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Definition of Finance

Finance is defined in numerous ways by different groups of people. Though it is difficult to give a perfect definition of Finance following selected statements will help you deduce its broad meaning.

Types of Financing
There are two main sources of finance:

Equity Financing - money invested into your business in exchange for a share in its ownership. Debt Financing - usually in the form of a loan where the principal amount borrowed and interest accumulated on the loan needs to be paid.

stock
An instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. For example, if a company has 1000 shares of stock outstanding and a person owns 50 of them, then he/she owns 5% of the company. Most stock also provides voting rights, which give shareholders a proportional vote in certain corporate decisions. Only a certain type of company called a corporation has stock; other types of companies such as sole proprietorships and limited partnerships do not issue stock. also called equity or equity securities or corporate stock.

Types of Stocks
There are many different types of stocks in which you can invest based upon your financial position, your appetite for risk and your investment goals. In order to determine in which type to invest, you first have to determine what you want the stock to do for you. Do you plan to hold the security long term, or are you a day trader? Are you looking for capital gains in your investments, or is income your main objective? How you answer these questions will give you a good idea of which type of stock you should be considering for your portfolio. A companys stock offerings generally fall into one of two categories: common stock or preferred stock. Common stock represents the basic equity ownership in a corporation. For total return (dividend income and capital gains), no publicly traded investment offers more potential over the long term than common stock. Stockholders are entitled to vote for directors and on other important company matters. They also participate in the appreciation of share values and benefit from any dividends declared from corporate earnings that remain after debt obligations and preferred stock dividends are met. Preferred stock is an equity with characteristics of both bonds and common stock. Because it is not debt, however, it still carries more risk than bonds. The dividends on preferred stock are usually a fixed percentage of the par, or face, value. Thus, like bonds, shares are sensitive to interest rate fluctuations. Prices go up when interest rates go down, and vice versa. Paying preferred dividends is not a contractual obligation of the issuer, however. Although, as stated previously, they are payable before common stock dividends, they can be skipped altogether if corporate earnings are low. Also, if the issuer goes bankrupt, though the claims of preferred stockholders come before those of common stockholders, neither will share in any liquidated assets until bondholders are paid in full,

because bonds are debt. Listed below are several types of stocks commonly traded in the securities market:

Blue chip stocks are stocks of well-established companies that have stable earnings and no extensive liabilities. They have track records of paying regular dividends and are valued by investors seeking relative safety and stability. The name comes from the blue-colored chips in the game of poker, which are typically the most valuable. Penny stocks are low-priced, speculative and risky securities traded over-thecounter (OTC), in other words, outside one of the major exchanges. Income stocks offer a higher dividend in relation to their market price. They are especially attractive to investors looking for current income that will gradually grow over the years as a way to offset inflation. Growth stocks are securities that appreciate in value and yield a high return. Their profits are typically reinvested to expand the business. Investors gain because the stock prices increase as the business grows, thus increasing the value of the investment. Value stocks are securities that investors consider to be undervalued. They feel that the stock is being traded below market value, and they believe in the long-term growth of the issuing company.

This is far from an all-inclusive list of the available classifications of stocks. Research and use all of the resources at your disposal to find the right security to fulfill your needs and meet your goals.

Characteristics of the Stock Market


The stock market in the United States is made up of stock exchanges such as the New York Stock Exchange (NYSE) and NASDAQ and self-regulating organizations such as the Pink Sheets, where smaller companies trade over the counter. The NYSE has acquired the American Stock Exchange, the Pacific Stock Exchange, the Philadelphia Stock Exchange, and others.

Growth Capital
o

Issuing of stock is the cornerstone of capital formation for enterprise in capitalist economic systems. The stock market provides a way for companies to issue stock to the investing public.

Liquidity
o

The free and transparent trading that takes place in the stock market prices all stocks according to demand and supply, bid and ask. In this way it provides liquidity for investors seeking to transact sales of their holdings through this active pricing mechanism.

Transparency
o

The public nature of trading maintains transparency in financial transactions. Efficiency, growth, freedom and variety are all possible because of transparency that allows all participants to access the bid and ask prices of all securities traded on the market and because all participants have access to the same information.

