Significance or importance of organizing

A sound organizing facilitates administration, promotes specialization, encourages growth, and stimulates creativity. It can contribute to the success of an organization. Hence, the significance of organizing may be discussed as below:

1)Efficient administration: Organizing is an important and the only tool to achieve enterprise goals. A sound organizing helps the management in many ways. It defines various activities and their authority relations in the organizational structure. It can avoid confusion and delays as well as duplication of work and overlapping of effort. It is the mechanism by which management directs, controls, and coordinates the various activities in the enterprise.

2)Optimum use of human resources: Sound organizing ensures that every individual is placed on the job for which he is best suited. Such matching of jobs and individuals helps in better use of human talent. It also provides the benefits of specialization, which results in economy of operations and reduction in cost.

3)Growth and diversification: A sound organizing contributes to the growth and diversification of the enterprise through decentralization and divisionalization. Through organization management can multiply its strength and undertake more actives. That is why many small firms have grown and become big.

4) Optimum use of new technology: A sound organizing is flexible. It has the capacity of absorbing changes in the environment. Hence, it provides for optimum use of technological improvements.

5)Coordination and communication: Organizing is an important means of creating coordination and communication among different departments of the enterprise. Different jobs and positions are welded together by structural relationship. It also specifies are welded together by structural relationship. It also specifies the channels of communication among different members of the enterprise.

6)Training and development: A sound organizing provides a good scope for the development of managerial ability through proper delegation of authority and decentralization. It provides responsibility, sufficient freedom to the supervision and creative thinking in different levels.

7)Productivity and job satisfaction: A sound organizing is based on democratic and participative management. Hence, the entire organizational environment is favorable for productivity and job satisfaction.

Principles’ of organizing

Organizing is one of the major functions of management. The success or failure of the organization depends upon sound and efficient organizational structure. Hence, there is a need to follow certain principles of organizing to formulate and develop sound and efficient organization. These principles are as follows:

Unity of objectives

The goals of the organization influence the organization structure. Hence, the goals and objectives must be clearly defined for the entire organization, for each department and even for each position in the organization structure. If there is contradiction among the various levels of objectives, then entire goals of the organization cannot be achieved.

Specialization

The total task in an organization should be divided in such a manner that every person is confined to a single job. This leads to specialization. An employee repeatedly performing a specific single job becomes an expert in that job. The work assigned should be according to his abilities and aptitude. Then he can work with greater economy and efficiency.

Span of control

Span of control represents a numerical limit of subordinates to be supervised or controlled by a manager. As there is a limit to the number of subordinates that can be supervised effectively. However, the exact number of subordinates will vary depending upon the nature of job, competence of the manager, quality of subordinates.

Exception

Each manager should make all decisions within the limitation of delegated authority. However, only exceptionally complex matters should be referred to the higher levels for their decision. This will enable the executives at higher levels to devote time to more important and crucial issue.

Scalar principle

This principle sometimes known as the “chain of command”. It is unbroken line of authority from the top level to the bottom of an organization. It makes clear about who will work under whom. The chain of command should be short and clear which makes decision making and communication more effective.

Unity of command

The principle of command suggests that an employee should have one and only one boss. Each subordinate should have only one supervisor whose command he has to obey. Directions from several superiors may result in confusion, chaos, conflict and indiscipline.

Delegation of authority

Proper authority should be delegated at all levels of management. The authority delegated should be equal to responsibility so as to enable each manager to accomplish the task assigned to him

Organizing and staffing function

The organizing means different things to different people. It is used widely to mean a structure of relationship, a process, a group of people, and a function of management, organizing is the basic function of management. By organizing, a manager achieve organizational goals. Organization as a process integrates and coordinates the efforts of human, financial, technological and other resources. As a group of people organizing contributes their efforts towards attainment of common goals.

Once a manager has set goals and developed a workable plan, the next management function is to organize people and other resources necessary to carry out the plan. The organizing function creates a structure of task and authority relationships. It also involves assigning activities, dividing work into specific jobs and tasks, and specifying who has the authority to accomplish certain task. Another major aspect of organizing is grouping activities into departments or some other logical subdivision. In essence organizing is the process of creating organizational structure that enables the organization to function effectively as a cohesive whole.

