The consumer need to be protected from the unfair trade practices like adulteration, Black Marketing, False weighting etc. Under Consumer Protection act, a consumer is a person who consumes a product or service, paying a price for the same. There are three important aspects which should be kept in mind while talking about consumer protection. They are:
a) Physical Protection: protection against unsafe and harmful products that are injurious to health.
b) protection of economic interest: It protect the consumers against deceptive and unfair trade practices.
c) protection of public interest: To take sufficient measures to protect the consumers with regard to monopoly position or restrictive practices.
Importance of Consumer Protection
Consumer protection ensures protection of consumer rights. The following are points conveys its significance.
1. Business to satisfy Consumer needs as well: It is a fact that a business man cannot run his business without protecting the interest of consumers.
2. Ensure social justice: It is the duty of our government to protect the consumers from different types of exploitations.
3. Stakeholders approach: the business must live up to the exploitation of consumers, owners, the public employees- and the government.
4. Business influences the society: Business determines living styles, fashion, food and dress habits of people. If the business enjoys so much powers in society, it has the responsibility to protect the interest of the consumers.
5. Business promotion through Consumer Interest: The essence of all business activity should be consumer protection and satisfaction. This creates a responsibility to ensure quality goods at the lowest cost and to produce things which people really needs.
6. Consumer creation and maintenance: Creation of consumer is one of the most important function of every business. Once the customers are created, business should take every steps to retain them.
7. Consumer rights: Right to receive the commodity or service as per the prescribed standard at the right price, right quantity at the right place. The following are the important Consumer rights:
a) The right to safety: The right to safety implies protection against the marketing of goods which are hazardous to health or life and property.
b) The right to be informed: The consumer has the right to be informed about the quality, quantity, purity, standard and price of goods so as to protect the consumers against unfair trade practices.
c) The right to choose: The right to choose is the right to be assured access to a variety of goods at company prices.
d) The right to be heard: the right to be heard involves an assurance that the consumer interest would be considered in the formulation of government policy.
e) Right to seek redressal : This is the right to seek redressal against unfair trade practices or unscrupulous exploitation of the consumer.
f) The right to consumer education: It implies the right to get the knowledge and skills to be an informed consumer.
g) Right to healthy environment: It deals with protection against environment pollution, loss of natural resources, deforestation etc.
Consumer Responsibilities
Consumer problems in India are highly complex in nature.The exploitation of consumers will be stopped only if they start exercising their rights to safeguard their interest.
1. Consumer must exercise his rights: It is the responsibility of every consumer to exercise his rights and ensure that he is not subject to exploitation.
2. Consumers to adopt a cautious approach: It is the responsibility of every customer to verify the details before purchasing, which will ensure a smooth purchase.
3. Responsibility to seek redressal: Consumer must file complaints even if it is of small value because it will create large impact in the society.
4. Consumer must not over react to advertisement: Advertising are often misleading and people are made to believe the false claims.
Means of Consumer protection
Following are the important means for consumer protection in India:
1) Lok Adalat : It consists of persons with judicial experience and a few others with prescribes qualifications. The affected parties can directly approach these adalats for their grievances.
2) Public interest Litigation (PIL): Public Interest Litigation is a means to provide legal representation to previously unrepresented groups and interests.
3) Redressel Forums and Consumer Protection Council: Under the Consumer Protection Act 1986, several redressel forums have been created to deal with consumer grievances. These bodies are set up under the Act, exclusively to provide simple, speedy and inexpensive redressel to the consumer disputes and grievances.
4) Consumer Welfare Fund (CWF): This fund has been created by transferring the amount of excise duty.
5) Consumer Protection Act, 1986: The act acclaimed to be the 'Magna Carta' of Indian consumers, has been amended in 1993 and 2002, The Act protects the following rights of consumers: 1. Right to safety, 2. Right to information, 3. Right to choose, 4. Right to be heard, 5. Right to education, 6. Right to seek redressel.
Features of the Act
It applies to all goods and services other than specifically exempted by the Central government.
All suppliers of goods & services, both private, public & the co-operative sector are covered by the Act.
It safeguards the consumers against different types of exploitations.
Consumer Legislation Act
the important among them other than Consumer protection act are:
Banking Regulation act, 1949
Companies Act, 1956
Customs Act, 1962
Essential commodities Act, 1955
Drugs & Cosmetics Act, 1940
MRTP (Monopolies & Restrictive Trade Practices Act), 1969
Prevention of Food adulteration Act (PEA), 1954
The Standards of weights & Measures Act, 1976.
reference: Kerala HSE, BS
Thursday, February 10, 2011
Thursday, December 23, 2010
HARSHAD MEHTA
Harshad Mehta was an Indian stockbroker caught in a scandal beginning in 1992. He died in 2001, while the legal issues were still being litigated.
Early life
Harshad Shantilal Mehta was born in a Gujarati jain family of modest means. His father was a small businessman. His mother's name was Rasilaben Mehta. His early childhood was spent in the industrial city of Bombay. Due to indifferent health of Harshad's father in the humid environs of Bombay, the family shifted their residence in the mid-1960s to Raipur, then in Madhya Pradesh and currently the capital of Chattisgarh state.He studied at the Holy Cross High School, located at Byron Bazaar. After completing his secondary education Harshad left for Bombay. While doing odd jobs he joined Lala Lajpat Rai College for a Bachelor's degree in Commerce.
After completing his graduation, Harshad Mehta started his working life as an employee of the New India Assurance Company. During this period his family relocated to Bombay and his brother Ashwin Mehta started to pursue graduation course in law at Lala Lajpat Rai College. After his graduation Ashwin joined (ICICI) Industrial Credit and Investment Corporation of India. They had rented a small flat in Ghatkopar for living.
In the late seventies every evening Harshad and Ashwin started to analyze tips generated from respective offices and from cyclostyled investment letters, which had made their appearance during that time.
In the early eighties he quit his job and sought a job with stock broker P. Ambalal affiliated to Bombay Stock Exchange (BSE) before becoming a jobber on BSE for stock broker P.D. Shukla.
In 1981 he became a sub-broker for stock brokers J.L. Shah and Nandalal Sheth. After a while he was unable to sustain his overbought positions and decided to pay his dues by selling his house with consent of his mother Rasilaben and brother Ashwin. The next day Harshad went to his brokers and offered the papers of the house as guarantee. The brokers Shah and Sheth were moved by his gesture and gave him sufficient time to overcome his position.
After he came out of this big struggle for survival he became stronger and his brother quit his job to team with Harshad to start their venture GrowMore Research and Asset Management Company Limited. While a brokers card at BSE was being auctioned, the company made a bid for the same with financial assistance from Shah and Sheth, who were Harshad's previous broker mentors.
