29 December 2016

What is the role of Money?

December 29, 2016


Money plays a number of extremely important roles in a modern economy. Money has three broad roles:

            1. It is a medium of exchange
            2. It is a measure of value
            3. It can be used as a store of wealth

The most obvious role of money is as a medium of exchange. During the early days of human civilization, it was realized that the barter system suffers from the problem of “double coincidence of wants”. This means that a barter system will only work if two persons can be found whose disposable possessions mutually suit each other’s wants. In a country or in an economy, there may be many people wanting a particular good and there may be many people who possess those things wanted, but to allow a barter or a direct exchange of goods to happen, there has to be a double coincidence of wants. For example, to have his food, a hungry tailor will have to find a farmer who needs a shirt. This is unlikely to happen. The second problem with a pure barter system is that it must have a rate of exchange, where each commodity is quoted in terms of every other commodity. This complication can be avoided if any one commodity be chosen, and its ratio of exchange with each other commodity is known. Such a commodity can be used as a unit of account or a numeraire. To overcome these problems of barter, use of a commonly accepted medium of exchange started. This medium also acted as a measure of value. Different civilizations used different commodities as the medium of exchange.

In some African countries, the medium of exchange was decorative metallic objects called Manilla. The Fijians used whales’ teeth for the same purpose. In some parts of India, cowry or sea shells were used as the medium of exchange and measure of value. Such usages of commodities as the medium of exchange and measure of value correspond to what we presently call ‘Money’. By the 19th century, commodity money narrowed down to usages of precious metals like silver and gold. Interestingly, during the World War II, cigarettes emerged as a form of commodity money in prisoner of war (POW) camps. This however limits the amount of money in the economy as it is constrained by the availability of precious metals which are exhaustible resources. Since then we have moved to an era of paper money. The use of paper money has become widespread because it is a convenient medium of exchange, is easy to carry and store and is also a measure of value for the large number of goods and services produced in a modern economy.The value of money stems from the fact that private individuals cannot legally create money. Only designated authorities are allowed to supply money. This limitation in the supply of money ensures that money retains its value. This also means that money can also be viewed as a store of wealth. It is worth pointing out here that modern currencies are not backed by any equivalent gold or silver reserves. Based on a host of macroeconomic factors, the government or the central bank decides the amount of money to be supplied to an economy.

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28 December 2016

Measures for controlling Inflation

December 28, 2016


In my previous posts I explained about the Impact of inflation over macro-economic factors. In this post lets see how can this inflation be controlled. There are broadly two ways of controlling inflation in an economy – Monetary measures and fiscal measures.

The most important and commonly used method to control inflation is monetary policy of the Central Bank. Most central banks use high interest rates as the traditional way to fight or prevent inflation. Monetary measures used to control inflation include (i) bank rate policy (ii) cash reserve ratio and (iii) open market operations. Besides these monetary policy steps, the fiscal measures to control inflation include taxation, government expenditure and public borrowings. The government can also take some protectionist measures such as banning the export of essential items such as pulses, cereals and oils to support the domestic consumption, encourage imports by lowering duties on import items etc..,

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26 December 2016

Impact of Inflation on macroeconomic variables

December 26, 2016

Sulthan Academy Impact of Inflation on macroeconomic variables

Inflation is crucial in determining the purchasing value of money. This has its impact in macro level and lets discuss here the impact of inflation over some macro economic factors such as Exchange rate, Export and Import, Interest rate and Unemployment.

Exchange Rate: Persistently higher inflation in a country (say India rupee ₹) relative to the inflation in another country (say US dollar) generally leads to depreciation of a Rupee in India. Depreciation of the currency of India means decrease in the value of the currency of country relative to the currencies of United States. In other words, if India persistently experiences higher inflation than United states, in exchange for the same number of units of Rupee ₹, the residents of India will get fewer units of US dollar $ than before.

Exports and Imports: As stated, relatively higher inflation in a country leads to the depreciation of its currency vis-à-vis that of the country with lower inflation. If the two countries happen to be trading partners, then the commodities produced by the higher inflation country will lose some of their price competitiveness and hence will experience lesser exports to the country with lower inflation. A currency depreciation resulting from relatively higher inflation leads not only to lower exports but also to higher imports.

Interest Rates: When the price level rises, each unit of currency can buy fewer goods and services than before, implying a reduction in the purchasing power of the currency. So, people with surplus funds demand higher interest rates, as they want to protect the returns of their investment against the adverse impact of higher inflation. As a result, with rising inflation, interest rates tend to rise. The opposite happens when inflation declines.

Unemployment: There is an inverse relationship between the rate of unemployment and the rate of inflation in an economy. It has been observed that there is a stable short run tradeoff between unemployment and inflation. This inverse relationship between unemployment and inflation is called the Phillip’s Curve. when an economy is witnessing higher growth rates, unless it is a case of stagflation, it typically accompanies a higher rate of inflation as well. However, the surging growth in total output also creates more job opportunities and hence, reduces the overall unemployment level in the economy. On the flip side, if inflation breaches the comfort level of the respective economy, then suitable fiscal and monetary measures follow to douse the surging inflationary pressure. In such a scenario, a reduction in the inflation level also pushes up the unemployment level in the economy.

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25 December 2016

Why Macroeconomics is important for the Investors?

December 25, 2016


For Investors or people in finance, understanding macroeconomics and its factor is very important because each of the major macroeconomic factors such as growth, inflation, business cycles etc.., have strong impact on the financial markets. They also have strong impact on the financial sector.

For example, when the economy gets into downturn, many firms find it difficult to repay their loans and as a result, the financial health of banks gets affected. Furthermore, changes in macroeconomic policies influence key variables of financial markets such as interest rates, liquidity and capital flows.

