The Standard & Poors Financial Service Company - Case Study Example

S&P GLOBAL INDEX 1200 Name: ID: Subject: Lecturer: Tutor: Introduction The McGraw-Hill Companies own The Standard & poor’s (S&P) financial service company. It has gained popularity for its stock market indices as well as its credit ratings. The S&P global 1200 offers major exposure in the equity market globally and is the first real-time tradable equity index. It captures around 70% of the market capitalization globally and comprises the 7 major indices like the S&P 500, S&P Europe 350 among others (Rose 2000 p.10). S&P Relevant Investors The S&P index best suits the mutual fund investors. Mutual fund investment involves the pooling of funds from various people for investment purposes. The collected funds then become the basis of investment in securities meant to offer profitable returns to the investors. The preferred security options include stocks, money market instruments, bonds, as well as high value commodities such as gold and other precious metals. These investors share common financial goals and the investment choice matches with the laid out objectives (Rose 2000 p.11). Mutual funds investors could engage professional finance managers to assist in monitoring the investment movements and value. The S&P index helps the investors in monitoring the changing values of their investments hence enable them predict trends. Market trends could enable them predict the rise or fall in value of certain securities hence facilitate the decisions to acquire or drop particular investments. The S&P index offers a standard measure of value for securities in various countries hence offers a regional outlook rather than a local view of the performance of securities. The mutual fund investors could also use the information to locate areas and companies with the most viable investment opportunity parallel to their investing goals. The quality of management determines the success of a business venture such as a mutual fund tenure and structure describe the major qualities of fund management. The fund’s management determines its risks, returns, growth, and investment style. Either individual managers, team of managers or even co-managers, monitor actively managed funds. The fund undergoes active management through hiring of professional fund managers who charge a fee for their services (Rose 2000 p.14). The hired managers apply their skills in managing the fund towards achieving the objectives. Where a team of managers is hired, decision-making occurs during panels where each manager’s opinion undergoes consideration. Actively managed funds require the investors to possess certain knowledge on investing to enable them rate the management of the fund and contribute on certain decisions. This mode of management produces highly profitable funds since they take advantage of profitable opportunities for maximum returns. However, the major concerns associated with this mode of management include the high fees charged by these managers. Passively managed funds on the other hand engage the market index to determine its portfolio composition. These are easy to understand and offer safety in investments covering a broad market base. Less experienced investors with low investment knowledge as well as sophisticated investors with huge portfolios utilize this management method. This method of utilizing indexing in investments is known as autopilot investment. This method eliminates human error by automating the management process (Rose 2000 p.14). Minimized portfolio turnover eliminates taxation costs and general operational costs making it more cost friendly. The system can also handle large portfolios and ensures their high performance. This offers a less costly mode of management since it eliminates the need of a professional fund manager. It also requires less monitoring by individual investors hence saving their time. Mutual funds mostly offer an attractive investment option for individual investors without the knowledge of investing and without the time to monitor their investments. S&P index involves different percentage representation of various countries’ economies. It covers different constituents of equity investments from different parts of the world. It features companies in 10 sectors in the global market (Stein & Daude 2001 p.25). Each region included in this index acquires substantial representation depending on the number of liquid stocks. The size of a region reflects in its size in the global equity market. The component index offer a calculated substantial balance between the country and the sector hence resulting in a perfect mix of the region as well as the market. The largest sector under consideration during construction of the index is the financial sector followed by other major sectors such as health care, information technology, and consumer discretionary. Minor sectors include the telecommunication services, energy, utilities the materials. The selection of the sectors occurs due to the number of companies in the sector as well as the weight associated with the sectors. The percentage allocated to various countries represents the amount of their contribution in terms of the mentioned sectors. The difference in percentages indicate that the diversity in the sectors in terms of the stocks composition and valuation. The featured countries have different economies, which translates in varying sizes of its sectors. The calculation of the index involves the use of a base-weighted method meaning that the level of an index represents the overall float-adjusted market value of the constituents stocks in relation to a specific set base period. The market value determination involves the multiplication of the prices of a company’s stocks with the available amount of shares obtained after the float adjustment. The results of the calculation are indexed to facilitate their use and enable tracking during the market changes. The indexes therefore represent the ratio of the market capitalization of the constituent stocks in relation to the utilized divisor (Stein & Daude 2001 p.28). After the expiration of the defined base period, the index undergoes modification through the adjustment of the divisors to reflect share capital changes. These changes represent the share capital composition as well as value that vary with time. The adjustments include changes due to share buybacks, issuance, share splits and rights issues that lead to the additions of deletions from the index. This maintains the relevance of the index in representing various stocks over a wide period. The market experiences major changes due to certain economic adjustments. Factors such as the inflation rate affect the exchange rate across the borders of involved countries. Thus also affects the prices of the featured stocks, which then leads to the changes in the S&P index. The economic changes may occur in a particular country, a certain region or may affect the overall economy. The index therefore undergoes adjustments to show the changes in the sectors as well as the economy in general. Time Zones Relevance Time zone differences negatively affect bilateral foreign direct investments between the host and the source countries. These differences affect the transactions that demand real-time interactions between parties. Time zone differences are beyond any business’ control and therefore the management just seeks ways to maneuver around these effects. The service industry