This is a report of an exercise practice. The student based on personal knowledge to purchase and sell the stocks in the British stock market. The fundamental stock analysis, technical stock analysis, and Efficient Market Hypothesis (EMH) act as the main evaluating machines in the essay. The stocks will be chosen after assessing the detail theories. These tools considered as the references to find a wining strategy. The conclusion summarised based on the results of this practice. In addition, the rate of return of FTSE100 is the benchmark to individual operation. In actual life, a wining strategy could not be existed. Realizing all uncontrollable and anticipated factors when making every transaction is important and necessary.
Introduction
The stupid behaviour was putting the money in the bank and just earning the interests. Thus, 'investment' was born to compensate people the time the funds were committed, the expected rate of inflation, and the uncertainty of the future payments. The investment types were various, including corporations in plant and equipment and investments by individuals in stocks, bonds, commodities, or real states (Strong, 2007). In this easy, the investor does transaction in UK stock market. This is simply a training practice. Its purpose is allowing people based on personal learning, such as basic environmental analysis tools, financial assessing methods, and the leverage machines (not use here), to make transaction in the British stock market and trying to find the winning strategy during the operating process.
Purchasing Records
The initial capital was £100,000 and people are not restricted to purchase just the constituents of the FTSE100. The data of FTSE100 here was as a benchmark to comparing with the operation. It would use stock portfolio to minimize the risk. Portfolio theory assumed all the investors were risk averse, meaning that, given a choice between two assets with equal rate of return, they would select the assets with the lower level of risk. Consequently, it does not put all eggs in one basket. It will mix the stocks type to minimize the risk.
Fundamental stock analysis
Fundamental analysts believed securities were prices according to fundamental economic data (Brown and Reilly, 2009). The stock of a wonderful firm with superior management and strong performance measured by sales and earnings growth can be priced so high that the intrinsic value of the stock is below its current market price and should not be acquired.
Hypothesis one: the good corporate financial performance would lead its stock arise
The stock choosing was the Barclays Plc (LSE: BARC.L Ticker: 134865 / ISIN: GB0031348658). Because of the financial crisis, the British bank industry suffered the unanticipated damage. Almost all banks bore the assets shrink problem, while the Barclay became the one enjoyed higher profit.
Table one: Barclays annual report 2010
Source: Barclays Annual Report 2010
The detail financial performance data could be seen in the Appendix Table one. The estimation of future growth rates was an art rather than a science. The strong financial performance of Barclay group showed their effective and efficiency guiding strategy and daily process (see Table two).
In addition, the well external economic effects also advanced the stock price. Since US Credit Crunch swept all around the world, the UK economy dropped down to its weakest growth period in 15 years in 2008 (BBC, 2008). However, the economists are confident for the recovery process and claim the influences of crisis would reduce and disappear (BBC, 2010). During the economic recession period, saving becomes the prior choice for people. The research of OFT (2008) shows the total market has at least 64 million accounts and earned £10.3 billion in revenue. Furthermore, after the UK government has provided nearly £1 trillion of support to the banking sector, the BOE will pump a further £200bn into the economy through QE because of the financial crisis (Anderson, 2010). These all could be the reason why the stock price of Barclay arising.
Table two: Key figure of Barclay Plc
Source: Yahoo Finance 2011
Table three: Stock of Barclays purchasing record on Oct 27th 2010
Purchase cost (-)
£ 2.75* 20,000= £ 55,000
275 pence per share, purchasing unit was 20,000
Stamp Duty (-)
£ 55,000* 0.005 = £ 275
£ 55,000 times 0.005 (Note: 0.005 = 0.5%). Payment only on purchasing.
Brokers commission (-)
£7.50 + £7.50 = £15.0
It is £7.50 whatever the size of the trade. Payment on both purchasing and selling.
Total cost
£55, 290
Technical stock analysis
Technical analysts think supply and demand factors play the most important role. Value came from utility, while utility came from a variety of sources. Charts were am important technical analysis tool as it was to predict changes in supply and demand. Market participants tried to anticipate events rather than merely reacted to them (Brown & Reilly, 2009). The stock market seldom waits for things to completely unfold. Market participants were continually anticipating future events, and frequently err in their forecasts.
Hypothesis two: through current supply and demand data forecasting potential one is useful
The stock choosing here was the Tesco (LSE: TSCO.L Ticker: 884709 / ISIN: GB0008847096). Tesco as the biggest commodities retailer in UK, it did not have seasonal effect, so it could just use simple trend liner model to estimate. The relative coefficients were the consumer's earning, total flowing capital in British stock market and CPI rate. Here, the result was based on the SPSS software.
Table four: the stock price changing of Tesco
Source: Yahoo Finance 2011
The financial crisis enhanced unemployed rate and the high CPI made citizen. And lower the interest rate to stimulate the consumption and investment lead more capital flowed into the stock market. The reason was when interest rates fall, funds needed for capital expansion become less costly or unavailable, and so it will provoke the investment and consumption (David, 2007) ( see Appendix table two: interest rate change). The SPSS results stated the potential increase of Tesco stock price.
Furthermore, the basic strategy of Tesco was lowest price around people, which was suitable to the current regression economic situation. The demand of such expendable and commodities stocks was rising as they acted as Defensive stocks. Defensive stocks referred the stocks with low or negative systematic risk (a small positive or negative beta) as their returns were unlikely to be harmed significantly in a bear market.
Table five: Stock of Tesco purchasing record on Oct 27th 2010
Purchase cost (-)
£ 4.289 * 10,000 = £42,890
428.90 pence per share, purchasing unit was 10,000
Stamp Duty (-)
£42,890* 0.005 = £ 214.45
£42,890 times 0.005 (Note: 0.005 = 0.5%). Payment only on purchasing.
