Saturday, July 30, 2005

More Fundas!

What Are Fundamentals?
On CNBC' s "Squawk Box", for instance, company CEOs come out and proclaim that their companies have good fundamentals.
Analysts and fund managers are always talking about how this or that stock has strong fundamentals.
In turn, there are some traders who proclaim that fundamentals don't actually matter and investors should rely on 'technical' merits instead.

Do you wonder, what are they all talking about?
In the broadest terms, fundamental analysis involves looking at any data, besides the trading patterns of the stock itself, that can be expected to impact the price or perceived value of a stock. As the name implies, it means getting down to basics. Unlike its cousin technical analysis, which focuses only on the trading and price history of a stock, fundamental analysis focuses on creating a portrait of a company, identifying the intrinsic or fundamental value of its shares and buying or selling the stock based on that information.
Some of the indicators commonly used to assess company fundamentals include: cash flow; retur`n on assets; conservative gearing; history of profit retention for funding future growth; and soundness of capital management for the maximizing of shareholder earnings and returns.

Lets digest this..

Think of the stock market as a shopping mall: stocks are the items for sale in the retail outlets. Technical analysts will ignore the goods for sale. Instead, they will keep an eye on the crowds as a guide for what to buy. If they notice shoppers congregating inside a computer shop, our technical analysts will try to buy as many PCs as they can, betting that the growing demand will push PC prices higher.

Fundamental analysts have a more staid approach. Their sights are set solely on the products in the mall. Shoppers are dismissed as an unreliable, emotional herd with no inkling of the real value of the goods for sale. Our fundamental analysts move slowly through the stores seeking the best deals. Once the crowd moves on from the PCs, they will take a closer look at the ones that were passed over.

When the stock market is booming, it is easy for investors to fool themselves into thinking they have a knack for picking winners. But when the market falls and the outlook is uncertain, investors cannot rely on luck. They actually need to know what they're doing.

That said, there is much that the investor can do to learn about fundamentals. Investors who roll up their sleeves and tackle the terminology, tools and techniques of fundamental analysis will enjoy greater confidence in using financial information and, at the same time, will probably become better stock pickers. At the very least, investors will have a better idea of what is meant when someone recommends a stock on strong fundamentals.

Analyzing Bond YieldsYIELD is the return on an investment, calculated as a percentage of the amount invested. Nevertheless, it is not that simple because the ultimate proceeds to be returned as principal may be more or less than your original investment. COUPON RATE is the fixed-dollar amount the issuer contracts to pay bondholders until the bond matures, expressed as a percentage of the face value of the bond.The CURRENT YIELD is the coupon rate on a bond divided by its current market price.

Coupon rate (in money terms) Market price Bond prices are calculated as a percentage of par and then translated in money terms. This percentage is usually calculated on a bond of $1000 face or nominal, value. Thus, a bond paying 9% per annum, selling at $98, has its current yield calculated in the following manner: $90/$980 = 9.18% 4Current yield is limited because it ignores the fundamental nature of bond risk:time.

YIELD TO MATURITY is a bond’s annualized total return if held to maturity.Yield to maturity is the true yield on a bond, reflecting both current and future return. YIELD TO CALL is a bond’s total annualized yield if it is called on its earliest call date.


Mark to Market (MTM)

The act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value.

MTM Margin

The mark to market margin (MTM) is collected by NSE from the members before the start of the trading of the next day.

How to calculate MTM Margin

Mark to market loss shall be calculated by marking each transaction in security to the closing price of the security at the end of trading. Please look at the below example computation

Example

For a Client A, his MTM profit/ loss would be calculated separately for his positions on T-1 and T day (two different rolling settlements). For the same day positions of the client, his losses in some securities can be set off/netted against profits of some other securities. Thus, we would arrive at the MTM loss/profit figures of the two different days T and T-1. These two figures cannot be netted. Any loss will have to be collected and same will not be setoff against profit arising out of positions of the other day.

Thus, as stated above MTM profits / losses would be computed for each of the clients; Client A, Client B, Client C etc. As regards collection of margin from the broker, the MTM would be grossed across all the clients i.e. no setoff of loss of one client with the profit of another client. In other words, only the losses will be added to give the total MTM loss that the broker has to deposit with the exchange.

Client

Security

T-1 day

T day

Total profit/loss of Client

MTM for broker

Client A

Security X

800

300

Security Y

-500

-1200

Total

300

-900

-900

Client B

Security Z

700

-400

Security W

-1000

800

Total

-300

400

-300

Client C

Security X

1000

500

Security Z

-1500

-800

Total

-500

-300

-800

Client D

Security Y

700

-200

Security R

-300

800

Total

400

600

1000

Member

-2000

In this example, the broker has to deposit MTM Margin of Rs 2000.


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