RISK TAKING

A Child while trying to walk fall down, A boy or girl while trying to learn Bi-cycle fall down in the Ground. Both incidents are common to all people. With fear stepping no attempts none can’t learn anything.

Similar to above, stock market risk can also be said as the same. A person after calculating the Entire risk, with the Depth of risk, by carefully attempting can overcome the risks favorable to them for a successful person.   

                                            

You have said simply. But day-by-day the sensex rising and lowering, about 100 and more points, creates fear. 

                                                                            

In Vegetable market while the price hike of Onion, we used to buy very small quantity , similarly after falling of prices we buy in large quantity required for us. See how intelligently we are facing the situation ? Similarly for stock investment also the following methods can be applied ! 

There are 3 types of risks. They are,

1.Interest rate risk

2.Company risk and

3.Market risk

For vegetable price hike :-  

1. Flood

2. Famine

3. Supply

4. Demand , the following reasons can be said, 

Likewise for stock prices hike :-

1. Supply

2. Demand

3. Money flow

4. Interest rate fluctuation

5. World Economic position

6. Government

7. Rules and Regulations etc

     and several other factors are also found. 

If you were an short term investor you can be feared of these factors. Day-by-day fluctuations of sensex are not based upon 

1. Economic growth

2. Companies accounts statements

Or some other Long term based criteria’s. So, Long term investors need not be worried of those short term risks. Investing in fair stocks for long term may reduce the risk considerably.

Your investment pattern if being below than 5 years can be choosed as R.D or Fixed Deposits. More than 5 years leaving your investment, can be invested in stock market. 

                     

While investing in stock market, stocks of Sensex or Nifty, the risk containing is low. In moderate ( based on market capitalization ) companies risk may be more, the gain also being more.

In small scale companies the risk will be large, gains also may be large. While starting the investment Large capitalization organizations can be chosen.   

                                              

Another important risk is the Broker. Persons who are interacting with you , must be honest and noble. Moreover the stocks bought by us are being kept safely, or without our permission stocks bought / sold must be investigated. 

                                     

How things happening in America affect our stock market ? Our Indian Economy globalizes with World Economy. Investors investing in one stock market, and changing to another, for various reasons is found casually happening incident now-a-days.

Since based on computerized Technology it is possible for anyone to transfer several billions, from India to any other country stock exchanges within few seconds. Due to the sudden changes ups and downs are happening in our stock market.

While compared to America, Japan ,Europe our stock market depth is low. Due to the changes our market may oscillate somewhat speedy.      

                                    

As already told, people able to leave their investment for more than 5 years can invest in Long term stocks of quality organizations. Some may think shortly either by 

1. Mortgaging or by  

2. Borrowing  Money  can be invested in stock market ? 

Since the stock market growth can’t be pre-defined, assured, anything may happen. Only it can be presumed. Supposing, after collecting money by Mortgaging or by Borrowing and investing in stock market, an untoward position may even partially or fully squander the invested amount. So these type of actions need not be attempted in any manner. 

                   

Some people may be possible with surplus amount such as Retirement P.F amount willing to invest. A Formula is prevailing for them can be applied as, 

                                  Investment = 100 ─  Present Age ( If your age is 51 ) 

                                                     = 100 ─ 51  

                                                     =  49.  

Only that percentage alone can be invested.

There are 3 types of Investors. They are,

1.Conservative             Unwilling to take high risks; happy with reasonable returns.

2.Aggressive                Willing to take calculated risks; wants high returns.

3.Speculative                Can take any risk; looks for extraordinary gains. 

People being in the above categories, depending upon their mentality and risk taking capacities their rewards may also be like this given below. They are,

Low risk takers             They should invest in Blue chips and aim at Long term gain ( 3                                                         years and above ) only. They should adopt a buy and Hold                                                                 Strategy.     

Medium risk takers       They should invest in growth stocks and aim at medium term                                                             gain ( 1 - 3 years ) They should adopt a reasonably aggressive                                         Strategy.     

High risk takers             They should invest in turnaround stocks and aim at short term                                                           gain only ( around 1 year ) Adopting a very bold Investment                                                               Strategy they should also go bargain Hunting.

           

Generally if there is no risk , no growth can be obtained.  

Firstly, there is liquidity risk. Because it is new shares in a company, you have no idea how the market see such shares. There might not be a lot of trading activity after the initial euphoria and you might have a difficult time to get rid of your cash in case you need. 

