Trading Investors Stock
"If A Stock's Price Has Followed a Cyclical Pattern, The Pattern Will Be Quickly Eliminated By Trading Investors"
Do You Agree?
Introduction
A cyclical pattern exists when the data exhibit rises and falls that are not of a fixed. The logic of the cyclical pattern is stock prices have an important impact on capital spending, affected by cyclical variables, notably interest rates and profits, stock prices can generally be expected to fluctuate in a manner that will have some impact on the overall pattern of business cycles. In my opinion, I agree that trading investors will eliminate a cycle pattern which has followed by a stock's price. I am going to explain about determinant of stock prices which is related to the trading investor and the last part I am going to explain and a bit illustration about how trading investor eliminate a cyclical pattern.
Determinants of Stock Price
There are several factors of stock price that influence the stock price whether the stocks are cyclical, going down or going up. In this essay, it is going to emphasise on foreign saving and investment due to the topics. Here is the factor of stock prices:
- Interest rates
- Corporate earnings
- Federal budget surplus or deficit
- Other factors determining expected rate of inflation
- Foreign saving and investment
- Tax rate on capital gains and dividends relative to rates on other personal and corporate income.
Foreign Saving and Investment
The initial allocation of FDI flows across countries is normally determined by microeconomic factors, such as the desire to exploit economies of scale, penetrate foreign markets, or reap other benefits.
Foreign investors consistently overweight more familiar stocks proxy by market capitalisation, company age and analyst coverage. It is also showed that foreign investors tend to continue to favour stocks where they are able to achieve persistent profits, thus where their information disadvantage is perceived to be the lowest. Domestic investors follow contrarian patterns and foreign investors follow momentum patterns over both two and ten year samples. While foreign investors outperform in the two year sample they under-perform over ten years.
Impact of Stock Prices on Capital Spending
- When the P/E ratio rises, the cost of equity capital declines, hence boosting capital spending.
- Also, a rising P/E may signify an improvement in business optimism, or a technological boom, indicating an increase in the MPK.
- In that sense, the stock market impacts both sides of the fundamental relationship affecting capital spending decisions.
The reason is that low T-bill rates may indicate a future business expansion or increased economic activity. Business expansions or increased economic activity has been historically associated with higher stock returns and recessions with lower stock returns. Whether the other state variables are positively or negatively correlated with future stock index returns is uncertain. To be specific, if these variables turn out to be reasonable proxies for the current health of the economy, then they will be negatively correlated with future index returns. This is because the economy is known to follow a cyclical pattern where periods of expansions are followed by periods of recessions. On the other hand, if these variables turn out to be reasonable proxies for the future growth rates of the economy, they will be positively correlated with future index returns.
The general cyclical relationship of the stock market, capital spending, and overall economic performance can be summarised as follows The increase in stock prices is one of the factors boosting capital spending, which helps to get the recovery started. As profits rise, and the MPK increases, higher stock prices also reduce the cost of equity capital, thereby strengthening the recovery. The economy begins to overheat, interest rates rise, reducing stock prices. After the normal lag, capital spending starts to decline
The "center" of stock prices as valuations swing due to cyclical changes in required returns and expected growth rates need not be the arithmetic midpoint. In fact, valuation theory tells us that the cyclical pattern for stocks is not the arithmetic variation represented in the customary, but in fact the very kind that negates its advantage over lump-sum investing. The cyclical behaviour of employment translates quite directly into a cyclical pattern of the unemployment rate.
