Posts Tagged ‘stock’

Annual Turnover: Definition, Formula for Calculation, and Example

Written by admin. Posted in A, Financial Terms Dictionary

Annual Turnover: Definition, Formula for Calculation, and Example

[ad_1]

What Is Annual Turnover?

Annual turnover is the percentage rate at which something changes ownership over the course of a year. For a business, this rate could be related to its yearly turnover in inventories, receivables, payables, or assets.

In investments, a mutual fund or exchange-traded fund (ETF) turnover rate replaces its investment holdings on a yearly basis. Portfolio turnover is the comparison of assets under management (AUM) to the inflow, or outflow, of a fund’s holdings. The figure is useful to determine how actively the fund changes the underlying positions in its holdings. High figure turnover rates indicate an actively managed fund. Other funds are more passive and have a lower percentage of holding turnovers. An index fund is an example of a passive holding fund.

Key Takeaways

  • A turnover rate is computed by counting how many times an asset, security, or payment changed hands over a year-long period.
  • Businesses look at annual turnover rates to determine their efficiency and productivity while investment managers and investors use turnover rate to understand the activity of a portfolio.
  • Annualized turnover is often a future projection based on one month—or another shorter period of time—of investment turnover.
  • A high turnover rate by itself is not a reliable indicator of fund quality or performance.

Calculating Annual Turnover

To calculate the portfolio turnover ratio for a given fund, first determine the total amount of assets purchased or sold (whichever happens to be greater), during the year. Then, divide that amount by the average assets held by the fund over the same year.


portfolio turnover   =   max ⁡ { fund purchases fund sales average assets \begin{aligned}&\text{portfolio turnover}\ =\ \frac{\operatorname{max}\begin{cases} \text{fund purchases}\\ \quad \text{fund sales}\end{cases}}{\text{average assets}}\end{aligned}
portfolio turnover = average assetsmax{fund purchasesfund sales

For example, if a mutual fund held $100 million in assets under management (AUM) and $75 million of those assets were liquidated at some point during the measurement period, the calculation is:


$ 7 5 m $ 1 0 0 m = 0 . 7 5 where: \begin{aligned}&\frac{\$75\text{m}}{\$100\text{m}}=0.75\\&\textbf{where:}\\&\text{m}=\text{million}\end{aligned}
$100m$75m=0.75where:

It is important to note that a fund turning over at 100% annually has not necessarily liquidated all positions with which it began the year. Instead, the complete turnover accounts for the frequent trading in and out of positions and the fact that sales of securities equal total AUM for the year. Also, using the same formula, the turnover rate is also measured by the number of securities bought in the measurement period.

Annualized Turnover in Investments

Annualized turnover is a future projection based on one month—or another shorter period of time—of investment turnover. For example, suppose that an ETF has a 5% turnover rate for the month of February. Using that figure, an investor may estimate annual turnover for the coming year by multiplying the one-month turnover by 12. This calculation provides an annualized holdings turnover rate of 60%.

Actively Managed Funds

Growth funds rely on trading strategies and stock selection from seasoned professional managers who set their sights on outperforming the index against which the portfolio benchmarks. Owning large equity positions is less about a commitment to corporate governance than it is a means to positive shareholder results. Managers who consistently beat the indices stay on the job and attract significant capital inflows.

While the passive versus active management argument persists, high volume approaches can realize moderate success. Consider the American Century Small Cap Growth fund (ANOIX), a four-star-rated Morningstar fund with a frantic 141% turnover rate (as of February 2021) that outperformed the S&P 500 Index considently over the last 15 years (through 2021).

Passively Managed Funds

Index funds, such as the Fidelity 500 Index Fund (FXAIX), adopt a buy-and-hold strategy. Following this system, the fund owns positions in equities as long as they remain components of the benchmark. The funds maintain a perfect, positive correlation to the index, and thus, the portfolio turnover rate is just 4%. Trading activity is limited to purchasing securities from inflows and infrequently selling issues removed from the index. More than 60% of the time, indices have historically outpaced managed funds.

Also, it is important to note, a high turnover rate judged in isolation is never an indicator of fund quality or performance. The Fidelity Spartan 500 Index Fund, after expenses, trailed the S&P 500 by 2.57% in 2020.