Effective organizing can provide a number of benefits. First, the process of organizing helps to clarify the specialized tasks and performance expectations for each person. Second, it produces appropriate authority structure with accountability to support planning and control throughout the organization. Thirds, it creates channels of communication that support decision-making and control. Fourth, the organizing process establishes a logical flow of work group. Fifth, it develops a division of labor that avoids the misuse of resources, conflict, and duplication of effort. Sixth, it creates coordinating, mechanisms in diversified activities. Finally, organizing produces focused work efforts that are logically and efficiently related to a common goal.

Departmentation

The grouping of similar and logically connected activities of organization is called departmentation. This is one of the primary tasks in designing an organization structure. Departmenatation is a process where tasks are grouped into jobs, jobs into effective work groups and work groups into identifiable departments. It leads to grouping of both activities and personnel. A department may be called a division, branch, section or some other organizational unit.

The purpose of departmentation is to administer the enterprise in the best possible manner. It increases the operating skill and efficiently of an enterprise. Departmentation is basically the process of assigning fixed responsibility to an executive in charge of a particular department. It provides distinct advantages of division of labor and specialization.

The importance of departmentation can be explained from the following points:

• Departmentation provides the advantages of specialization of work.
• Departmentation helps in fixing the responsibility and consequently accountability for the results.
• Departmentation facilitates to development of managers.
• Managerial performance of the managers can be appraised more objectively through departmentation.
• Departmentation gives the feeling of autonomy, which provides the satisfaction and motivation leading to higher efficiency of operations.
• Departmentation facilities administrative and financial control.

Organizing and staffing function

The organizing means different things to different people. It is used widely to mean a structure of relationship, a process, a group of people, and a function of management, organizing is the basic function of management. By organizing, a manager achieve organizational goals. Organization as a process integrates and coordinates the efforts of human, financial, technological and other resources. As a group of people organizing contributes their efforts towards attainment of common goals.

Once a manager has set goals and developed a workable plan, the next management function is to organize people and other resources necessary to carry out the plan. The organizing function creates a structure of task and authority relationships. It also involves assigning activities, dividing work into specific jobs and tasks, and specifying who has the authority to accomplish certain task. Another major aspect of organizing is grouping activities into departments or some other logical subdivision. In essence organizing is the process of creating organizational structure that enables the organization to function effectively as a cohesive whole.

Effective organizing can provide a number of benefits. First, the process of organizing helps to clarify the specialized tasks and performance expectations for each person. Second, it produces appropriate authority structure with accountability to support planning and control throughout the organization. Thirds, it creates channels of communication that support decision-making and control. Fourth, the organizing process establishes a logical flow of work group. Fifth, it develops a division of labor that avoids the misuse of resources, conflict, and duplication of effort. Sixth, it creates coordinating, mechanisms in diversified activities. Finally, organizing produces focused work efforts that are logically and efficiently related to a common goal.

Fixed income securities

A fixed income security is a financial obligation in which the issuer of the security agrees to pay a specified amount to the holder of the security at specified future dates. Debt obligation, such as bonds, and preferred stock are the two most common types of fixed income securities. The holders of debt obligations are called lenders or creditors, while issuers of debt securities are called borrowers. The holders of preferred stocks are called preferred stock holders.

The payments that are made on debt obligations are interest and principal repayments; preferred stocks pay dividends. Under most circumstances, the failure to pay interest or principal repayments on debt obligations in a timely manner is an act of default. However, preferred stockholders, as equity investors in a company, are entitled to preferred dividends only if they are declared by the issuers board of directors. Preferred stockholders have the right to dividends ahead of common shareholders. They also have a prior claim on funds resulting from a company’s liquidation that comes ahead of common shareholders.

