Q. 1 Is there any logic behind technical analysis? Explain meaning and basic tenets of technical analysis.
Selecting the right stocks for investment is an important part of making investment at the stock market but that is not the only thing that you have to consider. More important than the selection of stocks is determining the perfect time for investing is that stocks. Stocks have price movement at the stock market everyday. There are ups and downs that come in a cyclic way. As an investor you have to determine what is the exact time or more precisely the optimum price range for investing in that stock.
The reason behind this is that every stock has a potential price for a given time. It takes certain time to reach that point and once the stock reaches that price, it is most likely to fall or stand still at that level with least movement in the price. In both the scenario it is not profitable to invest in stock that has already reached that optimum level, as you will either make loss or get least profit. Therefore, it is not worth investing in the stocks that are already reached the potential high for the time being. So as a trader it is important to know what is the optimum price range for the stock as that will help you to decide whether it is the right time to invest in a certain stock or not.
Technical analysis is the process that does exactly that. Technical analysis can give you the idea of the future price movement of that stock. Based on that analysis you can decide whether it is profitable in that stock at that point. In technical analysis certain information like the past performance of the stock, current price of the stock, trading volume of the stock are considered. With these information and one the basis of certain principles different types of graphs and charts are prepared. By comparing these graphs of the price movements with that of the previous years it is decided by the experts how the stock will perform in the near future. So, basically technical analysis is the scientific way of predicting the movement of the stock price in the market. Technical analysis is performed by the analysts on the basis of different indicators such as cycles regressions, relative strength index, moving averages, regressions, and inter-market and intra-market price correlations. Different principles are followed by the analysts to prepare the charts and graphs of the price movements of the stocks on the basis of these indicators. These indicators are basically mathematically transformed date derived from the price of the stocks and trading volume. Here we are presenting some of the most popular models of technical analysis.
Candle Stick Charting – This method was developed by Homma Munehisa during 18th century. In candle chart method the price movement of a certain stock is predicted through the bar style chart. This chart is basically a combination of the simple line chart and colored bar chart. The candle stick chart gives a graphical presentation of the opening price, closing price, high and low price of the stock in a single day for over a period of time. This graphical presentation helps to predict the future movements by comparing the previous patterns of price movement of that stock.
Dow Theory – This theory is named after its inventor Charles H. Dow. He was the first editor of the Wall Street Journal and co-founder of Dow Jones and Company. The Dow Theory is based on six basic principles.
· There can be three different types of movements in the stock market.
· There are three different phases in the market trends.
· Stock market discounts all news.
· Market trends need to be confirmed by trading volume.
· Market average should always confirm each other.
· Market trend can be said have ended only when the definitive signals prove that.
Elliott wave principle - This theory was developed by Ralph Nelson Elliott and published for the first time in his book The Wave Principle in the year 1938. In his theory Elliott proclaimed that the psyche of the stock market investors moves from pessimism to optimism and this creates the swing creates the price pattern. This pattern is projected by the three wave structure of increasing degree in this theory.
Meaning Of Technical analysis-Technical Analysis is the study of prices and volume, for forecasting of future stock price or financial price movements. Technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is "likely" to happen to prices over time.
Technical analysis is not an exact science. It's an art and takes considerable experience. Not all studies work the same for every instrument traded. One study may give excellent buy and sell signals while another may not work for you at all.Stock Market Technical Analysis Basic Principles
Technical Analysis is based on these three basic principles:
Price Discounts Everything
Prices move in trends
History repeats itself
#1- Price Discounts Everything
Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders, and ...
Stock Market Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.
#2- Prices Move in Trends
Technical analysts or chartists believe that profits can be made by following the trends. In other words if the price has risen, they expect it to continue rising; if the price has fallen, they expect it to continue falling. However, most technicians also acknowledge that there are periods when prices do not trend.
#3- History Repeats Itself
Technical analysts believe that investors repeat their behavior and they assume that there is useful information hidden within price histories; that it is a way of analyzing the past actions of people in a particular market as reflected by their actual transactions.
Q.2 Explain role played by efficient market in economy. Apply the parameters of efficient market to Indian stock markets and find out whether they are efficient.
Efficiency is one of the most important concepts to use in you're A Level Economics course. There are several meanings of the term - but they generally relate to how well an economy allocates scarce resources to meets the needs and wants of consumers. Make sure you know your definitions well, can illustrate them using appropriate diagrams and can apply them to particular situations
StaticEfficiency
Static efficiency exists at a point in time and focuses on how much output can be produced now from a given stock of resources and whether producers are charging a price to consumers that fairly reflects the cost of the factors of production used to produce a good or a service. There are two main types of static efficiency
AllocativeEfficiency
Allocative efficiency is achieved when the value consumers place on a good or service (reflected in the price they are willing to pay) equals the cost of the resources used up in production. Condition required is that price = marginal cost. When this condition is satisfied, total economic welfare is maximised.
