Investment Articles

A common problem, which complicates the practical investment decision-making, is inflation. The rule of the game is, as we shall emphasize in the flowing discussions, to be consistent in treating inflation in the cash flows and the discount rate. Inflation is a fact of life all over the world. A double-digit rate of inflation is a common feature in developing countries. Because the cash flows of an investment project occur over a long period of time, a firm should usually be concerned about impact of inflation on the projects profitability. The capital budgeting results will be biased if the impact of inflation is not correctly factored in the analysis.

Because executives do recognize that inflation exists but they do not consider it necessary to incorporate inflation in the analysis of capital investment. They generally estimate as cash flows assuming unit costs and selling price prevailing in year zero to remain uncharged. They argue that if there is inflation, prices can be increased to cover increasing costs; therefore, the impact on then projects profitability would be the same if they assume rate of inflation to be zero. This line of argument, although seems to be convincing, is fallacious for two reasons.

1. The discount rate used for discounting cash flows is generally expressed in nominal terms. It would be inappropriate and inconsistent to use a nominal rate to discount constant cash flows.

2. Selling prices and costs show different decrease of responsiveness to inflation. In the case of certain products, prices may be controlled by the government, or by restrictive competition, or there may exist a long term contact to supply goods or services at a fixed price.

The drugs and pharmaceutical industry is an example of controlled, slow-rising prices in spite of the rising of the general price level. Costs are usually sensitive to inflation. However, some costs price rise faster than other. For example, wages may increase at rate higher than, say, fuel and power, or even raw material. There are yet examples of certain items, which are not affected by inflation. The depreciation tax shield remains unaffected by inflation since depreciation is allowed on the book value of an asset; irrespective of its replacement are market prices, for tax purposes.

• Sunk costs
Sunk costs are outlays incurred in the past. They are the results of past decisions, and cannot be changed by future decisions. Since they do not influence future decisions, they are irrelevant costs. They are unavoidable and irrecoverable historical costs; they should simply be ignored in the investment analysis.

http://professional-edu.blogspot.com/2010/06/196-investment-decisions-under.html

A firm evaluates a number of investment projects every year. In the absence of a capital constraint, it will undertake all those projects, which have positive net present values and reject those, which have negative net present values. Further analysis may, however, indicate that some of the profitable projects may be more valuable (that is, they may have higher net present values) if undertake in the future. If may also be related that some of the unprofitable projects may yield positive net present values if they are accepted later on. These categories of investment projects may have different degrees of postponed; some of them may be postponed at the most to one or two periods, while a few may be undertaken any time in future. Those projects, while are postponed, involve two mutually exclusive alternatives: undertake investment now, or later. The firm should determine the optimum timing of investment.

The timing of investment may be a critical factor in case of those investment projects, while occur once in a while and those, while are of strategic importance to the firm. Such projects cannot be deferred for long. Postponed also creates uncertainty. For example, the net present value analysis may show that a firm should introduce a new product next year. The firm may still decide to introduce the product this year for two reasons: The firm may have a corporate strategy of remaining market leader in introducing new products. If it anticipates that its competitors will introduce the product this year if it does not, it may come up with the product this year to remain the market leader. Also for the reason of unanticipated competition from unknown quarters the firm may decide to introduce the product now.

Projects with Different Lives

The correct way of choosing between mutually exclusive projects with the same lives is to compare their net present values, and choose the project with a higher net present value. The two mutually exclusive projects being compared, however, may have different lives. The use of the net present value rule without accounting for the difference in the projects’ lives may fail to indicate correct choice. In analyzing such projects, we should answer the question: what would the firm do after the expiry of the short-lived project if it were acquired instead of the long-lived project?

Annual equivalent value method

Assume we are going to choose one machine from two alternative machines called X and Y. In a choice between machines with different lives, we assume that each machine replaced in the last year of its life. For the purpose of analysis, the replacement chains of the machines can be assumed to extend to the periods of time equal to the least common multiple of the lives of the machines.

