Tuesday 26 June 2012

Nervous UK investors make a dash for cash

Thousands of nervous investors are shunning shares as the financial crisis drags on.

Family sheltering their savings
Investors opting for the safety of cash amid the economic debt crisis Photo: Howard McWilliam


British investors are making a dash for cash as the eurozone turmoil shows no sign of abating. Stockbrokers, fund providers and investment managers all say that investors with Sipps (self-invested personal pensions) and Isas are keeping their powder dry by investing in cash rather than stocks and shares.
At the end of May, one leading fund broker, Bestinvest, said 75pc of the money invested by its clients went straight into cash as the uncertainty around Spanish banks and a Greek default put investors off.
Last month Fidelity's Fundsnetwork said 36pc of all investments went into cash funds, compared with an average of just 3pc, while Skandia said twice as much money was invested in cash in May as in April.
Barclays' investment management arm has also reported increased demand from investors to move money into cash. Oliver Gregson, an investment manager at the bank, said it had been a year of two halves.
"Until March we saw investors being significantly 'risk on', with large flows into equities and other assets. Japan and the US were particularly popular," he said.
"However, in the past three months money has been coming out of markets, and deposits into cash are up."
Mr Gregson added that cash was the only asset class that could fulfil the remit set to him by many clients at the moment: not to lose capital.
Such is the market uncertainty that Barclays is allocating a substantial 45pc of low-risk investors' portfolios to cash. Move up the risk appetite scale and the proportion is reduced to 12pc for those who want moderate risk and 7pc for those who have high tolerance.
Barclays uses a mixture of floating-rate notes, short-term bonds and instant-access accounts for its clients' cash allocation – with at least half of the money in instant-access accounts for liquidity purposes.
Mark Dampier of Hargreaves Lansdown, the advisory firm, said cash was the more attractive asset for investors right now.
"While many cash accounts fail to beat the rate of inflation, at least your capital is protected if you keep it in cash," he said. "It may be an unpopular view among advisers, but the markets can lose you money."
Mr Dampier added that although fixed-rate accounts might offer a greater return on your money than the "cash park" facilities found on fund supermarket platforms, the most important thing about today's market conditions was keeping your assets liquid.
Cash parks allow investors to "park" their cash before investing it in an Isa, protecting its tax-free status and buying the individual more time to choose which fund to invest in. You can then return to the investment platform when you consider there is a worthy investment opportunity and transfer your money into a stock or fund without losing its tax-efficient status.
The cash park on the Hargreaves Lansdown platform pays 0.25pc for deposits of more than £50,000, 0.1pc for less. Fidelity Fundsnetwork's cash park facility pays Bank Rate minus 0.2 percentage points – currently 0.3pc. Bestinvest's facility pays 0.25pc on deposits of more than £20,000, but nothing for smaller sums.
Mr Dampier said: "The market moves so much at the moment that there may be a buying opportunity today that has passed in a week. If your cash is locked away in a 30-day notice account, that is no good," he said.
"Yes, you may not get an inflation-beating return in the cash park, but your capital is protected and your portfolio liquid."
While savers' fears about investing in the market are well founded, Adrian Lowcock of Bestinvest urged them to steel their nerve if they could.
"There is no doubt that the uncertainty in Europe, particularly around the Greek elections, has put investors off. It is important that, if you do put cash aside in an Isa or Sipp while waiting to invest, you actually take action and invest it. Don't forget about it," he said.
"It is human nature not to act in times of crisis. Ultimately when investing they buy high and sell low, when in fact they should be looking for the longer term and buying on weakness, not waiting for a rebound."
The euro crisis has hit this year's Isa investors hard and their caution is understandable. Last week The Daily Telegraph's Your Money section disclosed that many savers will have seen as much as 25pc wiped off the value of their fund in just three months as global economic fears intensified.
Several of the biggest and most popular funds have been hardest hit. Aberdeen Emerging Markets, for example, was one of the best-selling Isas in the run-up to the end of the tax year. But anyone who invested £10,000 in mid-March would now be sitting on a fund worth £9,156, according to Morningstar.
An investor who bought the popular JP Morgan Natural Resources fund would have seen a £10,000 investment fall by almost £2,500 to just £7,683 – which means that the fund needs to climb by more than 30pc from here just for savers to break even.
And there is little sign of relief on the horizon despite the Greek election result, which did not rule out the threat of the country exiting the euro.
Fund managers are in a cautious mood, too. A survey of 260 asset managers across the globe by Bank of America Merrill Lynch found that cash positions rose to 5.3pc in June, levels similar to those seen at the height of the financial crisis in January 2009 and the highest since March 2003 and December 2008.

