Research Methods, Finance and Accounting - Assignment Example

RESEARCH METHODS, FINANCE AND ACCOUNTING By Summary In analyzing the stock market, a number of factors play a major role. These include the volatility aspects of a stock, its daily price fluctuations and the volumes traded. Developing a graphical representation of the price variations and the volumes provides investors with an easy way of doing technical analysis to indicate the direction to take. Through these, investors are in position to tell a stock that is just within a random walk and that which is about to have a substantial change in price that would provide good returns for them. The analysis reveals the predictions of prices at which the investor could buy then later sell the stocks to yield good margins of profit overtime. The study below details a research conducted on a number of stock exchange items with graphical representation of their performance in price changes and volumes to aid indicate to the investors different items on the various counters and stock markets. Research Methods, Finance and Accounting Introduction Analyzing the stock market requires the application of technical skills that one may need for close monitoring the movements of a stock on daily basis to capture all the changes and use them to make investment decisions or advice the different stakeholders about the stock. Looking at the historic data of a security allows one to better understand its behavior and therefore make it easier to predict the next movement in prices. The prediction may never prove 100% unless if one predicted that the market will move up, come back down and eventually stagnate at one time. It is therefore vital to follow up on the daily movements of a stock in order to present a relatively close prediction of the price movements and the volumes traded. The percentage change of a stock aids in understanding the volatility of the stock, which plays a major role in comparing with a benchmark period, or stock. Looking at the volumes that a stock is able to trade in a day reflects the momentum of the market, which displays the actual movement of the stock within a specified period and hence dictating the efficient nature of the market (Singal, 2006, p.1). These may reflect a week, a day, a month or on yearly basis. The analysis below is based on the stock prices and considered on volumes traded on a weekly basis for different indices over a period of a year each and the detailed explanation of their meaning to an investor. Question One Download the weekly data of the index for the calendar year 2009 and make a time plot of the data. Comment on the variability of the index looking at the plot. Report the standard deviation and the range of the data and any other measures of uncertainty you feel are suitable and appropriate. The data considered was for the stock S&P 500 (GSPC) for the year 2009. The data represents the actual changes in the volumes traded on a daily basis, the opening price of the stock during a specific day, the high point of the day, which represents the data on the stock needed to make investment decisions. Plotting the data on a graph would produce a graph as below From the above, the daily volumes traded for the year 2009 reflected indicate the daily fluctuations of the index S&P 500(GSPC). That represents the momentum of the market on that day. A stock may make random walks or may decide to fall further over a specified period. Random walks may prove normal while overly changing movements reflect market changes that may have affected the prices of the stock. These changes may occur because of information on a given counter, the effects of natural calamity or market disturbances like the financial crisis. The use of the volatility of the stock may help understand the momentum better and explain the difference between its fluctuations with that of another. To understand the changes in prices of S&P 500 GSPC, a graph on opening prices is plotted that will give the following representation: For one to make a buying or sell decision on the counter there is need to consider the daily trading prices and the closing prices of the stock. These provide a position that allows the investor to know the weekly price movements to make a prediction of the fluctuations through which one may sale to make a gain. The graph below represents the weekly closing prices of the stock. Considering the volatility of the stock that represents the changes in prices for the stock in a day, one considers the opening price of the previous day and closing price that becomes the opening price for the next day. These will allow one understand the percentage change in prices on a weekly basis. The volatility of the stock above stands at 0.03492% for a daily consideration while the annual consideration is: Weekly stock volatility*52 weeks considering the data represents weeks throughout the year. This will yield 0.03492*52= 1.815855%. The volatility provides an indication of the behavior of the prices. Highly volatile stocks provide a price variation that may affect the ability of the investors to make better decisions on which stocks to pick on and which ones to sell or hold. Question Two Download the weekly data of the index for the calendar year 1999 and compare the data for 1999 and 2009 on a single plot. Which year has been more volatile? Calculate the respective standard deviations and ranges of the two sets of data as well as and any other measures of uncertainty you feel are suitable and appropriate. Do these numbers confirm your observations about the relative volatility of the two years? Covering the volumes