Organization
o

The stock market provides a degree of protection to investors through oversight by the SEC, FINRA and other legal regulatory and self-regulating bodies on state and professional levels that serve to create an organized and liquid group of stock exchanges and stock trading platforms.

Economic Indicator
o

One of the ten components of the Leading Economic Indicators is made up of the Standard & Poor's 500 Stock Index, one of the major stock market indexes. The direction of trading activity in the stock market provides an indication of the state of commerce and overall confidence in the economy.

Regulated Risk/Reward
o

An organized and regulated stock market serves as a way for investors who seek large returns on their investments to access organized, liquid, regulated and transparent risk investing.

Stock market index


The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext indices. Such indices are usually market capitalization weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment.

Share price determination


At any given moment, an equity's price is strictly a result of supply and demand. The supply, commonly referred to as the float, is the number of shares offered for sale at any one moment. The demand is the number of shares investors wish to buy at exactly that same time. The price of the stock moves in order to achieve and maintain equilibrium. The product of this instantaneous price and the float at any one time is the market capitalization of the entity offering the equity at that point in time. When prospective buyers outnumber sellers, the price rises. Eventually, sellers attracted to the high selling price enter the market and/or buyers leave, achieving equilibrium between buyers and sellers. When sellers outnumber buyers, the price falls. Eventually buyers enter and/or sellers leave, again achieving equilibrium. Thus, the value of a share of a company at any given moment is determined by all investors voting with their money. If more investors want a stock and are willing to pay more, the price will go up. If more investors are selling a stock and there aren't enough buyers, the price will go down.

Note: "For Nasdaq-listed stocks, the price quote includes information on the bid and ask prices for the stock."[18]

Of course, that does not explain how people decide the maximum price at which they are willing to buy or the minimum at which they are willing to sell. In professional investment circles the efficient market hypothesis (EMH) continues to be popular, although this theory is widely discredited in academic and professional circles. Briefly, EMH says that investing is overall (weighted by the standard deviation) rational; that the price of a stock at any given moment represents a rational evaluation of the known information that might bear on the future value of the company; and that share prices of equities are priced efficiently, which is to say that they represent accurately the expected value of the stock, as best it can be known at a given moment. In other words, prices are the result of discounting expected future cash flows. The EMH model, if true, has at least two interesting consequences. First, because financial risk is presumed to require at least a small premium on expected value, the return on equity

can be expected to be slightly greater than that available from non-equity investments: if not, the same rational calculations would lead equity investors to shift to these safer nonequity investments that could be expected to give the same or better return at lower risk. Second, because the price of a share at every given moment is an "efficient" reflection of expected value, thenrelative to the curve of expected returnprices will tend to follow a random walk, determined by the emergence of information (randomly) over time. Professional equity investors therefore immerse themselves in the flow of fundamental information, seeking to gain an advantage over their competitors (mainly other professional investors) by more intelligently interpreting the emerging flow of information (news). Factors Affecting Stock Prices There are two basic factors that affect the movements of stock prices. Fundamental Factors

Technical Factors

Fundamental Factors Following are the major Fundamental Factors which are affecting the price of stocks Demand and Supply Demand and Supply is the fundamental factors of economics, which holds good for the equity market as well. The price of stock is directly affected by the trend of stock market trading. When more and more people buy a same stock, the price of that stock increases and when more people are selling the same, the price of that particular stock falls. For Example- In Bangladesh, during 2009 and 2010 we find many people involved with stock market. As a result, most of the company shares demand was increasing. In one stage the price level of the stock price is going beyond track. So govt. tried to increase the supply number of shares. Once we could find out that the market share price was over valued. Which result we find a big clash in our market.

News News is an important factor which affects the stock price. Positive news about a company can increase peoples interest in buying the shares. At the same time a negative press release can ruin the interest of people in buying that same. After all it is the overall performance of the company that matters more than news.

Market Cap How will you determine the worth of a company..??? If you think it can be determined from the stock prices, then you are making a huge mistake. It is the market capitalization of

the company that is more important when it comes to determining the worth of the company. Market Cap can be calculated by multiplying the stock price with the total number of outstanding stocks in the market and that is the worth of the company. Earning Per Share (EPS) Earning per share is the profit that the company made per share on the last quarter. This is the most important factor for deciding the health of a company. Every public company has to publish the quarterly report that shows the earning per share of the company. High EPS influence the buying tendency in the market resulting in the increase in price of that particular stock. For example- in our country we find during 2009-10, we find our many companies EPS was so good. As a result the price of the share was growing high. But right now it becomes low and the price of share also come low.

