Monday, August 18, 2014

How to Measure Risk

Investing in stocks is a risky business. There are some risks you have some control over and other that you can only guard against. Thoughtful investment securities selections that meet your goals and risk profile keep individual stock and bond risks at an acceptable level.

However, other risks inherent to investing you have no control over. Most of these risks affect the market or the economy and require investors to adjust portfolios or ride out the storm.

There are two ways to measure risk. One is by using modern portfolio theory and the capital asset pricing model and the second is to look at the various risk factors which affect a business.

Capital Asset Pricing Model
We will not discuss in detail this theory of asset pricing as it requires you to have a working knowledge of first or second year university level statistics and finance. Since this is an introductory article, readers who are interested to learn more about the CAPM and Modern portfolio theory are encouraged to attend a course in finance or seek advice from a qualified advisor.

Basically, the CAPM makes some major assumptions about investors and their preferences. In order to use the CAPM to find the proper discount rate, one must know three things: a stock's beta, the nominal risk free rate, and the expected return on the market. Stock's with betas greater than one are more risky than the market and betas of less than one are less risky. For example, a stock with a beta of 1.5 is expected to gain 1.5% when the market rises 1%.

Modern portfolio theory is also where the main ideas about diversification come from. We will look at this concept in more detail later. For now, we can define a diversified portfolio as containing securities which have little or no correlation to other securities in a portfolio or the market. These securities are then placed in a portfolio in such a way as to minimize the volatility of the portfolio.

You may be scratching your head by now but this is essentially the basic concept of diversification and minimizing risk. There are a lot of disadvantages and advantages to using the CAPM and MPT. One assumption of the CAPM I will mention is that there are two types of risk. Market risk and firm specific risk. The CAPM assumes that investors only get a premium return for taking on market risk because the firm specific risk can be entirely eliminated through diversification. Thus, beta only measures market or nondiversifiable risk.

Second Way to Measure Risk
The second way to measure risk is to start by taking a nominal risk free rate. How do you do this? Well you take the yield that is currently offered on US Government bonds that match your investment horizon. For example, if you plan to invest for 5 years, you should use the yield on 5yr U.S. bonds. Now add to this the premium for risk and voila-you have your required return or discount rate. You may be asking, what makes up the risk premium? Well, remember from lesson one there are five things: financial, business, liquidity, foreign exchange, and political risk.

Financial Risk:
Financial risk involves a company's capital structure. What is their debt/equity? What is their current ratio? etc. We will look into how to assess financial risk in greater detail later in lessons on accounting and financial statements analysis.

Business Risk:
This involves the economics of the firm you are looking at. Ask yourself, how will this company look ten years from now? Do they have barriers to entry? (ie patents, economies of scale etc. more on this in the economics lessons).

Liquidity Risk:
It has been shown through various studies that firms which are private or thinly traded are sold at a significant discount to their value compared with similar firms with active markets. Firm's which can be easily bought or sold with little transaction costs are called liquid or marketable. The lack of liquidity can occur if the stock you are researching is not widely followed. It can also happen if you plan to liquidate a large block of stock. Your transaction could bring down the price significantly.

Foreign Exchange/Political Risk:
This involves firms which derive significant portions of their sales overseas. For example, many exporters to Asia have been affected by weaker demand for their goods. Foreign Exchange/Political risk can also happen because the company you are looking into is heavily restricted by the government. Finally, different countries have different accounting rules so you should be aware of this when investing in foreign stocks.
When investing in foreign stocks, you also run the risk of the U.S. appreciating. To adjust for this, you should restate your foreign returns to U.S. returns.
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Tuesday, August 12, 2014

5 Apps That Help You Manage Your Money

Let’s be honest. Most people are not accountants, financial advisers or qualified money managers. The normal person is not always equipped with the knowledge needed to maintain their personal finances. And with the economy in flux, responsible money management has never been more important. Luckily, there are several financial apps available to help you manage your money.

Mint

Mint.com app Image Via Flikr by Linsey Knerl
Price: FREE
Are you the kind of person who has no idea how much money you have in your bank account at a given moment? If so, the Mint application is the perfect way for you to start organizing your finances. It allows you to see all your account balances and transactions in an easy to read list. You are able to connect it to a variety of different accounts including credit cards, checking accounts, investments, and even loans. Not only are they listed for you to see the balances, but Mint breaks down your spending into categories. This can include Entertainment, Food, School, and Rent just to name a few. You can even set it up to send weekly breakdowns. Mint is an excellent app to get you on the right track to managing your money.

BillTracker

BillTraccker
Price: $1.99
Remembering to pay bills is one of the reasons people are having such a hard time managing their money. When thinking about your personal funds, it is important to realize future payables. This can include loan payments, rent, utilities, and a variety of other bills. BillTracker is a great app for displaying all your monthly bills in an organized and easy to follow manner. It allows you to input all your bills, set payment reminders, and even can be linked to provide payment confirmations. It is an excellent app to help anyone keep track of their bills and is a must have for managing your money.

