Beta

Beta is a numeric value that measures the fluctuations of a stock to changes in the overall stock market. A measure of a security's or portfolio's volatility. It also measures the responsiveness of a stock's price to changes in the overall stock market.

The degree to which different portfolios are affected by these systematic risks as compared to the effect on the market as a whole, is different and is measured by Beta. To put it differently, the systematic risks of various securities differ due to their relationships with the market. The Beta factor describes the movement in a stock's or a portfolio's returns in relation to that of the market returns. For all practical purposes, the market returns are measured by the returns on the index (Nifty, Mid-cap etc.), since the index is a good reflector of the market.

Beta is a measure of an investment's relative volatility. The higher the beta, the more sharply the value of the investment can be expected to fluctuate in relation to a market index. Beta is calculated by using regression analysis; one should think of beta as the tendency of a security's returns to respond to swings in the market.

A beta of 1 indicates that the price of a security or portfolio will move in tandem with the market, or further can be termed as neither more nor less volatile or risky than the wider market. A beta of more than 1 indicates greater volatility and a beta of less than 1 indicates less volatile than the market.

Beta is an important component of the Capital Asset Pricing Model, which attempts to use volatility and risk to estimate expected returns.

Risk is an important consideration in holding any portfolio. The risk in holding securities is generally associated with the possibility that realised returns will be less than the returns expected.

Risks can be classified as Systematic risks and Unsystematic risks.

• Unsystematic risks:
  These are risks that are unique to a firm or industry. Factors such as management capability, consumer preferences, labour, etc. contribute to unsystematic risks. Unsystematic risks are controllable by nature and can be considerably reduced by sufficiently diversifying one's portfolio. 
• Systematic risks:
  These are risks associated with the economic, political, sociological and other macro-level changes. They affect the entire market as a whole and cannot be controlled or eliminated merely by diversifying one's portfolio.

For example, if a stock's beta is 1.2, theoretically, it's 20% more volatile than the market. Many utilities stocks have a beta less than 1. Conversely, most high-flying tech stocks have a beta greater than 1, offering a chance for higher returns but with far greater risk.

On comparison of the benchmark index for e.g. NSE Nifty to a particular stock returns, a pattern develops that shows the stock's openness to the market risk. This helps the investor to decide whether he wants to go for the riskier stock that is highly correlated with the market (beta above 1), or with a less volatile one (beta below 1).

Boston Matrix of Stocks

BCG Matrix (Boston Consulting Group Matrix)

Within the world of product management and strategic planning, few strategies are as well recognized and appreciated as that of the Boston Matrix, which comes from the world-renowned Boston Consulting Group. 

A BCG matrix, also known as a Boston matrix or growth-share matrix, helps organizations figure out which areas of their business deserve more resources and investment. 

The “BCG matrix” or Portfolio Analysis is a portfolio planning model which had been created by Bruce Henderson for the Boston Consulting Group in 1968 to help corporations with analyzing their business units or product lines. 

The matrix framework categorizes products within a company's portfolio according to each product's growth rate, market share, and positive or negative cash flow. This helps the company allocate resources and is used as an analytical tool in marketing, product, strategic management, and portfolio analysis. By using positive cash flows, a company can capitalize on growth opportunities.

The matrix is recognized as the preeminent tool for classifying individual product lines within a company’s entire product portfolio, and for outlining the marketing strategies these companies must use to maximize their products’ returns.

"The payoff for leadership [in market share] is very high indeed, if it is achieved early and maintained until growth slows," Boston Consulting Group's Bruce Henderson told clients. "Investment in market share during the growth phase can be very attractive, if you have the cash. Growth in market is compounded by growth in share. Increases in share increase the profit margin...The return on investment is enormous." 

Often referred to as simply the BCG Matrix, its purpose isn’t merely to identify a company’s strongest product lines, but also to provide guidance as to 1) which product line the company should prioritize, 2) which product line the company should retain, 3) which product line it should kill, and finally, 4) which product line needs further definition and analysis. So, how does the BCG Matrix help define these four product classes? More importantly, how can your company use the BCG Matrix? 