The method for handling the choice of the mutually exclusive projects with different lives, as discussed above, can become quite cumbersome if the projects’ lives are very long. The problem fortunately can be handled by a simper method. We can calculate the annual equivalent value of cash flows of each project. We shall select the project that has lower annual equivalent cost.

http://professional-edu.blogspot.com/2010/06/203-investment-timing-and-duration.html

The Capital asset pricing model provides an alternative approach for the calculation of the cost of equity. As per the Capital asset pricing model, the required rate of return on equity is given is given by the following relationship:

Cost of equity = the risk free rate + (The market risk premium) the beta of the firms share

Above equation requires the following three parameters to estimate a firms cost of equity:

1. The risk free rate

2. The market risk premium

3. The beta of the firms share

(1). the risk free rate

The yields on the government treasury securities are used as the risk-free rate. You can use returns either on the short term or the long term treasury securities. It is a common practice to use the return on the short term treasury bills as the risk free rate. Since investments are long term decisions, many analysts prefer to use yields on long term government bonds as the risk free rate. You should always use the current risk free rate rather than the historical average.

(2). the market risk premium

The market risk premium is measured as the difference between the long term, historical arithmetic average of market return and the risk free rate. Some people use a market risk premium based on returns of the most recent years. This is not a correct procedure since the possibility of measurement errors and variability in the short term, recent data is higher. As we explained in our previous posts the variability (standard deviation) of the estimate of the market risk premium will reduce when you use long serious of market returns and risk free rates.

(3). the beta of the firms share

Beta is the systematic risk of an ordinary share in relation to the market. In our previous posts, we have explained the regression methodology for calculating beta for an ordinary share. The share returns are regressed to the market returns to estimate beta.

Capital Asset Pricing Model VS Dividend Growth Model

The dividend growth model approach limited application in practice because of its two assumptions.

1. It assumes that the dividend per share will grow at a constant rate, g, forever

2. The expected dividend growth rate, g, should be less than the cost of equity, to arrive at the simple growth formula.

The growth formula is,

Cost of equity = (Dividend in year one / Prize in current year) + growth

These assumptions imply that the dividend growth approach cannot be applied to those companies, which are not paying any dividends, or whose dividend per share is growing at a rate higher than cost of equity, or whose dividend policies are highly volatile. The dividend growth model approach also fails to deal with risk directly. In contrast, the Capital asset pricing model has a wider application although it is based on restrictive assumptions. The only condition for its use is that the companies share is quoted on the stock exchange. Also, all variables in the Capital asset pricing model are market determined and expect the company specific share price data; they are common to all companies. The value of beta is determined in an objective manner by using sound statistical method. One practical problem with the use of beta, however, is that it does not probably remain stable over time.

http://professional-edu.blogspot.com/2010/04/167-cost-of-equity-and-capital-asset.html

With literally thousands of managed funds available, selecting a good one can be a daunting task. Following a few simple guidelines will assist in picking a sound one.

Objectives and Timeframe
Part of the key to picking a good managed fund is first looking at your own personal situation. A retiree may look for a fund with solid income (i.e. regular dividends or distributions along with a high yield), whereas a young first time investor might be looking for long term capital growth. The former might be reliant on their managed fund for income, whereas the latter might prefer a fund that re-invests dividends, potentially leading to even greater returns at a later point in time. The proportion of one’s investments a proposed managed fund is likely to be (including other stock investments, property etc) also needs to be considered.

Risk Profile
Staying with the same example, a retiree who has accumulated substantial assets might elect to choose a managed fund with lower risk, to maintain those assets (for example, a diversified fund, or a fund that invests in only larger “blue chip” securities). Such a retiree’s assets, if diversified, might allow for investment in a higher risk, but potentially higher reward fund (such as a sector specific fund, or a fund that only invests in small start up companies) if this makes up only a small overall proportion of their net wealth. Conversely, if a first time investor’s proposed managed fund investment is likely to make up a high proportion of their savings, then investing in a lower risk fund may be more prudent. Risk may be able to be increased as savings are built up over time, and investments diversified.

