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Finance

Financial markets [show]

Bond market

Stock market (equity market) ( market) Over the counter Real estate participants: and speculator Institutional and Financial instruments [show] Cash: Deposit (call or put) or [show] management Accountancy Audit rating agency [show] Credit and Student financial aid Employment contract Financial planning [show] : (Redistribution) Government operations Government final consumption expenditure : Taxation Non- revenue Government budget Surplus and deficit (of payment) and banking [show] Fractional-reserve banking Central List of banks Deposits [show] Finance designations scandals Standards [show] ISO 31000 International Financial Reporting Economic history [show] bubble History of private equity

v·d·e Finance (pronounced /fɪˈnænts/ or / ˈfaɪnænts/) is the science of funds management.[1] The general areas of finance are business finance, personal finance, and public finance.[2] Finance includes saving money and often includes lending money. The field of finance deals with the concepts of time, money, risk and how they are interrelated. It also deals with how money is spent and budgeted. One facet of finance is through individuals and business organizations, which deposit money in a bank. The bank then lends the money out to other individuals or corporations for consumption or investment and charges interest on the loans. Loans have become increasingly packaged for resale, meaning that an investor buys the loan (debt) from a bank or directly from a corporation. Bonds are debt instruments sold to for organizations such as companies, governments or charities.[3] The investor can then hold the debt and collect the interest or sell the debt on a secondary market. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, funds, and other organizations have become important as they invest in various forms of debt. Financial assets, known as investments, are financially managed with careful attention to financial risk management to control financial risk. Financial instruments allow many forms of securitized assets to be traded on securities exchanges such as stock exchanges, including debt such as bonds as well as equity in publicly traded corporations.[dubious – discuss] Central banks, such as the Federal Reserve System banks in the United States and Bank of England in the United Kingdom, are strong players in public finance, acting as lenders of last resort as well as strong influences on monetary and credit conditions in the economy.[4] Contents [hide] • 1 Overview of techniques and sectors of the financial industry • 2 Personal finance • 3 Corporate finance ○ 3.1 Capital ○ 3.2 The desirability of budgeting  3.2.1 Capital budget  3.2.2 Cash budget ○ 3.3 Management of current assets  3.3.1 Credit policy  3.3.1.1 Advantages of credit trade  3.3.1.2 Disadvantages of credit trade  3.3.1.3 Forms of credit  3.3.1.4 Factors which influence credit conditions  3.3.1.5 Credit collection  3.3.1.5.1 Overdue accounts  3.3.1.5.2 Effective credit control  3.3.1.5.3 Sources of information on creditworthiness  3.3.1.5.4 Duties of the credit department  3.3.2 Stock  3.3.3 Cash  3.3.3.1 Reasons for keeping cash  3.3.3.2 Advantages of sufficient cash ○ 3.4 Management of fixed assets  3.4.1 Depreciation  3.4.2 ○ 3.5 Shared Services • 4 Finance of public entities • 5 • 6 Financial mathematics • 7 Experimental finance • 8 Behavioral finance • 9 Intangible Asset Finance • 10 Related professional qualifications • 11 See also • 12 References • 13 External links [edit] Overview of techniques and sectors of the financial industry Main article: An entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary such as a bank, or buy notes or bonds in the market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary earns the difference for arranging the loan. A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance) and by a wide variety of other organizations, including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments and methodologies, with consideration to their institutional setting. Finance is one of the most important aspects of business management and includes decisions related to the use and acquisition of funds for the enterprise. In corporate finance, a company's is the total mix of financing methods it uses to raise funds. One method is debt financing, which includes bank loans and bond sales. Another method is equity financing - the sale of stock by a company to investors. Possession of stock gives the investor ownership in the company in proportion to the number of shares the investor owns. In return for the stock, the company receives cash, which it may use to expand its business or to reduce its debt.