A high-growth product is for example a new one that we are trying to get to some market. It takes some effort and resources to market it, to build distribution channels, and to build sales infrastructure, but it is a product that is expected to bring the gold in the future.

A low-growth product is for example an established product known by the market. Characteristics of this product do not change much, customers know what they are getting, and the price does not change much either. This product has only limited budget for marketing. There is the milking cow that brings in the constant flow of cash. An example of this product would be regular Colgate toothpaste.

But the question is, how do we exactly find out what phase our product is in, and how do we classify what we sell? Furthermore, we also ask, where does each of our products fit into our product mix ? Should we promote one product more than the other one? The BCG matrix can help with this.

The BCG matrix reaches further behind product mix. Knowing what we are selling helps managers to make decisions about what priorities to assign to not only products but also company departments and business units.

The growth-share matrix helps organizations assess its companies and business units on two levels. The first is its level of growth within the market, while the second measures its market share relative to the competition within its industry.

It is based on the observation that the company’s business and to further analyze its assets, the matrix divides the business units in four different categories on the basis of their Market growth Rate (MGR) & Relative Market Shares (RMS).

Stars

The business units or products that have the best market shares and generate the most cash are considered stars. However, because of their high growth rate, stars also consume large amounts cash. This generally results in the same amount of money coming in that is going out.

Stars are units with a high market share in a fast-growing industry. Stars can eventually become cash cows if they sustain their success until a time that the market growth rate declines.

The hope is that stars become the next cash cows. Sustaining the business unit's market leadership may require extra cash, but this is worthwhile if that's what it takes for the unit to remain a leader. When growth slows, stars become cash cows if they have been able to maintain their category leadership, or they move from brief stardom to dogdom.

Strategic options for stars include:

• Integration – forward, backward and horizontal
• Market penetration
• Market development
• Product development
• Joint ventures

As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, and then turn into stars. Eventually the market stops growing thus the business unit becomes a cash cow. At the end of the cycle the cash cow turns into a dog.

The overall goal of this ranking was to help corporate analysts decide which of their business units to fund, and how much; and which units to sell. Managers were supposed to gain perspective from this analysis that allowed them to plan with confidence to use money generated by the cash cows to fund the stars and, possibly, the question marks. As the BCG stated in 1970:

Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has:

• Stars whose high share and high growth assure the future;
• Cash cows that supply funds for that future growth; and
• Question marks to be converted into stars with the added funds.

Cash cows

Cash cows are the leader in the marketplace and generate more cash than they consume. As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate – so they generate more cash than they consume. These units should be ‘milked’ extracting the profits and investing as little as possible.

They generate the abundant cash required to turn question marks into market leaders. These are business units or products that have a high market share, but a low growth prospects. 

Cash cows are units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They consume minimum of company resources They are regarded as staid and boring, in a "mature" market, and every corporation would be thrilled to own as many as possible.

According to NetMBA, cash cows provide the cash required to turn question marks into market leaders, to cover the administrative costs of the company, to fund research and development, to service the corporate debt, and to pay dividends to shareholders.

It is desirable to maintain the strong position as long as possible and strategic options include:

• Product development
• Concentric diversification
• If the position weakens as a result of loss of market share or

Market contraction then options would include:

• Retrenchment (or even divestment)

Dogs

Business units or products that are dogs are those have both a low market share and a low growth rate and neither generates nor consumes a large amount of cash.

They don't earn a lot of cash, nor do they consume a lot. Most likely these aspects of a business are making little, if any money. Dogs are generally considered cash traps because businesses have money tied up in them, even though they are bringing back basically nothing in return. These business units are prime candidates for divestiture.

Dogs are more charitably called pets, are units with low market share in a mature, slow-growing industry. These units typically "break even", generating barely enough cash to maintain the business's market share. Though owning a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of view such a unit is worthless, not generating cash for the company. A company must avoid the business than can be categorized as dogs.

