Share Market

What is Active Share

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Measure of the percentage of stock holdings in a manager’s portfolio that differ from the benchmark index is an Active Share. It is usually said that an Active share to quite some extent predicts fund performance. The researchers mostly conclude that managers with high Active share outperform their benchmark indexes.

These shares are useful in identifying closet indexers, or managers who claim to be active but whose portfolios are very similar to the benchmark portfolio. Now, identifying closet indexers is very important because active management fees can be a significant hurdle to outperforming the index for anyone holding a portfolio similar to its benchmark.

What is Active Share The extent of active management employed by mutual fund is traditionally measured by comparing a fund’s historical returns to those of its benchmark index. One such method is tracking error volatility that measures the standard deviation of the difference in a manager’s returns versus the index returns. In specific terms, high tracking error volatility indicates a high degree of active management.

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In contrast, Active share is calculated by analyzing the actual holdings of a manager’s portfolio and comparing those holdings to its benchmark index. This way it helps the investors gain a clearer understanding of what exactly a manager is doing to drive performance, rather than drawing conclusions from observed returns.

However, the investors should be cautious when trying to apply the findings. The benchmark-beating results of high Active share managers are an average of that group. It would be wrong for investors to interpret the results in a manner that leads them to conclude that all managers with high Active share portfolios will beat their benchmarks as the acquired data only indicates that the average performance of this group of managers has been better than the average performance of managers with low Active shares.

From the user’s perspective an active share seems like a good, useful tool in determining the likelihood that a manager will attain benchmarking-beating results. But, finding managers with high Active share is not an easy job. The process of comparing numerous mutual fund managers’ portfolios to their benchmark indexes is very time consuming and labour intensive. It is thus one tool that can be added to an investor’s toolbox for use in evaluating potential mutual fund investments. For those investors who rely on Active share as an indicator of market-beating performance could still continue with picking a manager that underperforms the benchmark.

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What are Dividends

A dividend is the summed up portion that is returned back to the shareholders when the company earns a profit. They provide an added incentive in the form of a return on investment. Even when a company is not earning much of a profit, the stable companies earn enough to give its shareholders a portion of their investment. There are certain cases where the companies whether mature or young diligently pay their stockholders a regular dividend.

What are Dividends Dividends are distributed amongst the stockholders because it is a way of passing on the companies’ profits directly to them. The dividend in most cases comes to the company in the form of cash. However, it is not unheard of companies that pay its dividends in the form of stock. Dividends can be determined by a fixed rate called preferred dividends, or a variable rate based on the company’s latest profits known as common dividends. It must be understood however that a company is under no way obligated to pay dividends; they will almost always pay dividends to its preferred shareholders unless the company is experiencing financial troubles.

When talking of dividends one must remember three dates: First the declaration date, on which the company decides the dividend payment date, the amount of the dividend, and the ex-dividend date. Second the record date, on which the company compiles a list of all current shareholders, all of whom will receive a dividend check. For practical purposes, there is a more important date called the ex-dividend date, without dividend, which occurs 2 days before the record date. Now, the ex-dividend date was created to allow all pending transactions to be completed before the record date. The ruling principle is that if an investor does not own the stock before the ex-dividend date, he or she becomes ineligible for the dividend payout.

Also, for all pending transactions not completed by the ex-dividend date, the exchanges automatically reduce the price of the stock vis-à-vis the dividend amount. This is basically done because a dividend payout automatically reduces the value of the company as it is coming from nowhere else but the company’s cash reserves.

The basic appeal of dividends is that it offers a consistent return on a low-risk investment. Plus, as the company grows, the dividends themselves may/may not grow, adding on to the value.

Bear and Bull Market

A Bear Market is when the market is showing a downtrend. If the market is falling by more than 20% then we enter a bear market. The market shows a severe lack of confidence and the prices. Prices tend to stay around the same level for some time before gradually falling down in such a market. Bear market also has a regular fall in the indices due to which the volume becomes a stagnant number. People wait for this period to end soon and pick up speed. In terms of the bull market, a bear market is referred to as a tentative bull or a bull that is asleep.

