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  • Moving Average Convergence Divergence

    Moving Average Convergence Divergence

    Developed by Gerald Appeal in the late 1970s, Moving Average Convergence Divergence (MACD) is a popular momentum indicator or tool that is prevalently used in technical analysis. This tool helps understand the momentum and the directional strength by evaluating the difference between two time periods. 

    For those unfamiliar with this tool and who wish to make the most out of their trading and investments, this article covers MACD in detail. Let’s read further and find out more about this tool. 

    What is Moving Average Convergence Divergence?

    Moving Average Convergence Divergence (MACD) is a technical indication tool that is majorly used to discover moving averages that indicate a new trend, whether bearish or bullish. With the help of a MACD chart, you will get to see three numbers used for the settings.

    • The first one is the number of periods that helps calculate the faster-moving average.
    • The second number is that of periods used in the slower moving average.
    • The third one is the number of bars used to evaluate the moving average of the difference between slower and faster moving averages. 

    For instance, if there were 14, 26, and 9 as the MACD parameters, you will interpret it as:

    • The 14 signifies a moving average of the last 14 bars.
    • The 26 signifies a moving average of the last 26 bars.
    • The 9 signifies a moving average of the difference between the two moving averages as mentioned above.

    What is MACD in Stock Market?

    In the stock market, the MACD is used to interpret the positives and negatives. In the chart, whenever the 12-period EMA is above the 26-period EMA, the MACD offers a positive value. And, if the 12-period EMA is below the 26-period EMA, it offers a negative value. The more distant the MACD is below or above the baseline, it signifies the growing distance between the two EMAs. 

    Often, MACD is showcased with a histogram, which outlines the distance between the MACD and the signal line. In a situation when the MACD is above the signal line, the histogram will be above the baseline of the MACD. If the MACD goes below the signal line, the histogram will also go below the baseline.

    When to Use MACD?

    If you are waiting for the best time to use MACD, know there is no best time. The MACD offers insights on possible divergence in any given time frame on the chart. Also, the best time frame you can use with MACD depends on the instrument, trade type, and stock you wish to create and execute a strategy for. 

    Moving Average Convergence Divergence Formula (MACD Formula)

    The formula to calculate MACD is:

    MACD = 12-Period EMA – 26-Period EMA

    This indicator is calculated by subtracting the long-term EMA, 26 periods, from the short-term EMA, 12 periods. An Exponential Moving Average (EMA) is a kind of Moving Average (MA) that puts a greater weight and importance on the latest data points. 

    The EMA is also known as the exponentially weighted moving average. It reacts more suggestively to the latest price changes than a Simple Moving Average (SMA), which smears an equal weight to every observation in the period.

    How to Calculate MACD?

    The MACD showcases the changing relation of short-term exponential moving averages to long-term exponential moving averages. In a MACD chart, the short-term and long-term moving averages come close together (converge), move apart (diverge) and cross over each other. This equation is used to calculate the moving average convergence divergence. 

    Typically, analysts and traders use closing prices for 12-day and 26-day periods to create EMAs used to evaluate the MACD. After this, a 9-day moving average for the MACD line is plotted along the indicator that acts as a signalling line, helping to illuminate when a market might be turning. 

    MACD Example chart

     

    The image above specifies the MACD line, the signalling line and the MACD histogram. These represent the difference between the MACD and the 9-day moving average. The histogram turns positive when the MACD Oscillator line crosses and moves beyond the 9-day average, which is the signalling line. On the contrary, the histogram turns negative when the MACD goes below the signalling line.

    12-period and 26-period values are used settings to evaluate the MACD. Any change in the time period used for the calculation can be made to put up the specific trade goals of a trader or a specific trading style.

    MACD Trading Strategy

    Traders generally use MACD to discover changes in the severity or direction of a stock’s price trend. At first glance, the entire concept of MACD may turn out to be a complicated one as it depends on extra statistical concepts, such as EMA. 

    However, primarily, MACD assists traders in finding out when the latest momentum in the price of a stock might signal a change in the underlying trend. This, in turn, helps traders decide when to enter, exit or add to a position. 

    Using MACD with other Indicators

    Since it is a versatile trading tool that helps reveal price momentum, MACD is also helpful in determining the direction and price trends. Although the MACD indicator is strong enough to work as a standalone tool, its predictive functionality isn’t absolute. Thus, MACD can improve your advantage as a trader when used with other indicators.

    If you have to comprehend the trend strength and a stock’s direction, overlaying the moving average lines onto the MACD histogram will be extremely useful.  

    Conclusion

    Now that you have understood the meaning of moving average convergence divergence and know how to use it, you can move forward and calculate to comprehend how stocks are performing. This way, you bring momentum and trend into one indicator. As an investor, you can apply this trend to daily, weekly and monthly charts. 

  • Conservatism Principle of Accounting

    Conservatism Principle of Accounting

    In the event of ambiguity, the conservatism principle of accounting directs the accounting process. Acknowledging all costs and obligations is necessary. Not all revenues and profits should be reported; instead, they should only be accepted when there is a reasonable certainty that they will be received.

    The conservatism principle supports a careful approach to accounting, only recording data once they have been confirmed. 

    Here’s a detailed explanation of what is the principle of conservatism, how it functions, and the benefits and drawbacks of conservatism in financial accounting.

    What Is the Conservatism Principle of Accounting?

    The general idea of recording expenditures and liability as soon as reasonable when there is ambiguity is known as the conservatism or prudence principle in accounting.

    In simple terms, it implies that you should always report uncertain losses and expenses but not uncertain profits and stick to the side of caution. This principle suggests that you should adhere to the rule of caution in any transaction because it is nearly difficult for anyone to anticipate the future accurately.

    Example of Conservatism Principle of Accounting

    Consider that Curly Tales Pvt ltd. is involved in a legal battle over copyright. Curly tales expects a sizable settlement from its lawsuit against Silly Souls Pvt ltd. for copyright violations. Curly Tales does not disclose the gain on the accounting records because the settlement is not guaranteed. Why? 

    The Curly Tales might not genuinely see this gain as an outcome. It may lose, or it may not gain as much as anticipated. The gain is not recorded since a sizable winning settlement could misrepresent the financial statements and mislead the clients.

    Why is the Conservatism Principle of Accounting Important?

    The financial statements depend on future events due to the company’s nature. Businesses can record transactions (revenues & expenses) that have not yet been received or paid for by using accrual accounting methods. This allows accountants to exaggerate or understate income and gains to distort accounts.

    Through such manipulation, businesses might be able to offer shareholders both an unfair and advantageous picture. That’s why the accounting authorities established the conservatism principle to stop this conduct.

