Managing Personal Finance - Term Paper Example

Qatar College of Business and Economics DEPartment of FINANCE and economics Bachelor of Business ADMINISTRATION SPRING PROJECT REPORT: PERSONAL FINANCE PORTFOLIO INVESTMENT PROJECT TOTAL 25 MARKS SUBMISSION DATE: ---------------------------- SUBMISSION BY name & id: __________________________________________________________ ______________________________________________________________________________ SUPERVISION BY DR. ARUNA DHADE LEARNING OBJECTIVES: 1. ENRICH THEIR ACADEMIC EXPERINCE WITHEXPERIETIAL LEARNING. 2. Demonstrate effective written communication. 3. Work effectively in teams. 4. Utilize information technology in making business decisions Index Page Content Page Chapter I: Managing Personal Finance 3 Introduction and Rationale 3 Investment Goal 4 Investment Objectives 4 Investment Philosophy 5 Table of Asset Allocation 5 Chapter II: Investment Portfolio 6 Investment in the Shares of Industries Qatar (IQCD) 6 Gold Investment 9 Investment in Foreign Currency 10 Chapter III: Return Outcomes 12 Review of Portfolio Distribution 12 Comparison with Investment Goals and Real Earnings 13 Degree of Satisfaction 14 Conclusion 14 References 15 Appendices 16 Chapter I: Managing Personal Finance Introduction The purpose of this paper is to use funds and generate return on investment. For this purpose, a total of 1,000,000 Qatari riyals were allocated. For investing this amount, three options were chosen: Stocks, gold and foreign currency. The allocated amount was shared in the percentage of 40, 30 and 30 per cent to stock, gold and foreign currency respectively. For this purpose, Qatar stock market was chosen and the required data were taken from the site and subsequently manual calculations were carried out for determining the amount of profit and loss from the investment in the stocks, gold and foreign currency. Rationale Stocks Investment in stocks is considered to be more secure and return oriented when it is compared with other investment options. For example, stocks mostly reflect the current stock market trends along with the current financial and operational position of different financial and operational indicators of the companies. Based on their fundamentals, the trend in the stocks always highlight that whether the company is performing better or faces the liquidity or other types of internal problems. Keeping in view the importance and credibility of stocks in the stock market, the selected stock is Industries Qatar (IQCD). And the fundamental rationale for choosing this stock was that from 1 May 2014 to 31 May 2014, it gained more than 6 Qatari Riyals in a period of thirty days, reflecting the potential and possibility of giving more attractive returns for the new and potential investors. Gold Investment in gold is considered to be safer than others (McGuire, 2008). In the international gold markets, it is an established fact that for the longer and durable investment, the gold offers a lucrative opportunity for the current and new investors because the frequency of fluctuations in the gold rates is considered to be very low and it is this low frequency in gold price fluctuations that attracts new investors. Keeping in view the trend and tendency of the gold price and for understanding its long term trend, 30 per cent of total outlay has been decided for investing in the area of gold. Foreign Exchange Dollar is an international currency and it is used for paying and receiving payments internationally (Reinert and Rajan, 2009; Paul, 2011). Additionally, it has been well-established fact that the international dollar rates are not frequently changing but a rare and slight normal change is always observed in its rate. As the dollar is an international currency and currently it has been seen that a stable but growing tendency in the dollar rate, around 30 per cent of total available investment amount has been invested by purchasing the foreign currency (i.e. dollar). Investment Goal Maximum return and minimum loss on investment are two important investment goals. Investment has been considered to be the most effective way for generating more lucrative returns than the other aspects of earning because it is considered and has also been established that the investment particularly in the stock market, gold market and foreign exchange market have been more effective for generating the expected level of returns from a sum of funds. Additionally, they are considered to be more productive especially for the new investors. For new investors before investing a considerable amount of funds in different options, it is highly appropriate to understand the market dynamics and market behaviours and this understanding can only be gained through investing in the stock markets. Investment Objectives The investment objectives are designed and established for retaining a return generating investment strategy. The clear understanding of investment objectives enables the investor to take into account the various factors which can have serious effects on the current and potential returns from investment. Keeping in view the serious ramifications of future events on the return of investment, following investment objectives have been determined: Identifying those stocks whose previous trend and their fundamentals are stronger Investing