Beruflich Dokumente
Kultur Dokumente
An investment is the current commitment of dollars for a period of time in order to derive future payments that will compensate the investor for : The time the funds are committed The expected rate of inflation The uncertainty of the future payments
Investor
The investor can be an individual, a government, a pension fund or a corporation. Investors trade with the intention to earn some future rate of return out of his investment which will provide a future stream of payments that will be greater than the current outlay.
Major Factors:
There are two major factors that drive the motive of investors. These are: Required rate of return Risk associated with the investment
Any investor must analyze properly these two factors before investing in any sector.
Investment areas:
There are financial markets where all the investments take place. These markets offer different investment instruments for the investors. There are several types of markets for investment:
Primary market Secondary Market Third Market Fourth Market Over the counter market
These markets are familiar for any kinds of investment related trading. These are the core places for any investment to take place.
Shares
Shares represents small portion of ownership of an entity. Stocks or shares are the core instruments offered by a company to raise capital. Each share has a par value & a face value which is comparable with its market value. The difference in value indicates the position of a share in the stock market. Investors invest in shares in order to get some future benefit which is termed as dividend. Besides bonus shares are also lucrative offers of a share issue.
Bonds/Debentures
Bonds are long term debt instruments representing a contractual obligation on the part of the issuer to pay interest and repay principal. On the other side, debentures are unsecured bonds backed by the general credit of a company.
Mutual Funds
The popular name for open end investment companies which continually stand ready to sell new shares to public and to redeem their own outstanding shares on demand at a price equal to an appropriate share of the value of their portfolio which is computed daily at the close of the market. These are usually investment companies i.e. financial intermediaries that sell shares to the public and invests the proceeds in a diversified portfolio of securities. Each share sold represents a proportionate interest in the portfolio of securities managed by the investment company on behalf of the companys shareholders.
Portfolio of shares
As mutual funds consists of portfolio of shares, there is diversion of risk observed.
Risk analysis
The risks are analyzed properly in order to make a diversified portfolio. It tries to minimize the unsystematic risks for the investors.
Flexibility
There is flexibility to sell & redeem the shares at investors option.
Share Price
The share prices are quoted on a bid-offer basis which is a good practice.
Selling Shares
The investors can sell their share any time with a small fee to the company. This is known as back-end load funds
Classification
For the privilege of the investors, there are two types of securities: Class A & Class B. Class A is for short time holding of investments & Class B is for long term investments. Thus, a mutual fund can be a good choice for investors who are investing for the first time.
Company Selection
The selection of a company for making investment decision is a prime factor for the investors. Followings are some basic factors that works behind company selection:
CAMEL Rating
The CAMEL rating of a company is a good indicator to rate a company. The CAMEL Stands for: C= Capital Adequacy A= Asset Quality M= Management efficiency E= Earning Profit L= Liquidity position
The ratings vary with a range from 1 to 5 with a mark up through strong to dissatisfactory.
Rating
1 to 1.4 1.5 to 2.4 2.5 to 3.4 3.5 to 4.4 4.5 to 5
Grade
Strong Satisfactory Moderate Low Dissatisfactory
Prospectus Analysis
Incase of investing in an IPO issue, investors must properly go through the prospectus issued by the company. The major issues include: Objective Company fact description History Manager background Financial statements Risks & return analysis
Company prospects:
For investing in existing company, following issues must be taken care of:
Minimum paid up capital Tk 10 million The company must be a registered public limited company Shares to be subscribed by a minimum of 250 no.s of shareholders
Some other related factors are: Efficiency Leverage Profit Margin Use of Proceeds Operating History Operating Base Management Product differentiation Single vs. multi product
Dow Jones Industrial Average Standard & Poors 500 composite index DSE & CSE index
A category companies:
Companies which are regular in holding the current annual general meetings & have declared dividend at the rate of ten percent or more in the last financial year.
