used on futures contracts. Various types of options are put options and call options.
Stock Futures
Overview of Stock Futures
Stock futures are futures contracts based on stock, and are traded on margin. They are traded in financial markets around the world.
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Before trading stock futures it is important to have a full understanding of what they entail, how they are traded, and what the risks are.
Futures
Futures or futures contracts are derivatives bought or sold on a futures exchange. Futures are contracts to buy or sell a particular commodity at a specified price on a certain date in the future. The underlying asset could be commodities, energy, currencies, government bonds or other financial instruments. The future date on which the contract is executed is known as the final settlement date or the delivery date. The predetermined price is known as the settlement price. The mechanism for settlement is provided by the clearinghouse of the futures exchange.
Common Features of Futures
The common features of futures are:
# Futures are exchange-traded derivatives.
# Futures are highly standardized. This standardization is ensured by specifying (a)
# The underlying asset – The particular asset as well as the quantity are specified in the futures contract.
# The currency - The currency in which the contract is to be executed is also specified.
# Settlement - The delivery month and the last trading date are also mentioned in the contract.
# Futures are used for hedging, particularly in a bear market. Those who have an interest in the underlying asset can protect themselves from the risk of price changes via futures contracts.
# Futures have lower transaction costs than other debt instruments.
# They also have high liquidity, since buyers and sellers of futures contracts can be found easily.
Pricing of Futures
When the price of the underlying commodity in a futures contract is higher than the spot (immediate) price, the situation is known as contango. When the price of the underlying commodity for future delivery is lower, the situation is known as backwardation.
Futures: Types of Settlement
There are two types of settlements in the futures market – physical settlement and cash settlement. A futures contract is physically settled if the underlying asset is actually delivered in exchange for the settlement price. This is not the case with cash settlement, where no physical delivery of the underlying asset takes place. Instead, the futures contract is settled for money depending on what the market value of the contract is expected to be at maturity. Speculators opt for cash settlements, which those with interest in the underlying commodity opt for physical settlement.
The futures market is not for the novice trader. It is critical that you check your financial situation, investing goals and risk appetite before venturing into futures trading.
Growth Investing
What is Growth Investing?
Growth investing is an investment approach that seeks to buy shares in firms which are growing. As such, they could appear overvalued, but their growth potential is what the investors are after.
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Growth investing can be an effective investment strategy if the investor fully understands what he or she is doing.
Value Investing
What is Value Investing?
Value investing is an investment approach that seeks to buy undervalued or underpriced securities. Warren Buffett is a value investor.
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Value investing can be an effective investment strategy if the investor fully understands what he or she is doing. It goes by the concept of "buy low and sell high".
Alternative Investments
What are Alternative Investments?
Alternative investments are investments other than the more conventional or traditional share, bond, treasury bill or mutual fund investments. This content is part of the extensive resources on investing featured in EconomyWatch.com.
Alternative investments could be in any number of areas, such as real estate, private equity, commodities, hedge funds, absolute return products, or more.
Alternative investments also embody anything of inherent value like art, wine, or classic cars.
Stock Charts
Overview of Stock Charts
Stock charts tell investors the historical peformance of individual or groups of stocks. They are necessary to make informed trading and investing decisions.
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Fundamental Analysis
Fundamental analysis involves examining the economic, financial and other qualitative and quantitative factors related to a security in order to determine its intrinsic value. While typically this method is used to evaluate the value of a company’s stock, its use can be extended for any kind of security, such as bonds or currency.
Fundamental analysis, which is also known as quantitative analysis, involves delving into a company’s financial statements (such as profit and loss account and balance sheet) in order to study various financial indicators (such as revenues, earnings, liabilities, expenses and assets). Such analysis is usually carried out by analysts, brokers and savvy investors.
Fundamental Analysis: Two Approaches
While carrying out fundamental analysis, investors can use either of the following approaches:
1. Top-down approach: In this approach, an analyst investigates both international and national economic indicators, such as GDP growth rates, energy prices, inflation and interest rates. The search for the best security then trickles down to the analysis of total sales, price levels and foreign competition in a sector in order to identify the best business in the sector.
2. Bottom-up approach: In this approach, an analyst starts the search with specific businesses, irrespective of their industry/region.