only in those investment opportunities which face limited systemic and non-systemic risks from the external and internal events. Avoiding those investment opportunities where the possibility of risk is higher and which can substantially affect the return potential Adopting those current and future investment strategies which can ensure smooth return from investments with minimum chances of loss. Investment Philosophy Investment philosophy refers to one’s general approach of tolerating risk (Garman and Forgue, 2012). based on this investment philosophy, out investment philosophy is “earning with understanding investment dynamism.” This means that there are two purposes of this investment philosophy: earning and understanding of investment dynamism. In today’s highly complex business environment, investment has become more challenging than ever as new direct and indirect factors affect the business environment. As a result, the businesses and investors find it hard to determine future direction of their investment strategy along with minimizing the loss from any potential risk. Consequently, it will not be incorrect to say that these new but complex factors have increase complexity and dynamism in the investment opportunities. So, in order to avoid loss and continue earning interruptedly, it is highly essential that understanding investment dynamism has become unavoidable for earning continuously. Table of Asset Allocation Funds Percentage of Total Investment Investment Time Investment Market (Sources) Shares 4,00,000 40 per cent 1-31 May, 2014 http://www.investing.com/equities/industries-qat-historical-data Gold 3,00,000 30 per cent 1-31 May, 2014 http://www.investing.com/commodities/gold-historical-data Foreign Exchange 3,00,000 30 per cent 1-31 May, 2014 http://www.investing.com/currencies/usd-qar-historical-data Chapter II: Investment Portfolio Investment in the Shares of Industries Qatar (IQCD) Date Transaction Available QAR Principal Investment Equity Price Total stocks Principal Plus Return Return (Profit) 01-May,14 Buy 4,00,000 182.4 2193 30-May, 14 Sell 188.8 414,038.4 14,038.4 On the very day of 1 May, 2014, the investment in the stocks of Industries Qatar was started. For this purpose, we allocated 4, 00,000 Qatari riyals, which is the highest allocation for earning the better returns from the entire distribution of portfolios. Subsequently, we went to the stock market and bought the stocks of Industries Qatar (IQCD). On the over first day of May, the stock price of the Industries Qatar was around 182.4 Qatari riyals. Based on this stock price of the Industries Qatar, we were given a total of 2193 stocks against the payment of 400,000 riyals. In other words, on the total investment of 400,000, we received 2193 stocks. Subsequently, we did not sell the stocks even after fifteen days as we were sure that the stock price would increase further and this increase would automatically add value to the principal amount invested in the stock. Later on, we decided to sell this stock on the last business day of May. As a result, on that day, the stock price did not remain the same but was recorded around 188.8 and at that time, we decided to sell the all stocks that we purchased on the very first of May. We sold out all of the stocks to another investor in the stock market and in return the investor gave us 414,038.4 Qatari riyals. This amount was more than the principal investment which was used for purchasing the stocks. When this amount was deducted from the initial invested amount, the subsequent results indicated that we earned (414.038.4-400,000=14,038.4). This means a total of 14,038.4 riyals were profit from the initial investment which was invested at the beginning of the month. Reasonable Returns The obtained returns are considered to be good and attractive. For a new investor, it is always expected that he should not expect profit (return) in the initial investment but he should avoid incurring loss by selecting the most appropriate and return-oriented stock from the available stocks in the stock markets. And there are certain reasons to expect such things. For example, a new investor is not normally aware of the stock market trends and he does not know about those internal and external factors that directly or indirectly affect the stock price movement. Additionally, the new investor does not know about the regulatory and other requirements that are normally required in the stock purchasing process. In addition to that, the new investor does not, sometimes, know about the corrupt practices, such as insider trading as well. In this regard, insider trading is considered to be harmful for the stock markets (Bainbridge, 2013). As a result, under such circumstances for any new investor, making profit on the very first stock purchase is hardly possible. However, in this regard, it is also important to highlight that selecting an attractive stock which will maximise the stock return, has also been a strategic stock decision because it is also understood in the stock market that some stocks are highly lucrative and generate attractive returns to the purchasers whereas some stocks take away even the original invested amount. Based on this understanding, it can be easily claimed and proved that our selected stock (Industries Qatar) was a correct economic decision and