Financial Instrument Traded in the Stock Market - Research Paper Example

Read Three Questions and Then Write an Essay Table of Contents Introduction 3 2. Literature 3 3. Methodology 4 4. Discussion 4 a) Relative Strength Index 4 b) Moving Average Price 6 c) Recommendation to Brett 8 5. References 10 1. Introduction The stock prices changes every day due to influence of the change in the market forces. In this regard, in order to take effective financial as well as investment decisions, business organization and investors needs to properly analyse the movement of security and its trend using various technical measures. Debts, equity, bonds and mutual funds are some of the most common financial instrument that has been traded in the stock market. Moreover, change in the price of the stock is influenced by its demand and supply, as the demand of the security raises above its supply, the price of the security raises significantly at the same time. Besides, high risk is also attached with most form of securities that has been traded in the financial market, thereby , analysis of the movement of pricing and market trends remains highly important prior to undertaking any investment decision (Gitman, 2008). 2. Literature The environment of stock market and stock pricing is highly volatile, which led to significant difficulty in taking sound investment decisions for the investors where they need to consider the risks involved and the return combination at large. Additionally, the technical measure also plays an important role in predicting and analysing the movement of stock in future. The relevance of technical tools and measure has been studied in various literatures in quantifying the pricing movement of stock markets. Besides, in the presence of the aspect of technical measure, investor can be able to look forward and take effective buying and selling decision. Thus, the approach of technical supervision in the security market helps to provide opportunity to the investor to make high profitability through analysing the trend of the share prices (Vashishtha & et. al., 2013; Brownlees & et. al., 2012; Christiansen & et. al., 2012). 3. Methodology In order to take the profitable position in the stock market, determining the possible movement of pricing of the security is highly important through using appropriate technical analysis. Thus, in this essay in order to determine appropriate investment plan for Brett Daly, two approaches of measuring the security pricing movement including Stock’s relative strength index (RSI) and moving average method have been used for determining the Nautilus security movement RSI, measures the speedily movement of pricing on the index of 0 to 100 whereas, moving average method is used to measure the pricing trend-followed as per security based on previous prices (Milionis & Papanagiotou, 2011; University of Rhode Island, n.d.). 4. Discussion a) Relative Strength Index Day of Period 9/30/13-10/31/13 11/30/13-12/31/13 Advance Advance 1 18 18.25 2 18.55 17.50 3 18.65 16.75 4 18.80 17 5 19 17.50 6 19.10 18.55 7 18.92 19.80 8 18.55 19.50 9 17.50 19.25 10 17.50 20 11 17.25 20.90 12 17 21 13 16.75 21.75 14 16.50 22.50 15 16.55 23.25 16 16.15 24 17 16.80 24.25 18 17.15 24.15 19 17.22 24.75 20 17.31 25 21 25.50 22 25.55 Average 17.66 21.21 Table 1: Average Price of Nautilus security RSI {9/30/13-10/31/13} = 100 – [100 / (1 + APCup/APCdown)] = 100 – [100 / (1 + 17.66)] = 100 – 5.36 = 94.64 Stock’s relative strength index (RSI) {11/30/13-12/31/13} = 100 – [100 / (1 + 21.21)] = 100 – 4.50 = 95.50 1. The above calculated RSI measure compares the average deflection in the price of Nautilus security during the declining periods with the average alteration in the price in the advance periods. Additionally, the analysis of the two different RSI i.e. 9/30/13-10/31/13 period and 11/30/13-12/31/13 revealed that the index is moving in upward direction in these two periods. Besides, it can also been revealed that Nautilus security, which has been overpriced earlier, is constantly growing to be overpriced. Apparently, it could be a bad signal for Nautilus Corporation as well as the shareholder, as the price of security is likely to fall in future. 