    Although the justification for conservatism is evident, we can delve deeper into the idea to make it more understandable. The argument that life is harsh may be made frequently. Though some could argue that this is especially true for the authorities who created the Generally Accepted Accounting Principles (GAAP), if we give it some serious thought, it becomes clear why this guideline was put in place.

    Usually, as people, we would find the idea of maximizing gains to be appealing. However, regardless of how promising or profitable a deal may seem, GAAP does not let us record such profits until they have been fully realized.

    How does the Conservatism Principle of Accounting Work?

    Many professionals employ a strategy known as accounting conservatism to lessen the probability of negative accounting information. The approach, often conservatism, plans for both little financial gains and overall losses.

    Businesses use this strategy to remove false perceptions of their financial soundness or integrity. Accountants can use accounting conservatism in a variety of internal accounting procedures. However, accounting conservatism loss recognition is subject to substantially more rigid rules than fiscal gain recognition.

    The Conservatism principle of accounting is also known as the principle of prudence, and greater prudence is the rule that follows prudence. Equal gains and losses are also anticipated by accounting conservatism.

    The two require substantial verification for accountants to distinguish between them. Moreover, the verification is based on corporate guidelines. Many acknowledge losses when there is a hint, but they only substantiate financial gains once they happen. 

    Simply put, Conservatism accounting delays identifying earnings while preparing for losses. Therefore, aggressive accounting’s opposite is conservatism accounting.

    When To Use Conservatism Principle of Accounting?

    When a business keeps track of its revenue, conservatism accounting is most often used. Revenues and expenses must be reported during the same accounting period to comply with reporting requirements.

    To be included in the financial statement, revenue and expenses must be realizable, according to the conservatism principle in accounting rules. It means that the income is not recognized and shouldn’t be reported if the transaction doesn’t conclude in a monetary exchange for a precise cash amount.

    Valuing inventory is another circumstance in which conservatism accounting may be used. The cautious approach would report the lower historical cost as a monetary value. While anticipating casualty losses or uncollectible account receivables, as well as any other time you expect winning gains but don’t yet know the precise amount, you would apply this approach.

    Merits of Conservatism Principle of Accounting

    As we know, financial transactions are handled asymmetrically. Accounting conservatism is likely to consistently report lower net income and future market gains. There are various benefits to the complete understatement of a company’s financials.

    1. It pushes managers to make decisions despite overconfidence or exaggerated uncertainty. 
    2. It indicates that the security margin against unsettled outputs is more significant.
    3. Accounting conservatism results in objective book values calculated using GAAP, making it more straightforward for investors to analyze performance across various markets and periods.

    Limitations of Conservatism Principle of Accounting

    Several drawbacks impact the principle of conservatism in accounting. 

    1. There are various ways to evaluate earnings’ uneven reaction to economic gains and losses. In this way, a company’s management may falsify accounting figures for their benefit.
    2. Conservatism accounting encourages revenue shifting. If a transaction does not satisfy the current period’s reporting requirements, it may be postponed to the following period.

    Why is the Conservatism Principle of Accounting also known as the “Concept of Prudence”?

    • A famous saying is, “Anticipate no profit, prepare for all losses.” Accountants must always take precautions and record the most excellent value for expenditures and liabilities while keeping the lowest values for assets and income. This idea states that profits or earnings should only be reported if they can be reasonably predicted to be realized.
    • All responsibilities, expenditures, and losses—certain or uncertain—must also be accounted for. Recording probable losses for all situations is also necessary. Therefore, it is acceptable to argue that conservatism helps a company to stay safe in the future.

    Conclusion

    The reduced price or market rule, which states that stock should be reported as lesser than its purchase price or the current market value, is primarily based on the conservatism principle.

    Following this procedure results in decreased tax collections and taxable income. However, it is essential to note that the principle of conservatism in accounting is merely guidance that an accountant must abide by to keep a clear image of a company’s financial situation.

    Reference

  • Modified Internal rate of return

    Modified Internal rate of return

    Introduction

    You must have come across the term MIRR. MIRR is an acronym for Modified internal rate of return and is a commonly used finance term in capital budgeting and valuation of loans. MIRR is a measure to rank a particular investment’s alternative options in capital budgeting. MIRR is a modification of the Internal rate of return (IRR), which solves the issues revolving around IRR.

    Before diving further into this topic, let us first understand what MIRR is:

    Definition of modified internal rate of return:

    Modified Internal rate of return (MIRR) is a revised version of the Internal rate of return (IRR). MIRR calculates a reinvestment rate and accounts for even or uneven cash flows. It assumes that the positive cash flows are reinvested at the firm’s cost of capital and the financing cost as the discount rate for the firm’s negative cash flows, whereas the traditional internal rate of return (IRR) assumes cash flow from a project is reinvested in IRR itself. The MIRR thus more accurately reflects the cost and profitability of a project

    The major difference between IRR and MIRR is that IRR assumes that cash flow is reinvested at the same rate at which they were generated, whereas, In MIRR positive cash flow is reinvested at the reinvestment rate.

    An investment should be considered/undertaken if the MIRR is higher than the expected return. If the MIRR is lower than the expected return, the project should be rejected. Between two projects the one with higher MIRR should be considered.

    How do you calculate MIRR?

    To calculate the MIRR formula of a project we need to know three things:

    1. a) Future value of a firm’s positive cash flow discounted at the reinvestment rate.
    2. b) Present value of a firm’s negative cash flows discounted at the cost of the firm.
    3. c) The number of periods

    Mathematically, the calculation of MIRR is expressed using the following formula:

    MIRR =   n(FVCF/PVCF) -1

    FVCF- Future value of positive cash flows discounted at the reinvestment rate

    PVCF- Present value of negative cash flows discounted at the financing rate

     n – the number of periods

    MIRR is tedious to be performed by manual calculation, calculating it in spreadsheets is fairly easy. In applications like MS excel, it can be calculated using the following function 

    =MIRR (cash flows, financing rate, reinvestment rate).

    MIRR Example:

    There are two mutually exclusive projects X and Y and we have to decide which one is more profitable than the other.

    Project X has a life of 3 years with a cost capital of 12% and financing cost of 14%

    Project Y has a life of 3 years with a cost of capital of 15% and financing cost of 18%

    The estimated cash flow is as follows:

    Year

    Project X

    Project Y

    0

    -1000

    -800

    1

    -2000

    -700

    2

    4000

    3000

    3

    5000

    1500

    Calculating the future value of positive cash flows discounted at the cost of capital.