consequently it provided at least some attractive returns. Better Investment Experience and Increased Investment Confidence The secured profit has increased both investment experience and confidence as well. While searching for an attractive investment stock, we were very careful and considerate as well because we did not had any idea about the appropriate stock providing attractive returns. Later on, we decided that there should be certain benchmarks on which the selection and purchase of stock should be carried out. For this purpose, we collectively took into account the historical data and there trend. The main reasons behind selecting this benchmark was that to get some information and understanding about the historical stock performance and value increasing trend and capacity of stocks. As a result, we find that the stock of Industries Qatar was giving some lucrative returns to both new and current investor besides its trend was consistent and stable as well. In addition, this investment decision and its subsequent return have considerably increased the investment confidence. For new investors, it is highly required that they should know the fundamentals relating to the stocks and they should have necessary investment confidence to retain the stock investment for a reasonable amount of time because it has been observed and seen that while retaining some stocks, the prices of such stocks sometimes experiences abnormal reduction or fluctuation which is a to some extent a normal trend in the stocks. At that time, some investors become panic and they do not know what to do and subsequently this panic situation leads them to sell out their investment in order to avoid loss on the invested amount. It is this time when investor is required to calm down the panic pressure and start seeing things normally and should adopt prudent investment thinking rather than reacting to the changes in the stocks. Moreover, in such type of odd situations, if some investors sell out their stocks due to the price reduction pressure in the stock market, this experience would become part of their investment thinking strategy. As a result, in future, they would react to such situations and would not be able adopt justified and reasonable investment approach. On the other hand, if some investors do not give attention to the short term uncertainty and panic in the stock market and they continue retaining their stocks for the longer period or as much as they want, subsequently they would learn that their decision pertaining to the holding stocks, was correct and justified as the effect of the panic and pressure on the stocks were short-lived and temporary. As a result, this would bring positive and constructive effects on the investment confidence which will be highly useful in the future stock related investment decisions. Gold Investment Date Transaction Available QAR USD/QAR Total USD 1 Troy Ounce Total ounce 01-May,14 Buy 3,00,000 3.6404 1,092,120 01-May, 14 Buy 1283.40 850.959 30-May, 14 Sell 3.6408 1,060,294.15 1246.0 Loss ($) (31,825.47) 30-May, 14 Loss (QAR) 3.6408 (8,741.34) This investment decision was very important for us. For investing in this portfolio, we allocated 30 per cent of total outlay (i.e. 3, 00,000). The provided amount is less than the allocation to the stock investment. First, it has been seen that the gold rates are rarely fluctuating and there is little room for observing changes in them. Consequently, this understanding largely influenced our investment decision pertaining to the gold. This investment was not simple but certain new steps were required. As the gold is not sold in the Qatari riyal, we were required to have dollars for buying a certain number of gold ounces. As a result, first we purchased the dollars in exchange for 300,000 Qatari riyals. In this regard, it is important to mention that without converting riyal into dollar, it was not possible to buy gold. Consequently, on the very first day of May, the dollar exchange rate was 3.6404 and the conversion of 3000000 Qatari riyals provided 1,092,120 dollars. Thereby, we became able to buy gold. Subsequently, we got information about the number of dollars required to buy 1 troy ounce of gold. On 1 May, 1 troy ounce of gold was traded on 1283.40. At that time we had 1,092,120 dollars. Hence, this amount brought 850.959 ounces of gold on 1 May. During the middle of May 2014, we discussed to sell gold and get some return on the invested amount. However, later on, we decided to sell the purchased gold on the last day of month. However, on 30 May 2014, the gold selling price was not more than the price on which we bought the gold on the very first day of May. On that day, the 1 troy ounce of gold was traded on 1246. When we sold the available ounces of gold in the gold market, we received 1,060,294.15 dollars from the purchaser. Obviously, this amount was not more than the amount which we paid for purchasing the gold. Subsequently, we incurred loss on the investment. After deducting the obtained amount from the sale of gold, we found that a loss of 31.825.47 had been borne. This amount was in dollar domination. Thereby, we were required to convert this amount into Qatari riyals in order to know the actual amount of loss in the local currency. For converting the loss amount from dollar, we again used the currency