Financial markets

financial assets argon made up of securities, linages and derivatives. These are claims to the bills flow generated by real, tangible assets which are the lands, buildings and machineries we use. These pieces of paper are how citizens of toweringly developed countries increase their wealth. riches generation involves seek, for no business activity is reliable to provide lights. Financial commercializes allow investors to participate in funds-making ventures with egress being physically present in the childbed site.Most risk tolerant individuals prefer variants, for it has the potential to bring back very luxuriously returns, while conservative ones go for bonds which provides a steady, fixed income. In this activity, assembly line profession is the main focus. Objectives Just like any investor, generating gold flow was the primary goal. The amount of cash to be gained from trading should compensate the risk under engendern. The goal was to reach steady exploitati on. The expected was return is 40%. afterward setting the required return, a portfolio strategy was chosen.Assets were indeed selected which would comprise the efficient portfolio provides the highest return for a wedded level of risk. Fundamental analysis was the method use to pick the stocks. variegation was a nonher tactic employ to maximize return while spreading the risk. effect a portfolio Portfolio construction was a tedious task. I had to weigh the risk and returns, and some propagation, to trust my gut feel. tune monetary values, as studies ease up shown follow a stochastic walk movement. The approach utilise was a put across-down portfolio construction. A portfolio is basically a collection of investing assets.The type of assets to be held was first de depotined. It was then followed by security analysis to pick out the stocks deemed profitable. Diversification was one principle employ in choosing the stocks. It plain meant that equities from different industr ies were held in the portfolio so that risk painting was limited. Shares from the software industry (RIMM, coffee), arms(SWHC), pharmaceutical (GERN), computer (PALM), indemnity ( chirrup), fountainheadness care(HMA), power (FL), SAM, metals and dig(AUY, AA) , embrocate and gas(IEO), magnate fund(SWPIX), cement(CX),AXP Asset synopsis Fundamental analysis was mainly used in the finishs undertaken.This approach uses hire and dividend prospects of the firm, expectations of rising interest rates, and risk evaluation of the firm to determine proper stock monetary values. It relies on the companys financial health indicators. The stocks annual process rate, quarterly earnings records, and P/E (price-to-earnings) ratios were measured. diachronic information was also used. genius such statistic is the EPS, or earnings-per- dole out ranking. PALM stocks were bought since the firms return on investment was stated at 2470. 70%. Also, on the day that it was traded, it was lower pri ced.Smith and Weson, SWHC had a P/E ratio of 5. 50%, an hard roe of 19. 7%. Thus, a conglomeration of 4000 shares of SWCH were bought. Alcoa, or AAs ROE was 16. 20%. Its EBITDA was 5. 45 B. Meanwhile, its P/E ratio was 11. 60 and its annual dividend was at . 68 per share. Alcoa looks financially healthy, further was expensive, so still 1000 shares were grease ones palmsd. Similarly, FPLs ROE was 14. 6%. Its P/E ratio was 12. 7%. Its EBITDA was 4. 47 B. The securities industry place values FPL shares highly. dear now, I put in it unsmart to invest in highly valued stocks, because market perceptions fluctuate wildly. Thus, I lone(prenominal) acquired 700 shares of FPL.RIMM had an ROE of 30. 60%. Its P/E ratio was 50%. For me, RIMM shares were genuinely costly. In fact, it was has the highest cost per share in my portfolio. But I was attracted to its financial forecast. Further much(prenominal)(prenominal), its 52 week high was at $148 so I found the $80 per share enticing . I thus bought 1000 shares from RIMM. thrum had an ROE of 19. 9% and a P/E ratio of 18. 00. It was quite everyplacepriced, so I tho bought 1000 shares. HMA was the lowest priced stock in my portfolio. But, I decided to corrupt it believing that demand for health care services will increase in the near future.CX, compared with its competitor, Heidelberg cement had higher earnings and historically displayed returns higher than the market average. I bought 1000 shares. I also bought SWPIX, an index fund as a comparison for the return of my trading activities. Event alternative One of the most remarkable discussion was the entranceway of PALMs Pre. With the belief that the Pre will be hot in the market, just like orchard apple trees I-pod, I bought 4,000 shares from PALM. I deem that the future value of PALM will increase more than two-fold once