Independent Research Houses
Every fund manager is always going to sing the praises of their own products. Highlighting attractive investment returns over one year as compared to similar funds might not tell the whole story – the comparative returns over three or five years might not be as attractive. An independent research house can assist in providing detailed analysis of a fund, and also the fund manager’s relative merits. Bear in mind that fund managers pay independent research houses to research their funds.

Consistent Track Record
Look for a fund manager and a fund that have provided reliable returns over a medium to longer term timeframe (more than 1-2 years). Short term performance can sometimes be anomalous. Performance also needs to be viewed with regard to overall market conditions. A rise of ten percent in a year is great compared to bank interest, but very poor if the overall market has risen thirty percent.

Past Performance Is Not Necessarily An Indicator Of Future Performance
This common disclaimer does highlight the inherent risks in investing. One take away from this is that it is important to look at past performance, but it is equally important to look at the reasons behind the figures. Are the results based on sound investment principles or good fortune? Does the fund manager’s outlook and strategy give you confidence in their ability to continue to provide you with good returns in the future?

Share Trading can contain many pitfalls. Heed each of the factors listed above, and you will give yourself the best chance of choosing a managed fund with positive performance.

William Shaw is a boutique investment manager which specializes in offering Managed Accounts to private individuals, Self Managed Super Funds and financial planners in Australia. Our Managed Accounts service has outperformed the ASX 200 by 23.32%. For more information about our managed share investment service and about our high conviction active investment methodology, visit Managed Funds

Investment is the commitment of money or capital to buy financial instruments or other assets in order to gain profitable returns in form of interest, income, or appreciation of the value of the instrument. Investment is a term normally used in the fields of economics, business management and finance. Your focus in investing is on return and can run the spectrum from conservative to very belligerent in terms of risk.

The best way to defend your stock investments is to own a broad mix of large and small companies and foreign and domestic issues. Business risk is, maybe, the most familiar and easily understood. The main technique for reducing investment risk is diversification. Thoughtful investment selections that meet your goals and risk profile keep individual stock and bond risks at a suitable level.

Many of the wealthiest people in the world owe their fortunes to different types of residual income – from stocks and bonds to investment trusts, real estate and possessions. Technical selection assumes that security prices typically move in identifiable patterns that can be determined through chart techniques to extrapolate trends.

In these difficult days when the soundness of our financial system has come into question, it is critical to find the optimum investment strategies which will guard and grow your wealth. I shall let you in on a little secret about investing; it is not nearly as hard as you think. The first thing you require to do is realize that there is no “perfect” way or time for you to start.

It goes without saying that for every parent the child is the dearest person in the world. Parents always want to provide the best education for their children and to make sure that they will never face difficult financial situation in the future. So, how to arrange this?

Here are some basic tips on children investment plans you should follow:

The first and the most vital thing for you to remember is that saving must be started from the earliest days of your child’s life. The point is that education costs are constantly growing, so it is just impossible to find out the exact amount of money you will need for education in 15 years. If you start early and put a part of your family budget in the children’s fund on a regularly basis, you will manage to save enough to be sure that your son/ daughter get a really good education. You will be able to use the money you put aside right when you need to pay for education.

The other essential aspect for you to pay attention to when choosing an investment plan is that for such purposes it is recommended to prefer low-risk investments options, such as bonds or securities. So, don’t be allured by high rates of return (that are provided by stock, for example) because you may lose it all. Don’t forget that this is a long term investment and it is better to choose safe variants.

One more children investment plans advice you should be aware of is that you should think about increasing your personal retirement plan. I know it might sound rather weird but, in actual fact, it will be more convenient if you make such savings in your account. As concerning children’s savings it should be mentioned that they have lower tax rates – this is a plus. And the minus is the following – it is pretty complicated to draw out money from such accounts when needed. Consequently, it is recommended to use your account.

