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BY KARIM ZAGHLOUL INVESTMENT CLUB COURSE OUTLINE.

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Presentation on theme: "BY KARIM ZAGHLOUL INVESTMENT CLUB COURSE OUTLINE."— Presentation transcript:

1 BY KARIM ZAGHLOUL INVESTMENT CLUB COURSE OUTLINE

2 INTRODUCTION

3 WHAT IS A STOCK MARKET DEFINITION OF THE STOCK MARKET: The market in which shares of publicly held companies are issued and traded either through exchanges or over-the-counter markets.

4 NEW YORK STOCK EXCHANGE

5 NASDAQ QMX

6 DEUTSCHE BÖRSE

7 WHAT IS A STOCK? A stock represent a share in the ownership of a company. If you own a company's stock, then you are a owner, or shareholder, of the company. A stock represents a claim on the company's assets and profits. A stock is also known as equity.

8 WHAT DO YOU ACTUALLY GET? Ownership percent, of a company that you own is calculated by dividing the number of shares a person owns buy the number of shares of stock outstanding. For example: 1000 shares owned 10,000 shares outstanding = 10% ownership.

9 BEFORE YOU INVEST How much money do you want to invest? What type of investment return do you expect to achieve? How much risk are you willing to take? What are the tax consequences of your investment decisions? How does inflation impact your investments?

10 THE BULLS AND THE BEARS The Bulls A bull market is when everything in the economy is great People are finding jobs Gross domestic product (GDP) is growing, and stocks are rising. Picking stocks is easier Cannot last forever If stocks become overvalued there is danger If a person is optimistic: called a bull. The Bears A bear market is when the economy is bad Recession is looming and stock prices are falling. Bear markets make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling using a technique called short selling. Strategy: wait on the sidelines, in anticipation of a bull market. Pessimistic: believing that stocks are going to drop, he or she is called a "bear“.

11 OTHER FARM ANIMALS Chickens Scared of investing anything Only go for safe bets Money market securities Get out completely Pigs High risk Looking for one big score Impatient, greedy, and emotional about their investments Drawn to high-risk securities

12 WHAT CAUSES STOCK PRICES TO CHANGE 1.If many are selling (supply)  price goes down 2.If many people are buying (demand)  price goes down 3.Earnings reports 4.Better than expected = good 5.Worse than expected = bad Stock’s value is NOT company’s value

13 READING A STOCK TABLE

14 MAKING A RETURN Buying stocks and selling them at a higher price Shorting: Selling high hen re-buying low Dividends: not all companies

15 EXAMPLE STOCK Full Name Current value Time Period Current value Price/earnin gs ratio Company’s dividend return

16 THE PRICE EARNING RATIO (PE RATIO) Calculated as: Market Value per Share / Earnings per Share (EPS) EPS is usually from the last four quarters (trailing P/E) Can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters. For example: A company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be ($43/$1.95).

17 UNDERSTANDING GRAPHS

18 CANDLE STICK FORMATION

19

20 Long: The longer the body the more intense the buying pressure Short: Little price movement and consolidation LONG VERSUS SHORT

21 Shadows - session high and lower Short shadows - most of the trading action was confined near the open Long shadows - prices extended well past the open and close LONG SHADOWS

22 Represent indecision Weakness among the bulls Weakness among the bears SPINNING TOPS

23 Doji - open and close are equal Small = insignificant Important if followed by sporadic market movement THE DOJI

24 Indicates decrease in selling pressure Any following movements are HIGHLY important If continued by: white, upwards advancement etc. LONG BLACK CANDLE + DOJI

25 BLENDING CANDLES

26 COMPARING (SEE THE DIFFERENCE?)

27 PUT IT ALL TOGETHER

28 ADVANTAGES & DISADVANTAGES Reflect only short term outlooks Investors' emotions  major asset movement Gauge the atmosphere surrounding a stock Can form conjectures about future movements

29 ADVANTAGES & DISADVANTAGES Advantages Reflect only short term outlooks Investors' emotions  major asset movement Gauge the emotions surrounding a stock Disadvantages Does not provide precise data Doesn’t show precise coordinates Limits use of analytical tools

30 TREND LINES

31 Trend lines: are straight lines that are drawn on a stock chart along at least two price highs or price lows Takes two points to draw the trend line Third point confirms the validity of the line - Downward Trend (Bearish) - Upward Trend (Bullish) - Side to Side (Channeling)

32 TYPES OF TREND LINES Short Term Trend Intermediate Term Trend Long Term Trend

33 CURRENCIES

34 HOW DOES THE FOREX MARKET DIFFER FROM OTHER MARKETS? Does not take place on a regulated exchange Not controlled by any central governing body Members trade with each other based on credit agreements Most liquid market in the world

