Money Manager, Investment Advisor or Broker?

As a new investor, one of the important decisions to make is whether to use the services of a money manager, investment advisor or a broker? All of these entities offer services tailored to the individual investor.

MONEY MANAGER:

i) Who is a money manager?

A money manager, as the name suggests, manages the money of several individual investors. A money manager can be an individual or a firm. Individual money managers are often experienced investors who typically manage the funds of friends and family. Institutional money managers offer their services to both individuals as well as institutions.

ii) What are the services offered by a money manager?

Money managers charge a fixed annual fee for their services and may also charge an additional commission on any profits accrured. They may also offer downside protection by guaranteeing a minimum return on the invested amount.

iii) Who should use the services of a money manager?

A money manager’s services is useful for individuals who wish to invest in the markets but do not have the time and expertise to follow up on a regular basis. Risk averse investors can opt for investments in money management funds of large banking institutions.

INVESTMENT ADVISOR:

i) Who is an investment advisor?

An investment advisor is an individual who offers investment advisory services to clients. An investment advisor can be an independent or can work for a firm.

ii) What are the services offered by an investment advisor?

An investment advisor offers a variety of services like designing an investment portfolio based on the client’s profile, recommending stocks to buy or sell, recommending different financial products like insurance, stocks, bonds, mutual funds etc.

Investment advisors typically have access to sophisticated tools and research and are hence in a position to provide a better insight to clients.

iii) Who will benefit from the services of an investment advisor?

An investment advisor’s services are useful for clients looking for additional information and advice to support their investment decisions.

BROKER:

i) Who is a stock broker?

A broker is an intermediary between the client and the exchange. Exchange traded stocks, bonds and derivatives can only be bought through a stock broker.

ii) What are the services offered by a broker?

A broker could be a regular brokerage firm or an online brokerage firm. Brokers sometimes offer minimum advisory services like research reports and market updates to clients.

iii) Who will benefit from a broker’s services?

A broker’s services is sufficient for experienced traders and investors.

Investment Style – what is yours?

One could be a miser, a spendthrift or even a wise man when it comes to personal finances. Similarly, stock investors can be classified based on their investment style.

Investment style is generally determined based on a variety of criteria such as investment goals, investment time line, risk objectives as well as some personal investor traits.

The following are some popular classifications.

1. ACTIVE vs PASSIVE: Active investors are well informed and typically believe in their ability to outperform the market. They actively follow the market and look for various ways to exploit market inefficiencies.

Passive investors are typically very long term investors who invest in stocks that they intend to hold for a long period.

2. GROWTH vs VALUE: Active investors can be either growth or value seeking. Growth seeking investors look for high-growth companies hoping to get a high return on their investment in a short period of time.

Value investors on the other hand look for under-priced stocks or ‘bargains’. Value stocks are typically identified through fundamental analysis techniques.

Are you a regular investor? What is your investment style?

Financial Instruments – the basics.

As an investor you have several options when it comes to investments. The following is a list of investment options available in the capital markets.

1. COMMON STOCK: Common stock is a financial instrument that represents ownership in a corporation. Holders of common stock own a portion of the corporation. They have voting rights in board member elections and other corporate policy decisions. They receive dividends from the corporation. However, in the event of a liquidation of the corporation, the holders of common stock are lower in the order or priority compared to preferred stock and other bond holders.

2. PREFERRED STOCK: Preferred stock is a financial instrument that represents ownership in a corporation. Holders of preferred stock own a portion of the corporation. They have no voting rights. In the event of a liquidation of the corporation, the holders of preferred stock have a superior claim over the firms’ assets compared to the holders of common stock.

3. BONDS: A bond is a debt instrument that is issued by a corporation or the government in order to raise money from the public. Holders of a bond are merely lenders who have lent money to the institution that issued the bond under the terms specified in the bond issue documents.

Some examples of bonds are government securities, corporate bonds, commercial paper, treasury bills, strips etc.

4. FUTURES: A future is a financial contract in which the buyer agrees to buy an underlying financial instrument on a certain future date for a certain fixed price.

5. OPTIONS: An option is a financial contract that gives its buyer the right, but not the obligation, to buy an underlying financial security at a certain price, on or before a certain date.

6. MUTUAL FUNDS. A mutual fund is a professionally managed investment fund that pools the money of several investors and makes investments on their behalf. Individual investors in the mutual fund own ‘shares’ in the fund and receive a return in proportion to their investment.

Mutual Funds – the basics.

What is a mutual fund?
A mutual fund is a professionally managed investment fund that pools the money of several investors and makes investments on their behalf. Individual investors in the mutual fund own ’shares’ in the fund and receive a return in proportion to their investment.

