Meeting the odds and still being an active trader is today’s style! The trading market is one with full of adventures every day. One thing which is very sure of in this market is changing. So every day could be a fresh beginning and hence it needs a lot of smartness to be an active trader, by keeping the risk factors in mind. The risk management of the trading sector is a challenging aspect which has been worked out by the members of this sector.
Such continuous analysis has given the option of risk management by means of hedging and arbitraging which follow different theories and help in better working of the trades.Each of these is capable in their own way to fetch long-term profits from trading as an art. There are many types of arbitrage functions that could be used according to each situation in the share market. They are detailed further.
This is a type which is useful from the point of view of market makers. Market makers work on the factors like far more trading capital, more skilled in general, faster computers, more complex software system etc.
With such unique features, it is difficult for the people retail trading to use the pure arbitrage for managing the risk of loss, but there could be another form of arbitrage to suit the needs of retail traders.
This is unlike true arbitrage, as the name suggests it is coined with the aspect of risk. This deals with addressing risk and particular function levels. One example can be at merger and acquisition level. By this method, a company which has been undervalued is identified and takeover by a well-performing company is initiated so that the undervalued one begins to develop better. This will benefit all those who are in the process.
Another type of the risk arbitrage can be the liquidation arbitrage which is by finding the liquidation value of the assets of a company. For example, the current value of a share is less than its book value the company can choose the liquidation arbitrage. So this will prove to be a profitable approach.
Yet another model is the Pairs Trading in which is a less common method of arbitrage. It is also referred to as relative-value arbitrage. The method goes into finding pairs of companies with a long-standing good trading history and correlating between them. It is quite challenging to find such pairs easily and hence this method could be least preferred.
Valuating the possibilities of risk and preventing loss from them can be possible with careful analysis of the arbitrage at different functional levels of the trading market.
Before getting into elaborating and explaining the topic, it is important and becomes essential to primarily understand fund management. Let`s now take a look at what this fund management is all about and how this is done. Fund management is nothing but the management of cash flows of a financial company. Now cash flows happen in any type of company and organization and even at our homes. So it is important to have this concept of fund management in places wherever there are financial transactions. This process of managing funds is mainly by the fund manager who is assigned and authorized to have a look and probe at all the financial transactions and he is the only authoritative person to question the company regarding the inflow and outflow of cash.
Why fund management?
Fund management is very important in all places involving inflow and outflow of cash because this is the indicator of a company`s performance and it would detail the financial performance of a company. As all of us know, a company needs to have a proper and conscious eye on what is being spent for the good and growth of the company and at the same time pay attention to what comes in. In fact, a company should take to concentrate more on what it gets in return in the name of incomes and should base all its expense on this for this would be ideal for its growth and it would be easy for it to have a track on what is being earned and what is being spent. This is the main reason for a company to note the cash inflows and cash outflows which is nothing but fund management.
Is fund management important everywhere?
Fund management is something important for all. It is not just the companies and organizations that enjoy incomes and experience expenses but this happens on a daily basis at all such situations wherever there is money getting transacted. Yes, even at homes we unknowingly follow fund management and it is important even here which helps in having an eye on what comes in and what goes out. So in these lines, if we see and discuss, this is a concept that is important and happens everywhere wherever there is cash and in such places, it becomes important for people handling it to manage them appropriately to have the right numbers at the end of the calculations.
So if you are dealing with cash inflows and outflows and if this is a constant and regular happening, understand that you have already become an efficient fund manager of your concern irrespective of whether it is big or small.
Valuating a startup might be very different from evaluating other businesses. An established business would have a lot of data to analyze making it easy to understand the performance of the business.
But evaluating a startup with very little background data to study is going to be more complicated. As an investor, if you plan to invest in a startup remember that it is not going to be a straightforward process.
Startups might be in need of reliable investors at several points. Investors who invest in new ventures should be able to master the art of business valuation so as to ensure accurate attention to details.
To know where the business would stand in the market, you should know where it stands at present
Startup valuation would give you the real worth of the business at present. This would be an indication of the value attainable in the future. As an investor, you would thus be able to get an idea of where you are investing your capital.