Parameters of efficient market to Indian stock markets
Efficiency of equity markets has important implications for the the investment policy of the investors. If the equity market in question is efficient researching to find miss-priced assets will be a waste of time. In an efficient market, prices of the assets will reflect markets‟ best estimate for the risk and expected return of the asset, taking into account what is known about the asset at the time. Therefore, there will be no undervalued assets offering higher than expected return or overvalued assets offering lower than the expected return. All assets will be appropriately priced in the market offering optimal reward to risk. Hence, in an efficient market an optimal investment strategy will be to concentrate on risk and return characteristics of the asset and/or portfolio. However, if the markets were not efficient, an investor will be better off trying to spot winners and losers in the market and correct identification of miss-priced assets will enhance the overall performance of the portfolio Rutterford (1993). EMH has a twofold function - as a theoretical and predictive model of the operations of the financial markets and as a tool in an impression management campaign to persuade more people to invest their savings in the stock market (Will 2006). The understanding of efficiency of the emerging markets is becoming more important as a consequence of integration with more developed markets and free movement of investments across national boundaries. Traditionally more developed Western equity markets are considered to be more efficient. Contribution of equity markets in the process of development in developing countries is less and that resulted in weak markets with restrictions and controls (Gupta, 2006) In the last three decades, a large number of countries had initiated reform process to open up their economies. These are broadly considered as emerging economies. Emerging markets have received huge inflows of capital in the recent past and became viable alternative for investors seeking international diversification. Among the emerging markets India has received it‟s more than fair share of foreign investment inflows since its reform process began. One reason could be the Asian crisis which affected the fast developing Asian economies of the time (also some times collectively called „tiger economies‟). India was not affected by the Asian crisis and has maintained its high economic growth during the period (Gupta and Basu 2005
Q. 3 What do you understand by yield? Explain the concept of YTM with the help of example
Yield- Yield is the rate of return on an investment expressed as a percent.
Yield is usually calculated by dividing the amount you receive annually in dividends or interest by the amount you spent to buy the investment.
In the case of stocks, yield is the dividend you receive per share divided by the stock's price per share. With bonds, it is the interest divided by the price you paid. Current yield, in contrast, is the interest or dividends divided by the current market price.
In the case of bonds, the yield on your investment and the interest rate your investment pays are sometimes, but by no means always, the same. If the price you pay for a bond is higher or lower than par, the yield will be different from the interest rate.For example, if you pay $950 for a bond with a par value of $1,000 that pays 6% interest, or $60 a year, your yield is 6.3% ($60 ÷ $950 = 0.0631). But if you paid $1,100 for the same bond, your yield would be only 5.5% ($60 ÷ $1,100 = 0.0545).
Case: A coworker of yours was discussing her investments with a broker. Your coworker was confused because she had purchased a 10% bond but the broker kept repeating that it had a 9% yield to maturity. What is Yield to Maturity?
Yield to maturity (YTM) is the yield promised by the bondholder on the assumption that the bond will be held to maturity.
YTM also assumes that all coupon and principal payments will be made and coupon payments are reinvested at the bond's promised yield at the same rate as invested.
YTM is a measurement of the return of the bond and its calculation is identical to the calculation of internal rate of return (IRR).
Applying to the situation mentioned, the coworker purchased a bond with a coupon rate of 10 percent.
The 9 percent YTM applies if she holds on to that bond until it matures while reinvesting all interest payments she received from the instrument.
The significance of YTM is that it allows comparison of bonds with different coupon rates and prices.
1) Calculator: enter n, M, PMT, PV and VL and request k
2) Trial and Error: find k such that VL = INT({PVIFAM n) + M(PVIF M n)
3) Yield approximation formula:
YTM = INT + (M- VL)/ n
--------------------
(M + VL)/2
Where:
VL = the value of the bond
kc = the fixed coupon interest
n= the number of periods until maturity
M = the dollar principal payment at maturity
INT = periodic dollar coupon payment = kc x M
kd = discount rate on the bond
If a bond's current yield is less than its YTM, then the bond is selling at a discount.
If a bond's current yield is more than its YTM, then the bond is selling at a premium.
If a bond's current yield is equal to its YTM, then the bond is selling at par.
No comments:
Post a Comment