Fundamental Analysis: How Does It Work?
Fundamental analysis is carried out with the aim of predicting the future performance of a company. It is based on the theory that the market price of a security tends to move towards its “real value” or “intrinsic value.” Thus, the intrinsic value of a security being higher than the security’s market value represents a time to buy. If the value of the security is lower than its market price, investors should sell it.
The steps involved in fundamental analysis are:
1. Macroeconomic analysis, which involves considering currencies, commodities and indices.
2. Industry sector analysis, which involves the analysis of companies that are a part of the sector.
3. Situational analysis of a company.
4. Financial analysis of the company.
5. Valuation
The valuation of any security is done through the discounted cash flow (DCF) model, which takes into consideration:
1. Dividends received by investors
2. Earnings or cash flows of a company
3. Debt, which is calculated by using the debt to equity ratio and the current ratio (current assets/current liabilities)
Fundamental Analysis: Benefits
Fundamental analysis helps in:
1. Identifying the intrinsic value of a security.
2. Identifying long-term investment opportunities, since it involves real-time data.
Fundamental Analysis: Drawbacks
The drawbacks of fundamental analysis are:
* Too many economic indicators and extensive macroeconomic data can confuse novice investors.
* The same set of information on macroeconomic indicators can have varied effects on the same currencies at different times.
* It is beneficial only for long-term investments.
Technical Analysis
Technical analysis involves the study of past market data related to price and volume with the purpose of forecasting future price movements. Technical analysis does not help in making absolute predictions. Rather it helps in projecting the “likely" price movement over time.
Technical analysis is applicable to commodities, stocks, futures, foreign exchange (forex), indices or any tradable instrument, the price of which is influenced by supply and demand trends. It is used by day traders and short-term investors participating in investment markets, such as the stock market and the foreign exchange (forex) market. This type of analysis is also very useful for hedgers.
How is Technical Analysis Done?
Technical analysis is based on the premise that price discounts every aspect and information in the market. Technical analysis is also based on the belief that price movements are never completely arbitrary and follow a trend. A technical analyst believes that it is possible to identify an ongoing trend, trade based on the trend and generate profits as the trend unfolds.
The methods used for technical analysis are:
1. Moving averages: This method is used to identify various support and resistance levels for the short and long term. The most commonly used moving averages are the 30-day moving average (DMAs) and 200-day moving average (DMAs).
2. Charts and patterns: Extensive charts are made based on historical data on price movements. These charts are used to identify patterns and shapes, such as double top, double bottom, head and shoulders and triple bottom.
Benefits of Technical Analysis
The benefits of technical analysis are:
1. Helps to identify a trend, allowing investors to make predictions on future trends.
2. Allows investors to judge the direction of the current trend and enables them to gauge the best time to take a position in the market.
3. When it is used in conjunction with fundamental analysis and company and industry related news, it minimizes the chances of an investor incurring losses.
Drawbacks of Technical Analysis
The drawbacks of technical analysis are:
1. It draws heavily on a person’s opinion or interpretation.
2. It is more a study of probabilities than of actual value.
3. Useful only for short-term investments.
Budget Calculator
Budgeting
A budget calculator is helpful in planning one's budget and securing a solid financial future. A budget calculator can help you in your financial planning.
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Budget Planning / Planner
Budgeting
Budget planning is critical to securing a solid financial future. A budget planner can help you in your budget planning.
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Wealth management
Wealth management is an integral part of financial planning. It is a systematic process of maintaining wealth over a long period of time.
Owing to the increasing uncertainty in global job market and fluctuating prices of common goods and services, wealth management services have gained huge importance in the recent times. Banks, brokerage firms, trust companies, and many other financial service providers offer wealth management services in the world market.
Success of wealth management is essentially dependent on financial planning. A well-guided financial plan ensures proper allocation of resources. Financial planning also helps to increase savings of individuals. Wealth management service providers help you to select the best investment options. This is turn results in increased returns from investments and financial growth in long term.
You can manage wealth on your own. However, efficient management of wealth requires specialized knowledge on this field. It is always good to take assistance from professionals for portfolio building.
Wealth management if done in a proper way can save your family from future liabilities. It protects your assets from harms that may come up all of a sudden. Wealth management also involves planning for post retirement period, in advance. Besides fulfilling day-to-day financial needs it makes arrangements for savings and investments.
