A portfolio is a set of financial securities or assets that an investor holds which together produce a financial outcome (profit and loss) over time.
When investors construct a portfolio, they are usually faced with multiple important decisions. The main question is: what should the asset allocation of the portfolio be? Does the investor want to hold shares, bonds, currencies, futures, or any two or more of those categories of assets combined? Perhaps the investor would like to exclude certain asset classes from his portfolio, or only focus on one asset class (for example, stocks). The choice is entirely up to the discretion of the investor or the manager of the portfolio.
While constructing the portfolio, the investor or manager needs to take into account the costs associated with the construction itself (regardless of the risks), such as transaction costs, com...
Valuation is a method of determining how much an asset or company is worth. Market value (Market capitalization), on the other hand, is simply the number of outstanding shares multiplied by the current share price (i.e. the buyer-willingness to pay a particular amount for the stock).
The valuation of a stock is based on: (Valuation does not refer to actual market price of the stock)
Earnings of the company
How well the company is expected to perform in the future
How well it is performing in terms of other similar firms
Free cash flow to the firm (FCFF) - this represents the net amount of cash that a firm generates after expenses, taxes, and any changes in operating and investing activities carried out by the firm
To understand this better, let’s take a scenario whe...
Technical Analysis: Using Charts, Lines, and Indicators
Technical analysis is the art and science of predicting future price movement based on its historical movements. This analysis uses charts which consist of price movement and possibly technical indicators to predict where the price is heading on the short, medium, or long term.
Experienced technical analysts usually focus on the price movement as the most important indicator for their analysis. This is a prudent approach as all technical indicators are derived from price action.
There are many ways to visualize price action. It can be visualized using the line chart, or Japanese candlestick, or bars, among many other ways. Each visualization method has its own advantages.
The line method helps smooth extreme market fluctuat...
Financial Ratio Analysis — How to Evaluate Stocks and Stock Ratios
Ratios are relationships between two numbers. For example, the ratio of current assets to total asset is one ratio related to the structure of assets. They help stakeholders assess the performance of companies, make it easier to compare their performance by using unified measures, and help investors understand the business models of companies.
Ratio analysis answers the following questions about a company:
How is the company doing — does it make healthy profits?
Does it use its cash and other assets in an effective manner?
Is it highly leveraged (has taken a lot of borrowed capital) and is it capable of paying interest on this borrowed capital on time?
What are its profit margins compared to its peers?
Financial Instruments, Asset Classes and Investment Options
A financial instrument, or a security, is an asset (an item of value) that can be bought and sold freely on the market.
To make sure investors choose the right instruments for their needs, those instruments are classified into different asset classes based on their characteristics, behavior, or the regulations that affect them.
This article covers the numerous financial instruments that are available for investments and how they are divided into asset classes to offer a clarification for investors.
An asset class groups together financial securities (tradable financial assets that are monitored by a regulatory authority) with similar features based on factors such as:
The maturity time (the time remaining for a financial security to expire. For a 10-year Government Treasury Bond, the maturity time is 10 years from the date when...
A stock or a share gives you a small ownership in a company — as the word “share” itself implies, you are sharing something with the company. As the company earns profits or losses, your stock price either appreciates or depreciates. For example, if a Company has 100 shares and you own 10 shares, you own 10% of the company.
Where do Stocks Fit in a Diversified Portfolio?
Stocks play a very important role in a diversified portfolio. They are dependent on the growth rate of the economy and automatically adjust for the rate of inflation (the rate at which expenses increase) and other positive macroeconomic signals. As a consequence, they offer a higher rate of return compared with traditional or debt instruments.
Consider the case of McDonald's burger, which were p...
Bonds are debts from investors to either a government or private companies. A government may want to finance infrastructure projects for example, and for that purpose, it can issue bonds to obtain funding. Investors would then purchase the bonds for a certain price (principal amount). Then, depending on the maturity period of the bond the investor will receive his money back in different regular installments. In addition to the installments, the investor receives interest payments on the loan on a regular basis as well. This interest payment is what incentivizes the investor to lend the money to the government or private company.
Bonds are considered fixed income assets since the interest rate is predetermined upon the purchase of the bond. Therefore, the investor knows in advance the amount he will receive in return for his investment. Bonds are usually a better choice for investors who have a long term investment horizon, since it usually takes considerable time for the bond amount to be repaid in full.
Bonds and fixed income assets, in general, are consi...
Broad Investment Strategies: Active vs Passive Investing
There are plenty of investing strategies and factors to consider before buying (or selling) an asset. However, when it comes to the time horizon of your investing strategy, your strategy can fall somewhere between two extremes.
Active Investing Strategy
This strategy is characterized by a short term frame of investments, and more frequent investments. This strategy requires more effort from the investor since the number of investment decisions to make will be significantly higher. Investors who use this strategy are looking to take advantage of short term opportunities.
Passive Investment Strategy — Buy and Hold
Investors who implement this strategy are more passi...