On the other hand, what is happening in the financial market can have a strong impact on the rest of the economy. Some examples of such transmission can be observed during the financial crises. In the United States, weaknesses in the financial sector stemming from a sudden and substantial decline in the prices of real estate, led to a downturn for the entire economy. In fact, almost all the countries of the world were affected because of this problem in the United States. In many countries across the world, this crisis hit not only the financial markets but also the entire economy, causing major recession and unemployment. The governments of these countries had to undertake serious coordinated policy measures to pull their economies out from recession.
As finance and macroeconomics are intimately interlinked, it becomes imperative for a finance professional to have at least a working knowledge of macroeconomics, so that they can better predict how firms and individuals behave in different situations, what risks and opportunities arise in what macroeconomic situation, how changes in policy changes can affect different macroeconomic variables and so on.

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23 December 2016

what is T+2 or T+3 days settlement in share trading?

December 23, 2016

T+2 or T+3 days settlement - Sulthan Academy

Indian and European capital markets follows T+2 Rolling Settlement whereas countries like South Africa and United States follows T+3 settlement.

  • T is the transaction date
  • ‘+2’ or ‘+3’ denotes the number of days for settlement

Thus, trades done on Monday are settled 2 working days later viz. Wednesday and In case of T+3 days, settlement is made after 3 working days i.e. on Thursday.

All transactions executed on the stock exchanges are to be settled through the Clearing Corporation/House of the stock exchanges. However, the following exceptions are provided:

  • Total connectivity failure to the exchange/STP (Specific connectivity issues of the custodians and members are not to be considered as valid exceptions).
  • International Holidays that may be decided upfront by the stock exchanges in consultation with the custodians.
  • Closing down of national/international centres due to calamities.

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Hedge funds–Simple and Easy explanation

December 23, 2016

Sulthan Academy - Hedge funds

Hedge funds are generally created by a limited number of wealthy investors who agree to pool their funds and hire experienced professionals (fund managers) to manage their portfolio. These funds are private agreements and generally have little or no regulations governing them. This gives a lot of freedom to the fund managers.

For example, hedge funds can go short (borrow) funds and can invest in derivatives instruments which mutual funds cannot do.

Hedge funds generally have higher management fees than mutual funds as well as performance based fees. The management fee (paid to the fund managers), in the case of hedge funds is dependent on the assets under management (generally 2 - 4%) and the fund performance (generally 20% of the excess returns over the market return generated by the fund).

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22 December 2016

Open ended and closed-ended funds–Explained

December 22, 2016

Sulthan Academy

Funds are usually open or closed-ended.

In an open-ended fund, the units are issued and redeemed by the fund, at any time, at the NAV prevalent at the time of issue / redemption. The fund discloses the NAV on a daily basis to facilitate issue and redemption of units.

Unlike open-ended funds, closed-ended funds sell units only at the outset and do not redeem or sell units once they are issued. The investors can sell or purchase units to (or from) other investors and to facilitate such transactions, such units are traded on stock exchanges. Price of closed ended schemes are determined based on demand and supply for the units at the stock exchange and can be more or less than the NAV of the units.

We now examine the different kind of funds on the basis of their investments. Mutual fund investments represented as units in a single portfolio, in real life, fund houses float various schemes from time-to-time, each a constituting a portfolio where inputs translate into units. These schemes are differentiated by their charter which mandates their investment into asset classes. Beyond the type of instruments they invest in, fund houses are also differentiated in terms of their investment styles. The approaches to equity investing could be diversified or undiversified, growth, income, sector rotators, value, or market-timing based.

Each mutual fund scheme has a particular investment policy and the fund manager has to ensure that the investment policy is not breached. The policy is laid right at the outset when the fund is launched and is specified in the prospectus, the ‘Offer Document’ of the scheme. The investment policy determines the instruments in which the money from a specific scheme will be primarily invested. Based on these securities, mutual funds can be broadly classified into equity funds (growth funds and income funds), bond funds, money market funds, index funds, etc. Generally, fund houses have dozens of schemes floating in the market at any given time, with separate investment policies for each scheme.

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18 December 2016

things you need to know about a Company Share or Stock

December 18, 2016
things you need to know about a Company Share or Stock


Simply put, the shareholders of a company are its owners. As owners, they participate in the
management of the company by appointing its board of directors and voicing their opinions,
and voting in the general meetings of the company. The board of directors have general oversight of the company, appoints the management team to look after the day-to-day running of the business, set overall policies aimed at maximizing profits and shareholder value.

Shareholders of a company are said to have limited liability. The term means that the liability of shareholders is limited to the unpaid amount on the shares. This implies that the maximum loss of shareholder in a company is limited to her original investment. Being the owners, shareholders have the last claim on the assets of the company at the time of liquidation, while debt- or bondholders always have precedence over equity shareholders. At its incorporation, every company is authorized to issue a fixed number of shares, each priced at par value, or face value in India.

The face value of shares is usually set at nominal levels (Rs. 10 or Re. 1 in India for the most part). Corporations generally retain portions of their authorized stock as reserved stock, for future issuance at any point in time. Shares are usually valued much higher than the face value and this initial investment in the company by shareholders represents their paid-in capital in the company. The company then generates earnings from its operating, investing and other activities. A portion of these earnings are distributed back to the shareholders as dividend, the rest retained for future investments. The sum total of the paid-in capital and retained earnings is called the book value of equity of the company.

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29 November 2016

Basic Assumptions of Technical analysis of Stocks

November 29, 2016

Technical analysis is a method of evaluating securities by analysing the past prices (Historical prices) and Volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

  1. Market Discounts Everything: A major criticism over technical analysis is that it only considers movement of share price, ignoring the fundamentals of a company. However, technical analysis assumes that, at any given time, a stock’s price reflects everything that has or could affect the company - including fundamental factors. Technical analysts believe that the company’s fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.
  2. History Tends To Repeat Itself:  Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyse market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.
  3. Price Moves in Trends: In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.

