Supports and Resistance helps traders and investors to identify trends in the stock prices. 3. Supports and Resistance can be used to identify chart patterns as Head and Shoulders, Double top to determine stock trends more accurately. Conclusion When a stock price approaches an important support level, it is thought that at those levels buying pressure would be greater than selling pressure and a potential reversal can take place and traders can look to go long. On the other hand, when a stock price approaches an important resistance level, it is assumed that there will be more of selling pressure and a potential reversal can take place and traders can look to go short.
Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
An investor that believes the price of an underlying asset will decline or remain the same, can if his speculations are correct, realize income by selling a call option. The seller is said to be in a short call position. When the purchaser of an option has the right to sell the underlying asset the option is called a put option. With a put option you can insure an asset by locking in a selling price. If the price of the underlying falls you can exercise your option and sell it at the locked in price.
Bodie, Marcus, and Kane (2011) noted derivatives to be securities that derive value from some other asset, such as a stock, index, or foreign exchange currency. Options, futures, and swaps are derivatives whose payoffs are dependent upon the movement, up or down, of another asset. Derivative securities can be used by both hedgers and speculators to gain profits on or protect the value of an underlying asset. Through various options strategies, hedgers and speculators can ensure payoff amounts or insulate their portfolios from drastic losses. This paper will discuss the different types of derivative securities options, futures, and swaps.
Arbitrageurs. Hedgers These investors have a position (i.e., have bought stocks) in the underlying market but are worried about a potential loss arising out of a change in the asset price in the future. Hedgers participate in the derivatives mark... ... middle of paper ... ... , the lower the loss. Similarly, if S T is greater than F, the investor makes a profit and higher the S T, the higher is the profit. Pay-off diagram for a short position is the pay-off diagram for someone who has taken a short position on a futures contract on the stock at a price F. Short Futures Payoff for Short Futures Here, the investor makes profits if the spot price (ST) at expiry is below the futures contract price F, and makes losses if the opposite happens.
Contingent value rights (CVRs) are contractual options conferred to the buyers of a newly acquired or majorly restructured company to the sellers of that company. Under the CVR, acquirers are committed to paying additional cash or securities to the target company’s stockholders on the occurrence of specified payment triggers; generally, if the CVR issuer’s share price falls below a specific level (Chatterjee, 2003). There are two main types of CVRs, price-protected and event-driven. Price-protected CVRs guarantee the target company’s stockholders the value of acquirer shares issued as consideration in the transaction. Because the CVR essentially hedges against the downside price risk of the rights issuer, it can be seen as a mechanism that guarantees a minimum value for the payment package.
Also, the discount rate can be in nominal or real terms. Advantage: By taking into consideration the intrinsic value of the asset, investors are aware of the und... ... middle of paper ... ... for wrong judgment between overvalued and undervalued securities. Even if a security is found overvalued with relative valuation, it may still be undervalued compared to the market. This happens because relative valuation assumes that although markets are inefficient, errors in pricing can be identified and corrected more easily. However, this applies for the markets in the aggregate and not for individual securities.
The most common threat in stock investment is about losing money (little, 2011). Moreover, stocks are bought and sold in a specific place called stock Market which is conquered by traders who hypothesize on price of shares to make profit. Shares themselves are intangible assets and the annual profit paid out is called dividends. Moreover, the price of share depends on the supply and demand within the market. Stocks are valued by two types, first by cash flows, sales or fundamental earning analysis and second valuation is the amount an investor is willing to pay for stock and the other investor is willing to sell stock for a particular price or demand and supply of stocks (freefinancialadvice, 2002).
This could prevent market power manipulation such as the corner. When a trader buys large quantity of derivatives so taking large position, the trader is able to exert his power to move price as his power would be increased with his position.Thus this rule restricts position held by the trader as well as ability to manipulate. Furthermore, this prevention helps to make the futures market more efficient. (Gwilym and Ebrahim, 2013).On the other hand, Pirrong (2007) agreed to a certain extent but Pirrong argued that the speculative position limit had a negative effect on market efficiency as it ‘actually reduce welfare’. As speculators are restricted in quantity, hedgers are not able to transfer price risk to speculators and speculators are not able to absorb the price risk.
This form of analysis is used to predict which stock is valuable and has the potential to generate good returns. • It gives a fuller picture that is not just limited to the market but also covers the overall stock market situation. How is Fundamental analysis different from Technical analysis? Fundamental is used to evaluate the basic strength and weakness the economy, using the Top-Down and Bottom-Up approach. While Technical analysis decides on WHEN to buy a stock based on price fluctuations, Fundamental analysis determines WHAT to buy based on financial statements.