Why do we invest in share market or purchase shares of any public company? While investing, why do we cautiously select for shares which are consistent and yielding? There is no hidden agenda in this; the reason is to ensure profit from the shares. Now, it will be interesting to know how we get our due from the company in which we invested. Like every professionally-operated business process, here also there is a systematic system for calculating our payouts.
The cash or income which we obtain from the concerned company is called dividend. The dividend can reach us in two ways; either as the entire profit earned by the company or a portion of it, devoid the amount retained by the company. The dividend we receive for our investment depends on the performance of the shares, the company sales and also the company policies. The percentage varies between the companies and among the industries. For example, for a share worth $1000, the dividend paid by a software firm may be $100, whereas a pharmaceutical company may pay you $75. The factors acting to create this difference include the policies of the companies, the net income, tax relaxations, import and export expenses, regulatory expenses etc. Therefore, it is right to compare industries operating in the same sector for their dividends, while selecting the share for investing.
Dividend forms the basis for our percentage earning
The percentage of the earnings paid to us by the company is calculated by finding the dividend payout ratio. It is the proportion of the complete chunk of dividends compensated to all the shareholders in the specified period to the company earnings from these shares during the same time period. Usually, calculations are done on a yearly or quarterly basis and paid out in the same manner. This can also be defined in terms of the ratio of the total dividend amount be remunerative to the net income of the company. Dividend payout ratio can be represented as:
Total dividend per share in year/Earnings per share received by the company.
The ratio gives the percentage of the company earnings you receive for the investment you made by purchasing its shares. If the company decides to retain some portion of the dividend with themselves, this fund is usually utilized to expand the company, pay off debts or divert towards emergency funds. It is an unwritten trend that older and stable companies usually give larger dividends, while the younger ones at the initial growing stages may retain more of the earnings, even if the amount is higher.
Working capital is required for the smooth running of a company’s everyday operations. The more the working capital a business has access to, the safer & better it is for any organization. Improving a business’ working capital denotes greater financial stability. Therefore, every company should be on the lookout for ways to improve its working capital.
Why Increase Working Capital
Ways to Improve Working Capital
Install and set up excellent and latest enterprise resource planning (ERP) tools and other related information systems to carry out business operations efficiently. Good systems should be easy to use and critical in cash conversions.
Maintain high standards of recording and bookkeeping in order to track all payments, due dates, deductions, short-pays, hierarchies, billings, receivables, and others. A good system should be able to aggregate all information and provide detailed insight to all outcomes.
Ensure to contact and send as timely reminders to all concerned parties for timely payments. No issues regarding invoices, terms & conditions, taxes, or freight should arise.
Double-check all calculations for cent percent accuracy in order to take timely actions and to prevent any missing leads, a hindrance in task execution, and lowering productivity. Every sales region and every individual division needs to be verified and accounted.
Do background checks of the payment behavior of every party involved with the business in order to assess risks, calculate cash conversions, and carry out follow-ups.
Periodically check the selling & non-selling products and corresponding performing & non-performing inventory to allocate capital effectively.
As in every business, it is very important to maintain high levels of communication standards while working with the business’ working capital.
Include automation techniques to improve business processes and to empower staff to perform better. This will contribute to the business’ overall productivity.
Encourage employees to work effectively by linking employee goals and rewards to the business’ untapped working capital. This will also encourage creativity among employees to perform efficiently.
Incorporate the power of technology and existing business processes to witness a substantial impact. Thus, adopting the best practices to help your business improve its working capital and the total liquidity value even when the business revenues are low or undergoing a declining phase.
A project is one’s dream. After passing the consent to start the work, it becomes the life of many workers. Sometimes, there occur cases where the project gets canceled or the parameters have to redesign for producing more amounts. To get an extra benefit is really valuable with regard to a project’s view and should be definitely included in the related calculations. This rethinking coincides with the term ‘flexibility’.
In the above-mentioned case, flexibility comes in different modes. Either you have the option to completely drop the project, or you might come up with a large factory project of the same line with an option of expansion in future and so many. It is quite observable that some proposals are more flexible than others and this should be definitely taken into account while determining the scheme and value of the project.
