In the world of finance, private equity is a relatively new industry whereby private companies finance other businesses through direct investment, often in exchange for equity in the company and in some cases, decision-making capabilities. Private equity companies generally use capital of the principals or of high net worth investors to strategically invest in growing companies that need growth capital or seed capital to expand operations. Continue reading...
When foreigners purchase shares of domestic companies that represent less than 10% of the voting shares in the companies, and the investments are not those of company expansion or market penetration, but rather to add diversification to the foreigners’ investment portfolios, it is known as Foreign Portfolio Investment (FPI). FPI is the passive investing that foreigners do in a domestic market. It is separate from investments that companies might make into joint ventures or purchase facilities or acquire controlling interest in a domestic company — all of those are active investing and are usually called Foreign Direct Investment (FDI). FPI can be done by individuals or institutional investors. Institutional investors might run a mutual fund or pension fund in another country. Continue reading...
The main idea behind index investing is that markets are efficient, and, especially with the low fees of indexed funds, it can be a winning strategy. Index investing is a simple strategy of choosing the indices which reflect your investment beliefs and offer diversification, buying mutual funds or ETFs that track these indices, and holding them for a long period of time. The last 10 years have seen the propagation of index funds for any specific market, industry, country, commodity, etc. Continue reading...
Foreign investment is the act of an individual or corporation, or institutional investor, acquiring a large stake in a company, which may be a controlling or non-controlling interest. When it is a controlling interest, it is known as Foreign Direct Investment (FDI). Foreign corporate expansion in terms of newly acquired domestic facilities and equity interest in domestic companies tends to be monitored by domestic governments. Continue reading...
Investing in commodities has lately become accessible to even small retail investors via ETFs. There are now literally hundreds of different commodity ETFs, linked to various individual commodities and baskets (such as agricultural baskets, commodity indices, etc.) These instruments are very complex and sometimes do not reflect the behavior of the underlying commodity. While investing in commodities may significantly diversify your portfolio, it requires profound knowledge of the behavior of the underlying assets. Continue reading...
Gold can provide diversification in a simple way, since it has a history of being generally non-correlated with most other asset classes. It is not necessarily a hedge against anything specific, as some claim, since its price movement is too random. Conventional wisdom says that investing in gold might be a good hedge against inflation or market cataclysms. Some of these beliefs are unfounded. The price of gold appears to go up only when it is in high demand (such as when the price has gone up some already), rather than in tandem to any specific market force such as inflation or interest rates. If investors have some idea of when other investors are going to pile in, such as during times of uncertainty, they will likely be able to ride an uptrend in gold prices for a while. Continue reading...
Alpha is a risk ratio which measures gains or losses relative to a benchmark, indicating whether an investor is being compensated with a return greater than the volatility risk being taken. Alpha’s counterpart, the Beta figure, measures how closely an investment follows movements in the market as a whole or, when examining mutual funds, how similarly the funds move to their relevant indexes. Alpha is expressed as integers, which can be translated into percentage points above or below a benchmark for a time period. Investors are interested in higher Alpha figures: the larger the positive Alpha, the more the fund in question has outperformed its benchmark. An Alpha of 2 indicates a performance 2% greater than its benchmark; inversely, a -2 Alpha would denote 2% underperformance. Continue reading...
Custodians are the institutions which hold your securities for you and provide some related services. Some will have various arrangements and relationships with exchanges and broker-dealers, and some may do everything in-house; such things have bearing on what your investment options are, how much equity you must have for margin, what kind of fees you pay for various services, and so on. Different custodians tend to structure their fees and services to a particular type of clientele or a particular account size. You may outgrow the custodian you have, or you may discover that there is a better, more affordable option for an account like yours. Continue reading...
Commodities can be acquired through brokerage services that can access the commodities markets, or you can buy the stocks of companies that bring commodities to market. Investors can also gain exposure to commodities through mutual funds and ETFs that focus on them. There are a few ways to invest in commodities. One simple way is to purchase the stock of companies that produce commodities. You can also invest through futures contracts, which are agreements to buy a certain amount of a commodity at a certain price at some point in the future; this is the primary way that commodities are traded. They can also trade at spot, which means at the current price, or through the use of other derivative instruments, such as options on futures contracts. Continue reading...