the Pre is introduced. The hype will push the price of its stock.Thereafter, I can sell my shares at a profit. In addition, the f avoriteity of smart phones, or phones which serve more than just talking devices was forecasted to increase steadily in the near future. Aside from purchasing PALM stocks, I decided to bribe shares from BlackBerrys maker, RIMM. intelligence service of the global swine flu outbreak prompted me to purchase HMA shares. HMA , a healthcare provider would surrender more pay if the flu would become widespread. In addition, Citigroup upgraded HMA shares from hold to buy. Meanwhile, the word of honor on the pending sale of JAVA host me to sell my 1000 shares.Monster stocks which were identified two weeks in a row implicated AUY. The education urged me to buy 3000 shares of AUY. Behavioral Finance Even if instruction bear upon were perfect, it seemed that investors tend towards irrational decisions. In hindsight, these behavioural biases generally affected how I framed questions of risk versus return. Psychologists dedicate found that individuals blame themselves more when an unc onventional decision turned out poorly. Based on trouble aversion theory, buying a blue-chip portfolio that declines in value is not as painful as experiencing similar losses on an unknown start-up firm.Losses on the blue-chip stock can be more easily attributed to grim luck rather than atrocious decision. To avoid future remorse, I did not include stocks from start up firms. I chooseed less-well-known firms to be more risky. Even if potential gains can be realised from new firms due to their tremendous growth message and often undervalued stocks, I steered clear from such path. Instead, I trudged towards the tried and tested road and concentrated on well-established companies like Alcoa, Smith and Weson and Cemex, and popular companies like JAVA and RIMM.Avail great power bias is rooted on the concept that tribe base their decisions on the most recent and meaty events. The more current or up-to-date the information, the more profound would be its effect on the investor. In t he late 1990s, investors got caught up in the internet mania, which caused them to trend the risks. I suppose that people naturally pass away lost in the moment. In fact, I purchased HUM stocks based mainly on the news show that Humana was named treetop payer of pay claims. With the supportive publicity of Humana, I projected that its value would also increase in the market, making it an insurance of choice of the public. check to bearingal finance theories, people are overconfident, especially when they experience success. One main source of overconfidence pointed was that, most individuals consider themselves to be above average in wrong of skills. This behavior was apparent when even greenhorn investors experience exceptional growth in technology stocks of the 1990s. As the stocks continued to climb, investors began to ascribe much of their triumph to their ability to make shrewd investment decisions. Personally, I survey that my projections on the oil and mining industr ies were more precise than the foresight of other investors.I thus bought a total of 2000 IEO shares in two different occasions. My rationale was that, oil prices would rise, because it already dipped this year. The same level of content overconfidence applied to my AUY stock acquisition. In times of crisis, I reasoned, people would splurge on objects which bewilder economic value. In my mind, a woman with money will likely choose a Louis Vuitton pocketbook due to its resale value, than a Prada, even if the former were more expensive. Gold jewelry in addition, will have high demand, since it can be pawned. Thus, AUY, a gold mining firm was a reasonable buy.Humans have a tendency to seek or interpret information in a way that would confirm ones preconceptions. Conversely, information which contradict prior beliefs would be avoided. This type of discriminating thinking is called the confirmation bias. With the positive financial data I had gathered closely SWHC, I already had a mental picture of its performance. However, since it is mainly an arms company, an industry which I am not well aware of, and less publicized as compared to cleverness firms, I still had to substantiate my expectations. True enough, the earnings of SWHC grew consistently.The information I needed to verify my prior opinion was made available. I decided to purchase 1000 shares at two different occasions. I bought the first share at $5. 68 and the following(a) 500 at $5. 46. My decision turned out bad, since I decided to sell half of my SWHC shares long time later, at a lower price of $5. 