Annual Turnover in Business: Inventory Turnover

Businesses use several annual turnover metrics for understanding how well the business is running on a yearly basis. Inventory turnover measures how fast a company sells inventory and how analysts compare it to industry averages. A low turnover implies weak sales and possibly excess inventory, also known as overstocking. It may indicate a problem with the goods being offered for sale or be a result of too little marketing. A high ratio implies either strong sales or insufficient inventory. The former is desirable while the latter could lead to lost business. Sometimes a low inventory turnover rate is a good thing, such as when prices are expected to rise (inventory pre-positioned to meet fast-rising demand) or when shortages are anticipated.

The speed at which a company can sell inventory is a critical measure of business performance. Retailers that move inventory out faster tend to outperform. The longer an item is held, the higher its holding cost will be, and the fewer reasons consumers will have to return to the shop for new items.

[ad_2]

Source link

130-30 Strategy

Written by admin. Posted in #, Financial Terms Dictionary

[ad_1]

What Is the 130-30 Strategy?

The 130-30 strategy, often called a long/short equity strategy, refers to an investing methodology used by institutional investors. A 130-30 designation implies using a ratio of 130% of starting capital allocated to long positions and accomplishing this by taking in 30% of the starting capital from shorting stocks.

The strategy is employed in a fund for capital efficiency. It uses financial leverage by shorting poor-performing stocks and, with the cash received by shorting those stocks, purchasing shares that are expected to have high returns. Often, investors will mimic an index such as the S&P 500 when choosing stocks for this strategy.

Key Takeaways

  • This investing strategy makes use of shorting stocks and putting the cash from shorting those shares to work buying and holding the best-ranked stocks for a designated period.
  • These strategies tend to work well for limiting the drawdown that comes in investing.
  • They do not appear to keep up with major averages in total returns but do have better risk-adjusted returns.

Understanding the 130-30 Strategy

To engage in a 130-30 strategy, an investment manager might rank the stocks used in the S&P 500 from best to worse on expected return, as signaled by past performance. A manager will use a number of data sources and rules for ranking individual stocks. Typically, stocks are ranked according to some set selection criteria (for example, total returns, risk-adjusted performance, or relative strength) over a designated look-back period of six months or one year. The stocks are then ranked best to worst.

From the best ranking stocks, the manager would invest 100% of the portfolio’s value and short sell the bottom ranking stocks, up to 30% of the portfolio’s value. The cash earned from the short sales would be reinvested into top-ranking stocks, allowing for greater exposure to the higher-ranking stocks.

130-30 Strategy and Shorting Stocks

The 130-30 strategy incorporates short sales as a significant part of its activity. Shorting a stock entails borrowing securities from another party, most often a broker, and agreeing to pay an interest rate as a fee. A negative position is subsequently recorded in the investor’s account. The investor then sells the newly acquired securities on the open market at the current price and receives the cash for the trade. The investor waits for the securities to depreciate and then re-purchases them at a lower price. At this point, the investor returns the purchased securities to the broker. In a reverse activity from first buying and then selling securities, shorting still allows the investor to profit.

Short selling is much riskier than investing in long positions in securities; thus, in a 130-30 investment strategy, a manager will put more emphasis on long positions than short positions. Short-selling puts an investor in a position of unlimited risk and a capped reward. For example, if an investor shorts a stock trading at $30, the most they can gain is $30 (minus fees), while the most they can lose is infinite since the stock can technically increase in price forever.

Hedge funds and mutual fund firms have begun offering investment vehicles in the way of private equity funds, mutual funds, or even exchange-traded funds that follow variations of the 130-30 strategy. In general, these instruments have lower volatility than benchmark indexes but often fail to achieve greater total returns.

[ad_2]

Source link

Adjusted Closing Price

Written by admin. Posted in A, Financial Terms Dictionary

[ad_1]

What Is the Adjusted Closing Price?

The adjusted closing price amends a stock’s closing price to reflect that stock’s value after accounting for any corporate actions. It is often used when examining historical returns or doing a detailed analysis of past performance.

Key Takeaways

  • The adjusted closing price amends a stock’s closing price to reflect that stock’s value after accounting for any corporate actions.
  • The closing price is the raw price, which is just the cash value of the last transacted price before the market closes.
  • The adjusted closing price factors in corporate actions, such as stock splits, dividends, and rights offerings.
  • The adjusted closing price can obscure the impact of key nominal prices and stock splits on prices in the short term.

Understanding the Adjusted Closing Price

Stock values are stated in terms of the closing price and the adjusted closing price. The closing price is the raw price, which is just the cash value of the last transacted price before the market closes. The adjusted closing price factors in anything that might affect the stock price after the market closes.