This ability to have a number of flexibility ideas for a project is often known as having a real option. This name suggestion came from the similarity it has with a financial option
The case of unequal project comparison
Let us start with an example for easy understanding: Consider a simple case of buying two different varieties of tube lights for your business firm of which one is low-priced but it comes with a lifetime guarantee of 1 year and the other one is quite expensive but last for 4 years and comes with an energy saving mode. So how and which option to choose becomes our point of consideration.
Thus, it can be said this is a special type of project structural evaluation which involves comparison of more than two options which needs repeated purchases but stays for totally different time spans. Even though this case sounds unusual, this really happens in a number of situations.
In the case discussed above, the cash payment is to be done initially for the purchase of the tube light and later also you have to continue paying for the electricity used by the tube. You can clearly observe no cash flowing at any time. But we need to get the tube as they get their part done but cost differently right?
There are two of ways to compare such projects
- Replacement chain method: This implicates the idea that though the first one is cheaper in terms of cost, they will have to be replaced sooner and so better go for the second one.
- Equivalent Annual Annuity: This is an evaluation where all the expense and benefits of the product are transferred into cash value yearly.
These circumstances of cash flow can always be accounted for calculating capital budgeting of a project.
The financial risk management is a vast area to study and also understand how to manage risk. This gets more challenging as technology plays a vital role in the current industry. In this tricky scenario, we have the help from the hedging technique which is a life saver to reduce risk and make better profits.
Hedging is a method to reduce the risk it is not a long-term strategy though. But it can be catered according to the need of the hour. Hence there are different types of hedges that can be followed. Some of the prominent ones are:
1. Pairing: pairing is to find a similar security like the one which is in a risky state. The similarities could be in terms of characteristics of the industry or sector categorization, market capitalization, dividend yield, volatility, price to earnings ratio. Once we are able to find a pair of two securities with similar features it becomes easier to correlate them and hedge in order to reduce the risk of loss.
2. Shot against the box: this is a unique technique in which securities are sold using short selling the same stock. This was a common technique used by many high net worth companies and hedge funds to avoid the capital gains occurring from these.
3. Futures: this is a typical contract between two parties to buy or sell securities at a later date at a particular price in future. This will eliminate the risk during the remaining period as the security is not in the trade. Therefore this is one of the most common derivates used to hedge risk.
4. Exchange traded funds: these are the types of funds which have a wide hedging option. This is traded like a stock on day to day basis hence it would be an ideal option to reduce the risk associated with the price change. These stocks can be sold as and when required and don’t have any extra brokerage or commission, thus making the process easy.
5. Options: this is one of the most complex tools for the hedging function. This requires an in-depth knowledge so that it can be executed rightly for risk aversion. Some of the specific types are covered call option, buying a put option and collaring.
Therefore, it is important to understand which type of hedging will suit your type of security and also the market force which affects the price should be analyzed so that the perfect choice can be made for the best interest of the trader.
If you are a trader who is looking to making a fast buck in day trading, let us remind you that there is no shortcut to successful trading. You may earn the first few times but once you are trapped in cycle of losses, there will be no looking back. So, to start with, it is a wise idea to tread carefully and take calculated decisions while day trading. It might look simple but there are a few common mistakes that can take away everything from you. Learn about these mistakes, here.
Averaging down too often
It is not at all a good idea to average down in day trading sessions. Holding on to a losing position not only requires money but also a lot of time and energy. For every minute loss, the returns are way too large to recover the losses. Moreover, day trading is very sensitive to movements in the market. Holding on to a position for a long time only exposes you to risks that you might not be prepared to take. So, having a time frame that lets you exit the trade as quickly as possible, is what you should be looking at.
Trading right after an announcement
Trading is like gambling in a casino and there are a thousand ways in which you can lose your money if you are not too careful. A lot of day traders make the mistake of trading right after a piece of news hits the market. This could be catastrophic because you could be influenced by emotions and if you do not have a solid plan to back you up, you might end up losing money.