He rose and survived the bear runs, this earned him the nickname of the Big Bull of the trading floor, and his actions, actual or perceived, decided the course of the movement of the Sensex as well as scrip-specific activities.By the end of eighties the media started projecting him as "Stock Market Success", "Story of Rags to Riches" and he too started to fuel his own publicity. He felt proud of this accomplishments and showed off his success to journalists through his mansion "Madhuli" ,which included a billiards room, mini theatre and nine hole golf course. His brand new Toyota Lexus and a fleet of cars gave credibility to his show off. This in no time made him the nondescript broker to super star of financial world.
During his heyday, in the early 1990s, Harshad Mehta commanded a large resource of funds and finances as well as personal wealth.
Stock Market Scandal
Mehta gradually rose to become a stock broker on the Bombay Stock Exchange and had an expensive lifestyle. He lived in a 15,000 square feet (1,400 m2) apartment, which had a swimming pool as well as a golf patch. By 1990 Harshad Mehta had risen to prominence in the stock market. He had been buying shares heavily. The shares which attracted attention were those of Associated Cement Company (ACC). The price of ACC was bid up to Rs 10,000. For those who asked, Mehta had the replacement cost theory as an explanation. The theory basically argues that old companies should be valued on the basis of the amount of money which would be required to create another such company.
Through the second half of 1991 Mehta had earned the sobriquet of the ‘Big Bull’, who was said to have started the bull run.
On April 23, 1992, journalist Sucheta Dalal in a column in The Times of India, exposed the dubious ways of Harshad Metha. The broker was dipping illegally into the banking system to finance his buying.
The authors explain: “The crucial mechanism through which the scam was effected was the ready forward (RF) deal. The RF is in essence a secured short-term (typically 15-day) loan from one bank to another. Crudely put, the bank lends against government securities just as a pawnbroker lends against jeweller. The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price.”
It was this ready forward deal that Harshad Mehta and his cronies used with great success to channel money from the banking system.
A typical ready forward deal involved two banks brought together by a broker in lieu of a commission. The broker handles neither the cash nor the securities, though that wasn’t the case in the lead-up to the scam.
“In this settlement process, deliveries of securities and payments were made through the broker. That is, the seller handed over the securities to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker, who then made the payment to the seller.
In this settlement process, the buyer and the seller might not even know whom they had traded with, either being known only to the broker.”
This the brokers could manage primarily because by now they had become market makers and had started trading on their account. To keep up a semblance of legality, they pretended to be undertaking the transactions on behalf of a bank.
Another instrument used in a big way was the bank receipt (BR). In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e. the seller of securities, gave the buyer of the securities a BR.
As the authors write, a BR “confirms the sale of securities. It acts as a receipt for the money received by the selling bank. Hence the name - bank receipt. It promises to deliver the securities to the buyer. It also states that in the mean time, the seller holds the securities in trust of the buyer.”
Having figured this out, Mehta needed banks, which issue fake BRs, or BRs not backed by any government securities. “Two small and little known banks - the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) - came in handy for this purpose. These banks were willing to issue BRs as and when required, for a fee,” the authors point out.
Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, obviously assuming that they were lending against government securities when this was not really the case. This money was used to drive up the prices of stocks in the stock market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned.
The game went on as long as the stock prices kept going up, and no one had a clue about Mehta’s modus operandi. Once the scam was exposed though, a lot of banks were left holding BRs which did not have any value - the banking system had been swindled of a whopping Rs 4,000 crore. When the scam was finally revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office roof because he knew that if people come to know about his involvement in issuing cheques to Harshad Mehta, people would accuse him.
Mehta made a brief comeback as a stock market guru, giving tips on his own website as well as a weekly newspaper column. This time around, he was in cahoots with owners of a few companies and recommended only those shares. This game, too, did not last long.
Interestingly, by the time he died, Mehta had been convicted in only one of the many cases filed against him.
Till now, the real story behind the entire scam is unknown. The recent Hindi movie 'Gafla' showed this scam in a different perspective
The fall
In April 1992, the Indian stock market crashed, and Harshad Mehta, the person who was all along considered as the architect of the bull run was blamed for the crash. It transpired that he had manipulated the Indian banking systems to siphon off the funds from the banking system, and used the liquidity to build large positions in a select group of stocks. When the scam broke out, he was called upon by the banks and the financial institutions to return the funds, which in turn set into motion a chain reaction, necessitating liquidating and exiting from the positions which he had built in various stocks. The panic reaction ensued, and the stock market reacted and crashed within days.He was arrested on June 5, 1992 for his role in the scam.
His favorite stocks included
* ACC
* Apollo Tyres
* Reliance
* Tata Iron and Steel Co. (TISCO)
* BPL
* Sterlite
* Videocon.
The extent
The Harshad Mehta induced security scam, as the media sometimes termed it, adversely affected at least 10 major commercial banks of India, a number of foreign banks operating in India, and the National Housing Bank, a subsidiary of the Reserve Bank of India, which is the central Bank of India.
As an aftermath of the shockwaves which engulfed the Indian financial sector, a number of people holding key positions in the India's financial sector were adversely affected, which included arrest and sacking of K. M. Margabandhu, then CMD of the UCO Bank; removal from office of V. Mahadevan, one of the Managing Directors of India's largest bank, the State Bank of India.
The end
The Central Bureau of Investigation which is India's premier investigative agency, was entrusted with the task of deciphering the modus operandi and the ramifications of the scam. Harshad Mehta was arrested and investigations continued for a decade. During his judicial custody, while he was in Thane Prison, Mumbai, he complained of chest pain, and was moved to a hospital, where he died on 31st December 2001.
His death remains a mystery. Some believe that he was murdered ruthlessly by an underworld nexus (spanning several South Asian countries including Pakistan). Rumour has it that they suspected that part of the huge wealth that Harshad Mehta commanded at the height of the 1992 scam was still in safe hiding and thought that the only way to extract their share of the 'loot' was to pressurise Harshad's family by threatening his very existence. In this context, it might be noteworthy that a certain criminal allegedly connected with this nexus had inexplicably surrendered just days after Harshad was moved to Thane Jail and landed up in imprisonment in the same jail, in the cell next to Harshad Mehta's.
References:
Wikipedia.com,associatepublisher.com
Early life
Harshad Shantilal Mehta was born in a Gujarati jain family of modest means. His father was a small businessman. His mother's name was Rasilaben Mehta. His early childhood was spent in the industrial city of Bombay. Due to indifferent health of Harshad's father in the humid environs of Bombay, the family shifted their residence in the mid-1960s to Raipur, then in Madhya Pradesh and currently the capital of Chattisgarh state.He studied at the Holy Cross High School, located at Byron Bazaar. After completing his secondary education Harshad left for Bombay. While doing odd jobs he joined Lala Lajpat Rai College for a Bachelor's degree in Commerce.
