Corporate Finance- Analysis of the US Stock Market - Example

Corporate Finance Introduction Investment in the stock market has taken a different angle in the recent past. In essence, the stock market has grown very dynamic and competitive in the past two decades. Investors have realized the need of having a substantial interest in the stock market. Investors usually commit funds to projects that promise reputable returns. However, investment opportunities that are perceived to generate reputable benefits are sometimes very risky. For instance, investment in the stock market promises positive outcome, but gaining the benefits from the investment is not automatic. In this regard, investment in the stock market possess speculative risks to the investor. When investing in the stock market, it is important to develop an effective portfolio to minimize the possibilities of loss as much as possible (Buffett & Clark, 2011). In finance, portfolio refers to an aggregate of assets possessed by an individual or an organization. The purpose of this papers is to evaluate the US stock market and assess the effectiveness of stock portfolio. Analysis of the US stock market The size of the US stock market has enlarged to cover many companies. A recent research showed that the number of companies participating in the stock market have increased by a great percentage in the past one decade. Actually, the US stock market has more than fifty companies currently that are involved in selling and buying of shares. The Wall Street Journal is a dependable spring of information regarding the performance of different companies in the stock market. The Wall Streets Journal presents all the companies involved in the stock market. In this case, investors can get important information regarding investment in the stock market. From the information displayed in the Wall Street Journal on January 30, 2015 and April 24, 2014 one can get an insight of current trends in the US stock market. The table below shows that the companies presented are actively involved in the US stock market. The table presents the companies in the order of performance with the best performing company emerging at the second row of the table. A critical analysis of the information presented in the table reveals that the companies shown are the best to buy stock from since they are actively involved in the stock market. Investing in dormant companies can be very risky since chances of losing the invested capital are at maximum. ISSUE VOLUME PRICE CHANGE % CHANGE BankAm (BAC) 32,631,425 16.41 0.06 0.37 Vale ads (VALE) 22,100,689 8.90 0.10 1.19 Nokia (NOK) 17,288,297 6.49 0.11 1.65 PetrlBra ADS (PBR) 15,854,618 10.38 0.19 1.85 ChespkeEngy (CHK) 15,575,910 15.33 -0.53 -3.34 Source: http://online.wsj.com/mdc/public/page/mdc_us_stocks.html?refresh=on In the table above, it can be observed that BankAnn Company dominated the stock market during the time of data collection. The company led in the sales volume and the price per share. Even though ChespkeEngy is among the top performing companies in the US stock market, it lags behind the other big companies such as Nokia, Vale ads and BankAnn. From this analysis, it can be concluded that investors should not commit all the available investment funds to the stock of one company. Instead, investors should consider investing in at least three companies in order to spread risks and maximize the chances of making profits. Companies perform differently at different seasons in the stock market. Investing in more than one company offers some financial security to the investors since all companies cannot experience dismal performance at the same time. In addition, even when the entire market experience financial challenges, some companies will be hurt by the financial difficulties more than others. In this regard, investing in multiple companies offers some kind of financial assurance to the investment. Based on the above discussion, I would create a stock portfolio for four stocks. Essentially, it is important to consider investing the $10000 in the socks of the four top performing companies. However, priority should be given to the top performing company since the chances of loss in such a company are minimal. In this regard, 60% of the $10000 will go to BankAnn Company, 20% to the Vale ads Company, 15% to the Nokia Company, and 5% PetrlBra ADS Company. Investing in the stocks of ChespkeEngy Company adds insignificant financial benefits since the stock volume is less and almost the same as that of PetrlBra Company. Following the outlined portfolio structure, the $10000 investment is likely to reap maximum benefits. However, when developing the stock portfolio, it is necessary to consider the market indexes for the various stocks. In essence, the major US indexes are very appropriate control tools for developing a profitable stock portfolio. Basically, developing a stock portfolio without considering the market indexes will always result to erroneous investment decisions. A good investment in the stock market is determined by how well