Price/Earning Ratio Price/Earning ratio also known as P/E ratio helps you to get a fair idea of how a company's share price compares to its earnings. If the price of the share is very less than the earning of the company, the stock is undervalued and it has the potential to rise in the near future. On the other hand, if the price is higher than the actual earning of the company and then the stock is said to be overvalued and the price can fall at any point. Technical Factors Things would be easier if only fundamental factors determine stock prices. Technical factors are the mix of external conditions that modify the demand and supply of a company's stock. Some of these indirectly affect fundamentals. (For example, economic growth indirectly contributes to earnings growth). Following are the major Technical factors affecting stock price: Inflation Inflation is a huge driver from a technical perspective of stock market. Historically, low inflation had a strong inverse correlation with valuations. On the other hand deflation is generally bad for stocks because it indicates a loss in pricing power for companies.

Economic Strength of Market and Peers Generally company stocks tend to follow the track of market and with their industry peers. Stock Market specialists say that the combination of overall market and sector movements determines a majority of a stock's movement. For example, a sudden negative outlook for one oil stock often hurts other oil stocks and drags down the demand for the whole sector as "guilt by association" Substitutes Substitutes influence the price of stocks to a great extent. These include corporate bonds, government bonds, commodities, real estate and foreign equities. In any point of time if the investors are finding that the alternatives are giving more returns than equities, probably they will withdraw all the investments from the stock and go for alternatives, this will affect the stock price very badly. Incidental Transactions Incidental Transactions include executive insider transactions, which are often driven by portfolio objectives. These are purchases or sales of a stock that are forced by something other than the intrinsic value of the stock. They do impact supply and demand and therefore can move the price. Trends A stock always moves according to a short-term trend in the market. On the other hand, a stock that is moving up can gather momentum. Sometimes stocks behave in the opposite way in a trend and do exactly opposite to the market. Liquidity Liquidity is a very important factor in determining the price of stocks. Liquidity refers to how much investor interest and attention a specific stock has. Some companys stocks are highly liquid and therefore highly responsive to material news. Trading volume indicates both liquidity and a function of corporate communications. Other factors affecting stock prices Apart from those discussed above, there are many reasons for increase or decrease in price of the share. There are several stock factors affecting share prices. Stock Price does not depend upon one or two factors, but some factors directly influence the share prices. Major factors affecting stock prices can be broadly divided under following categories
Specific Company News flow such as new product development, new business gained from supply of services or products for a specific third party or reporting of earnings which either meet or exceed analyst expectations will in general increase the share price. Conversely if a business reports news of business being lost or trading in their market in general is being affected by the economy or they report earning which are either decreasing, at a loss or less than expected, the share price will in general go down. News is reported via many web sites, some is regulatory and some from other sources. Economic & World News has an impact across the whole spectrum of the market and in general would move the major market indices either up or down based on the news. Key indexes to watch exist for each country, as an example you have: Economic Indicators exist for gauging the state of a countries economy, as the USA economy is the largest they should be watched closely. One of the most important is the WLI Weakly Leading Indicator, this indicator has a strong correlation to predicting