[5] Investors, in both bonds and stock, may be institutional investors - financial institutions such as investment banks and pension funds - or private individuals, called private investors or retail investors. [edit] Personal finance Main article: Personal finance Questions in personal finance revolve around • How much money will be needed by an individual (or by a family), and when? • How can people protect themselves against unforeseen personal events, as well as those in the external economy? • How can family assets best be transferred across generations (bequests and inheritance)? • How does tax policy (tax subsidies or penalties) affect personal financial decisions? • How does credit affect an individual's financial standing? • How can one plan for a secure financial future in an environment of economic instability? Personal financial decisions may involve paying for education, financing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance, investing and saving for retirement. Personal financial decisions may also involve paying for a loan, or debt obligations. [edit] Corporate finance Main article: Corporate finance Managerial or corporate finance is the task of providing the funds for a corporation's activities. For small business, this is referred to as SME finance (Small and Medium Enterprises). It generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock. term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these elements forms the company's capital structure. -term funding or working capital is mostly provided by banks extending a . Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hope that it will maintain or increase its value. In – in choosing a portfolio – one has to decide what, how much and when to invest. To do this, a company must: • Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations; • Identify the appropriate strategy: active v. passive – hedging strategy • Measure the portfolio performance is duplicate with the financial function of the Accounting profession. However, financial accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm. [edit] Capital Main article: Financial capital Capital, in the financial sense, is the money that gives the business the power to buy goods to be used in the production of other goods or the offering of a service. (The capital has two types of resources Equity and Debt) [edit] The desirability of budgeting Budget is a document which documents the plan of the business. This may include the objective of business, targets set, and results in financial terms, e.g., the target set for sale, resulting cost, growth, required investment to achieve the planned sales, and financing source for the investment. Also budget may be long term or short term. Long term budgets have a time horizon of 5–10 years giving a vision to the company; short term is an annual budget which is drawn to control and operate in that particular year. [edit] Capital budget This concerns proposed fixed asset requirements and how these expenditures will be financed. Capital budgets are often adjusted annually and should be part of a longer-term Capital Improvements Plan. [edit] Cash budget Working capital requirements of a business should be monitored at all times to ensure that there are sufficient funds available to meet short-term expenses. The cash budget is basically a detailed plan that shows all expected sources and uses of cash. The cash budget has the following six main sections: 1. Beginning Cash Balance - contains the last period's closing cash balance. 2. Cash collections - includes all expected cash receipts (all sources of cash for the period considered, mainly sales) 3. Cash disbursements - lists all planned cash outflows for the period, excluding interest payments on short-term loans, which appear in the financing section. All expenses that do not affect cash flow are excluded from this list (e.g. depreciation, amortization, etc.) 4. Cash excess or deficiency - a function of the cash needs and cash available. Cash needs are determined by the total cash disbursements plus the minimum cash balance required by company policy. If total cash available is less than cash needs, a deficiency exists. 5. Financing - discloses the planned borrowings and repayments, including interest. 6. Ending Cash balance - simply reveals the planned ending cash balance. [edit] Management of current assets [edit] Credit policy Credit gives the consumer the opportunity to buy, purchase or acquire goods and services, and pay for them at a later date. This has its advantages and disadvantages as follows: [edit] Advantages of credit trade • Usually results in more customers than cash trade. • Can charge more for goods to cover the risk of bad debt. • Gain goodwill and loyalty of customers. • People can buy goods and pay for them at a later date. • Farmers can buy seeds and implements, and pay for them only after the harvest. • Stimulates agricultural and industrial production and commerce. • Can be used as a promotional tool. • Increase the sales. • Modest rates to be filled. • can be a marketing tool [edit] Disadvantages of credit trade • Risk of bad debt. • High administration expenses. • People can buy more than they can afford. • More working capital needed. • Risk of Bankruptcy. [edit] Forms of credit • Suppliers credit • Credit on ordinary open account • Installment sales • Bills of exchange • Credit cards • Contractor's credit • Factoring of debtors • Cash credit • Cpf • Exchange of product [edit] Factors which influence credit conditions • Nature of the business's activities • Financial • Product durability • Length of production process • Competition and competitors' credit conditions • Country's economic position • Conditions at financial institutions • Discount for early payment • Debtor's type