Introduction
Being the financial consultant of Ms. Lauren Steininger, I have taken up the responsibility of investing her $100,000 in the stock market to maximize her investment with high earning. Stock market investment due to its high return seems a very lucrative mode of investment. High returns from the stock market are also associated with high risk. Therefore, it’s important to understand the proper functioning of the stock market, its regular fluctuation mode and the appropriate strategy to be adopted in making investment decisions that are rational rather than emotional.
Stock Market concept, working, and regulatory framework
The stock market is the public entity where stocks and derivatives are publicly traded. These stocks or shares are listed in the stock exchange and they represent ownership right on the company by the investors. Since the shares of the company are listed and traded in the stock market, it provides a platform for companies to generate money for their capital investment. It also allows companies to generate additional shares to finance projects and business expansions by selling shares or stocks of ownership to the investors.
The liquidity of the stock market depends on the investor’s ability to buy and sell the shares in the market. The more frequent the activity is conducted the more liquid the market will be. The stock market, compared to other modes of investment like long-term bonds and real estate are relatively more liquid investments giving you access to the principal amount of investment whenever needed.
The stock market is also considered to be the prime indicator of economic growth. Countries that have high traded corporations listed on the stock exchange with increasing stock prices will experience a flourishing economy with more domestic and foreign investment attracted to it. On the micro-level, share prices also affect the house income and living standards of the people with their consumption pattern. As the stock market affects the macro and micro levels of the economy, the central bank keeps a watchful eye on its activity to control the mechanism of the financial system.
Companies generate investment for the first time through Initial Public Offering (IPO) in the primary market and then the shares are subsequently traded in the secondary market. The investors benefit from the appreciation of the stock price and earn a capital gain, simultaneously bearing the risk of a decrease in the share price with a capital loss. The original company doesn’t participate in taking benefit from the capital gains or loss due to the fluctuation in the prices of shares.
The stock exchanges are also functioning as the clearinghouse for each transaction. They collect and deliver the shares and guarantee payments to the seller of the security. Thus these exchanges eliminate the risk associated with the transaction of security. Securities and Exchange Commission regulates the stock market for its smooth functioning. It sets rules for IPOs, the company’s rules for issuing shares, and investors’ guides and rules for investment in shares. It also monitors stockbrokers and illegal activities like ‘insider trading’.
Stock market weekly performance analysis – from 3rd-March 2011 to 4th- April- 2011
The fluctuation in the stock prices is evaluated in price indices referred to as stock market indices. The prominent names in this are:
Dow Jones, S&P 500 INDEX, NASDAQ COMPOSITE INDEX, FTSE 100 INDEX, DAX INDEX and NIKKEI 225.
These indices are weighted based on market capitalization. The weights represent the contribution it makes to the overall stock market. These are reviewed regularly to monitor business environment changes. The recent market figures America’s indexes are reflected as under:
All the stock exchange indexes tries to maintain and even increase the liquidity of their respective indexes and provide transparent, fluent and efficient trading system. However they are different with respect to their trading mechanisms, infrastructure like in NASDAQ the trading of securities is done electronically and their modes if the index is market maker they will be highly competitive in pricing with open competition and individual investor can get best price.
Market Summary from 3rd March 2011 to 17th April 2011
The strategies adopted for the investment in the stock market are basically of two types. An investor can ‘buy low and sell high’ and ‘buy high and sell higher. The investor would delay the plan to sell the securities of the company having a well-managed organizational structure, technologically advanced, enjoying the position of market leader or near prospects of becoming a market leader, and committed to long-term growth prospects.
To have high margins and reasonable diversification investment in a number of the companies showing high growth prospects would be appreciated. Investing in the growing companies and companies enjoying the growth climate is long term prudent strategy towards stock market investment.
With this strategy, the investor’s portfolio can perform reasonably well as compared with the high risk and high return stocks portfolio that bears the risk of market failure to a higher degree. Investors would be selling the stock of those companies that have already enjoyed the growth phase and prospects are questionable, the price earning (P/E) ratio of the company crosses 40 or when there has been a bad selection from the investor.
Company Profiles
Microsoft
Microsoft is engaged in the business of manufacturing, licensing, and supporting a broad range of software products and services for computer devices. The services and products that Microsoft offers to the market include personal computers, servers, intelligent devices, productivity applications, and business solution software.
Microsoft is also engaged in the business of providing hardware solutions like Xbox 360 gaming and entertainment, Zune digital music and entertainment devices and accessories, and Microsoft personal computers. According to the analyst, Microsoft has an earnings growth of 14.07% with a moderate range of 10%- 19% and annual sales of around $66,690 million. The yield earning price ratio is also considerably fine with a positive investment outlook. The earning per share ratio of the company is $2.36 which is attractive for investors.
AIG
AIG is again balanced with common shareholders after its successful bailout from the federal government. The company is expected to operate with a smaller organization, already have lost a great deal of global growth potential. AIG once was a leading insurance business that will have to go long way to regain its position.
But this company has positive growth prospects for they have experience in managing and taking the firm to its heights. Investors would be seeking it as a positive investment for long-term capitalization. AIG is still enjoying the largest insurance business even though they have sold their Asian subsidiaries. Its operations are spread in a wide range of insurance businesses and its growth prospects are high. It has a market capitalization of 60.1 billion.
References
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