Wealth management also helps to reduce tax burden of individuals. Efficient management of wealth assists one to save money for securing child’s future.
There is no dearth of wealth management service providers in financial market. Wealth management solutions offered by these firms are designed to meet the diverse financial needs of clients. However, it is always advisable to check credibility of the wealth management firms, before seeking wealth management solutions from them.
Retirement planning
Retirement planning essentially is planning for a steady income after retiring from regular work. It is an investment option where the returns are payable after a gestation period. Individuals investing in retirement benefit schemes normally earn pension over an extended period.
Planning for retirement earning is best done during the course of regular job or practice. Saving regularly is the initial step towards planning for investment. The earlier an individual starts saving the higher is the amount of investment possible. All investments yield interest, and rate of interest earned on longer terms usually outweighs inflation rates.
The factors determining the need for retirement income plans are:
1. Quantification of retirement – It is very important to work out the planned expenses after retirement. Planned expenses vary from individual to individual and from one city to another.
2. Listing of current wealth and investments gives an indication of the gap existing between the actual earning potential and the desired expenditure
3. After identifying this gap plan investments accordingly which take closer to your desired expenditures.
4. The risks involved in these future investments are of vital consideration.
5. A constant review of available investments helps to mix and match future retirement income plans.
Retirement benefit investment plans are offered by banks, non-banking financial institutes and government agencies. In many countries post offices also extend retirement investment plans.
Criteria for choosing a retirement plan
After deciding for investing in a retirement scheme it is important to understand the benefits of the same. The criteria for selecting a retirement plan are:
1. Bonus is an important criterion for choosing a retirement policy. Some companies pay bonus on the total money invested, while others pay bonus on the premium amount.
2. Terminal bonus – In addition to annual bonus, certain companies also pay terminal bonus.
3. Life Coverage – A few companies provide life coverage to investors, and are always the better option compared to companies that do not.
4. Compounded returns – The interest payable is either simple or compounded. Since compound interest is always higher on a given principal sum compared to simple interest, investing in a scheme yielding compounded interest is preferable.
Investment Guide
An investment guide can be defined as a complete guide for putting money in certain sectors of the economy, be it for domestic or international investors. The investment guide for a certain country will depend on various parameters of the economy ranging from the banks and the banking services of the country, policies under taken by the home government with respect to foreign and domestic investors and most importantly, the situation of secondary markets in the home country.
In the context of India, major financial market changes have occurred in India since the post 1991 liberalization period. This was primarily driven by a large number of private players entering the banking and financial services sector in the commercial banking and asset management business. Adding to it, the many deregulations implemented by the government and the openings in the insurance sector with stiff competition among the private players have ensured that interest rates have not increased too much in that period. The capital market regulators, namely the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Management Authority (IRDA) have been given more independence by the Union Government. Besides, the Public Sector Banks, due to its sheer reach to the rural areas of the country and still managing the majority of businesses in the banking industry are being encouraged to run on professional lines and many have already been listed on national stock exchanges.
These should be good indicators of the climate for investment in India. With the economy consistently exhibiting above 5%-6% growth in the recent years, any investment guide based on the above factors coupled with some others such as flows of Foreign Direct Investment (FDI) and situations in the capital and secondary markets would rate it as profitable investment destination in the years to come. There has been a rapid development in the Finance Institutions in India and many Non Banking Finance Companies (NBFC’s) have come up in the recent years seeking registration with the Reserve Bank of India (RBI). Secondary markets previously facing tight controls by the government with limited liquidity have been revamped with the introduction of new money market instruments and the setting up of the Discount and Finance House of India (DFHI). DFHI is the principal agency for developing the secondary market for money market instruments and Government of India treasury bills. Another agency set up to monitor the secondary market has been the Securities Trading Corporation of India (STCI).
In the front of the capital market, private mutual funds have been permitted and buy back shares have been allowed. Mutual funds now come under the SEBI (Mutual Funds), Regulations, 1996. With the growth in the securities markets and tax exemptions allowed for mutual fund schemes, it is only natural that mutual fund units are starting to become popular. That India’s stock market is showing signs of improvement are evident from the fact that there are around 25 million shareholders in the country and many of them actively trade in stocks.
