Investment Project

1 Investment Project Name Course Instructor Date 2 Investing and Investment Strategies Investing is a pivotal trigger for accomplishing financial goals, accumulating wealth, and underpinning future financial security. Whether the goal is building up retirement savings, paying for education, or generating extra income, having a good knowledge base on investments is crucial to doing so successfully. Knowing various investment strategies and selecting the right investment tools to make profits is critical. Motivation for Investing Reasons for investing frequently involve the wish to secure financial freedom, increase wealth, and reach long-term financial goals. It is a dynamic approach that entails making smart moves to secure better investment deals in different financial markets. Investment studies give people enough “equipment” to judge risks, seek out opportunities, and earn the highest possible returns. Key Steps in Investment Decision-making Choosing where to place investments involves a lot of important steps. An in-depth study of the available investment choices is a prerequisite for making appropriate decisions. Evaluating risk tolerance, as well as investment goals, will align investment strategies with individual financial goals. Portfolio diversification via asset allocation addresses the risk factor and increases the investment portfolio’s overall performance (Maharani & Saputra, 2021). Tracking economic indicators, geopolitical developments, and market trends generates the necessary inputs for quick investment decision-making. Frequent monitoring with an appropriate adjustment of investment strategies after observing their performance and market status is very important. It helps to cope with the changing investment environment. Calculation Example: Diversification 3 Diversification allows for the distribution of risk across classes of assets, which is a key point of investing theory. The measurement of portfolio diversification may use a correlation coefficient. The formula for the correlation coefficient (ρ) between two assets X and Y is: ρ= 𝑐𝑜𝑣(𝑋,𝑌) 𝜎𝑋𝜎𝑌 Where: • cov(X, Y) is the covariance between the returns of assets X and Y. • σX is the standard deviation of the returns of asset X. • σY is the standard deviation of the returns of asset Y. Investors can measure how exactly the portfolio assets’ returns are related by calculating the correlation coefficient. Consequently, a correlation coefficient very close to 1 denotes a high positive association, and -1 represents a strong negative relationship. Coefficients near zero indicate a low correlation. Diversifying by acquiring assets that have low or negative correlations can reduce portfolio risk by offsetting losses with gains. This formula illustrates how diversification plays a role in risk management and brings about positive returns. Research Method For effective investment decision-making, I have analyzed secondary data such as books, journals, and websites. In particular, I will explore the S&P Global Capital IQ website to gather qualitative and quantitative data necessary for effective investments. The website contains vital data on public company ownership, transactions, estimates, as well as financials. The website also data analysis for different types of organizations (Capital IQ Course: Dashboard & Features, 2024). I have summarized the gathered information and data for effective analysis. The project is divided into three major components, with each requiring one week for completion. 4 Investment Strategies The optimal investment strategy includes diversification, a long-term horizon, value investing, income investing, and passive investing. Diversification distributes investments across various asset classes and protects portfolio performance from market fluctuations. The long-term perspective aims at realizing financial goals over several years, in which compound interest is a powerful tool to get wealthy gradually (Meira et al., 2022). Value investing is the process of identifying undervalued assets with growth potential and seeking out market inefficiencies to create value. The income investing strategy seeks to generate income from dividends or interest rate payments, resulting in a stable cash flow stream. Passive investing utilizes index funds or exchange-traded funds (ETFs) to track market performance, offering cost-effective exposure to broad market indices. Favorite Investment Vehicle: Index Funds The popularity of index funds is because they are easy to understand, are diversified, and are inexpensive. This money is accumulated by multiple investors in a pool, and through it, they purchase a portfolio of securities that try to approximate a specific market index, such as the S&P 500. When an investor buys shares of an index fund, what he gets are the positions in all the companies in the index. As such, the investor gets a bag of goodies for market-wide performance (Capital IQ Course: Companies Screening | Part 4, 2021). Index funds are characterized by passive management, lower expense ratios, and tax efficiency. Therefore, they are convenient choices for individuals who want to achieve capital market returns without making much effort and in an inexpensive way. Characteristics of Securities and Security Markets 5 Securities are of different types, like stocks, bonds, mutual funds, ETFs, and derivatives, each consisting of unique features such as time horizon, type of ownership, liquidity, and the means of conducting the trade. What is a stock? It is the bourse-traded title of ownership in a company, and stock exchanges allow people to benefit through capital appreciation and dividends. Bonds, recognized as debt products, offer investors a