What Is the Amsterdam Stock Exchange (AEX) .AS?

Founded in 1602, along with the creation of the Dutch East India Company (VOC), the Amsterdam Stock Exchange is considered the oldest, still-functioning stock exchange in the world.

The need for a bank grew with the prevalence of European trade and with the need to offer financiers a way to profit in this commerce. The Dutch East India Company was one of the earliest businesses to compete for the exports from the spice and slave trade. It was a joint-stock company and would offer shares to investors who would bankroll the voyages. Financiers required a safe and regulated place where buy and sell shares of these early global enterprises.

Before the AEX, many regions and towns had independent systems of asset valuation and trade regulation which operated much like stock exchanges, but the AEX was the first official stock exchange as we know it.

The Basics of the Amsterdam Stock Exchange (AEX) .AS

Over its centuries-long history, the Amsterdam Stock Exchange has gone through several ownership changes and governance structures.

Looking to recent history, in 1997 the Amsterdam Stock Exchange and the European Options Exchange (EOE) merged, and its blue-chip index was renamed AEX for “Amsterdam Exchange.”

In September 2000, the Amsterdam Stock Exchange merged with the Brussels Stock Exchange and the Paris Stock Exchange to form Euronext Amsterdam. Euronext is Europe’s largest cash equities market. For some time fell under the umbrella of NYSE Euronext, which operated several exchanges, including the New York Stock Exchange, the Liffe in London, and NYSE Arca Options. In 2014, Euronext was spun off to become an independent entity once again. As of 2017, Euronext was the sixth largest combined stock exchange by market cap.

Equity Indexes of the AEX

Euronext Amsterdam’s three broad equity indexes are the blue-chip AEX, mid-cap AMX, and small-cap AScX. By far, the most traded and influential index is the AEX, which began in 1983 and is composed of more than 20 of the most frequently traded Dutch companies which trade on Euronext Amsterdam. These companies include international businesses such as Unilever, ING Group, Philips, and Royal Dutch Shell. It is one of the leading national indices of the stock exchange group Euronext alongside Brussels’ BEL 20, Paris’s CAC 40, and Germany’s DAX.

Real World Example

Review of the composition of the AEX index is done each quarter, with a comprehensive review conducted in March and interim reviews in June, September, and December. Any changes made to the index as a result of these examinations take effect on the third Friday of the month. Before 2008, index changes were made only once annually in March.

The AEX is a market capitalization-weighted index, with initial index weightings of any one company capped at 15%. The index weights are calculated concerning the closing prices of the relevant companies on March 1. During quarterly reviews, weightings after adjustment are left as close as possible to those of the previous day and are not re-capped.

What Are Accounting Principles?

Accounting principles are the rules and guidelines that companies and other bodies must follow when reporting financial data. These rules make it easier to examine financial data by standardizing the terms and methods that accountants must use.

The International Financial Reporting Standards (IFRS) is the most widely used set of accounting principles, with adoption in 167 jurisdictions. The United States uses a separate set of accounting principles, known as generally accepted accounting principles (GAAP).

The Purpose of Accounting Principles

The ultimate goal of any set of accounting principles is to ensure that a company’s financial statements are complete, consistent, and comparable.

This makes it easier for investors to analyze and extract useful information from the company’s financial statements, including trend data over a period of time. It also facilitates the comparison of financial information across different companies. Accounting principles also help mitigate accounting fraud by increasing transparency and allowing red flags to be identified.

Comparability

Comparability is the ability for financial statement users to review multiple companies’ financials side by side with the guarantee that accounting principles have been followed to the same set of standards.

Accounting information is not absolute or concrete, and standards are developed to minimize the negative effects of inconsistent data. Without these rules, comparing financial statements among companies would be extremely difficult, even within the same industry. Inconsistencies and errors also would be harder to spot.

What Are the Basic Accounting Principles?

Some of the most fundamental accounting principles include the following:

• Accrual principle
• Conservatism principle
• Consistency principle
• Cost principle
• Economic entity principle
• Full disclosure principle
• Going concern principle
• Matching principle
• Materiality principle
• Monetary unit principle
• Reliability principle
• Revenue recognition principle
• Time period principle

The most notable principles include the revenue recognition principle, matching principle, materiality principle, and consistency principle. Completeness is ensured by the materiality principle, as all material transactions should be accounted for in the financial statements. Consistency refers to a company’s use of accounting principles over time.

Generally Accepted Accounting Principles (GAAP)

Generally accepted accounting principles (GAAP) are uniform accounting principles for private companies and nonprofits in the U.S. These principles are largely set by the Financial Accounting Standards Board (FASB), an independent nonprofit organization whose members are chosen by the Financial Accounting Foundation.

A similar organization, the Governmental Accounting Standards Board (GASB), is responsible for setting the GAAP standards for local and state governments. And a third body, the Federal Accounting Standards Advisory Board (FASAB), publishes the accounting principles for federal agencies.

Although privately held companies are not required to abide by GAAP, publicly traded companies must file GAAP-compliant financial statements to be listed on a stock exchange. Chief officers of publicly traded companies and their independent auditors must certify that the financial statements and related notes were prepared in accordance with GAAP.

Privately held companies and nonprofit organizations also may be required by lenders or investors to file GAAP-compliant financial statements. For example, annual audited GAAP financial statements are a common loan covenant required by most banking institutions. Therefore, most companies and organizations in the U.S. comply with GAAP, even though it is not a legal requirement.

International Financial Reporting Standards (IFRS)

The International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS). These standards are used in more than 120 countries, including those in the European Union (EU).

The Securities and Exchange Commission (SEC), the U.S. government agency responsible for protecting investors and maintaining order in the securities markets, has expressed interest in transitioning to IFRS. However, because of the differences between the two standards, the U.S. is unlikely to switch in the foreseeable future.