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24 November 2016

Demonetization of Rs.500 and Rs.1000, Why it could fail? - My feedback

November 24, 2016

Demonetization of Rs.500 and Rs.1000 Why it could fail? - My feedback

I am a PhD scholar in finance. My friends and family ask me what's your opinion on this. I am here sharing my opinion and some facts that I received from them.

Demonetization a new scary word among the common people of India, could really turned out to be a treasure hunt if proper steps are taken further. The success or failure of this couldn't be decided now but I smell a hole already in the vault. That's why I am writing my view point over this.

First of all, I really appreciate and welcome the bold step taken by Honourable Prime minister of India, Narendra Modi. The aim behind this is to bring the black money out and to built a corruption less India. Special Investigation Team (SIT) on Black Money has submitted 5 reports on black money which contains tremendous information and they have given numerous suggestions on each and every scenario. You can get the reports of SIT from Press Information Bureau. I hereby like to share my viewpoint about corruption and Black money generation in India.

Corruption and Black money are a duo. Black money is a giant tree that drinks the wealth of a nation. The basic question on this is who suffers from black money? Its not people staying in top get affected on first place because of this. Its the people in lower level of the pyramid who takes the huge pressure of this. Black money in an economy is a huge loss of revenue to the Government. It increase the gap between rich and poor which in other words, rich becomes richer and the poor become poorer.

Lets come to Demonetization now, before taking this action government introduced Income Declaration Scheme -2016 through which undeclared income should be reported to income tax before the deadline which in turn brought more than Rs.65000 crores in to the account. Which in my point of view I believe its a tip of an Iceberg. Few weeks after the deadline of Income declaration scheme Narendra Modi’s announcement of demonetization took the country in storm.

Something we should understand is the black money doesn't just refer to a physical currency. Black money is in form of Deposits in Share market, Deposits in Foreign banks, Investments in Real estate, Gold, Corporate entities  and etc.. The same is highlighted by SIT on their reports. So, we can say demonetization ends the economy of black money but this could trigger it if proper steps aren't taken.


Where does the tree grow?

As I previously mentioned Black money is the tree but where does it grow? . Economy of Black money is not created by some Alien creature. Its citizens of country who creates it and the bitter truth is knowingly or unknowingly, in other words willingly or unwillingly we are part of this. Yes, I said we. Its you and me we are a reason too. for a simple example , Corruption is route for black money. from Rs.10 given to a compounder of Govt hospital to crores of amount given for a govt employee on approval of tenders which involves crores and crores of deal for a business man , just like the 2G spectrum. Whereas 4G is already in air now but still the 2G case is going on the court. I believe the one huge group that could really stop black economy of a country could be govt employees. I am not blaming govt employees on this purely . what makes them to do this is important. The bribe given for a government job, that's where the a common man think about corruption. Lets say you got a Ph.D, you have passed  NET exam too. Do all candidate with such qualification get their job? Do all students get admission in colleges with out donations?  Majority of the people gets their hand in the govt jobs only after bribing the authorities those who give them job. Let if be a professor job in govt colleges, Engineers in govt offices, even for a smallest job in side the govt sector you need a recommendation. for the recommendation you need to bribe them. Who is behind such network? Who knows any one is possible it could be ministers, business man, Principal and any one. I am afraid there is high possibility for even the people who frame rules and Acts involve in such corruption and stood as backbone for black money.

People are suffering in a long queue on ATMs and banks. Even there is a incident that police made a lathi charge at Baghpat bank. All these suffering should bring real benefits and that rise the really is the plan going good or its just a screen and giants are dealing behind the screens now.

Practically speaking – What's going on after Demonetization?

Its great to read banks reporting they received 1000’s of crores across the country. Lets get practical now, What's going on.

There are numerous people carrying commissions such as 25%,15% on conversion of old 500 and 1000 notes to 100’s. This is not happening in 1000’s. Its happening in crores. Gold merchants carrying a business behind the screen. The black economy includes the gold and diamonds that are traded which doesn't comes in to account and still those bullions are out there in the market. The black bullion trader is carrying out this now. He got giants on their backs to convert the crores they receive in 500 and 1000’s. These giants may even have political background. I am not blaming and individual or a political party or a group. I am pointing out the hole in the rat bait.

So , I conclude the success of this really lies on the hands of people with power. As of now I believe its departing from its success. Achieve a 50% success isn't what people are expecting from such sufferings they need 100% .we all know 100% isn't possible so at least we should get succeed in majority on this. and Strict rules should be framed to reduce the gap between rich and poor which is key success for an economy. For this we need a good rule makers. I am still welcoming this action but with a future plans too.

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21 November 2016

List of free and premium websites for financial and economic data

November 21, 2016

List of free and premium websites for financial and economic data

Data is so much important for researchers, Investment analyst, Quants and in Academia. We are in information age. Data is everywhere in internet. The thing is it depend for where you look for the data. Here I bring you a list of best websites, free and paid platforms  where you can retrieve Financial and economic (macro and micro) data.

