The Art and Science of Technical Analysis - Essay Example

SHARE TRADING by The of the The of the School The and where it is located The Date Letter of Transmittal I hereby submit a proposal in support of a research program entitled ‘SHARE TRADING’ to be performed under prescribed directions of spiriting the capital used in trading at a ratio of 50:50 in reference to the use of technical and fundamental analysis in the London stock exchange. I am requesting funding in the amount of 100,000 pounds in total estimated capital cost. Your consideration is greatly appreciated. Acknowledgments I would like to acknowledge the great service provided by the London stock exchange in the information provided in order to write this proposal. For the theoretical analysis, the LSE provided all the performance charts for all the companies highlighted and presented in this paper. For the fundamental analysis, the LSE provided all the data in terms of income statements, profit and loss accounts, as well as balance sheets for all the companies stated and highlighted in this paper. Table of Contents 1. Introduction……………………………………………………………….6 2. Summary or Background………………………………………………….6 3. Methods/Procedures……………………………………………………….8 Technical Analysis………………………………………………………..8 Fundamental Analysis…………………………………………………….9 4. Case Study and Results…………………………………………………….9 Fundamental Analysis…………………………………………………….9 Technical Analysis……………………………………………………….12 5. Discussion of results……………………………………………………...12 6. Recommendations…………………………………………………………16 7. Conclusions………………………………………………………………..16 8. Bibliography…………………………………………………………….....17 Abstract A common trend in the investment market in the UK has shown that the trading of securities has been increasing in recent years. The London stock market (LSM) has been in existence for the last 300 years. Many people believe that the LSM holds the ideology where the rich get richer by owning percentages of firms in the financial market. However, due to the introduction of pro trading skills, the LSE has changed its identity allowing an open avenue for any suitable investor to play a vital role in the investment and financial market. The mechanisms of trading in the stock market have been complicated for these investors, a phenomenon that has increased the risks of investment. However, the study of the theoretical and fundamental analysis makes the comprehension of the securities trading mechanism easier to absorb. In this paper, these two phenomena have been identified and explained comprehensively and a comparison analysis has been made to further explain how trades can be made in the London stock market. A case study has also been outlined to determine the two analyses by using 100,000 pounds in the UK local trading floor. Introduction A stock is a portion in the proprietorship of a company. Stocks characterize a privilege on the companys properties and earnings. As an individual acquires more stock, their proprietorship stake in the establishment becomes larger. It should be taken to account that the terms stock shares or equity represent the same thing. Most stocks are transacted on exchanges, which are dwellings where customers and vendors set and decide on a price. During the previous few years, the typical persons concern in the stock market has developed exponentially. In this view, many investors once regarded stocks as a financial venture of the rich, which has now turned into an avenue of choice for growing wealth for the ordinary UK citizen. This demand coupled with improvements in trading expertise has opened up the stock markets so that currently, nearly anybody can possess stocks. As we enter the third millennium, investors have more cause than ever to ask where the markets are heading. This article examines and explores the investment potential in the UK stock market on the returns that can be expected from equities, bonds, and bills by using technical and fundamental analysis on a 100,000 pound investment in the stock market. Summary or Background The London Stock Exchange (LSE) is known as one of the world’s oldest stock exchanges establishments in history and can be traced back to nearly 300 years ago. Currently, the LSE is a financial and investment giant situated in the City of London’s business district. However, it started life as a small establishment in coffee houses of 17th century and quickly grew to become the London’s most important financial organization through the years (Khurshed, 2009, p. 32). Over the times that followed, the LSE has steadily led the way in increasing a strong, well-structured stock market, and is currently placed at the core of the universal financial public. In December 2011, the LSE realized a market capitalization of 3.266 trillion US