and prices that the stocks traded, an investor may be in position to make better decisions on the stocks. The consideration of the prices allows technical analysts to make better decisions in relation to the stocks to buy over the period specified. Looking at the prices reveals the possible prices at which an investor may buy and at which they would consider selling hence providing a better picture for decision-making. Single plot covering the S&P 500 (GSPC data for 1999 and 2009) Volumes Studying the volumes of the stocks one discovers more activity in the stock S&P 500 for the year 2009 and less activity I the year 1999. The reduced volumes traded in 1999 indicate a market effect that had the stock hold close to a stagnant movement. A market moves in three dimensions. Up, down and leveled. In situations that the market moves upwards, their indicates growing in volumes the downward movement indicates a market that is on the decline in volumes while a stagnated market indicate a close to constant flow of volumes. Considering the prices and the level of volatility would help one understand the movement in volumes. Single Plot Indicating the S&P 500 (GSPC Data For 1999 & 2009) Weekly Price Changes The fluctuation in prices allows for a definition on how the investors will trade. Looking at the prices in the year 1999, the prices were higher compared to the prices in 2009. The prices in 2009 were low and that would explain the higher trade in volumes. The high prices in 1999 indicate low volumes in trade. The volumes were affected by the high prices. Considering the weekly volatility for 1999, the volatility indicated 0.02595 while the annualized volatility indicates to 1.35. Weekly volatility is 0.02595. Annualized volatility= weekly volatility*52 = 0.02595*52= 1.35 The weekly volatility for the year 2009 was 0.035 while the annualized volatility was 1.82. Considering these, one discovers that the volatility of 2009 was higher and hence an affected price fluctuation that indicated to major changes in the prices of the stock. The S&P 500 stock with less volatility in 1999 had a price fluctuation that seemed more stable and that translates into the volumes traded. Investors have more confidence in stocks that have lower prices and fluctuate more since they easily can obtain profits from them compared to volatile stocks that have more stable prices that the investors may not easily predict the movement. In times when the stocks hold a close to constant price that indicates stability, many shareholders hold on their shares and only sell when the prices fluctuate in their favor. Question Three Download the weekly data of the index S&P 500 for the calendar year 2009 and compare the data for same year for NASDAQ on a single plot. Which index has been more volatile? Calculate the respective standard deviations and ranges of the two sets of data as well as and any other measures of uncertainty you feel are suitable and appropriate. Do these numbers confirm your observations about the relative volatility of the two indices? Plotting the relationship of S&P 500 and NASDAQ produces a table that one can use to interpret the information aiding investors to make decisions on which stocks to buy, hold, or sell. The graphs below draw a picture on the volumes of the stocks traded and the different variations in prices. Single Plot covering NASDAQ Composite 2009 & S&P 500 2009 Volumes The graph above indicates the variation of the volumes that NASDAQ Composite and S&P 500 all of the year 2009. Comparing the two, one discovers more volumes of S7P traded compared to those of NASDAQ. In trying to understand the actual reasons for the volumes sold, one discovers the volatility aspects behind the movements. Comprehending the price variations aids one understands the variation in prices that affect the variation in volumes. A further study of the volumes reveals a declining trade effect as the year moves towards the end. The two stocks may have their volumes decline further. The decline in volumes traded may originate from the indication of investors holding back and avoiding much of the trade aspects. A number of aspects would influence this behavior in investors. This ranges from the indication of a decline in the performance of the companies or poor returns or investors that hold the stock more to wait for a favorable price in order to dispose them off. Single Plot covering NASDAQ Composite 2009 & S&P 500 2009 Prices The price variations too indicate that NASDAQ had higher prices compared to S&P 500. The performance of S&P indicates the actual volatility of the price and the stock at large. The weekly volatility of NASDAQ was 0.036 while its annualized stood at 1.87. Weekly volatility =0.036. Annualized volatility= 0.036*52= 1.87 The weekly volatility for S&P 500 was 0.035 while its annualized volatility stood at 1.82. Analyzing the two revealed that NASDAQ had a higher volatility and hence a poor stability factor. Considering the difference between them, one realizes that the differences in volatility are minute and that explains the close relationship between two stocks. The prices confirm my thoughts on the effects of volatility on the stocks (Vaishampayan, 2015). The raising prices indicate to the reduced trading ability of the stock with volumes reducing as the year approaches the end. Question Four Download the weekly data of the index Dow Jones Industrial Average (DJIA) for the calendar year 2009 and compare the data for same year for NASDAQ on a single plot. Which index has been more volatile? Calculate and draw the respective Box plots and Histograms. Do these graphs confirm your