Adaptu Wallet

Adaptu Image Via PCmag
Price: Free
Adaptu Wallet is a hybrid app combining both of the aforementioned apps. It allows you to display your latest account balances and also set up bill reminders. The idea behind the app is to act as a virtual wallet that allows you to carry all your information in the palm of your hand. It even allows you to store images of your insurance, social security, and business cards. Not to mention, the added benefit of spending forecasts so you can evaluate your finances. The best part of all is that everything is stored under bank-level security, so you will never have to worry about losing your information.

PayPal

PayPal Image Via Itunes
Price: Free
The PayPal application can be used on all cell phone plans. If you have ever purchased something online you have probably come across PayPal before. This app makes it extremely easy to transfer money at the push of the button. You can shop around for the best deals on your smartphone and then quickly purchase the item through this safe and easy app. Another great feature is that it allows you to deposit a check immediately to your account by simply snapping a photo. Having an accessible and secure way to transfer money over a variety of different accounts makes PayPal an excellent app for people looking to manage their money.

StockTwits

PayPal
Image Via Itunes
Price: Free
If you are someone who is relatively responsible with their personal finances, but looking to become more connected with investments and stocks then StockTwits is for you. This is a financial communications platform for anyone looking to gain insight into the stock market and investing. It connects you to traders and investors, financial news, charts, and all kinds of investment information. It pulls up real time stocks and connects it with all of your investment portfolios. This app is an excellent way to monitor the money you have invested and makes it very easy to see trends and gain professional insight. Monitoring your personal finances is no easy task. From bill paying and account management all the way to investment portfolios it is tough to keep track of where and what your money is up to. There are hundreds of useful financial apps on the market and many of them are free to download. If you are looking to take control of your money take the opportunity to look at some of the apps mentioned above.  
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Saturday, July 5, 2014

Tax Return Filing Season is here – 11 Things to keep in Mind!

Online Tax return filing for Indians for FY 2013-14 would be different in many ways. However, one thing which really stands out is that it will have more tax payers under its ambit in compare to any previous year since now it is mandatory to e-file your tax return if your income is more than Rs.5 lacs.  This article would stress on 11 things which a tax payer should keep in mind while e-filing his tax return, especially first time filers.

1) Permanent Account Number - This is a unique alpha-numeric number allotted to you, which basically is the base identifier for all correspondence with the IT department. Thus it is of paramount interest to double check the PAN number while e-filing your tax return. 

2) E-mail Id – IT has become hi-tech and moving towards paper less environment, wherein most of the correspondence from them, including ITR acknowledgment and intimation would come to the email id you provide in the tax return.  

3) Your Bank Account Details - This would contain your bank a/c number, MICR code and from this year onwards one more mandatory detail is required i.e., IFSC code of your banker.

4) Correct ITR Form - It is very important to select the correct ITR form that is applicable to you for E-filing of tax return as the government has made various changes in regard to the selection of ITR forms for different assessees. If you fail to select correct form then your IT Return may be regarded as defective return. 

5) Check Form-26AS before filing- The Government keeps record of all tax deposited/ credited to your PAN number. You can register with the e-filing site of IT Department to view your Form-26AS. It is important to note here that the information disclosed in your income tax return form should match with the details in your Form 26AS. Thus there is a need to check Form-26AS while doing e-filing your tax returns. 

6) Provide Details of all the Tax saving investments made by you- It is advisable that one should always make a list of Tax saving investments made throughout the year which are eligible for deduction under Chapter VI of the Income Tax Act, otherwise there is always a chance to miss those in the tax returns, and not claiming benefit on those. 

7) Filing ITR with Multiple Form16- Form 16 is a certificate issued by an employer to an employee who provides details in respect of salary earned by the employee and tax deducted at source by the employer. Tax payers often get confused regarding how to file their income tax return with multiple Form16, wherein they have worked for more than one employer in a financial year.

8) Interest on savings bank account is taxable- Interests on savings bank account, post office savings and savings in cooperative banks are taxable when amount exceeds Rs.10000. Thus if you have such income then you should disclose it the income tax return. Only saving bank interest income is exempt upto Rs. 10000, and this fact misunderstood. For example, interest on fixed deposit and recurring deposit are fully taxable income which is to be shown under the head “income from other sources”. 

9) Exempt income need to be disclosed separately in the returns - It has been noted that many tax payers do not disclose exempt incomes in their income tax return on the contention that they are not taxable. IT department has taken this very seriously by making ITR 2 applicable to tax payers, who have exempt income of more than Rs .5000, thus they can’t file ITR 1.  Thus, it is advisable to disclose all exempt income at the required schedule in the ITR return. 

10) Mailing ITR-V submission is a must when ITR is uploaded without digital signature – ITR-V (income tax return verification ACK) is generated when a ITR is uploaded online without use of the digital signature. ITR-V ACK is required to be mailed to the CPC, Bangalore within 120 days of the upload of the ITR online. Upon the receipt of this, the CPC sends a final Acknowledgement to the email id. 