Then you have all the other risks like corporate fraud risk, litigation risks and so on. 
Risk vs Return
There are risks involved in any investment - risks that the return will be lower than expected and risks that some or all of the money invested (the capital) will not come back.
Investing is always subject to one fundamental principle - the higher the risk, the higher the return (and vice versa). Some forms of investment, like bank deposits, are widely recognised as low risk but they usually give lower returns. Generally speaking, shares are higher-risk than deposits, debt securities and property. But they also offer the prospect of much higher returns, especially over the longer term.
The risks in share investing are closely linked to all the uncertainties that exist around businesses and the profitability of companies, now and in the future. Some companies - especially those with established businesses and steady profits from year to year - involve far less risk than others (although returns tend to be lower as well).
The risks can be reduced by taking the view of investing for the long term, selecting shares carefully and spreading investment across different types of companies (the process of "diversification"). NZX's regulatory framework also helps reduce risks that could arise from a lack of information, poor conduct by companies or share trading irregularities, by providing rules which all market participants must adhere to.
While history shows that share prices will rise over time, there are no guarantees - especially when it comes to individual companies. Unlike debt securities, which promise a payout at the end of a specified period plus interest along the way, returns from shares come from dividends companies pay out of their profits, and capital appreciation of the shares through a rising share price. Neither of these can be guaranteed.
The worst-case scenario is that a company goes bankrupt and the value of your investment evaporates altogether. Happily, that's rare. More often, a company will run into short-term problems that depress the price of its shares for what can seem like an agonisingly long period of time.
In investing, risk is the chance you take that the returns on a particular investment may vary. Because of the increased uncertainty of returns, investors will, all other things being equal, require a higher return if they take on more risk.
For all the risk, however, there are ways to manage your exposure. The best is to diversify by owning a variety of shares and other investment products, such as debt securities. That way, no single company can endanger your savings. It's also important to remember that investors are well compensated for taking the risk with shares. Historically, the long-term return from shares is much higher than for debt securities, which are less risky. Over time, that spread can make a huge difference in the earning power of your savings.
So you'd like to make a fortune in the sharemarket? Who wouldn't? The first thing you need to understand, before you phone a broker or commit a cent to a portfolio, is that it's impossible to realise a return on any investment without facing a certain degree of risk.
No matter what you decide to do with your savings and investments, your money will always face some risk. You could stash your cash under your mattress or in a piggy bank, but then you'd face the risk of losing it all if your house burnt down. You could deposit your money in the bank, but the buying power of your savings would barely keep up with inflation over the years, leaving you with possibly less dollars in real terms than when you started. Investing in shares, debt securities, or mutual funds carries risk of varying degrees.
The second fact you need to face is that in order to receive an increased return from your investment portfolio, you need to accept an increased amount of risk. Keeping your money in a savings account reduces your risk, but it also reduces your potential reward.


While risk in your investment portfolio may be unavoidable, it is manageable. The riddle of controlling risk and return is that you need to maximise the returns and minimise the risk. When you do this, you ensure that you'll make enough return on your investment, with an acceptable amount of risk.
So, what constitutes acceptable risk? It's different for every person. A good rule of thumb followed by many investors is that you shouldn't wake up in the middle of the night worrying about your portfolio. If your investments are causing you too much anxiety, it's time to reconsider how you're investing, and sell those securities that are keeping you awake at night in favour of investments that are a little less painful. When you find your own comfort zone, you'll know your personal risk tolerance - the amount of risk you are willing to tolerate in order to achieve your financial goals. 

I was wondering, what are the risks besides never seeing the money you invested in a stock market? Is there any way you all of the sudden have to owe money? Lets say i gather a few friends and we pich in some money and invest that into a stock market, i will be the shareholder, we can gain money by havning the company making gains or we can loose, and never see the money again, but can we get into dept? 

Stock market is affected by various factors. Earlier political, economical and social factors controlled the market. Now even global factors and inflation etc do affect share market.

Common stocks in limited companies give you no way to be into debt. But the process of buying stocks, as in leveraged buying, can clearly leave you in debt. 
Short selling (ANOTHER FORM OF LEVERAGE) can also leave you in debt.

In some markets, income trusts, a form of stock, can leave you in debt, if the income trust pays out too much in distributions and the income trust then folds short of its debts.