observations about the relative volatility of the two indices? The volumes traded on the DJIA stock for the calendar year 2009 indicate the trading aspects of the stock. The stock volumes traded more for DOW Jones Industrial Average compared to the NASDAQ stock. The stocks traded as per the graph below. Single Plot covering DOW Jones Industrial Average NASDAQ Composite 2009 Volumes The graph indicates that the DJIA stock had a higher market volumes fluctuation that indicated its varying performance in the market. The other stock NASDAQ performed poorly in volumes sold and held an almost constant volumes level. Studying the price fluctuations indicates to the understanding of the reasons for the volumes traded. The graph below provides a picture of the prices and their varying over the weekly considerations. Single Plot covering DOW Jones Industrial Average NASDAQ Composite 2009 Volumes The prices indicate that the DJIA stock had a better price factor that favored the activities of the investors. The price lowered once and started on an upward trend that lasted throughout the year. Comparing these to the prices of the NASDAQ stock, one discovers that the stock had a more stable price level that affects the profitability of the investors hence that would indicate fewer volumes in sales. Comparing the two stocks, one discovers that the volatility of the two stocks indicates towards the price effects and hence the volume effects. The volatility of the stock DJIA on a weekly consideration yields 0.032 while its annualized volatility yields 1.65. Weekly volatility= 0.032. Annualized volatility= weekly volatility * 52= 0.032*52=1.65 The volatility of the NASDAQ 2009 values yields to 0.036 for weekly and 1.870 for its annualized volatility. Comparing the two, one discovers the volatility of the NASDAQ stock to be higher than that of DJIA. The stock NASDAQ has a higher volatility and yet its price movements prove more stabilized than that of DJIA. Considering a histogram as below, more data detailing of the relationship of the stocks is revealed. Question Five Download the weekly data of the DJIA index for the calendar year 2013, year 1968+10 years (where DD/MM/YYYY your date of birth) and compare the data for 2013, 1968+10 years and 2009 on a single plot. Which year has been more volatile? Single Plot covering DOW Jones Industrial Average, 1988+10YearsASDAQ Composite and DJIA 2009 Volumes The weekly fluctuation of stock prices affects the volumes traded. Sold and some bought while others remain held by some investors. Looking at the graphs one discovers the highest volumes ever traded for DJIA are in 2009. At the peak, it indicates the sales made during that week. The curve indicates the weekly fluctuations of the volumes. The year 2013 indicates moderate fluctuations while in 1988 year of birth the volumes were traded at a low scale. These indicate market performance during the three years. The market performed better in the 2009. It performed ok in 2013 while 1998 was the least in performance. Single Plot covering DOW Jones Industrial Average, 1988+10YearsASDAQ Composite and DJIA 2009 Prices The prices indicate the various price growths in 2013. The prices went high and the volumes traded were low. The prices in 2009 and 1998 reflect a close variation of prices that reflected a low deviation from the market prices on a weekly basis. The volatility for DJIA 2013 indicates a 0.0126 while the annualized volatility indicates a 0.675. The weekly volatility of D.O.B+10 years is 0.025 while the annual volatility is 1.323. Considering DJIA for 2009 had a weekly volatility of 0.032 and the annualized volatility is 1.65. Volatility affects the level and nature of decisions investors make in relation to their portfolio management (Gregoriou, 2009, p.180). Considering the above, one discovers that the DJIA 2009 had the highest volatility of 1.65 followed by D.O.B+10 years that was at 1.323 then the DJIA for 2013 indicated the least volatility. These indicate that the stock with the highest volatility had easy changes in prices in any directions either up or down more regularly in a more rapid manner. Considering DJIA 2013, the prices seemed more stable with less rapid changes that only reflect on a rise and in a more predictable manner. It is therefore evident that a more volatile year has more fluctuations or price swings that do not easily reflect a sustained rise or decline in prices. Conclusion All investors aim for profits in the stock exchange. The gaining of profits provides for the need to critically analyze a stock before one invests in it. The analysis may reveal various factors that may indicate to reasons that the stock may perform well or poorly on the market. These aids those in deciding the right time to buy, sell or hold a stock. The volatility of a stock indicates the level of fluctuations that one expects a stock to make over the period of consideration. It is therefore the role of the investors to identify stocks taking a random walk and those whose prices change that will lead to positive impacts in price resulting into profits for the investors. Reference List Gregoriou, G N. (2009) Stock Market Volatility. Boston: CRC Press. https://finance.yahoo.com/q/hp?s=%5EDJI&a=00&b=1&c=1998&d=11&e=31&f=1998&g=w Singal, V. (2006) Beyond the Random Walk: A Guide to Stock Market Anomalies and Low-Risk Investing. Oxford: Oxford University Press. Vaishampayan, S 2015. Traders Prepare for Stock Volatility. Index Points to More Swings in Shares. Wall Street Journal. Viewed on March 12, 2015 from http://www.wsj.com/articles/traders-prepare-for-stock-volatility-1421105135 Read More