Archive for July, 2010

Stock market terms

July 11th, 2010 Comments off

Fundamental & technical analysis

One of the advantage of recognizing  the time intention to trade is when the analyst or investor need to take data for analyzing stock market. Willingness to predict stock price in longer time means that investors need to compile fundamental data such as sales, earnings, dividends, interest rates and so forth. Yes, in this case, investors do fundamental analysis. How long it takes for relatively long time trading? McDonald suggested it for at least nine months.

Thus, if you’re interested in predicting price movements of less than six months, you should study technical data, he suggested. Technical analysis is the process of compiling and considering information gathered on the stock exchange floor, such as volume, current stock price, and short interest, in an effort to predict stock process.

Hence, examining fair value of stock actually is lying back to fundamental analysis. It is because fair value of stock determined by put fuzzy (uncertain) future dividends of stock as numerator (in the top) of fraction and interest rate raised to a power in the bottom (denominator). Interest rate is more certain than dividends of stock.

The pivotal point

Jesse Livermore emerged term of pivotal point to describe the situation in the market that gave a sign to start a trade. He convinced that he have always made money in his operation. But, the exact sign of when the pivotal point is arrived at is blurred and subjectively for someone else. A pivotal point essentially is a price or a moment in time form which trader know real soon which way the market will go. Thus, the location of the point depends on the model applied by traders to understand the market.

Theory of contrary opinion

When the vast majority of market participants think stock prices will advance, they usually decline. Likewise, when the vast majority thinks prices will decline, they advance. Prices will move contrary to what investors expect when those expectations have reached an extreme. The importance of the theory is the necessary and sufficient condition to signal the start of a major movement up or down in stock prices is extreme investor sentiment.

*APH2 m303, 2:27pm*

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The time intention of the trade

July 11th, 2010 Comments off

There is another way to differentiate investors categorized by the time intention of the trade. First category is short-term investors who seek profits from price movement that last from a day to a few weeks. They buy some stocks today with the intention to sell it in a few days. In this case, they live in a very small time world, where hours often seem like years.

Second category is intermediate term investors, who focus on prive movements lasting a month to many months. Their time world or scale is much larger than previous kind of investors. Then the third type is the long-term investors. They focus on movements of many months to a few years.

Recognize investors by their time intention to trade is important to legitimate investment activity in the realm market. Along with the feedback loop, then the stability of stock price will be understandable. McDonald explain that, generally market doers ignored short-term traders. They think short-term trading is less important than long-term investing. But, take a closer look at the amount of money invested by them which are about 30% of daily volume or more. This is a rather large percent. And dont say that these traders produce short-term price moves that last a day or two, and can be ignored. This is totally wrong, because this is where chaos theory and the power of feedback loops would be happened. Panic and nervous of short-term investors would be followed by intermediate-term investors, and so on. Yes, in this feedback loops, investors behave lies on emotional reactions.

Reference: McDonald, Michael. 2002. Predict market swings with technical analysis. John Wiley & Sons, Inc. NY, USA.

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Chaos theory

July 11th, 2010 Comments off

A new term I got tonight from stock market book. Chaos theory. This theory could be applied in mathematics, physics, economics as well as philosophy. It describes a dynamical systems that highly sensitive to initial conditions. It is sensitive because small differences in initial conditions generate widely diverging outcomes for chaotic system. Thus, long-term prediction is almost impossible in general. Further, because this sensitivity drawn a butterfly form, it is called as the butterfly effect.

This butterfly effect could be happened in established system though. In this case, this system should be deterministic designated. It means future behavior is fully determined by their initial conditions, with no random element involved. However, this deterministic nature of this system does not make them predictable. Then, if some stimulus interrupted, they could yield a deterministic chaos on the system.

*APH2 internet room, 12:11am*

Categories: Out of the boxes Tags:

Don’t be immersed

July 10th, 2010 Comments off

A quite interesting book about applying technical analysis to examine stock market. The author describes that a hundred indicators to analyze stock market are useless since it makes the user confuse because being overwhelmed by too much information. He convinced that only one or two points were vital, and the rest just served to divert attention to unimportant and contradictory data.