If you become a company director, you can become liable for failure to exercise your fiduciary responsibility, but this is not a direct result of owning stock.If you simply buy shares of stock, there is no risk of owing money. Buying on margin means you borrow money from the broker to buy additional shares, so you then owe your broker money and must pay interest on it. You hope that the stock prices go up, but if they don't, your shares can be sold by the broker without your permission. And even if the stock price goes up, you have to pay the interest on the borrowed funds. All expenses take away your investment results, so don't incur unnecessary expenses.

So, stay away from buying on margin.

If you sell stocks short, and their price goes up, you can wind up needing to borrow money to buy the shares of stock you already sold. So, stay away from short selling.

However, if you and some friends get together and buy stock together, there is a big risk that somebody will be unhappy at some point in time. They may force you to sell the stock at a bad time, because they need the money. If you're the shareholder, you run the risk of being sued due to some misunderstanding.

This risk is hasn't been addressed by previous answerers, but given human nature, it's the most dangerous risk you are contemplating (beyond just losing money on the stock, of course).

I suggest that all of you buy your own shares of stock, though of course you can have some sort of club where you meet and research them together and so on. But let everybody have their own personal brokerage accounts, so they are responsible for their own money. There can be many risks like you can loose some amount of ur investment even you can go in debt but.........but...........
The flip-side of this is you can make a lot of money if you invest in the right company.

These risks can be avoided if you educate yourself and then enter into this market . First three months only watch how the markets go , how it reacts? be in touch with every days performance , read a lot about the market , try to learn its basics and last but not the least start investing in a systematic manner and keep an eye on ur stocks then dear I am pretty sure you will forget about such risks of stock market. To put it briefly; there are two main risks you would be faced with. Which are "systemic risk" and "unsystemic risk".

The first type kicks in as soon as you enter the stock market with the purchase of your first stock; as it pertains to factors affecting the whole market. And then you also take on the second risk which would pertain to the specific company shares you have purchased.There are situations in which you can go into such conditions. Most of the brokers allow you to trade on margins. With this you can trade fro 5-6 times higher than the actual amount in your bank account. When the trading completes and if u are under a deep loss, then u have to return back the money.
Although this can happen, Most of the online brokers already have safeguarded the traders - they do have an automatic square off system if the loss level crosses a threshold - say more that 5% in intraday

Short answer is no. As long as you do not buy on margins (where you do not pay the full amount), you can only lose the amount you put in. This is extremly rare as you would have enough notice to sell and recover some amount. 

There are several ways you can track the performance of your shares online and make decisions to buy or sell.Investing in shares are risky as it will depend on the various conditions below.

Companies Business, Market Conditions, Global Market Conditions, Terror, Politics, GDP, IIP nos., Inflation, Company management, Government policies, etc.The risk of common shares can be disaggregated into three components. Identify and briefly describe each of these three? 

If anyone can assist I will be much appreciative......It seem like I have searched everywhere and cannot even get a start. I am thinking though that they are asset, equity, and liability.         

DIVIDEND YIELD

Any Investment must produce cash flow (returns). If we are owning either a Land or House we may be able to get money in the form of Renting or through Lease. Similarly in Stock investing it is termed as (Gains from stocks) Dividend. If we are being a long term investor the only term obtained as cash flow is Dividend.

                  

For each stock there is a Base value called Face value. In our country based in the face value dividend is announced. For example 10 rupees face value stock named “ Indian Bank ” up to the year ending March – 2011, has given 25% and 40% dividend , adding to a total of 65% (Rs. 6.50 /- )

                  

This dividend percentage is based on face value and announced. But, with the present stock price (or) with the price you have purchased , the gains obtained would be correct. It is called Dividend Yield. Let us again take Indian Bank.   

                  

This stocks present price  when taken as Rs.234 /- the March – 2010, Dividend yield is 2.78 % (6.50/234). Indian Bank which offered the public issue in 2007, if purchased then , the dividend yield may be (6.50/91) is 7.14 %. Among the various factors , the very important factor to be seen is dividend yield, while purchasing.

Generally the dividend yield being more is better. Sometimes, due to some problems in Organization the stock prices may have slashed. During these times the dividend yield seems to be large. The investors must be cautious while purchasing those stocks.   