Falling sipp rates

The rates paid on cash by Sipp providers have come in for criticism in the past – last year several financial advisers branded them as "unacceptable".
Investors who choose to keep Sipp allowances in cash frequently earn Bank Rate (0.5pc) or less; the average rate is just 0.75pc, according to Investec Bank.
With inflation still riding high at 2.8pc, this gives negative real returns for hundreds of thousands of pension investors.
Advisers said that on average investors held almost 10pc of their Sipp in cash. Investors are allowed to deposit £50,000 or 100pc of their salary a year into a pension, whichever is the lower. This means that potentially £5,000 a year of pension savings is guaranteed to be eroded by inflation.
The average amount of cash held in a Sipp is £39,000, Investec said, with some investors having as much as £50,000 in cash – built up over years of pension contributions.
Lionel Ross of Investec said: "The stagnant Bank Rate is having a knock-on effect on the rates paid on the cash element of Sipps. Advisers are now waking up to the need to challenge their current cash account provider to ensure that their clients are getting the highest possible returns on their deposits, which should in turn enhance overall pension fund performance.
"Given ongoing market volatility, investors, particularly those nearing retirement, are increasing their cash allocation. However, it is essential that they check that this money is held in an account paying a competitive rate of interest."
Around £90bn is held in Sipp accounts nationwide.
Not all Sipp cash rates are bad, however. Investec's own offering pays 2.25pc for sums of £25,000 or more. James Hay Partnership pays between 1.4pc and 2.9pc, and Hargreaves Lansdown said it offered fixed deals paying up to 2.5pc for Sipp holders who wanted to hold cash for three months or more.
But Darius McDermott of Chelsea Financial Services warned investors to avoid cash funds. "There are funds that invest in cash or cash equivalents but other than providing more of a 'safe haven' for your money, as they invest across more than one financial institution, they offer little incentive at the moment. Most are returning only in the region of the Bank Rate so you'd be better off in a bog-standard savings account," he said.
Moneyfacts, the financial information service, said a higher-rate taxpayer would need to find an account paying at least 4.7pc to negate the impact of tax and inflation. However, there are few accounts available that will pay this much, meaning that once people have exhausted their Isa allowance they will struggle.
Basic-rate taxpayers have more luck, with 210 accounts that overcome both the effect of inflation and the taxman's cut by paying 3.7pc or more.
Birmingham Midshires has a three-year fixed-rate bond that pays 4pc and can be opened with a deposit of just £1. Secure Trust Bank's five-year fixed-rate cash bond requires a larger deposit of £1,000 but pays an impressive 4.45pc.
The best one-year bond on the market is from Cahoot and pays 3.6pc. For instant access go to santander.co.uk – the bank's online saver account pays a market-leading 3.2pc and can be opened with £1.

The pros and high frequency traders rule the world. Is the Buy & Hold Stock Strategy Officially Dead?


If you hold onto an investment for longer than five days, consider yourself the new millennium’s version of Benjamin Graham.
Benjamin Grahamn, author of 'Intelligent Investor'
Source: Reed Business Information, Inc.
Benjamin Graham, the economist often considered the father of value investing.