    Project X: 4,000 x (1+12%) x1+5,000=9,480

    Project Y: 3,000x (1+15%) x1+1500=4,950

    Calculating the present value of negative cash flow discounted at the financing cost:

    Project X: -1,000+(-2,000)/ (1+14%) x1= -3,000

    Project Y: -800+(-700)/ (1+18%) x1 = -1,500

    Calculating the MIRR of each project

    Using the formula:

    MIRR  =   n(FVCF/PVCF) -1

    Project X:   MIRR = 3(9,480/3,000) -1 = 0.467 

    Project Y: MIRR = 3(4,950/1,500)    – 1= 0.488

    Therefore, Project Y should be undertaken as it has a higher rate of return

    Let us now talk about some of the advantages and disadvantages of MIRR:

    Advantages of MIRR:

    • MIRR can be used to assess projects with inconsistent cash flow
    • MIRR takes into consideration, the practically possible reinvestment rates 
    • MIRR can be used to calculate project sensitivity as it measures variation between the cost of capital and financing cost.

    Disadvantages OF MIRR:

    • MIRR demands computing an estimate of the cost of capital, which can be flawed as it is not subjective and can vary depending on the assumptions made.
    • MIRR does not quantify the various impacts of different investments in absolute terms, it may also fail to produce optimal results in case of capital rationing.

    How MIRR solves the multiple IRR problems

    MIRR improves on standard IRR by adjusting for differences in assumed reinvestment rates of initial cash outlays and subsequent cash inflows.In a project with different periods of positive and negative cash flows, the IRR produces more than one solution which creates ambiguity. MIRR solves this problem by providing only one solution.

    Conclusion:

    MIRR is excellent to assess projects with a mix of positive and negative cash flow. It can also be used to compare the different investment projects of unequal sizes. MIRR also solves the issues associated with IRR having multiple solutions for the same project. It helps an individual to make a definite investment decision.

    MIRR also provides flexibility, allowing the project managers to change the assumed rate of reinvested growth from stage to stage in a project. If there are a series of investments at different times having different interest rates, then MIRR can offer more accurate results compared to IRR.

    To sum it up, although MIRR has certain disadvantages like its complexity, and assumptions considering the cost of capital. But its clarity and its ability to produce a single solution make it an attractive option for measuring investments.

  • Ichimoku Cloud Definition and Uses

    Ichimoku Cloud Definition and Uses

    There can be two ways of evaluating a company’s stock while investing: technical analysis and fundamental analysis. 

    When discussing technical analysis, there are various methods to decide whether it is an excellent time to sell or buy a stock, especially in the case of intraday trading. 

    Today, we will talk about one of the most popular methods of technical analysis, Ichimoku Cloud. In this article, we will understand Ichimoku cloud, Ichimoku indicator, Ichimoku cloud indicator, Ichimoku trading strategies, Ichimoku trading, and Ichimoku cloud trading strategy. 

    What Is the Ichimoku Cloud?

    The Ichimoku Cloud is also known as Ichimoku Kinko Hyo. It is an adaptable indicator that defines support and resistance, identifies trend direction, gauges momentum and provides trading signals while conducting technical stock analysis. 

    Ichimoku Kinko Hyo, which means “one look equilibrium chart,” is a Japanese term. Journalist Goichi Hosoda created the indication, which was then made available in his book in 1969. Chartists can see the trend at a glance and search inside it for potential signs.

    The Ichimoku Cloud is a relatively simple indicator; the concepts are clear, and the signals are well-defined, even though it may appear complicated when examined on the price chart.

    In comparison to the traditional candlestick chart, it offers more data points. While it may appear complicated at first, individuals who know how to interpret charts frequently find it simple to comprehend with clear trading signals.

    A crucial component of the indication is the cloud. The trend is downward when the price is below the cloud. The trend is upward when the price is higher than the cloud.

    If the cloud moves in the same direction as the price, the aforementioned trend signals are strengthened. For instance, the cloud’s top moves upward during an uptrend and its bottom move downward during a decline.

    The Formulas for the Ichimoku Cloud

    There are five plots that make up the Ichimoku Cloud indicator. Their names and calculations are:

    1. TenkanSen (Conversion Line): (High + Low) / 2 default period = 9
    2. KijunSen (Base Line): (High + Low) / 2 default period = 26 
    3. Chiku Span (Lagging Span): Price Close shifted back 26 bars 
    4. Senkou A (Leading Span A): (TenkanSen + KijunSen) / 2 (Senkou A is shifted forward 26 bars) 
    5. Senkou B (Leading Span B): 

    (High + Low) / 2 using period = 52 (Senkou B is shifted forward 26 bars)

    How to calculate?

    The highest and lowest prices recorded throughout the period—in the case of the conversion line, the highest and lowest prices recorded over the previous nine days—are the highs and lows. If you wish to compute it manually, you can add the Ichimoku Cloud indication to your chart.

    Here are the following steps that you need to follow:

    • Calculate the Conversion Line and the Base Line

    A positive signal is generated during an uptrend when the Conversion Line crosses above the Base Line. Similarly, a negative signal is given when the Conversion Line crosses below the Base Line during a downturn.

    • Calculate Leading Span A based on the prior calculations

    Span A is a 26-period ahead-plotted leading indicator.

    It is determined by taking the average of the tenken and kijun values over the previous 26 periods. Since it takes a short time to calculate, this indicator mainly slants with the prices rather than remaining flat.

    • Calculate Leading Span B

    This indicator is calculated by averaging together the last 26 periods.

    Since it takes a while to calculate, it is usually flat; therefore, it can be used as a line of support when prices are above it and a line of resistance when prices are below it.

    • Plot the closing price 26 periods in the past on the chart to get the lagging span. The cloud is drawn by colouring in the difference between Leading Spans A and B.
    • Color the cloud green if Leading Span A is higher than Leading Span B. Color the cloud red if Leading Span A is lower than Leading Span B.

    This is how you can calculate Ichimoku Cloud to make a technical analysis of a stock.

    What does it indicate?

    Now that we know everything about Ichimoku cloud trading strategies, let’s understand what Ichimoku cloud indicates. 

    How should you assess the trend’s persistence and corrective actions?

    1. Price crossing the cloud signifies an upward trend.
    2. A downtrend is indicated when the price drops below the cloud.
    3. A sideways trend is indicated by price moving within the cloud.
    4. A cloud shifting from green to red indicates a correction during an uptrend.
    5. A cloud turning from red to green indicates a correction during a downtrend.

    How to assess support and resistance levels through Ichimoku trading?

