The Australian Stock Exchange Essay Research Paper — страница 3

objective is to determine the long term value of particular securities. Put simply, it’s a matter of working out what is a cheap price to pay for a security. The search involves examining company details which may indicate that a company is currently undervalued in the marketplace: balance sheets, auditor’s reports, profit and loss statements, annual reports, half-yearly reports, sales growth, earnings, management ratios, capital structure ratios, market performance ratios, and so on. Fundamental analysts usually declare their findings as ratios which have been calculated using the balance sheet or profit and loss statement. An examination of the industry, cyclical industry or recessive industry? The fundamentalist is seeking companies that have been ‘mispriced’ in the

market. This type of investor works on the proposition that if you study the market, study industry and study individual company’s ratios and statistics, such as earnings per share and net tangible assets per share, such mispriced companies can be found. The Technical or Chartist’s Approach There is no siren that sounds or light that flashes when it’s a good time to buy or sell a security. There is, however, a series of devices that one can use to select particular securities. By matching the prospects of these securities with your own investment objectives, there is a far greater chance of being a far greater investor. The technical analyst (chartist) relies on the stock market to reflect the true worth of a share using charts as forecasting tools. Unlike the

Fundamentalists the technical analyst believes that an individual company’s share price and indeed the total market can be predicted or at least anticipated by studying by studying past trends in market price and/or the number of shares traded. It has been said that the chartist looks backwards, while the fundamentalist looks forward (with an occasional glance over the shoulder). This is not quite correct because both approaches require an element of prediction; both look at the data of the past in an attempt to predict the future. Technical analysts produce charts to study daily through to monthly price and volume changes in securities. They record the price, or index if they are plotting general market or industry movement, and volume of transactions on the vertical scale,

with the horizontal scale recording time (except in the case of point and future charts). When examining charts and the recorded volume and price changes, the aim is to gauge the strength of demand and supply, and then on the basis of such observations to predict future performances. Chartists believe supply exceeds demand when particular shapes, patterns and formations are evident. Other patterns suggest supply and demand are more or less equal, or demand exceeds supply. There are probably as many different charts as there are chartists. However, it is recommended that both index charts and charts on individual companies be used if adopting the chartists approach. Index charts give a broad view of the market. Examples of indices which are often charted are the All Ordinaries

Index (Australia), Dow Jones Index (USA), Hang Seng Index (Hong Kong) and Barclays Index (New Zealand). The Contrarian or Psychological Approach It has been said that there are two major emotions that drive many an investment decision-GREED and FEAR. Historically investors have failed to learn from their previous mistakes, still preferring to follow the crowd buying when the market is booming and selling everything when it crashes. This is mass psychological or herd mentality at work. For those wishing to avoid following the leader, an alternative approach is that of the contrarian. The contrarian buys the security that are out of fashion. This approach has been around for the last fifteen years. Put it simply, it proposes as an investment strategy not to what everybody else is

doing. Avoid the crowd mentality or, specifically, the ‘public phase’ of the market cycle. phrases describing this approach are: ‘Buy straw hats in winter’; ‘buy when blood is running on the streets’; ’swim against the tide’; ‘Sell in strength buy in weakness’. This approach sounds easy in theory yet it is very hard to sell when everybody else believes the near future will provide higher prices and greater profits. It is also hard to by today’s bargain when everybody else feels it will be a better bargain tomorrow. There is more to this approach then simply being contrary. Some strategies associated with this approach are: 1) choose only larger companies that are financially sound, with debt to equity ratios of no more than one. 2) Make your selections from