The average holding period for the S&P 500 SPDR (SPY), the ETF which tracks the benchmark for U.S. stocks, is less than five days, according to shocking statistics in analyst Alan Newman’s latest Crosscurrents newsletter.
“Given recent average volume, the SPY trades its entire capitalization and then some each and every week,” wrote the always-provocative analyst. “Does anyone really wish to argue where valuation might enter the picture in this scenario? Value does not matter in the slightest.”
Analysts blame the hot potato market on the disappearance of the individual investor and the entry of the high-frequency trader. After three bear markets in the last decade, individual investors – especially baby boomers careening toward retirement – don’t have the risk tolerance to be burned once again.
“True liquidity has not come back and the pros and high frequency traders rule the world,” said Brian Stutland of Stutland Volatility Group. “Plus, if the average person ever comes back, then they won't have time to play all day long back and forth in the market. So, maybe buy and hold really is dead.”
Newman notes in his newsletter that the average holding period for all stocks was almost four years from 1926 through 1999. After a tech mania, a housing bubble, and the explosion in electronic trading, the average holding period sits at just 3.2 months today.
The decline in mutual funds and rise of short-term oriented hedge funds are also partly to blame for this trend, investors said.
“From the hedge fund perspective, we are judged on monthly performance, and three months is a lifetime,” said Brian Kelly of hedge fund Shelter Harbor Capital. “Ask any hedge fund or mutual fund manager for how long do they believe they can underperform the market and I guarantee they will tell you, ‘One quarter.’”
In one of the most extreme examples of our day-trading, computer-driven investment culture, Newman unveils this gem: “In the three months from the beginning of March to the end of May, transactions in Apple comprised one of every $16 traded in the U.S. market, very likely the most concentrated focus on one stock in stock market history.”
How many of the human beings or machines behind those trades looked at Apple’s price-earnings ratio?
“I speak with retail investors every day and I can tell you that more than ever, they believe that the stock market is a casino for the large and well-connected investors,” said Mitch Goldberg, ClientFirst Strategy in Woodbury, NY. “Of course, different investment styles go in and out of favor every so often, so to be a long term investor, you’d need a ton of patience and very thick skin. Eventually, the Graham and Buffett way will be back in favor and I think that is what will encourage the retail investor to step back into the market.”

Monday 25 June 2012

How exactly do we know the value of the asset? Trust Your Instincts (Common Sense).

"Price is what you pay. Value is what you get."

Leave it to Warren Buffett to sum up the dilemma in a single pithy dichotomy. 


The world's greatest investor reminds us that the value of an asset -- whether a car, a house, or a stock -- does not necessarily have any relation to the price we pay to own it.   


Buffett's observation still leaves us with one crucial question: How exactly do we know the value of the asset?

  • Benjamin Graham's classic non-answer stated that an asset is worth at least its book value, so you're safe if you pay less than that. 
  • There's also a logically impeccable but not very helpful adage that "an asset is worth whatever someone will pay for it." 
  • And Professor Aswath Damodaran offers this math-intensive solution: "The value of equity is obtained by discounting expected [residual] cash flows."


A more honest answer, though, is that we simply never know how much anything is worth. Not exactly, at least.



Yet in real life, we don't allow the lack of an exact answer to stop us from buying. 

  • Humans need shelter, so we buy a house when the price seems fair. 
  • We need cars, so we work from sticker prices and the Kelly Blue Book to pick an acceptable price for those, too.

The same goes for stocks. We shouldn't "measure with a micrometer, mark it off with chalk, then cut it with an axe." 

  • We make our best guess at a fair price (intrinsic value). 
  • We try to buy for significantly less (margin of safety) than our estimation. 
If we guess right more often than wrong, we make money. But where do we start?








Start with common sense

Look in places where you're more likely than not to find bargains:

Low prices: Stocks hitting the new 52-week-lows list may be "down for a reason." Still, a stock selling cheaper today than it's sold any time for the past year is more likely a good bargain than a stock selling for more than it's ever fetched before. 

Read the paper: Newspaper headlines offer another superb place to seek bargains. Remember how oil was selling for $150 a barrel last July? Remember how a few months later, it sold for less than $40? How much do you want to bet that the intrinsic values of oil majors such as ExxonMobil (NYSE: XOM) or Chevron (NYSE: CVX) tracked those movements exactly? (Hint: They didn't.) Somewhere between $40 and $150, there was value to be had in the oil majors.

Cheap valuations: Another great way to scan for bargains is to run a stock screener every once in a while. I like to look for stocks that trade for low price-to-free cash flow multiples, exhibit strong growth, and have low debt. 


The key point I want you to take away from all this is simple: Trust your instincts.
  • When Zillow tells you your house has doubled in value, treat that "Zestimate" with some skepticism. 
  • When Suntech Power (NYSE: STP) doubles in price on announcements of industry subsidies from China, be wary. 
  • On the other hand, when stocks that have little to do with the financial crisis drop 50% in the space of a year, when stock prices don't match the news they're supposed to reflect, or when you stumble across a stock with a price that looks cheap, you might just have found a bargain.

Sunday 24 June 2012

There is no price low enough to make a poor quality company a good investment.

