Does it always make sense to add more securities to a portfolio in order to reduce the portfolio risk? When would you stop? What are some reasons that may make it impractical to use a very large number of stocks in your portfolio?
Addition of securities inorder to reduce risk can be expensive and sometimes may hurt the overall returns, making it impractical. However, market risk can never be diversified and we can never beat the market by adding securities to the portfolio. Considering the expected returns from the portfolio, diversification should be controlled, to avoid huge expenses. There comes a point after which just adding more securities to a portfolio is not worth the costs of doing so in terms of its impact on lowering risk.
Explain the differences between Common stock (Ordinary shares) and Preferred stock/shares.
Common stock/Ordinary shares; are certificates of ownership of a company. They normally comprise the bulk of a company’s capital. Common stock carries voting rights. They carry risk and incase of bankruptcy, Common stockholders will either not get their investment back, or get a balance after every creditor and Preferred stockholder gets their dues. But if the company were to be successful in making good profits, they will be entitled to all balance profit after the Preferred stockholders take their ‘fixed earnings’. Preferred stock/shares; Preferred stock/shares attract fixed dividends. They have no rights to vote. In event of bankruptcy they are entitled to be returned their investment in priority to Common stockholders. Preferred stock/shares might be Cumulative (any shortfall in dividends in one year is paid in the subsequent year along with that year’s dividend.) or Non-cumulative (any dividend not paid in one year is effectively lost).
Briefly describe the difference between a Cashflow Statement and an Income Statement.
Cashflow statements are a forecast of the timing and amounts of money in and out of a business. Income statement is a statement of revenue and allocated costs over a certain time period, based upon given accounting conventions/assumptions. Cash is necessary for the survival of a business in the short run and thus a cashflow statement is of great importance to a business. Profit however, is a measure of the performance of a business and an Income Statement indicates the degree of success achieved by a business.