                                               

The Indian Economy and the Organizations being in a Growth Track , the dividend yield is generally found low. The reason is the companies reinvest their profits in their Business itself. Our Nifty Index dividend yield is 1.07 % only. Banking like some sectors dividend yield may be somewhat greater.             

Generally, Middle and Small Cap Organizations dividend yield may be larger, when compared with Large Cap Organizations. Low risk taking persons can invest in dividend yield largely found stocks. Generally Old Economic Companies (other than New Economic companies ) dividend yield will be present more.    

Highest Price / Lowest Price :- 

Generally while analyzing various factors for purchasing a stock, the highest price/ lowest price and 52 weeks high / low can also be seen. This may indicate whether the stock is in Bullish phase or Bearish phase.

Stocks while costing nearest to Highest price, avoiding to purchase stocks is better. At the same time, either the lowest prices or the stock being in Bearish phase, we can buy a smaller Quantity.  

                  

Like the Sathyam Computers ( Present Mahindra Sathyam ) any large untoward incidents may happen. During those moments we must be cautious.

While the Entire stock market , being dragged (or) some stocks being dragged , the stocks may be available in very cheapest prices. During these periods , the other factors if found advantageous , we can utilize those golden moments definitely.      

Share Holding :-

The Stocks you ought to buy, before purchasing we can look a glance of the stock holding persons whom are belonging as partners. Efficiently managed Mutual Fund schemes, Government allied and private sector largest Organizations, Insurance Companies, I.F.C.( International Finance Corporation ) similar concerns being as Shareholders can be considered as positive points. It can be taken as a Filter.

Those people may have not purchased without Analyzing those stocks. F.I.I’s           ( Foreign Institutional Investors) being the investors, in one angle is considered better. The stock prices may rise.

On another side, Disadvantage is if money required for them in their country at any moment they may withdraw the amount invested from Indian stock market, which results in rapid downfall of the stock prices.

So, we must be cautious in that point. While compared with Large Organizations it may not be a problem. But for Mid Cap and Small Cap , the Downfall to be relieved may take a Larger period.        

Total Debts :- 

Several Organizations, thrown to the corner the reason is excessive presence of Debts. Debts can be termed as two faced coins. If the moment (period) is good it may lift a company to a greater level.

If it is in a struggle ( opposite ) it may push the company to the utter bottom of the valley. Similarly in India and in Foreign countries several Organizations were pushed to the bottom of the valley.

Without debts functioning a company is very much better. In some times the Debts being low , the Management may speed up their activities. The performance may be speedy in the Organization. After all the income from stocks may be considerably High.

The stocks you ought to buy , before purchasing, listen to the Total Debts of the Company. With regard to the Share Investment, listen to the ratio of the Debts received. For each sector it may differ.

Banking Organizations cannot function without Debts. Likewise the Organizations in service sector need not require debts largely. The stock you ought to buy,compare with the sector based best stocks. Doing those Analysis we can get a clear picture of Clarification about investing.    

Dividend Yield :-

Question: What is Dividend Yield and How is Dividend Yield Calculated

Answer: Dividend yield is an easy way to compare the relative attractiveness of     various dividend-paying stocks. It tells an investor the yield he / she can expect by purchasing a stock. This allows a basis of comparison between other investments such as bonds, certificates of deposit, etc.

To calculate the dividend yield, divide the annual dividend by the current stock price.

An Example: If company XYZ was trading for $10 per share and paid a $1 dividend, how much will the stock yield each year for the investor? Using our formula (Annual Dividend ÷ Current Stock Price = Dividend Yield), we find the answer is 10%.

The Dividend Yield 

Many investors like to watch the dividend yield, which is calculated as the annual dividend income per share divided by the current share price. The dividend yield measures the amount of income received in proportion to the share price.

If a company has a low dividend yield compared to other companies in its sector, it can mean two things:

(1) the share price is high because the market reckons the company has impressive prospects and isn't overly worried about the company's dividend payments, or

(2) the company is in trouble and cannot afford to pay reasonable dividends. At the same time, however, a high dividend yield can signal a sick company with a depressed share price. 

Dividend yield is of little importance for growth companies because, as we discussed above, retained earnings will be reinvested in expansion opportunities, giving shareholders profits in the form of capital gains (think Microsoft). 

Our Indian Companies are giving dividend based to the Face value. On seeing this either a company giving more or less dividend cannot be decided. If a company giving more dividend can be known from its dividend yield. The amount given as dividend is the percentage of present stock price, called as Dividend yield. 