A stock’s price is typically affected by supply and demand of market participants. However, some corporate actions, such as stock splits, dividends, and rights offerings, affect a stock’s price. Adjustments allow investors to obtain an accurate record of the stock’s performance. Investors should understand how corporate actions are accounted for in a stock’s adjusted closing price. It is especially useful when examining historical returns because it gives analysts an accurate representation of the firm’s equity value.

Types of Adjustments

Adjusting Prices for Stock Splits

A stock split is a corporate action intended to make the firm’s shares more affordable for average investors. A stock split does not change a company’s total market capitalization, but it does affect the company’s stock price.

For example, a company’s board of directors may decide to split the company’s stock 3-for-1. Therefore, the company’s shares outstanding increase by a multiple of three, while its share price is divided by three. Suppose a stock closed at $300 the day before its stock split. In this case, the closing price is adjusted to $100 ($300 divided by 3) per share to maintain a consistent standard of comparison. Similarly, all other previous closing prices for that company would be divided by three to obtain the adjusted closing prices.

Adjusting for Dividends

Common distributions that affect a stock’s price include cash dividends and stock dividends. The difference between cash dividends and stock dividends is that shareholders are entitled to a predetermined price per share and additional shares, respectively.

For example, assume a company declared a $1 cash dividend and was trading at $51 per share before then. All other things being equal, the stock price would fall to $50 because that $1 per share is no longer part of the company’s assets. However, the dividends are still part of the investor’s returns. By subtracting dividends from previous stock prices, we obtain the adjusted closing prices and a better picture of returns.

Adjusting for Rights Offerings

A stock’s adjusted closing price also reflects rights offerings that may occur. A rights offering is an issue of rights given to existing shareholders, which entitles the shareholders to subscribe to the rights issue in proportion to their shares. That will lower the value of existing shares because supply increases have a dilutive effect on the existing shares.

For example, assume a company declares a rights offering, in which existing shareholders are entitled to one additional share for every two shares owned. Assume the stock is trading at $50, and existing shareholders can purchase additional shares at a subscription price of $45. After the rights offering, the adjusted closing price is calculated based on the adjusting factor and the closing price.

Benefits of the Adjusted Closing Price

The main advantage of adjusted closing prices is that they make it easier to evaluate stock performance. Firstly, the adjusted closing price helps investors understand how much they would have made by investing in a given asset. Most obviously, a 2-for-1 stock split does not cause investors to lose half their money. Since successful stocks often split repeatedly, graphs of their performance would be hard to interpret without adjusted closing prices.

Secondly, the adjusted closing price allows investors to compare the performance of two or more assets. Aside from the clear issues with stock splits, failing to account for dividends tends to understate the profitability of value stocks and dividend growth stocks. Using the adjusted closing price is also essential when comparing the returns of different asset classes over the long term. For example, the prices of high-yield bonds tend to fall in the long run. That does not mean these bonds are necessarily poor investments. Their high yields offset the losses and more, which can be seen by looking at the adjusted closing prices of high-yield bond funds.

The adjusted closing price provides the most accurate record of returns for long-term investors looking to design asset allocations.

Criticism of the Adjusted Closing Price

The nominal closing price of a stock or other asset can convey useful information. This information is destroyed by converting that price into an adjusted closing price. In actual practice, many speculators place buy and sell orders at certain prices, such as $100. As a result, a sort of tug of war can take place between bulls and bears at these key prices. If the bulls win, a breakout may occur and send the asset price soaring. Similarly, a win for the bears can lead to a breakdown and further losses. The adjusted close stock price obscures these events.

By looking at the actual closing price at the time, investors can get a better idea of what was going on and understand contemporary accounts. If investors look at historical records, they will find many examples of tremendous public interest in nominal levels. Perhaps the most famous is the role that Dow 1,000 played in the 1966 to 1982 secular bear market. During that period, the Dow Jones Industrial Average (DJIA) repeatedly hit 1,000, only to fall back shortly after that. The breakout finally took place in 1982, and the Dow never dropped below 1,000 again. This phenomenon is covered up somewhat by adding dividends to obtain the adjusted closing prices.

In general, adjusted closing prices are less useful for more speculative stocks. Jesse Livermore provided an excellent account of the impact of key nominal prices, such as $100 and $300, on Anaconda Copper in the early 20th century. In the early 21st century, similar patterns occurred with Netflix (NFLX) and Tesla (TSLA). William J. O’Neil gave examples where stock splits, far from being irrelevant, marked the beginnings of real declines in the stock price. While arguably irrational, the impact of nominal prices on stocks could be an example of a self-fulfilling prophecy.