  1. Yahoo Finance (free): If you are looking for stock market data like historical share price, ETF, and Mutual funds then Yahoo finance is perfect and free platform. Many Excel sheets and R scripts use Yahoo finance API to get data. To understand how to download read my post DOWNLOADING SHARE PRICES METHOD 1 YAHOO FINANCE TO EXCEL SHEET .
  2. Economagic (free): Economagic provides over 400,000 data files, with charts and excel files for economic data related to most of the country around the world. The site was started in 1996 to help students in an Applied Forecasting class. Majority of the data is related to USA macro economic factors.
  3. Econstats(free): Econstats holds large source of historical data on US and other economies, both economic and financial data presented in a spreadsheet.
  4. Bankscope(Paid): Bankscope specially holds data of almost all banks around the globe. It may be commercial, private, public, central, Islamic, or of any kind. Still the database holds financial details of banks.
  5. Worldbank(free): World bank database is named as DataBank that contains collections of time series data on a variety of economic and social data of countries. You can create your own queries; generate tables, charts, and maps; and easily save, embed, and share them.
  6. IMF(free): Its a Superb resource for economic data contains 32,000 macro times series covering over 200 countries, and trade stats.
  7. WTO(free): If you are looking for trade data then its perfect location that includes exports and imports by product group, trade in services and tariff related data.
  8. International Labor Office(free): This website Collects huge amounts of labour related data that includes employment, wages, Child labour stat, labour productivity, income distribution and more.
  9. Trading Economics(free): Provides economic data on over 230 countries along with historical data on some 300,000 economic indicatorsincluding bond yields, stock indices and commodity prices.
  10. United nations database (free): United Nations has data covering, crime, education, energy, environment, gender, health, population, tourism and trade and much more.

The above mentioned are some of the commonly used database where you can find and retrieve data for your research. Share your list of database in comment section. Subscribe Sulthan Academy for weekly updates. Share with your friends.

Levels of Market Efficiency / EMH

November 21, 2016

Levels of Market Efficiency / EMH

Economists have defined different levels of efficiency according to the type of information, which is reflected in prices. To understand what is efficient market . First, I recommend you to read  EFFICIENT MARKET HYPOTHESIS AND ITS TYPES . There are three levels of market efficiencies, they are discussed below:

Weak-form efficiency

In this form of market the share prices fully reflect all information contained in past price movements. It is pointless to predict share price based on historical share price.

Recommended: How to download historical share price

Semi-strong form efficiency

In this form, All the publicly available information are reflected in Share prices already. This includes not only past price changes but also the earnings and dividend announcements, rights issues, technological advancements, appointments of directors, and more.

This implies that there is no use in analyzing publicly available information after it has been released, because the market has already absorbed and reflected it into the price.

To estimate the intrinsic value of a share the fundamental analyst gather as much relevant information as possible. This may include: macroeconomic growth projections, industry conditions, company accounts and announcements, details of company’s personnel, tax rates, technological and social change and so on.

Strong-form of efficiency

All relevant information, including that which is privately held, is reflected in the share price. Insider trading comes in to play in this form of market.which means few privileged individuals (directors) trade in shares, as they know more than the normal investor in the market. In a strong-form efficient market even insiders are unable to make abnormal profits.

Example: It is well known that it is possible to trade shares on the basis of information not in the public domain and thereby make abnormal profits. In this respect stock markets are not strong form efficient. Trading on inside knowledge is thought to be a “bad thing”. It makes those outside of that charmed circle feel cheated.

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19 November 2016

FINANCIAL STATEMENT ANALYSIS- Significance and Limitations

November 19, 2016


Financial statements includes Trading, Profit and Loss Account and Balance Sheet. Expressing the financial items in these financial statements brings a meaningful information.

Financial statement – Definition:

A process of evaluating the relationship between the component parts of the financial statements to obtain a better understanding of a firm’s position and performance.

Financial statement analysis is an important part of the overall financial assessment. The different users look at the business concern  from their respective view point and are interested in knowing about its profitability and financial condition. A detailed cause and effect study of the profitability and financial condition is the overall objective of financial statement analysis.

Significance of Financial Statement Analysis:

1. Judging the earning capacity or profitability of a business concern.

2. Analysing the short term and long term solvency of the business concern.

3. Helps in making comparative studies between various firms.

4. Assists in preparing budgets.

Limitations of Financial Statement Analysis:

Analysis of financial statements helps to ascertain the strength and weakness of the business concern, but at the same time it suffers from the following limitations.

1. It analyses what has happened till date and does not reflect the future.

2. It ignores price level changes.

3. Financial analysis takes into consideration only monetary matters, qualitative aspects are ignored.

4. The conclusions of the analysis is based on the correctness of the financial statements.

5. Analysis is a means to an end and not the end itself.

6. As there is variation in accounting practices followed by different firms a valid comparison of their financial analysis is not possible.

There are different ways by which financial statement analysis can be undertaken and one important and usual technique used among them is Ratio Analysis.

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18 November 2016

Efficient Market Hypothesis and its types

November 18, 2016

Efficient Market Hypothesis and its types

EMH (Efficient Market Hypothesis) elaborates that all relevant information is fully and immediately reflected in market price of a security where an investor will receive stable rate of return. In other words, an investor should not expect to earn an abnormal return (above the market return) through either technical analysis or fundamental analysis.
The efficient market hypothesis (EMH) implies that if new information is revealed about a firm it will be incorporated into the share price rapidly and rationally, with respect to the direction of the share price movement and the size of that movement. In an efficient market no trader will be presented with an opportunity for making a return on a share (or other security) that is greater than a fair return for the riskiness associated with that share (or any other security). The absence of abnormal profit possibilities arises because current and past information is immediately reflected in current prices. It is only new information, which causes prices to change.

Note:  Stock market efficiency does not mean that investors have perfect powers of prediction; all it means is that the current level is an unbiased estimate of its true economic value based on the information revealed. In the major stock markets of the world prices are set by forces of supply and demand. There are hundreds of analysts and thousands of traders, each receiving new information on a company through electronic and paper media. The moment an unexpected, positive piece of information leaks out investors will act and prices will rise rapidly to a level that gives no opportunity to make further profit.