          Yield = ( Dividend / Stock price ) x 100 

                   =  ( 10 / 1000 ) x 100

                   =     1 %  

Also we could have heard of 50 %, 195 %, 500 %, dividend giving companies. We need not be confused with those percentage. Except mentioning as dividend yield, if simply said in percentage is only meant as percentage to the Face value.  

For Example :-

                   Present stock price               Face value          Dividend

                                 100                                  10                      50 %

                   Dividend = ( 10 / 100 x 50 ) 

                                   = Rs.5 /-         

Past years dividend value can be utilized for present year dividend calculation also. But previously given dividend can now also be obtained is not guaranteed. Moreover we cannot expect the same also.

During Economic Crisis some large companies also never offered Dividend. Once in a year dividend must be given is not mandatory. Also yearly once is, not restricted.

In practice, many organizations are providing dividends more than once in a year. Interim dividends are also given. Continuous years to be given is not essential. The total number of dividends given, must be calculated for dividend yield for a certain year.  

                            

In dividend yield, highly earning companies growth may be slow. Since being already grown sectors , the P.E ratio may be low. Pay-out returns will be more due to the offer of dividend for the past years. Dividend yield scale can be a Better Shield for a Defensive Investor.

Management not swallowing the promoters money and distributing to all the share holders is an identity of Highest yield. At the same time it is also felt as the companies Balance Sheet being thick.  

Let us see 2 Companies, 

                                           ABC                       DEF   

          Stock price               50                         100    

          Dividend                 2 rupees                2 rupees 

          Dividend Yield =  ( 2 / 50 x 100 )       ( 2 / 100 x 100 ) 

                                   =           4 %                      2 %    

From the above example which company can be selected ? It’s a confusion in all the minds. Considering all the features as the same for both the companies ABC can be selected. Isn’t it ! 

                          

An Organization with its business transactions creating gains can be handled in 2 ways, 

1. Excessive gain can be Re-invested and Expanded.

2. Dividend can be given. 

3. Another type is the profit amount can be utilized for buy back of own stocks.

So that the number of stocks can be reduced. Moreover the share holders rights can be increased. 

                   

If the profits are not distributed to the share holders, and again Re-Invested for companies growth then the investment needs rapid growth. Shortly saying if the growth seems to be dull, then simply giving the Dividend to the Investors would be beauty to the Administration.

                                                         

Market Capitalization more than a limit grown up companies, the growth while they were smaller cannot be expected continuously. It means that Re-Investment need not be required continuously. After some period the profits must be returned to the Investors in the form of Dividend. 

                                                         

The best fact in dividend is cheating can’t be done. Only 2 facts,

1. Dividend will be given (or)

2. Dividend will not be given.        

Year- by – year the increase in dividend can be seen visibly. But in gains not like that. In the accounts statements and the Balance sheets portraying untrue EPS, due to Fraudulent actions with the help of Government Law and Auditors, can’t be committed in Dividend. Increasing the value of Dividend gradually indicates the identification of continuous Economic success.

                                                                            

Growth Organizations probably provide higher dividend. In the name of dividend sharing with the share holders is considered as a secondary part other than strengthening themselves. These types of actions must be felt prudent for both Administration and the Investor. Fair growth stocks after monitoring some years later ,apart from the price, the dividend rate will be increased considerably.

                                                           

Again analyzing in a certain angle, the dividend certifies the Managements stability and Decision capacity can be said. Without sharing the investors and the Company itself holding, may lead to Lavish spendthrift in the form of salary hike ,special benefits by the Top Officials of the company.

Instead if maintaining a stable policy of, the percentage of gain, the percentage of dividend, it testifies the managements honesty and Discipline. If failing the above , leads to distress, and the stock prices can get down.

                                                                                               

A stock in very low P.E  ratio with 3 – 4 % dividend ratio yield, chances to grow more than beating Inflation, if found by a value investor. Holding these stocks for several years will definitely produce better results than growth stocks. Moreover the acquired dividend can again be re-invested ( Dividend re-investment ) and enjoy the activity. Stocks like these criteria need not be a rapid growing stock instead need not be a vanishing stock must be noted in mind. 

