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Finance Management Articles
Page 25 of 96
What is meant by Randomness of Share Prices?
Random Walk TheoryIn a "random walk", a variable does not follow a trend and it moves at random. When we apply this theory to stock prices, it suggests that the stock prices move at random and it is impossible to predict their movement, either through fundamental or technical analysis.According to the Random Walk Theory, the stock prices of any listed company follows a random walk. The theory also assumes that movement of stock prices of two different companies are independent of each other.Randomness of Share PricesThe randomness of share prices is related to the concept of fair pricing and efficient ...
Read MoreWhat are the limitations of Walter’s Theory on Dividend Policy?
According to Walter’s Model, dividends are relevant and have a bearing on a company's share prices. It also advocates that the investment policy is interlinked with the dividend policy and the two cannot be separated.Walter's Dividend Theory is based on some assumptions that are needed to exactly classify the theory. However, some of these assumptions make the theory too rigid.Limitations of Walter's Dividend Theory ModelHere are the limitations of Walter’s dividend theory model −No External FinancingWalter’s model considers that the dividends of a company are paid using 100% retained earnings and no external financing - equity or debt is used ...
Read MoreWhat is meant by Tax Neutrality of Dividends?
Tax Neutral InvestorsIn the share market, there are always three types of investors −The first type of investor considers dividends to be always good.The second type thinks dividends are always bad.And the third type does not have any opinion about dividends.The high-payout investors prefer the first option because they can save taxes by opting for current dividends. The low-payout groups may like the second group, while a third group of tax neutral investors have no preferences because they don’t have to pay any tax on their investments.The third group of investors are actually tax neutral in nature. Since the applied ...
Read MoreWhat is Gordon's Bird-in-the-Hand argument of dividend?
What is Bird-in-the-Hand Theory?The bird-in-the-hand argument of dividend means that the near-future dividends are worth more than a distant-future dividend of equal amount. It considers that investors are always risk averse and so, they will discount distant future gains (capital gains) more heavily than the near future ones. That is, if an investor is asked whether he prefers one bird in the hand or two in the bush, he will always select the former.In other words, there are risks associated with dividends that are payable after a longer tenure than the ones that are paid in the near future. Investors ...
Read MoreWhat is Miller Modigliani's hypothesis about Dividend Irrelevance?
Miller and Modigliani’s dividend irrelevance model is one of the most used principles of dividend valuation. It states that a firm’s dividend payout is not relevant to the valuation of a firm. The value of a firm will remain the same even when the dividends are paid or held by the company for an infinite number of years.Miller and Modigliani suggested that in a perfect share market, the dividend policy is irrelevant. They proposed that the dividend policy of a company has no effect on the stock price of a company or the company’s valuations.There are mainly two hypotheses that ...
Read MoreWhat is the concept of Rolling Settlement?
Rolling settlement is a norm under which the settlement of claims in the market is done within 1 day. With effect from April 1, 2003, all obligations in a market shall be settled and netted on a T + 2 system or by the next day. Therefore, in a rolling settlement system, the trades done on Monday are settled by Tuesday.Why Was the Rolling Settlement Introduced?There is a need for keeping securities in Demat form because every day is a day of settlement in the rolling settlement system.The rolling settlement system makes the process of settling the dues and claims ...
Read MoreThe Pros and Cons of Investing in an Index Fund
What are Index Funds?The funds created depending on the stock market indices are known as index funds. Sector-specific funds are index funds because they invest depending on a stock market or specific sector indices. The most common two examples of stock market indices are BSE Sensex and NSE Nifty. These indices cover large-cap Indian stocks and shares traded in the markets.The BSE Sensex covers the 30 most active and liquid shares in the Bombay Stock Exchange, while the BSE 100 covers the 100 largest companies.The NSE’s S&P CNX 500 covers 94 percent of total market capitalization and about 98 percent ...
Read MoreDifference between Book Value and Market Value of a Share
People often get confused with the terms "book value" and "market value" of shares. While there are undoubtedly some good reasons to confuse one for the other, the book value and market value of shares are two distinct terms with different meanings. However, one can be related to the other in some cases when certain forms of values are same in both the cases.How to Calculate the Book Value?The book value of a share is given by its net worth divided by the total number of outstanding shares in the market.$$\mathrm{\mathrm{Book\: Value}\:=\:\frac{\mathrm{Net\: Worth\:of\:a\:Company}}{\mathrm{Total\:Number\:of\:Outstanding\:Shares}}}$$The net worth of a company is made ...
Read MoreWhat are the roles played by a Mutual Fund?
Mutual funds are formed to mobilize the savings of individuals by offering them a certain percentage of income. Mutual funds were introduced in India in 1964. It was Unit Trust of India (UTI). UTI enjoyed a monopoly in the Indian markets till 1987, and thereafter banks were allowed to offer mutual funds. Later on, various other financial institutions and insurance companies started offering mutual funds for individual clients.A Novel Way of InvestmentMutual funds are a novel way of investment because the firms offering them know about the market and can foresee the growing industries to some extent. In that sense, ...
Read MoreHow do Transaction Costs affect the Dividend Policy of a company?
One of the assumptions of the Modigliani-Miller model is that the internal financing (retained earnings) and the external financing (issue of new shares) are equivalent in nature. Therefore, when a company wants to raise funds, it can issue new shares to get the required funds. It is assumed that this issuance of new shares is free of cost for the shareholders. The issuance of shares does not impact the wealth of shareholders, as the transaction is free of cost. However, in practice, this is just the reverse of the process that takes place in a real-world market.What are Transaction Costs?The ...
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