After completing his graduation, Harshad Mehta started his working life as an employee of the New India Assurance Company. During this period his family relocated to Bombay and his brother Ashwin Mehta started to pursue graduation course in law at Lala Lajpat Rai College. After his graduation Ashwin joined (ICICI) Industrial Credit and Investment Corporation of India. They had rented a small flat in Ghatkopar for living.
In the late seventies every evening Harshad and Ashwin started to analyze tips generated from respective offices and from cyclostyled investment letters, which had made their appearance during that time.
In the early eighties he quit his job and sought a job with stock broker P. Ambalal affiliated to Bombay Stock Exchange (BSE) before becoming a jobber on BSE for stock broker P.D. Shukla.
In 1981 he became a sub-broker for stock brokers J.L. Shah and Nandalal Sheth. After a while he was unable to sustain his overbought positions and decided to pay his dues by selling his house with consent of his mother Rasilaben and brother Ashwin. The next day Harshad went to his brokers and offered the papers of the house as guarantee. The brokers Shah and Sheth were moved by his gesture and gave him sufficient time to overcome his position.
After he came out of this big struggle for survival he became stronger and his brother quit his job to team with Harshad to start their venture GrowMore Research and Asset Management Company Limited. While a brokers card at BSE was being auctioned, the company made a bid for the same with financial assistance from Shah and Sheth, who were Harshad's previous broker mentors.
He rose and survived the bear runs, this earned him the nickname of the Big Bull of the trading floor, and his actions, actual or perceived, decided the course of the movement of the Sensex as well as scrip-specific activities.By the end of eighties the media started projecting him as "Stock Market Success", "Story of Rags to Riches" and he too started to fuel his own publicity. He felt proud of this accomplishments and showed off his success to journalists through his mansion "Madhuli" ,which included a billiards room, mini theatre and nine hole golf course. His brand new Toyota Lexus and a fleet of cars gave credibility to his show off. This in no time made him the nondescript broker to super star of financial world.
During his heyday, in the early 1990s, Harshad Mehta commanded a large resource of funds and finances as well as personal wealth.
Stock Market Scandal
Mehta gradually rose to become a stock broker on the Bombay Stock Exchange and had an expensive lifestyle. He lived in a 15,000 square feet (1,400 m2) apartment, which had a swimming pool as well as a golf patch. By 1990 Harshad Mehta had risen to prominence in the stock market. He had been buying shares heavily. The shares which attracted attention were those of Associated Cement Company (ACC). The price of ACC was bid up to Rs 10,000. For those who asked, Mehta had the replacement cost theory as an explanation. The theory basically argues that old companies should be valued on the basis of the amount of money which would be required to create another such company.
Through the second half of 1991 Mehta had earned the sobriquet of the ‘Big Bull’, who was said to have started the bull run.
On April 23, 1992, journalist Sucheta Dalal in a column in The Times of India, exposed the dubious ways of Harshad Metha. The broker was dipping illegally into the banking system to finance his buying.
The authors explain: “The crucial mechanism through which the scam was effected was the ready forward (RF) deal. The RF is in essence a secured short-term (typically 15-day) loan from one bank to another. Crudely put, the bank lends against government securities just as a pawnbroker lends against jeweller. The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price.”
It was this ready forward deal that Harshad Mehta and his cronies used with great success to channel money from the banking system.
A typical ready forward deal involved two banks brought together by a broker in lieu of a commission. The broker handles neither the cash nor the securities, though that wasn’t the case in the lead-up to the scam.
“In this settlement process, deliveries of securities and payments were made through the broker. That is, the seller handed over the securities to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker, who then made the payment to the seller.
In this settlement process, the buyer and the seller might not even know whom they had traded with, either being known only to the broker.”
This the brokers could manage primarily because by now they had become market makers and had started trading on their account. To keep up a semblance of legality, they pretended to be undertaking the transactions on behalf of a bank.
Another instrument used in a big way was the bank receipt (BR). In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e. the seller of securities, gave the buyer of the securities a BR.
As the authors write, a BR “confirms the sale of securities. It acts as a receipt for the money received by the selling bank. Hence the name - bank receipt. It promises to deliver the securities to the buyer. It also states that in the mean time, the seller holds the securities in trust of the buyer.”
Having figured this out, Mehta needed banks, which issue fake BRs, or BRs not backed by any government securities. “Two small and little known banks - the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) - came in handy for this purpose. These banks were willing to issue BRs as and when required, for a fee,” the authors point out.
Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, obviously assuming that they were lending against government securities when this was not really the case. This money was used to drive up the prices of stocks in the stock market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned.
The game went on as long as the stock prices kept going up, and no one had a clue about Mehta’s modus operandi. Once the scam was exposed though, a lot of banks were left holding BRs which did not have any value - the banking system had been swindled of a whopping Rs 4,000 crore. When the scam was finally revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office roof because he knew that if people come to know about his involvement in issuing cheques to Harshad Mehta, people would accuse him.
Mehta made a brief comeback as a stock market guru, giving tips on his own website as well as a weekly newspaper column. This time around, he was in cahoots with owners of a few companies and recommended only those shares. This game, too, did not last long.
Interestingly, by the time he died, Mehta had been convicted in only one of the many cases filed against him.
Till now, the real story behind the entire scam is unknown. The recent Hindi movie 'Gafla' showed this scam in a different perspective
The fall
In April 1992, the Indian stock market crashed, and Harshad Mehta, the person who was all along considered as the architect of the bull run was blamed for the crash. It transpired that he had manipulated the Indian banking systems to siphon off the funds from the banking system, and used the liquidity to build large positions in a select group of stocks. When the scam broke out, he was called upon by the banks and the financial institutions to return the funds, which in turn set into motion a chain reaction, necessitating liquidating and exiting from the positions which he had built in various stocks. The panic reaction ensued, and the stock market reacted and crashed within days.He was arrested on June 5, 1992 for his role in the scam.
His favorite stocks included
* ACC
* Apollo Tyres
* Reliance
* Tata Iron and Steel Co. (TISCO)
* BPL
* Sterlite
* Videocon.
The extent
The Harshad Mehta induced security scam, as the media sometimes termed it, adversely affected at least 10 major commercial banks of India, a number of foreign banks operating in India, and the National Housing Bank, a subsidiary of the Reserve Bank of India, which is the central Bank of India.