B category companies
Companies which are regular in holding the annual general meeting but have failed to declare dividend at least at the rate of ten percent in the last English calendar year
Z category companies
Companies which failed to hold the current annual general meetings or have failed to declare any dividend or which are not in operation for more than six months or whose accumulated loss after adjustments of revenue reserve, if any, is negative and exceeded its paid up capital
G category companies
Newly listed shares of those companies, which do not fall under any of the categories, shall be placed under G category companies for which the settlement procedure followed for B category companies shall be applicable. Investors who wish to take risk can invest in B,C or G category shares. Investors who wish to get stable return can invest in A category companies shares.
Risk:
The chance that the actual return on an investment will be different from the expected return Any investor must trade-off between the risk & return in order to ensure his future return with a positive cash flow stream.
Standard Deviation of Rates of return Coefficient of Variation of rates of return Covariance of returns with the market portfolio
Any investor must take care of these issues when he tends to invest. The investment company or the brokers can help him to assess the position
Systematic Risk:
The market risk associated with investment which cannot be avoided or ignored.
Unsystematic Risk:
The risks associated with investments which can be minimized with a portfolio investment option but cannot be eliminated. Any investor must measure these two risks & also evaluate the risk-return analysis to get the maximum future outflow. Unsystematic (Diversifiable) Risk
Amount:
The investors must identify the total number of shares that he wants to buy or sell. It may be a bulk of shares or may be a small lot depending on investors investment opportunity & also if the brokers advice them to do so.
Instrument:
Investors may invest in following types of categories: IPO Private Placement
How to Trade
Investors must draw a proper track about how he will make his investments. There are few possible ways regarding this matter:
Margin Trading:
Margin trading is a way to make investment in stocks or securities through the financial help of the broker. Here only a portion of the investment proceed comes from investors own money. The remaining portion is borrowed from a broker. Followings are some features of margin trading:
Method:
Bet on a rise in the price of the security Higher leverage, magnifying upside & down side risks
Collateral:
Stocks purchased on margin must be maintained with the broker as collateral for the loan
Initial Margin:
The percentage of stock value that must be maintained with the broker
Maintenance Margin:
Minimum amount of equity maintained in the account.
Margin Call:
Call from a broker to put up more equity funds when exceeds minimum balance. Margin arrangements differ for different securities.
Margin control:
The broker controls how much equity must be maintained by margin traders. The equation is: Equity = ( Total value of investment Amount borrowed ) /Total Value of Investment Here, High volatility stocks may not be marginable.
Short Sale
Short Sale is a way to make investment in stocks or securities through the borrowing of securities with the help of the broker when a decline in price is estimated. Here only a portion of the securities are supplied by the seller. The remaining portion of securities are borrowed from a broker. Followings are some features of short sale:
Method:
Collateral: The proceeds from the short sale must be maintained with the broker as collateral for the loan Bet on a decline in the price of the security Higher leverage, magnifying upside & down side risks
Mechanism:
Borrow stocks from a broker Sell it, deposit the proceeds and margin money in an account Close out the position by buying the securities & returning it to the lender Short seller must pay any dividend paid during the short sale to the lender of the stock
Own Investment
Investors can make their own investment with full of their money. But there are several risks associated with this kind of investment. Investors must take proper & expertise advice incase of such investments.
There are evidences related to market sectors which helps to indicate the form of market efficiency.
Market Analysis
Market analysis consists of following three major analysis. These are: Fundamental Analysis Technical Analysis Economy Analysis
Fundamental Analysis
The idea that a security has an intrinsic value at any time, which is a function of underlying economic variables. Fundamental Analysis at the company level involves analyzing basic financial variables in order to estimate the companys intrinsic value. These variables include: Sales Profit Margin Depreciation The tax rate Sources of financing Asset utilization Other Factors
Additional Analysis could involve the firms the firms competitive position and so on. The end result of fundamental analysis at the company level is the data needed to estimate the price of a stock using one of the valuation models.
In fundamental analysis intrinsic value is an important consideration. Intrinsic value or estimated value of a stock is its justified price, or the price supported by a companys fundamental financial variables. Alternatively, for a short run estimate of intrinsic value the earnings multiplier model could be used . Intrinsic value is the product of the estimated earnings per share(EPS) for the next year and the estimated multiplier or P/E ratio. The equation for finding out the intrinsic value: Intrinsic Value = Po = Estimated EPS * Justified P/E Ratio = E1 * Po / E1 If the intrinsic value is larger than the current market price, then the stock is undervalued. Thus investors should buy at this time. If the intrinsic value is less than the current market price, then the stock is overvalued. Thus investors should sell at this time.
