Stock market
A stock market is a platform on which stocks are sold. Stock (share) is a share of ownership in a company. Shares are the commodities traded on a stock market. The key participants in a stock market range from small single investors to well-established institutions such as hedge funds, pension funds, index funds among others, and also the companies which have listed their shares. The large investors are beneficial in the stock exchange market since their participation reduces the transaction fees for carrying transactions on the stock exchange market.
The players are all over the world and not just one geographical region. The stock market creates a platform where these players can carry out their economic transactions. Some of the world largest stock exchanges are New York Stock Exchange (in the USA), Toronto Stock Exchange (in Canada), and London Stock Exchange (in Europe) (Furgang, 2010).
Transactions are often executed on the network but few are carried out on the trading floor. Most stock exchange markets operate as a hybrid. That is, transactions are carried out on the network and the floor of the stock exchange market. An auction is often used as a way of carrying out transactions on the floor of a stock exchange. In this type of transaction, the players place their bids and offer verbally on the trading floor. This mode of trading is known as an open outcry. “Orders executed on the trading floor enter by way of exchange for members and flow down to a floor broker who goes to the floor trading post specialist for that stock to trade the order” (Furgang, 2010).
The specialist ties purchase and sale of orders using the auction. However, if a spread exists, no trade is concluded immediately. The specialist closes the gap using his resources. After the trade is executed, details of the trade are reported and sent to the brokerage firm then the firm notifies the investor who placed the bid. It is worth mentioning that even when trading on the floor, there is dismal human interaction the floor. The other way of trading in the stock exchange market is by way of electronic trading (Furgang, 2010).
A section of the stock exchange market is segregated from the trading floor contains well-connected computers for the function. Thus, traders in the stock exchange market conclude transactions on the network. An example of a virtual stock market is the NASDAQ. All transactions in NASDAQ are carried out in the network. It is worth mentioning that only stocks that are listed on the stock exchange market can be traded. This has been beneficial to players in several ways. First, there has been an increase in order in the stock exchange market. Secondly, the transaction fees for carrying out transactions at the stock exchange market have significantly dropped. Finally, traders have access to a vast amount of information on the trading of shares on the stock exchange.
The stock exchange market is a vital economy since companies raise capital for growth and expansion. In addition, it affects the money demand, supply and exchange rate of a country. Thus, the activities carried out need to be regulated so that the market does not crash. The Central Bank of a country bears the sole responsibility of regulating the stock exchange market. The central bank ensures that there is a sound operation in the stock exchange market. This in turn ensures financial stability in the stock exchange market (Furgang, 2010).
Evaluation of the performance of the stock market
The performance of the stock market is measured using stock market indices. The indices are computed from the prices of a sample of the stock market. Such a sample often contains stock that has similar characteristics. The market index gives information on the section of the market that is analyzed. In the US, the exchange-traded funds and index funds track the performance of a given index.
Thus, the US Securities and Exchange Commission are not responsible for these indices. Some of the indices used in the US are Dow Jones Industrial Average (DJIA). It is an index that measures the performance of 30 blue-chip stocks. The basket contains an array of companies operating in various industries. The second index is NYSE Composite Index. The index monitors the movement of prices of all common stock listed on the NYSE. It is a weighted index.
The third index is S & P 500 Composite Stock Price Index. It is a weighted index of 500 stocks. The 500 stock is considered as a representative sample of leading companies in leading industries in the US. The sample is selected based on the market size, industry group, and liquidity. The fourth index is Wilshire 5000 Total Market Index. It is envisioned to measure the performance of the whole US stock market. The fifth index is Russell 2000® Index. It is intended to measure the performance of the 2,000 smallest publicly traded entities in the US. The final index is a Nasdaq – 100 index. It measures the performance of the 100 largest actively trading non-financial domestic and international securities. It focuses on securities listed on the Nasdaq Stock Market. Some of the factors that affect the stock market are changes in inflation and interest rate, exchange rate fluctuations, the hype of a company and world events such as war and terrorism.