Strategic options would include:

• Retrenchment (if it is believed that it could be revitalised)
• Liquidation
• Divestment (if you can find someone to buy!

Question marks

Question mark, are characterised by rapid growth and thus consumes large amounts of cash, but because they have low market shares they do not generate much cash. The result is large net cash consumption but bringing little back in return They are also known as problem child or losing money.

A question mark has the potential to gain high market share and become a star, and eventually a cash cow when the market growth slows.

However, if the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines.

According to NetMBA, question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow their market share.

Strategic options for question marks include:

• Market penetration
• Market development
• Product development
• Which are all intensive strategies or divestment.

Arbitrage

Arbitrage is a trading strategy whereby a trader sells a security in one market and buys the same security in another market. Arbitrage is a term used to describe the purchase of a product which is then immediately sold to make a profit.

Arbitrage is popular in the stock market or as a means to make profit from goods being sold at differing prices in varying markets. A person who uses arbitrage is called an arbitrageur.

The person who conducts and takes advantage of arbitrage in stocks, commodities, interest rate bonds, derivative products, forex is know as an arbitrageur.

Arbitrage refers to the opportunity of taking advantage between the price difference between two different markets for that same stock or commodity.

Arbitrage is described as risk free because participants are not speculating on market movements. Instead, they bet on the mis-pricing of a share/asset that has happened between to related markets.

It is a highly technical field. Market’s mis-pricing is taken advantage by traders to make risk free gains.

Market arbitrageurs assume the risk that the price of a security in the offsetting market may rise unexpectedly and result in a loss. In theory, market arbitrage opportunities should only exist for a short time because security prices adjust according to forces of supply and demand.

Primarily, large institutional investors and hedge funds are the ones capable of profiting from market arbitrage opportunities. The spread between unequally priced securities is usually only a few cents, so very large amounts of capital are required in order to make substantial profits.

In simple terms one can understand by an example of a commodity selling in one market at price x and the same commodity selling in another market at price x + y. Now this y, is the difference between the two markets is the arbitrage available to the trader. The trade is carried simultaneously at both the markets so theoretically there is no risk. (This arbitrage should not be confused with the word arbitration, as arbitration is referred to solving of dispute between two or more parties. )

Arbitrage opportunities exists between different markets because there are different kind of players in the market, some might be speculators, others jobbers, some market-markets, and some might be arbitrageurs.

In India there are a good amount of Arbitrage opportunities between NCDEX, MCX in commodities.

In the Indian Stock Market, there are a good amount of Arbitrage opportunities between NSE, Cash and Future market and BSE, Cash and Future market.     

Arbitrage Examples

• Arbitrage exists in sports betting. When bookmakers offer various odds it opens the opportunity for betters to spread their cash out among different bookmakers in order take the best odds on each and cover any possible win or lose circumstance. This tactic often results in a small profit, but can be much more at times.

• Exchange-traded funds, traded in the stock market, are also a means for an arbitrageur to make a profit. Participants in exchange-traded funds exchange shares in underlying securities as well as in the fund. This is different than the sale of other mutual funds since it does not promote shares being bought or sold with the fund sponsor. Prices are set by demand; and, when a drastic premium of the assets occurs, the underlying securities can be bought, converted and then sold in the open market. Similarly, when a drastic discount exists, the securities will be sold.

• Supposing a stock on the NYSE is not in line with the stock's corresponding futures contract on OCX. The more inexpensive stock or contract can be purchased and then sold at a higher price on the other market.

• Hedge funds can also use arbitrage to make a profit. Instead of purchasing and selling the same asset, a hedge fund might purchase and sell different derivatives, assets and securities that have similar characteristics. This practice lets the hedge fund "hedge" any big price differences between the two assets. 

• The term arbitrage is also utilized by Google to describe those advertisers whose sites are filled with a lot of advertisements. They are banned from advertising on Google since the advertisers will make more money just from hosting the ads than Google would make from a user clicking only once. 