                                               

Like Philip Fischer, a successful growth investor, rejects the dividend as a secondary Why ? Because new concepts , Plans , Technology, incorporates new companies may require largest capital requirement. During that time we can’t expect dividend from them. If expecting, investors in Future , may loss huge percentage of Organizations growth which may reflect in stock prices.

                                                                                               

Capital appreciation alone expecting investors may not give more importance to dividend. From his 40 year investment strategy , if considering dividend alone as an important fact , he would have lost several Huge profit investments, at a silly reason must be bared in mind. 

According to the statement by the finance ministry, the Tax Exemption for dividend even if it is a huge value, may be a relief for small investors. This statement reveals that the largest stock holder persons like promoters, and Directors may take advantage of Dividend. Even for small investors and for overall stock investors this can also be a suitable news.  

                                                                      

Most commonly other than Large, moderate and small companies are yielding and offering fair dividend yield. Very rare large companies are found in this List , investors must carefully access and select for investment , buying intermittently during the stock prices being low.

On today’s position the following features can be considered for selecting the stocks:- 

1. Stocks traded in national Stock Exchange.

2. Market capitalization being more than 500 crores.

3. Being in the industry for many years.

4. Quality Organizations.

5. Good dividend record history based Organizations.

6. Minimum 4 % dividend yield organizations.

7. Expected dividend in the forthcoming years also.     

      

BOOK VALUE VALUATION

What is Book Value Valuation ?

The accounting net worth of a business – total assets minus total liabilities is called book value valuation. Assets are valued at their adjusted cost basis minus depreciation. The book value does not take into consideration certain unrecorded assets and liabilities such as the current value of goodwill, customer lists or lease obligations.

In Valuation method we have seen a customer ready to give money only for Machineries with all Accessories including Building and Land. His prediction is nearest Book Value. In Book Value, he tried to buy that Industry. But the Owner refused. Companies or Stocks Book Value exactly calculating and with that Company / stocks value discovering is called Book Value Valuation Method.

                  

Calculating all Business with Book Value is not suitable. For Example, you are owning a Departmental store. You have started that store , nearly 10 years back. Your stores present Machineries with Accessories value can be taken as Rs.10 Lakhs. Your stores Annual Net Profit can be taken as roughly Rs10 Lakhs. If you will be ready to sell that share in Book     Value ? Just think!

                  

So, we can conclude that each valuation method is suitable for some sort of Business only. For service oriented Industries book value method doesn’t suit. Capital Intensive told as Large Capitalization Business can be calculated with the book value valuation method. ( Shipping, Electricity Production, Banking, and Finance sectors )   

                            

Likewise several Old Economic Business can be valued through Book Value Method. Which stocks can be bought lesser than the Book Value? Which Company stocks can be bought?

                            

Absence of more growth sectors / stocks , more debts present companies, can be available in less than book value. In our country

1)      During Economic problems felt (or)

2)      In, Good companies ,problems raised (or)

3)      The, Good companies when not familiar to the World.  

                            

During those times the companies / company stocks can be available less than book value. Even in those times, better Track record present, Quality Organizational stocks can be bought , which may be better. 

                            

Even several times companies portray their purchased asset value in book. In those stocks the value may be hidden. While Analyzing those stocks and purchasing we can yield attractive gains.

                  

In the past 10 to15 years in our country Real estate sector has raised well. Several organization even today predicting their real estate in the purchased rate as in older years in the book. Recently in north India some textile sectors based stocks are found  suddenly rising due to their vacant places. Residential blocks and trading buildings were built and sold (or) rented by way of creating income to the company

                  

Using book value valuation method must be handled carefully. After creating “PEER GROUP”, P/BV (stock market price/ book value) founded and compared with, which stock is suitable for investment can be worked out. Separately using a stocks book value or using P/BV alone don’t invest. Because some companies available very lower than the Book Value may be in a Horrible situation. So, using “PEER GROUP” comparing with some other stocks / Business execute the Investment.

Tangible book value.

Book value minus intangible assets (goodwill, covenant not to compete, etc.). This method only records the assets that can be collateralized. It is most often used  by financial institutions.

Adjusted tangible book value. 

Adjusts the tangible assets up or down to their fair market value. It tells what the liquidation value of a business is most likely to be.  It is sometimes used in place

of book value for buy/sell agreements.

                              

MARKET PRICE VALUATION METHOD ;-

Advantages :-

In Economy (or) specified sector / companies while occurring problems the demand of those stocks / companies will be low. So, in those times, from its real value the prices will be available in very low cost. 