    1. The first support line for an uptrend is provided by Leading span A.
    2. A second support line for an uptrend is provided by leading span B.
    3. A downtrend’s first resistance line is provided by Leading span A.
    4. For a downtrend, Leading span B acts as a second resistance line.

    How to recognize buy/sell signals 

    1. When the conversion line crosses Base line up from below, it is a signal to buy
    2. When the conversion line crosses Base line down from above, it is a signal to sell

    Limitations 

    There are always two faces of one coin, advantages and disadvantages. While pursuing Ichimoku Cloud trading strategies, you need to remember a few limitations it has while trading. 

    There are three main limitations that you need to keep in your mind;

    1. The Ichimoku Cloud’s reliance on historical data is one of its drawbacks. It’s possible that historical patterns won’t repeat themselves as traders might anticipate.
    2. The Ichimoku Cloud may generate erroneous indications like any other technical indicator. 
    3. Also, the indicator might not consider patterns that extend over a long period of time.



  • All you need to know about Capital Asset Pricing Model (CAPM)

    All you need to know about Capital Asset Pricing Model (CAPM)

    The core goal of investing money is to generate value, whether in stocks or other financial assets such as bonds. In investing, two things are imperative: i) return on investment and ii) risk involved. One can not exist without the other; if you invest in the equity market, you are prone to market fluctuations daily, which creates a question on how much return you should get on the risk undertaken? You can find this answer using the Capital Asset Pricing Model or CAPM. 

    What is CAPM?

    Capital Asset Pricing Model is the calculation to determine how much return can be expected given a certain percentage of risk. In corporate finance, the CAPM formula holds significance as it helps find the cost of equity investment which is necessary for calculating the Weighted Average Cost of Capital (WACC). WACC helps in finding the real risk-return trade-off for a diversified portfolio. 

    The model was invented by the prominent economist and Nobel laureate William Sharpe in the early 1960s, which he later published in his book named Portfolio Theory and Capital Markets in 1970. He is also the inventor of the famous ‘Sharpe Ratio’. Each portfolio has a different cost of capital and degree of risk. As a result, one size doesn’t fit all and demands an efficient pricing model to gauge how much risk should be taken to gain a certain return and if it’s even worth it at all! CAPM model is the solution here. 

    The CAPM model considers the systematic risk of investment. If you wonder what systematic risk is, recall the market volatility when interest rate changes occur? In simple words, anything that affects the stock market becomes a systematic risk. With the inclusion of this market risk, the cost of equity returns becomes much more realistic. 

    These terms may sound complicated, but with some basic understanding, you can ace the calculation of the CAPM model.

    How to calculate CAPM?

    The CAPM formula is essential to ensure that the return on equity is at least equal to the cost involved. If it is less, the investment is a red flag and vice versa. 

    CAPM formula:

    Ra = (Rrf) + [βa * (Rm- Rrf) ]

    Whereas, 

    • Ra = Expected return on equity asset
    • Rrf = Risk-free rate of investment. Typically, the risk-free rate is equal to the 10-year US government bond. Though, the appropriate way is to consider country-specific bond rates.
    • Ba = Beta (volatility) of the equity investment or stock. It shows the correlation of investment with the market fluctuations. For example, if a stock increases by 10% in reaction to market volatility, the Beta is said to be 1.1. The higher the Beta, the more the sensitivity to the market. If the Beta equals 1, the stock will behave the same as the market volatility; 1% move for 1% volatility. Beta can also be negative, which means that the stock value would reduce with regard to the market. 
    • Rm – Rrf = Expected return of the market – Risk-free rate (Known as Risk Premium)

    Deduction of the risk-free rate of investment from the expected market return is also known as the market premium. The conscience here is that investors always prefer higher returns than the risk taken; they want a premium beyond the risk-free rate. The risk premium, in simple words, is investors’ compensation for undertaking the risk. We can also write the CAPM formula as:

    Expected return on equity = Risk-free rate (Beta of investment – Market premium) 

    Let’s understand the CAPM model better with the example. 

    CAPM example:

    The XYZ stock trades around Rs. 500 per share, and you expect to get a 5% return on this stock. It has a beta of 1.3, the market is likely to increase at the rate of 8%, and the risk-free rate is 3.5%. What is the cost of equity in this case or the return that can compensate you for the risk taken?

    Ra = (Rrf) + [ βa * (Rm- Rrf) ]

    Ra = 5 + [1.3 * (8 – 3.5)] 

    The return on your equity investment will be 10.85%. 

    Advantages of using CAPM 

    Below are the advantages of using CAPM. 

    • The CAPM model considers the market risk, the systematic risk for investment, making the calculation realistic. 
    • It helps calculate the cost of equity and, in turn, find the total cost of capital, aka WACC. 
    • Compared to other models for calculating equity cost, such as the Dividend Growth Model (DGM), the application of CAPM is easier and has greater scalability. 

    Shortfalls of CAPM model

    Below are the disadvantages of using CAPM.

    • CAPM is based on assumptions that there is perfect competition in the market and the market is highly efficient, which is not the case typically. There is always an opportunity to benefit from arbitrage trades. 
    • Another assumption on which CAPM is based suggests that the investors are rational and averse to the risk. That is also a highly unrealistic expectation since investors often trade with emotions and are not rational. 
    • The CAPM model doesn’t account for taxes an investor has to pay, which can sometimes reduce their returns. For example, In India, an investor has to pay a 10% long term capital gains tax on long term investment gains. This is not a part of calculating the cost of equity. 
    • Apart from this, the other drawbacks include challenges to calculate Beta and potential frequent changes in the risk-free rate. 

    The bottom line

    Since its inception, the CAPM model has been used widely in the banking and finance industries. It helps in identifying assets worth investing in. It also played a vital role in bagging its inventor William Sharpe his joint Nobel prize. Yes, there are some assumptions used by this theory that has been a topic of debate for ages, but still, its application, without a doubt, holds significance. 

  • International trade theories – Overview, Reason & advantage

    International trade theories – Overview, Reason & advantage

    International trading is nothing but trading between two different countries. It is one of the most important factors in raising the standard of living, creating employment and providing consumers with various goods and services that are not easily accessible in their home countries.

    International trade has been there for generations, but in the past few decades, international trade has become increasingly important in increasing the GDP of a nation. A large part of our country’s GDP depends on its imports and exports. Let us now understand what international trade theory is.

    What’s the International Trade Theory

    The proposition of international trade simply explains how international trade works in different ways. Trading is the exchange of goods or services between two or more parties. The purpose of trading is for people to profit from the business. The goods or services may be demanded or wanted by them. International trade is the cross-border exchange of goods and services. Over time, several regulations have been developed to cover domestic dealers and the trade itself. The international trade proposition is dominated by how countries use their resources efficiently.