Technical analysis books which are somehow guiding market technicians are correct obviously, as well as the basic data. But the problem is that the books often omit the practical instruction  on how to apply the information in real time. If two important indicators are pointing to opposite scenarios, which one to choose?

One of tips is rank the data by relative importance then learn how to fit the rankings together to see correct stock market story. Stock markets will tell stories through their price action. The art is learning how to use the available statistical information to figure out the story. Don’t be immersed in all the indicators for looking for some great truth. Put the indicators together to see what that story is.

Such a great think :-)

Reference: McDonald, Michael. 2002. Predict market swings with technical analysis. John Wiley & Sons, Inc. NY, USA

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Reaction to new paradigm

Somehow, there is a difficulty faced by researcher to determine when a new paradigm is needed to explain an event. According to Kuhn (1970), there are three ways are available to react to an anomaly which cannot be explained by ruling the existing paradigm.

  1. Science usually provides proved-way to handle the crisis-provoking problem. Then no new paradigm is needed as the problem can be solved within the old paradigm.
  2. Even if ‘radical new approaches’ fail to explain the anomaly, the future generation is pursued to develop more appropriate tools to explain the anomaly. Then, substitution to new paradigm is surely need more considerations and evidences.
  3. Third possible reaction is that crisis ends with a new candidate for paradigm and with the ensuing battle over its acceptance.

Reference: Kulpmann, Mathias. 2002. Stock market overreaction and fundamental valuation: Theory and empirical evidence. Springer. Germany

Categories: Research Tags:

Silicon Valley

Last week I attended an open lecture discussing about Silicon Valley. Basically, this area has developed a regional clustering model, which provides an area of intellectual capital building, and then, manifests it into innovative communication technologies. That is why giant companies such as Google, Yahoo, Mac, Microsoft and so on are gradually growing on that area suitably. The presenter, a Japanese man who has been working on SV,  explained that the development of those companies are supported by university research unit, entrepreneurship, and venture capital. These three elements are vital to build a strong innovation-based manufactures.

In this case, a university research unit is treated as an incubator or field work to invent new ideas, rethink the possibility of adaptation of them, and combine the idea with inputs to generate new products. Actually this model can be adopted by our university as long as the systems of rights of inventors are covered and guaranteed. To do this, the research unit need capital that provided by venture institutions. Then the entrepreneurs are those who develop the ideas and sell it to market. This rule of game usually named as network of innovation. What a such good-term, rite :-D

The interesting point is that the network is built in informal circumstance, but it has strong cohesiveness. They allow people have their high mobility, and conduct seminars & conferences that connecting universities and their research institution with entrepreneurs and capital owners. To doing so, fundamental characteristics of people within the network are they should have the openness traits and to new ideas, and have tolerance for failure. It is nature since innovation has its attempt and failure stories behind its success.

It just a little thought to materialize entrepreneurial university. Apparently, the only thing we need is to look at others experiences ;-)

*APH2 m303, 8:58am*

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Shift of supply & demand curves of bonds

July 6th, 2010 Comments off

In the bond market, a market equilibrium occurs when the quantity of bonds demanded equals the quantity of bonds supplied. The market-clearing price is obtained at this equilibrium.

Shifts in the demand for bonds

What things that influence people to hold assets? They are 1) investor wealth, 2) the relative expected return, 3) the relative degree of risk associated with the return, and 4) asset liquidity. These factors will influence the quantity demanded of assets. While investor health (during business cycle expansions), expected return and liquidity (how quickly an asset can be converted to cash at low cost) will help to increase the quantity demand, the increasing level of risk will reduce the demand to hold asset.

Shift in the supply of bonds

Three factors that can affect the supply of bonds: 1) expected profitability of investment opportunities, 2) expected inflation, and 3) government activities. During business expansion, the number of possible profitable investment opportunities increase, pursue companies to seek additional capital for investment that will give impact on increasing number of bonds issued.