However, the FASB and the IASB continue to work together to issue similar regulations on certain topics as accounting issues arise. For example, in 2014, the FASB and the IASB jointly announced new revenue recognition standards.

Since accounting principles differ around the world, investors should take caution when comparing the financial statements of companies from different countries. The issue of differing accounting principles is less of a concern in more mature markets. Still, caution should be used, as there is still leeway for number distortion under many sets of accounting principles.

The Bottom Line

Accounting principles are rules and guidelines that companies must abide by when reporting financial data. Whether it’s GAAP in the U.S. or IFRS elsewhere, the overarching goal of these principles is to boost transparency and basically make it easier for investors to compare the financial statements of different companies.

Without these rules and standards, publicly traded companies would likely present their financial information in a way that inflates their numbers and makes their trading performance look better than it actually was. If companies were able to pick and choose what information to disclose and how, it would be a nightmare for investors.

What Is an Arbitrageur?

An arbitrageur is a type of investor who attempts to profit from market inefficiencies. These inefficiencies can relate to any aspect of the markets, whether it is price, dividends, or regulation. The most common form of arbitrage is price.

Arbitrageurs exploit price inefficiencies by making simultaneous trades that offset each other to capture risk-free profits. An arbitrageur would, for example, seek out price discrepancies between stocks listed on more than one exchange by buying the undervalued shares on one exchange while short selling the same number of overvalued shares on another exchange, thus capturing risk-free profits as the prices on the two exchanges converge.

In some instances, they also seek to profit by arbitraging private information into profits. For example, a takeover arbitrageur may use information about an impending takeover to buy up a company’s stock and profit from the subsequent price appreciation.

Understanding an Arbitrageur

Arbitrageurs are typically very experienced investors since arbitrage opportunities are difficult to find and require relatively fast trading. They also need to be detail-oriented and comfortable with risk. This is because most arbitrage plays involve a significant amount of risk. They are also bets with regards to the future direction of markets.

Arbitrageurs play an important role in the operation of capital markets, as their efforts in exploiting price inefficiencies keep prices more accurate than they otherwise would be.

Examples of Arbitrageur Plays

As a simple example of what an arbitrageur would do, consider the following.

The stock of Company X is trading at $20 on the New York Stock Exchange (NYSE) while, at the same moment, it is trading for the equivalent of $20.05 on the London Stock Exchange (LSE). A trader can buy the stock on the NYSE and immediately sell the same shares on the LSE, earning a total profit of 5 cents per share, less any trading costs. The trader exploits the arbitrage opportunity until the specialists on the NYSE run out of inventory of Company X’s stock, or until the specialists on the NYSE or LSE adjust their prices to wipe out the opportunity.

An example of an information arbitrageur was Ivan F. Boesky. He was considered a master arbitrageur of takeovers during the 1980s. For example, he minted profits by buying stocks of Gulf oil and Getty oil before their purchases by California Standard and Texaco respectively during that period. He is reported to have made between $50 million to $100 million in each transaction.

The rise of cryptocurrencies offered another opportunity for arbitrageurs. As the price of Bitcoin reached new records, several opportunities to exploit price discrepancies between multiple exchanges operating around the world presented themselves. For example, Bitcoin traded at a premium at cryptocurrency exchanges situated in South Korea as compared to the ones located in the United States. The difference in prices, also known as the Kimchi Premium, was mainly because of the high demand for crypto in these regions. Crypto traders profited by arbitraging the price difference between the two locations in real-time.

What Is Absolute Return?

Absolute return is the return that an asset achieves over a specified period. This measure looks at the appreciation or depreciation, expressed as a percentage, that an asset, such as a stock or a mutual fund, achieves over a given period.

Absolute return differs from relative return because it is concerned with the return of a particular asset and does not compare it to any other measure or benchmark.

How Absolute Return Works

Absolute return refers to the amount of funds that an investment has earned. Also referred to as the total return, the absolute return measures the gain or loss experienced by an asset or portfolio independent of any benchmark or other standard. Returns can be positive or negative and may be considered uncorrelated to other market activities.

Relative and Absolute Returns

In general, a mutual fund seeks to produce returns that are better than its peers, its fund category, and the market as a whole. This type of fund management is referred to as a relative return approach to fund investing. The success of the asset is often based on a comparison to a chosen benchmark, industry standard, or overall market performance.

As an investment vehicle, an absolute return fund seeks to make positive returns by employing investment management techniques that differ from traditional mutual funds. Absolute return investment strategies include using short selling, futures, options, derivatives, arbitrage, leverage, and unconventional assets. Absolute returns are examined separately from any other performance measure, so only gains or losses on the investment are considered.

The History of Absolute Return Funds

Alfred Winslow Jones is credited with forming the first absolute return fund in New York in 1949. In recent years, the absolute return approach to fund investing has become one of the fastest-growing investment products in the world and is more commonly referred to as a hedge fund.

Hedge Funds

A hedge fund is not a specific form of investment; it is an investment structured as a pool and set up as either a limited partnership or limited liability company (LLC). A hedge fund manager raises funds by working with outside investors. The manager uses the funds to invest based on a declared strategy involving only the purchase of long equities, such as common stock.

Hedge funds may specialize in specific areas, such as real estate or patents, and may also engage in private equity activities. While anyone may invest in a hedge fund, participants are traditionally accredited and sophisticated investors.

Example of Absolute Return

As a historical example, the Vanguard 500 Index ETF (VOO) delivered an absolute return of 150.15% over the 10-year period ending Dec. 31, 2017. This differed from its 10-year annualized return of 8.37% over the same period. Further, because the S&P 500 Index had an absolute return of 153.07% over the same period, absolute return differed from the relative return, which was -2.92%.