of business and financial position [edit] Credit collection [edit] Overdue accounts • Attach a notice of overdue account to statement. • Send a letter asking for settlement of debt. • Send a second or third letter if first is ineffectual. • Threaten legal actions. [edit] Effective credit control • Increases sales • Reduces bad • Increases profits • Builds customer loyalty • Builds confidence of financial industry • Increase company capitalisation • Increase the customer relationship [edit] Sources of information on creditworthiness • Business references • Bank references • Credit agencies • Chambers of commerce • Employers • Credit application forms [edit] Duties of the credit department • Legal action • Taking necessary steps to ensure settlement of account • Knowing the credit policy and procedures for credit control • Setting credit limits • Ensuring that statements of account are sent out • Ensuring that thorough checks are carried out on credit customers • Keeping records of all amounts owing • Ensuring that debts are settled promptly • Timely reporting to the upper level of management for better management. [edit] Stock Purpose of stock control • Ensures that enough stock is on hand to satisfy demand. • Protects and monitors theft. • Safeguards against having to stockpile. • Allows for control over selling and cost price. Stockpiling Main article: Cornering the market This refers to the purchase of stock at the right time, at the right price and in the right quantities. There are several advantages to the stockpiling, the following are some of the examples: • Losses due to price fluctuations and stock loss kept to a minimum • Ensures that goods reach customers timeously; better service • Saves space and storage cost • Investment of working capital kept to minimum • No loss in production due to delays There are several disadvantages to the stockpiling, the following are some of the examples: • Obsolescence • Danger of fire and theft • Initial working capital investment is very large • Losses due to price fluctuation Rate of stock turnover This refers to the number of times per year that the average level of stock is sold. It may be worked out by dividing the cost price of goods sold by the cost price of the average stock level. Determining optimum stock levels • Maximum stock level refers to the maximum stock level that may be maintained to ensure cost effectiveness. • Minimum stock level refers to the point below which the stock level may not go. • Standard order refers to the amount of stock generally ordered. • Order level refers to the stock level which calls for an order to be made. [edit] Cash [edit] Reasons for keeping cash • Cash is usually referred to as the "king" in finance, as it is the most liquid asset. • The transaction motive refers to the money kept available to pay expenses. • The precautionary motive refers to the money kept aside for unforeseen expenses. • The speculative motive refers to the money kept aside to take advantage of suddenly arising opportunities. [edit] Advantages of sufficient cash • Current liabilities may be catered for meeting the current obligations of the company • Cash discounts are given for cash payments. • Production is kept moving • Surplus cash may be invested on a short-term basis. • The business is able to pay its accounts in a timely manner, allowing for easily obtained credit. • Liquidity • Quick upfront pay. [edit] Management of fixed assets [edit] Depreciation Depreciation is the allocation of the cost of an asset over its useful life as determined at the time of purchase. It is calculated yearly to enforce the matching principle [edit] Insurance Main article: Insurance Insurance is the undertaking of one party to indemnify another, in exchange for a premium, against a certain eventuality. Uninsured risks • Bad debt • Changes in fashion • Time lapses between ordering and delivery • New machinery or technology • Different prices at different places Requirements of an insurance contract • Insurable interest ○ The insured must derive a real financial gain from that which he is insuring, or stand to lose if it is destroyed or lost. ○ The item must belong to the insured. ○ One person may take out insurance on the life of another if the second party owes the first money. ○ Must be some person or item which can, legally, be insured. ○ The insured must have a legal claim to that which he is insuring. • Good faith ○ Uberrimae fidei refers to absolute honesty and must characterise the dealings of both the insurer and the insured. [edit] Shared Services There is currently a move towards converging and consolidating Finance provisions into shared services within an organization. Rather than an organization having a number of separate Finance departments performing the same tasks from different locations a more centralized version can be created. [edit] Finance of public entities Main article: Public finance Public finance describes finance as related to sovereign states and sub-national entities (states/provinces, counties, municipalities, etc.) and related public entities (e.g. school districts) or agencies. It is concerned with: • Identification of required expenditure of a public sector entity • Source(s) of that entity's revenue • The budgeting process • Debt