For Example :-

1)      S.K.F. Bearings a Multinational Company, Rs.125 /- reduced in Year 2008. Now its value           is Rs.  

2)      Likewise 2008- 09, VOLTAS stocks reduced to Rs.33/-.( During 2007-2008, a maximum          of Rs.250/- )Now it cost is Rs.    

                             

So, even Market value is most Transparent value method, we have to know how Effectively use for our own.  

Disadvantages :-  

In valuation we have seen a person comparing the market price for buying a Residential House. In the market, persons buying / selling being ready cost is the calculation used for this method. In this method the positives and also the negatives (like any other method) are also present. First we can see the Negatives,

                  

Market price is derived with various factors. Among those the important one is Demand and Supply. Market rising to the Top and Touching the Bottom line are casual incidences. But many amateur people within us , buy in the Top of the Sensex and with scolding in the Bottom of the market position is found common. 

                  

While Market being in the Top several stocks / companies value, deand being more, the values will be at the Top. Similar instances are not alone common for small investing but even for Giant Companies like TATA.

                  

In 2007, TATA Steel Company purchased, Britain’s “CHORES” for 12.2 Billion Dollars while market was at its Top. Similarly TATA MOTORS Company purchased Britain’s “JAHUAR” in 2008 for 2.3 Billion Dollars. After the stock market crash both companies stocks crashed largely. Rattan Tata in an interview said that the companies can be bought in considerable low prices. So, the market price is Either True must be investigated before Acquiring.   

  

Market Price Method

Estimates economic values for ecosystem products or services that are bought and sold in commercial markets.

1.    Overview

2.    Why Use the Market Price Method?

3.    Application of the Market Price Method

4.    Summary of the Market Price Method

5.    Applying the Market Price Method

6.    Advantages of the Market Price Method

7.    Issues and Limitations of the Market Price Method

Overview

The market price method estimates the economic value of ecosystem products or services that are bought and sold in commercial markets. The market price method can be used to value changes in either the quantity or quality of a good or service.  It uses standard economic techniques for measuring the economic benefits from marketed goods, based on the quantity people purchase at different prices, and the quantity supplied at different prices. 

The standard method for measuring the use value of resources traded in the marketplace is the estimation of consumer surplus and producer surplus using market price and quantity data. The total net economic benefit, or economic surplus, is the sum of consumer surplus and producer surplus.

This section continues with an example application of the market price method, followed by a more complete technical description of the method and its advantages and limitations.

Hypothetical Situation: 

Water pollution has caused the closure of a commercial fishing area, and agency staff want to evaluate the benefits of cleanup.

Why Use the Market Price Method? 

The market price method was selected in this case, because the primary resource affected is fish that are commercially harvested, and thus market data are available. 
 

Application of the Market Price Method: 
  
The objective is to measure total economic surplus for the increased fish harvest that would occur if the pollution is cleaned up.  This is the sum of consumer surplus plus producer surplus.  Remember that consumer surplus is measured by the maximum amount that people are willing to pay for a good, minus what they actually pay.  Similarly, producer surplus is measured by the difference between the total revenues earned from a good, and the total variable costs of producing it.  Thus, the researcher must estimate the difference between economic surplus before the closure and economic surplus after the closure. 

Step 1: 
The first step is to use market data to estimate the market demand function and consumer surplus for the fish before the closure.  To simplify the example, assume a linear demand function, where the initial market price is $5 per pound, and the maximum willingness to pay is $10 per pound.  The figure shows the area that the researcher wants to estimate ? the consumer surplus, or economic benefit to consumers, before the area was closed. 

At $5 per pound, consumers purchased 10,000 pounds of fish per year.  Thus, consumers spent a total of $50,000 on fish per year.  However, some consumers were willing to pay more than $5.00 per pound and thus received a net economic benefit from purchasing the fish.  This is shown by the shaded area on the graph, the consumer surplus.  This area is calculated as ($10-$5)*10,000/2 = $25,000.  This is the total consumer surplus received from the fish before the closure.

Step 2: 
The second step is to estimate the market demand function and consumer surplus for the fish after the closure.  After the closure, the market price of fish rose from $5 to $7 per pound, and the total quantity demanded decreased to 6,000 pounds per year.

Thus, the economic benefit has decreased, as shown in the figure.  The new consumer surplus is calculated as ($10-$7)*6,000/2 = $9,000.