As an aftermath of the shockwaves which engulfed the Indian financial sector, a number of people holding key positions in the India's financial sector were adversely affected, which included arrest and sacking of K. M. Margabandhu, then CMD of the UCO Bank; removal from office of V. Mahadevan, one of the Managing Directors of India's largest bank, the State Bank of India.
The end
The Central Bureau of Investigation which is India's premier investigative agency, was entrusted with the task of deciphering the modus operandi and the ramifications of the scam. Harshad Mehta was arrested and investigations continued for a decade. During his judicial custody, while he was in Thane Prison, Mumbai, he complained of chest pain, and was moved to a hospital, where he died on 31st December 2001.
His death remains a mystery. Some believe that he was murdered ruthlessly by an underworld nexus (spanning several South Asian countries including Pakistan). Rumour has it that they suspected that part of the huge wealth that Harshad Mehta commanded at the height of the 1992 scam was still in safe hiding and thought that the only way to extract their share of the 'loot' was to pressurise Harshad's family by threatening his very existence. In this context, it might be noteworthy that a certain criminal allegedly connected with this nexus had inexplicably surrendered just days after Harshad was moved to Thane Jail and landed up in imprisonment in the same jail, in the cell next to Harshad Mehta's.
References:
Wikipedia.com,associatepublisher.com
Monday, December 20, 2010
FORMS AND FORMATION OF BUSINESS ENTERPRISES
Hai commerce learners, I think this session is more better for the beginners, especially students of Higher Secondary (Kerala Syllabus)-Plus One. I tried to cover all the points relating to this particular topic, if I ignore to point out any details about this Chapter, u can inform me directly to my Mail address.
all the best:
The following are the form s of Business organisations in the private sector.
1. Sole Proprietorship
2. Joint Hindu family Business
3. Partnership
4. Co-Operative Society
5. Company
1. Sole trader or sole proprietorship
A business owned, managed and controlled by a single individual is called sole proprietorship organizations. The individual is callled sole trader or sole proprietor.
Features of sole proprietorship
1. Single ownership: single indivcidual is the owner of the businees.
2. Risk bearing: The proprietor is the sole beneficiary of all profits. So he has to bear the entire loss, if any, incurred in the course of business.
3. Unlimited liability.: If the business are not sufficient to meet the liabilities of business, the proprietor's personal assets are sold out to meet such liabilities.
4. Freedom of operation: The proprietor enjoys freedom of operations as there is minimum government regulations.
5. Control.: The proprietor has full control over the affairs of the business as he is the sole owner.
Merits of Sole proprietorship
The following are the merits of sole proprietorship business.
1. Easy to form and close: it is easy to start a sole trading business because of minimum legal formalities.
2. Flexibility of operations : all decisions are taken by a single person. This provides flexibility to the business.
3. Sole beneficiary of profits: the entire profits of the sole trading business is entitled to the proprietor.
4. Suitability for small business: Most of the small businesses are established as Sole proprietorship.
Limitations of sole proprietorship
1. Limited resources: The resources of a sole trader are limited. There is a limit to which a single person can invest.
2. Limited managerial skill : One person may not be expert in each and every function of the business. It limits the prosperity and growth of business.
3. Unlimited liability: The sole trader is personally liable for all business operations.
4. Lack of continuity : The business is dependent on a single individual. His illness insolvency or death causes discontinuity of business.
2. Joint Hindu Family Business
A joint hindu family business refers to a business which is owned by the members of a hindu f amily. It is also called Hindu Undivided Family (HUF) business. The male members of the HUF are called copaeceners. The senior most male member of the family is called karta.
Features of HUF business.
The major features of HUF business are the following.
1. membership by birth: Membership of HUF business is got by the birth and not by agreement.
2. Management: Management of the affairs of the businees is vested with Karta.
3. Liability : The personal property of the Karta can be used for payment of business debts. Ie, the Karta's liability is unlimited. But every other coparcener has limited liability up to his share in the HUF property.
4. No maximum limit: The membership of HUF is not limited.
5. Minor members: By birth itself a male member becomes the member of the HUF.
6. Unaffaected by death: The HUF business exist even after the death of the Karta or other coparcener.
Merits
1. Security and status to members: This business provides members a sense of security and belonging.
2. Continuity: The death or insolvency of the Karta or any other coparcener will not affect the existence of business of HUF.
3. Centralised Management: Management is centralized in the hands of Karta.
4. Unlimited membership: By law membership is limited to male members, but no limits as to the number of members.
5. Limited liability: The coparceners liability is limited, even though that of the Karta is unlimited.
Limitations of HUF Business
1. Unlimited liability : Karta's liability is unlimited. His personal assets are also sold to meet the business debts.
2. Limited financial resources: A JHF (Joint Hindu Family business) has relatively limited financial resources.
3. Limited managerial liability : As all business decisions are taken by the Karta, an incompetent Karta cannot run business.
3. Partnership Businesses
Partnership form of organisation has been developed due to the limitations of sole trading concern. The Indian Partnership Act 1932 defines partnership as, “partnership is the relation between persons who have agreed to share the profitsof a business carried on by all or anyone of the m acting for all”.
Features of Partnership
1. Number of persons: The minimum number of persons required to form a partnership is two. The maximum is ten in a banking firm and twenty in a trading firm.
2. Lawful business : Partnerships can be formed for the purpose of carrying ona business. The business must be lawful.
3. Agreement : For the formation of a partnership, an agreement between partners is essential. The agreement may be either Oral or written.
4. Implied Agency: Every partner of a firm is both an agent as well as a principal.
5. Profit sharing: The profit of the partnership business must be shared by all the partners in an agreed ratio.
6. Unlimited liability: The liability of the partners of a partnership firm is unlimited.
7. Utmost good faith: Every partner must be just and faithful to one another.
8. Collective management: Each partner is entitled to take part in management of the firm. For convenience, the right of management may be given to a particular partner is known as managing partner.
9. Restriction of Transfer of Interest: No partner can transfer his share to an outsider without the consent of all the other partners.
10. No separate legal existence: a partnership is not a legal entity. It does not enjoy any legal status.
Kinds of partners.
There are different kinds of partners. They are:
1. Active or working partner: Active partner is one who not only contributes capital but also takes active part in the business.
2. Sleeping or dormant partner: he provides funds to the firm. He is not active in business.
3. Nominal partner : He only lends his name and reputation for the benefit of the firm. He does not get any share in the firm's profit but he is liable to the outsiders for the debts of the firm.
4. Partner in profit only: A person who becomes a partner on the specific understanding tha that he will get a share in the profits of the firm but will not share any loss is called a partner in profit only.
5. Partner by estoppel: he is a person who has not contributed any capital to the firm. He does not take any part in the management of the firm.