2. The RSI value that has been depicted above is at the extreme point of 95, which is most likely to trigger the buying and selling position of most of the traders. Additionally, in the general prospective, RSI valuation above 70 indicates that security is at the overbought position. Besides, this index also reflect that price of security is likely to fall in future and is also likely to enter into the period of downward pricing. Thus, the RSI at the level of 95.50 is a high signal of selling of security. b) Moving Average Price Period Moving Average Period Moving Average Period Moving Average Period Moving Average 14 (08/15/13) 18.55 18.477 20 18.436 17.5 18.59 14.25 17.50 18.507 20.21 18.777 18.55 18.445 14.79 17.50 18.457 20.25 19.087 19.80 18.4 15.50 17.25 18.382 20.16 19.381 19.50 18.35 16 17 18.227 20 19.65 19.25 18.33 16 16.75 18.037 20.25 19.898 20 18.41 16.50 16.50 17.807 20.5 20.125 20.90 18.675 17 16.55 17.562 20.8 20.283 21 19.025 17.25 16.15 17.267 20 20.232 21.75 19.525 17.20 15.849 16.8 17.055 20 20.217 22.5 20.075 18 16.249 17.15 16.915 20.25 20.242 23.25 20.65 18 (09/30/13) 16.624 17.22 16.887 20 20.221 24 21.195 18.55 17 17.31 (10/31/13) 16.868 19.45 20.141 24.25 21.64 18.65 17.315 17.77 16.92 19.20 20.045 24.15 22.105 18.80 17.595 18.23 17.043 18.25 (11/30/13) 19.87 24.75 22.655 19 17.895 19.22 17.29 17.50 19.595 25 23.155 19.10 18.155 20.51 17.691 16.75 19.22 25.50 23.615 18.92 18.347 20.15 18.051 17 18.84 25.55 (12/31/31) 24.07 Table 2: Showing closing price and 10 days moving average price of Nautilus security 1) Daily closing price of Nautilus security from 08/15/13 to 12/31/13 2) Daily closing price and average moving price of Nautilus security from 08/15/13 to 12/31/13 Based on the above depicted graphical representation of daily closing price of Nautilus security as well as the moving average price of 10 days of the company, it has been quite apparent that during the later period of August, the price of Nautilus security has been significantly above the 10 days figure of the moving average price of the same security product. Besides, at the end of October and mid of December period, it has also been recognised that the price of security above the moving average price of the security has depicted an upward arrow signs, which is presented in table 2. Apparently, table 2 and graph significantly reflect the signal of selling the security when the price of Nautilus security dropped to $17.25, $18.92, $19.25, $20, $20.15, $20.16, and $24.15 in different period. On the other hand, the signals of buying the Nautilus security have been provided to the traders when the price has been reached at $14, $17, $17.15, $18, $20, $20.21, $20.25, and $24.75. 3) Correspondingly, based on the analysis of the trend of prices and moving average of Nautilus security at different point of instance, it can be apparently to comprehend that, as on 12/31/13, Nautilus security signalled to buy the shares. Moreover, for the shareholders, holding the share of Nautilus, retaining the security could be a beneficial approach. The prior reason due to which traders are been suggested to buy and hold the share for the future is that the current price of Nautilus security exceeds the price of 10 days moving average in 12/31/13. Furthermore, those investors that takes their trading approach using the 10-day moving average should have purchased the Nautilus shares has make their buying decision 3 days earlier when the price of security tends to be priced at $24.75. Nevertheless, based on the calculated RSI and 10 days moving average price, it can be suggested that Nautilus security needs to correct in its price, as the approach of RSI indicated that stock has been overvalued and may likely to fall in future. c) Recommendation to Brett The RSI and moving average technical indicators have significantly help in taking his investment decision over the years. In this regard, the RSI indicates the fact that the price of Nautilus security has been overpriced and is in an overbought position. Besides, indexes indicated the fact that holding Nautilus security for the long period could be riskier for Breet, as it likely to fall in future. Besides, based on the 10 days moving average pricing condition of Nautilus security, it can be recommended that Breet can buy the security for high profitability for the shorter duration. On the other hand, the chart and tables also indicated that navigation in Nautilus security is higher in the short run with relatively small amount of alteration. 5. References Brownlees, C. & et. al., 2012. A Practical Guide to Volatility Forecasting Through Calm and Storm. The Journal of Risk, Vol. 14, No. 2, pp. 3-12. Christiansen, C. & et. al., 2012. A Comprehensive Look at Financial Volatility Prediction by Economic Variables. BIS Working Papers, pp. 1-43. Gitman, L. J. & et.al., 2008. Fundamentals of Investing. Pearson Higher Education AU. Milionis, A. E. & Papanagiotou, E., 2011. Decomposing the Predictive Performance of the Moving Average Trading Rule of Technical Analysis: The Contribution of Linear and Non-Linear Dependencies in Stock Returns. University of the Aegean, pp. 1-40. University of Rhode Island, No Date. Relative Strength Indicator (RSI). Technical Analysis. [Online] Available at: http://www.uri.edu/artsci/ecn/lardaro/technical_analysis/RELATIVE%20STRENGTH%20INDICATOR.pdf [Accessed February 26, 2015]. Vashishtha, S. D. & et. al., 2013. Prediction of Buy and Sell Signals Using a Moving Average-Tool of Technical Analysis. International Journal of Marketing, Financial Services & Management Research, Vol.2, No. 3, pp. 1-11. Read More