dollars hence making it the second major stock market in Europe only after Euronext. Subsequently, it was ranked as the fifth-major stock exchange in existence. This information has led a high number of investors decide to take part in the business of stock trading. Nonetheless, despite the fact that this is a great sign to the financial market, most of these investors have very little knowledge of the stock market portfolios. In order to comprehend how the UK stock market works, one has to understand the two common techniques of getting around the perils of trading in the investment market. These techniques are the employment of stock market advisers, understanding the technical analysis, and the fundamental analysis for personal comprehension. In regards to matters of stock market investing, most stock market analysis technocrats advise all investors not to poll all their investments capital in one form of share or company. This trait allows one to spread risks in all investments made. Therefore, it is favourable to spread ones capital around so that in case of an ineffectively performing speculation, investors do not harm their returns. In any case, there is usually a considerably more imperative purpose that enhances the running of a portfolio, which also incorporates a scope of advantages and values. For example, bonds, property, and money are demonstrated to record the mass of returns over the long-term. This methodology is known as resource designation, and is quite often the initial stage of stock market investment that any prospective investor will take when making a difference on what share to buy and how to continue trading in the stock market (Grimes, 2012, p. 67). In reference to personal comprehension for any potential investor, one may go the extra mile to take a look at the stock market with the use of technical analysis and the other fundamental investigation methods. Methods/Procedures This paper uses a methodology approach to explain the changes that can be caused by a proper study in both analyses. Technical analysis is a method of gauging securities by analyzing information generated by market movements such as previous prices and volume of particular shares or the market as a whole. Technical analysts or specialist do not endeavour to measure a securitys inherent significance. However, they alternatively use charts and other apparatuses to categorize patterns that can advise on future market activities (Grimes, 2012, p. 68). Technical analysts or specialists consider that the past performance of shares and markets provide significant indications of future performance of the suggested investment products such as stocks, bills or bonds. Technical analysis technocrats examine the price activities of the financial markets as a substitute to the fundamental factors that appear to affect market prices. These technicians suggest that even if appropriate information of a specific market or share was entirely accessible, one still could not forecast an exact market "reaction" to that data. There are numerous aspects that make it common for such significant factors to be ignored in favour of the ‘fundamental’ aspects. When one takes time to study the financial markets, it is clear that there are tendencies, momentum, and outlines that are reparative over time. They may not be precisely the same way but tend to take similar characteristics. Charts are representations that display the same fractal arrangement in stocks, bills, or bonds. Most specialists find charts as a mirror of the attitude of the investors and not a representation of the statistical data factors. Therefore, technical analysis is defined as the examination of human group psychology but some call it behavioural finance. A fundamental analysis is a technique of assessing a security that involves attempting to quantify its intrinsic value by probing related economic, fiscal, and other qualitative as well as quantitative features. Fundamental analysis experts endeavour to study all quantitative aspects that can change the securities worth including macroeconomic features such as the general economy and industry environments as well as company-specific influences such as financial state and management (Schwager, 1995, p. 56). The main goal of executing fundamental analysis is to create a value that a potential investor can relate to as the securitys present price with the purpose of finding out what class of security or position to take whether it is making an underpriced purchase or not. Many stock investment gurus consider fundamental analysis as the cornerstone of investing. This is so because when talking about securities, it is significant to know how they can be fragmented down into quantitative and qualitative