6. Secret partner: In reality he is a partner but he does not want to be known as a partner to the outsiders.
7. Partner by holding out: he is not actually a partner. But knowingly he permits himself to be a partner of the firm by his activities.
8. Limited partner: If the liability of a partner is limited to the extent of his capital in the firm he is called a limited partner.
9. Minor partner : A minor does not have the capacity to be a full fledged partner. He can be admitted to the benefits of a partnership.
Kinds of partnership
I. On the basis of liability, partnership can be divided into two. They are 1. general partnership and 2. Limited Partnership.
1. General partnership: Here the liability of all the partners is unlimited. All partnership firms in India are organised in this form only.
2. Limited partnership: Here the liability of certain partners is limited to the amount of capital contributed. A limited partnership should have at least one unlimited partner.
II. On the basis of duration of the firm, Partnership may be, 1. Partnership-at-will and 2. Particular partnership.
1. Partnership-at-will: when partnership is formed to conduct business for an indefinite period, it is called partnership-at-will.
2. Particular partnership: When a partnership is formed to conduct a particular business for a specified period it is called a particular partnership.
Formation of Partnership firm
A partnership can be formed by any two or more persons who enter into an agreement to carry on business with a view to sharing profit. This agreement may be oral or in written. To avoid misunderstanding in future, it desirable to have a written agreement, concerning the working of the firm., signed by all the partners is called Partnership Deed or Partnership agreement.
Contents of Partnership Deed
Partnership Deed usually contains the following:
1. names and addresses of the partners.
2. Name of the firm.
3. Nature of the business.
4. Date of commencement of Partnership.
5. The principal place of business.
6. Capital contribution by each partner.
7. Duration of each partnership, if any.
8. The profit sharing ratio.
9. Amount of salary or commission, if any payable to partners.
10. Rules regarding operation of bank account.
Registration of a Partnership firm.
Registration of a partnership firm is not compulsory in India. Registration of a firm is a simple process.
Limitations of an Unregistered Partnership Firm
An unregistered firm suffers from certain drawbacks or limitations. Following are some of them:
1. It cannot sure any partner or partners of the firm.
2. Partners of an unregistered firm cannot sue the firm nor they can sue against each other as partners.
3. Third parties cannot recover their dues from an unregistered firm through the court of law.
Advantages of a Partnership firm
1. Large financial resources: When compared to the sole trading concern a partnership firm can raise more capital.
2. Easy formation: Formation of a partnership firm is very compulsory.
3. Flexibility: the operation of the partnership firm is flexible. The nature and place of business can be changed easily whenever the partners desire.
4. Easy to borrow money: As the partners are jointly and severally liable for the debts, banks and money lenders will lend money to the firm.
5. Easy dissolution: A partnership firm can be dissolved easly at any time without undergoing any legal formalities.
Disadvantages of a Partnership firm
1. Limited finance: Modern business needs large amount of capital. Capital may be inadequate for big business.
2. Uncertain future: Instability is the greatest disadvantage of a firm Death, insolvency, insanity etc., of on e of the partners may lead to the dissolution of the business.
3. Unlimited liability: Partners are liable for the debts of the firm to an unlimited extent.
4. Non-transferability of interest: A partner is not permitted to transfer his capital or interest in the firm to outsiders without the consent of all other partners.
5. No public confidence: The activities of a firm are not legally controlled .
3. Co-operative Organisation
Meaning
Co-Operative society is an organisation which is operated jointly by its members.
to be continued.......
all the best:
The following are the form s of Business organisations in the private sector.
1. Sole Proprietorship
2. Joint Hindu family Business
3. Partnership
4. Co-Operative Society
5. Company
1. Sole trader or sole proprietorship
A business owned, managed and controlled by a single individual is called sole proprietorship organizations. The individual is callled sole trader or sole proprietor.
Features of sole proprietorship
1. Single ownership: single indivcidual is the owner of the businees.
2. Risk bearing: The proprietor is the sole beneficiary of all profits. So he has to bear the entire loss, if any, incurred in the course of business.
3. Unlimited liability.: If the business are not sufficient to meet the liabilities of business, the proprietor's personal assets are sold out to meet such liabilities.
4. Freedom of operation: The proprietor enjoys freedom of operations as there is minimum government regulations.
5. Control.: The proprietor has full control over the affairs of the business as he is the sole owner.
Merits of Sole proprietorship
The following are the merits of sole proprietorship business.
1. Easy to form and close: it is easy to start a sole trading business because of minimum legal formalities.
2. Flexibility of operations : all decisions are taken by a single person. This provides flexibility to the business.
3. Sole beneficiary of profits: the entire profits of the sole trading business is entitled to the proprietor.
4. Suitability for small business: Most of the small businesses are established as Sole proprietorship.
Limitations of sole proprietorship
1. Limited resources: The resources of a sole trader are limited. There is a limit to which a single person can invest.
2. Limited managerial skill : One person may not be expert in each and every function of the business. It limits the prosperity and growth of business.
3. Unlimited liability: The sole trader is personally liable for all business operations.
4. Lack of continuity : The business is dependent on a single individual. His illness insolvency or death causes discontinuity of business.
2. Joint Hindu Family Business
A joint hindu family business refers to a business which is owned by the members of a hindu f amily. It is also called Hindu Undivided Family (HUF) business. The male members of the HUF are called copaeceners. The senior most male member of the family is called karta.
Features of HUF business.
The major features of HUF business are the following.
1. membership by birth: Membership of HUF business is got by the birth and not by agreement.
2. Management: Management of the affairs of the businees is vested with Karta.
3. Liability : The personal property of the Karta can be used for payment of business debts. Ie, the Karta's liability is unlimited. But every other coparcener has limited liability up to his share in the HUF property.
4. No maximum limit: The membership of HUF is not limited.
5. Minor members: By birth itself a male member becomes the member of the HUF.
6. Unaffaected by death: The HUF business exist even after the death of the Karta or other coparcener.
Merits
1. Security and status to members: This business provides members a sense of security and belonging.
2. Continuity: The death or insolvency of the Karta or any other coparcener will not affect the existence of business of HUF.
3. Centralised Management: Management is centralized in the hands of Karta.
4. Unlimited membership: By law membership is limited to male members, but no limits as to the number of members.
5. Limited liability: The coparceners liability is limited, even though that of the Karta is unlimited.
Limitations of HUF Business
1. Unlimited liability : Karta's liability is unlimited. His personal assets are also sold to meet the business debts.
2. Limited financial resources: A JHF (Joint Hindu Family business) has relatively limited financial resources.
3. Limited managerial liability : As all business decisions are taken by the Karta, an incompetent Karta cannot run business.