issuance (municipal bonds) for public works projects [edit] Financial economics Main article: Financial economics Financial economics is the branch of economics studying the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. Financial economics concentrates on influences of real economic variables on financial ones, in contrast to pure finance. It studies: • Valuation - Determination of the fair value of an asset ○ How risky is the asset? (identification of the asset-appropriate discount rate) ○ What cash flows will it produce? (discounting of relevant cash flows) ○ How does the market price compare to similar assets? (relative valuation) ○ Are the cash flows dependent on some other asset or event? (derivatives, contingent claim valuation) • Financial markets and instruments ○ Commodities - topics ○ - topics ○ Bonds - topics ○ Money market instruments- topics ○ Derivatives - topics • Financial institutions and regulation Financial Econometrics is the branch of Financial Economics that uses econometric techniques to parameterise the relationships. [edit] Financial mathematics Main article: Financial mathematics Financial mathematics is a main branch of applied mathematics concerned with the financial markets. Financial mathematics is the study of financial data with the tools of mathematics, mainly statistics. Such data can be movements of securities—stocks and bonds etc.—and their relations. Another large subfield is insurance mathematics. This is also known as quantitative finance, practitioners as Quantitative analysts. [edit] Experimental finance Main article: Experimental finance Experimental finance aims to establish different market settings and environments to observe experimentaly and provide a lens through which science can analyze agents' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanisms, and returns processes. Researchers in experimental finance can study to what extent existing financial economics theory makes valid predictions, and attempt to discover new principles on which such theory can be extended. Research may proceed by conducting trading simulations or by establishing and studying the behaviour of people in artificial competitive market-like settings. [edit] Behavioral finance Main article: Behavioral finance Behavioral Finance studies how the psychology of investors or managers affects financial decisions and markets. Behavioral finance has grown over the last few decades to become central to finance. Behavioral finance includes such topics as: 1. Empirical studies that demonstrate significant deviations from classical theories. 2. Models of how psychology affects trading and prices 3. Forecasting based on these methods. 4. Studies of experimental asset markets and use of models to forecast experiments. A strand of behavioral finance has been dubbed Quantitative Behavioral Finance, which uses mathematical and statistical methodology to understand behavioral biases in conjunction with valuation. Some of this endeavor has been led by Gunduz Caginalp (Professor of Mathematics and Editor of Journal of Behavioral Finance during 2001-2004) and collaborators including Vernon Smith (2002 Nobel Laureate in Economics), David Porter, Don Balenovich, Vladimira Ilieva, Ahmet Duran). Studies by Jeff Madura, Ray Sturm and others have demonstrated significant behavioral effects in stocks and exchange traded funds. Among other topics, quantitative behavioral finance studies behavioral effects together with the non-classical assumption of the finiteness of assets. [edit] Intangible Asset Finance Main article: Intangible asset finance Intangible asset finance is the area of finance that deals with intangible assets such as patents, trademarks, goodwill, reputation, etc. [edit] Related professional qualifications There are several related professional qualifications in finance, that can lead to the field: • Accountancy: ○ Qualified accountant : Chartered Accountant (ACA - UK certification / CA - certification in Commonwealth countries), Chartered Certified Accountant (ACCA, UK certification), Certified Public Accountant (CPA, US certification),ACMA/FCMA ( Associate/Fellow Chartered Management Accountant) from Chartered Institute of Management Accountant(CIMA) ,UK. ○ Non-statutory qualifications: Chartered Cost Accountant CCA Designation from AAFM • Business qualifications:Master of Business Administration (MBA), Bachelor of Business Management (BBM), Master of Commerce (M.Comm), Master of Science in Management (MSM), Doctor of Business Administration (DBA) • Generalist Finance qualifications: ○ Degrees: Masters degree in Finance (MSF), Master of Financial Economics, Master of Finance & Control (MFC), Master Financial Manager (MFM), Master of Financial Administration (MFA) ○ Certifications: Chartered Financial Analyst (CFA), Certified Valuation Analyst (CVA), Certified International Investment Analyst (CIIA),, Association of Corporate Treasurers (ACT), Certified Market Analyst (CMA/FAD) Dual Designation, Corporate Finance Qualification (CF) • Quantitative Finance qualifications:Master of Science in (MSFE), Master of Quantitative Finance (MQF), Master of (MCF), Master of Financial Mathematics (MFM), Certificate in Quantitative Finance (CQF). [edit] See also Main article: Outline of finance