recession or expansion and is the most up to date official data released on a weekly basis. Due to the nature of globalisation its also recommended to review economic news coming from the other G7 countries, in particular China should be watched very closely. Currency Movements have a high correlation to the movement of share prices, it should be noted that when examining the currency price data and rebasing currency movements, index charts can almost appear the same. For instance the S&P 500 & Nikkei 225 can have this effect over long periods of time. Seasonal Patterns that affect share prices, there is a well known saying whereby you should sell in May and buy in September, over decades this has been proven to be a very successful trade. The explanation to this is the summer holidays causing a down swing due to less demand in the economy, and the pre / post Christmas manufacturing and trading season, more people are in work making and buying business to business and business to consumer. Technical Analysis is the view of a share prices past movements shown via a chart. The share price chart is then analysed technically. Many indicators are used to divulge past share price movements and the potential for the share price to move up or down against the given indicators. Typical indicators used are moving averages 20 day / 50 day / 200 day, bollinger bands, fast & slow stochastics and MACD moving average convergence divergence. Other indicators are support and resistance levels of a share price, basically where it can be seen that a share price has had a fall in value from a high, this is resistance and support is where a share price has stopped falling and held its price and subsequently advanced up. There are further exotic analysis methods such as Elliot Wave Theory based on natures laws / mans rhythmical routines, astrological events, solar sunspot output and many more. It can be quite enlightening to look at such reports as at time over many months and years they appear to have notable correlations to the movement in share prices / stock market indices. Company Fundamentals or fundamental analysis is when the share price is directly analysed against the earnings and dividends of a firm, PE price to earnings ratio gives earnings per share, book value or tangible book value (minus all debts) and future predicted earnings given by analysts / the company itself give indications of the real value of a companies assets per share. Any premium above book value is driven by the market and either the past or suspected future performance. Other factors can be assessed such as beta and PEG which give indications on future speed of growth when the economy is a favour of expansion for the specific market sector. When all us assessed an supposed efficient share price should be given to the company. Politics and Politicians can have major impacts on share prices and stock markets. Politicians are significant movers on news flow which is the major mover of market sentiment and there is likely a level of control brought about over media, even from indirect media flow being manipulated by politicians. They can apply pressure to their central banks for example the Federal Reserve, purposefully foster bubbles through poor regulation and commands from a president / prime minister can be given to regulatory bodies, as happened in 2002 2008 with light touch policies from the UK Financial

Services Authority. When you see mortgages of 100% 110% on bubble property prices you know theres something rotten happening. The same set of light touch policies occurred in the USA, whereby major banks where selling mortgages to anyone who could tie a shoe lace. In retrospect when you look back at head of states back patting each other followed by credit booms and senior politicians flipping property, its evident that politicians have a major sway on markets and in some instances for their own gains. Other key factors that move share prices are interest rates and inflation, too high and the markets will likely fall. If interest rates are too low they can foster a stock market bubble, in turn the blunt tool can be used to reduce the pain of a recession and assist in turning an economy to growth. However if the tools are used incorrectly and too often over a prolonged period, it can lead to a ponzi style economy, which ultimately can cause an economic disaster and national defaults. This would affect all asset classes, including gold. Due to the level of news manipulation be extra cautious and do not let the media as a whole drive your investing strategy, although being aware of manipulation should improve your market timing for buying and selling shares. Market Sentiment is driven from fundamental facts on companies, economies, market indicators, news flow, credit booms and busts, major world disasters, central bank policies, seasonal patterns, politicians, regulation or lack of and all the factors above. Market Sentiment always makes a good affect to the index. For example- When our Finance minister says anything about the stock market, it affects the stock market directly. Whose prove we can find since many days.

In effect this delivers a market emotion and movement. In this will send the stock markets and company share prices up (bullish) or down (bearish). Govt. decision: Govt. decisions on stock market also affect the market index. If any govt. takes decisions on pro-stock market it is good for high market rate and if takes antistock market will bad for market. For example- In our country, our govt. took pro-decision in 2009 for stock market. On that time we see a well pumping market. In last six months ago we see our govt. took another decision which also helped to increase market index.

Controller commission of stock market: Declaration of controller commission of stock market also affects market index and shares fluctuation. Some time market behaves false for their false decision. Justice of stock market: Justice of stock market also affects the market price index. Now our stock market faces this kind of problem.

Dividend declaration: Dividend declaration also affects the market shares. People feel good to buy those shares whose declaration always good. Beside this market price of a share depends on dividend declaration.

Unethical Process: 1. Some gamers inform to the general investor about the market or any organization
which is not true and it is done for achieving their goals. As a result we can find a huge fluctuation on the share price of an organization or in the market index. We can find this in the third world like Bangladesh because most of the trader have no knowledge about the market

2. As in our stock exchange we cant find proper number of mutual fund. So market is depended on some people intention. These people make decision
on their personal goal. Sometime we find they make a good unity on the purpose of buy and sell share. As a result they make wrong demand or wrong supply of a share. Which directly affect the general investors portfolio and share prices. 3. Some workers of the controller of share market do some unethical work to achieve their goals which also affect the market share. 4. Some time we find some firm shows false report on their financial status. So people behave wrongly. Which also affect the market index.