In summary, arbitrage basically means the exchanging of one thing for another to take advantage of price differences in two markets, hence earning a profit.

In most of the transactions of Arbitrage in stocks and commodities markets, the traders tries to square up the transaction by reversing both his trades and he pockets the difference in this way.

In any transaction, 100% risk can never be removed but the risk is highly reduced in an arbitrage transaction because generally at the end of the settlement, the spot and the future price have to converge and that is when an arbitrageur can quit his positions without any loss.

What is "Depression"

The Great Depression didn’t happen overnight, It was caused by a whole bunch of factors including deflation where money is not worth as much as it used to be, A decline in trade this is important because if no one is buying our goods then we cannot make money.

The Great Depression of 1929 to the late 1930s was the largest economic downturn in the history of the modern world. Although capitalism's boom and bust cycle has been producing a bust roughly every decade or so since the early 19th century, this was the worst.

The Great Depression was an economic collapse that began in the United States in 1929 and spread across the globe, lasting for much of the 1930s. During the Great Depression, millions of Americans lost almost everything they had: their jobs, as the economy contracted; their investments, as the stock market plunged; and their savings, as bank after bank failed.

The Great Depression was the most severe economic crisis in U.S. history. And even before it had ended, journalists, historians, and especially economists were trying to put together the pieces to figure out what exactly had caused it.

Today, more than three-quarters of a century after the Great Depression began, its causes are still the subject of much debate.

The term depression is usually defined now simply as an economic downturn that is longer lasting and more severe than the more frequently occurring recessions. Sometimes, in order to define the term more formally, a depression is said to begin when GDP declines more than 10% from the most recent economic peak. By this criterion, the last two real depressions in the United States occurred:

•  From 1929 to 1933—the Great Depression—where US GDP declined by nearly 33%   and unemployment rose to 25%. 
•  In 1937-38, where GDP declined by more than 18% and unemployment reached 19%.

By contrast, US GDP declined at most 5% in the severe recession of 1973-75.

In general, periods of economic depression are characterized by greatly reduced GDP, as well as severely high measures of unemployment, foreclosures, business closures, and greatly reduced wholesale and retail sales activity.

Define "Boom Market"

A boom refers to a rising financial market. Another term for boom would be a bull market. Period that follows recovery phase in a standard economic cycle. A boom is characterized by an economy working at full or near-full capacity, strong consumer demand, low rate of unemployment, and a rising stockmarket, usually accompanied by rapidly increasing consumer prices (inflation).

Although the stock market has the reputation of being a risky investment, it did not appear that way in the 1920s. With the mood of the country exuberant, the stock market seemed an infallible investment in the future.

During a stock market boom the majority of stocks rise in price and there is often a euphoric feeling about the market. A boom market does not necessarily refer to the stock market as a whole. As more people invested in the stock market, stock prices began to rise. This was first noticeable in 1925. Stock prices then bobbed up and down throughout 1925 and 1926, followed by a strong upward trend in 1927. The strong bull market (when prices are rising in the stock market) enticed even more people to invest. And by 1928, a stock market boom had begun.

The stock market boom changed the way investors viewed the stock market. No longer was the stock market for long-term investment. Rather, in 1928, the stock market had become a place where everyday people truly believed that they could become rich. Interest in the stock market reached a fevered pitch. Stocks had become the talk of every town. Discussions about stocks could be heard everywhere, from parties to barber shops. As newspapers reported stories of ordinary people - like chauffeurs, maids, and teachers - making millions off the stock market, the fervor to buy stocks grew exponentially.

Although an increasing number of people wanted to buy stocks, not everyone had the money to do so. 

Individual sectors of the market can have explosive boom periods of high, often unsustainable growth, such as the boom in the dot com sector during the late 1990s.

The opposite of a boom period is known as a bust, and many sectors of the market traditionally have boom and bust cycles. Substantial profits can be made during a boom cycle of the market, but, similarly, fortunes can be lost when the boom ends and the prices of stocks fall.