Securities

How to Estimate Stocks' Fair Values 

Estimate Stocks' Fair Values
How do analysts arrive at fair value estimate for a stock, and how do they relate to the stocks rating? To determine a stock's fair value, analysts examine factors such as estimated future cash flow, competitive positioning, and even the degree of certainty the analyst has in making his or her evaluation. 

Analysts typically track companies within specific sectors and revise their fair value estimates whenever information becomes available that affects their outlook for a stock. A new product launch, a merger or acquisition, or a major competitor abandoning a market are some examples that could cause an analyst to revise a company's fair value estimate up or down.

The process on how analysts arrive at a fair value estimate is outlined below.

The first thing the equity analyst does is examine the company's fundamentals: sales, revenue, expenses, and so on. These are gathered from financial statements, industry reports, discussions with company management, trade-show visits, and other sources. Read more "How to Estimate Stocks' Fair Values "



Credit Default Swap: Powerful force in financial crisis

European policy makers aimed for a voluntary Greek debt exchange that would not trigger the credit event

February 24, 2012

A Credit default swap (CDS) has emerged as one of the most powerful forces in the crisis faced by Greece and other members of the euro zone recently. European policy makers have looked cautiously at credit-default swaps, while they structured the Greek rescue over the last six months. They aimed for a voluntary debt exchange that would not trigger the credit event, fearing that payments on the swaps might set off destabilizing chain reactions through Europe’s financial system.

Credit default swaps were invented by Wall Street in the late 1990s as a form of insurance contract against the default of one or more borrowers. The original purpose of CDS was to make it easier for banks to issue complex debt securities by reducing the risk to purchasers. Credit default swaps became an alternative method of credit enhancement, apparently allowing investors to buy sub-prime loans and insure their safety. 

Between 2000 and 2008, the market for such swaps ballooned from $900 billion to more than $30 trillion. In sharp contrast to traditional insurance, swaps are totally unregulated. CDSs are not traded on an exchange and there is no required reporting of transactions to a government agency. During the 2007-2010 financial crisis the lack of transparency became a concern to regulators. They played a pivotal role in the global financial meltdown. Read more "Credit Default Swap: Powerful force in financial crisis"



Asset Classes for Portfolio Construction

Asset Classes for Portfolio Construction
When constructing your portfolio, you will want to consider variety of asset classes that match with your investment objective. An asset class is a collection of securities, which possess similar characteristics, behave similarly in the market and are subject to the same laws and regulations. 

Core asset classes are commonly consists of cash equivalents or money market instruments, fixed income, and equity. You may include other asset types beyond the core classes in your investment; some investment professionals would add real estate and commodities as alternative investments. 

Each asset class has different risk and return investment characteristics, and will perform differently in any given market environment. Read more "Asset Classes for Portfolio Construction"



Money Market Instruments

A Safer Investment Alternative In Volatile Bear Market

When official bear market strikes, investors usually begin to dump stocks and seek refuge for their money to safer investment in money market instruments. 

Cash Equivalents (Money Market Instruments) are investment securities that are short-term, have a low-risk, low-return profile and are highly liquid. Money market instruments are considered as a unique asset class commonly used in building an investment portfolio as they have distinct risk and return characteristics from other asset classes. Cash equivalents include U.S. government Treasury bills, bank certificates of deposit, bankers' acceptances, commercial paper and other money market instruments. Read more "Money Market Instruments"



Credit Default Swaps

Financial instruments called Credit Default Swaps (CDS) are derivative securities that have been getting more attention recently. They are widely used in the financial markets especially by bond insurers. Exposure to these securities is not limited only to bond insurers but also to investment banks and bond fund. Many largest bond funds have exposure to Credit Default Swaps.

Purpose

The Credit Default Swaps are commonly used to beef up yield. Many investment managers use CDS to create a kind of synthetic bond. Yields of the synthetic bonds are usually more than that of bond the CDS protects. In a basic form, Treasury bond is married with the swap. The result is a higher yield than managers could get on a Treasury bond, or even by holding the corporate bond that the CDS insures.

The CDS is also used by investment managers to hedge bond positions.

How does CDS work?

In reality, any financial player can place a bet on a company’s credit quality; neither side has to actually own the bond. All of those bets help explain why the credit default swap market is larger than the entire bond market.

Credit Default Swap is a private contract between a buyer and a seller who bet on their different views on whether a company's credit rating will get better or worse. For the buyer, the contract acts as an insurance policy against a company defaulting on its bonds. For the seller, the swap delivers a payment stream over a certain time for providing that protection. Read more "Credit Default Swaps"


Understanding cost basis

First What is cost basis? Cost basis is, generally, the price you paid for your shares. This includes adjustments such as reinvested dividends and capital gains, as well as any sales commissions or transaction fees.

Why you need to calculate cost basis? Keeping track of your cost basis is an important step in determining your capital gains or losses on sales of shares. The IRS requires you to report your gains or losses for shares sold when you file your annual tax return.

Under provisions of the Emergency Economic Stabilization Act of 2008, the U.S. Treasury has issued new regulations that will require investment companies and brokers/dealers to begin reporting to the IRS the cost basis of securities you acquire in 2011 or later and subsequently sell or transfer.

The Act’s requirements apply to firms involved in the transaction: brokers, custodians, transfer agents, etc. Although the legislation does not address financial advisers’ role directly, the new regulations nonetheless will influence advisers’ workflow and change the reports their clients receive from custodians. Read more "Understanding cost basis"