Summary of a Stock Market - Essay Example

The essay concludes by indicating with clear support whether the investment made would be profitable or not, and if profitable, the value is provided based on the stock’s current price.

            Either the stock market can be a physical or a virtual platform created to facilitate buying and selling of securities between the willing and able buyers and sellers. Because of their function, they have been considered financial institutions that provide facilities and regulations required to peacefully conduct transactions in a lawful convenient way. The exchanging the stock market is facilitated by the existence of individuals called brokers. Their chief function is to facilitate the exchange of stocks and other securities by providing a link between buyers and sellers. They act in place of members of the public who buy and sell shares of the quoted companies. The whole amount ($ 1 million) should be invested in ordinary shares. The company selected is Dow Jones. It is a listed public limited company, which means that it is supported by the law to issue initial public offerings. The company is based in the United States and is traded on New York Stock Exchange (Farmer 1-4). According to NYSE history, Dow Jones is one of the top-performing companies and as a result, its share performance has been and is still been used in determining the New York Stock Market index. A stock market index is a numerical figure that measures relative changes in the values or prices of shares. It has been evident that when stock prices are rising, the stock market index will rise and vice versa. The New York Stock Market index has been rising and it has been presenting stable values. This information is therefore an indicator of good investment opportunities in the portfolios that comprises the New York Stock Exchange (Farmer 1-4). One of the criteria used to measure the performance of a company is whether its share price performance is used to determine the market index. Since Dow Jones’ records are used for the same purpose, it experiences a good economic performance. The company’s financial records for the year 2012 indicate that it had earnings per share (EPS) of 6.81 with a price-earnings ratio of 10.44. Another indicator that the company experiences good performance is the fact that it pays cash dividends. For most companies, the cash dividend payment is not economical, instead, they offer more shares to shareholders and use the net profit figures as retained earnings. Payment of cash dividends, for low-performing companies, destabilizes their economic performance. Dow Jones, its financial performance has been stable regardless of its current dividend policy. The company records a beta of 1.40 %. Beta is used to measure the variance between market return and the expected return of a security. For instance, a beta of 1% indicates that if the excess return of the market portfolio is 1% larger than expected, then the security’s excess return is likely to be 1% larger than expected. Securities with beta values of less than 1% are defensive while those with beta values larger than 1% are aggressive. The share prices of defensive securities tend to rise at a lower rate than that of the market and tend to fall at a slower rate. Dow Jones is defensive security because its beta is larger than 1%. It is therefore safe to invest in the company since its share prices are less responsive to that of the market. The following factors could influence share prices: profit records of a company, growth prospects of the industry, and general economic conditions. In the year 2012, the top-performing industry in the United States was financial services followed by consumer services and industries. This is a clear indication that shares of Dow Jones are performing well too (Farmer 1-4).

            The whole amount of $ 1 million is to be invested in Dow Jones. The current share price of the company is $ 71.10 per share. As a result, the investor would have ($1000000/71.10) = 14064.69 shares. To ensure profitability, the company’s shares should be bought at the bottom of the market (when M.P.S. is lowest) and be sold at the top of the market (when M.P.S. is highest) (Farmer 1-4). This strategy would ensure a profitable investment. Currently, using the company’s share price, the investor is expected to hold 14064.69 shares. On a speculative note, after a while, say one year, the company’s share prices increase to $ 72.4 due to the company’s growth, if the investor sells his shares he would obtain a profit of ($ 1018283.556-1000000)= $ 18283.556. To conclude, the investment would be profitable. Read More