exchange rate. For this purpose, we used the exchange rate which was available on 30 May, 2014 (i.e. 3.6408). After knowing the exchange rate, we converted the available dollars into the local currency and this conversion gave 8,741.34 Qatari riyals. Thereby, we incurred this loss in the local currency. Investment in Foreign Currency (USD) Date Transaction Available QAR USD/QAR Total USD Investment Total 01-May,14 Buy 3,00,000 3.6404 1,092,120 3,00,000 01-May, 14 30-May, 14 Sell 3.6408 299,967.04 30-May, 14 Loss (QAR) 3.6408 (32.96) Investment in foreign currency (USD) did not bring profit but a breakeven point. While deciding and allocating the amount from the available funds of 1000,000 Qatari riyals, we provided 30 per cent of this amount for investing in the foreign exchange markets. For this purpose, we decided that no other currency would be taken but the United States’ dollar. On the very first day of May, the dollar exchange rate was 3.6404. Based on this conversion rate, we received 1,092,120 dollars. On 30 May, the sale of available dollars was carried out. For this purpose, we used the currency exchange rate of that day (i.e. 3.6408). After buying the Qatari riyals, it became clear that some difference occurred. In this regard, it is important to point out that the reported difference can be termed as a breakeven point. The breakeven point has been defined as a point on which no gain or loss is obtained but the entire originally invested amount is returned to the investors (). Keeping this definition in mind, it can be clearly established that this investment strategy did not provide any return or profit. And there are some plausible reasons for this situation. First, there hardly exists any difference between the exchange rate reported on 1 May and 30 May 2014. A further closer analysis signifies that 0.0004 was recorded in the dollar exchange rate during this entire period, clearly authenticating that the dollar exchange rate did not change much in this entire period. Moreover, it has been observed that the exchange rates do not change much especially those exchange rates which represent strong economies and stable production and economic policies in the native country. Based on this analysis, it looks accurate and correct that the dollar hardly undergoes any substantial change with respect rate the Qatari riyal because in the recent times it has been seen that the economy of the United States of America is booming again and its imports and exports are rising with a stable trend. As a result, such effects are clearly demonstrated by the almost stagnant dollar exchange rate. Chapter III: Return Outcomes Review Portfolio Distribution Funds Percentage of Total Investment Investment Time Profit/(loss) Stocks 4,00,000 40 per cent 1-31 May, 2014 14,038.4 (Profit) Gold 3,00,000 30 per cent 1-31 May, 2014 (8,741.34) (Loss) Foreign Exchange 3,00,000 30 per cent 1-31 May, 2014 (32.96) (Break-even) Net Profit 8,760.262 This table clearly depicts the overall result of the investment strategy and investment performance by different available investment options. First, profit from the investment in the stocks is 14,038.4, which is the highest amount of profit among all other investment options. This investment return clearly proves that the decision of allocating the highest amount of funds (40 per cent) was a correct and true investment decision which brought the highest level of return. On the other hand, the investment on gold did not generate any return but a loss of 8,741.34 during the investment period. In other words, this investment decision was not up to the mark and did not provide any return. Throughout this period, we invested and waited for the reasonable and opportune time for selling the available ounces of gold. However, as we were required to hold the investment maximum till the end of 30 May, we followed the condition. On the basis of price changes and the historical trend of gold in the metals market, we found that the frequency of price upward movement was not regular and consistent instead they went down. Consequently, this investment decision only brought loss to the aggregate investment portfolio. On the other hand, the foreign exchange investment decision brought new experience of breakeven point (i.e. no profit and no loss). In this regard, it is important to highlight that the highlighted loss (32.96) is not generated by the investment but the minor difference in the exchange rate that occurred during the period from 1 to 30 May caused it. In addition, this difference was in the range of decimals and that also caused this minor reduction in the investment. However, despite its negative balance, the investment in the foreign exchange currency cannot be termed as loss because the loss amount is neither substantial and nor is caused by the considerable change in the dollar exchange rate. Comparison with Investment Goals and Real Earnings Maximum return and minimum loss were two investment goals before investing the amount in different options. Based on the provided results, it can be deduced that the investment strategy was largely successful in attaining and retaining the investment goals. For example, the investment in the stocks clearly authenticates that the goal of maximum of return was mainly satisfied and achieved as well because the generated