It never helps if you are rushing through the process of trading. When it comes to day trading, slow and steady wins the race. It is advisable that you wait till market conditions settle down and then start trading. You should have a stable direction of price in order to be able to trade efficiently.
The market can be totally illogical and you will have to accept it. On some days, the market might be a bed of roses to you and on the other days, it might make no sense to you. Expect the unexpected and have a trading plan ready to face all consequences.
Risking more than you can afford to
You should have an amount of money set aside that you can afford to lose because trading is unpredictable. Doing this will help you save your precious pennies when market conditions are not in your favour.
When the prices increase people despair but economist may not react to inflation in the same way. Inflation may have some positive outcomes as well and surprisingly, countries consider this factor while designing their annual budgets and expenditure plans.
The most important aspect is that the government and banks conduct all their financial business on the basis of funds and if the inflation is in the negative then the rate of interest also goes down. This will lead to a liquidity trap. Some inflation is required to motivate people to work harder to earn more money and thereby affect the market and lending and borrowing rates.
Why do bankers not like falling inflation
When inflation is high, people still buy the essential services and goods. For example, food, medicines, and fuel are essential items. Now if the inflation goes down and the prices of essential items go down then people can afford to buy more non-essential items like vehicles, clothes and other stuff. This makes sense but it is not what really happens in the real world.
The negative impact of reduced inflation
People will wait for prices to fall further and keep postponing important purchases and inventories will start piling on. This will have a direct effect on the production and manufacturing industry and many people may end up being jobless and without money even though the prices are low.
Even otherwise if the prices are constant or keep decreasing, then the employers may not be able to increase the salaries and other bonuses etc. given to the employees. This will also lead to discontent among them and an unhappy bunch of society. People want more money so that they can buy more varieties of things. They have moved beyond the simple living style of an old generation. People today want newer things and that cost money. With fewer wages and maybe joblessness, due to less demand in the market people will lose the buying power completely. The economy may go into a spiral.
Effect on debt
Deflation or reduced inflation will also encourage people to hoard the money that they have. They will not get good rates of interest in the market or from investing in financial institutions. This will further reduce the amount of money in the market for use by people and institutions.
Inflation reduces the debt taken by people and governments as the amount of money in circulation increases and the rate of interest remains the same at which the debt was taken. So people can pay off their loans when their wages increase and governments also find it easy to get rid of their debts.So we can conclude that some amount of inflation is critical to keep the economy working smoothly and positively.
Risk assessment helps organizations save a lot of expenses. These are ways to predict the occurrence of issues in advance and thus helping the teams function better. So risk assessment is crucial in risk management. If during the assessment some risks are ignored, or if the relationships between the risks and the priorities are ignored the risk management planning might not be efficient. There are common mistakes that are prone to occur during risk assessment and these are the ones that might result in additional expenses.
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Not getting to the root cause of the issues
Many of the assessment teams succeed in identifying the risks. But one thing that matters even more than that is to identify the possible causes, the triggers that can induce the risk. This is a better way to manage risks because when the triggers are avoided, the chances of the risk would also come down. So missing out on understanding what causes those risks is a mistake to avoid.
Solely looking at the legal implications
When we talk about risk assessment the focus is often inclined to identifying issues that have legal implications. There are legal issues associated with every task directly or indirectly. But there should also be a focus on the safety point of view. Some firms simple carry out risk assessments because the reports submitted by risk management teams might be required for documentation purpose. And there might be legal terms that stress the need for certain risk assessment measures like the evaluation of workplace risk. But these are done more than just for the legal causes.
Not planning a periodic evaluation
A risk assessment done once would be good to give the firm a few weak links to work on. The risk management plan should also have clauses about the periodic repetition of the risk assessments. The time period between each assessment might vary depending on the type of risks being studied and the company itself.
Not creating an awareness about risk management
There would definitely be a dedicated team working on assessing and planning on avoiding the risks. But every employee should be involved in the process at some point. There should be a general awareness created about the risks to look out for. A glimpse of the risk assessment reports and education about the ways to avoid those risks would make the process smoother to implement within the organization. At least the concerned teams should be made aware of the observations.