If you're in doubt about the quality of a company as an investment, abandon the study and look for another candidate.

When in doubt, throw it out.

Abandon your study and go on to another.  There is no price low enough to make a poor quality company a good investment.


The worse a company performs, the better value its stock will appear to be.

Because declining fundamentals will prompt a company's shareholders to sell, the price will decline.  This will cause all the value indicators to show that the price has become a bargain.  It's not!

When the stock is selling at a price below that for which it has customarily sold, you will want to check to see why - what current investors know that you don't.

Telltale signs of good cash generation are dividends, share buybacks, and an accumulation of cash on the balance sheet.

Economies of scale:  refers to a company's ability to leverage its fixed cost infrastructure across more and more clients.

Operating leverage:  The result of economies of scale should be operating leverage, whereby profits are able to grow faster than sales.

Low ongoing capital investment to maintain their systems:

The combination of operating leverage and low ongoing capital requirements suggests that the firms should have plenty of free cash to throw around.

Telltale signs of good cash generation are dividends, share buybacks, and an accumulation of cash on the balance sheet.


E.g.  Technology-based businesses:  A desirable characteristic of technology-based businesses is the low ongoing capital investment to maintain their systems.  For firms already in the industry, the huge upfront technology investments have already taken place.  And the cost of technology tends to drop over time, so upkeep expenditures are minimal.  The combination of operating leverage and low ongoing capital requirements suggests that the technology-based firms should have plenty of free cash to throw around. 



  • Understanding Free Cash Flow (Video)

  • Read more: http://www.investopedia.com/video/definitions#ixzz1yiD0k3ZQ


    1. Understanding Free Cash Flow

    Concept of Risk vs. Reward


    Evaluation of Customers - Concept of Risk vs. Reward

    Measuring Portfolio RisksOne of the concepts used in risk and return calculations is standard deviation which measures the dispersion of actual returns around the expected return of an investment. Since standard deviation is the square root of the variance, this is another crucial concept to know. The variance is calculated by weighting each possible dispersion by its relative probability (take the difference between the actual return and the expected return, then square the number).

    The standard deviation of an investment's expected return is considered a basic measure of risk. If two potential investments had the same expected return, the one with the lower standard deviation would be considered to have less potential risk.

    Risk MeasuresThere are three other risk measures used to predict volatility and return:
    • Alpha - this measures stock price volatility based on the specific characteristics of the particular security. As with beta, the higher the number, the higher the risk.
    • Sharpe ratiothis is a more complex measure that uses the standard deviation of a stock or portfolio to measure volatility. This calculation measures the incremental reward of assuming incremental risk. The larger the Sharpe ratio, the greater the potential return. The formula is: Sharpe Ratio = (total return minus the risk-free rate of return) divided by the standard deviation of the portfolio.
    • Beta - this measures stock price volatility based solely on general market movements. Typically, the market as a whole is assigned a beta of 1.0. So, a stock or a portfolio with a beta higher than 1.0 is predicted to have a higher risk and, potentially, a higher return than the market. Conversely, if a stock (or fund) had a beta of .85, this would indicate that if the market increased by 10%, this stock (or fund) would likely return only 8.5%. However, if the market dropped 10%, this stock would likely drop only 8.5%.
    • Learn how to properly use beta to help meet your portfolio's risk criteria in the article, Beta: Gauging Price Fluctuations.
    Asset Allocation
    In simple terms, asset allocation refers to the balance between growth-oriented and income-oriented investments in a portfolio. This allows the investor to take advantage of the risk/reward tradeoff and benefit from both growth and income. Here are the basic steps to asset allocation:

    1. Choosing which asset classes to include (stocks, bonds, money market, real estate, precious metals, etc.)
    2. Selecting the ideal percentage (the target) to allocate to each asset class
    3. Identifying an acceptable range within that target
    4. Diversifying within each asset class
    If you are unfamiliar with asset allocation, refer to the tutorial: Asset Allocation.

    Risk ToleranceThe client's risk tolerance is the single most important factor in choosing an asset allocation. At times, there may be a distinct difference between the risk tolerance of a client and his/her spouse, so care must be taken to get agreement on how to proceed. Also, risk tolerance may change over time, so it's important to revisit the topic periodically. 