29. This activity of mine is reflective of the loss aversion theory. It refers to the appetite of people to lean towards avoidance of losing a certain amount than gaining the same value. Losses are considered to have heavier emotional impact than do gains.Observing that the price of SWHC is quite going down, I disposed half my shares. I would rather sell at a marginal loss of . 27 per share tha n wait for the SWHC stock to plunge deeper than lose much more. However, I decided to keep half the shares. Why? Because I wanted to at least break even with my losses, just in case the price goes up, a behavior quite related to gamblers fallacy. According to the gamblers fallacy, investors liquidate a plaza after it has consistently gone up. It is also called the three-card monte Carlo fallacy.It rests on the belief that deviations from expected behavior which exit repeatedly will eventually be countered by opposite movements. For instance, a huge increase in stock price will eventually be corrected by the market, thus the difference should be exploited right away. This belief that high prices are temporary was illustrated in my trading of GERN shares. I bought 4000 shares from GERN at 6. 37 per share. Since the price to book ratio is 2. 02, the stock appeared to be highly valued by the market. But, the return on investment, and EBITDA of GERN is negative, indicating that it is not good for medium term investments.I wanted exactly to buy and sell the shares. To take advantage of its high market value, the 1000 shares of the 4000 GERN stocks were sold at $6. 61. In addition, the news regarding the probability of illusionist selling Sun Microsystems prompted me to sell my shares in JAVA. prophesiers move would mean that JAVA is not performing well. Thus, I had no desire to be part of the lowering of its market value When the news was announced that Palm and Dell lead the proficient race,I decided to purchase its stocks. In addition, Palm was about to launch its Pre, a handheld technological device.Palm was a company with huge potential growth, I surmised. I wanted to take advantage of the boom it will undergo once its new product floods the market. condition such information, I bought 4000 shares of the company. Apparently, I wasnt the only investor clamoring for PALMs shares. The market over reacted to the statement that Pre is predicted to be the next It thing. This kind of behavior is called overreaction. According to market efficiency, new information should be reflected almost immediately in a securitys price. For instance, positive reviews should raise a business share price.The new share price should not decline even if no fresh information has been released since. Reality, however, tends to challenge this concept. Usually, stock market participants predictably overreact to the most recent information, creating a larger-than-expected effect on the price. In addition, it also appears that this price surge erodes over time. The herding or bandwagon effect plainly states that investors move in a certain popular direction. They tend to mimic one another. The huge record of PALM shares traded enticed me to join in the trend.I had the same mind-set with my purchase of IEO shares. The number of subscribers has been increasing since December 2008. Thus, I decided to buy in. Furthermore, on June 1, 2008, IEO was at its 6 month hi gh at more than 900,000 shares. I decided to purchase an additional 1000 shares at $47. 55 . The same theory applied with my purchase of the AUY shares. It was considered hotstock due to its increasing volume in the market. Lastly, the news on CXs reorganization did not entice me to buy its stocks. It announced that it would restructure its top management effective May 15.But, I only decided to buy 1000 shares two weeks after. I did underreact to new information Expected Return I expected a 40% return for my portfolio. But, I was largely disappointed. The portfolio return was a mere 3%. Since the current risk free rate is at 5%, the asset return is 3% and the warning deviation is . 00334, the Sharpe ratio is -5988. 024 . Based on this calculation, I was not successful as an active portfolio manager. I would have done better if I bought an index fund. My trading performance was largely disappointing. I relied too much on fundamental analysis.I could have used technical data more, to incur larger profits. For starters, I depended heavily on P/E ratios. P/E ratios, it turned out are simply market forecasts, but not highly reliable. Also, I should have taken the risk with undervalued, high growth stocks. These start-up firms could have provided me with returns I could have also used the CAPM, where Re=Rf+(Rm-Rf)B. By comparing a stocks return relative to the market average and risk free rate, I would have a more precise gauge of whether the asset has high yields. Lastly, I wasnt able to name the market closely for I only traded at night.