    Export and Import 

    Products vended on the global request are called exports, and products bought on the global request are called imports. The imports and exports are recorded in the current account section of the country’s balance of payments.

    Global trade allows developed countries to use their resources like labour, technology, and capital more efficiently. Different countries are endowed with different means and natural resources, similar as land, labour, capital, and technology.

    The efficient use of resources allows countries to produce some goods more efficiently and at a lower cost. However, if a country cannot produce an item efficiently, it can be obtained through trade with other countries. This is known as international trade specialization. 

    How International Trade Works?

    International trade is carried out along incredibly intricate supply chains that connect the countries which supply the raw materials, the manufacturing countries that make and process those materials, and the consumer countries that use the finished goods. 

    An import is a product that is purchased from the global market, whereas an export is a product that is sold to the global market. The network of supply routes, suppliers, processors, and consumers behaves like a living thing when trade is allowed to flourish. The chain will be affected when any one link changes, such as when an iron ore miner declares bankruptcy or when the price of the metal suddenly rises. 

    Numerous stimuli have the potential to cause change. The most frequent ones include shifting consumer demand for products, technological advancements, and new methods of transporting goods around the world.

    Why do we need international trade laws?

    In cross-border transactions, two or more entities trade internationally with each other beyond the territorial limits of a country or transact in a domestic trade where one or more of the parties is located outside the country of the transaction. Here are some of the reasons why countries need international trade laws:

    • For financing cross-border transactions

    A cross-border financial arrangement is one that crosses national boundaries. The terms of this agreement include loans, letters of credit, banker’s acceptances, bank guarantees, depository receipts, etc. that require international trade laws.

    • Buying or selling products or services

    It involves buying and selling goods and services. We need international trade laws for production and sales that take place outside the jurisdictional borders of a country.

    • Combined research/shared services etc.

    Increasingly, businesses are utilizing shared services. To accomplish this, joint research programs are being established as an industry cartel or chamber of commerce. As these shared service centers provide services across borders, they are concerned with international trade if they are located in different parts of the world.

    Why is it important? 

    International trade theory explains and promotes international trade. A wrong or unwise view of international trade can seriously affect a country’s long-term financial stability.

    For example, various international trade theories compete over the idea that: Can countries ban products from other countries – through slavery or child labour? A trading theory focusing solely on financial ratios and statistics favours such businesses. Another trade theory would argue that the long-term effects of child labour would cause more harm to both countries involved in the trade. A third trade theory argues that trade based on slavery and child labour is inherently neither good nor bad for traders. Rather, it depends. 

    International trade theory is a very controversial and powerful theory, so it is important to study it well. Policymakers should be familiar with all possible theories and apply the most appropriate ones to their country’s specific circumstances.  

    Benefits of International trade

    Let us now understand some of the benefits of international trade laws:

    • It creates job opportunities 

    International trade has the primary benefit of creating a wide range of job opportunities. Through international trade, new industries are developed to meet product demands in different countries, resulting in more jobs. Countries will certainly be able to reduce unemployment rates under this condition. Therefore, it will be easier for someone who does not have a job to find one.

    • Leads to the prosperity of a country

    Each country’s income is also increased by international trade. In other words, the goods they need can be sold and obtained by countries that have advantages and disadvantages of an item. It is through international trade activities that needs will be met, and income will be increased. As a result, a country’s income will increase due to its prosperity.

    • The needs of life are easier to fulfill

    International trade will also aid countries in meeting their needs if those needs are not produced in their home country. Having a wealth of natural resources is a necessity for every country. First, we must consider the geographical conditions, the climate, the level of skill and knowledge in science and technology, and so on. In the future, countries can produce their own products.

    • Expanding markets and increasing income

    In addition to expanding the market for the company, international trade has other benefits. As a result, overproduction and falling sales prices are avoided by producing optimally. Exporting excess products abroad is possible thanks to international trade, which allows entrepreneurs to run their production machines to the maximum. As a result, income will rise due to high productivity.

    • Make good relations between countries

    The establishment of positive relations between countries is another benefit of international trade. There is no doubt that positive relations will be established between the participating countries. After that, the country can engage in other forms of cooperation as well.

    Wrap Up

    Globalization has increased the interdependence of the world economy, and international trade is an important part of most economies. It provides consumers with a variety of choices and increases competition, forcing companies to produce cost-effective, high-quality goods that benefit these consumers.

  • How Do I Perform a Financial Analysis Using Excel

    How Do I Perform a Financial Analysis Using Excel

    Whether you are an investor or a financial analyst, possessing extensive working knowledge of Excel and mastering foundational Excel functions can be invaluable. While it may seem nearly impossible to master every Excel feature, you must have a minimum knowledge of performing financial analysis using excel. If that is what you are looking for, you have come to the right place. Let us find out more about it here.

    Importance of Excel for Finance Professionals

    Excel is the choicest tool in the finance domain for financial analysis and insights, compiling non-numerical data and crunching numbers. Below mentioned are some points that highlight the importance of Excel for finance professionals:

    • Allows Substantial Analysis

    Excel provides users aptitude to tackle intense qualitative analysis, which is a massive part of why this tool is invaluable in finance and accounting. You can input and interpret vast chunks of data and discern the direction of statistics and numbers as you continue manipulating them. 

    • Will Move You Up the Ladder in the Corporate World

    Excel is the fundamental tool for most accounting companies, used to predict and facilitate a company’s growth. It also helps in decision-making and determining the system’s requirements and the changes that should be implemented. 

    Excel for Investors

    You can effortlessly keep a tab on your investment holdings with an Excel spreadsheet. The first step here is to decide the data that you would like to include, such as:

    • Entry
    • Date
    • Size (the number of shares)
    • The closing price for a specific date
    • Difference between the entry and the closing price
    • Percentage return
    • Standard deviation
    • Profit and loss for every periodic closing price

    In Excel, you can use a different sheet for every stock in your portfolio. 

    Top 10 Excel Functions for Finance

    Here are the top ten important Excel functions for finance that everybody should know:

    • XNPV

    XNPV Formula = XNPV (discount_rate, cash_flows, dates)

    If your valuation analysis’s objective is to determine a company’s worth, you will have to figure out the Net Present Value (NPV) of a series of cash flows. XNPV considers specific dates for cash flows. Thus, it is more precise and useful.

    excel for finance xnpv function

    • XIRR

    XIRR Formula: XIRR (cash flows, dates)

    This one is closely linked with XNPV but helps comprehend the Internal Rate of Return (IRR) for a series of cash flows provided on specific dates. 