experiences the largest effect since service delivery requires the interaction of the service renderer and the recipient. Lack of direct contact with customers may lower the customers’ trust on the services hence making them to seek other providers. Convincing the customers to purchase a product or service also demands direct contact with the potential customer in order to offer them first hand information back on the products (Portes & Rey 2011 p. 27). It also facilitates collection of feedback that enables the company to modify its products towards achieving the market requirements. Certain business deals also require the direct interaction between the parties for confidence and familiarization purposes. Controlling time zone effects therefore becomes important for investors to avoid losing any potential investments. A firm operating in regions experiencing time zone differences must account for these effects on its operations (Portes & Rey 2011 p. 26). The interaction between the head office and the foreign affiliates increase operating expenses of the business. The geographical characteristics that result from time zone differences include distance, remoteness, adjacency, island, or landlocked locations, which affect transportation costs. Other factors with an effect on operating costs include historical and cultural that influence culture and language similarities or differences. The geographical factors hinder real-time interactions for business purposes since people prefer sleeping at night and working during the day. The investors can hardly control the aspects hence all they can do is working around the set working hours. Information technology has largely solved the issues associated with real-time interactions requirements using videoconferencing, internet usage, emails, and electronic cash payments among others. These however increase the costs incurred in conducting business. An investor therefore requires comprehensive information on the effects of time zone differences on the value of stocks. When the time difference increases, the costs of the companies involved increases thus reducing the value of their profits. Lower profits translate in low capital earnings ratio hence low returns for the investors. An investor would generally prefer to invest in highly profitable areas hence considering stocks in areas with lower time differences with his location. Investments that require active participation such as the managed funds flourish with close monitoring by the investors. Physical investments also demand close monitoring to prevent mismanagement of assets. Time zones also indicate the available working hours in various countries covered by the S&P index (Portes & Rey 2011 p. 25). This enables the investor to select the countries that favor his current schedule to facilitate close monitoring of the investments. If the business operations occur when the investor is asleep, this makes it difficult to follow up on the performance. Convenience in time zones hence posses a huge impact on the success of foreign direct investments (FDI). Real Time Index A real time index reflects the current prevailing market, social, political, or economic conditions. Various conditions affect the stock valuation of a company. These conditions may include the share split, share acquisition, buybacks among others. The value of a company may deteriorate or increase due to these factors. The S&P index undergoes adjustments as soon as these factors arise in order to reflect the accurate value of the feature companies and to avoid misleading the investors, which may lead to suffering of huge losses. Therefore, the changes in the index represent the actual changes in the market capitalization due to movements in the stock prices. However, corporate actions like the mergers, acquisitions, dividend policy do not affect changes in the capitalization of the individual stocks or the index. When the price of a stock decreases due to corporate actions, the index calculation utilizes the price but adjusts the divisor to offset the resulting change in the index’s market value. The replacement of a stock also undergoes similar adjustments to eliminate the effect on index level. The adjustments of stock price changes of 5% or more occur at the effective dates or at the dissemination of the necessary information concerning the changes. The adjustments to changes of less than 5% occur on the third Friday of December, September, June, and March. These three months interval offers reliability of the index through timely adjustments. The changes occurring due to float adjustments cause adjustments if their effect on market capitalization exceeds 5%. The changes with an effect of below 5% cause annual adjustments in September during the index’s annual review. The calculations of the S&P index occur in the US dollars currency. The global market uses this as the standard currency for measuring transactions. Reuters offers real-time spot rates of exchange that assist in the conversion of various stock values into the US dollar currency (Wei Shang-Ji 2007 p.34). The U.S and Mexican exchanges close last at 04:00 PM Eastern Time while the index’s closing value undergoes calculation one hour and fifteen minutes later after allowing for late stock trades up to 05:15 PM Eastern Time. The real-time exchange rates then help in computation of the closing value. If a stock fails to trade during the time of index calculation, its value adopts the last available closing price of the closed exchange to convert it into U.S dollars. This utilizes the real time spot exchange rates of that particular day hence updating the index level. The closing value of the index then facilitates the conversion of the stock prices represented in the index calculation at the spot rate. The ongoing index adjustments utilize real time spot rates at the Forex market. Each day, the index adjustments utilize the closing real time exchange rates offered by Reuters (Portes & Rey 2011 p. 23). Regional exchange markets close at different times, which make it difficult to incorporate their effects on the index. However, when the stock stops trading for the day, the value at that time marks the closing spot rate and influences adjustments on the index level. The index offers real time information for the value of certain trading .stocks. The volatility in stock values necessitates the frequent adjustment on the index value. Failure to make adjustments may result in poor decision making concerning investment options, which may lead to heavy losses for investors. This therefore maintains the reliability and relevance of the S&P index to the investors. References Barro Robert J. and Lee Jong-Wha 2000, “International Data on Educational Attainment Updates and Implications”. National Bureau of Economic Research. Helpman Elhanan 2005, “A Simple Theory of International Trade with Multinational Corporations.” Journal of Political Economy. Portes Richard and Rey Hèlene 2011, “The Determinants of Cross-Section Border Equity Flows.” National Bureau of Economic Research. Rose Andrew 2000, “One Money, One Market: The Effect of Common Currency on Trade.“ Economic Policy. Stein Ernesto H. and Daude Christian 2001, “Institutions, Integration, and the location of Foreign Direct Investment.“ Inter-American Development Bank, Research Department.Washington, DC. Wei Shang-Ji 2007, “Why is Corruption So Much more Taxing than Tax? Arbitrariness Kills”, National Bureau of Economic Research. Read More