Financial markets

Financial summations argon made up of securities, phone lines and derivatives. These atomic number 18 claims to the cash flow generated by real, tangible assets which are the lands, buildings and machineries we use. These pieces of paper are how citizens of passing developed countries impr all all over their wealth. Wealth generation involves risk, for no bank line activity is trustworthy to provide hands. Financial grocerys allow investors to participate in money-making ventures without being physically present in the project site.Most risk bighearted individuals prefer stocks, for it has the possible to yield very high dies, fleck unprogressive ones go for bonds which provides a steady, fixed income. In this activity, stock trading is the primary(prenominal) focus. Objectives Just like any investor, generating cash flow was the primary goal. The kernel of cash to be gained from trading should compensate the risk under engagen. The goal was to hand steady result. The expected was impart is 40%. After setting the indispensable return, a portfolio strategy was chosen. assets were then selected which would comprise the efficient portfolio provides the highest return for a given level of risk. Fundamental analysis was the method used to set up the stocks. Diversification was another tactic used to maximize return while spreading the risk. Construct a portfolio Portfolio construction was a tedious task. I had to weigh the risk and returns, and sometimes, to trust my gut feel. Stock termss, as studies dupe shown follow a random walk movement. The come up used was a line of longitude-down portfolio construction. A portfolio is basically a collection of investment assets.The persona of assets to be held was first subsided. It was then followed by security analysis to disrupt out the stocks deemed profitable. Diversification was one principle used in choosing the stocks. It but meant that equities from distinct industries were held in th e portfolio so that risk exposure was limited. Shares from the software application (RIMM, JAVA), gird(SWHC), pharmaceutical (GERN), computer ( address), insurance (HUM), health care(HMA), power (FL), SAM, metals and excavation(AUY, AA) ,oil and gas(IEO), index monetary fund(SWPIX), cement(CX),AXP Asset Analysis Fundamental analysis was primary(prenominal)ly used in the endings underinterpreted.This approach uses earnings and dividend prospects of the firm, expectations of future interest rates, and risk evaluation of the firm to determine proper stock sets. It relies on the companys financial health indicators. The stocks annual result rate, quarterly earnings records, and P/E (price-to-earnings) ratios were measured. Historical data was in like manner used. One such statistic is the EPS, or earnings-per- lot ranking. ornament stocks were bought since the firms return on investment was stated at 2470. 70%. Also, on the solar day that it was traded, it was lower priced.Sm ith and Weson, SWHC had a P/E ratio of 5. 50%, an roe of 19. 7%. Thus, a total 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, but was expensive, so further one thousand shares were bribed. Similarly, FPLs ROE was 14. 6%. Its P/E ratio was 12. 7%. Its EBITDA was 4. 47 B. The food market measure outs FPL shares highly. But, I found it unsmart to invest in highly surveyd stocks, because market perceptions fluctuate wildly. Thus, I scarcely acquired 700 shares of FPL.RIMM had an ROE of 30. 60%. Its P/E ratio was 50%. For me, RIMM shares were really pricely. In fact, it was has the highest cost per share in my portfolio. But I was attracted to its financial forecast. Furthermore, its 52 workweek high was at $148 so I found the $80 per share enticing. I thus bought 1000 shares from RIMM. HUM had an ROE of 19. 9% and a P/E ratio of 18. 00. It was quite a overpriced, so I only bought 1000 shares. HMA was the lowest priced stock in my portfolio. But, I headstrong to barter for it believing that demand for health care services depart increase in the near future.CX, compared with its competitor, Heidelberg cement had high earnings and historically displayed returns higher than the market intermediate. I bought 1000 shares. I as well as bought SWPIX, an index fund as a comparison for the return of my trading activities. Event survival of the fittest One of the most remarkable countersign was the launching of PALMs Pre. With the belief that the Pre go forth be hot in the market, just like Apples I-pod, I bought 4,000 shares from PALM. I deem that the future value of PALM will increase more than devil-fold once the Pre is introduced. The hype will push the price of its stock.Thereafter, I can sold my shares at a profit. In addition, the favouriteity of smart phones, or phones which serve more th an just lecture devices was forecasted to increase steadily in the near future. Aside from purchasing PALM stocks, I decided to buy shares from BlackBerrys maker, RIMM. News of the worldwide swine flu out cut in prompted me to purchase HMA shares. HMA , a healthcare provider would support more profits if the flu would become widespread. In addition, Citigroup upgraded HMA shares from hold to buy. Meanwhile, the news on the pending sale of JAVA drove me to transport my 1000 shares.Monster stocks which were identified two weeks in a row embarrassd AUY. The development urged me to buy 3000 shares of AUY. Behavioral Finance Even if nurture processing were perfect, it seemed that investors black market towards irrational decisions. In hindsight, these fashional biases largely affected how I inclose questions of risk versus return. Psychologists have found that