yield through periodic interest payments, which can be either fixed or floating, with either a short- or long-term outcome. Mutual funds, as well as ETFs, offer professionally managed, diversified portfolios that address different objectives and arising risks. Derivatives, mainly options and futures, are likewise marketable products for investors with the aim of hedging against risks and speculating, but they have complicated characteristics and risks. Advantages and Disadvantages of Different Securities All types of security imply certain advantages and disadvantages. A stock allows you to receive both capital appreciation and dividends. The downside is that it increases volatility and risk. Bonds’ fixed-income payments make them less volatile and provide capital preservation. However, when it comes to yield, stocks outperform bonds. Diversification and professional management are options that any mutual fund or ETF investor would prioritize, but they may incur management fees and underperform market benchmarks. Derivatives can be beneficial because they help managers hedge against risk, but they can be complicated and result in heavy losses if not well understood. Understanding the advantages and disadvantages of the different financial securities is critical when it comes to creating a diversified investment portfolio that is in line with the years of investment and the investor’s tolerance level for risk. Security Valuation Methods and Ratios 6 While security valuation methods and ratios shed light on the intrinsic value of securities, investors have more grounds to be informed when making good investments. I mention two of the most common examples: the P/E ratio and the discounted cash flow analysis. The P/E ratio compares a company’s current stock price to its earnings per share (EPS) and is calculated as: 𝑀𝑎𝑟𝑘𝑒𝑡𝑃𝑟𝑖𝑐𝑒𝑝𝑒𝑟𝑆ℎ𝑎𝑟𝑒 P/ERatio = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠𝑝𝑒𝑟𝑆ℎ𝑎𝑟𝑒(𝐸𝑃𝑆) A low price-to-earnings ratio will probably indicate an undervalued stock, while a high one might be a sign of overvaluation. While the P/E ratio is a helpful indicator of a stock’s valuation, it does not take into account future growth or other factors that may impact stock valuation. Thus, DCF analysis uses the discount rate to take the current value of future cash flows and put it in the present time. This method of valuing firms involves applying future cash flows and choosing an appropriate discount rate, which makes it susceptible to assumptions and prone to estimation errors. The P/E ratio is an inherently imprecise measure due to its inability to account for variations in accounting practices, equity structure, and growth potential among firms. Additionally, the P/E ratio might be unsuitable when comparing companies in different industries because of the discrepancies in growth rates and risk profiles. The DCF analysis method’s limitations may include its dependence on accurate cash flow predictions, high sensitivity to shifts in discount rates, and high probability of forecasting mistakes. Companies with erratic cash flow patterns or drastic changes in their business environments also find it challenging to apply a DFC analysis. In-depth Explanation of Security Strategies A continuous analysis and decision-making process that aims to maximize profits and control risks in equal measure forms the foundation of deep security strategies. The analysts play 7 an important role in information gathering, financial data analysis, market analysis, and spearheading investment decisions using the gathered information. The analysts consider a variety of factors, including company characteristics, industry dynamics, macroeconomics, and market sentiment, to identify investment opportunities and develop strategies in line with the investment goals and risk preferences of the client. They do the qualitative evaluation by assessing factors like competitive advantage and management quality with quantitative analysis that involves financial statement analysis, valuation modeling, and risk assessment (Capital IQ Course: Companies Financials & Data | Part 2, 2021). Analysts additionally conduct performance evaluations, and risk/opportunity discovery, and adjust the asset allocation appropriately. They supply investors with invaluable information and recommendations that smooth out the distortions caused by market volatility and enable them to attain financial goals. Market Efficiency and Levels Market efficiency refers to how well asset prices reflect available information and allow investors to make informed and unbiased decisions without taking advantage of any arbitrage opportunities. The Efficient Market Hypothesis (EMH) distinguishes between three levels of market efficiency: anemic, mild, and virulent. According to the weak form-efficient approach, current stock prices reflect all past price and volume data, so technical analysis cannot predict future price movements (Chang et al., 2023). Semi-strong form efficiency says that stock prices take into account all publicly available information about both fundamental data and market news. This means that neither technical nor fundamental analysis can consistently beat the market. In the realm of strong-form efficiency, the notion is that stock prices convey all the public and private information; hence, neither the analysis nor the information advantage helps the investors gain an edge over the other investors in the market. 