factors. This technique does so by bidding to decide a security’s price and concentrating on fundamental influences that impact a companys real business and its future projections. For instance, one can execute fundamental analysis on businesses or the economy in general. Case Study and Results Using this information, a capital of 100,000 pounds is placed in investment to show how to beat stock market perils and pitfalls using current UK LSE stock market data. Fundamental Analysis Companies in the UK are required to report earnings regularly and a good investor will rely on these data to make an informed decision. According to financial records gathered and represented in summary form as stated by current performance and an analysis on past performance, the ARM HOLDINGS PLC ORD 0.05P is considered as one of the best buys from the current trimester report publicized by the company and information provided over the last five years. Figure 1: Summary Balance Sheet for ARM HOLDINGS PLC ORD 0.05P. ID. Code: GB0000595859, trading floor: London Domestic 2009 IFRS in mill. GBP 2010 IFRS in mill. GBP 2011 IFRS in mill. GBP 2012 IFRS in mill. GBP 2013 IFRS in mill. GBP Assets Property and Equipment Intangible Assets Long-Term Investments Fixed Assets Inventories Accounts Receivable Cash and Cash Equivalents Current Assets Total Assets 12 24 8 600 3 60 32 250 989 14 15 30 650 3 89 30 400 1231 17 18 120 750 4 112 25 556 1602 30 40 150 790 5 120 45 644 1824 34 75 159 830 5 135 46 780 2064 Liabilities Accounts Payable Long-Term Liabilities Liabilities to Banks Provisions Liabilities Share Capital Total Equity Minority Interests Total liabilities equity 2 - - 40 100 1 740 - 882 3 - - 65 180 1 850 - 1098 7 - - 75 240 1 1050 - 1372 5 2 5 80 259 1 1195 - 1546 7 2 4 91 327 1 1311 - 1742 Income Statement Revenues Depreciation (total) Operating Result Interest Income Income Before Taxes Income Taxes Minority Interests Profit Net Income Earnings per Share Dividend per Share 302 - 45 - 46 -6 - 39 0.029 0.019 410 - 104 - 109 -25 - 85 0.069 0.029 495 - 145 - 155 -42 - 110 0.079 0.04 580 - 200 - 220 -59 - 155 0.119 0.049 715 - 154 - 163 -58 - 105 0.008 0.06 Cash Flow Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Decrease / Increase in Cash Employees 95 -121 -9 -35 1,712 170 -170 -9 -4 1,890 195 -160 -30 -2 2,111 160 -87 -46 -17 2,395 315 -250 -67 -2 2,833 Technical Analysis Companies in the stock market have charts to show their performance. These charts are generated from the precise performance displayed on a daily basis and later on a monthly basis as well as a subsequent a yearly chart. Figure 2: Technical Analysis charts for UNITED UTILITIES GROUP PLC ORD 5P. (Yearly chart) Discussion of Results From the data displayed above, it is quite evident that the company has been performing better all through the five years. The increase in total assets by 240 million pounds, which is nearly a quarter of a billion pounds, is evidence of good performance. In 2012, there was a gap of total assets and total liability of 278 million pounds, which was a sign of a good profit. However, this is dwarfed by the same difference but different value of 322 million pounds and increased profit of 44 million pounds. These figures are higher than any other holding company of its kind in the country. A cash flow increase of 2,833 million pounds from 2,395 million pounds in the previous year of causes a difference of 438 million as evidence of irregular profits for the company. The increase in the number of employees shows or indicates that the company is set on an expanding process. Therefore, this company has been a top performer for a long time making it a good investment venture. Figure 3: the table below show nine other companies that hold a similar trait as ARM HOLDINGS PLC ORD 0.05P. Shares Current value (31 Dec 13) Gain (profit and revenue) In million pound CEY CENTAMIN PLC ORD NPV (DI) 305.53 43 HIK HIKMA PHARMACEUTICALS PLC ORD SHS 10P 827.77 145.52 GMS GULF MARINE SERVICES PLC ORD 10P 111.74 24 LRD LAIRD PLC ORD 28.125P 537.00 17.8 BDEV BARRATT DEVELOPMENTS PLC ORD 10P 3157.00 551 DRX DRAX GROUP PLC ORD 11 16/29P 2062.10 282.30 TW. TAYLOR WIMPEY PLC ORD 1P 2295.50 276.50 PSN PERSIMMON PLC ORD 10P 2085.90 364.4 RMV RIGHTMOVE PLC ORD 1P 139.94 20.57 NOTE: the shares shown above are currently trading in the LSE and data in form of balance sheets have been used to select them. Theoretical Analysis The data provided by the LSE logistics department shows that the spectacular surge from United Utilities records a bullish +3.22% increase. The security got off to a rosy start at 904.5 GBX, which was below the peaks of the previous session. It then increased its performance as trading progressed closing in flying form at 929 near the days high