35 HOW DOES THE FOREX MARKET DIFFER FROM OTHER MARKETS? No position caps No such thing as insider trade Free self regulated environment National Future Association: act as arbitrators

36 HOW IT WORKS FX market does not have commissions Once the price clears the cost of the spread, there are no additional fees or commissions Pure profit to the investor Scalping much more difficult in FX

37 WHAT IS A PIP "percentage in point" FX market: prices are quoted to the fourth decimal point Bar of soap: drugstore priced at $1.20  FX market quoted at:

38 WHAT ARE YOU REALLY SELLING OR BUYING IN THE CURRENCY MARKET? Purely a speculative market No physical exchange of currencies Trades exist simply as computer entries  netted out depending on market price Facilitate exchange of one currency into another ex: multinational corporations 80% of trades in the currency market are speculative in nature

39 HOW TO DO IT? Traded in pairs: Long one currency + short the other Buying one currency and selling another Ex: EUR/USD represent number of USD one EUR can buy If you think EUR will go up  buy euro with dollars Keep in mind: high risk

40 LEVERAGE

41 Use of various financial instruments/ borrowed capital: such as margin  increase potential return Amount of debt used to finance a firm's assets A firm with more debt than equity = highly leveraged. Commonly used in real estate transactions  use of mortgages

42 FOR EXAMPLE… Options Futures Margins Say Bill has 2000$ to spend The exact amount to buy 20 AAPL shares By investing in an options contract  he can get more shares = higher return

43 USING DEBT To invest in business operations No increase in equity Increase value of company for shareholders Comes with greater risk Magnifies both gains AND losses Can back firer

44 MARGIN LOANS Equity used as collateral Provided by brokers Heavily regulated by agencies High risk investment credit – negative in past (1929)

45 MARGINAL LOANS Costs: Very high Lower charge with more money Advantages: Easy to use Used to purchase almost any investment Investors with lower budget can do more

46 RISKS IN MARGINAL LOANS Serious financial risks If equity falls below predetermined level Broker will ask for additional equity Initial margin + maintenance margin = cap for amount borrowed A 50% initial maintenance  is initial leverage ratio 2:1

47 STOCK AND INDEX FUTURES Future contract - financial instrument  Buy certain investment at certain price  At a later date Financing costs included in the price Can be thought of as short term loan Associated with currencies, commodities and interest rates Not so much equities

48 OVERALL COSTS Reputation for being expensive Beyond the reach of the typical investor Companies are moving to expand access Less initial capital required Ex:) e-mini contract now: $4,000

49 ADVANTAGES VS. DISADVANTAGES Advantages Low bid ask spread High amount of leverage Interest costs lower Calculated = ‘call rate’ – ‘dividend yield paid’ (by the underlying securities) Required to maintain cash position = margin call Increased leverage Disadvantages If underlying security declines Investors must put up more cash Very risky

50 STOCK AND ETF OPTIONS Buy or sell securities for a specific price Strike price: Call options: where the security can be bought Put options: price at which shares can be sold Built-in financing cost similar to futures Option pricing is primarily driven by seller risk  related to volatility of investment.

51 ADVANTAGES VS. DISADVANTAGES Advantages Act as hedging tools Limit the risk Disadvantages At expense of appreciation More specialized Not available for most brokers 100 options for each security Tradeoff between: initial premium / leverage provided / rate of time decay Highly complex

52 EXCHANGE TRADED FUNDS

53 ETFS Baskets of securities Traded intraday Like individual stocks on an exchange Designed to track an underlying index Focused on a specific sector, asset class, or category

54 TRADING ETFS Liquidity: Large + active with several popular traded issues Choices: stocks/bonds categorized by: commodity, investment style, geographic area Diversities: Delving into un-explored markets / can mitigate risk Commissions and fees: lower feeds / less commission

55 COVERED CALL Among the safest of positions Take advantage of a neutral or declining share value Call option on the stock while simultaneously holding an equivalent amount of the same stock option expires, the writer keeps the premium If the holder of the call "exercises" the option, then the seller must deliver the stock seller is already holding an equivalent amount of the stock, risk is limited

56 HEDGING INVESTMENTS Long term Increases diversification Exposition to new industries Spread risk across broader range Lack dollar-for-dollar correspondence of a classical hedge Short selling Drop in portfolio value from a price in underlying stocks is offset by a short position in the ETF Anticipating market weakness will remove exposure After market rebound short position can be profitable

57 LONG TERM Utility stocks Originally conceived as long-term Remain an excellent choice for a long-term investment strategy Represent a basket of stocks from various companies making up an index Speculation that one area will boom  invest in ETFs ETFs bring built-in diversity to a portfolio Diversity + balance = good

58 TRADING STRATEGIES Technical analysis: focused on statistics generated by market activity, such as past prices, volume, and many other variables Fundamental analysis: measuring an investment's value based on economic, financial, and Federal Reserve data Depend on individual ETF