11) Keep documentary evidences of all the information you give- Last but not the least, tax payers should look to properly maintain all the documentary evidence that is associated with the filing of return which the assessing office might call upon in future. 

About Author:
Alok Patnia founded Taxmantra.com to understand and address the pain points of individuals, businesses and startups. He is an expert in handling ITR filing, has great insights on the business startup issues such as choosing right business entity and also has vast experience in the field of business maintenance services such as accounting, auditing, company law compliances, service tax and other related fields.


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Friday, July 4, 2014

Should You Consider a Pension Transfer?

Transferring a pension isn’t the right move for everyone to make, as we all have to consider different circumstances when making our decision. However as this article reveals, there are some situations in which transferring your pension fund could turn out to be a very good move indeed.

The process of setting up a pension seems to be rather simplified when you first look at it. You consider where to start up your private pension, get everything set up and then start paying into it every month. Job done – or at least you would think that was the case.

In reality people sometimes change their plans regarding their pensions, and there can be some very good reasons why this might happen. For example it is generally accepted that the best pension to have is one that your employer provides for you. This is because they pay into it as well as you, so every month you have two lots of payments going into your pension pot.

However if you leave that job and move on to another one, you will retain your pension pot from the first employer and start a new one with your next one. You can keep your pension pot growing with the first employer’s scheme if you wish, but nothing else will be going into it each month. You may have the option to go for a pension transfer in this situation if there are benefits to doing so. It is always wise to seek proper independent advice on this matter as no two situations will be exactly the same. Don’t make a decision now based on your own point of view as it could be the wrong one to make.

Since most of us change jobs and companies through our working lives, it is not unusual to end up with several pensions held with different companies and schemes. There are often advantages to bringing several smaller pensions together and putting them all into one single pot. For instance in some cases you can pay lower charges by having a larger amount in one pot instead of having your pensions spread around in different places. You need to work out your sums and assess what is best in your case though before deciding what to do.

There is also the chance that old pensions that you haven’t paid into for years could be achieving a very poor return for you. When you leave a particular job it is easy to forget about the pension you had there, even though you should still have the paperwork from it. In fact if you suspect you may have a pension you haven’t thought about (or paid into) for a while, now is the time to do something about it. If you find a pension like this is performing badly you should almost certainly transfer it elsewhere. However as we have mentioned before in this article, do seek professional advice before doing this to make sure you have covered all your bases. You want to make the right decision now to put you in a better financial position in the future when you do eventually retire.


As you can see there is a lot to think about and the idea of transferring a pension should not be taken lightly. The more advice you get now, the better off you are likely to be in the future.
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Saturday, June 28, 2014

Inside Look: Check out this Unprecedented Bear Market Formation Since 2000

Think the current conditions in the stock market are normal? Think again. Here are 3 characteristics you should expect to see in wave b.


By Elliott Wave International

Editor's Note: Below you will find a sneak peek from the just-published issue of Robert Prechter's Theorist. It provides you an opportunity to see some of the research, analysis and forecasts that Elliott Wave International's subscribers are enjoying inside their latest issue.

Figure 4 (below) is a diagram from Chapter 2 of Elliott Wave Principle. It displays a typical progression of prices and psychology in a bear market. We can apply this picture to the stock market since 2000. The real-life pattern is a bit more complex than this picture, because wave a itself was a flat correction, which ended in 2009. The dashed line in Figure 4 represents what the market has been doing since then: rallying to a new high in a b-wave. The entire formation has been tracing out an "expanded flat" correction (see text, p.47) of Supercycle degree.
Per Figure 4, among the characteristics we should expect to see in wave b are: "Technically weak," "Aggressive euphoria and denial" and "Fundamentals weaken subtly." The volume contraction in the stock market has now lasted over five years, which is extreme technical weakness, albeit only in that indicator. The 30+ charts we have shown of market sentiment reveal historically high levels of optimism regarding stocks. No doubt bulls would dismiss the idea that investors today exhibit "aggressive euphoria and denial." But look at Figure 5.
It shows that the yield on junk bonds has just reached its lowest level ever. Junk bonds did not even exist prior to 1989. In 2009, investors were deathly afraid of them. Now they cannot get enough of them. They are thinking only about yield; they are ignoring risk to principal. That's denial. Finally, fundamentals have not just weakened a bit but rather are awful. The economy is flat, the amount of debt is at a record high, and as shown in the June issue of The Elliott Wave Financial Forecast the quality of debt is at a record low.
There has never been an expanded flat pattern as large as Supercycle degree in recorded stock market history, going back 300 years. It's a first. So, we are getting commensurate expressions of stupendous optimism, which will prove worthy of the record books. People think today's market conditions are normal, because a benign present is always considered normal. But it's not normal. It's unprecedented.

Would you like to see the rest of the issue for free? For more details, the complete wave count, and EWI's forecast for how they believe it will all play out, continue reading Prechter's 10-page June Theorist now, completely risk-free. Learn more here.

This article was syndicated by Elliott Wave International and was originally published under the headline Inside Look: Check out this Unprecedented Bear Market Formation Since 2000. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
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