Production and prices of commodities usually follow a cyclical pattern. When commodity prices are on a cyclical upswing, companies that market often reap due to every additional currency realised goes straight to the bottom-line. Valuations of these stocks also swing up and down in line with the commodity cycle. When commodity prices are rising, the stock market is often willing to pay more. This pattern tends to magnify the ups and downs in the prices of stocks of companies in a cyclical reversal. The stocks deliver substantial index-beating returns, or trail far behind the index, depending on the phase of the cycle. Lower output certainly helps companies liquidate accumulated stocks at lucrative prices. But a fall in output can also create a serious problem of raw material availability for commodity processors. Even in a recovery phase, a company's experience in dealing with shortage situations and the nature of relationships with its raw material suppliers will determine the extent to which it can take advantage of buoyant commodity prices. When the interest rates raises enough that investors start to believe the demand for loan funds will soon decrease enough - either because of lower inflation and or lower real GDP
Understanding Trading Investor Eliminated a Cyclical Pattern
I am going to illustrate how to understand the trading investors will be eliminated a cyclical pattern that has followed by stock's price. There are three parties involve this illustration. Firstly, trading investors is as the main party that has consistent value and the main investment to a firms or companies as well. Secondly is the brokers play role as third parties of trading investors. The last party is the firms or companies that play role as the main of demand in the stock's price.
For instance, there are two firms or company has different economic situation. Firm A has par value £1 and firm B has same par value £1, meanwhile, firm A has good performance in the stock markets with higher market price, but firm B has poor performance at the same markets. After 2 years, firm A has increased the stock price £5, but firm B just slightly increased only £2. In this case, according to business pattern, firm B decide to increase capital investment by selling their stock to the public investment.
In other case, this is an example for some country; someone wants to get the profit from stock market with illegal rule. His name is John for example. From this situation, John tries to make misunderstanding for investor traders that this company will get better in company performance. For instance, actually company B, market price is only 3£ in January with par value 1£. John who want to get profit from the market price and he have power to lead misunderstanding to investors. He can persuade broker or make news that this company will have a good performance soon and stock would be increase. Moreover, the stock price in that price is increase continuous. It shows that the company will have a high market price. Therefore, trading investors will as soon as possible to buy stock market because investors believe that the price will be increase continuous. Therefore, investors can get more profit with stock price. After trading investors buy this company stock market. Suddenly, the price of stock market is fallen down. John who already known this situation, he already bought the stock price at the first time at £3 and sell it more than £3. For example, he sold at £5. Therefore, he will get profit from the gap that is £2 per share.
Conclusion
I agree that the stock's price should be followed a cyclical pattern, but these can be get rid of by trading investors or third party. These can change the rule of cyclical pattern. Therefore, as the situation above, the investors should be careful with this situation.
Bibliography
Anderson, K. Westerholm, J.(2006) International Trading Patterns and Investor Performance University of Sydney, NSW, 2006, Australia.
Brooks, C. Tsolacos, S. Lee, S (2000) The cyclical relations between traded property stock prices and aggregate time-series Journal of Property Investment &Finance, Vol. 18 No. 6, 2000, pp. 540-564. MCB University Press, 1463-578X.
Brozik, D. (2003), A Farewell to Put/Call Parity Marshall University
Falinouss, P.(2007) Stock Trend Prediction Using News Articles A Text Mining Approach, Luleå University of Technology
Leung, T. M. Daouk , H. Chen,A.S.(1998), Application Of Neural Networks To An Emerging Financial Market: Forecasting And Trading The Taiwan Stock Index University of Michigan.
Levy, D. M.(2002) Healthy Economic Recovery and Rising Real Interest Rates Bank of America
Shleifer, A. Implementation Cycles: The Journal of Political Economy, Vol. 94, No. 6. (Dec., 1986), pp. 1163-1190.
Smith, L. V. Suchanek, G. Williams, A(1988), Bubbles, Crashes, And Endogenous Expectations In Experimental Spot Asset Markets Econometrics, Vol. 56, No. 5 (September, 1988), pp.1119-1151
Umi, T. Lipworth, G. (1997) Japanese Foreign Direct Investment and Regional Trade Finance & Development, IMF's Working Paper series.
We provide a professional essay writing service that thousands of our customers use as an effective way of improving their grades, improving their research and saving them lots of time.