The contract between the issuer of bonds and the bondholders that sets forth the obligations of the borrower and the rights of the lender is called an indenture. However, a trustee is interposed between the issuer and the bondholders. The trustee is a fiduciary who is charged with the duty of representing the bondholders, making sure the issuer meets its obligations and the bondholders rights are upheld. It is the trustee who can send an issuer into default if it fails to honor the bondholders rights. It is the trustee who can send an issuer into default if it fails to meet all of its obligations as set forth in the indenture.

Reasons for financial analysis

Investors have to make decision on the basis of financial analysis. Financial analysis provides strength and weaknesses of the company. To make investment decision, an investor has to the analyze the company. Some reasons for the investment analysis are given below:
To identify mispriced securities:
Security analysis involves examining a number of individual securities within the broad categories of financial assets. The purpose for conduction such examinations is to identify those securities that currently appear to be mispriced.
Fundamental analysis begins with the intrinsic value of any financial asset equals the present value of all cash flows that the owner of the assets expects to receive. Once the intrinsic value of the common stock of a particular firm has been determined, it is compared with security’s current market price of the common stock. If the current market price of the common stock is below the intrinsic value, a purchase is recommended. Conversely, if the current market price is above this intrinsic value, a sale is recommended.

To determine security characteristics:
The financial analysis is try to determine the certain characteristics of securities. Financial analyst should estimate a security’s future sensitivity to major factors and unique risk to determine the risk of a portfolio. The analyst will also want to estimate the dividend yield of a security during the next year to indemnity its suitability for the portfolio in which dividend yield is relevant. Careful analysis of such matters as a company’s dividend policy and future earnings and cash flows may lead to better estimates.

To get the information about the company:
An investor makes financial analysis to make the financial decision.
Sometimes investors fail form the decision due to lack of information. Success or failure of public limited companies depends much on their investment analysis and performance.

To make sound judgment and forecasting:
Investors can correct decision on the basis of the financial analysis. Therefore financial analysis is the base for the sound judgment and forecasting. In present situation, some investors are very conscious to make investment analysis in stock market. Investors gradually have to know that when to beat the market. Sometimes, investor fails to select right judgment and forecasting for the best securities.

To select of good security:
Financial analysis helps the investors to select the right security for investment. Funds available for investors are limited, so investors have to select best securities that provide high return.

To help in risk analysis:
Investors can predict the riskiness of the securities from the financial analysis. After the assessment of risk analysis, investors can determine the rate of return with the help of financial analysis.

Advantages and Disadvantages of Preferred Stock

Advantages of preferred stock

Preferred stock are advantageous from the viewpoint of the issuer and the investors.

Form the company’s viewpoint:

Risk less leverage advantage: Preferred shares increase financial leverage because, first of all, the preferred dividend is a fixed obligation and unlike debentures there is no default ever if the dividend is not paid. That means, non-payment of dividend doesn’t force the company into insolvency. Thus, there is an increased risk less financial leverage.

Repayment anxiety and dividend postponability: The maturity period of a perpetual preferred stock is not specified. Thus, there is no obligation to call the preferred stock within a specified time. This is a permanent source of financing, which will not result in liquidation ever if the dividend and par value/stock value is not paid for a longer period of time. The firm has no repaying anxiety and can easily postpone the payment of dividend.

Fixed dividend: The preferred dividends are restricted to the stated amount. Thus, preferred shareholders do not participate in excess profit as the ordinary shareholders do.

Control: preference shareholders do not have a voting right unless the dividend arrears exit. They do not have a voice in the management of the company, therefore the control of ordinary shareholders remains secure.

Flexibility: preferred stocks are free of maturity period. Besides, the dividend can be postponed if earning is insufficient or uncertain. Thus, this is a flexible source of financing.

Ease in expansion: It facilitates those firms that want to expand their business because preferred stock secures the interest of the shareholders as they have a prior claim on the earning and assets. Hence, the company can raise a greater fund by issuing preferred stocks than by issuing common stock

Participation in earning: Ordinary shareholders have equal participation in the earnings made through additional issuance of ordinary shares. But, such participation is not there in case of preferred stock. Their claim is restricted to a limited amount per share. Hence, preferred stocks are in flavor of the owners.

