December 2018 – Korsell Corporate Consult

Diversification

December 12, 2018 (updated December 12, 2018) Published by kccadmin

What Diversification Is

It is rare to find rational investors concentrating their entire wealth in a single security or investment. Instead, they tend to invest in a diversified portfolio of securities. The reason is that pooling imperfectly correlated stocks together helps to diversify away diversifiable (unique or non-systematic) risks. It has been found that risk of a portfolio is less than the sum of the risks of the individual stocks within the portfolio.

When security returns have perfect positive correlation, the returns of the securities in the portfolio move in the same direction. Therefore, it is not possible to reduce risk without sacrificing some returns. When securities returns have perfect negative correlation, returns always move in different directions. Therefore, the portfolio may contain too risky stocks, but the portfolio may not be risky at all. This is because a fall in the return of one stock will be compensated for by a rise in the return of the other. The more negative the correlation, the higher the possibility of risk reduction.

Diversification is the process of combining securities or investments in a portfolio with the aim of reducing total risks (market risk plus unique risk) without sacrificing portfolio return. It is a form of corporate strategy whereby a company seeks to increase profitability through greater sales volume obtained from new products and/ or new markets.

The Brokerage Business

December 10, 2018 (updated December 10, 2018) Published by kccadmin

INTRODUCTION

Every investor who wishes to transact business in the securities market will need the services of a brokerage firm unless such an investor is a member of an organized exchange or a registered dealer in securities.

TYPES OF BROKERAGE FIRMS

Brokerage firms and dealers insecurities can be classified according to the three broad functions they perform. They function as:

Investment Bankers

Brokerage firms act as investment bankers because they sell securities to the public without using the facilities of an exchange. Investment bankers normally buy new issue from the issuer at an agreed price and hope to resell it at a higher price to the general public. In this capacity, investment bankers are said to underwrite an issue. Sales through an investment banker can take the form of best-efforts or agency agreement. In this case, the investment banker does not underwrite the issue but use his best effort to sell it. Any unsold securities will be returned to the issuer. This best-efforts activity will normally be used in the sale of new and small companies‟ shares that are thought to be highly risky.

As Buyers And Sellers Of Securities On Behalf Of Customers

A brokerage firm functions as a buyer and seller of securities for customers. It is this function that most brokerage firms are known by the investing public and the function with which the individual investor comes in contact with the broker. A broker trading in listed securities is acting as an agent on behalf of a client. Compensation for this service is in the form of commission. It is important that the brokerage firm exercises care and demonstrate a reasonable amount of skill in filling customers orders. The brokerage firm may be liable for any losses that result from its mistake.

The care with which brokerage firm issues orders is determined by what is reasonable practice in the brokerage business. The exercise of broker’s skill requires that instructions are followed and the order placed in the market where the securities are traded fastest possible time. The broker is required to refrain from making secret profits or crossing orders in its office by acting as both dealers and brokers in the same transaction. The brokerage firm cannot act as dealer and broker in the same transaction because there could be a conflict of interest and this could result in the client paying double commission. All Securities listed on an exchange must be traded on the floor of that exchange. They cannot be executed off the floor by the broker except in certain circumstances.

As Principal-Making Markets in Securities

The broker functions as a principal and makes markets in securities. The broker’s main principal activity is to bring sellers and buyers together. Thus, the brokerage firm is a middleman. As a true intermediary, brokers bring sellers and buyers together, thus creating a market. This is generally done through over-the-counter issue, but can also take place in listed securities. If the securities to be traded are not listed on an exchange but traded in over the-counter market, the broker might own the shares himself.He/she will be acting as a principal or dealer in the transaction. Many brokerage firms specialize in making a market in a certain securities. In this case the brokerage firm will sell the security to the customer at the asking price and will not charge a commission for handling the transaction. The brokerage firm makes its fee from the difference between the price it pays for the securities for its own account and the price it sells them to the investor. The difference between the asked and the bid price is called the spread and is the compensation for making a market in that security.

Steps in Investment

December 6, 2018 Published by kccadmin

STEPS IN INVESTMENT

Undertaking an investment is a very important decision in life. Therefore all care must be undertaken to ensure the success of such an investment. There are certain things that need to be considered no mater the type of investment you want to undertake. This may be the difference between a successful investment and a failed investment venture. When undertaking an investment, the following steps need to be followed:

Meeting Investment Prerequisite

Before you undertake any investment, the investor must make sure the basic necessities of life are met. You cannot invest your entire fund and starve to death. The investor must ensure that the basic needs of food, clothing and shelter are provided for him/her and the family before thinking of investing other than that he/she will have to sell the investment to meet these necessities. The investor can establish a savings account from which contingencies can be met. Such account should be readily accessible to avoid financial problems when the need arises. The investor can also ensure against losses such as death through accident, illness or negligence on the part of a third party, disability, loss of property through fire and theft by taking insurance policies

Establishing Investment Goals

For an investor to be successful, he needs to establish specific investment goals and work towards achieving those goals. Without a target, the investor will not have something to work towards achieving. For example, the investor may have the following goals; accumulate 1.2 million Ghana Cedis by the end of ten years time when you go on retirement, accumulate 100 million Ghana Cedis by 2025 to build a house. In setting such targets, the investor must be sure that the target can be met considering his financial status, investments available and the return of such investments. For instance, a worker whose annual income is 2 million Ghana Cedis cannot achieve an investment target of 20 million Ghana Cedis in 5 years when the highest return of all available investments is say 15%. This is because even if he invest all his income he is not likely to get that amount. Therefore when setting investment goals, the investor should be realistic as much as possible looking at his financial standing and the returns of available investments.

Evaluating Investment Vehicles

Once the investor has set a target, he/she must evaluate the available investment vehicles with his financial goals and select which investment vehicles that can help to achieve the set goals. The investor should therefore determine assets/investments that will be eligible. The investor then should assess the expected return over a holding period and risk associated with each investment.

Selecting Suitable Investment

The selection process is very important because it determines a course of action. Whether the investor will be successful in achieving his/her investment goals will depend on the type of investment vehicles that were selected. When selecting an investment, the investor may have to consider not only the return and risk of a particular investment but also other factors such as tax liability and liquidity. For example a student investing to meet next semester‟s school fees should consider liquidity and risk in terms of loss of principal as very important factors.

Constructing a Diversified Portfolio

A portfolio of investment is a collection of investments to meet a set investment goal. The investor will have to combine assets in certain proportion to form a desired investment portfolio. One factor that should be considered in portfolio construction is diversification. Diversification leads to a higher return at a possible minimum risk. The portfolio that gives the possible minimum risk is known as minimum variance portfolio. It is normally good for risk averse investors who want to get a return higher than Treasury bill’s rate. The investor can also use optimization techniques to determine investments that will be suitable for a portfolio mix. This is because certain assets on their own may be risky but when combined with other assets reduce the risk drastically. In constructing a portfolio, the investor will have to consider the co-variance of the assets that form the portfolio because co-variance determines the level of risk of a portfolio.

Managing The Portfolio

Once a portfolio of investment has been formed, the investor must monitor the portfolio to make sure the targeted goals are met. The investor has to measure the actual returns of the portfolio in relation to expected performance. If there is deviation from the set target, the investor will need to take corrective measures. This may include selling certain investments and using the proceeds to acquire another investment or changing the portfolio mix. In certain situations, it may mean selling the entire portfolio and investing in a new set of assets altogether.

Month: December 2018