A spin-off is when a division or subsidiary of a company is separated from the parent corporation and starts to offer its own shares. The term can also colloquially refer to a situation where a group of talent leaves the larger company to start their own firm doing similar work as they used to do. As far as the SEC is concerned, the definition of a spin-off must include the shareholders of the parent corporation being offered a substantially proportionate amount of shares in the new company. Continue reading...
Momentum investors usually have their own models for determining whether they think a price trend (to the upside or downside) is set to continue - sometimes it’s looking at a 3 month trend, sometimes a few weeks, sometimes even longer. The idea is that once a trend is established, an investor can buy into its continuance (if its an upward trend), or sell into (or sell short) if it is an established downward trend. Momentum investing is by no means a proven method, but sophisticated investors will try to use models to increase their probabilities of success. Continue reading...
An investment center is an almost autonomous division of a company whose purpose is to generate returns on invested money. Cost center and profit center are terms used for various kinds of business divisions when observed from a solely financial, instead of operational, standpoint. These categories help a business to identify and group its similar assets for evaluation. A cost center can be turned into a profit center if it manages to reduce costs enough to generate a profit. Continue reading...
Passive investing relies on market indices and unmanaged approaches to investing, with the idea being that attempting to beat the market is futile, especially if such attempts involve fees and speculation. Passive investing favors buy-and-hold strategies using no-load, low-fee index funds and other securities meant to be held long-term, in a portfolio allocation suiting the investor that will usually be rebalanced over time to prevent overweighting anything. Continue reading...
An investment bank is a financial institution that typically specializes in large, complex transactions, such as underwriting an Initial Public Offering (IPO), mergers and acquisitions, direct investment into start-up firms, or advising large institutional clients on investments/transactions. In short, investment banks help create the bridge between large enterprises and the investor. In that sense, IPOs are one way to accomplish this, but they also help businesses secure financing in other ways, such as through bond issues or derivative products. Continue reading...
Beta is a volatility indicator that denotes how closely an investment follows movements in the market as a whole; when examining mutual funds, it indicates how similarly the funds move to their relevant indexes. It is often referenced with its counterpart, Alpha; a risk ratio which measures gains or losses relative to a benchmark, indicating whether an investor is being compensated with a return greater than the volatility risk being taken. Continue reading...
Investment analysis is the practice of evaluating assets or securities in terms of value, risk and return, as well as correlation with other assets. It is to determine their possible place within various strategies and portfolios. Some analysis will be done seeking the best option for specific asset classes, some analysis will focus on the best overall portfolio for a given situation. Analysis is done using quantitative metrics and indicators, some of which can be considered fundamental analysis tools and some of which are technical analysis tools. Continue reading...
Investment banking activity is different than traditional banking. Investment banks often serve as intermediaries that underwrite a new issue of stock and help to distribute it. They also trade in their own accounts, run hedge funds, and generally invest and speculate in ways that most institutions can’t. Investment banks can assist with new issues of stocks and bonds, purchasing large blocks of them to distribute at a premium. Continue reading...
Investment bankers are proficient analysts themselves, but they have subordinate financial analysts that crunch the numbers for them. They are primarily in the business of procuring clients for deals such as IPOs which their investment bank will underwrite. Investment bankers are employees of investment banks whose role is to acquire clients for the bank and to be the liaison between clients and the back office of the investment bank. Continue reading...
Also referred to as passive income, investment income is money paid to an investor from the dividends, premiums sold, or sale of assets in their portfolio. Some investors treat it like a part-time job, such that there is nothing passive about it. In retirement, investors often receive income from bonds, preferred stock, and dividend-paying common shares. Income can be pulled from several kinds of investments, including real estate, and it is likely to be taxed at ordinary income tax rates. Continue reading...
An investment manager’s job is to adhere to the guidelines set forth in a prospectus while directing the decision-making process for a pooled investment company such as a mutual fund. He must remain accountable to the shareholders and observe SEC regulations while attempting to generate the best returns possible. Investment managers direct the flow of assets and trading in an investment account, usually a pooled investment using the funds of various numbers of investors, while seeking to serve the best interests of the investors whom he serves. Continue reading...