3. Partnership Businesses
Partnership form of organisation has been developed due to the limitations of sole trading concern. The Indian Partnership Act 1932 defines partnership as, “partnership is the relation between persons who have agreed to share the profitsof a business carried on by all or anyone of the m acting for all”.
Features of Partnership
1. Number of persons: The minimum number of persons required to form a partnership is two. The maximum is ten in a banking firm and twenty in a trading firm.
2. Lawful business : Partnerships can be formed for the purpose of carrying ona business. The business must be lawful.
3. Agreement : For the formation of a partnership, an agreement between partners is essential. The agreement may be either Oral or written.
4. Implied Agency: Every partner of a firm is both an agent as well as a principal.
5. Profit sharing: The profit of the partnership business must be shared by all the partners in an agreed ratio.
6. Unlimited liability: The liability of the partners of a partnership firm is unlimited.
7. Utmost good faith: Every partner must be just and faithful to one another.
8. Collective management: Each partner is entitled to take part in management of the firm. For convenience, the right of management may be given to a particular partner is known as managing partner.
9. Restriction of Transfer of Interest: No partner can transfer his share to an outsider without the consent of all the other partners.
10. No separate legal existence: a partnership is not a legal entity. It does not enjoy any legal status.
Kinds of partners.
There are different kinds of partners. They are:
1. Active or working partner: Active partner is one who not only contributes capital but also takes active part in the business.
2. Sleeping or dormant partner: he provides funds to the firm. He is not active in business.
3. Nominal partner : He only lends his name and reputation for the benefit of the firm. He does not get any share in the firm's profit but he is liable to the outsiders for the debts of the firm.
4. Partner in profit only: A person who becomes a partner on the specific understanding tha that he will get a share in the profits of the firm but will not share any loss is called a partner in profit only.
5. Partner by estoppel: he is a person who has not contributed any capital to the firm. He does not take any part in the management of the firm.
6. Secret partner: In reality he is a partner but he does not want to be known as a partner to the outsiders.
7. Partner by holding out: he is not actually a partner. But knowingly he permits himself to be a partner of the firm by his activities.
8. Limited partner: If the liability of a partner is limited to the extent of his capital in the firm he is called a limited partner.
9. Minor partner : A minor does not have the capacity to be a full fledged partner. He can be admitted to the benefits of a partnership.
Kinds of partnership
I. On the basis of liability, partnership can be divided into two. They are 1. general partnership and 2. Limited Partnership.
1. General partnership: Here the liability of all the partners is unlimited. All partnership firms in India are organised in this form only.
2. Limited partnership: Here the liability of certain partners is limited to the amount of capital contributed. A limited partnership should have at least one unlimited partner.
II. On the basis of duration of the firm, Partnership may be, 1. Partnership-at-will and 2. Particular partnership.
1. Partnership-at-will: when partnership is formed to conduct business for an indefinite period, it is called partnership-at-will.
2. Particular partnership: When a partnership is formed to conduct a particular business for a specified period it is called a particular partnership.
Formation of Partnership firm
A partnership can be formed by any two or more persons who enter into an agreement to carry on business with a view to sharing profit. This agreement may be oral or in written. To avoid misunderstanding in future, it desirable to have a written agreement, concerning the working of the firm., signed by all the partners is called Partnership Deed or Partnership agreement.
Contents of Partnership Deed
Partnership Deed usually contains the following:
1. names and addresses of the partners.
2. Name of the firm.
3. Nature of the business.
4. Date of commencement of Partnership.
5. The principal place of business.
6. Capital contribution by each partner.
7. Duration of each partnership, if any.
8. The profit sharing ratio.
9. Amount of salary or commission, if any payable to partners.
10. Rules regarding operation of bank account.
Registration of a Partnership firm.
Registration of a partnership firm is not compulsory in India. Registration of a firm is a simple process.
Limitations of an Unregistered Partnership Firm
An unregistered firm suffers from certain drawbacks or limitations. Following are some of them:
1. It cannot sure any partner or partners of the firm.
2. Partners of an unregistered firm cannot sue the firm nor they can sue against each other as partners.
3. Third parties cannot recover their dues from an unregistered firm through the court of law.
Advantages of a Partnership firm
1. Large financial resources: When compared to the sole trading concern a partnership firm can raise more capital.
2. Easy formation: Formation of a partnership firm is very compulsory.
3. Flexibility: the operation of the partnership firm is flexible. The nature and place of business can be changed easily whenever the partners desire.
4. Easy to borrow money: As the partners are jointly and severally liable for the debts, banks and money lenders will lend money to the firm.
5. Easy dissolution: A partnership firm can be dissolved easly at any time without undergoing any legal formalities.
Disadvantages of a Partnership firm
1. Limited finance: Modern business needs large amount of capital. Capital may be inadequate for big business.
2. Uncertain future: Instability is the greatest disadvantage of a firm Death, insolvency, insanity etc., of on e of the partners may lead to the dissolution of the business.
3. Unlimited liability: Partners are liable for the debts of the firm to an unlimited extent.
4. Non-transferability of interest: A partner is not permitted to transfer his capital or interest in the firm to outsiders without the consent of all other partners.
5. No public confidence: The activities of a firm are not legally controlled .
3. Co-operative Organisation
Meaning
Co-Operative society is an organisation which is operated jointly by its members.
to be continued.......
Sunday, March 21, 2010
Investment
The term investment refers to the employment of funds are with the aim of achieving additional income or growth in value. The essential quality of an investment is that it involves waiting for a reward. It takes that the commitment of resources which have been saved on put away from the current consumption. In the hope that some benefit will accure in future . Thus investment may be defined as “commitment of funds made in the exception of some positive rate of return”. The expectation of result is as essential element of investment. Since the return is expected to be realized in future. There is a possibility that the return actually realized is lower than the return expected to be realised. This possibility of variation in the actual return is known as investment risk. Thus every investment involves return and risk.
Investment may be classified into:-
1. Financial investment
Investment to the allocation of monetary resources to asset that are expected to yield some gain or return on the form of interest, dividend, premeium, pension benefit or appreciation in the value of capital. These assets renge from safe investment to risky investment. Investment in this forms called financial investment. Purchase of shares, dubuntures, post office savings certificates, insurance policies are all investments in financial sense.
2. Economic Investment
In the economic sense investment means the net additions to the economy’s capital stock which consist of goods and services. Investment in this sense implies the formation of new and productive capital in the form of new constructions, plant and machinery, inventory etc. Such investments generate physical assets.
Charecteristics of Assets:-
All investments are charecterised by certain features:
1. Return:
All investments are made with the primary objective of return. Therefore investments are characterized by the expectation of return. The return may be received in the form of yield plus capital appreciation. The dividend or interest received from investment is yield while the differences between sales price and purchase price is called capital appreciation.