amount was considerable and reasonable enough to term it as a successful investment decision. In addition, when the return from the stock investment is compared with the result of other options, it can be clearly seen that the stock investment decision did obtain the goal of maximum return. In addition, the gold investment obtained the goal of minimum loss. It is a normal trend that new investment does not give quick and large return and takes time before generating some returns and this situation is more appropriately represented by the loss from the gold investment. And this loss is mainly contributed by the certain international factors. For example, it has been seen that the gold is normally purchased for the long term investment and it is also seen a good investment opportunity when other investment options do not give attractive returns. However, internationally, the markets are stable and the investors have better other opportunities other than the gold. As a result, the demand and supply of gold have largely remained stable and stagnant as well. It is this reason that brought loss in the gold investment. Similarly, the breakeven point in the foreign currency investment cannot be termed as loss because it has not provided any substantial amount of loss nor has caused any substantial reduction in the initial amount of investment which was originally spent for purchasing a certain number of dollars. As a result, this currency investment has not retained its original investment amount. Degree of Satisfaction Overall, a reasonable degree of satisfaction has been achieved from all investment options because each has provided a unique opportunity to understand the different dynamics and returns from the available options. From the investment in stocks, the degree of satisfaction is considerably higher because only this investment option has outclassed and outperformed the other investment options and provided the highest amount of returns. On the other hand, the degree of satisfaction from the gold investment was below expectation as this investment incurred loss from the investment. On the other hand, the foreign currency investment provided a moderate degree of satisfaction because it did not bring any substantial amount of loss but retained its original investment. For any investors, this situation is the least ideal one as little loss was faced in this situation. Conclusion This investment experience was unique and very informative. First 1,000,000 Qatari riyals were allocated to the stock, gold and the foreign currency in the 40, 30 and 30 per cent respectively. The subsequent results indicate that the return from the stock remained the highest one when the returns from the other sources are compared with. From stock, gold and foreign currency investment, 14,038.4, (8,741.34) and (32.96) were respectively generated by the options available in the entire investment. In other words, the stock investment was the most successful as it generated the return of 14,038.4. On the other hand, the loss of (8,741.34) was incurred from the gold investment. However, the foreign currency investment neither brought return nor incurred loss but retained the breakeven point by not allowing loss in the initial investment. References Bainbridge, S.M. (Ed.) (2013). Research Handbook on Insider Trading. Glasgow: Edward Elgar Publishing Garman, E.T., Forgue, R.E. (2012). Personal Finance. 11thedn. Ohio, OH: South-Western Cenagage. McGuire, S. (2008). Buy Gold Now: How A Real Estate Bust, Our Bulging National Debt, and the Languishing Dollar Will Push Gold To Record Highs. New Jersey, NJ: Wiley & Sons Reinert, K.A., Rajan, R.S. (Eds.). (2009). The Princeton Encyclopedia of the Wold Economy. New Jersey, NJ: Princeton University Press. Paul, J. (2011). International Business. 5thedn. New Delhi: PHI Learning Appendices: Industries Qatar http://www.investing.com/equities/industries-qat-historical-data Gold investment Source: http://www.investing.com/commodities/gold-historical-data Dollar Exchange Rate May 30, 2014 3.6408 3.6410 3.6410 3.6393 -0.01% May 29, 2014 3.6410 3.6397 3.6412 3.6395 0.04% May 28, 2014 3.6397 3.6408 3.6415 3.6397 -0.03% May 27, 2014 3.6408 3.6402 3.6416 3.6402 0.02% May 26, 2014 3.6402 3.6409 3.6418 3.6402 -0.02% May 25, 2014 3.6409 3.6409 3.6409 3.6409 0.04% May 23, 2014 3.6395 3.6408 3.6418 3.6395 -0.04% May 22, 2014 3.6408 3.6409 3.6417 3.6404 -0.00% May 21, 2014 3.6409 3.6410 3.6416 3.6402 -0.00% May 20, 2014 3.6410 3.6407 3.6414 3.6402 0.01% May 19, 2014 3.6407 3.6393 3.6414 3.6355 0.04% May 18, 2014 3.6393 3.6398 3.6398 3.6393 -0.03% May 16, 2014 3.6403 3.6405 3.6412 3.6398 -0.01% May 15, 2014 3.6405 3.6408 3.6418 3.6400 -0.01% May 14, 2014 3.6408 3.6406 3.6413 3.6399 0.01% May 13, 2014 3.6406 3.6407 3.6418 3.6402 -0.00% May 12, 2014 3.6407 3.6407 3.6416 3.6398 0.00% May 11, 2014 3.6407 3.6407 3.6407 3.6407 -0.00% May 09, 2014 3.6408 3.6404 3.6414 3.6402 0.01% May 08, 2014 3.6404 3.6410 3.6416 3.6389 -0.02% May 07, 2014 3.6410 3.6410 3.6414 3.6404 0.00% May 06, 2014 3.6410 3.6407 3.6414 3.6400 0.01% May 05, 2014 3.6407 3.6403 3.6419 3.6401 0.01% May 04, 2014 3.6403 3.6403 3.6403 3.6403 0.00% May 02, 2014 3.6402 3.6404 3.6410 3.6392 -0.01% May 01, 2014 3.6404 3.6413 3.6413 3.6397 -0.02% Source: http://www.investing.com/currencies/usd-qar-historical-data Read More