Types of Efficiency

There are Three types of Efficiency such as Operational efficiency, allocation efficiency and Pricing Efficiency. Do not confuse these with the levels of market efficiency such as Weak form, Semi-strong form and Strong form of market efficiencies. Lets discuss the types here

  1. Operational efficiency – refers to the cost to buyers and sellers of transactions in securities on the exchange. It is desirable that the market carries out its operations at as low a cost as possible. This may be promoted by creating as much competition between market makers and brokers as possible so that they earn only normal profits and not excessively high profits. It may also be enhanced by competition between exchanges for secondary-market transactions.
  2. Allocation efficiency – Our society has a scarcity of resources (that is, they are limited) and it is important that we find mechanisms, to allocate those resources to where they can be most productive. Those industrial and commercial firms with the greatest potential to use investment funds effectively need a method to channel funds their way. Stock markets help in the process of allocating society’s resources between competing real investments. For example, an efficient market provides vast funds for fast-growth sectors such as Information Technology, Automobiles and Banking industries (through IPO, Right issues and etc..,) whereas allocates only small amounts for slow-growth industries.
  3. Pricing efficiency – In a pricing efficient market the investor can expect to earn merely a risk-adjusted return from an investment as prices move instantaneously and in an unbiased manner to any news. It is pricing efficiency that is the focus of this section and the term efficient market hypothesis applies to this form of efficiency only.

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Measurement of Risk in Stocks

November 18, 2016
Measurement of Risk
The uncertainty of a future outcome is the simplest and most accurate way to describe risk. The anticipated return from an investment is known as the expected return. Whereas, the actual return over some past period is known as the realized return. The simple fact that dominates investing is that the realized return on an asset with any risk attached to it may be different from what was expected.


Volatility may be described as the range of price movement or price fluctuation from the expected level of return. The more a stock  goes up and down in price, the more volatile that stock is. Because wide price swings create more uncertainty of an eventual outcome, increased volatility can be equated with increased risk. Being able to measure and determine the past volatility of a security is important in that it provides some insight into the riskiness of that security as an investment.

Standard Deviation

Investors and analysts need to be familiar with the study of probability distributions. standard deviation is used as an indicator of market volatility . Since the return is not known, it must be estimated. Standard deviation is high for more volatile securities.


Beta is a measure of the systematic risk that cannot be avoided through diversification. It is important to note that beta measures a security’s volatility, or fluctuations in price, relative to a benchmark, the market portfolio of all stocks. Securities with different slopes have different sensitivities to the returns of the market index. If the slope of this relationship for a particular security is a 45-degree angle, the beta is 1.0. This means that for every one percent change in the market’s return, on average this security’s returns change 1 percent. The market portfolio has a beta of 1.0. A security with a beta of 1.5, indicates that, on average, security returns are 1.5 times as volatile as market returns, both up and down. This would be considered an aggressive security because when the overall market return rises or falls 10 percent, this security, on average, would rise or fall 15 percent. Stocks having a beta of less than 1.0 would be considered more conservative investments than the overall market. Beta is useful for comparing the relative systematic risk of different stocks and, in practice, is used by investors to judge a stock’s riskiness. Stocks can be ranked by their betas’. Because the variance of the market is a constant across all securities for a particular period, ranking stocks by beta is the same as ranking them by their absolute systematic risk. Stocks with high betas are said to be high-risk securities.
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17 November 2016

Investment Risk and its types

November 17, 2016

Investment Risk and its types - Sulthan Academy

Risk can be defined as the probability of failing to receive expected return. Every investment involves uncertainties that make returns of investment risk prone. These uncertainties could be due to the political, economic and industry factors.

Types of Investment Risk

1. Systematic vs Unsystematic Risk

Risk could be systematic and unsystematic depends upon the source of it. Systematic risk is risk involved for whole market, while unsystematic risk is specific to an industry or the company individually. The first three risk factors discussed below are systematic in nature and the rest are unsystematic. Political risk could affects the market as a whole or just a particular industry. Therefore, we must consider these two categories to understand the total risk. The following discussion introduces these terms. Dividing total risk into its two components, a general (market) component and a specific (issuer) component, we have systematic risk and non-systematic risk, which are additive:

Total risk = General risk + Specific risk

             = Market risk + Issuer risk

                                   = Systematic risk + Non-systematic risk

Systematic Risk: An investor can construct a diversified portfolio and eliminate part of the total risk, the diversifiable or non-market part. What is left is the non- diversifiable portion or the market risk. Variability in a security’s total returns that is directly associated with overall movements in the general market or economy is called systematic (market) risk. Practically, all securities have some systematic risk, it may be whether bonds or stocks, because systematic risk directly encompasses interest rate, market, and inflation risks. The investor cannot escape this part of the risk because no matter how well he or she diversifies, the risk of the overall market cannot be avoided. For instance: If the stock market declines sharply, most stocks will be affected; if it rises strongly, most stocks will appreciate in value no matter about their performance for past few weeks. Clearly, market risk is critical to all investors.

Non- systematic Risk: The variability in a security’s total returns not related to overall market variability is called the non- systematic (non-market or unsystematic) risk. This risk is unique to a particular security and is associated with such factors as business and financial risk as well as liquidity risk. Although all securities tend to have some non-systematic risk, it is generally connected with common stocks.

“Systematic (Market) Risk is attributable to broad macro factors affecting all securities. Non-systematic (Non-Market) Risk is attributable to factors unique to a security.”


Types systematic and unsystematic risk

1. Market Risk

The variation in a security’s returns resulting from fluctuations in the aggregate market is known as market risk. All securities are exposed to market risk including recessions, wars, structural changes in the economy, tax law changes, even changes in consumer preferences. Market risk is sometimes used synonymously with systematic risk.

2. Interest Rate Risk

The variability in a security’s return resulting from changes in the level of interest rates is referred to as interest rate risk. Such changes generally affect securities inversely; that is, other things being equal, security prices move inversely to interest rates. The reason for this movement is tied up with the valuation of securities. Interest rate risk affects bonds more directly than common stocks and is a major risk faced by all bondholders. As interest rates change, bond prices change in the opposite direction.