Bear and Bull Market A Bull Market on the other hand is the one that shows a lot of confidence in terms of number and flight. You can measure the confidence by way of high indices and rising prices. For example- Nasdaq goes up subsequently. The number of shares traded in the bull market is also at a high, obviously because the traders and investors are all happy to put in their money. The number of people entering the market is steeply high. The market is quite confident also because of the huge influx of people in the market. If there is a complete run of bullish days then the market is called a bull market. The rise is technically computed to be a rise of 20% at least. The huge rise of the Dow and Nasdaq during the tech boom is a good example of a bull market.

It is important to identify the market according to its nature. Mostly investors get too emotional and start selling their stocks in a bear market because they are too scared of losing money. These investors only indulge in buying during the bull market as they don’t want to miss out on the big gains that come by their chance. Yes, money can be earned that way; in fact big money can be earned by adopting this tactic. But, the biggest disadvantage of this kind of a market is that the investors tend to lose the money by trying to judge the market’s nature. There can be times when you actually can’t identify whether the market is in its bullish or bearish days. The safest way to prevent yourself from making these mistakes is to buy stocks and invest in the market by regularly making fixed size investments and holding on to them for a long period of time.

Stock Market Myths

There are a lot of unrealistic and outright wrong beliefs that float the stock market. The rumors or preconceived stock market myths can be of both the harmful and harmless nature. As an investor and trader it’s important to steer clear of these and have an active involvement within the market. Some of the very common stock market myths:

1. When Someone Makes Money, Someone Else Loses It. It is believed that the stock market is a zero sum game. So, when one loses money, one gains it. Thus believing that stock market is never in a money growing position. The truth is very different from this. All long term investors earn money as long as the stock market is constantly going higher. It’s only in the case of an immediate short term that the stock market be considered a zero-sum game, where one investor’s loss is another investor’s gain.

Stock Market Myths 2. Buy And Hold Is The Best Strategy. It is believed that the best way to grow your money is to find stocks that you like and to sit on them for as long as possible. Due to stock market’s unstable nature, it is better to wait for the stocks to rise. However, the truth of the matter is that although this stood true till many years ago, it has failed to stand true today. It is in fact a very poor strategy.

3. You Can’t Beat The Stock Market. It is widely believed that the stock market cannot be beaten at its own game. A good performance at the market is according to the market’s nature and those who have been very lucky with the profits will not have their luck last for long. It’s believed that the market cannot be outsmarted and that every investor must just accept that. In reality, the truth is that the stock market can be beaten in terms of performance. There is no stock market as unbeatable. Investors and traders do it every year, and some even do it every year consistently. Beating the stock market is not everyone’s forte but it very much attainable. You have to manage your portfolios, take an active part and be vigilant. Most investors and traders don’t focus on the stock market and then crib about this being the nature of stock market. This is why the myth refuses to die.

Online Trading

True to its name it’s purely a trading process that is done via internet. Trading was earlier done by other means but owing to the easy access and wide reach of internet, online trading has picked up speed. Online trading gives both beginners who have just started a single day trading course and the advance traders an opportunity to trade. The trading can be in any form like stocks, options, forex and futures all over the world without any physical presence of an actual broker. It also reduces the commission that is otherwise involved.

Online Trading Stock online trading is strictly based on buying and selling of stocks. It has become the most popular method of trading as it does not restrict the information of stocks only to brokers. That is, today the information is widely accessible to all investors and traders and not only to the brokers. You don’t have to call up on your broker every time you want to know what the scene at the stock market is.

This system gives all traders and investors a perfect chance and opportunity to control and protect their stocks and simultaneously generate their investment benefits. The main idea of stock option online trading is that an option that is bought has its fixed price and time limitation.

Online trading is different in respect to different online businesses. Forex Online trading is a speculative online business based on buying and selling of foreign exchange. It involves gaining profits due to rise and fall of currency rate, basically on the difference between the currency pairs price.

Futures online trading is another kind of online trading which is based on buying and selling financial products, i.e., commodities, labour, currency etc by means of futures contracts. This kind of a contract specifies a particular date highlighting the delivery or final settlement date in the future.

Online trading is perfect to trade and earn money but is not meant for everybody. You must have the basic knowledge of online trading, its pros and cons, have a handful guide of online trading so that you don’t invest in a foolish manner. One must never identify online trading with gambling because the results of such approach can be quite disastrous. It’s important to ensure one’s finances before hitting the trading floors online.