Evaluation of blue-chip companies
Background of the companies
McDonald’s Corporation
Ray Kroc founded McDonald’s Corporation in 1955. The company went public, on the stock exchange, in 1967. His mission “was to build a restaurant that would be famous for food of consistently high quality and uniform methods of preparation. He wanted to serve burgers, buns, fries, and beverages” (McDonald, 2012). He based his philosophy on a simple principle of a three legged stool. The three legs were McDonald’s, franchisees and McDonald’s suppliers. McDonald’s has a global presence. The corporation has several franchisees in the global arena. Some of them include Big Mac, Filet-O-Fish and Egg McMuffin, among others.
The company has established over 31,000 local restaurants located in about 120 countries. In the US, there are about 14,000 outlets. Further, the corporation has employed over 58 million people worldwide. McDonald’s vision is to be “Estonia’s best quick service restaurant, experience supported by a set of core values and guiding principles” (McDonald, 2012).
Coca-Cola Company
The Coca-Cola Company is a multinational company that trades in soft drinks. It has a presence in over 200 countries. The profits earned in the fiscal year ended June 2011 were embedded in a number of financial strengths these are, effective advertisement, diversity of products, and consistency in the rate of production. PepsiCo created in 1965, is a multinational company that trades in beverages and food. PepsiCo was formed after a merger between Pepsi-Cola Company and Frito-Lay. The company is incorporated in the United States and it trades on the New York Stock Exchange. It has a presence in over 200 countries. The net revenue for the company totaled $43.3 billion in 2012. As of 2011, the company had 297,000 employees. A strong brand name and aggressive advertisement were the key factors that contributed to the increased sales. It is worth noting that the financial meltdown affected the profitability of some outlets for the two companies (Hayes, 2009).
Motivation for investing in the companies
McDonald’s Corporation and Coca-Cola Company have been in the market for quite long. The companies have traded for several decades and have passed several tests such as stiff competition, rapid change in technology, and changes in regulatory requirements among other changes. Despite the constant changes in the market conditions, the companies have recorded growth in performance over the years. In addition, they are top performers in the industries in which they operate. Thus, analyzing their financial performance will be of utmost importance before making investment decisions.
The financial health of the company
The five categories of ratios that will be discussed below are profitability ratios, liquidity, efficiency, debt ratios and market ratio (Gibson, 2010).
McDonald’s Corporation
Coca Cola Company
The ratios above indicate that the performance of McDonald’s is better and growing than the performance of Coca–Cola Company as shown by better profitability, liquidity, efficiency, debt, and market ratios. Thus, the investor should consider investing in the shares of McDonald’s Corporation.
Assessment of risk level of the companies
Risk denotes the probability that a chosen course of action will lead to financial loss to a company or an individual. In this context, it is the probability that McMullin will incur losses in the investment that he pursues. There are a number of ways of measuring the risk of an asset. A commonly used method is by computing the variance and standard deviation of a stock. The two measure the volatility of a stock.
A stock with a high variance and standard deviation is highly volatile and thus risky. An asset with low variance and a standard deviation is often referred to as an asset with high variance and standard deviation irrespective of the average return of the assets. Another tool that is often used to measure risk is the coefficient of variation. It is the ratio of mean and standard deviation. The ratio is regarded as superior since it brings the average of the asset being discussed in context when analyzing the standard deviation of the asset. The table below summarizes the calculations of the variance, standard deviation, and coefficient of variation of stock of the two companies.
McDonald’s Corporation
Coca-Cola Company
The expected returns and standard deviation for the shares of Coca–Cola Company is lower than that of McDonald’s. However, the coefficient of variation of Coca–Cola is quite high. This indicates high volatility. Thus, the investor should invest 70% of the money in the shares of McDonald’s Company and the rest in the shares of Coca–Cola Company.
References
ABC News Network. (2013a). Coca Cola company: Historical prices. Web.
ABC News Network. (2013b). McDonalds corporation: Historical prices. Web.
Furgang, K. (2010). How the Stock Market Works. USA: The Rosen Publishing Group.
Gibson, H. (2010). Financial Reporting and Analysis: Using Financial Accounting Information. California: Cengage Learning.
Hayes, J. (2009). Coca-Cola Television Advertisements. New York: Nation’s Restaurant News.
McDonalds. (2012). Our History. Web.
US Securities and Exchange Commission. (2012). Market indices. Web.