    Time HorizonClearly, the time horizon for each of the client's goals will affect the asset allocation mix. Take the example of a client with a very aggressive risk tolerance. The recommended allocation to stocks will be much higher for the client's retirement portfolio than for the money being set aside for the college fund of the client's 13-year-old child.


    Read more: http://www.investopedia.com/exam-guide/finra-series-6/evaluation-customers/risk-reward.asp#ixzz1yhz7GZFU

    Investment Objectives


    Evaluation of Customers - Investment Objectives


    This section refers to general investment objectives, not the client's specific needs such as retirement at a certain age or college plans for his/her children (see the next section on capital needs). However, there is certainly a correlation between the two, and it is useful to know the characteristics of each of these investment goals:
    • Preservation of capital - the investor is more concerned with safety than return. Treasury bills and money market funds may be most appropriate.
    • Current income- the investor needs a portfolio that produces steady income for current living expenses. Bonds, annuities, and stocks with high dividends (such as utility stocks) may be appropriate.
    • Tax-exempt income -
    • Growth and income - the investor is looking for a portfolio that generates some amount of income, but he/she is looking for capital appreciation as well (often for protection against inflation). Appropriate investments could include a mix of bonds and stocks.
    • Capital appreciation - the investor's goal is likely retirement or another event in the future, where growth is required and current income is not needed. A diversified stock or mutual fund portfolio is appropriate.
    • Aggressive growth - the investor is looking for high-risk investments with a potential for very large returns. This is rarely the goal for an entire portfolio, but rather for a specific portion of assets. Aggressive growth funds and small-cap issues may be most appropriate.


    Read more: http://www.investopedia.com/exam-guide/finra-series-6/evaluation-customers/investment-objectives.asp#ixzz1yhxwhzOn

    Investment Risks


    By understanding the various types of investment risks you will be better able to recommend securities according to a client's suitability. Remember that representatives have a fiduciary obligation to match customers with appropriate investments. 


    Investment Risks
    Risk is simply the measurable possibility of either losing value or not gaining value. In investment terms, risk is the uncertainty that an investment will deliver its expected return.

    Before you can make suitable recommendations that are in line with the investment objectives of a client, you must understand the concept of risk, the types of investment risk associated with various investment vehicles and the amount of risk that a client is willing to assume. In general, your clients must first understand that no investment is without risk and that there is a trade-off between returns and the amount of risk an investor is willing to assume in order to reach his or her financial goals.
    The following tutorial, Risk and Diversification will provide you with a quick introduction on what risk is, the different kinds, and how diversification can help to minimize risk.


    Read more: http://www.investopedia.com/exam-guide/finra-series-6/evaluation-customers/default.asp#ixzz1yhVI7yaD

    Economic Factors - International Economic Factors



    A significant issue when dealing with international companies is that transactions occur in more than one currency. A company that collects revenues in a foreign currency will be either long or short in that currency, depending on whether they receive more revenue than they pay out in expenses (long) or less revenue than they pay out (short). 

    Currency Exchange RatesChanges in currency exchange rates can have a huge impact on both business profits and on securities prices. These rates are expressed as the ratio of the price of one currency against the price of the other.

    When the U.S. dollar weakens against another currency, that currency is worth more dollars. In this case, foreign investment in the U.S. dollar will decline. Imports will also decline as they will be more expensive to U.S. businesses and consumers. On the other hand, a weaker dollar makes importing U.S. goods more attractive to foreign countries. Therefore, exports will increase. 

    When the U.S. dollar strengthens against another currency, the dollar will buy more of that currency. Foreign investment will increase as foreign investors will be attracted to a strong U.S. dollar. U.S. imports will increase as it is cheaper for U.S. businesses and consumers to purchase foreign goods. Finally, U.S. exports will decrease as U.S. goods will be expensive for consumers in many foreign countries.
    Balance of TradeThis is the largest component of a country's balance of payments. (The balance of payments is a record of all transactions made by one particular country during a certain period of time. It compares the amount of economic activity between a country and all other countries.)

    Balance of trade is the difference between exports and imports. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy.

    A country has a trade deficit if it imports more than it exports, and a trade surplus if it exports more than it imports.