Why should I invest in a mutual fund?
Investing in a mutual fund has the following advantages:

i) Professionally managed – Mutual funds are managed by professionals. Individual investors benefit from the high quality research and analysis that goes into their investment process.

ii) Well diversified – The large pool of funds provides the opportunity to make a wide array of investments. Mutual funds are very well diversify such that a loss in a particular investment will be offset by profits from other investments. The net return is thereby beneficial to the individual investor.

iii) SEBI regulated – Mutual funds are regulated by the SEBI. This protects the individual investor from ponzi schemes and other potential fraud.

iv) Liquid – Mutual funds are highly liquid and so the individual investor can convert their investment to cash with relative ease.

Is my money safe with a mutual fund?
Mutual funds are regulated by the SEBI and are under strict regulatory supervision. They are required to fully disclose the details of all investments and are overseen by a board of trustees that should comprise of more than two thirds of independent directors.

What are the disadvantages of investing in a mutual fund?

i) Additional Costs – Fund management adds an overhead to the investment process and this additional cost is borne by the individual investors in the form of management fees.

ii) Taxes – Investment decisions do not take into account the tax liabilities of individual investors. Hence it is often not possible to minimize tax liabilities on mutual fund investments.

Stock Investing – learn the language.

1. MARKET CAPITALIZATION: Market capitalization is used to measure the economic size of a corporation. It is defined as the current market value of a corporation’s total outstanding shares. It is calculated by multiplying the total outstanding shares of a corporation by its current market price per share.

2. DILUTION: EPS or earnings per share is a commonly used metric to measure the performance of a corporation. It is calculated by dividing the corporation’s reported earnings by its total outstanding shares. Whenever the number of outstanding shares of a corporation increases, the EPS is said to be diluted.

The total outstanding shares of a corporation can increase due to i) issuance of additional shares ii) conversion of convertible securities.

3. LIQUIDITY: Liquidity is defined as the ability to convert an asset to cash quickly. In the case of the equity markets, liquidity or market liquidity is the ability to buy or sell a share quickly.

4. DIVIDEND: Dividend is a payment received by a shareholder from the corporation. A corporation can decide to distribute a portion of its income or earnings as dividends to its shareholders. The actual dividend received is proportionate to the shareholding in the corporation. Dividend income is taxable.

5. BUYBACK: A corporation may decide to buyback or repurchase a certain number of its outstanding shares from the market. A buyback may be to increase shareholding percentage or to decrease supply in a highly volatile market.

6. OUTSTANDING STOCK: Outstanding stock is the total number of shares that have been issued by the corporation and is currently held by the investors.

7. IPO: Initial public offering or IPO is the first time a private corporation makes its shares of stock available, for investment, to the public.

8. MARGIN: Margin is the amount deposited as collateral by an investor in order to trade certain types of securities.

9. PRIMARY MARKET: Primary market is the market that trades in the very first or initial issue of stocks of a private corporation.

10. SECONDARY MARKET: Secondary market is the market that trades in the stocks of a public listed company.

Stocks – should I invest?

The following are the steps toward financial stability – earn a regular income, save a portion of your income and grow your savings.

A savings of Rs.1 lakh will be worth much less ten years later; hence it is extremely important to grow your savings. Investments are a way to grow your savings.

Buying a stock of a company will in essence make you a part owner of the company. As the company grows, the stock value increases and your investment grows. Historically, stock investments are shown to have higher growth rates over long time periods.

Also, public companies are regulated by the SEBI and so investing in the stocks of public companies is considered a relatively safe form of investment.

What is the catch?
Investments over a short time period can be risky since share prices are volatile and the investment value can go down.
It is important to pick the right stock to invest and this may require extensive research and analysis.

Technical vs Fundamental Analysis

Investors perform analysis in order to predict market trends in price movements. The 2 most common types of analysis used by investors are: Fundamental and Technical.

FUNDAMENTAL ANALYSIS: Also known as ‘qualitative analysis’, this method primarily focuses on the overall valuation of a company using ‘fundamental’ data. An analyst typically looks at the financial statements of a company to derive its intrinsic value. This intrinsic value is compared with the company’s stock price and the decision to buy or sell is made depending on whether the intrinsic value price is below or above the current market price.

Fundamental analysts use the following information for their analysis:

• Income Statement.
• Balance Sheet.
• Cash Flow Statement.

Fundamental analysis is typically used by long-term investors and it involves analyzing the financial statements of a company over multiple years.

Fundamental Analysis Research Report.

TECHNICAL ANALYSIS: This method is based on the underlying assumption – ‘history repeats itself’. A technical analyst looks for pre-defined patterns in the data to predict future market movement.

Technical analysts use the following information for their analysis:

• Price.
• Volume.
• Time.

Technical analysis can be performed on data for a very short timeline including a few minutes or hours. This method of analysis is used by traders who expect the price to move in a certain direction and make trading decisions accordingly.