The market valuation is a great first step to understand the position of the business with respect to the others in the same segment. After taking into account the various comparables and projections you would then be able to predict the worth in the long run.
Market multiple approaches
For the above conclusion to be drawn market valuation is what is chosen. Market multiple approaches to business valuation are something that a lot of venture capitalists prefer. Though this is not a very accurate method it gives a closer picture of what the worth would be by comparing the case of similar acquisitions that happened in the recent past.
Such assumptions would have to be taken because there is no proven method to accurately predict a startup’s growth and performance.
The real difference
When the earnings and the account profits of the business are already available, as with established businesses; valuation is much simpler. For startups, there is a lot of inherent inconsistency. Till the cash flow stabilizes and a pattern develops there are different parameters to study to understand the worth of a startup.
The supply-demand consideration is a good place to start. Even if there is no stability established if there is a huge demand for the products or services offered by the startups and if it stands out in the competition then it surely would have a bright potential for growth.
Investors are constantly looking at how well the business can be run with a keen eye on the cash conversion cycle of the enterprise where they have a financial interest in.
Their comprehensive view of the balance sheet has 3 main metrics: the assets performance, the manner in which the structure of Capital is assembled and the adequate working capital of the business. The efficiency in managing the above financial standpoints, it is important for the business to run its operational cycle smoothly.
As they say, Revenue is Vanity, profit for Sanity and Cash is the reality which perpetuates the fact on how well the conversion of cash equivalents’ are done in the business during the short span of time necessitated for funding the short-term requirements in the enterprise. Investors look in the:
- a good analysis of the healthy working capital ratios which are mostly the improvement of the cash flow cycle in the business including how well the conversion period is
- accelerating the cash inflows in the business which takes on the customer’s purchase decision, credit decisions, payment terms, the collection period and improvising the debt collection, payment, and deposit of funds
- the credit policy and checking where and how the policy works effectively in the business along with the Credit insurance
- the forecasting of the cash inflows, the collection period, the sales ratio including the aging schedule, projected outgoings from the business, combined together to understand the incoming and outgoing projections together gives a good cash flow movement understanding
- the surplus and shortage forecasting and asset sales will determine the projection of how well the cash inflow and outflow is happening in the business however large or small it is
- Study of the ratio’s in financial terms gives the overall picture of how the company accounts are used to understand and bring out the quick view of the operating cycle of the business.
As investors judge on how well the short-term assets are managed in the business to generate the funds, to inject in the business expansion or special projects the liquidity should be determined in the correct way without having to circle around the numbers for long, as cash is King, it works on like the sixth sense for the business, without which all the five senses are in vain. Managing the collections of the business with priority on the collection method employed and the terms help the overall process of managing the business efficiently.
If you are new to the Forex market then there is one feature that will invariably hold your interest and make you want to invest in it and that is the promise of no exchange fees. For a trader who has just joined the bandwagon and is yet to settle himself, it is a great piece of information to be able to start trading without spending money on transactions. However, you might also wonder how your broker will be paid. If you are not paying the money, who is?
The forms of commission
Forex brokers make use of three forms of commissions. The first form of the commission is known as a fixed spread, the second form is known as a variable spread and the third form of commission happens to be a certain percentage of the entire spread. You might instantly take a liking to the fixed spread because it seems doable but before you choose this option, do understand that there are other factors involved.
Ask Price and Bid Price
The difference between the bid price and the asking price is what is popularly known as the spread. It is the difference in price between what the market maker might pay you because you have bought the currency and the price at which he will sell the currency to you. This spread is the broker’s commission. A broker could charge a commission as well as a spread, depending upon the type of trade.
If the spread is variable then it will depend on the movement of the market. Sudden market movements such as changing interest rates etc could change the spread as well. This could work in your favor or could go against you, depending on what your position is. If the market conditions are volatile, you might end up paying way more than what you would have if your broker had a fixed variable spread payment method.
Commission based payments
If you have a broker who is being paid on the basis of commission then the size of the commission will depend on the things that the broker offers. If he is offering you good services then paying that extra bit of commission is worth the trouble.
Whatever the mode of payment, you must ensure that the broker you have hired has been in the business for a long time and has enough experience in the Forex market. You should also take a note of the experience that he might have had in terms of managing a firm.