    XIRR is a top Excel function in Finance
    • MIRR

    MIRR Formula: MIRR (cash flows, cost of borrowing, reinvestment rate)

    This is another version of IRR and is highly crucial for finance professionals. Here, the M denotes Modified, and this formula is used in case the cash from one investment is being invested in another investment. 

    mirr Excel function
    • PMT

    PMT Formula: PMT (rate, number of periods, present value)

    This is a common Excel function. With the help of an interest rate, a number of periods (months, years, etc.) and the present value of the loan, you can comprehend the regular payments. This formula comes up with a total payment, including principal and interest.

    pmt excel for finance
    • IPMT

    IPMT Formula: IPMT (rate, current period #, total # of periods, present value)

    IPMT helps calculate the interest portion of fixed debt payments. This function works well along with the PMT function. By separating the interest payments in every period, you can come up with the principal amount in every period by considering the difference between IPMT and PMT. 

    ipmt function in Excel
    • EFFECT

    Formula EFFECT: EFFECT (interest rate, # of periods per year)

    This function helps you conclude the effective annual interest rate for non-annual compounding. This is a crucial function for you if you are involved with borrowing or lending. 
    • DB

    DB Formula: DB (cost, salvage value, life/# of periods, current period)

    This formula can be used in Excel to determine your depreciation expense for each period

    DB function in Excel for finance professionals

    • RATE

    RATE Formula: 

    RATE (# of periods, coupon payment per period, price of a bond, the face value of a bond, type)

    The RATE function is generally used to evaluate the Yield to Maturity for a specific security. This function is useful for finding out the average annual rate of return earned from the purchase of a specific bond.

    yield to maturity function in excel
    • FV

    FV Formula: FV (rate, # of periods, payments, starting value, type)

    If you wish to know the amount of money you will have in the future, this function is useful, given that you have a starting balance, a compounding interest rate and regular payments.

    future value formula
    • SLOPE

    SLOPE Formula: SLOPE (dependent variable, independent variable)

    This function lets you calculate Beta, given that you have weekly returns for a specific stock and the index to which you want to compare it. 

    How to Make Investment Decisions Using Excel?

    With Excel, you can make investment decisions by:

    • Calculating the Average Return and Standard Deviation for Stocks

    Let’s assume you wish to calculate the monthly returns for Amazon stocks. For this, you can use the following formula:

    Monthly return = Ending Price – Beginning Price / Beginning Price

    An Excel screenshot the ending price and monthly return of Amazon’s stock price for 13 months. The average monthly return is 0.0330. The standard deviation is 0.0933
    • Calculating the Average Return and Standard Deviation for Portfolios

    Suppose your portfolio contains four different stocks: Amazon, CVS, Apple and Netflix. You can create an equally weighted portfolio, with each stock having 25% of the weight. You will use the following formula to do the calculation:

    Return = 0.25 x RAmazon + 0.25 x RCVS + 0.25 x RAaple + 0.25 x RNetflix

    The Excel screenshot shows the Average Return and Standard Deviation for a Portfolio containing four-stocks: Amazon, CVS, Apple, and Netflix. The monthly average return and standard deviation is calculated for the individual stocks, as well as the entire portfolio. It shows that the portfolio has a Monthly Average Return of 0.0269 and a Standard Deviation of 0.0710.
    • Calculating the Stock’s Beta

    To calculate the Beta of a stock, you will need a monthly return for the market and the monthly return for that stock. This can be done by using a scatter plot to create a graph. For this:

    • Open Excel
    • Visit Insert tab
    • From the Chart menu, select the scatter plot option

      An Excel screenshot shows how to create a scatterplot using excel. The data for the monthly return for two stocks, SPY and AMZN are placed in columns B and C, respectively. These columns are selected. On the insert tab, the scatterplot icon is selected, revealing the different types of scatterplots available for this data.

    By doing so, a chart will get inserted that will look like this:

    A screenshot of scatter plot created in excel. The scatterplot is over the data that was entered into the Excel sheet.

    How Can Excel Template Help in Financial Analysis?

    The pre-made Excel templates save time and allow you to understand the financial performance in crucial areas. All you would have to do is choose a template, enter data, and it will automatically bring the results. 

    Conclusion

    Understanding Excel’s basic functionalities can help you generate quicker results and upgrade your professional skills. So, being a financial analyst, get started with all the functions mentioned above and start creating results seamlessly. 

  • What Is Present Value (PV)?

    What Is Present Value (PV)?

    Present Value (PV) is the amount of money you expect to get from your future potential income today. It is obtained by adding up the expected returns on future investments and discounting them at a certain expected rate of return. In other words, it’s how much a series of payments is worth right now instead of at some time in the future when the payments are actually due.

    So, what’s the importance of present value? Let’s say you got Rs. 10,000 today. It is more valuable than the Rs 10,000 collected after four years. The reason for this is because you have a chance to earn interest on the amount. It might be 4–6% or even higher, depending on where you invest the money. You will not receive the rate of return if you receive Rs 10,000 after four years.

    If you get money today, you can buy things or use services at the current rate. Things become expensive due to inflation, which is the increased cost of products and services. In layman’s words, inflation reduces the value of money for purchases. Money loses value if you don’t invest it because of inflation.

    The concept of Present Value is applied to financial modelling, stock valuation, bond pricing, and the evaluation of various investment options. To determine whether an investment is worthwhile making today, the investor estimates a present value from the investment’s projected cash flow. A discount rate, which is the projected rate of return determined inversely with future cash flow, is applied to the expected cash flow of the future. 

    Due to inflation, the prices of goods and services go up over time, which makes money worth less because what it is worth today might not be worth the same tomorrow. PV calculations make sure that the expected rate of return or the inflation rate is used to figure out the effect of inflation.

    Discount Rate for Finding Present Value

    The investment return rate used in the present value computation is called the discount rate. Given that it represents the anticipated rate of return you would experience if you had invested today’s money for a period of time, the discount rate that is used for the present value calculation is very subjective. In other words, if an investor chooses to accept an amount in the future as opposed to the same amount today, the discount rate would be the forgone rate of return.

    The hurdle rate, also known as the risk-free rate of return, is frequently calculated and used as the discount rate in numerous situations.

    The discount rate is the result of adding an applicable interest rate to the time value, which raises future value mathematically. A lender can determine the fair amount of any future earnings or liabilities in relation to the present value of the capital by using the discount rate, which is used to calculate future value in terms of present value. Future value is discounted to current value when the term “discount” is used.

