Investment Goal and Strategy - Essay Example

Portfolio Investment Introduction Everyone who is involved in business operations has a major objective which is to make financial gains in the future. One puts money in a business venture so that they can make profits. The expectation is capital appreciation or interest earnings as well as dividends. It should be noted that investment is characterized by numerous uncertainties. It is not all times that one will make a gain out of an investment. A loss is also a probability and so is a breakeven. The worst result any investor would wish for would be a break even (Monks and Alexandra, P 18). Therefore, all investors try to avoid a loss at all cost. However, it is inevitable that at one point in time a loss will be incurred. In order to reduce the general total loss, investors practice portfolio investment. This refers to a passive investment whereby the investor is not directly involved to the day to day running of the company. An individual or a company invests in a range of securities from different companies rather than investing in securities of just one company. The aim is to spread the risk of losing money in the event that the securities of one company do not perform as per expectations. If the securities of one company incur a loss, the investor will gain from those in other companies and hence will not lose all their money. This project aims at analyzing an investment plan and how one should make an investment portfolio that will reduce the possible losses by a great ratio. Investment goal and strategy There are a number of investment strategies that one can adopt whenever they want to place their money in an investment. The two major strategies are active investment and passive investment. In this project, the focus is on passive investment rather than active investment. Under active investment, the investor is actively involved in the management of the company while in passive investment there is no active involvement (Monks and Alexandra, Pp. 26). In my project, I decided to pursue this strategy since it holds fewer risks as compared to active investment. First, I can be able to invest in a number of securities from different companies. This is because I will not be committed to the running of any one of them and hence can afford time to check on the performances of the different companies and hence get more information to base my decisions on. On the other hand, the goal and objective of any investment is to increase capital. Therefore, one should take all the measures that are necessary to minimize capital loss and at the same time generate more new sources of income. The strategy that one sets should be in line with their goals and objective and should support the achievement of those goals. The strategy to be adopted in this project will be designed in such a manner that it helps me to learn the financial market and invest in a portfolio that will reduce the inherent risks and maximize the gains. Strategy The primary investment goal as it has been mentioned earlier in this article is to increase capital while the strategy is passive investment. While investing passively, it is important to adjust the security weights in the light of the market development. Different weights are to be assigned for different companies. The security weights were done according to the prices of the various shares of various companies. The investment strategy included margin trading. In the event that I do not have enough money to buy securities, I can borrow money from a broker to buy the stock and then refund once I sell. This is important in that it will be possible to purchase more stock than it could originally be possible and hence one can take advantage of a perceived opportunity. However, it bears a huge risk in that once a loss is incurred, the investor will have to pay the broker regardless of the losses. On short selling, the investor sells stock that he does not own. He gets stock from a broker and sells it. The proceeds are credited to his account. He then repurchases the stock later and returns the brokers stock. He anticipates that the prices will go down so that the difference will be his profits. This is a strategy that I can use in the event that I don’t have money to purchase stock and the prices are high and are anticipated to fall in the future. Derivative trading is a strategy where the investor buys a security whose price will be determined by other assets. It is a strategy that will be used for speculative purposes in order to hedge out a risk that may result from the exchange rates. In order to effectively predict the prices of securities, I will register with Stock Trak which is an investment portfolio simulation program that operates in real time. This is a program that will enable me in improving on my portfolio management knowledge. Analysis of individual Stock Every investor aims at the best when they invest their money in securities. The prospect is that they will make profits and increase their capital. Having analyzed the Bloomberg reports and also analyzed the Beta of each security, it is expected that the stocks price will rise in the future and hence the capital will increase. From the graph below it can be observed that the general trend of the securities price of Amazon. Com Inc. is positive and hence chances are that a profit can be made from investing in them. It is approximated that for the last four years. The company has been able to yield average returns of 37%. The earning per share has also had a positive trend over this period. EPS TRENDS Current Qtr. Mar 14 Next Qtr. Jun 14 Current Year Dec 14 Next Year Dec 15 Current Estimate 0.23 0.23 1.91 4.23 7 Days Ago 0.23 0.23 1.91 4.23 30 Days Ago 0.24 0.23 2.01 4.27 60 Days Ago 0.54 0.43 2.64 5.33 90 Days Ago 0.54 0.43 2.68 5.41 The open prices for the security are at $372.37 while the closing prices are $359.34. The average market capitalization is approximated at 171.0B while the Beta stands at 28.11. Analysis of the portfolio The aim of an investor is to reduce the level of risk for his portfolio and at the same time increase the returns (Monks and Alexandra, Pp. 30). My portfolio is faced with some risks which are likely to affect is return negatively. First, the business world is full of uncertainty. It is not easy to predict precisely what is going to happen in the stock market in the future. This possesses a risk to the portfolio in that the prices might fall. Amazon.com Inc. is an organization formed on the backbone of technology. The rate of advancement in technology is too high and hence the risk of organizations operating fully in the internet since they face too much competition as technology continues to advance and new organizations joining the market. Hence the price of its shares is likely to fall in the event that it is edged out in terms of technology. However, the returns are expected to be high judging from their trend over the past couple of years. The trend has been positive for the last four years and it is expected to continue rising in the future. The company is likely to continue performing well in the short run and also in the long run if it invests in improving the quality of its operations. The Stock Trak analysis shows that the trading costs are generally low and the margins are sufficient to support the required profitability. This means that there are high chances that the investment will continue to give high returns. Analysis of Futures, Option, Margins In an investment, it is important to be able to predict what may happen in the future and what options one might take in the event that the yields from the current investment are not up to expectations. The future of an investment is characterized by uncertainty. The return on investment is very important in financial markets and for this reason it is important to understand how prices vary with time. As an investor, I should also analyze the possible options that I should take in case the current investment doesn’t yield expected returns. A profit margin should be set so as to help the investor to compare the yields generated by the portfolio with the expected yield. This will help the investor to make a decision on whether to continue with the investment or not. The margin should be a percentage and should be based on the expected rate of return on capital invested. Performance The performance of the portfolio is generally good based on the Beta and Alpha figures. The Beta is 0.864. The interpretation of this is that the movement of the portfolio is in one direction. In addition, the performance of the asset is not affected much by the day to day fluctuations. This means that the inherent risk associated with the asset is less. The movement of the asset is the same as that of the benchmark. The change in graph is in the upward trend meaning that the prices are likely to continue increasing in the foreseeable future. Conclusion The general observation is that the portfolio holds relatively lower risk and that the returns are expected to be high. Given the value of the Beta which is 28.11 and that the graph shows an upward trend, the movement is in one direction and hence prices will continue to rise and hence increase the returns. The degree of diversification is generally low. I did not invest in securities from so many companies. However, the securities in which I invested in hold a low risk and there are high chances that the returns will be high. The aim of the investment to increase capital and my portfolio meets this need. Works Cited Monks, Robert A. G, and Alexandra R. Lajoux. Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, Cash Flow, Stock Price, Governance, and Special Situations. Hoboken, N.J: Bloomberg Press, 2011. Print. Read More