Brokers commission (-)
£7.50 + £7.50 = £15.0
It is £7.50 whatever the size of the trade. Payment on both purchasing and selling.
Total cost
£43,119.45
Efficient market hypothesis
This hypothesis was the single most important paradigm in finance, proposing that market prices are in fact fair because of the large number of market participants. Additionally, the term efficiency could refer to either type or degree. Before conducting any research, formally decide what kind of information will be useful. The market usually divided into weak- form, semi strong - form and strong - form these three ones (Brown & Reilly, 2009).
Hypothesis three: the British stock market was the strong -form market
The strong - form EMH contended stock prices fully reflect all information, both public and private. In other words, the stock price must adjust to new public information but also that no group had access to private information. Actually, the British stock market was not so perfect, it just stated at semi strong - form even weak- form level.
Looking at the total FTSE100 figures, it had obvious January and weekend effects.
January Effect
Table six: the FTSE100 figure in 6 months
Source: Yahoo Finance 2011
Number studies showed stock returns were inexplicably high in January and the small firms did better than large firms in January (Strong, 2007). From the table, the FTSE100 did well in January and fall in March. The explanation might stocks tend to trade near the bid price at the end of the year and toward the ask price at the beginning of the year. Another suggestion might the superior January performance came from tax loss trading late in December.
Based on this theory, it sold the stock of Barclays at the end of January and repurchased the stock when the stock price was under its selling price. The detail trading records could be found in Appendix table three. The highest price did not appear in January, but from the end of 2010 to the beginning of 2011, the stock price did show the up trend (see table five).
Table seven: The chart of Barclays stock price in 6 months
Source: Yahoo Finance 2011
Weekend Effect
Table eight: The FTSE100 figure in one week
Source: Yahoo Finance 2011
The weekend effect referred the observed phenomenon that security price changes tend to be negative on Mondays and positive on the other days of the week, and Friday being the best of all. The table showed a general up trend all the week and exclude Monday, almost others increased at final. The reason could be people were upbeat on Friday, and this attitude translated into stock market optimises (Strong, 2007).
Based on this effect, it operated the Tesco stock in the nearest two weeks like this: selling in the Friday and repurchasing in next Monday. Obviously, the weekend effect in Tesco stock showed clear in the latest month. The investor could earn the money when the profit exceeded the admin costs. It was to stuff if did in every week during this essay, so it just chosen one month to practice. The detail trading record listed on the Appendix table three.
Table nine: The Tesco stock price in one month
Generally, the stock market of developed countries usually semi strong - form or weak-form market. The internal information or personal controllable activities could influence the price of the stock. The reflecting of people to the information did not same.
Comparing and Contrasting the Earning
The return on the FTSE100 = (End value of the index - value of the index on the day started trading)/Value of the index the day started trading
The choosing operating period started from 27th October 2010 to 26th April 2011, lasting 6 months. The initial FTSE100 opened at the figure 5,707.30 27th October morning and in 26th April, it stated at 6,069.40 when the stock market closing. So the return on the FTSE100 equal (6,069.40 - 5,707.30) / 5,707.30, so the answer was 6.34%.
Individual operating profit = (the wealth at the end of trading - £100,000)/£100,000 ( here £100,000 was the initial capital)
The choosing stocks were Barclay and Tesco. At the end of trading, the capital at the end of trading equal £104,078 (including Remain capital). So the individual operating profit equal (£-104,078 - £100,000) /£100,000 equal 4.078%.
Conclusion
The individual operation did not beat the market. The rate of return was lower than FTSE100 average performance. During the practice, it showed there was no a general wining strategy. Three hypothesises made in the essay were not totally correct. The initial reason was it just considered single factor when purchasing a stock, all effects were connected and interacted. Because the market was not efficiency, so the valuable information could earn money as the information did not spread perfect freedom. The valuable information might influence the supply and demand relation to affect the final stock price. The January and weekend effects was obviously. However, not all stock showed these feature. The stock of Tesco lost the money was it did act the January effect. The corporate performance was the indicators of a company's stock, while the external environment also was powerful. It was better to combine all useful tools together to ensure the movements of the stocks. This was the best way of investment.
References
Anderson, R. (2010) UK bank lending the key to economic recovery. Available at: http://news.bbc.co.uk/1/hi/business/8571999.stm (Accessed: 15th April 2011)
Barclays (2009) Investor presentation autumn 2009. Available at: http://group.barclays.com/Investor-Relations/Financial-results-and-publications/Annual-Reports (Accessed: 29th April 2011)
BBC (2008) The credit crush and UK economic. Available at: http://news.bbc.co.uk/1/hi/business/7212545.stm on 28 January 2008 (Accessed: 15th April 2011)
BBC (2010) IMF proposes two big new bank taxes to fund bail-outs. Available at: http://news.bbc.co.uk/1/hi/business/8633455.stm (Accessed: 15th April 2011)
Brown, K. & Reilly, F. (2009) Analysis of investment and management of portfolio. Beijing: South-Western.
David, F. (2007) Strategic management: concepts and cases. Upper Saddle River, N.J.: Pearson and Prentice Hall.
Office for National Statistics (2010) National statistics. Available at: http://www.statistics.gov.uk/default.asp (Accessed: 16th April 2011)
Strong, R. (2007) Management for practical investment. Mason: Thomson Higher Education.
Yahoo Finance (2011) Yahoo UK and Ireland finance. Available at: http://uk.finance.yahoo.com/ (Accessed: 27th April 2011)