    The balance of trade is one of the most misunderstood indicators of the U.S. economy. For example, many people believe that a trade deficit is a bad thing. However, whether a trade deficit is bad thing or not is relative to the business cycle and economy. In a recession, countries like to export more, creating jobs and demand. In a strong expansion, countries like to import more, providing price competition, which limits inflation and, without increasing prices, provides goods beyond the economy's ability to meet supply. Thus, a trade deficit is not a good thing during a recession but may help during an expansion.

    Find out what it means when more funds are exiting than entering a nation in the article Current Account Deficits.


    Read more: http://www.investopedia.com/exam-guide/finra-series-6/economic-factors/international-economic-indicators.asp#ixzz1yhSg2SwE

    Economic Factors - Economic Indicators



    There are several economic factors that change prior to, during, or simultaneously with the business cycle. These factors are examined by analysts to determine the current state of the economy. We will examine the three common types of indicators below.
    • Leading IndicatorsA measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy, but are not always accurate. Bond yields are typically a good leading indicator of the market because traders anticipate and speculate trends in the economy.
      Other types of leading indicators include:
      • building permits (new private housing)
      • industrial production rates
      • money supply
      • S&P 500
      • average of weekly unemployment insurance claims
    • Lagging IndicatorsA measurable economic factor that changes after the economy has already begun to follow a particular pattern or trend. Lagging indicators confirm long-term trends, but do not predict them. Interest rates (especially the prime interest rate) are a good lagging indicator; rates change after severe market changes. Other examples are:
      • unemployment rates
      • corporate profit
      • labor cost per unit of output
    • Coincident Indicators: An economic factor that varies directly and simultaneously with the business cycle, thus indicating the current state of the economy.
      Some examples include:
      • nonagricultural employment
      • personal income
      • inventory/sales ratio
    Economic indicators can have a huge impact on the market and knowing how to interpret and analyze them is important for all investors.

    Without further ado, the tutorial Economic Indicators to Know will examine 11 economic indicators we feel investors should understand.


    Read more: http://www.investopedia.com/exam-guide/finra-series-6/economic-factors/economic-indicators.asp#ixzz1yhRcBvnR

    Economic Factors - Price Changes in the Economy



    InflationInflation is the economic condition characterized by continuously rising prices for goods and services. As a result, the purchasing power of a country's currency deteriorates as its value decreases and interest rates rise. 

    What exactly causes inflation and how does it affect your investments and standard of living? See the tutorial: All About Inflation for the answers

    There are two generally recognized types of inflation: demand-pull inflation and cost-push inflation.
    • Demand-Pull Inflation: The money supply is seen as the cause of this type of inflation. In this situation, the money supply is too large when compared with the supply of produced goods in the economy. Interest rates rise as a result, making it more expensive to borrow money. As a result, the money supply begins to shrink with the drop in lending activity.
    • Cost-Push Inflation: The rising cost of raw materials used to produce goods is seen as the cause of this type of inflation. Since manufacturers now need to pay more for these materials, they raise the prices on their products to compensate. As a result, retailers must pay more for goods, so they increase prices to pass the difference on to the consumer.
    DeflationConversely, deflation is a persistent decline in the prices of goods and services usually caused by slowing market demand with a level supply. Purchasing power increases as a result of stagnant demand, fixed-income securities become more appealing, and producers must lower their prices to compete for the limited demand. 

    Inflation usually has a negative effect on security prices, especially those equities that are particularly interest-rate sensitive, such as financials, smaller companies that rely on debt financing to grow, and cyclical businesses such as durable goods like heavy machinery, automobile and steel manufacturers, and other capital goods industries.


    Read more: http://www.investopedia.com/exam-guide/finra-series-6/economic-factors/price-changes-economy.asp#ixzz1yhPyxhMx

    Corporate Finance - Dividend Payment Procedures


    Dividend payouts follow a set procedure as follows:

    Declaration date
    Ex-dividend date
    Holder-of-record date
    Payment date

    1.Declaration DateDeclaration dateis the announcement that the company's board of directors approved the payment of the dividend.

    2.
    Ex-Dividend DateThe ex-dividend date is the date on which investors are cut off from receiving a dividend. If for example, an investor purchases a stock on the ex-dividend date, that investor will not receive the dividend. This date is two business days before the holder-of-record date. 

    The ex-dividend date is important as, from this date and forward, new stockholders will not receive the dividend. As a result, the stock price of the company will be reflective of this. For example, on and after the ex-dividend date, a stock most likely trades at lower price, as the stock price is adjusted for the dividend that the new holder will not receive.