2. Risk
Risk is a inherent characteristics of investment. The risk may be due to loss of capital, delay in repayment of capital, non payment of interest etc. it may be remembered that higher is the risk, higher will be the return.
3. Safety
Safety is another feature which an investors desires for his investment. It implies the certainty of return of capital without loss of money or time.
4. Liquidity
Liquidity of investment implies that the investment while is easily slable or marketable without loss of money or loss of time. Sometimes the preference shares and debuntures are not easily marketable but equity shares of companies loted in the stock exchange are easily marketable through the stock exchange.
Investment process
Investment process is generally described in for stages.
1. Investment policies:
The first stage determines and involves financial affairs and objectives before making investment. Investor has to see that he should be able to create an emergency fund, al element of liquidity and quick convertability of securities into cash. This stage may therefore be called the proper time for identifying investment assets and considering the features.
2. Investmrnt analysis
When an individual has arranged the investment he requires, the next step is the analyze the securities available for investments. He must make a comparitive analysis of type of industry, kind of security, expected return and associated risk.
3. Valuation of security
The third step is the valuation of investment. Investment values in general is taken to be the present worth to the owners of future benefit from investment. Comparison of value with current market price of the assets. Each assets must be valued on its industrial merit.
4. Portfolio constructions:
After evaluating various investment portfolio construction should be made. It requires the knowledge of different aspects of various securities.
Types of investments
1. Industrial investors:
Industrils investros have a difficult time while deterrmining their investment portfolio. They do not have usually have a time to research a share or debunture in depth before making investment decision. They have very limited time after meeting their business family and social life. The material should be locked I nto read by them must be very judiciously selected. They cannot have an extensive study. So they approach brokers, openions expressed in papers or journels or enquiry from friends engaged in business for the information to arrive at investment decision.
2. Institutional investors.
He institutional investors have both time and resources than that of individual investors. They can employ skilled economist, financial analyst and investment managers. They can purchase copies of registration documents of relevant companies and read have continuous review and scrutiny of his investment portfolio. When we adverse condition develop they can dispose of security no longer worth while. This institutional investor has a great advantage over than the average individual investor in managing his investment portfolio.
Investment V/s Speculation.
It is very difficult to make out a precise distinction between speculation and investment. An investment is a successful speculation is an unsuccessful investment. Good investment requires the ability and capacity to foresees the future events. Investment therefore requires speculation while speculation also involves some investment.
Another distinction between investment and speculation emphasize on the basis of the basic intentional of the parties while entering into business transaction. The prime objective of an investor is to get a steady flow of returns. A speculator on the other hand tends to buy an asset with the expectation of earning profit by a subsequent sale when the market rises. The speculation therefore will buy those marketable asset which he does not plan to own for a very long time.
The third distinction is that the speculation involves a higher level of risk and more uncertain expectation as compared to investment. It leads to the possibility of incurring loss in the financial transaction. In a broader sense investment is considered to involve risk and turn the capital safe.
Reference: M.Com-kerala university text
books, wekipedia.com
Investment may be classified into:-
1. Financial investment
Investment to the allocation of monetary resources to asset that are expected to yield some gain or return on the form of interest, dividend, premeium, pension benefit or appreciation in the value of capital. These assets renge from safe investment to risky investment. Investment in this forms called financial investment. Purchase of shares, dubuntures, post office savings certificates, insurance policies are all investments in financial sense.
2. Economic Investment
In the economic sense investment means the net additions to the economy’s capital stock which consist of goods and services. Investment in this sense implies the formation of new and productive capital in the form of new constructions, plant and machinery, inventory etc. Such investments generate physical assets.
Charecteristics of Assets:-
All investments are charecterised by certain features:
1. Return:
All investments are made with the primary objective of return. Therefore investments are characterized by the expectation of return. The return may be received in the form of yield plus capital appreciation. The dividend or interest received from investment is yield while the differences between sales price and purchase price is called capital appreciation.
2. Risk
Risk is a inherent characteristics of investment. The risk may be due to loss of capital, delay in repayment of capital, non payment of interest etc. it may be remembered that higher is the risk, higher will be the return.
3. Safety
Safety is another feature which an investors desires for his investment. It implies the certainty of return of capital without loss of money or time.
4. Liquidity
Liquidity of investment implies that the investment while is easily slable or marketable without loss of money or loss of time. Sometimes the preference shares and debuntures are not easily marketable but equity shares of companies loted in the stock exchange are easily marketable through the stock exchange.
Investment process
Investment process is generally described in for stages.
1. Investment policies:
The first stage determines and involves financial affairs and objectives before making investment. Investor has to see that he should be able to create an emergency fund, al element of liquidity and quick convertability of securities into cash. This stage may therefore be called the proper time for identifying investment assets and considering the features.
2. Investmrnt analysis
When an individual has arranged the investment he requires, the next step is the analyze the securities available for investments. He must make a comparitive analysis of type of industry, kind of security, expected return and associated risk.
3. Valuation of security
The third step is the valuation of investment. Investment values in general is taken to be the present worth to the owners of future benefit from investment. Comparison of value with current market price of the assets. Each assets must be valued on its industrial merit.
4. Portfolio constructions:
After evaluating various investment portfolio construction should be made. It requires the knowledge of different aspects of various securities.
Types of investments
1. Industrial investors:
Industrils investros have a difficult time while deterrmining their investment portfolio. They do not have usually have a time to research a share or debunture in depth before making investment decision. They have very limited time after meeting their business family and social life. The material should be locked I nto read by them must be very judiciously selected. They cannot have an extensive study. So they approach brokers, openions expressed in papers or journels or enquiry from friends engaged in business for the information to arrive at investment decision.
2. Institutional investors.
He institutional investors have both time and resources than that of individual investors. They can employ skilled economist, financial analyst and investment managers. They can purchase copies of registration documents of relevant companies and read have continuous review and scrutiny of his investment portfolio. When we adverse condition develop they can dispose of security no longer worth while. This institutional investor has a great advantage over than the average individual investor in managing his investment portfolio.
Investment V/s Speculation.
It is very difficult to make out a precise distinction between speculation and investment. An investment is a successful speculation is an unsuccessful investment. Good investment requires the ability and capacity to foresees the future events. Investment therefore requires speculation while speculation also involves some investment.
Another distinction between investment and speculation emphasize on the basis of the basic intentional of the parties while entering into business transaction. The prime objective of an investor is to get a steady flow of returns. A speculator on the other hand tends to buy an asset with the expectation of earning profit by a subsequent sale when the market rises. The speculation therefore will buy those marketable asset which he does not plan to own for a very long time.