Book: Finance

Wikipedia Books are collections of articles that can be downloaded or ordered in print. • Financial crisis of 2007–2010 [edit] References 1. ^ Gove, P. et al. 1961. Finance. Webster's Third New International Dictionary of the English Language Unabridged. Springfield, Massachusetts: G. & C. Merriam Company. 2. ^ finance. (2009). In Encyclopædia Britannica. Retrieved June 23, 2009, from Encyclopædia Britannica Online: Finance 3. ^ Charitytimes.com 4. ^ Board of Governors of Federal Reserve System of the United States. Mission of the Federal Reserve System. Federalreserve.gov Accessed: 2010-01-16. (Archived by WebCite at Webcitation.org) 5. ^ Business.timesonline.co.uk [edit] External links

Look up finance in Wiktionary, the free dictionary.

Wikiversity has learning materials about Finance

• OECD work on financial markets Observation of UK Finance Market • Wharton Finance Knowledge Project - aimed to offer free access to finance knowledge for students, teachers, and self-learners. • Professor Aswath Damodaran (New York University Stern School of Business) - provides resources covering three areas in finance: corporate finance, valuation and investment management and syndicate finance.

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# 10 procurement of funds and proper allocation of available funds in efficient manner to maximize returns FINANCE IS MANAGING OF MONEY

# 8 Management of funds

# 7 the practice of manipulating and managing money is called finance

# 6 Finance is the management, investment and arranging of the money or worth of company

# 4 Finance is related with cost, time, money and risk...... It deals with matters related to money and markets...... resousce allocation amd its management are tha part of this. finance is very important factor in organization like blood of body how to invest

Pay off high interest debt . If you have a loan or credit card debt with a high (over 10%) there's no point in investing your hard-earned cash. Whatever interest you earn through investing (usually less than 10%) won't make much of a difference because you'll be spending a greater amount paying interest on your debt.[1] For example, let's say Sam makes has saved $4,000 for investing, but he also has $4,000 in credit card debt at a 14% interest rate. He could invest the $4,000 and if he gets a 12% ROI (return on investment--and this is being very optimistic) in a year he'll have made $480 in interest. But the credit card company will have charged him $560 in interest. He's $80 in the hole, and he still has that $4,000 principal to pay off. Why bother? Pay off the high interest debt first so that you can actually keep any money you make by investing. Otherwise, the only investors making money are the ones who loaned it to you at a high interest rate.

Choose your investments. The bigger the chunk of money you have available for investing, the more choices you have. Most people diversify by investing in more than one place, but the way they split their investments depends on their goals and the amount of risk they're willing to accept.

• Savings accounts - low minimum balance, liquid but with limitations on how often the account is accessed, low interest rate (usually much lower than inflation), predictable • Money market accounts (MMAs) - higher minimum balance than savings, liquid but with limitations on how often the account is accessed, earns about twice the interest rates of savings accounts,[2] high- MMAs offer higher interest rates but higher risks • Certificates of deposit (CDs) - similar to savings account but with higher interest rates and restrictions on early withdrawal, offered by banks, brokerage firms and independent salespeople, low-risk but reduced liquidity, may require high minimum balance for desired interest rates • Bonds - a loan taken out by a government or company to be paid back with interested; considered "fixed income" securities because the same income will be generated regardless of market conditions,[3] you'll need to know the par value (amount loaned), coupon rate (interest rate), and maturity rate (when the principal and interest must be paid back)