Join the public discussion about Eigeline Network and its financial planning potential in this YouTube video – your feedback is highly appreciated.

In a broad sense, an option is a claim without any liability. It is a claim contingent upon the occurrence of certain conditions. Thus, an option is a contingent claim. More specifically, it is a contract that gives the holder a right, without any obligation, to buy or sell an asset at an agreed price on or before a specific period of time.

The option to buy an asset is known as a call option, and the option to sell an asset is called an exercise price or a strike price. The asset on which the put or call option is created is referred to as the underlying asset. Depending on when an option can be exercised, it is classified on two categories,

• European. When an option is allowed to be exercised only the maturity dates, it is called a European option.
• American. When the option can be exercised any time before its maturity, it is called an American option.

When will an holder exercise his right? He will exercise his option when doing so provides him a benefit over buying or selling the underlying asset from the market at the prevailing price.

There are three possibilities,

1. In the money. A put or a call option is said to in the money when it is advantageous for the investor to exercise it. In the case of in the money call options, the exercise price is less than the current value of the underlying asset, while in the case of the in the money put options, the exercise price is higher than the current value of the underlying asset.

2. Out of the money. A put or a call is out the money if it is not advantageous for the investor to exercise it. In the case of the out of the money call option, the exercise price is higher than the current value of then underlying asset, while in the case of the out of money put options, the exercise is lower than the current value of the underlying asset.

3. At the money. When the holder of a put or a call option does not lose or gain whether or not he exercise his option, the option is said to be at the money. In the case of the out of the money options the exercise price is equal to the current value of the underlying asset.

Options do not come free. The involve cost. The option premium is the price that the holder of an option has to pay for obtaining a call or a put. The price will have to be paid, generally in advance, whether or not the holder exercises his option.

http://professional-edu.blogspot.com/2009/12/108-options.html

We can identify that put option is a contract that gives the holder a right to sell a specific share or any other asset at an agreed exercise price on or before a given maturity period. Suppose you expect price of company Y share to fall in the near future. Therefore, you buy a 3 month put option at a price of 50$. The current market price of company Y share is 48$. If the price actually falls to 35$ after three months, you will exercise your option. You will buy the share for 35$ from the market and deliver it to the put option seller to receive 50$. Your gain is 15$, ignoring the put option premium, transaction cost and taxes.

You will forgo your option if the share price rises above the exercise price; the put option is worthless for you and its value is zero. A put buyer gains when the share price falls below the exercise price. Ignoring the cost of buying the put option called put premium, his loss will be zero when the share prices rises above the exercise price since he will not exercise his option.
Put option pay off

An investor hopes that the price of company Y share will fall after three months. Therefore he purchases a put option on company Y share with a maturity of three months of premium of 5$. Then exercise price is 30$. The current market price of Company Y share is 28$. How much is profit or loss of the put buyer and the put seller if the price of the share at the time of the maturity of the option turns out to be 18$, or 25$, or 28$, or 30$, or 40$?

The option buyers maximum loss is confined to 5$ that is the put premium. His profit equal to exercise price less the sum of share price and premium. Since the share price cannot fall below zero, he has a limited profit potential. The put buyer will always exercise his option if the exercise is more than the share price. His break even share price is 25$ that is the exercise price premium.

For the seller, the profit will be limited to 5$ the amount of premium. His loss potential depends on the price of the share. But it cannot exceed 25$ that is the difference between the exercise price, 30$ and the premium 5$.

http://professional-edu.blogspot.com/2009/12/110-put-option.html

Finding an investor for your business provides you with the seed money you need to start the business. In return for investing in your business, most investors receive a percentage of the sales or company stock. Finding an investor for your business may be harder than it sounds, but there are some ways to go about locating and convincing investors to invest in your business.