Stock Ticker

Stock Ticker is another term for ticker and ticker tape. They all mean scrolling displays on trading floors that flash either on television or a computer screen. The stock ticker shows the last sale price and volume of an equity trade. The trades that are printed on the stock ticker are updated continuously throughout the trading day.

The expression “stock ticker” comes from the ticker tape machine, which was a mechanical device invented in the year 1870s. The machine was made to record, send and print stock prices over telegraph wires with the help of punching holes.

Stock Ticker In today’s time, a stock ticker also means an identifying letter symbol which is required for security-purpose so as to trade on an exchange or through an over-the-counter system. It is also known as stock ticker symbol or ticker symbol.

Monitoring a stock ticker is a good way to keep up with the investments made or to stay updated of stock market activity. When one looks at any ticker symbol, it is automatically added to the recent quotes. Looking up at a quote is as easy as entering the ticker symbol in the search bar at the top of the page. All your recently visited quotes of the stock ticker will appear at the top of the stock quote page.

Anyone can customize their own stock ticker by creating a portfolio. Making a profile is again pretty easy. You have to click the blue Create a New Portfolio button in the My Investments module to the right and follow the instructions to go on the next page. Once your portfolio has been set, you can easily select what data you want displayed in your Stock ticker. Click on the Recent Quotes label to the left of your stock ticker and you can choose the name of your portfolio that you want on display.

The profile thus made is free for editing. You can create or edit portfolios as per your liking by clicking on the link appearing directly to the right of your stock market ticker. If the profile is already made then there would be an Edit option and if you’re viewing the markets ticker or your recent quotes ticker then the links will read as ‘Save as New Portfolio’. Your profile stays even if you don’t visit and open it regularly. There are stock alerts to notify you of the market fluctuations in such a case.

Stock Broker

A stockbroker is a person who invests in the stock market for individuals or corporations. The transaction in a stock exchange can only be made by members of the exchange. So, whenever individuals or corporations want to buy or sell investments they need a stock broker.

Brokers are the people who explain the workings of the stock exchange to their clients and gather information from them about their needs and financial ability, and then determine the best investments for them. After collecting full information on the needs of the investor they send the order out to the floor of the securities exchange via computer or phone. Once the transaction has been made, the broker supplies the client with the price of the investment. The chain stops at a stop where the buyer pays for the stock and the broker transfers the title of the stock to the client and performs clearing and settlement procedures.

Stock Broker It’s in the market’s and stockbroker’s interest that they learn the market thoroughly, with its ups and downs. In fact, his work and efficiency can be noted from his interest in the market. One cannot become a good stock broker with an eye on the money.

Stock broking is a tough job with long working hours and constant vigil on the market. Stockbrokers spend their time in a fast-paced office, usually working from nine to five. For any new broker it’s important that he build a good contact base through phoning his clients.

Stock brokers are called differently in different countries. In Canada, stock brokers are called “Licensed Representative” or “Investment Representative”. There in fact you have to be licensed enough to trade on stock exchanges. It’s done in order to trade derivatives and future wherein a person has to obtain respective licensing for these instruments. To become a representative one has to work for a licensed firm and pass 3 exams to prove one’s competency.

In the UK, brokers are required to pass the XII Certificate in Securities. This qualification is achieved by passing two exams. In the US, the stock broker is commonly called the registered rep or simply rep. It is obtained by passing the FINRA and being employed with a brokerage firm. It’s important for the broker to have one or another state insurance department licenses. Being a stock broker is not an easy cake walk. You need to procure licenses from the state authority or a government prescribed licensing authority to start functioning as one.

Stock Options

Stock options are more so a privilege sold from one party to another that gives the buyer, right to buy or sell a stock at a previously agreed price within a certain period of time. Here, the buy is also called call and the selling is called pull. They are the most creative, innovative and flexible financial derivative instrument that has ever been created.

Stock options are there in stock markets and in employee benefit schemes. This has been done to incorporate employee benefits in a company’s growth. Besides the stock futures, stock options have become an important derivative instrument since the early 70’s.

Stock Options When a trader purchases stock options, the seller of the Stock Options is obligated to sell the underlying stocks at the price agreed in the Stock Options contract. Such Stock Options are known as Call Options. On the other hand, Stock Options which allows the trader to sell the current number of shares at an agreed price in the future are known as Put Options.

