Investing in the Securities Market - Coursework Example

Table of Contents Introduction 2 Selected stocks and performance 2 Trading strategies 3 FTSE100 and portfolio return 5 Risk 6 Conclusion 7 References 8 Introduction Embarking on a journey in a place where people buy and sell securities can be tricky, just like life, it is not devoid of loopholes and pitfalls; it has to be properly contemplated. The journey started with 8 securities from different industries where the investment was equal. The time value of money concept was taken into consideration as inertia have its opportunity cost, yet indiscriminate over-activity can wipe out the whole $100,000 and make it all seem like a bad dream. The principle used in determining portfolio selection was the prediction of those stocks that are poised to increase from their current levels and provide a decent gain. Selected stocks and performance The method is no different from day trading. "Oct 3 "Nov 22 Price No. Shares total Price No. Shares total BARC.L 271.9 4590 12480 256.95 6930 17807 GKN.L 344.5 3620 12471 372.7 3952 14729 BP.L 428.64 2910 12473 493.45 3323 16397 GKO.L 122.75 10132 12437 146.5 9645 14130 HFG.L 426.25 2900 12361 426.25 1910 8141 DTY.L 1402 880 12338 1340 730 9782 VOD.L 218.62 5700 12461 229.05 5700 13056 CTA.L 6233 200 12466 6065 200 12130 cash £ 1.02 £ 1.25 total $ 99,489 106,173 Gain (loss) $ 6,685 The investment of £100,000 represents about 100% of the available investment money. Subsequent ventures will depend on how the stocks will fare. Further investments will follow with how much I gain the necessary expertise needed. I will continue do extensive research so I get to know the different plays in this high stake game and would sought the counsel of people who are knowledgeable about the securities market From the final portfolio weight it appears that some of the portfolio gained their value during past 6 weeks. This is the main reason why portfolio selection and diversification is important. The diversification benefit does depend on the time period over which returns and variance are calculated. Some of the riskiness associated with individual assets can be eliminated by forming portfolios. The process of spreading an investment across assets (and thereby forming a portfolio) is called diversification. The principle of diversification tells us that the spreading an investment across many assets will eliminate some of the risk Trading strategies To learn more about how the securities market work, I decided to tackle buying on margin to see firsthand how it operates and what I can get out of it. All the shares had equal amounts then on the 10th October, 2013, stocks of BARC.L, GKN.L and BP.L were sold and share of GKO.L, GKO.L and GKO.L broker-assisted trade, charging an additional £40 to cover their services and transaction commission of £4.9746. On the 22nd October, 2013 I decided to sell the GKO.L which was running at £13.3328 per share. Lucky enough, the stock price did not fall below the pegged price and no margin calls were made, no additional funds for the margin were needed. In total I have made 20 transactions however between the periods 3rd October, 2013 to 22 November, 2013. My last transaction was on 11th and 13th November 2013 where I made a number of selling and buying. If I could have engaged in further trading then the following could have been the gains and losses for the four weeks. After 6 weeks the final portfolio weight changed because of the activities that took place in the market. Number of shares "Oct 3 "Oct 10 "Oct 22 "Nov 7 "Nov 11 "Nov 13 "Nov 22 BARC.L 4590 (4590) 6930 6930 GKN.L 3620 (3620) 3952 3952 BP.L 2910 (2910) 3323 3323 GKO.L 10132 10513 (11000) 9645 HFG.L 2900 3010 (4000) 1910 DTY.L 880 850 (1000) 730 VOD.L 5700 5700 CTA.L 200 200 From the final portfolio weight it appears that some of the stocks lost their value during past 4 weeks. That is the reason why the portfolio value decline. This is the main reason why portfolio selection and diversification is important. The diversification benefit does depend on the time period over which returns and variance are calculated. Some of the riskiness associated with individual assets can be eliminated by forming portfolios. The process of spreading an investment across assets is called diversification. In the investment cycle, a trader will always come across options as a way of getting through the maze of the securities market. A portfolio can consist of investments in various industries, however, opportunities to make money does not end there, another type called an option, can provide a good source of profit for the sophisticated investor. As the word sophisticated