1-17. Stocks, Indices, Funds

So, how do we define whether a company is growth or value? We can look at valuation metrics such as price to earnings ratio, price to sales ratio, and price to book ratio. Then, within a list of companies in an index, we can rank these stocks by these metrics and say that a stock … Read more

Indices can also include stocks based on whether companies are considered growth or value stocks. So, what’s a growth stock, and what’s a value stock? A growth stock tends to have high growth in sales or earnings and potential for future growth. For example, if a company creates new ways for people to make purchases … Read more

So far we’ve seen some major indices that track a large collection of stocks, from big to small with different sectors such as technology or banking. What if we wanted a more refined look at just the smaller companies or what if we wanted to track just high-growth companies. Having a more specific index would … Read more

Indices may track stocks within a specific stock exchange or country. For example the CSI 300 includes stocks that are listed on the Shanghai and Shenzhen Stock Exchanges in China. Stocks can also be related by sector for example the Nasdaq 100 technology index or Nasdaq financial 100 index track the performance of stocks in … Read more

An important point to keep in mind is that an index is a virtual portfolio, and not an actual fund that people invest in. We can think of an index has a fantasy football team in which sports fans pick their favorite players and put them in a virtual team. We can track the performance … Read more

What is an index? If you’re listening to financial news about the U.S. markets, you may hear about the S&P or the Dow. For news about Latin America, there is IBOVESPA or MERVAL. For markets in Asia, there’s the NIKKEI or HANG SENG, and in Europe, there’s the FTSE or EURO STOXX. These are all … Read more

In this lesson, we learned about indices, mutual funds, and hedge funds. We learned how indices may either be market cap-weighted or price-weighted. We also saw an example of how to construct an index and update its value from one day to the next. We learned about mutual funds and hedge funds. We discussed the … Read more

An important consideration for any investor or a portfolio manager is the cost of buying and selling stocks. These are called transaction costs. Transaction costs can be commissions paid to brokers or bargain-making investment banks. Transaction costs can also be the costs of moving the market price by trading a large block of shares. Large … Read more

Because the need to maintain cash tends to erode the total return of the open-end fund, the financial services industry created closed-end funds to address this issue. Closed-end mutual funds are closed ended because they accept investor money when the fund is initially created and don’t create new shares or handled withdrawals afterwards. By making … Read more

Holding cash means that the portfolio cannot make use of all of its assets in the given investment strategy. Also, if many investors wish to redeem their investments at the same time, the fund may need to sell their existing investments to get cash and increase liquidity. These issues may reduce the overall potential return … Read more

Let’s first define the terms Equity, Stocks and Shares. What does it mean when an investor buys stocks. When you get a new job and the company pays you in shares what does that mean? Equity, is the value of a company’s assets minus it’s liabilities, is the net value of the company after counting … Read more

Note that open-end mutual funds must keep part of their investments in cash, in case investors wish to redeem their shares. For example, let’s say an open-end fund has issued 10 shares and the shares are worth $100 each, one investor wishes to return their shares for cash. The investor gets their $100 in cash … Read more

Mutual funds receive investor money, which they invest in a portfolio of stocks or other assets. In exchange, investors receive shares in the fund. For example, when a fund starts, investors may pay $100 for each share of the fund that they receive. There are two types of mutual funds; open-end funds and closed-end funds. … Read more

Usually, the expenses associated with the fund are defined as a fraction of assets under management, which is called the gross expense ratio. Sometimes, when funds are just starting out and trying to attract investors, they give discounts to their new customers. So, these customers actually pay less than the gross expense ratio. This is … Read more

When an investor puts money into a fund, they receive shares in the fund which increase or decrease in value as the funds portfolio value goes up or down. The share represents a fraction of the funds fair value. To get the fair value of a fund’s share, we start with the value of its … Read more

Hedge funds employ hedging strategies, in an attempt to deliver a market neutral returns. By market neutral, I mean that the portfolio’s gains or losses are less affected by overall market movements. Hedging generally means entering into a transaction in order to reduce exposures to price fluctuations. This is done by buying derivatives such as … Read more

Hedge funds are usually evaluated by absolute returns. Absolute return funds use the cash interest rate such as the US three-month Treasury rate or LIBOR as the benchmark. Since the cash rate is relatively small, it doesn’t fluctuate much compared to the equity markets. Absolute return funds are measured by their returns themselves, not the … Read more

There are two ways that funds are evaluated on their performance, relative versus absolute returns. Relative returns refer to how the fund compares to a benchmark, which is usually an index. Mutual funds, both active and passive, are evaluated relative to their benchmark. Let’s say for example, that an actively managed fund chooses to focus … Read more

Then, there are hedge funds. Hedge funds have fewer restrictions on their trading strategies, which allow them to take short positions and also use derivatives such as options or futures. Hedge funds typically take money from high-net-worth individuals or institutions such as pension funds. Hedge funds generally require a higher minimum investment, and may require … Read more

Now, that we’ve had an overview of funds. Let’s discuss two general types of funds: mutual funds and hedge funds. Mutual funds are available to everyday investors and have restrictions on certain strategies, such as shorting stocks or using derivatives. So, they’re usually long only, which means fund managers buy and hold stocks that they … Read more