The third distinction is that the speculation involves a higher level of risk and more uncertain expectation as compared to investment. It leads to the possibility of incurring loss in the financial transaction. In a broader sense investment is considered to involve risk and turn the capital safe.
Reference: M.Com-kerala university text
books, wekipedia.com
Port folio analysis
Port folio simply means a group of securities held together for investment purpose. It is usual that of the investors tends to invest in a group of securities rather than single security. Individual securities have risk return characteristics of thereon. Usually the investors have an awaration of risk. It is hoped that if money is invested in several securities simultaneously. The loss in one will be compensated by the gain in others. Therefore creation of portfolio is important. This creation of portfolio is termed as diversification. The efficiency of portfolio can be evaluated only in terms of expected return and risk. Thus determining the expected risk and return of different portfolio is called portfolio analysis.
Portfolio selection
The objective of every rational investor is to maximize his return and minimize risk. Diversification is a method adopted for reducing risk. It essentially resulted in the construction of portfolio. The proper goal of portfolio construction would be to generate a portfolio that provides the highest return and lowest risk. The investor should maximize return at a given level of risk or minimize risk at a given level of return. Such a portfolio would be known as optimal portfolio. The process of finding optimal portfolio is described as portfolio selection.
*Markowitz theory
Markowitz was the first who has developed modern portfolio analysis model for portfolio construction. He generated a portfolio within a return-risk context. He considered the variance in the expected returns from investment and their relationship to each other in constructing portfolio.
Modern portfolio theory has brought out by Markowitz. It is the construction of securities to get the most efficient portfolio. A portfolio is efficient when it is expected to yield the highest relation for the level of risk accepted for a alternatively the smallest portfolio risk for a specified level of expected return. Markowitz used mathematical and statistical analysis in order to arrange for the optimum allocation of asset within portfolio.
Assumptions within Markowitz theory
1. Investors base these decision on the expected rate of return of
theirinvestment.
2. The market is efficient all investors would react all securities in the
market.
3. All investors are risk owns.
4. By combining asset the security returns are co-related to each other.
5. Investors combines the investment by getting maximum return with minimum
risk.
6. The investor can reduce his risk if he adds investments in his portfolio.
Markowitz has shown the effect combining the securities with the help of
finding out the different mathematical and statistica tools like standard
dividend., co-efficient of co-relation.
Limitations of Markowitz model
One of the major problems in this model is that a large number of input data required for the calculation. With a given set of securities infinite number of portfolio can be constructed. Because of this difficulty it found little use in practical application of portfolio analysis. Much simplification is needed and this is achieved through index models. There are essentially two types of index models.
1. Single Index Model
2. Multi Index model.
1. Single index model
It is the simplest and most widely used simplification and may be considered as the extreme point of the continuum with Markowitz model. The basic notion underlying the single index model is that all stocks are affetcetd by movements in the stock market. Casual observations in the stock prices reveals that when the market moves up prices of the most shares tempt to increase. When the market goes down response to market changes.
Sharpe Single Index Model
William Sharp tried to simplify the Markowitz method of diversification of portfolio. Sharpe index model simplifies the process of Markowitz model by reducing the data in a sustentative manner. He assumed that security not only have individual relationship but they are related to each other through some indexes represented by business activity. Sharpe has improved the estimate of expected return and variance of index which may be one or more and are related to economic activity. Sharpe index showed that the return of each securities is co-related by some securities.
2. Multi Index model.
The single index model is infact an over simplification. It assumes that stock together only because of a common movement with the market. Many researchers found that there are influences other than market that cause stock to move together. Multi index model attempts to identify and incorporate these non market factors that cause securities to move together also into the model. These extra factors are a set of economic factors that leads to changes in price. A multi index complex and require more data estimate for its application. But single index model and multi index model have helped to make portfolio analysis practical.
Portfolio selection
The objective of every rational investor is to maximize his return and minimize risk. Diversification is a method adopted for reducing risk. It essentially resulted in the construction of portfolio. The proper goal of portfolio construction would be to generate a portfolio that provides the highest return and lowest risk. The investor should maximize return at a given level of risk or minimize risk at a given level of return. Such a portfolio would be known as optimal portfolio. The process of finding optimal portfolio is described as portfolio selection.
*Markowitz theory
Markowitz was the first who has developed modern portfolio analysis model for portfolio construction. He generated a portfolio within a return-risk context. He considered the variance in the expected returns from investment and their relationship to each other in constructing portfolio.
Modern portfolio theory has brought out by Markowitz. It is the construction of securities to get the most efficient portfolio. A portfolio is efficient when it is expected to yield the highest relation for the level of risk accepted for a alternatively the smallest portfolio risk for a specified level of expected return. Markowitz used mathematical and statistical analysis in order to arrange for the optimum allocation of asset within portfolio.
Assumptions within Markowitz theory
1. Investors base these decision on the expected rate of return of
theirinvestment.
2. The market is efficient all investors would react all securities in the
market.
3. All investors are risk owns.
4. By combining asset the security returns are co-related to each other.
5. Investors combines the investment by getting maximum return with minimum
risk.
6. The investor can reduce his risk if he adds investments in his portfolio.
Markowitz has shown the effect combining the securities with the help of
finding out the different mathematical and statistica tools like standard
dividend., co-efficient of co-relation.
Limitations of Markowitz model
One of the major problems in this model is that a large number of input data required for the calculation. With a given set of securities infinite number of portfolio can be constructed. Because of this difficulty it found little use in practical application of portfolio analysis. Much simplification is needed and this is achieved through index models. There are essentially two types of index models.
1. Single Index Model
2. Multi Index model.
1. Single index model
It is the simplest and most widely used simplification and may be considered as the extreme point of the continuum with Markowitz model. The basic notion underlying the single index model is that all stocks are affetcetd by movements in the stock market. Casual observations in the stock prices reveals that when the market moves up prices of the most shares tempt to increase. When the market goes down response to market changes.
Sharpe Single Index Model
William Sharp tried to simplify the Markowitz method of diversification of portfolio. Sharpe index model simplifies the process of Markowitz model by reducing the data in a sustentative manner. He assumed that security not only have individual relationship but they are related to each other through some indexes represented by business activity. Sharpe has improved the estimate of expected return and variance of index which may be one or more and are related to economic activity. Sharpe index showed that the return of each securities is co-related by some securities.
2. Multi Index model.
The single index model is infact an over simplification. It assumes that stock together only because of a common movement with the market. Many researchers found that there are influences other than market that cause stock to move together. Multi index model attempts to identify and incorporate these non market factors that cause securities to move together also into the model. These extra factors are a set of economic factors that leads to changes in price. A multi index complex and require more data estimate for its application. But single index model and multi index model have helped to make portfolio analysis practical.
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