8 Technical Analysis in Investment Determination Technical analysis analyzes previous price data and trading volume to predict future price movements and identify trading opportunities. Some widely used technical analysis techniques include moving averages, the relative strength indicator (RSI), and support and resistance. Moving averages filter price information to reveal trends and trading signals, with a cross-over indicating a probable sell or buy. The RSI (relative strength index) indicates the speed and extent of price changes resulting in overbought or oversold conditions and provides direction to a trader on how to find entry or exit points. Against the use of technical analysis, many critics have put forward several arguments, such as the sensitivity of historical data, the subjectivity of chart patterns, and the susceptibility to fake trading signals during times of market volatility. Selection of Securities Utilizing Capital IQ, two securities selected for investment are Apple Inc. (AAPL) and Johnson & Johnson (JNJ). Apple Inc. is one of the companies that is a good investment because of the strong financial results it has, its diversified kinds of products, and the fact that it is very well known and recognized as a strong brand. Quantitatively, Apple has a since-long reputation for being at the forefront of technological innovations, hard-core loyal customers lacking a competent alternative, and an aim to capture the global markets in particular, indicating the organization’s strength and strategic opportunities. To begin with, Apple has quite impressive revenue growth, which is combined with a healthy profit margin as well as strong cash flow, making it resilient and, in turn, a profitable venture. Johnson & Johnson, a multinational and therefore diversified company involved in pharmaceuticals, medical devices, and consumer goods, can be a good option for investment. It 9 offers stable and defensive characteristics. In a quantitative outlook, Johnson & Johnson is a company rich in key product areas with an innovative portfolio and a big commitment to research and development; therefore, it is a good company to bet on. Quantitatively, this is proven by the company’s regular earnings growth, firm balance sheet, and constant dividend payments, which make the investment choice for income-based investors quite dependable and suitable for longterm capital appreciation. Business Cycle It is important to consider the business cycle when making investment decisions. The business cycle, also known as the economic cycle, depicts a cycle of fluctuations in the production of goods and services, over time. It explains the expansions and contractions in the gross domestic product over time. A business cycle has four stages-expansion, peak, contraction, and trough. Economic expansions are associated with an increase in production, a decrease in unemployment levels, an increase in wages, and an increase in consumer spending. Economic contractions are associated with a decrease in output, an increase in unemployment, a decrease in wages, and a decrease in consumer spending. At the peak phase, the real gross domestic product stops increasing and starts declining. At the trough phase, the real gross domestic product stops declining and begins increasing. The economic cycle can go through extreme stages, namely, boom, recession, and depression. A boom is characterized by strong economic expansion where several organizations are operating at full capacity. The output and income levels are very high while the unemployment levels are very low. A recession is a period where the unemployment rate rises and the production levels have fallen for a period of time. Depression is characterized by high unemployment levels and a significant contraction in the economy (Male, 2011). Relationship between the Stock Market and the Economy 10 The general assumption that finance is a critical component of economic growth has been enhanced by the growing relevance of financial markets across the globe. Thus, many economies have focused on expanding their stock markets and economic growth. The stock market is an important economic pillar with a significant effect on the development of industry as well as business. Thus, the stock market has a significant impact on the economic performance of a country. For this reason, business organizations, central banks, and business experts closely assess the action of stock markets. However, the stock market and the economy do not have a reliable relationship. Due to market volatility, stock prices can fall during good economic times and decline during poor economic times. Hence, it is reasonable to posit that stock markets do not often accurately reflect the economic status of a country because stock markets are volatile to events that pose little long-term impacts (Goel, 2023). Yield Curve The yield curve is another important determinant of investment decision-making. It is a graphical representation of a bond’s yield to maturity visa vie the bond’s interest rate. It indicates the yield that bondholders expect for lending out their money for a given period of time. Fixedincome analysts can use yield curves to forecast economic performance. Investors can use the shape of yield curves to determine the future direction of interest rates. For instance, an upwardsloping yield curve implies that long-term securities have higher yields while an inverted yield curve signifies that short-term securities have higher yields. Investors can also use the yield curve to determine the tradeoff between bond yield and maturity. For instance, investors should invest in longer-term securities if the yield curve is sloping upwards, which implies more risk (Rebonato, 2018). Desired Economic Characteristics 11 Despite the unreliable relationship between the stock market and economic performance, the expansion and peak phases of the business cycle are ideal for investing in Apple and Johnson and Johnson’s stock. Typically, stocks perform