3. Purchasing Power Risk

A factor affecting all securities is purchasing power risk also known as inflation risk. This is the chance that the purchasing power of invested dollars will decline. With uncertain inflation, the real (inflation-adjusted) return involves risk even if the nominal return is safe (e.g., a Treasury bond). This risk is related to interest rate risk, since interest rates generally rise as inflation increases, because lenders demand additional inflation premiums to compensate for the loss of purchasing power.

4. Regulation Risk

Some investments can be relatively attractive to other investments because of certain regulations or tax laws that give them an advantage of some kind. Municipal bonds, for example pay interest that is exempt from local, state and federal taxation. As a result of that special tax exemption, municipals can price bonds to yield a lower interest rate since the net after-tax yield may still make them attractive to investors. The risk of a regulatory change that could adversely affect the stature of an investment is a real danger.

5. Business Risk

The risk of doing business in a particular industry or environment is called business risk. For example, as one of the largest steel producers, U.S. Steel faces unique problems. Similarly, General Motors faces unique problems as a result of such developments as the global oil situation and Japanese imports.

6. Reinvestment Risk

The YTM (Yield to maturity) calculation assumes that the investor reinvests all coupons received from a bond at a rate equal to the computed YTM on that bond, thereby earning interest on interest over the life of the bond at the computed YTM rate. In effect, this calculation assumes that the reinvestment rate is the yield to maturity. If the investor spends the coupons, or reinvests them at a rate different from the assumed reinvestment rate of 10 percent, the realized yield that will actually be earned at the termination of the investment in the bond will differ from the promised YTM. And, in fact, coupons almost always will be reinvested at rates higher or lower than the computed YTM, resulting in a realized yield that differs from the promised yield. This gives rise to reinvestment rate risk. This interest-on-interest concept significantly affects the potential total dollar return. The exact impact is a function of coupon and time to maturity, with reinvestment becoming more important as either coupon or time to maturity, or both, rises. Specifically:

1. Holding everything else constant, the longer the maturity of a bond, the greater the reinvestment risk.

2. Holding everything else constant, the higher the coupon rate, the greater the dependence of the total dollar return from the bond on the reinvestment of the coupon payments. Let’s look at realized yields under different assumed reinvestment rates for a 10 percent non-callable 20-year bond purchased at face value. If the reinvestment rate exactly equals the YTM of 10 percent, the investor would realize a 10 percent compound return when the bond is held to maturity, with $4,040 of the total dollar return from the bond attributable to interest on interest. At a 12 percent reinvestment rate, the investor would realize a 11.14 percent compound return, with almost 75 percent of the total return coming from interest on interest ($5,738/ $7,738). With no reinvestment of coupons (spending them as received), the investor would achieve only a 5.57 percent return. In all cases, the bond is held to maturity. Clearly, the reinvestment portion of the YTM concept is critical. In fact, for long-term bonds the interest-on-interest component of the total realized yield may account for more than three-fourths of the bond’s total dollar return.

Read more: What is Inflation and Deflation?

7. Bull-Bear Market Risk

This risk arises from the variability in the market returns resulting from alternating bull and bear market forces. When security index rises fairly consistently from a low point, called a trough, over a period of time, this upward trend is called a bull market. The bull market ends when the market index reaches a peak and starts a downward trend. The period during which the market declines to the next trough is called a bear market.

8. Management Risk

Management, all said and done, is made of people who are mortal, fallible and capable of making a mistake or a poor decision. Errors made the management can harm those who invested in their firms. Forecasting errors is difficult work and may not be the effort and, as a result, imparts a needlessly sceptical outlook. An agent- principal principle relationship exists when the shareholder owners delegate the day to day decision making authority to managers who are hired employees rather than substantial owners. This theory suggests that owners will work harder to maximize the value of the company than employees will. Various researches in the field indicate that investors can reduce their losses to difficult-to-analyse management errors by buying shares in those corporations in which the executives have significant equity investments.

9. Default Risk

Is that portion of an investment’s total risk that results from changes in the financial integrity of the investment? For example, when a company that issues securities moves either further away from bankruptcy or closer to it, these changes in the firm’s financial integrity will be reflected in the market price of its securities. The variability of return that investors experience as a result of changes in the creditworthiness of a firm in which they invested is their default risk. Almost all the losses suffered by investors as a result of default risk are not the result of actual defaults and / or bankruptcies. Investor losses from default risk usually result from security prices falling as the financial integrity of a corporation weakness-market prices of the troubled firm’s securities will already have declined to near zero. However, this is not always the case – ‘creative’ accounting practices in firms like ENRON, WorldCom, Arthur Anderson and Computer Associates may maintain quoted prices of stock even as the company’s net worth gets completely eroded. Thus, the bankruptcy losses would be only a small part of the total losses resulting from the process of financial deterioration.

10. International Risk

This include both Country risk and Exchange Rate risk. All investors who invest internationally in today’s increasingly global investment arena face the prospect of uncertainty in the returns after they convert the foreign gains back to their own currency. Unlike the past when most U.S. investors ignored international investing alternatives, investors today must recognize and understand exchange rate risk, which can be defined as the variability in returns on securities caused by currency fluctuations. Exchange rate risk is sometimes called currency risk. For example, a U.S. investor who buys a German stock denominated in marks must ultimately convert the returns from this stock back to dollars. If the exchange rate has moved against the investor, losses from these exchange rate movements can partially or totally negate the original return earned. Obviously, U.S. investors who invest only in U.S. stocks on U.S. markets do not face this risk, but in today’s global environment where investors increasingly consider alternatives from other countries, this factor has become important. Currency risk affects international mutual funds, global mutual funds, closed-end single country funds, American Depository Receipts, foreign stocks, and foreign bonds. Country Risk Country risk, also referred to as political risk, is an important risk for investors today. With more investors investing internationally, both directly and indirectly, the political, and therefore economic, stability and viability of a country’s economy need to be considered. The United States has the lowest country risk, and other countries can be judged on a relative basis using the United States as a benchmark. Examples of countries that needed careful monitoring in the 1990s because of country risk included the former Soviet Union and Yugoslavia, China, Hong Kong, and South Africa.

