Meaning of security
One profitable trading strategy especially for portfolio managers is top-down stock strategy wherein the economic and market environments are analyzed before making a decision. Bottom-up approach emphasizes financial analysis of a firm’s data including comparison of stock performance against its competitors. (Portfolio managers)
There is also a technique to forecasts stock price movements by using previous charts to identify trends and there signals of actually happening including their impact. Hedging and arbitraging strategies are also used to aid in analysis. (Technical traders)
Another is the strategy that aims to determine the best price by having knowledge of trading partners and relative prices to identify who is liquid in the market and exploit such identification. (Sales traders)
An increase in expected dollar benefits with unchanged risk implies increased stock price.
An increase in expected dollar benefits with lower risk implies significant increased stock price.
More…. P4-
8. Highest-ranked common stocks are those that have highest expected rate of return for the risk or the lowest risk for the expected rate of return. The common action of portfolio holders is to sell the lower-ranked for the higher-ranked stocks.
9. Investors are interested in EPS.
Available capital is scarce and so the firm should compete with it.
Corporate earnings have positive relationship with stock price.
Expected earnings in common stock should exceed the interest rate by a government bond. The price of money is the interest rate. When there is great demand for money, interest rate is pressured to move upwards. When the economy is in flourished, the demand for money increases. However, a big economy like the United States could simply borrow or mint without paying-out the effects of interest rate. As a result, a yield in their bond will decrease the value of stocks.
Inflation (either increase in demand or raw materials/ producer view) can also has negative effect on stock price.
56. Common stocks are viewed as inflation hedgers as firms can easily adjust the cost of their goods to follow inflation of raw materials.
The economic/ stock cycle says it’s all about investment opportunities and profitable trading strategy.
Ideally, common stocks are bought at their low, switched at their high to money market securities or short positions, and then switched into long term U.S. – ACTIVE
PASSIVE – buy/ hold strategy whatever the cycle is.
63 Common stock prices have a long-term bias to rise if the underlying economy continues to grow, accompanied by rising expected earnings and stable interest rates.
A diversified portfolio of common stocks
Proofs and Evidences
Is the expected earnings in common stock of St. George exceeds the interest rate of a Government Bond?
Is there possible inflationary events?
The fundamental and technical indicators of Australian market show a favorable environment for investment and there is not yet potential economic bubble facing the stock market. Fundamental approach on this analysis has explained that price and earning ratio is stable and therefore no indication that the strong market is the result of significant speculation. However, there are economic areas that posted risks like resource sector particularly mining that shared the large bulk of market gains despite downsizing regimes. This may suggest that the market might overestimate cost-cutting actions of such firms towards efficiency and underestimation of loosing opportunities. In addition, the surging oil prices are always standing-by to attack strategies of firms not only the manufacturing sector but also consumer goods since freight for the finished products could pressure price increases.
In a technical perspective, the market is in a bullish channel (insert chart) that suggested another cycle unfolding after reaching the maximum range. This is solidified by the chart’s performance above the critical point of 4,500. However, in similar footing with fundamental indicator, technical estimates show that the market is volatile due to abrupt surge of trading despite its ambiguity of future direction. In effect, there is a need to put considerable effort for portfolio investors on financial data of their firms while classifying them as resource industry- or oil industry-related firm. There is also a need to determine the future chart performance of the market to guide data of economic conditions and market’s updated investment decisions.
In its Interim Report 2006, St. George posted 11.5% increase in profits before significant items and in accordance to accounting standards while after significant items resulted to 0.3% increase to this percentage. Dividend also rose to 10.4%, earnings per share (EPS) increased by 9% (excluding hedging and derivatives), return on equity up to 23% from 21.8% and expense to income down to 44.1% from 46.8%. By this data, it can be said that the firm has strong earnings potential and continues to be going-concern to its business reflected by its cost-effectiveness in cutting down expenses or in a different approach providing superior products/ services at low costs. Further, shareholder funds continue to gain as shown by EPS which means that investments in the firm have its way of increasing its value in the future or simply put an attractive share.
The firm is also unattached to risky industry areas mentioned. This means that fluctuations in these firms stock price due to external events will not directly affect the share of firm. But, an exemption should be applied when excessive speculation (which was explained as not yet in the offing) emerges since the positive performance of St George would not be clear rather bias from speculators point-of-view. Of course, the market will react to such speculations resulting to unrealized gains of St. George stocks. Due to this, investors should be cautious on forecasts and future movements of the markets to anticipate the emergence of too much speculation. This idea will also support the needed information from markets and economy.
Credit:ivythesis.typepad.com
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