poorly during the contraction and trough phases and excellently during the peak and expansion phases of the business cycle. Corporate earnings and stock prices decrease during the contraction and trough stages and vice versa (Adam & Merkel, 2019). For more than six decades, stocks have recorded the highest performance during the expansion phase of the business cycle, averaging a return of at least 20 percent per year. Annual stock performance during the mid-cycle of the economic cycle has averaged nearly 14 percent per year. Historically, the stock market has averaged a return of 5 percent per year while the recession phase has averaged an annual return of -15 percent (Fidelity Investments, 2023). Economic and Industry Factors Influencing Investment Decision-Making The decision to invest in Apple Inc. and Johnson and Johnson is also founded on the organizations’ strong performance over the last five years. Apple Incorporation’s earnings per share for the fiscal years 2019, 2020, 2021, 2022, and 2023 were 0.3%, 10.4%, 71.0%, 8.9%, and 0.3%, respectively. Johnson and Johnson Incorporation’s earnings per share for 2019, 2020, 2021, 2022, and 2023 were 0.4%, -2.1%, 20.9%, -7.8%, and -15.3%, respectively (Capital IQ Course: Companies Financials & Data, 2024). However, earnings per share can be a misleading indicator of investment decision-making. More specifically, it does not reveal an organization’s earnings per share growth prospects. In particular, an organization can manipulate its earnings to meet its earning expectations (Killian, Snyman van Deventer, 2014). From the industrial perspective, Apple is the leading organization in the smartphone industry, controlling at least 20.1 percent of the total market share (The Economic Times, 2024). The global smartphone market is also expected to grow by at least 3.53 percent between 2024 and 2028, resulting in a 12 market volume of nearly $0.5 trillion in 2028 (Statista, 2024). Johnson and Johnson’s healthrelated industry is expected to invest in digital technologies, which will not only shape healthcare delivery (JPMorgan, 2022) but also the financial performance of organizations such as Johnson and Johnson. Technology can optimize business processes, increase market share, and uncover new sources of revenue, resulting in increased profitability as well as business growth (Gupta, Raychaudhuri, & Haldar, 2018). 13 References Adam, K., & Merkel, S. (2019). Stock price cycles and business cycles. SSRN 3455237. https://dx.doi.org/10.2139/ssrn.3455237 Capital IQ Course: Companies Financials & Data | Part 1. (2021). https://www.youtube.com/watch?v=oZNR5T8Boyk Capital IQ Course: Companies Financials & Data | Part 2. (2021). Www.youtube.com. https://www.youtube.com/watch?v=Uz2h-b-lmCU Capital IQ Course: Companies Screening | Part 4. (2021). Www.youtube.com. https://www.youtube.com/watch?v=IWIuh2uoem8 Chang, H.-W., Chiang, Y.-C., Ke, M.-C., Wang, M.-H., & Nguyen, T.-T. (2023). Market efficiency of Asian stock markets during the financial crisis and non-financial crisis periods. International Review of Economics & Finance, 83, 312–329. https://doi.org/10.1016/j.iref.2022.08.020 Fidelity Investments. (2023). How to invest using the business cycle. Fidelity Investments. https://www.fidelity.com/viewpoints/investing-ideas/sector-investing-businesscycle#:~:text=Investments%20in%20the%20mid%2Dcycle,have%20also%20delivered% 20strong%20returns. Goel, A. (2023 January, 10). The relationship between stock market &economy. Economic Times. https://economictimes.indiatimes.com/markets/stocks/news/the-relationshipbetween-economy-stock-market/articleshow/96878611.cms?from=mdr Gupta, S. D., Raychaudhuri, A., & Haldar, S. K. (2018). Information technology and profitability: evidence from Indian banking sector. International Journal of Emerging Markets, 13(5), 1070-1087. 14 JP Morgan. (2022). Healthcare industry outlook. https://www.jpmorgan.com/insights/banking/commercial-banking/healthcare-industrytrends-outlook Kharchuk, T. V., Kredisov, V. A., Melnik, V. V., & Purdenko, O. A. (2020). Improved methods of evaluation of financial security for companies in Ukraine. Financial and Credit Activity Problems of Theory and Practice, 1(32), 213–222. https://doi.org/10.18371/fcaptp.v1i32.200300 Kilian, C. G., & Snyman van Deventer, E. (2014). The legal implications of the economic realities of artificially manipulating a decrease/increase of earnings per share-if any. Potchefstroom Electronic Law Journal, 17(6), 2635-2665. Maharani, A., & Saputra, F. (2021). Relationship of Investment Motivation, Investment Knowledge, and Minimum Capital to Investment Interest. Journal of Law, Politic and Humanities, 2(1), 23–32. https://dinastires.org/JLPH/article/view/84 Male, R. (2011). Developing country business cycles: Characterizing the cycle. Emerging Markets Finance and Trade, 47(2), 20-39. Meira, E., Cunha, F. A. F. de S., Orsato, R. J., Miralles‐Quirós, M. M., & Miralles‐Quirós, J. L. (2022). The added value and differentiation among ESG investment strategies in stock markets. Business Strategy and the Environment. https://doi.org/10.1002/bse.3221 Rebonato, R. (2018). Bond pricing and yield curve modeling: A structural approach. Cambridge University Press. Statista. (2024). Smartphones-worldwide. https://www.statista.com/outlook/cmo/consumerelectronics/telephony/smartphones/worldwide 15 The Economic Times. (2024 January, 16). Apple surpasses Samsung to become leader of global smartphone market in 2023. The Economic Times. https://economictimes.indiatimes.com/industry/cons-products/electronics/applesurpasses-samsung-to-become-leader-of-global-smartphone-market-in2023/articleshow/106903656.cms

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