Liquidity Risk

This Risk associated with the particular secondary market in which a security trades . An investment that can be bought or sold quickly and without significant price concession is considered liquid. The more uncertainty about the time element and the price concession, the greater the liquidity risk. A Treasury bill has little or no liquidity risk, whereas a small OTC stock may have substantial liquidity risk. It is that portion of an asset’s total variability of return which results from price discounts given or sales concessions paid in order to sell the asset without delay. Perfectly liquid assets are highly marketable and suffer no liquidation costs. Illiquid assets are not readily marketable and suffer liquidation costs. Illiquid assets are not readily marketable – either price discounts must be given or sales commissions must be paid, or both the costs must be incurred by the seller, in order to find a new investor for an illiquid asset. The more illiquid the asset is, the larger the price discounts or the commissions that must be paid to dispose of the assets.

Political Risk

It arises from the exploitation of a politically weak group for the benefit of a politically strong group, with the efforts of various groups to improve their relative positions increasing the variability of return from the affected assets. Regardless of whether the changes that cause political risk are sought by political or by economic interests, the resulting variability of return is called political risk if it is accomplished through legislative judicial or administrative branches of the government.

Domestic political risk arises from changes in environmental regulations, zoning requirements, fees, licenses, and most frequently taxes. Taxes could be both direct and indirect. Some types of securities and certain categories of investors enjoy a privileged tax status. International political risk takes the form of expropriation of non residents assets, foreign exchange controls that won’t let foreign investors withdraw their funds, disadvantageous tax and tariff treatments, requirements that non residents investors give partial ownership to local residents, and un-reimbursed destruction of foreign owned assets by hostile residents of the foreign country.

Industry Risk

An industry may be viewed as group of companies that compete with each other to market a homogeneous product. Industry risk is that portion of an investment’s total variability of return caused by events that affect the products and firms that make up an industry. For example, commodity prices going up or down will effect all the commodity producers, though not equally. The stage of the industry’s life cycle, international tariffs and/or quotas on the products produced by an industry, product/industry related taxes (e.g. cigarettes), industry wide labour union problems, environmental restrictions, raw material availability, and similar factors interact with and affect all the firms in an industry simultaneously. As a result of these common features, the prices of the securities issued by the competing firms tend to rise and fall together. These risk factors do not make up an exhaustive list but are only representative of the major classifications involved. All the uncertainties taken together make up the total risk, or the total variability of return.

So, these are risks associated in investments of any kind. Investing the amount and monitoring for these risk make your investment safe and secure. Subscribe Sulthan Academy for updates. Share with your friends. Leave your queries in comment section.


15 November 2016

What is depository? and how is it similar to a bank?

November 15, 2016

What is depository? and how is it similar to a bank?

A Depository deals and hold with funds and shares for depositors and it can be compared with a bank. An comparison between a bank and a depository are shown here:

  • Banks holds cash whereas depository holds securities.
  • Banks transfer funds from accounts on the instructions of the account folders whereas Depository transfer securities.
  • Banks are safe places to save your funds whereas Depository is safe place to hold your shares.

Depositories in India:

In India we got two depositories provide dematerialization of securities. They are

  • National Securities Depository Limited (NSDL) and
  • Central Depository Services Limited (CDSL).

Benefits of having a depository:

The benefits of participation in a depository are:

  • Securities are transferred immediately
  • No stamp duty on transfer of securities
  • Eliminates the risks (bad delivery, fake securities, etc.) associated with handling physical certificates
  • Paper works are reduced massively
  • Ease of nomination facility
  • Change in address recorded with DP gets registered electronically with all companies in which investor holds securities eliminating the need to correspond with each of them separately
  • Transmission of securities is done directly by the DP eliminating correspondence with companies
  • Convenient method for consolidation of folios/accounts
  • A single account to hold equity, debentures and Government securities
  • Automatic credit of shares, arising out of split/consolidation/merger etc.

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08 November 2016

500 and 1000 rupee notes are going demonetized–Surprise news

November 08, 2016
The above shown note will be circulated as new Rs.500 and Rs.2000.  When addressing the nation today prime minister of India addressed the public that Rs.500 and Rs.1000 notes will no longer be circulated and it goes invalid from midnight of November 08 (today) . Prime minister also state this is chance for citizen to fight against the corruption and black money. This sudden step is taken to fight against corruption and black money. These notes are ceased under certain conditions:
  • These notes should be exchanged in banks,  head post offices and sub post office within December 30, 2016, by providing a valid identity proof such as Aadhaar, PAN card or voter ID card.
  • People who possess Rs.500 or Rs.1000 currency notes after December 30 can exchange it at Reserve Bank of India by providing a declaration. This is till March 31, 2017.
  • Banks will be closed on November 9. ATMs will not function till November 9, and till November 10 in some places.
  • Exemption for Government hospitals and international airports too.
  • A new series of Rs. 500 currency notes and Rs. 2000 currency notes will be brought into circulation.
  • Rs. 500 and Rs. 1000 can deposit the same in their bank and post office accounts from November 10 till December 30.
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06 November 2016

