Navigating Capital Markets PDF

ICCT COLLEGES FOUNDATION INC. Rizal, Philippines Antipolo Campus Navigating Capital Markets: A Guide for `Business Management Stude...

ICCT COLLEGES FOUNDATION INC. Rizal, Philippines Antipolo Campus Navigating Capital Markets: A Guide for `Business Management Students Presented by: Kyumi Borgueta Professor: Anthony Caldero Introduction: The buying and selling of goods, bonds, and other financial resources, as well as the expansion of small businesses and the building up of reserves for the company, are all made possible by the existence of capital markets. With the help of this eBook, which seeks to analyze the significance of every element in this field, students will be able to apply their knowledge in the trade field with greater effectiveness and a thorough understanding of chapters 1 through 10. Overview: The course covers a wide range of subjects, including global markets, emerging trends, equity markets, investment strategies, portfolio management, risk management, asset allocation, and diversification. It is intended to help students studying business management get a deeper comprehension of the nuances of the industry, especially with regard to capital markets. Students are encouraged to think creatively and investigate a range of business-related subfields in this course. CHAPTER 1: Foundations of Capital Markets The capital market is primarily concerned with securing or raising long-term financing for firms, entrepreneurs, and governments. This job will help to boost economic growth and stabilize the economy's finances. In addition to maximizing corporate profits, the primary market facilitates debt repayment, business expansion, and the introduction of new products by connecting investors with publicly issued equity shares, bonds, and debentures. 1. Stocks (Equities) Although common stocks typically do not have voting rights, stocks, which represent ownership in a company, grant shareholders the ability to vote, which in turn increases acquired assets and dividends. 2. Bonds To finance an infrastructure project, the local government issued bonds to cover the government's or company's debt.3. Derivatives A legally binding agreement between two parties, derived from stock, commodities, and current, is called a contract. CHAPTER 2: Investment Strategies and Portfolio Management VALUE INVESTING Principles of Risk Management Value investors use a methodical approach to investing in an effort to mitigate risk. This involves establishing precise investing goals, specifying risk tolerance, and creating an all-inclusive investment plan. Long-term investment success requires effective risk management. Among the key principles of risk management are: 1. Diversification: Disperse your assets among several asset classes, industries, and regions to reduce your exposure to any certain market or sector. 2. Asset Allocation: Distribute assets according to each person's risk tolerance, investing objectives, and state of the market. 3. Stop-Loss: To reduce possible losses, set a predefined price level at which an investment should be sold if it drops below that level. 4. Position Sizing: Determine each investment's ideal size by taking risk and expected returns into account. 5. Regular Monitoring: Regularly review and rebalance the portfolio to ensure it remains aligned with the investment plan. Asset Allocation The process of distributing an investment portfolio among several asset classes, including cash, stocks, bonds, and real estate, is known as asset allocation. Asset allocation in a well-diversified portfolio ought to be determined by: 1. Return Expectations: Allocate assets with higher potential returns in order to meet long-term objectives. 2. Risk Tolerance: Distribute assets in accordance with each person's investment horizon and risk tolerance. 3. Market Conditions: Adapt your asset allocation to the state of the market, taking inflation and interest rates into account. Diversification A key principle of value investing is diversification, which lowers risk by distributing investments over a variety of industries and asset classes. To effectively diversify, one must: 1. Sector Rotation: Rotate between sectors with high growth potential and those with low valuations. 2. Geographic Diversification: Invest in companies from different regions to reduce exposure to specific country-specific risks. 3. Style Diversification: Combine value, growth, and dividend investing strategies to achieve a balanced portfolio. GROWTH INVESTING Principles of Risk Management Growth investors aim to maximize returns by investing in companies with high growth potential. However, this approach also comes with higher risk. To mitigate this risk, growth investors employ various risk management strategies, including: 1. Diversification: Spread investments across different asset classes, sectors, and geographies to minimize exposure to any one particular market or industry. 