Efficient market

Market Efficiency implies that all known information is immediately discounted by all investors and reflected in share prices in the stock market. As such, no one has an information edge, in the ideal efficient market. As such, no one has information simultaneously, interprets it similarly, and behaves rationally. But, human beings what they are, this of course rarely
happens.

In such a world, the only price changes that would occur are those which result from new information. Since there is no reason to expect that information would be non-random in its appearance, the period-to-period price changes of a stock should be random movements, statistically independent of one another.
The efficient market will provide ready financing for worthwhile business ventures. Corporations that are poorly managed or producing obsolete products. Capital drain away from that market.
The requirements for a securities market to be efficient market are:-
1) To supply new inventories to the firm, prices must be efficient.
2) Across the nation information freely and quickly must be discussed. All investors can react to new information.
3)Transaction costs as sales commission on securities are ignored.
4) No noticeable effect on investment policy, taxes are assumed
5)Every investor is allowed to borrow or lend at the same rate and finally.
6)Investors must be rational and able to recognize efficient assets and that will want to invest money where it is needed most.

Preference share

 A preference share is a hybrid security, It combines some of the characteristics of debt and some of the equity. It represents a position of the ownership of the capital stock or equity interest.  

     The terminology of preference share

Dividend-Preference share has dividend provision which is either cumulative or non-cumulative. Cumulative provision of dividend which means any dividend not paid by the company accumulates. The firm must pay these cumulative dividends prior to the payment of the common stock dividend.

An investor contemplating the purchase of preference shares with a non-cumulative dividend. Provision needs to be especially diligent in the investigation of the company because of the investor’s potentially weak position.

Participating preference share-Preference shares mostly non-participating. The preference shareholder receives only the stated dividend. It has surrendered claim to the residual earnings of his company in return for the right to receives his dividend.  Dividends paid to common shareholders.

Voting rights-Preference shares do not normally confer voting rights preference shareholders. Not allowing to vote is that they are in a relatively secure position.  They should not right to vote to expect in the special circumstances.

Convertible-Convertible means that the owner has the right to exchange a preference share for a share of the equity. The holder of convertible preference share usually has a stronger claim .the holder of an equity share to earnings and assets.
A company earnings increase, the convertible preference share will rise in value. The company might call preference share, the preference shareholder given the required number of days notice this will enable him to either convert into equity or sell the stock.

Par value- Most of the preference share has a par value at the dividend right. A call price usually stated in terms of the par value.

 Sinking fund retirment-Preference share are often a certain percentage of earnings allocated for redemption each year. Sinking fund share called a lot or purchased in the open market.The owner of preference share called for sinking fund purposes must seek alternative investment.Sinking fund requirements reduce preference share outstanding which will give the remaining shares a strong income position.

Features of preference share

The following are the features.
->Claims-Preference shareholders have a claim on assets and income prior to ordinary shareholders. Equity shareholders have a residual claim on a company’s income and assets. They are the legal owners of the company.

->Dividend-The dividends rate is fixed in the case of preference share. It may be issued with cumulative rights. In the case of equity shares neither the dividend rate known nor does dividend accumulate. Dividends paid on preference and equity shares are not taxed deductible.

->Redemption- Both redeemable and irredeemable preference shares have a maturity date while irredeemable preference shares are perpetual equity shares have no maturity to date.

->Conversion- A company can issue convertible preference shares. That is after a stated period. Such shares converted into ordinary shares.

                           Valuation of preference share

A company may issue two types of shares.
a)Ordinary shares
b)Preference shares

Preference shares have preference cover ordinary shares in terms of payment of dividend and repayment of capital. If the company is wound up. They issued with or without a maturity period.

Redeemable preference shares with maturity. Irredeemable preference shares are shares with maturity.

Irredeemable preference shares are shares without any maturity. The holders of preference shares get dividends at a fixed rate with regards to dividends. Preference shares get dividends at fixed rate with regard to dividends. It issued with or without cumulative features.

In the use of cumulative preference shares, unpaid dividends accumulate and are payable in the future. Dividends in arrears accumulate in the case of non-cumulative preference shares.

 

 

Bonds

Investment media includes bonds and debentures. This form of investment needs of a risk avertor who is primarily interested in steady returns. Coupled with the safety of the principal sum.
Definition of bond
A debenture is a legal document containing an acknowledgment of indebtness by a company. It contains a promise to pay a stated rate of interest for a defined period. Repay the principal at a given date of maturity.
Bond is a formal legal evidence of a debt and are termed as the senior securities of a company.

                           Why issuing bonds

The government has no choice but he borrows when they are unable to meet their express from the current revenue corporation. On the other hand, have a wider choice in the matter of financing their operation. Retained earnings, new equity issues, etc. They still prefer to go in for borrowing for the following reason.

1) To reduce the cost of capital ->Bonds are the cheapest source of financing. A corporation is willing to incur the risk of borrowing in order to reduce the cost of capital. Financing a portion of its assets with securities bearing a fixed rate of return of increasing the ultimate return to the equity holder.