Technical Analysis
The methodology of forecasting fluctuations in the prices of securities whether individual securities or the market as a whole. Technical analysis can be defined as the use of specific market generated data for the analysis of both the aggregate stock market and individual stocks. It is sometimes called market or internal analysis because it utilizes the record of the market itself to attempt to assess the demand for and supply of shares of a stock or the entire market. Thus, technical analysis believe that for market forecasts the market itself is its own best source of data. Technical analysis assumes that prices are determined by the interaction of demand and supply and reflect the net optimism of market participants. The followings are some key points of technical analysis: Technical analysis is based on published market data and focuses on internal factors by analyzing movements in the market or a stock. In contrast, fundamental analysis focuses on economic and political factors which are external to the market itself. The focus of technical analysis is timing. Stock prices tend to move in trends as the stock price adjusts to a new equilibrium level. These trends can be analyzed and changes in trends detected by studying the action of price movements and trading volume across time. The emphasis is on likely price changes. Technicians tend to concentrate more on the short run. The techniques of technical analysis are designed to detect likely price movements over a relatively
short time. Fundamental analysts on the other hand have a substantial interest in the intermediate and longer run. Technical Analysis---DOW Theory: This aims at evaluating the primary, secondary & daily movements. It identifies two markets: 1. Bull market 2. Bear Market for investment purpose. Strategies for Technical Analysis: For a fair technical analysis followings things must be taken care of: Risk Transaction Cost Consistency Out of sample Validity
With the help of above and by applying Filter rule strategy, a proper technical analysis can be done.
Economy Analysis:
Investors must make intelligent judgments about the current state of the financial markets & possible changes. A logical starting point in assessing the stock market is to understand the economic factors that affect stock prices. Understanding the current & future state of the economy is the first step in understanding what is happening & what is likely to happen to the market. Because of the markets impact on investors success, investors should seriously consider the markets likely direction over some future period.
moving upward whereas downward trends may encourage some to liquidate their holdings and invest in money market assets or funds. Some popular market measures are: Trend Analysis Historical Performance Portfolio Performance Calculating Beta
If the investor can recognize the bottoming out of the economy before it occurs, a market rise can be predicted , at least based on past experience , before the bottom is hit As the economy recovers, stock prices may be level off or even decline. Therefore, a second significant movement in the market may be predictable again based on past experience. Based on the last ten economic slumps, the market P/E usually rises just before the end of the slump. It then remains roughly unchanged over the next year.
The importance of analyzing business cycle turning points as an aid to market timing cannot be overemphasized. Investors would have always increased their returns by switching into cash before the business cycle peaks and into stocks before the cycle reaches its trough. It is particularly important to switch into stocks before business cycle troughs.
Choosing a broker before making investment decision is very important. The following matters are important to note regarding this issue: Integrity Intelligence & Efficiency Experience in Market Someone who understands investors investment philosophy Reputation in the Market Costs & Commissions effective
Opening An Account:
Open account with enlisted broker Apply in proper application form with two copies passport sized photograph There must be an introducer who also should be a member of that broker Incase of no introducer, with some other supporting documents one can proceed There is no maximum or minimum amount to be deposited Each investor is given a client code for trading
Money:
The monetary value of money should be considered
Economic Boom:
Analyzing trend & Govt. initiatives
Political Scenario
The political condition & stability is important
Natural Calamity
Market Trend
The analysis of upward & downward market trend
Govt. Policy
The Govt. policy may favorably or unfavorably effect the investment decision
Investor Behavior
The behavior of investors incase of investment decision. the investors may be:
Liquidity
The position of liquidity position of any company is important
Dividend Factor
The EPS & related dividend factors
Inside trading
The inside trading is another important consideration
Risk analysis
Analysis of country risk, exchange risk & financial risk are also need to be taken care of.
Return s
RiskReturn Analysis
Positive Relationship
Fundamental Analysis
Fundamental Analysis at the company level involves analyzing basic financial variables in order to estimate the companys intrinsic value. This must be analyzed by a new investor.