After 1991 and the commencement of reforms, the openness to foreign investments was also confirmed with most of the Foreign Direct Investment (FDI) now allowed through the automatic route. However, those in excess of the 51% limit in foreign equity investment are required to get the prior nod from Foreign Investment and Promotion Board (FIPB) approved by a Cabinet Committee. As a move to allow more FDI flows into the country, foreign brokers are now permitted to facilitate operations on behalf of Foreign Institutional Investors (FII). This is also a positive investment guide for India. Foreign ownership in many companies has been raised from 51% to 74% as per the latest Budget Announcement of 2007-08. Non-Resident Indians and Overseas Corporate Bodies have been allowed up to 100% ownership in and certain industries. Income tax exemptions on corporate income for both domestic and foreign companies are also in place according to the most recent figures.
An investment guide will also lead you to the developing erstwhile Soviet Republics such as Kazakhstan and Tajikistan, which are showing up good investment opportunities to invest in those countries. These central Asian countries are rich in natural resources and chemicals and metals such as copper, zinc, bauxite, gold, silver and uranium. Going westwards, the Baltic regions of Romania and Bulgaria are also giving enough investment opportunities in the real estate sectors with property interest rates falling. According to a World Bank report of 2004, Slovakia experienced the most dramatic change in investment climate in the world for that particular year. Property rates can also be taken as an investment guide to invest in real estates, which are throwing up a profitable venture in the Gulf city of Dubai.
In conclusion, it can be stated that a favorable investment climate influenced by strong investment guide parameters such as banking services, FDI flows, secondary and capital market flexibility is rendered useless unless a macroeconomic stability with sound fiscal and monetary policies is ensured by the government. These factors, along with lack of a stable political situation can have an unfavorable effect on the stock market of the country in question, which will anyway ward off potential foreign investors.
Financial Management
Financial management seeks to plan for the future such that a personal or business entity has a positive flow of cash.
The term ‘financial management’ has a number of meanings including the administration and maintenance of financial assets. The process of financial management may also include identifying and trying to work around the various risks to which a particular project may be exposed.
Some experts refer to financial management as the science of money management – the primary usage of the term being in the world of financing business activities. However, the process of financial management is important at all levels of human existence, because every entity needs to look after its finances.
From an organizational standpoint, the process of financial management is the process associated with financial planning and financial control. Financial planning seeks to quantify various financial resources available and plan the size and timing of expenditures.
In the business world, this means closely monitoring cash flow. The inflow is the amount of money coming into a particular company, while outflow is the record of the expenditure being made by the company in various sources.
At the corporate level, the main aim of the process of business organization is to achieve the various goals a company sets at a given point of time. Businesses also seek to generate substantial amounts of profits with the help of a particular set of financial processes.
Financial planning aims to boost the levels of resources at their disposal, while also functioning on money invested in them from external investors. Another goal companies have is to provide investors with sufficient amounts of returns on their investments.
At the individual level, financial management mostly involves tailoring expenses as per the financial resources the particular individual has.
Individuals who are in a favorable financial position, with surplus cash on hand or access to funding, plan to either invest their money for a positive return (which normally means that they have made more money after calculating the double impact of tax and inflation) or to spend it on discretionary items.
Financial decision-making is also an important part of the modern day financial management process. The particular entities involved in financial management also need to be able to take the financial decisions that are intended to benefit them in the long run and achieve their financial aims, which is the basic premise of financial management.
National Finance Center (NFC)
The National Finance Center was founded in the year 1973. Since then it has been providing various systems and support services to the Government. Both the Government as well as the Greater New Orleans have benefited a lot from the National Finance Center.
The National Finance Center has been working with a mission of developing the cost benefit financial, administrative, and management information services to its customers.
Various system operations given by the National Finance Center are as follows:
* Payroll/Personnel System
* Administrative Payments Systems
* Accounts Receivable Systems
* Property Management systems
The above systems are being imposed by the National Finance Center for rendering services in the country.
The address and the contact details of the National Finance Center is as follows:
Mailing Address:
The National Finance Center
P.O. Box 60000
New Orleans, LA 70160-0001
Street Address:
The National Finance Center
13800 Old Gentilly Road
New Orleans, LA 70129
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