2. Stop-Loss: Set a predetermined price level at which to sell an investment if it falls below that level to limit potential losses. 3. Position Sizing: Determine the optimal size of each investment based on expected returns and risk. 4. Regular Monitoring: Regularly review and rebalance the portfolio to ensure it remains aligned with the investment plan. Asset Allocation Growth investors typically allocate their assets between different asset classes, such as: 1. Equities: High-growth stocks with high potential for capital appreciation. 2. Fixed Income: Government and corporate bonds with stable returns. 3. Alternatives: Alternative investments, such as private equity or real estate, offering diversification and potentially higher returns. A typical asset allocation for growth investors might be: * 60-70% equities * 20-30% fixed income * 10-20% alternatives Diversification Diversification is critical for growth investors, as it helps to reduce risk and increase potential returns. Effective diversification involves: 1. Sector Rotation: Rotate between sectors with high growth potential and those with low valuations. 2. Geographic Diversification: Invest in companies from different regions to reduce exposure to specific country-specific risks. 3. Style Diversification: Combine value, growth, and dividend investing strategies to achieve a balanced portfolio. PASSIVE PORTFOLIO MANAGEMENT Passive portfolio management involves investing in a broad market index, such as the S&P 500, to achieve long-term returns. The principles of risk management, asset allocation, and diversification are less critical in passive portfolio management, as the strategy is designed to track the market as a whole. 1. Risk Management: Limited risk exposure due to broad market coverage. 2. Asset Allocation: No explicit asset allocation, as the portfolio tracks the overall market. 3. Diversification: Built-in diversification through broad market coverage. ACTIVE PORTFOLIO MANAGEMENT Active portfolio management involves actively selecting individual securities to beat the market's returns. This approach requires a more nuanced understanding of risk management, asset allocation, and diversification. 1. Risk Management: Higher risk exposure due to individual security selection. 2. Asset Allocation: Explicit asset allocation to achieve specific return targets. 3. Diversification: Diversification is crucial to reduce risk and increase potential returns. Comparison Passive portfolio management is often preferred for its simplicity, low costs, and consistent performance. Active portfolio management, on the other hand, may offer higher potential returns but comes with higher costs and greater risks. CHAPTER 3 Market Analysis and Valuation Techniques Fundamental Analysis: A Comprehensive Examination Fundamental analysis is a crucial aspect of stock market analysis that involves examining the intrinsic value of a company to determine its stock's true worth. It focuses on a company's financial health, management team, industry trends, and overall business prospects to make informed investment decisions. In this examination, we'll delve into the key components of fundamental analysis, provide practical examples, and case studies to illustrate its application. Important Elements of Foundational Analysis: 1. Financial Statements Analysis: Analyzing a company's financial statements (income statement, balance sheet, and cash flow statement) to understand its financial performance, profitability, and liquidity. 2. Ratio Analysis: Finding Different Ratios (e.g., P/E ratio, dividend yield, debt-to-equity ratio) to evaluate a company's financial health, efficiency, and profitability. 3. Industry and Market Analysis: Studying the industry in which the company operates, including market trends, competition, and regulatory environment. 4. Management Team Analysis: Evaluating the experience, track record, and leadership style of the company's management team. 5. Economic Analysis: Examining the broader economic conditions that affect the company's business, such as interest rates, inflation, and GDP growth. Practical Examples: 1. Financial Statements Analysis * Analyze the financial statements of Amazon (AMZN) and Alibaba Group (BABA). 2. Ratio Analysis * Evaluate the Dividend Yield for Johnson & Johnson (JNJ) against its historical average dividend yield. 3. Industry and Market Analysis * Research the e-commerce industry trends and competition between Amazon and Alibaba Group. 4. Management Team Analysis * Evaluate the experience and track record of Amazon's CEO Jeff Bezos. Case Studies: 1. Case Study: Netflix (NFLX) Netflix was founded in 1997 as a DVD rental service. In 2007, it shifted its focus to streaming content. In 2010, Netflix went public with an IPO. Fundamental analysis revealed: * Strong revenue growth rates (25%+ annually) * High profit margins (>20%) * Low debt-to-equity ratio (