• Stocks - usually purchased through brokers; you buy pieces (shares) of a corporation which entitles you to decision-making power (usually by voting to elect a board of directors). You may also receive a fraction of the profits (dividends). Dividend reinvestment plans (DRPs) and direct stock purchase plans (DSPs) - bypass brokers (and their commissions) by buying directly from companies or their agents, offered by more than 1,000 major corporations,[4] can invest as little as $20-30 per month, can buy fractions of stocks, can be high-risk. • Real estate property - ties up money (not easy to liquidate investment), capital intensive (usually leveraged through mortgage loans) • Mutual funds - not insured by any government agency, built-in diversification, some funds have low initial purchase amounts, you'll have to pay fees • Real Estate Investment Trusts (REITs) - similar to mutual funds, but instead of investing in stocks, they invest in real estate • Gold and silver - these are great ways to store your money and keep up with inflation. They are not subject to tax, and they are easy to store and very liquid (can buy and sell easily). • Home • News • Markets • Investing • KiwiSaver • My NZX • NZX Customers • Market Supervision • About NZX Site Map NZX Blog

• How to Invest • Find a Broker • Shareholder Balance • Glossary • NZX virtualTrading

How to Invest • Tips for Success The basic idea behind investment is simple – use your money to make more money. The money you invest in securities (shares issued by companies, debt securities and other investment units) is called "capital" and the money created is the "return on investment". With investment in shares, the return comes in two forms – capital gain and dividend income. Capital Gain Capital gain comes from increasing share prices. When investors buy shares, they want the price of those shares in the market to be higher in the future. The higher the future prices, the bigger the capital gain for investors. Capital gain can occur rapidly - in days or even hours when share prices are volatile - or slowly.

Prices rise for many reasons but most fundamentally they rise because the outlook for a company's future profitability is improving. The biggest and most obtainable capital gains come from the shares of companies that grow and increase their profits over time.

Capital losses occur too, and sometimes very rapidly. When a company's profitability is declining or its outlook is poor, the share price will probably fall and shareholders lose.

Capital gains become a cash return on investment when investors sell their shares - they get back their capital plus an amount accrued because of the higher selling price.

Dividend Income Companies often pay dividends out of their profits. Dividends are a means of sharing the money made by companies with their owners. Just as property owners receive return in the form of rent from their tenants, share owners receive dividends as regular income.

Shareholders in many companies receive dividends twice a year. New Zealand has one of the highest levels of return from dividends in the world.

When the amount paid out is high, dividends can be a big part of total investment returns since companies are retaining less money to reinvest in the business to grow potential future profits. On the other hand, some companies pay no dividends and keep profits to help fund growth in their business.

Equity Securities (Shares) A share is a piece of ownership in a company. Buying shares in a company makes you a partial owner of that company. The more shares you buy, the bigger your ownership stake becomes and the more say you can have in how the company is run.

Along with ownership, a share gives you the right to vote at company general meetings and have a say in how the company is run - one vote for every share you own. However one of the realities of the sharemarket is that individual investors rarely get to own enough shares to be able to alone exert any significant influence over a company - that's usually for big institutional shareholders. Consequently, it is important to carefully research the competence of company management before you buy shares. The best measure of that may be the company's ability to consistently produce profits over time.

Debt securities (Bonds) Debt securities can be used to diversify your portfolio and provide a steady return stream. They represent an amount of money lent to a company or other entity, such as the Government.

When a company or other entity issues debt securities it borrows money from the buyers of the securities, who become the lenders. Holders of debt securities receive returns in the form of regular interest payments ("coupons") from the borrower. They also get their original money back at a pre-defined date - the "maturity date" of the debt security. How are shares valued? Company Profits Or more precisely expected future profits - are the fundamental indicator of share prices. Companies must report their profits at least twice a year and investors pore over these numbers - often expressed as earnings per share (EPS) - trying to gauge a company's present health and future potential. With any company, there will always be different views on future profits and all the factors that make its business successful or not. Share prices should reflect the combination of all such competing views at a particular time.

The market rewards both fast earnings growth and stable earnings growth. Investors will even buy shares in a non-profitable company that promises to earn a lot in the future (as happened during 1998's explosion in Internet stocks). Declining profits or unexplained losses have a negative effect on share prices. Companies that surprise the market with bad financial or earnings reports are almost always punished with falling share prices.