2)To gain the benefit of leverage->Presence of debt and preference share in the company’s financial leverage. When financial leverage is used changes in earnings before interest and tax(EBIT) translate into the larger changes in earning per share. If EBIT falls and financial leverage is used the equity holders endure negative changes in EPS that are larger than the negative decline in EBIT.

3)To effect tax-saving-> The interest on bonds is deductible in figuring up corporate income for tax purposes, Hence the Eps increase. If the financing is through bonds rather than with preference or equity share.

4) To wider, the source of a funds->The corporation can attract fund from individual investor and especially from those investing institutions which are reluctant or not permitted to purchase equity share.

5)To preserve control->An increases in debt does not diminish the voting power of present owners since bonds ordinarily carry no voting right.

                                  Types of Bonds

1) Sinking fund bonds->Sinking fund bonds arise when the company decides to retire its bond issue systematically by setting aside a certain amount each year for the purpose.This person the users the money to call the bonds annually at some call premium or to purchase then or the open market if they are selling at discount.

2)Mortgage or secured bonds ->The term mortgage generally refers to a lien on real property or buildings mortgage bonds may be an open-end close end and limited open-end. An open-end mortgage means that a  corporation under the mortgage may issue additional bonds.
In close end mortagage the company agrees to issue at one time a stated amount of bonds.
In a limited open-end mortagage.The indenture provides that corporation may issue a stated amount of bonds over a period of years in series.

3)A convertible and non-convertible bonds->A convertible bond is a cross between a bond and a stock.The holder can at his option convert the bonds into a predetermined number of shares of common stock at a predetermined price. In all convertible bonds, the indenture contract specifies the term of conversion and the period during which the conversion privilege can be exercised.

4)Serial bonds->Serial bonds are appropriate for companies that wish to divide their issues into a series each point of the series maturing at a different time ordinarily the bonds are not callable and the company pay each part of the series as it matures.|

5)Collateral trust bonds->Collateral trust issues are secured by a pledge of intangibles usually in the form of stocks and bonds of a corporation collateral trust issue are thus secured by
a)Shares, representing ownership incorporation.
b)Bonds, representing the indirect pledge of assets or a combination of both, usually, the pledged securities are those of other corporations. The shares pledged frequently represent a contract of a subsidiary corporation and such control often materially adds to or detracts from the intrinsic value of collateral issues secured thereby.

6)Convertible and Non-convertible bonds-Convertible bonds can be one of the finest holdings for the investor looking for both appreciations of investment and income of bonds. A convertible bond is a cross between a bond and a stock. Convert the bond into a predetermined number of shares of common stock at a predetermined price.

7)Income bonds->Income bonds on which the payment of interest is mandatory only to the extent of current earnings.If earnings are sufficient to pay only a portion of the interest that portion usually required to be paid. Income bonds are not offered for sale as new financing but are often issued in reorganization or recapitalization to replace other securities.

8)Adjustment Bonds->Adjustment issued in the reorganization of companies in financial difficulties. In practically all cases, interest is payable only if earning permits. They are the leading type of income bond.

9)Assumed bonds->Assumed bonds issued in the reorganization of companies in financial difficulties. In practically all cases, interest is payable only if earning permits. They are a leader type of income bond.

10)Adjustment bonds->Adjustment bonds issued in the reorganization of companies in financial difficulties. In practically all cases interest is payable only if earning permit. They are lading types of income bonds.

11)Joint bonds->Joint bonds are loan certificates that is jointly secured by two or more companies,two companies that use a common facility, and have raised money to finance. It through the sale of debt would provide a good example of a situation where the bonds might jointly secure.

12)Guaranteed bonds->Bonds may be guaranteed by a firm other than the debtors. Some guarantors assure payment of both principal and interest only. A guaranty or lease contract will add assurance to a bond if the guarantor or lessee is financially strong.

13)Redeemable and irredeemable bonds->A redeemable debenture is a bond which issued for a certain period on the expiry of which its holder will be repaid the amount thereof with or without premium. A bond without the redemption period is termed as an irredeemable debenture.

14)Participating bond->Companies with poor credit position issue participating bonds. They have a guaranteed rate of interest but may also participate in earning up to an additional specified percentage.

 

 

Active equity management

The security analyst always faced with the problem of buy hold or sell decision.He/she must evaluate the past performance of the security for forecasting the future performance.

Valuation of preference share and bond is straight forward because return generally constant and certain.Equity valuation is different because return on equity is uncertain and it can change time to time.therefore analysis and forecasting of equity is crucial.Stock market is not totally efficient.

Active Equity investment style:
Active equity management has two styles top-down and bottom-up.In top-down equity management style begins with overall  economic environment forecasting near term outlook and make a general asset allocation decision.Top-down managers analyses the stock market is an attempt to identify economic sector after identifying attractive and unattractive sectors and industries top-down managers finally select a portfolio of individual stock.

Bottom-up equity management style:
In bottom-up styles managers focuses analysis of individual security instead economic and environmental analysis using financial analyst or computer screening bottom-up managers analyses company performance ratio analysis,price earning ratio other financial ratio,management efficiency.