Disadvantage of preferred stock

Cost: It is costly because, generally, dividend rate on such shares is higher than interest rate payable on debentures. Similarly, preference dividend is paid out of earning after interest and tax. The higher the tax rate, the higher the cost of preference shares and it will be inefficient to raise fund through preferred stock issuance. In other words, it is costlier than debentures because it is not tax deductible.

Difficult to sell the stocks: Investors may not like to invest on preferred stocks because they go only a fixed amount of dividend even though unstable they may not get preferred dividend as such dividend even though the firms earning is too high. Besides, if the earning of the firm is low or unstable they may not get preferred dividend as such dividend is not an obligation to the firm. Thus, it is difficult to sell the stocks.

Seniority claim: The preferred stockholders have a prior claim over the earning and assets of the company. This adversely affects the claim of ordinary shareholders. Their claim will, however, be lower than that of preferred stockholders.

Commitment to pay dividend: Common stockholders cannot get dividend unless preferred dividend is paid. Thus, it becomes a sort of obligation to pay preferred dividend.

Preferred stock and Common stock

Preferred stock

Preferred stock represents the long term source of financing under which the stockholders are entitled to get fixed amount of dividend out of the earning of the company after payment of debenture interest and tax.

Preferred stock, also called preference share, is a hybrid form of long term financing with combined features of both common stock and long term debenture. As in the case of common stock the nonpayment of preference dividend doesn’t force the company to insolvency. Dividends cannot be deducted for tax purpose i.e, they have no maturity date. Now, similar to debentures, fixed rate of dividend is paid and generally, preference shareholders have no voting right. But preference shareholders have claims on income and assets prior to common stockholders except that of creditors.

Preference dividend is discretionary. Failure to pay such dividend will not result to default of company’s obligation or insolvency of the company. Hence, if needs be, the board of directors may postpone or omit such dividend because treatment of preferred stock dividend as a fixed obligation increases the explicit cost of the company. Hence preferred stocks are less risky than bonds from the corporations point of view

Dividend does not have to be paid if profit is not earned.

Nonpayment of preferred dividend will not bankrupt the firm.

Characteristics of common stocks

Common stock is an ownership share in a corporation. Common stock certificates are legal documents that evidence ownership in a company that is organized as a corporation; they are also marketable financial instruments. Sole proprietorship and partnership are other forms of business organizations, but only corporations can issue common stocks.

Common stock is the recipient of the residual income of the corporation. Though the right to vote, holders of common stock have a legal control over the corporation. An element of risk is also involved in equity ownership due to its low priority of claim at liquidation. Common stockholders have limited liability. Common equity provides a cushion for creditors if losses occur on dissolutions. The equity-to-total-assets ratio is an indicator of the degree by which the amount realized on the liquidation may decline from the stated book value before creditors suffer losses.

Diversification

The process of adding securities to a portfolio in order to reduce the portfolios unique risk and thereby, the portfolios total risk.

The objective of portfolio analysis is to reduce risk. By combining securities of low risks with securities of high risk, success can be achieved by an investor in making a choice of investment outlets. Combination of securities can be made in many ways.

Forms of diversification

Portfolio approaches usually assume one of the following forms of diversification.

Simple diversification: The simple diversification would be able to reduce unsystematic or diversifiable risk. Simple diversification is the random selection of securities that are to be added to a portfolio. Simple diversification reduces a portfolios total diversifiable risk to zero and only the undiversifiable risk remains. It was found in many research studies that 10-15 securities in a portfolio would bring adequate returns. So this approach assumes that an investor can expect a reasonable return for a given level of risk.

Superfluous diversification: It refers to the investors spreading himself in so many investments on his portfolio. The investors finds it impossible to manage the assets on his portfolio because the management of a large number of assets requires a knowledge of the liquidity of each investment, return, the tax liability and this will become impossible without specialized knowledge. He also finds it both difficult and expensive to look after a large number of investments. If the plans to switch over investments by often selling and buying assets expecting a high rate of return, he involves himself in high transaction costs and more money will be spent in managing superfluous diversification.