As well as shares, there are several other types of equity securities listed on the NZSX and NZAX Markets.

Company Analysis and Valuation Company analysis is the means by which investors and their advisors (many working in NZX Firms) seek to arrive at the best investment decisions. By analysing past performance and the state of today's business, analysts attempt to predict what is likely to happen tomorrow to a company's profits, cash flows and ability to pay dividends.

Company analysis can be a quick check on financial health and profit prospects, or painstaking research using all available facts and figures. Professional analysts build numerical models for predicting profit and other factors several years into the future. This enables current valuation on the shares, and in turn, comparison with current market prices. The analyst provides an opinion on whether a company's shares are under or overvalued, which will ultimately lead to a "buy", "sell" or "hold" recommendation on the company.

At its simplest, company analysis focuses on: • Price/earnings ratios (or P/Es) - the current share price relative to the company's profit. • Dividend yield - the rate of return from dividends. • Net tangible asset backing - the value of assets theoretically attributable to each share in event of the company being liquidated.

Company executives will usually have plans, budgets and forecasts on exactly those things, but there is no accuracy guarantee on a company's view of its own future.

Managed Funds and Passive Funds There are two main categories of investment funds: managed funds and passive funds.

Managed Funds Anyone can invest in the stock market directly, or indirectly through a managed fund. The former means buying shares you select through an NZX Broker. The latter means buying shares or units in an index fund, investment trust or other form of managed fund which, in turn, buys into various companies on behalf of you and many others. Managed funds have distinct advantages including: • Greater diversification with the use of relatively less capital. (Diversification means owning a variety of shares and investment types from different industry sectors, so in the event of a major fall in the share price of one company, your entire savings are not threatened.) • Shares are selected by professionals drawing on rigorous company analysis. The return on share investing through a fund will be reduced by the fees paid to professional managers and tax on the fund’s capital gains. Indirect investment in shares gives you no involvement in the affairs of the company, as your interests are represented by the fund manager.

Individual investors' objectives will determine their preference for direct or indirect investing in shares. Fund managers, using capital from many investors, are a major feature of any market as they form and manage large "portfolios" of shares (and other forms of investment). Passive Funds Passive funds usually track an index and mirror the make-up of that index. They are categorised as "passive" because in following an index, the fund manager does not make decisions on what companies the fund will buy into. The fund is simply re-adjusted to ensure it maintains the correct weightings of the companies that make up the index.

Exchange-Traded Funds (ETFs) Funds that are listed and traded on the sharemarket. They usually “track” an index by holding a basket of securities with weightings based on the relative index weights of the companies included in that index. Investors buy a share in the ETF, which is essentially a diversified basket of the securities in the index that the fund tracks. As ETFs are normally passively managed, the main costs are brokerage and management fees, which are low compared to managed funds.

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.

Information and the Market Investors need information. A constant flow of relevant and timely information is critical if the sharemarket is to work properly. It really is the lifeblood of the market.

NZX's regulatory framework is designed largely with this in mind. Companies are required to disclose information to the market that is material to the value of their shares as soon as they become aware of the information - that means any information that might persuade a reasonable investor to buy or sell shares in a particular company. This way all investors are equally aware of decisions the company makes that are likely to affect the share price. This ensures the market is fully informed and investors all have fair access to material information.

Companies submit this information by way of market announcements to NZX which are then distributed to the market and published on the NZX website.

NZX, NZX Advisors and the news media all focus on conveying information from, and about, companies to investors and anyone else who might be interested.

The market is said to be "efficient" when all information material to the valuation of shares is in circulation - and hence factored into current market prices.

Data on the market itself is obviously critical as well. Share prices, volumes of share traded at particular prices, and current buy/sell quotes are among the first information investors need. NZX provides market data and pricing here on www.nzx.com. Daily newspapers provide summary tables on the most recent trading session. More tailored and in-depth reports are available from an NZX Advisor.