individuals blame themselves more when an unconventional decision turned out poorly. Based on regret aversion theory, get a blue-chip stock portfolio that declines in value is not as fearsome as experiencing similar losses on an unknown start-up firm.losings on the blue-chip stock can be more easily attributed to grim part rather than bad decision. To avoid future remorse, I did not include stocks from start up firms. I considered little-well-known firms to be more risky. Even if potential gains can be realized from new firms receivable to their tremendous growth capacity and often undervalued stocks, I steered clear from such path. Instead, I trudged towards the essay and tested road and concentrated on well-established companies like Alcoa, Smith and Weson and Cemex, and popular companies like JAVA and RIMM.Availability bias is rooted on the concept that plurality base their decisions on the most recent and meaningful events. The more circulating(prenominal) or up-to-date the information, the more profound would be its effect on the investor. In the late 1990s, investors got caught up i n the internet mania, which caused them to disregard the risks. I suppose that tribe naturally get lost in the moment. In fact, I purchased HUM stocks based mainly on the news that Humana was named top payer of pay claims. With the positive publicity of Humana, I projected that its value would too increase in the market, making it an insurance of choice of the public.According to behavioral 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 terms of skills. This behavior was apparent when even greenhorn investors experienced exceptional growth in technology stocks of the 1990s. As the stocks continued to climb, investors began to judge much of their triumph to their ability to make shrewd investment decisions. Personally, I thought that my projections on the oil and mining industries were more accurate than the foreboding of other inve stors.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 self-satisfied overconfidence utilize to my AUY stock acquisition. In times of crisis, I reasoned, people would splurge on objects which have economic value. In my mind, a womanhood with money will likely choose a Louis Vuitton bag due to its resale value, than a Prada, even if the former were more expensive. Gold jewelry too, will have high demand, since it can be pawned. Thus, AUY, a gold mining firm was a reasonable buy.Humans have a tendency to search or interpret information in a way that would economize ones preconceptions. Conversely, information which contradict prior beliefs would be avoided. This type of selective sentiment is called the confirmation bias. With the positive financial data I had gathered active SWHC, I already had a mental picture of its performance. However, since it is mainl y an arms company, an industry which I am not well aware of, and less publicized as compared to energy firms, I still had to substantiate my expectations. unbowed enough, the earnings of SWHC grew consistently.The information I needed to verify my previous credence was made available. I decided to purchase 1000 shares at two different occasions. I bought the first share at $5. 68 and the undermentioned 500 at $5. 46. My decision turned out bad, since I decided to sell half of my SWHC shares days later, at a lower price of $5. 29. This action of mine is reflective of the loss aversion theory. It refers to the propensity 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 than clutch 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 position after it has consistently gone up. It is also called the Monte Carlo fallacy.It rests on the belief that deviations from expected behavior which occur repeatedly will eventually be countered by opposite movements. For instance, a vast increase in stock price will eventually be corrected by the market, thus the difference should be exploited by rights 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 honest for medium term investments.I wanted scarce 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 Oracle selling Sun Microsystems prompted me to sell my shares in JAVA. Oracles move would mean that JAVA is not playing well. Thus, I had no desire to be part of the lowering of its market value When the news was denote that Palm and Dell lead the scientific 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 suffer once its new product floods the market. Given 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 efficienc y, 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 quarrel 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 simply states that investors move in a certain popular direction. They tend to mimic one another. The huge volume of PALM shares traded enticed me to join in the trend.I had the same mindset with my purchase of IEO shares. The number of subscribers has been change magnitude since December 2008. Thus, I decided to buy in. Furthermore, on June 1, 2008, IEO was at its 6 month high at more than 900,000 shares. I decided to purchase an additional 1000 shares at $4 7. 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 ongoing risk quit rate is at 5%, the asset return is 3% and the standard 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 do better if I bought an index fund. My trading performance was largely disappointing. I relied too much on fundamental analysis.I could have used skillful data more, to incur larger profits. For starters, I depended heavily on P/E ratios. P/E ratios, i t 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 observe the market most for I only traded at night.