Diversification across industries: some investment counselors advocate selecting securities from different industries to achieve better diversification. It is certainly better to follow this advice than to select all the securities in a portfolio from one industry. But, empirical research has shown that diversifying across industries is not match better than simply selecting securities randomly.

Simple diversification across quality rating categories: Simple diversification reduces risk within categories of stocks that all have the same quality rating.

Markowitz diversification: Markowitz diversification is the combining of assets, which are less than perfectly positively correlated in order to reduce portfolio risk. It can sometimes reduce risk below the undiversifiable level. Markowitz diversification is more analytical than simple diversification and considers assets correlations. The lower the correlation between assets, the more that Markowitz diversification will be able to reduce the portfolios risk.

Non-satiation and risk aversion

There are two assumptions implicit in the portfolio selection problem. First, investors want to select a portfolio, which provides the highest possible return. An assumption of non-satiation is made n the Markowitz portfolio, in which investors are assumed to always prefer higher levels of terminal wealth to lower levels of terminal wealth. Therefore, given two portfolios with the same standard deviations, the investor will choose the portfolio with the higher expected return.

The portfolio theory presumes that individual investors attempt to maximize the utility of their portfolios. However, since individuals differ in their attitude toward risk, differences in their risk aversion factor will lead to different investment policies. The portfolio theory defines three types of investors:

Risk averse: Investors who have positive risk aversion factors. They view the true return that is earned on an investment as being its expected return, less an amount that compensates for its risk.

Risk neural: Investors who have a risk aversion factor equal to zero. Their utility functions only consist of an investments expected return. Such investors tend to ignore risk when making an investment decision.

Risk loving: Investors who have negative risk aversion factors. This means that, for them, the greater the risk, the more they like an investment. They view the true compensation that an investment offers as consisting of both its expected return and the thrill of the game.

Concept of portfolio

Portfolio theory was originally proposed by Harry M. Markowitz in 1952. The theory is concerned with the selection of an optimal portfolio by a risk-averse investor. A risk –averse investor is an investor who select a portfolio that maximizes the expected return for any given level of risk or minimizes the risk for any given level of expected return. Thus a risk-averse investor will select only efficient portfolios.

The selection of the optimal portfolio depends on the investors preferences for risk and returns. The investors risk-return preferences can be represented by indifference curves. By combining the efficient portfolios with the investor’s indifference curves. By combining the efficient portfolios with the investor’s indifferences curves, the optimal portfolio can be determined.

Portfolio theory assumptions

The portfolio model developed by Markowitz is based on the reasonable assumption:

• The expected return from asset is the mean value of a probability distribution of future returns over some holding period.
• The risk of an individual asset or portfolio is based on the variability of returns.
• Investors depend solely on their estimates of return and risk in making their investment decisions. This means that an investors utility is only a function of the expected return and risk.
• Investors adhere to the dominance principle. That is for any given level with a lower expected return; for assets with the same expected return, investors prefer lower to higher risk.

Function of security market

Price discovery

Price discovery is the first function of the security market. Price discovery is a determination of a fair price of the securities it trades. The interactions of buyers and sellers in a security market determine the price of the security.

The provision of liquidity

Liquidity refers to how an asset can be converted into cash. Security markets provide a mechanism for an investor to sell a financial security. Due to this feature, it is said that a security market offers liquidity. If you takes a long time to sell the shares or if you can sell them immediately only at a sacrifice, it does not meant liquidity. If you sell 20 shares of standard chartered immediately for a fair price, then the market provides you a good liquidity.

The minimization of trading costs or transaction costs

The third function of the security market is that it reduces the cost of transaction. There are two costs associated with transacting i.e. search costs and information costs.

Search costs represent explicit costs, such as the money spent to advertise ones intention to sell or purchase a financial security, and implicit costs, such as the value of time spent in locating a counter party. The present of some form of organized security market reduces search costs. Information costs are costs associated with assessing the investment merits of a financial security.

Organized securities markets lower the trading costs in a variety of ways. By restricting access and setting rules, by standardizing trades, by providing a framework for conflict resolution, and by guaranteeing execution.