59 FOR EXAMPLE Corporate bond ETF  fundamental research (credit rating, past and future earnings, as well as the economic outlook) An ETF that tracks stocks  technical data (technical on index + fundamental analysis on market may be impacted by the overall economy, or both)

60 HOW TO SWING TRADE ETS Capture the bulk of a price movement Profit from an ETF price move Few days – few weeks Capitalize on good chunk of a move Swing traders concerned with a short-term move Technical analysis is the primary tool used

61 HOW TO TRADE ETFS Pattern breakouts or surges in momentum ETFs that quickly move back and forth between support and resistance Aggressive price action in one direction Strong trends are ideal swing trade candidates.

62 CHART PATTERNS Triangle chart pattern: Created by price action – more sedate or constrained Eventually price action will expand again Triggered by the price moving outside the confines of the triangle

63 COMMODOTIES

64 DEFINITION Simply, the raw materials humans use to create a livable world and are the foundation for any infrastructure and the global economy Commodities are Tradable Liquid Deliverable Examples: A raw material or primary agricultural product that can be bought and sold, such as copper or coffee Sale and purchase of commodities is usually carried out through futures contracts

65 TYPES OF COMMODITIES Energy metals Livestock and meat Agricultural

66 CHARACTERISTICS

67 FEATURES Volatile market  investors run to commodities Precious metals safer (low risk/low reward) Specific commodities can be risky often smaller in volume less resistant to downward market trends Excellent safety when investing in other high risk securities Used to hedge against high inflation

68 CAN BE RISKY Can be a risky investment Become volatile during various times of the year Move in accordance to global markets Generally agreed that: 10% max Affected by eventualities hard to predict: Weather patterns Natural disasters Epidemics

69 HIGH FREQUENCY TRADING

70 WHAT IS IT Definition: automated trading platform that delegates multiple micro transactions within 10ths of a second. Complex algorithms to analyze the markets Gains are fractional but numerous Used by large investment banks, hedge funds and institutional investors

71 HOW IT WORKS Consider a regular stock - small price movements below/above trend line No particular news or outstanding indicators Now consider large institutional investors During the day – large trades are made creating bumps (limits to size of transaction)

72 COMPANY X During the course of the day large chunks of company x are bought Opposing the regular trend HFTs buy and lows and short at highs Buy Sell

73 ITS NOT THAT EASY! Blips can be more than just blips Downwards trends might actually be downward So buying on downward trend can lead to significant losses Need to look at all factors: stocks, bonds, commodities, futures and options etc. Massive amounts of data need to be crunched Millisecond reaction time High competition among HFTs

74 SPEED, EFFICIENCY, KNOWLEDGE Better access to the market By-pass brokers to execute trades Much faster than humans Servers are often next to exchange servers Understand market micro structure

75 THE FLASH CRASH 2010 – “unprecedented drops” Dow Jones average down almost 1000 points… in MINUTES! HTFs rapidly bought and sold e- mini contracts and outrageously high rates Prices bounced up and down uncontrollably Algorithms didn’t take price factor into account correctly Solution: regulation to even the playing field

76 BONDS

77 ARE BONDS REALLY THAT BORING? Definition: A debt investment in which an investor loans money to an entity that borrows the funds for a defined period of time at a fixed interest rate. Credit quality + duration = interest rates Corporate / Municipal / Treasury bills / 10 years – 30 years Considered a “safe bet”

78 FEATURES OF BONDS Simply a type of loan In exchange companies gives interest (coupon) Treasury bonds have no risk of default Maturity is the date the bond is redeemed for its par value Current yield is the percentage yield of the bond at its market price

79 THE RULE OF “SIX” S ecured: inability to pay = surrender of various assets U nsecured: Principal only guaranteed by the credit L iquidation Preference: Order in which debt is paid back C all provision: bond can be paid of earlier M aturity: date when principal amount will be paid I nterest/ Coupon: interest paid annual or bi-annual basis T ax status: un-taxed bonds yield lower interest

80 INTEREST - ING Inverse relationship between interest and price Interest increases– bond prices decrease Drop in price needed to balance out interest This means: bonds are excellent during times of high interest rates

81 RISK Credit risk: the risk that interest and principal payments due will not be made Prepayment risk: bond issue might be paid off earlier Interest rates: it is hard to predict fluctuations in interest rates The quality of a bond (or its likelihood to default) is assessed by rating agencies e.g. Standard and Poor’s

82 TYPES OF BONDS Debentures Mortgage Ginnie Mae Senior Convertible Treasury Tax-free Zero-coupon

83 BEFORE BUYING BONDS 1.Research 2.Assess current economic climate 3.Discount / high interest opportunities / Tax Free 4.Check ratings 5.Develop Strategy


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