In detail, Call Options are Stock Options contracts allowing the trader to buy the stock in future at the current agreed price. The stock thereon rallies strongly and the call option becomes more valuable due to the fact that the trader is still able to buy it at a lower agreed price from the seller of the Stock Options. It is exactly like two people betting against each other. There are two cases- when the stock falls, the seller wins and gets to pocket the money the buyer paid for Stock Options and the other case where when stock rises, the seller is still obligated to buy the stock at a lower price losing money.

Quite conversely, Put Options are Stock Options contracts allowing the trader to sell current stocks in future at the current agreed price. The stock ditches and put option becomes more valuable due to the fact that the trader is still able to sell the stock at a higher agreed price to the seller of the put stock options. When the stock rises the trader can just let the put stock options expire, allowing the seller of the put options to pocket the money paid by the buyer for those stock options. In case the stock falls, the buyer of the put options can still sell the stocks to the seller at a higher price agreed. Thus in both cases when the stock rises and falls, in case of put options the seller does not lose money.

Primary and Secondary Markets

The term market has many meanings to it. It is sometime even used to denote both primary and secondary markets when both of them are entirely different. Primary market is a market where securities are created. Whereas, the secondary market is one in which these securities are traded among the investors.

Primary and Secondary Markets Primary market is the market where the forms sell new stocks and bonds to the public for the first time ver. It can be called synonymous with an IPO (initial public offering). In such a market securities are directly purchased from an issuing company. IPO are very complicated and are ruled by some rules and regulations. The procedure starts with a company contacting an underwriting firm to determine the legal and financial details of the public offering. Then a preliminary registration statement detailing the company’s interests and prospects is filed with the authorities. This is then approved by the governing bodies. This statement has the issue’s price, restrictions, benefits and more which becomes a legally binding copy for the company.

When people talk of stock markets they are referring to the Secondary market. It includes the New York Stock Exchange, NASDAQ, and other major exchanges of the world. Here the investors trade among themselves. They trade the previously issued securities without the involvement of the issuing companies. They can be further divided into auction market and dealer market.

The auction market is where all individuals and institutions who want to trade securities come together and quote prices that they are willing to buy and sell in. These prices are called bid and ask prices. It works on the idea that the prices should be made public and should be given according to the budget.

The dealers hold an inventory of the security in which they make a market. The dealers stand ready to buy or sell with market participants. They earn profits through the spread between the prices at which they buy and sell securities. The basic theory behind this market is that the competition between the dealers will provide the most optimum price for investors. Thus the primary and secondary markets are totally different from each other with different uses attached to them.

What is a Demat Account

Demat or dematerialised account is for individual citizens to trade in listed stocks or debentures, required for investors by The Securities Exchange Board of India (SEBI). For example, you open an account in a bank if you want to save money. Likewise you open a demat account if you want to buy or sell stocks. Thus a demat account is a bank account for shares.

Shares and securities in the demat account are held electronically instead of the investor taking physical possession of certificates. It is opened by the investor while registering with an investment broker or sub broker. The Demat account number is quoted for all transactions while making electronic settlements of trades.

Demat Account Access to the Demat account requires passwords of internet and transaction. Only then can the transfers or purchases of securities can be initiated. Once transactions are confirmed and completed, purchases and sales of securities on the Demat account are automatically made.

A Demat account has many advantages like- it reduces brokerage charges, makes pledging or hypothecation of shares easier, enables quick ownership of securities on settlement resulting in increased liquidity, avoids confusion in the ownership title of securities, and provides easy receipt of public issue allotments or IPOs

It also helps in avoiding problems that are associated with physical share certificates. It eliminates risks that are associated with forgery and the loss that is caused due to damaged stock certificates. Demat account holders also avoid stamp and filling up of transfer deeds. Demat account holders usually obtain quicker receipt of benefits like stock splits and bonuses.

The system of Demat was adopted basically for electronic bookkeeping. This is where the shares and securities are represented and maintained electronically, eliminating the pain associated with paper shares. After the introduction of the depository system by the Depository Act in 1996, the process of shares (sale, purchase and transfer) became much easier. Also most of the risks associated with paper certificates were blown away.

There are hundreds of Depository Participants (DPs) offering the Demat account facility in India since Sept, 2011. Another point to note down is that there is a fee that is levied on a demat account holder. They are majorly 4 major types: account opening fee, annual maintenance fee, custodian fee and the transaction fee. These charges for all fees however vary from Depositary participants to depositary participants.

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