    3. Holder-of-Record DateThe holder-of-record (owner-of-record) date is the date on which the stockholders who are to receive the dividend are recognized.


    Look Out!
    Remember that stock transactions typically settle in three business days.



    Understanding the dates of the dividend payout process can be tricky. We clear up the confusion in the following article:

    Declaration, Ex-Dividend and Record Date Defined

    4.
    Payment dateLast is the payment date, the date on which the actual dividend is paid out to the stockholders of record.

    Example: dividend paymentSuppose Newco would like to pay a dividend to its shareholders. The company would proceed as follows:

    1.On Jan 28, the company declares it will pay its regular dividend of $0.30 per share to holders of record on Feb 27, with payment on Mar 17.
    2.The ex-dividend date for the dividend is Feb 23 (usually four days before of the holder-of-record date). On Feb 23 new buyers do not have a right to the dividend.
    3.At the close of business on Feb 27, all holders of Newco's stock are recorded, and those holders will receive the dividend.
    4.On Mar 17, the payment date, Newco mails the dividend checks to the holders of record.

    Read more: http://www.investopedia.com/exam-guide/cfa-level-1/corporate-finance/dividend-payment-procedures.asp#ixzz1yhItvcPN

    Financing a capital project with equity may be a signal to investors that a company's prospects are not good.


    Corporate Finance - Signaling Prospects Through Financing Decisions

    One of the key assumptions Modigliani and Miller make in their work is that market information is symmetric, meaning companies and investors have the same information with respect to the company's future projects/investments. This assumption, however, is not realistic. When making capital decisions, a company's management should have more information than an investor, which implies asymmetric information. 

    A financing decision is a way in which a company can inadvertently signal its prospects to investors. For example, suppose Newco decides to finance a new project with equity. Newco's additional equity would in fact dilute stockholder value. Since companies typically try to maximize stockholder value, would an equity offering be a bad signal? The answer is yes.

    There would be some benefit from the project to the stockholders; however, the dilution from the offering would offset some of that benefit.
    If a company's prospects are good, management will finance new projects with other means, such as debt, to avoid giving any negative signals to the market. 

    Look Out!Financing a capital project with equity may be a signal to investors that a company's prospects are not good.


    Read more: http://www.investopedia.com/exam-guide/cfa-level-1/corporate-finance/signaling-prospects-financing-decisions.asp#ixzz1yhFwj3bz

    Corporate Finance - Types of Risk



    Like anything, projects do have risks. There are three types of project risks associated with capital budgeting:
    1. Stand-alone risk
    2. Corporate risk
    3. Market risk

    1.Stand-Alone Risk This risk assumes the project a company intends to pursue is a single asset that is separate from the company's other assets. It is measured by the variability of the single project alone. Stand-alone risk does not take into account how the risk of a single asset will affect the overall corporate risk.
    2.Corporate RiskThis risk assumes the project a company intends to pursue is not a single asset but incorporated with a company's other assets. As such, the risk of a project could be diversified away by the company's other assets. It is measured by the potential impact a project may have on the company's earnings.
    3.Market RiskThis looks at the risk of a project through the eyes of the stockholder. It looks at the project not only from a company's perspective, but from the stockholder's overall portfolio. It is measured by the effect the project may have on the company's beta.


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    Portfolio Management - Return Objectives and Investment Constraints


    Return objectives can be divided into the following needs:
    1. Capital Preservation - Capital preservation is the need to maintain capital. To accomplish this objective, the return objective should, at a minimum, be equal to the inflation rate. In other words, nominal rate of return would equal the inflation rate. With this objective, an investor simply wants to preserve his existing capital.
    1. Capital Appreciation -Capital appreciation is the need to grow, rather than simply preserve, capital. To accomplish this objective, the return objective should be equal to a return that exceeds the expected inflation. With this objective, an investor's intention is to grow his existing capital base.
    2. Current Income -Current income is the need to create income from the investor's capital base. With this objective, an investor needs to generate income from his investments. This is frequently seen with retired investors who no longer have income from work and need to generate income off of their investments to meet living expenses and other spending needs.
    1. Total Return - Total return is the need to grow the capital base through both capital appreciation and reinvestment of that appreciation.