Step 3: 
The third step is to estimate the loss in economic benefits to consumers, by subtracting benefits after the closure, $9,000, from benefits before the closure, $25,000.  Thus, the loss in benefits to consumers is $16,000.

Step 4: 
Because this is a marketed good, the researcher must also consider the losses to producers, in this case the commercial fishermen.  This is measured by the loss in producer surplus.  As with consumer surplus, the researcher must measure the producer surplus before and after the closure and calculate the difference.  Thus, the next step is to estimate the producer surplus before the closure. 

Producer surplus is measured by the difference between the total revenues earned from a good, and the total expense of producing it.  Before the closure, 10,000 pounds of fish were caught per year.  Fishermen were paid $1 per pound, so their total revenues were $10,000 per year.  The variable cost to harvest the fish was $.50 per pound, so total variable cost was $5,000 per year.  Thus, the producer surplus before the closure was $10,000 - $5,000 = $5,000.

Step 5: 
Next, the researcher would measure the producer surplus after the closure.  After the closure, 6,000 pounds were harvested per year.  If the wholesale price remained at $1, the total revenues after the closure would be $6,000 per year.  If the variable cost increased to $.60, because boats had to travel farther to fish, the total variable cost after the closure was $3,600.  Thus, the producer surplus after the closure is $6,000 - $3,600 = $2,400.

Step 6:  
The next step is to calculate the loss in producer surplus due to the closure.  This is equal to $5,000 - $2,400 = $2,600.  Note that this example is based on assumptions that greatly simplify the analysis, for the sake of clarity.  Certain factors might make the analysis more complicated.  For example, some fishermen might switch to another fishery after the closure, and thus losses would be lower.

Step 7: 
The final step is to calculate the total economic losses due to the closure—the sum of  
lost consumer surplus and lost producer surplus.  The total loss is $16,000 + $2,600 = $18,600.  Thus, the benefits of cleaning up pollution in order to reopen the area are equal to $18,600.

How Can the Results be Used? 

The results of the analysis can be used to compare the benefits of actions that would allow the area to be reopened, to the costs of such actions.  

Summary of the Market Price Method

The market price method estimates the economic value of ecosystem products or services that are bought and sold in markets. The market price method can be used to value changes in either the quantity or quality of a good or service.  It uses standard economic techniques for measuring the economic benefits from marketed goods, based on the quantity people purchase at different prices, and the quantity supplied at different prices. 

For those resources for which markets exist, economists determine individuals’ values by observing their preferences and willingness to pay for the goods and services at the prices offered in the market.  The standard method for measuring the use value of resources traded in the marketplace is the estimation of consumer surplus  and producer surplus  using market price and quantity data.  The total net economic benefit, or economic surplus, is the sum of consumer surplus and producer surplus. 

Applying the Market Price Method

The market price method uses prevailing prices for goods and services traded in markets, such as timber or fish sold commercially.  Market price represents the value of an additional unit of that good or service, assuming the good is sold through a perfectly competitive market (that is, a market where there is full information, identical products being sold and no taxes or subsidies).

Application of the market price method requires data to estimate consumer surplus and producer surplus.  To estimate consumer surplus, the demand function must be estimated.  This requires time series data on the quantity demanded at different prices, plus data on other factors that might affect demand, such as income or other demographic data.  To estimate producer surplus, data on variable costs of production and revenues received from the good are required. 

Advantages of the Market Price Method

• The market price method reflects an individual's willingness to pay for costs and benefits of goods that are bought and sold in markets, such as fish, timber, or fuel wood.  Thus, people’s values are likely to be well-defined.
• Price, quantity and cost data are relatively easy to obtain for established markets.
• The method uses observed data of actual consumer preferences.
• The method uses standard, accepted economic techniques.

Issues and Limitations of the Market Price Method

• Market data may only be available for a limited number of goods and services provided by an ecological resource and may not reflect the value of all productive uses of a resource.
• The true economic value of goods or services may not be fully reflected in market transactions, due to market imperfections and/or policy failures. 
• Seasonal variations and other effects on price must be considered.
• The method cannot be easily used to measure the value of larger scale changes that are likely to affect the supply of or demand for a good or service.
• Usually, the market price method does not deduct the market value of other resources used to bring ecosystem products to market, and thus may overstate benefits.