Write a business plan. Before looking for investors write a business plan. A business plan is a written guide of your business including the purpose, the startup costs, expenses, sales forecasts and other information to gain the interest of investors.

Make a list of possible investors. Add people you know to the list who have money to invest and may be willing to take a risk with your business startup. Friends, family members and business owners of related businesses are the best places to start. For example, if your business involves a computer software product, then other software companies may be interested in investing in your company.

Locate business investors on investor websites. Dozens of investor websites exist, where business startups can search for investors (see resources), which may be called angel networks. If you do not have someone you know personally that can invest in your business startup idea, you can typically find possible investors through these networks.

Develop an investor presentation. Compile a speech or pitch to present the business idea for convincing investors to invest in your startup. Include information in your presentation that includes what the product or service offering for the business is, the costs involved in starting the business, what kind of demand there is in the market for the item and how much the company stands to make in one year, three years and so on.

Contact the possible investors. Schedule a time to meet with and make your presentation to each investor on your list.

Present your business idea to investors. At the meeting with the investor, pitch your business by giving your presentation and providing a copy of your business plan to the investor. Answer any questions the investor has about the startup and tell the investor what is in for them such as shares of the company stock or a percentage of the sales.

Sign an investor agreement. Once you find an investor, put your agreement in writing. You can find general agreement templates online or work with a business attorney to help you draw up a legally binding contract for both you as the business owner and the investor to sign.

Kristie Lorette is a freelance copywriter and marketing consultant specializing in helping small businesses and entrepreneurs. Visit http://www.studiokwriting.com to learn more about Kristie and see samples of her work. Kristie also produces The Inky Dot, a weekly e-newsletters that includes writing and marketing tips for businesses. Subscribe to The Inky Dot at http://www.studiokwriting.com.

Swing trading is the act of making money from securities that have short-term price movements between a few days, to a few weeks in length. Once in awhile this can hit a month or two maximum, but usually it’s within a time frame of a few days. Swing traders are individuals and sometimes institutions like hedge funds. Usually they do not have positions 100% of the time; instead they wait for the right opportunities to jump in. Their goal is to take advantage of a significant up or down trend in pricing. When the stock market is gaining and doing well, they buy more then they sell. When the market is weak, they are short more then they buy. When the market is not doing well at all, they sit on the side and wait for another opportunity.

Are far as taxes go with Swing Trading, there are a few important things to know. How much tax you pay on your earnings depends on a few different factors. First is how long you are holding your positions. If you hold a position 366 days, just 1 day over a year, then you sell it, you will pay a lower tax rate than normal on your profit. This income rate is usually at about 15% for most people, but can be as low as 5% for people with lower income. The current tax law that sets the 15% tax rate is set to expire at the end of 2010, so it could change after that date.

Swing traders will usually not qualify for this rate as they do not hold onto positions for very long. Short term profits are usually taxed at an individuals normal taxation rate. There are exceptions to this rule. If you are classified as a pattern day trader and you trade four or more round-trip day trades each 5 business days, then you can treat your profits and losses as a cost of doing business. You also have to maintain an account with $25,000 or more in it. This can be very useful as you can classify capital gains and losses as normal income and loss. If you are doing high volumes of trading you can save a lot of money this way. This is not for everyone, as you have to have a good amount of money to trade with.

There difference between a swing trader and a buy and hold investor is that the buy and hold investors do not care about price swings. They are only interested in the long term growth of their money, so they assume that their positions will go up in price over a longer amount of time. Usually this is several years down the road, so they are not looking at day to day price swings, just the big picture. Buy and hold investing is not very time intensive and can bring a lot of profit if you are not in need of a cash flow.

Swing trading is not for everyone, but for someone that has a lot of self control and a good work ethic, there is a lot of profit to be made. Being educated, experienced and dedicated is a large part of being a successful swing trader.

Jesus is a big outdoors person. He loves camping in the forest and enjoying a fire. You can check out his recent web site at http://mosquitobands.net where he writes about Mosquito Bands.