    Investment ConstraintsWhen creating a policy statement, it is important to consider an investor's constraints. There are five types of constraints that need to be considered when creating a policy statement. They are as follows:
    1. Liquidity Constraints Liquidity constraints identify an investor's need for liquidity, or cash. For example, within the next year, an investor needs $50,000 for the purchase of a new home. The $50,000 would be considered a liquidity constraint because it needs to be set aside (be liquid) for the investor.
    2. Time Horizon - A time horizon constraint develops a timeline of an investor's various financial needs. The time horizon also affects an investor's ability to accept risk. If an investor has a long time horizon, the investor may have a greater ability to accept risk because he would have a longer time period to recoup any losses. This is unlike an investor with a shorter time horizon whose ability to accept risk may be lower because he would not have the ability to recoup any losses.
    3. Tax Concerns - After-tax returns are the returns investors are focused on when creating an investment portfolio. If an investor is currently in a high tax bracket as a result of his income, it may be important to focus on investments that would not make the investor's situation worse, like investing more heavily in tax-deferred investments.
    1. Legal and Regulatory - Legal and regulatory factors can act as an investment constraint and must be considered. An example of this would occur in a trust. A trust could require that no more than 10% of the trust be distributed each year. Legal and regulatory constraints such as this one often can't be changed and must not be overlooked.
    1. Unique Circumstances Any special needs or constraints not recognized in any of the constraints listed above would fall in this category. An example of a unique circumstance would be the constraint an investor might place on investing in any company that is not socially responsible, such as a tobacco company.

    The Importance of Asset AllocationAsset Allocation is the process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio. 

    The ideal asset allocation differs based on the risk tolerance of the investor. For example, a young executive might have an asset allocation of 80% equity, 20% fixed income, while a retiree would be more likely to have 80% in fixed income and 20% equities.
    Citizens in other countries around the world would have different asset allocation strategies depending on the types and risks of securities available for placement in their portfolio. For example, a retiree located in the United States would most likely have a large portion of his portfolio allocated to U.S. treasuries, since the U.S. Government is considered to have an extremely low risk of default. On the other hand, a retiree in a country with political unrest would most likely have a large portion of their portfolio allocated to foreign treasury securities, such as that of the U.S.


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    Portfolio Management - The Portfolio Management Process


    The portfolio management process is the process an investor takes to aid him in meeting his investment goals.

    The procedure is as follows:
    1. Create a Policy Statement -A policy statement is the statement that contains the investor's goals and constraints as it relates to his investments.
    2. Develop an Investment Strategy - This entails creating a strategy that combines the investor's goals and objectives with current financial market and economic conditions.
    3. Implement the Plan Created -This entails putting the investment strategy to work, investing in a portfolio that meets the client's goals and constraint requirements.
    4. Monitor and Update the Plan -Both markets and investors' needs change as time changes. As such, it is important to monitor for these changes as they occur and to update the plan toadjust for the changes that have occurred.

    Policy StatementA policy statement is the statement that contains the investor's goals and constraints as it relates to his investments. This could be considered to be the most important of all the steps in the portfolio management process.The statement requires the investor to consider his true financial needs, both in the short run and the long run. It helps to guide the investment portfolio manager in meeting the investor's needs. When there is market uncertainty or the investor's needs change, the policy statement will help to guide the investor in making the necessary adjustments the portfolio in a disciplined manner.

    Expressing Investment Objectives in Terms of Risk and ReturnReturn objectives are important to determine. They help to focus an investor on meeting his financial goals and objectives. However, risk must be considered as well. An investor may require a high rate of return. A high rate of return is typically accompanied by a higher risk. Despite the need for a high return, an investor may be uncomfortable with the risk that is attached to that higher return portfolio. As such, it is important to consider not only return, but the risk of the investor in a policy statement.

    Factors Affecting Risk ToleranceAn investor's risk tolerance can be affected by many factors:
    • Age- an investor may have lower risk tolerance as they get older and financial constraints are more prevalent.
    • Family situation - an investor may have higher income needs if they are supporting a child in college or an elderly relative.
    • Wealth and income - an investor may have a greater ability to invest in a portfolio if he or she has existing wealth or high income.
    • Psychological - an investor may simply have a lower tolerance for risk based on his personality.


    Read more: http://www.investopedia.com/exam-guide/cfa-level-1/portfolio-management/portfolio-management-process.asp#ixzz1yfBLNFTr