    Calculation of Present Value

    Here’s the Present Value(PV) formula: 

    PV = Future Value / (1+i)^n

    Where, 

    FV is the future value 

    I is the rate of return 

    n is the number of periods 

    Here are the steps to calculate the Present Value: 

    Step 1: Enter the investment’s future expected value

    Step 2: Put the expected rate of return on your investment 

    Step 3: Enter the length of the investment period

    Let us look at an example to understand the working of the PV formula. 

    We are assuming that you have the option of receiving Rs.2,200 one year from now instead of Rs.2,000 today at 3% annually. 

    According to the present value formula, PV= Rs.2,200 / (1 +. 03)^1 = Rs. 2,135.92 

    The present value represents the minimal amount that would need to be given to you today for you to have Rs.2,200 in one year. To put it another way, even if you received Rs.2,000 today at a 3% interest rate, you wouldn’t receive Rs.2,200 in a year.

    Instead of calculating the PV manually, one can use an online Present Value calculator to calculate the present value in a jiffy.

    Net Present Value

    Another concept that is confused with Present Value is Net Present Value(NPV).  

    Given a specific rate of return, present value (PV) is the current value of a future financial asset or cash flow stream. Net present value (NPV), on the other hand, is the difference between the present value of cash inflows and outflows over a period of time.

    Net present value assesses how profitable a project or investment might be. NPV and PV may be crucial when a person or business makes investment decisions.

    Here’s the Net Present Value formula:

    Net Present Value = cash flow/(1+r)^t − initial investment

    where r is the rate of return and t is the total time periods.

    What Is the Present Value of an Annuity?

    The amount of money required today to fund a series of future annuity payments is referred to as the annuity’s present value. Given a specific rate of return, or discount rate, the present value of an annuity is the current value of the payments from an annuity in the future. The present value of the annuity decreases as the discount rate increases.

    The formula for the present value of an Annuity = 

    PMT * {1- (1/(1+R)^N)} /R 

    where:

    PMT is the amount of each annuity payment

    R is the interest rate/discount rate

    N is the number of times payments will be made

    ​Conclusion

    Present Value (PV) is one of the key concepts in finance. Although it sounds fancy and complicated, it is actually pretty simple. PV provides a way to calculate how much money you need today to have a certain amount of cash at a future date. Often, this concept will be used in an investment setting. 

  • Technical analyis

    Technical analyis

    Investors, traders and analysts have been using technical analysis to accomplish broad acceptance among the academic community and regulators – specifically pertaining to the behavioral finance aspects. 

    Although technical analysis trails predefined principles and rules, the results’ interpretation is generally subjective. This means that though some aspects, like the indicators’ calculation, follow specific rules, the explanation of discoveries is often based on a combination of techniques that suit the approach and style of the individual analyst. 

    In this post, let’s highlight technical analysis and learn more about it. 

    What is technical analysis?

    Technical analysis is referred to as a trading discipline that is used to assess investment instruments such as stocks and discover trading opportunities by evaluating statistical trends accumulated from varying trading activities, like volume and price movement. It mainly concentrates on the study of volume and price. 

    Understanding Technical Analysis

    Technical analysis was first brought into the picture by Charles Dow in the late 1800s. Later, many credible researchers, such as John Magee, Edson Gould, Robert Rhea, and William P. Hamilton, contributed to the Dow Theory to form its basis. Today, it comprises hundreds of signals and patterns curated through years of comprehensive, profound research.

    Technical analysis is generally used to examine how demand and supply for security will impact volume, price, and implied volatility changes. It functions from the supposition that previous price changes and trading activity of the security can be valued indicators of the security’s future price movements when combined with adequate trading or investing rules.

    Often, it is used to generate short-term trading signals from various charting tools. It can also assist in assessing a security’s weakness or strength related to the broader market or sector. With this information, analysts can easily enhance their valuation estimates.

    Types of Technical Analysis Charts

    There are three primarily popular technical analysis charts, such as:

    • Line Charts

    A line chart is extremely basic and simple. It comprises one single line that tracks the stock’s closing price movements. Traders use it to gain a basic understanding of the change in stock prices. While this chart type doesn’t display much and may not provide extensive data, it offers a general idea of the price trend. 

    • Candlestick Charts

    Candlestick charts showcase a specific stock’s closing, opening, low and high price during a trading session. However, these charts use candlesticks to display the results rather than a single line. 

    • Bar Charts

    Bar charts are a bit more complex than line charts and candlestick charts. In this chart type, you will find a series of vertical lines. Every line depicts the closing, opening, low and high prices in one specific trading session.

    Indicators of Technical analysis

    Some such indicators of technical analysis primarily focus on categorizing the current market trend, including resistance and support areas. On the other hand, such indicators concentrate on comprehending a trend’s strength and its likelihood of continuation. 

    Some of the prevalently used charting patterns and technical indicators include:

    • Momentum indicators
    • Moving averages
    • Channels
    • Trendlines

    Generally, technical analysts examine the below-mentioned indicators:

    • Price trends
    • Support and resistance levels
    • Chart patterns
    • Moving averages
    • Volume and momentum indicators
    • Oscillators

    Example of technical analysis 

    For instance, let’s consider the S&P 500. Along with some exceptions, the 50-day moving average of the index has proven to be a dependable support level in the last few years. When the value of the S&P 500 goes above the 50-day moving average and retains that behavior, it is highly likely that the upward trend will continue. Thus, experts will purchase when there is any monetary drop below the line. 

    Uses of Technical Analysis 

    Often, analysts use technical analysis along with other research types. Retail traders might make decisions solely based on price charts of specific security and other similar statistics. However, practicing equity analysts seldom restrict their research to technical or fundamental analysis alone.

    Traders can apply technical analysis to any security with historical trading data. This comprises:

    • Currencies
    • Fixed-income securities
    • Commodities
    • Futures
    • Stocks

    And other securities. 

    Technical analysis is more prevalent in forex and commodities markets, where traders prioritize short-term price movements. 

    The technical analysis attempts to predict the price movement of any instrument that can be traded virtually and is subject to forces of demand and supply, including currency pairs, futures, bonds, and stocks. Some experts consider technical analysis a simple study of demand and supply forces mirrored in a security’s market price movements.

    Most commonly, technical analysis is applied to price changes. However, some analysts keep track of numbers and not just prices, such as open interest figures or trading volume. 