implies, options are complex securities that is full of risk and can end an investor’s dream. As the initial investments I made were stocks that were doing good enough, the need to make a protective put did not present itself as an alternative course of action. I was not actually concerned about any downside market risks for the initial stocks and did not consider the protection offered by protective put. After all the activities I undertook, the learning gave some confidence in dealing with the securities market. The level of confidence makes me contemplate of trying my new found expertise in dealing with futures, a task enveloped with so much risk. On 7th November, 2013 HFG.L shares went from a high to £44 and they were sold to make some gains and purchase shares of BARC.L whose price had come done. FTSE100 and portfolio return After6 weeks the portfolio return were computed in comparison with the market. It appeared that the market outperformed the portfolio. From this analysis it is clear that they did not perform well. This is shown in the graph below The graph shows that the portfolio was underperforming FTSE and the market except on October 9th when it performed well than the market. The extreme swings of the market are simply too unpredictable to make a safe investment (Graham 2004). To start with, it isn’t a profitable investment already. The picture we have painted above will change drastically should we look at this situation using 2 yrs as range when computing for stock returns. Obviously, the short term investing style is not as easy or profitable as when you are investing for the long term and evaluating major trends on the stock, not just the daily fluctuations on the stock market. In terms of predictability, we will find it extremely hard to judge the profitability of the stock alone just by using beta since it is also a relative value computed within a chosen time range. Risk When an investor invests in a single asset portfolio, asset variance is important, but as we keep on adding assets and the portfolio increases, the effect of individual asset variance decreases and the effect of portfolio variance increase. The weighted sum of the asset variances and co-variances equals the portfolio variance. Despite the fact that an asset might be very risky, having a high variance of return, the risk might be cancelled out by the covariance of the assets in the portfolio as a whole. The portfolio has 0.66% as compared to the market of 1.14% Stocks volatility in relation to the market is measured by beta. Portfolios with high risk are characterized with high beta which tends to give higher returns. The converse for which is also true. Portfolio Beta is the sum of the individual betas; principally the market has a beta value of 1. Portfolio beta is less than one which 0.053. Bearing in mind the relation of beta to the market we can infer that the assets in the portfolio have less amount of risk involved, hence they might have lower return. When looking at Sharpe ratio portfolio have negative Sharpe ratio of -8.8%. This means that it has a deficit return to the total risk. Treynor ratio measures the portfolio excess return to the portfolio beta. In this case portfolio has a negative ratio of 1.08. This means that in terms of reward to risk portfolio has not returned excess profit. Conclusion Investing in the securities market proved its worth. It may pose a steep learning curve, but the knowledge it brings is something of great value. Having some capital, like £100,00 of savings money, is like an assurance of some good life for now and future. However, once one gets to get the feel of how investing in the stock market works, the possibility to earn so much more is unfolded. The initial move in decision to invest takes more anxiety as fundamental questions looms like, will I not lose my money or is securities trading for me? When all the vital questions are answered and one knows what kind of investing to pursue, things become easier as long as there is continued research to support actions. As with any endeavour, experience will prove to be a great tool to allow for the realization of objectives and aspirations. What it involves is meticulous research and disciplined investing. As the saying goes, the trend is your friend; one has just to find their way in the complex maze of investing in the securities market. References Finance Yahoo, 2013. Historical prices. Maginn, J., Tuttle, D., Pinto, J. & McLeavey, D., 2007. Managing Investment Portfolios: A Dynamic ProcesS. New York: John Wiley and Sons. Miller, J. & and Bradford, T. 2008. Fundamentals of Investments Valuation and Management. Boston : McGraw-Hill Irwin, 2008. Read More