[ad_2]

Source link

Alternative Trading System (ATS) Definition, Regulation

Written by admin. Posted in A, Financial Terms Dictionary

Alternative Trading System (ATS) Definition, Regulation

[ad_1]

What Is an Alternative Trading System (ATS)?

An alternative trading system (ATS) is a trading venue that is more loosely regulated than an exchange. ATS platforms are often used to match large buy and sell orders among its subscribers. The most widely used type of ATS in the United States are electronic communication networks (ECNs)—computerized systems that automatically match buy and sell orders for securities in the market.

Key Takeaways

  • Alternative trading systems (ATS) are venues for matching large buy and sell transactions.
  • They are not as highly regulated as exchanges.
  • Examples of ATS include dark pools and ECNs.
  • SEC Regulation ATS establishes a regulatory framework for these trading venues.

Understanding an Alternative Trading System (ATS)

ATS account for much of the liquidity found in publicly traded issues worldwide. They are known as multilateral trading facilities in Europe, ECNs, cross networks, and call networks. Most ATS are registered as broker-dealers rather than exchanges and focus on finding counterparties for transactions.

Alternative trading system (ATS) is the terminology used in the U.S. and Canada. In Europe, they are known as multilateral trading facilities.

Unlike some national exchanges, ATS do not set rules governing the conduct of subscribers or discipline subscribers, other than by excluding them from trading. They are important in providing alternative means to access liquidity.

Institutional investors may use an ATS to find counterparties for transactions, instead of trading large blocks of shares on national stock exchanges. These actions may be designed to conceal trading from public view since ATS transactions do not appear on national exchange order books. The benefit of using an ATS to execute such orders is that it reduces the domino effect that large trades might have on the price of an equity.

Between 2013 and 2015, ATS accounted for approximately 18% of all stock trading, according to the Securities and Exchange Commission (SEC). That figure represented an increase of more than four times from 2005.

Criticisms of Alternative Trading Systems (ATS)

These trading venues must be approved by the SEC. In recent years, regulators have stepped up enforcement actions against ATS for infractions such as trading against customer order flow or making use of confidential customer trading information. These violations may be more common in ATS than national exchanges because ATS face fewer regulations.

Dark Pools

A hedge fund interested in building a large position in an equity may use an ATS to prevent other investors from buying in advance. ATS used for these purposes may be referred to as dark pools.

Dark pools entail trading on ATS by institutional orders executed on private exchanges. Information about these transactions is mostly unavailable to the public, which is why they are called “dark.” The bulk of dark pool liquidity is created by block trades facilitated away from the central stock market exchanges and conducted by institutional investors (primarily investment banks).

Although they are legal, dark pools operate with little transparency. As a result, dark pools, along with high-frequency trading (HFT), are oft-criticized by those in the finance industry; some traders believe that these elements convey an unfair advantage to certain players in the stock market.

Regulation of Alternative Trading Systems (ATS)

SEC Regulation ATS established a regulatory framework for ATS. An ATS meets the definition of an exchange under federal securities laws but is not required to register as a national securities exchange if the ATS operates under the exemption provided under Exchange Act Rule 3a1-1(a). To operate under this exemption, an ATS must comply with the requirements in Rules 300-303 of Regulation ATS.

To comply with Regulation ATS, an ATS must register as a broker-dealer and file an initial operation report with the Commission on Form ATS before beginning operations. An ATS must file amendments to Form ATS to provide notice of any changes to its operations, and must file a cessation of operation report on Form ATS if it closes. The requirements for filing reports using Form ATS is in Rule 301(b)(2) of Regulation ATS. These requirements include mandated reporting of books and records.

In recent times, there have been moves to make ATS more transparent. For example, the SEC amended Regulation ATS to enhance “operational transparency” for such systems in 2018. Among other things, this entails filing detailed public disclosures to inform the general public about potential conflicts of interest and risks of information leakage. ATS are also required to have written safeguards and procedures to protect subscribers’ trading information.

The SEC formally defines an alternative trading system as “any organization, association, person, group of persons, or systems (1) that constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of Rule 3b-16 under the Exchange Act; and (2) that does not (i) set rules governing the conduct of subscribers other than the conduct of such subscribers’ trading on such organization, association, person, group of persons, or system, or (ii) discipline subscribers other than by exclusion from trading.”

[ad_2]

Source link