the issued stock relate to the prevailing market indexes. To elaborate on the relationship between stock portfolio and market indexes we can focus on a discussion that expounds on the major indexes in the US stock market. The table below demonstrations major indexes in the US stock exchange market as provided in the Wall Street Journal. Major U.S. Indexes Five major Indexes Last Change %Chg DJIA 17839.42 -88.78 -0.50 Nasdaq 4923.78 -15.55 -0.31 S&P 500 2081.56 -7.90 -0.38 DJ Total Stock Market 21739.79 -63.81 -0.29 Russell 2000 1217.32 1.90 0.16 Source: http://online.wsj.com/mdc/public/page/mdc_us_stocks.html?refresh=on From the above major indexes in the US stock market, it can be observed that the DJIA has the best index and, therefore, offers the best investment opportunity. In this regard, investors should analyze the stock indexes in order to get a clear overview of the performance of various companies in the equity market. In essence, investment in the stock market requires the investor to remain always informed about the changes and merging trends in the market. Being update with the current affairs of the stock market facilitates efficient decision-making and timely investment. It is imperative to identify that market information is very crucial for stock market investors. In this regard, proficient stock market investors conduct comprehensive market research before making the decision to invest. From the table above, it can be witnessed that the DJIA leads the indexes table. The change of indexes over subsequent years provides useful information to investors. The knowledge gained through the observation the changing trends of stock market indexes is very useful in decision-making. Research has shown that decision-making is one of the biggest challenges facing modern investors. The challenge of decision-making usually crops up due to lack of reliable information regarding the various investment opportunities. In this regard, as an investor, one is supposed to have a variety of sources of information in order to have varied grounds for decision making. It is imperative to recognize that failure to make reputable decision is the major cause of losses in many investments. In essence, the capacity to make decision is the most important asset of an investor. Apparently, decision-making skills do not develop overnight. In essence, one has to develop the decision-making skills for a period of time before affording to address technical issues. Moreover, one has to be a proficient researcher to gain effective decision-making skills. Research facilitates acquisition of knowledge as well as development of sound critical and creating thinking skills. Advantages of investing in many stocks. By investing in numerous stocks, the investors avoid the risks of suffering huge losses due to poor performance of one company in the equity market. In essence, the investor is assured of some financial gains in an of unfavorable business environment in the stock market. Actually, the investor maximizes the earning possibilities that are present in the market. Investing in numerous stock provides investors with unlimited chances of generating returns. According to Weigand (2014) Investment in more than one stock promotes innovation and creativity. Basically, investors have to make critical decision on the best investment opportunity to pursue. In this regard, they are obliged to think beyond the normal provisions in order to come up with unique investment ideas. In this case, innovation is built in the process of devising unique investment ideas. In addition, the level of creativity is boosted since unique ideas develops out of creativity. Essentially, when investors engage in more than one investment platforms they develop effective risk management skills. Eventually, their ability to deal with real life challenges is boosted thereby increasing the quality of life. Conclusion The US stock market has grown rapidly in the recent past. Many firms have stormed the market and the number of investors has increased significantly. With the increased number of investment opportunities, the investors in the stock market should develop effective stock portfolios to maximize earnings and mitigate losses. Developing an effective stock portfolio is a process that requires massive information search and adequate proficiency in the equity market. In this regard, investors in the stock market should develop effective research skills in order to study the market research and be able to devise appropriates investment decisions. Investing in more than one stock is of great benefit to the investor. Therefore, investors should learn to diversify their investment options so as to spread risks and maximizes earning possibilities. References: Buffett, M., & Clark, D. (2011). The Warren Buffett stock portfolio: Warren Buffett stock picks: why and when he is investing in them. New York: Scribner. Weigand, R. A. (2014). Applied Equity Analysis and Portfolio Management: Tools to Analyze and Manage Your Stock Portfolio. Hoboken: John Wiley & Sons Read More