Indian and international number system–explained

November 06, 2016
Indian and international number system–explained sulthan academy
It is common people confuse between lakhs and millions, and crores and billions. So its common question people ask .  how many lakhs makes a million? Well, I present you clear answer here. Indian number system use terms such as ones, tens, hundreds, thousands and then lakhs and crores. While International number system use terms such as ones, tens, hundreds, thousands, millions and so on.  For better understanding refer the table below.
Indian system
International system
1 Ones 1 Ones
10 Tens 10 Tens
100 Hundreds 100 Hundreds
1,000 Thousands 1,000 Thousands
10,000 Ten Thousands 10,000 Ten Thousands
1,00,000 One lakh 100,000 Hundred thousand
10,00,000 Ten lakhs 1,000,000 One million
1,00,00,000 One Crore 10,000,000 Ten million
10,00,00,000 Ten Crore 100,000,000 Hundred million
1,00,00,00,000 Arab 1,000,000,000 One billion
10,00,00,00,000Ten Arab 10,000,000,000 Ten billion
10000,00,00,000Kharab 100,000,000,000 Hundred billion
100000,00,00,000 Ten Kharab 1,000,000,000,000 One trillion
1000000,00,00,000 Neel 10,000,000,000,000 Ten trillion
10000000,00,00,000 Ten Neel 100,000,000,000,000 Hundred trillion
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Video tutorial How to download historical share price automatically Method-2 Using Excel sheet

November 06, 2016

05 November 2016

Downloading Share prices Method 1 Yahoo Finance to Excel sheet

November 05, 2016

Youtube thumbnail

This Video explains how to download Share prices from Yahoo Finance to Excel sheet. this is method 1 out of three methods that i will cover in further videos.

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03 November 2016

17th Annual research conference of IMF

November 03, 2016

17th International Monetary Fund’s Jacques Polak Annual Research Conference

The 17th International Monetary Fund’s Jacques Polak Annual Research Conference has started at the headquarters in Washington DC. The Even will held Today and tomorrow (November 3–4, 2016) The event is live streamed and Here I provide you the link.

17th International Monetary Fund’s Jacques Polak Annual Research Conference LIVE!!

The theme of this year's conference is "Macroeconomics after the Great Recession." The conference will honour Olivier Blanchard’s contributions to economic research and policy.

Blanchard, a citizen of France, spent most of his professional life in Cambridge, MA. After obtaining his PhD in economics from the Massachusetts Institute of Technology (MIT) in 1977, he taught at Harvard University, and returned to MIT in 1982. He was chair of the economics department from 1998 to 2003. In 2008, he became the economic counsellor and director of the Research Department at the International Monetary Fund. Blanchard retired from the International Monetary Fund in September 2015 and joined the Peterson Institute for International Economics as the first C. Fred Bergsten Senior Fellow in October 2015.

The conference will bring together an outstanding array of economists and policymakers, many of whom studied or worked in collaboration with Blanchard. Lawrence Summers (Harvard University) will deliver the Mundell-Fleming Lecture.

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List of useful Acronym/ abbreviation used in Finance

November 03, 2016
Financial acronym

Hello all, Hereby I bring you list of Acronym/ abbreviation that are frequently used in Finance and by people in Stockmarkets. Subscribe my website and sahre with your friends.

American Depository Receipts
Assessment Year
American Stock Exchange
Assessment Year
Branch Order Value Limit
Bombay Stock Exchange
Central Depository Services (India) Limited
Credit Rating Information Services of India Limited
Credit Analysis & Research Limited
Collateral Security Deposit
Depository Participant
Dividend per Share
Equivalent Monthly Instalment
Earnings per Share
Exchange Traded Fund
Futures and Options
Financial Blood-Test Report
Free Cash Flow to Equity
Free Cash Flow to the Firm
Forward Markets Commission
Global Depository Receipts
Hindu Undivided Family
Immediate or Cancel
International Organisation of Securities Commission
Investor Protection Fund
Initial Public Offer
Insurance Regulatory and Development Authority
Internal Rate of Return
Interest Rate Swap
International Securities Identifi cation Number
International Securities Services Association
Know Your Client/Customer
Liquidity Adjustment Facility
Life Insurance Corporation of India Limited
Lead Manager
Last Trade Price
Market By Price
Mutual Funds
Money Market Mutual Fund
Multi National Companies
Memorandum of Understanding
National Association of Securities Dealers Automated Quotation System
Net Asset Value
Non-Banking Financial Companies
Non-convertible Debentures, Non-convertible Debt Securities
National Commodity and Derivatives Exchange Ltd.
Negotiated Dealing System
National Stock Exchange Automated Trading
Non-Government Organisations
NSE’s Internet-based Information System
No Objection Certificate
Non-Performing Assets
Non Resident Indians
National Securities Depository Limited
National Stock Exchange
National Securities Clearing Corporation Ltd.
New York Stock Exchange
Overseas Corporate Bodies
Open Electronic Consolidated Limit Order Book
Overnight Index Swaps
Order Routing System
Over-the-Counter Market
Over the Counter Exchange of India Limited
Out-of the-Money
P/E ratio
Price Earning Ratio
Permanent Account Number
Profit After Tax
Public Sector Undertakings
Present Value
Previous Year
Reserve Bank of India
Registrar of Companies
Real time Gross Settlement
Standard & Poor
Securities Appellate Tribunal
Securities Contract (Regulation) Act
Securities Contract (Regulation) Rules
Securities & Exchange Board of India
The Singapore Exchange Derivatives Trading Limited
Systematic Investment Plan
Standard Portfolio Analysis of Risks
Self-Regulatory Organisation
Statutory Liquidity Ratio
Systematic Transfer Plan
Systematic Withdrawal Plan
Second day from the trading day
Treasury Bills
Tax Deducted at Source
Total Returns Index
Unit-linked Insurance Plan
Unit Trust of India
Value at Risk
Volatility Index
Ex- Bonus
Ex- Rights