Market Analysis Essay Example
Market Analysis Essay Example

Market Analysis Essay Example

Available Only on StudyHippo
  • Pages: 6 (1550 words)
  • Published: April 27, 2017
  • Type: Analysis
View Entire Sample
Text preview

The term market pertains to a group of people or organizations who have a common interest in a specific product.

According to MassMutual Financial Group (n. d.), a good market should possess specific characteristics. These include being profitable, substantial in size, and offering potential income opportunities. Additionally, a favorable market should be concentrated geographically and consist of accessible individuals with whom compatibility can be established.

Market liquidity is defined as the discrepancy between the transaction price and the fundamental value (Brunnermeier & Pedersen, 2008), and is evaluated by considering factors such as the price impact of a trade. A market is considered liquid if trades can be conducted with minimal impact on its price. Furthermore, market liquidity is regarded as a crucial element in market effectiveness and can impact its price discovery function (Muranaga &


Shimizu, n.d.).

, p. 2). The sale of new securities in the primary market is beneficial for issuers, governments, and corporations (ShareGyan, 2007). A multitude of transactions occur in this market, including negotiations with large institutional investors and investment bankers to sell bonds on behalf of corporations (, 2009). In contrast, the secondary market involves buying and selling bonds (About.

According to Chabchitrchaidol and Permpoon (2002, p.196), secondary trading has a crucial role in the process of discovering prices, ensuring that no borrowers or issuers are at a disadvantage due to high capital costs. For efficient secondary trading, certain requirements are necessary including an efficient clearing and settlement system, access to hedging tools, and the involvement of a diverse pool of investors, as well as intermediaries. Additionally, an IPO is the first time a company sells its stocks, bonds o

View entire sample
Join StudyHippo to see entire essay

certificates of deposits with the aim of raising capital (HSBC, 2009), while others define it as the sale of common stock equity (, 2009).

According to Investopedia (2009), a seasoned equity issue or offering (SEO) pertains to stocks from a reputable company that have shares with stable price movements. This is complemented by the function of an underwriter in investment banking, who is responsible for appraising and measuring risk and charging premiums based on the degree of risk a company assumes through a given policy (Long & Gregg, 1965, and Kolakowski, 2009). Meanwhile, security market indices serve as indicators for the direction and movements of prices of securities, such as commodities, bonds, stocks, currencies, among others. A security market index (SMI) also measures the growth in value of a set of insecurities (Shilling, 1996).

Spaulding (2008) explains that the base market value is often determined by a ratio, which involves dividing the current value index by the index value of a certain base year. The price weighted index principle states that changes in the price of a stock by a dollar will not affect the index despite the percent change for that particular stock. For instance, if a $30 stock experiences a $1 change, it will have the same effect whether it becomes $60 or decreases to $29.

The Dow Jones Industrial Average (referenced by Little, 2009) is a price weighted index that is based on the share prices of the companies included in it. The calculation method involves adding up the shares of every company and then dividing by 30 (as explained by Paglia, 2009). Some people consider the value-weighted index to be a superior choice compared

to other methods.

The proportion of each constituent stock in this index is determined based on its market share in terms of capitalization. This means that the amount invested in each stock is proportional to its percentage of the total value of all constituent stocks (Chittagong Stock Exchange, 2006). To create a value-weighted index, the market capitalization of all stocks in the index can be added up. Moreover, this index is flexible and adjusts quickly to corporate actions like stock splits (Financial Education, n.d.).

It is challenging to create and sustain bond market indexes due to factors concerning public debt securities in Thailand. This issue results in a lack of quality issuers, thus impeding market development (Chabchitrchaidol and Permpoon, 2002, p. 190).

Furthermore, numerous issues exist regarding supply, demand, market liquidity, and volatility that hinder the issuance of bonds. Additionally, there is a lack of quality corporate issuers with strong financial standings who meet public disclosure requirements and rating standards, which makes funding through bond issuance more costly. As a result of current economic conditions, the credit quality of firms has weakened. Moreover, most banks are hesitant to underwrite bond issues, which only adds to the complexity of the situation.