    Technical Analysis vs Fundamental Analysis 

    As far as approaching the markets is concerned, both technical analysis and fundamental analysis work at the different ends of the spectrum. Both methods are used to research and predict future trends in stock prices. Moreover, like any philosophy or investment strategy, both have their adversaries and advocates. 

    Fundamental analysis is a method that assesses securities by attempting to evaluate a stock’s intrinsic value. Fundamental analysts generally study everything from the overall industry and economic conditions to the financial condition as well as the management of companies. Some of the important characteristics of a fundamental analyst are:

    • Liabilities
    • Assets
    • Expenses
    • Earnings

    Talking about technical analysis, price and stock volume are the only inputs. The principal assumption is that every known fundamental is factored into the price. Hence, you don’t have to pay any close attention to them. Generally, technical analysts don’t put effort into evaluating a security’s intrinsic value. Instead, they use stock charts to discover trends and patterns that suggest what stock could do in the future. 

    Conclusion

    Now that you have understood technical analysis, remember that there is no such technical indicator that is perfect. None will offer 100% accuracy all the time. So, being an intelligent trader, ensure you watch for warning signs. When done well, technical analysis can surely help you gain profits. However, you must spend more time and invest more effort into handling everything in a better way. 

  • Difference Between Shareholders And Debenture Holders

    Difference Between Shareholders And Debenture Holders

    A company may raise money in one of two ways: by issuing stock shares or debt instruments. Although each approach has the same final objective, they differ in many important aspects. The holders of the company’s shares or debt instruments are one such difference. And that’s just what we’ll be exploring in this essay.

    Who are Shareholders?

    Recently, the shareholders and creditors of National Mineral Development Corporation (NMDC) agreed to the demerger of its under-construction Nagarnar Steel Plant (NSP), according to its Chairman and Managing Director Sumit Deb.

    But why did the mineral producer company require the shareholders’ permission? Are they right to be included in the decision-making process of the company? Do they own the company? Well, yes!

    An entity holding at least one share of a company’s stock or unit in a mutual fund is a shareholder. Someone who owns stock in a company, say, ITC Ltd, is an example of a shareholder.

    Shareholders essentially own the company and also have specific rights and obligations. With this ownership structure, they can benefit from a company’s success. 

    These benefits take the shape of rising stock prices or dividend payments from financial gains. In contrast, when a company experiences a loss, the share price inevitably falls, resulting in financial losses for shareholders or declines in the portfolio.

    The owners of a company’s common stock are known as common shareholders. They are the most common kind of stockholders and have the right to vote for decisions affecting the company. They have the authority to sue the business as a group for any misconduct that might endanger the organization since they have control over how it is run.

    On the other side, preferred stockholders are relatively uncommon. They own a share of the company’s preferred stock, as opposed to common shareholders, and have no voting rights or influence over how the business is run. Instead, they are qualified for a set annual dividend that will be paid before the common shareholders receive their portion.

    Even while both common and preferred stock sees an increase in value in response to the company’s success, the former is more likely to experience capital gains or losses.

    Who are Debenture Holders?

    In FY19, Reliance Capital pledged the shares in its unit RGI as security against funds raised by group companies via the issue of debentures. However, IDBI Trusteeship, custodian of the RGI shares, stated the debenture holders are not permitting it to release the pledged shares.

    Why did Reliance Capital pledge its shares as collateral? Why did it issue debentures? Read on to understand better.

    A debenture holder is a person or business that has borrowed money from another business using a debenture. A debenture holder receives interest payments at predetermined rates and times.

    A bond or other financial instrument secured by collateral is referred to as a debenture. Debentures must rely on the issuer’s trustworthiness and reputation for support because they lack collateral backing. Debentures are commonly issued by both businesses and governments to raise funds.

    Treasury bonds and treasury bills are examples of debentures. As a result, when a corporation issues treasury bonds or bills as debentures, it is admitting that it has borrowed money from the general public and is promising to pay it back later. For this reason, holders of these treasury bonds and bills are examples of debenture holders.

    Debentures are debt securities, making them less risky than buying common stock or preferred shares of the same corporation. During bankruptcy, holders of debentures are regarded as more senior and have priority over those other sorts of investments.

    Considering the fact that there is no collateral supporting these debts, they are intrinsically riskier than secured debts. As a result, these may have relatively higher interest rates than comparable, collateral-backed bonds from the same issuer.

    Shareholders And Debenture Holders — Comparison

    By now, it should be clear that shareholders and holders of debentures are substantially different. However, their distinctions go well beyond simply being owners of different instruments. Here are a few key distinctions between these two categories of holders. 

    Basis of difference

    Shareholders

    Debenture holders

    Relation with the company

    Shareholders are the owners of the company. 

    Debenture holders are lenders to the company and are thus regarded as creditors.

    Decision-making process

    Shareholders get the opportunity to actively participate in corporate decision-making. 

    Debenture holders are not permitted to take part in decision-making.

    Entitlement

    Dividends, which are simply a piece of the company’s profits, are entitled to be received by shareholders.

    Debenture holders are entitled to interest because they lent money to the company.

    Obligation

    Despite making money, a company may decide not to distribute dividends to its shareholders.  

    A company is required to pay interest to the holders of its debentures whether or not it makes profits. 

    AGM meeting

    Shareholders are allowed to attend the annual general meeting (AGM) of the company. 

    Debenture holders are not allowed unless any decision affecting their interest is made.

    Control

    The company’s affairs are managed by the shareholders. The Board of Directors, who are elected by the shareholders, is in charge of running it.

    Debenture holders are unconcerned with the company’s governance and management.



    Annual Report

    Shareholders get copies of the Annual Report having the Balance Sheet, the Profit & Loss Account, and the Auditor’s Report.

    Debenture holders never get the Annual Report.

    Interest income

    Dividend income is only realized by shareholders when the company is profitable.


    Debenture holders get the interest at a set rate regardless of whether a profit was made or not.

    Equity/debenture conversion flexibility

    The shareholders’ shares cannot be changed into debentures.

    Debenture conversion to equity is possible.

    Company Liquidation

    Shareholders’ interest in the company is placed after debenture holders.

    Debenture holders are paid out first in the event of a company’s liquidation because they are secured creditors.

    The Key Takeaways

    Debentures are the borrowed money of a company, whereas shares are the capital owned by a company. Likewise, the individual who owns shares is referred to as a shareholder, whereas the one who owns debentures is referred to as a debenture holder.

    The shareholders are the company’s owners and give financial support in exchange for prospective dividends paid out over the course of the business. The debenture holders have secured creditors of the business and can promote long-term financing for business expansion. Both shareholders and holders of debentures are investors in the business and act as sources of capital for it.