Technical Analysis
Technical analysis assumes that prices are determined by the interaction of demand and supply and reflect the net optimism of market participants. This should also be analyzed by the investors.
Economy Analysis
Investors must make intelligent judgments about the current state of the financial markets & possible changes.
Return Estimation
The minimum expected return on asset that an investor requires before investing. This must be also evaluated by the investors.
Risk-Return Trade-Off
Trading Instrument selection depending on risk-return analysis is a considerable factor.
Dividend factors
The EPS & related dividend factors should be considered
Liquidity position
The position of liquidity position of any company is important for new investors.
To measure the market position of shares, there are several indices in operation. These indices rate the companies according to their performance. This rating is important for the new investors.
Trading proceed
Whether to go for margin trading or short sale is another important factor
A REPORT ON ANALYZING & EVALUATING INVESTMENT OPPORTUNITIES & RELATED FACTORS FOR A NEW INVESTOR
COURSE NO: B-504
SUBMITTED TO
SUBMITTED BY
NAME Nafisa Zabeen Ovi Syed Mohammod Mostofa Shams Md. Amdadul Haque Shah Md. Ashraful Alam Md. Anwar Hossain Zinnurayn Sukhee A.K.M Mamun Raja Saiful Islam
MBA ROLL 6-226 6-239 6-261 6-228 6-275 6-260 6-263 6-296
July 20, 2006 Mrs. Hasina Sheykh Course Teacher Department of Banking Faculty of Business Studies University of Dhaka Dear Sir, Here is the assignment on Analyzing & Evaluating investment opportunities & related factors for a new investor you asked us to conduct on at beginning of the semester. We appreciate having this assignment. We prepared this assignment with sincerity and serious effort. Thank you for providing us the opportunity to participate in
this topic. We are really grateful to you for giving us the scope to prepare this term paper under your observation. We have enjoyed preparing this report and presented it for your judgment. Sincerely yours, Name Nafisa Zabeen Ovi Syed Mohammod Mostofa Shams Shah Md. Ashraful Alam Md. Amdadul Haque Md. Anwar Hossain Zinnurayn Sukhee A.K.M Mamun Raja Saiful Islam ID 6-226 6-239 6-228 6-261 6-275 6-260 6-263 6-296 Signature
Acknowledgement
It is our great pleasure to express our heartfelt gratitude to our honorable course teacher Mrs. Hasina Sheykh for giving us such an opportunity to prepare this report. This report presents a thorough analysis of investment sector which reflects the overall performance of stock market operations.
Investment is an essential tool that effects the financial viability of every industry and the economy as a whole. In fact, growth and development of a country largely depends on the performance of investment sector. It plays a great role in the financial sector of a country and it has profound influence on the whole macro & micro economic sector. The preparation of this study paper is very much helpful for us as we can have a deep insight towards our investment areas & sectors. In this regard, we would also like to thank the respective investment officials for their support & also ourselves for our good teamwork and successful team spirit. Without cooperation and the support from each other, it would not be possible to prepare a resourceful report. Lastly we would again like to express our heartfelt thanks to our course teacher for providing the theoretical knowledge and valuable guidelines related to real world investment.
& EVALUATING INVESTMENT OPPORTUNITIES & RELATED FACTORS FOR A NEW INVESTOR
SUBMITTED TO
MRS. HASINA SHEYKH COURSE TEACHER DATE OF SUBMISSION: 20 July 2006.
ANALYZING
CONTENTS
Investment & Investors Defined Investment Areas Investment Instruments Company Selection Risk-Return Analysis Investors Focus Point How To Trade Market Efficiency Market Analysis Fundamental Analysis Technical Analysis Economy Analysis Choosing a Right Broker How to Open an account Evaluating Market Condition Recommendations for New Investors Appendix
APPENDIX
1. Investment Analysis & Portfolio Management---By Frank K. Reilly & Keith C. Brown 2. Financial Markets---By Fabozzi 3. Investment TechniquesJohn Smith 4. Financial Market & Institutions George William 5. Investment Banking Handouts & Class Lectures.