Fundamental analysis is widely used amongst institutional investors and other long term investors. Technical analysis is used by day traders and other investors with a short investment time horizon.

Technical Analysis Research Report.

Indian Markets – A 30-minute primer.

Investment in the stock markets can seem risky to some non-investors; it could be intimidating to a few others and some others might question the value behind such an investment.

This article is an initial primer to investing in the Indian stock markets. It helps understand the various aspects involved in the investment process, however, subsequent articles will go into the specifics of each step.

1. PUBLIC COMPANY: A company that has been registered to sell tiny fractions of its ownership as ‘shares’ to the general public.

2. STOCK EXCHANGE: Also known as the equity exchange, this is the market in which ‘shares’ of a public company are bought and sold (traded) by investors.

eg. National Stock Exchange (NSE), Bombay Stock Exchange (BSE).

3. FINANCIAL INSTRUMENTS: An instrument is a device designed to enable a certain business. Musical instruments produce music and medical instruments record or track medical parameters. Likewise, financial instruments are ‘contracts’ that help in conducting some kind of financial business.

A ‘stock’ in a public company is a common example of a financial instrument.

4. SEBI: The Securities and Exchanges Body of India, SEBI, is the Indian government regulator that oversees the trading of stocks and stock related instruments in India.

5. BROKERAGE: A brokerage is a registered firm that mediates between a buyer and a seller of stocks. Brokerages work on a commission basis and there is the option of an online or an offline broker. Commission and other hidden costs should be taken into consideration while choosing a brokerage.

6. DIVIDENDS: A public company can decide to share its profits with its shareholders and thereby ‘declare a dividend’. Each individual investor will receive a payout in proportion to their individual share holding in the company.

6. TAXES: Profits and losses incurred in trading stocks carry a tax liability.

7. MARKET INDEX: In order to track the overall progress of a market or exchange, each exchange has an ‘index’ that is a composition of several stocks traded in the exchange. Statistical and other measures are used to pick stocks that go into the index and hence the performance of the index is generally considered a good measure of the overall performance of the market or exchange.

8. SENSEX: Sensitive Index or SENSEX is the BSE index and it consists of the 30 largest and most actively traded stocks listed in the BSE. The initial value was set to 100 in 1979 and it’s currently valued at 11,403.

Bulls vs Bears – An Overview.

Bull

A ‘Bull’ refers to an individual investor or trader who believes that the price movement is headed upwards. If the investor’s belief is with respect to a stock, the investor is referred to as being ‘bullish’ about the stock; however, if the belief is with respect to the overall market, then the investor is referred to as being ‘bullish’ about the market.

When a majority of the investors in a market are bullish about the market, the market is then referred to as a ‘bull market’.

A bull market often lures new bullish investors and creates a market rally that trends upward.

Bear

A ‘Bear’ refers to an individual investor or trader who believes that the price movement is headed downwards. If the investor’s belief is with respect to a stock, the investor is referred to as being ‘bearish’ about the stock; however, if the belief is with respect to the overall market, then the investor is referred to as being ‘bearish’ about the market.

When a majority of the investors in a market are bearish about the market, the market is then referred to as a ‘bear market’.

A bear market often creates new bearish investors and creates a market rally that trends downward.

Trader vs Investor – 5 Differences.

Investors view stocks as a form of ‘investment’. They typically look for investments that will yield a reasonable return over a period of time.

Investors are further classified as ‘value investors’ and ‘growth investors’. Value Investors look for ‘bargains’, or stocks that are under priced based on complex valuations. Growth investors on the other hand look for ‘high growth’ sectors and stocks that will typically yield higher than average returns.

Warren Buffet, named as the top money manager of the 20th century, is a noted value investor. In 2008 he was named the world’s richest man with a net worth of $58B.

A trader buys and sells securities with the sole purpose of making a profit. Traders look for opportunities in price fluctuations and make trade to cash in on these opportunities. They typically use technical analysis to identify trading opportunities.

Professional traders are often ‘money managers’ who make trades for clients. They use complex technical analysis tools to predict market movement.

The following is a list of major differences between investors and traders.

1. INVESTMENT GOALS: Investors buy shares with the of holding the shares – typically referred to as a ‘buy and hold’ strategy. They view shares as a form of investment, similar to any other investment eg. real estate investment.

Traders buy shares with the intention to sell as soon as they make a desired profit.

2. RISK PROFILE: Investors are more risk averse and traders are generally more willing to take risks.

3. INVESTMENT TIMELINE: Investors look at a long time frame for investments, while traders are typically looking at anything between a few seconds to a few weeks.

4. OWNERSHIP: Investors look at shares as ‘assets’ that they own, whereas traders do not have a sense of ownership towards share that they purchase.

5. TAXES: Tax liabilities vary widely between investors and traders, primarily due to differences in the holding time frames.