point. On a weekly basis, the stock is trending higher than the UK FTSE All Share. The performance of United Utilities, in essence, has been higher than the related benchmark index. Figure 4: the table below shows nine other companies that hold a similar trend as UNITED UTILITIES GROUP PLC ORD 5P Share PSN PERSIMMON PLC ORD 10P BWY BELLWAY PLC ORD 12.5P TW. TAYLOR WIMPEY PLC ORD 1P BDEV BARRATT DEVELOPMENTS PLC ORD 10P TRS TARSUS GROUP PLC ORD 5P ACA ACACIA MINING PLC ORD 10P HIK HIKMA PHARMACEUTICALS PLC ORD SHS 10P CGL CATLIN GROUP LTD COMS SHS $0.01 MEC MECOM GROUP PLC ORD 60.85888P This data shows how different the two analyses work since they both give different results, which are regarded as smart buys in the LSE. The first form of differentiation occurs on the application of both models. Technical analysis is centered at tracking the price movement of a share and uses this information to forecast its future price activities. Conversely, fundamental analysis is centered at analyzing economic influences known as ‘fundamentals’. However, this paper goes further on the differentiation concept of both models. Charts vs. Financial Statements At the most rudimentary level, a technical analyst examines a security by using periodic charts while a fundamental analyst does the same but by using financial statements of singular companies. By going through a company’s balance sheet, cash flow statement, and income statement, a fundamental analysis expert attempts to identify a companys worth. In financial expressions, an analyst endeavours to create a standard measurement scheme by the use of a companys intrinsic worth (Aldridge, 2010, p. 31). Time Horizon Fundamental analysis takes a fairly long-term tactic to examine the market paralleled to technical analysis. While technical analysis results can be used on a timeframe of years, months or even days or hours, fundamental analysis frequently looks at statistics over the years. The dissimilar timeframes that these methods use is a consequence of the type of the examining style to which they each adhere (Turner & Schwager, 1996, p. 10). Trading Versus Investing As previously shown and explained, not only is the technical examination shorter in analysis time than fundamental analysis, but the aims of an acquisition or sale of a security are usually dissimilar for each method. Generally, technical analysis is designated in the trade of share while fundamental analysis is centered at making an investment. Investors buy assets that they believe will increase in worth, while traders buy assets that they believe will sell at greater prices (Xie, 2011, p. 11). Recommendations The market changes in the stock market go beyond the two set of analyses. For example, the political changes in a country as well as external influences affect these prices. The two analyses do not show such kind of changes since they are neither predictable nor seasonal. It is my recommendation that for any potential investor to make a profit in the market, the individual should do more than just a fundamental and theoretical analysis. Conclusion In conclusion, a stock is a portion in the proprietorship of a company that is transacted in an exchange location usually a trading floor of an established stock market. The London Stock Exchange (LSE) is known as one of the world’s oldest stock exchanges establishments in history and has grown to be the world’s fifth major stock trading establishment. Additionally, it is the second largest in the European investment market. Through the years, investors have increased in number but most of them do not know the type of analysis to make in order to make a good trade. As previously elaborated, technical and fundamental analysis are the key schools of comprehension in the financial markets. The models are defined as two different forms and give results that when applied, lead to good trades in the financial markets. Finally, a test was done on a 100,000 investment showing how both analyses can be used in selecting the best buys. Bibliography Aldridge, I. (2010). High-frequency trading a practical guide to algorithmic strategies and trading systems. Hoboken, N.J., Wiley. Grimes, A. (2012). The art and science of technical analysis: market structure, price action, and trading strategies. Hoboken, John Wiley & Sons, Inc. Khurshed, A. (2009). The investors guide to IPOs: how to profit from initial public offerings. Petersfield, Harriman House Schwager, J. D. (1995). Fundamental analysis. New York, Wiley. Turner, S. C., & Schwager, J. D. (1996). Study guide to a company fundamental analysis. New York, Wiley & Sons. Xie, X. (2011). Full view integrated technical analysis a systematic approach to active stock market investing. Hoboken, N.J., Wiley. Read More