Whilst, increases in expected inflation will be reducing real interest rates. It will be recognized as cheaper source of funds for corporations. Thus, higher expected inflation causes the supply of bonds to rise (supply curve for bonds to shift to the right). And finally, government activities are often financed through the issuance of government bonds when government expenditures are higher than government revenues. Thus, budget deficits result in an increase in the supply of bonds and shift the curve to the right.

Reference: Strother (2006)

*cyberroom, 18:14pm….those were the best days of my life (Summer of ’69)..sugoi :-D *

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Types of financial markets (2)

Beside of differentiating financial market based on the type of securities traded, another way is based on level of transaction. There are 1) primary market, 2) secondary market.

In the primary market, the corporation or government agency will ultimately use the funds to sell new issues of securities. Secondary market is where the previously issued securities are resold. An example for secondary market is New York Stock Exchange. Other important secondary markets include the over-the-counter market, the American Stock Exchange, and the Chicago Board of Trade. Secondary market provides valuable services to make securities more liquid, by establishing a ready market for the security when the holder wishes to sell. In this manner, brokers & dealers are matching buyers and sellers of the security.

Actually, there is another way to distinguish markets on the basis of the maturity of the securities traded in the market. Securities which have  maturity less than one year are included on the money market, while the one exceeds one year will be included on capital markets.

*cyberroom, 17:16pm*

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Financial intermediaries

July 6th, 2010 Comments off

To a well-functioning economy, financial markets (as briefly described previously) need to be supported by financial intermediaries. Sometimes, direct financial transactions have been occured, but more frequently an intermediary institution brings the two parties together and reduces transaction costs by taking advantage of economic of scale. Thus, indirect financing  is emerged.

By this time being, savers and spenders can often more than when using direct financing. Other advantage is financial intermediaries also help investors to share risk, which is achieved trought 1) asset transformation (the alteration of risk characteristics of assets, from less attractive or more risky assets into acceptable or less risky assets that meet the needs of investors). Second type of risk sharing is 2) diversification (put funds to other places to work where they should provide the greatest return).

Then, who the financial intermediaries are they? They include 1) depository institutions, who make loans and accept deposits from individuals and institutions. They may be commercial banks, saving and loan associations, mutual saving banks & credit union. 2) Contractual saving institutions who acquire funds at periodic intervals on a contractual basis, such as life insurance companies, fire and casuality insurance companies and pension funds. 3) Investment intermediaries who invest funds on behalf of others. This category includes finance companies, mutual funds and money market mutual funds.

Other important role of intermediaries is helping to remove informational asymmetries. Asymmetrics information occurs when the borrower and the lender (in bond market, for instance)  have different information about the transaction. Let say, lenders continue lending to firm because they dont know the shaky fact of the company that managers might know well.

Reference: Strother, T. Shawn (2006) Study guide to accompany financial markets + institution. Fifth Edition. Pearson Addison Wesley. Boston, USA.

*cyberroom, 13:31pm. Gomen ne..too serious, huh? :-D *

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Types of financial markets (1)

Financial market is an artificial market where financial assets (or securities) are exchanged. People or institution with excess funds transfer those funds to people or institution who have a shortage funds. Commonly, there are three financial markets:

Bond markets. More than 1 year maturity of debt are transacted via this market. The eye-catching aspect in bond market is interest rate. Shorter-term rates tend to fluctuate more and be lower than longer-term rates. Important to remind that lower rating bonds tend to be higher than rates on less risky bonds.

Stock markets. This market closely related to the appropriateness of claims on earnings and assets of a corporation. Yes, it is about ownership of company by buying its stock (often transactions are on common stocks). Need to remember that condition in the stock market affect the ability of business to raise funds for expansion and growth.

Foreign exchange markets, which establish the rate at which money in one country can be traded for money in another country. Let say, the amount of Rupiah that I can get in Japan for one unit of domestic currency (Yen) is referred as the foreign (Rupiah) exchange rate. A change of Rupiah as foreign exchange rate has a direct impact on my level of consumption during my time living in Japan. A strong Yen leads to make my living cost more expensive, then Indonesian goods seems to be cheaper for Japanese. Vice versa.

But, in this case, on the strong or weak Yen, I must finish this study as soon as possible :-D *rodo*

*cyberroom, 12:42pm*

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