Insufficient infrastructure was present for the promotion of a secondary market for corporate bonds, as noted by Chabchitrchaidol and Permpoon (2002, p. 194). Nesbitt (2000) explains that style indices can include stocks with concentrated value characteristics, which are employed to evaluate the performance of investment styles and active managers. Han (2008) identifies the Efficient Market Hypothesis (EMH) as a fundamental concept in modern financial economics, based on the belief that securities prices reflect all available information as elaborated

by Russel and Torbey (n.d.).

EMH, or Efficient Market Hypothesis, suggests that asset prices incorporate available information effectively, rendering past information obsolete in predicting future price movements (Han, 2008). The Weak EMH specifically states that past returns reflect on future returns or prices.

The utilization of accounting or macroeconomic variables to forecast future returns is part of it, which is deemed unreliable. This is due to security prices being the most readily available information (Russel and Torbey, n. d.).

According to Han (2008), numerous individuals perceive it as ineffective since it is unable to anticipate future price fluctuations. The Semi-Strong Efficient Market Hypothesis (EMH) stipulates that security prices solely reflect publicly available information (Russel and Torbey, n. d.). Additionally, the information available is already incorporated into the asset prices, encompassing the enterprise's financial statements, economic factors, and communications.

According to Han (2008), a semi-strong Efficient Market Hypothesis (EMH) suggests that a company's financial statements are not useful in predicting future price changes. On the other hand, a strong EMH asserts that all information, including private information, is reflected in the securities price. Despite this, Russel and Torbey note that there is evidence of insiders gaining from trading on non-public information, which challenges the notion of an "uneven playing field" under a strong EMH (n.d.).

Financial ratios are tools used to measure firm performance (Trimbath, 2001). They allow companies, investors, or shareholders to effectively assess a company's financial status, identifying strengths and weaknesses as well as trends and predicting future changes. Ratios are easier to use than absolute numbers, facilitating easy comparison of performance any time (Hill, 2009), making it easier for companies to make investment decisions (Elmerraji, 2009). It is

important to regularly compare a company's ratios to similar ratios within the industry to identify areas for improvement.

In addition, analyzing a company's ratios compared to its historical performance can reveal any progress or setbacks. It is also crucial to compare a company's ratios to its industry standards to evaluate its financial well-being (Hill, 2009). The top-down approach to security valuation involves several steps, starting with an examination of security markets and various national economies. This is vital for companies to determine how to allocate investments among and within countries.

Another important aspect is conducting an analysis of alternative industries to identify the potential for success or failure. A third crucial step is analyzing various companies and stocks. (Financial Education, n.d.)

In stock valuation, assessing the economy and industry is crucial. This is because the economy has a direct impact on industries and companies. A flourishing economy leads to growth for businesses while a collapsing economy adversely affects them. Stock Charts (2009) emphasize the importance of thoroughly evaluating the economic conditions to guide industries and companies towards wise investment decisions. Economic indicators, such as unemployment and inflation rates, serve as tools for measuring how well or poorly the economy is doing. These indicators can fall under three categories: leading, coincident, and lagging economic indicators.

Forecasting future economic conditions is crucial and investors rely on leading economic indicators, such as stock market returns, for this purpose. These indicators precede economic changes. Conversely, coincident economic indicators move in sync with the economy.

The unemployment rate, as explained by Moffatt (2009), is an example of a lagging economic indicator. On the other hand, Investopedia (2009) defines a composite index as

a statistical measure that combines equities and indexes to determine market performance.

The National Association of Securities Dealers Automated Quotations (NASDAQ, n.d.) employs the composite index to ascertain the domestic and international stocks that make up its stock market. Furthermore, a diffusion index can be calculated by adding together half of the unchanged responses with the percentage of positive responses.

The calculation of the diffusion index, which reflects trends in the factory sector, requires determining component proportions. This involves assessing whether a component has risen, fallen or stayed constant. The importance of this index is that it is available on the first day of each month and does not require revision. (Econoday, 2006).

According to MarketGauge (2005), the Ratio Index could potentially be based on a weekly survey of individual investors. However, one limitation of the Cyclical Indicator Approach is that some cyclical indicators may not be as comprehensive as GDP, and they are also subject to bias (Haltmaier, 2001). The text references various sources, including articles on corporate bonds, composite indexes, seasoned issues, insurance, and economic indicators, as well as documents from the Federal Reserve and HSBC.

Get an explanation on any task
Get unstuck with the help of our AI assistant in seconds