Final Thesis Proposal
Final Thesis Proposal
Final Thesis Proposal
ON
CORRECT TIMING FOR PROFITABLE INVESTMENT IN COMMON
STOCKS USING MOVING AVERAGE TECHNIQUE
(REFERENCE TO THE COMMON STOCKS OF COMMERCIAL BANKS IIN
NEPAL)
Submitted by:
Yashmin Dangol
MBA Term 6
Ace Institute of Management
Submitted to:
Mr. K.B. Manandhar
Thesis Guide
1.1 BACKGROUND
The term Investment means putting money on something with the expectation of getting
some return in future. Investment is the long term decisions. Any investment is made
with the primary objective of earning returns on the invested sum. Based on the type of
investment instruments, returns can vary. Investment is done in any area of the economy
like stock, bond, financial derivatives etc. The returns can be of two types, repetitive cash
receipts, capital gain or loss. The gain or loss of capital makes the difference between the
purchase price and the selling price of the security. In present day, investment in the
common stock of the commercial banks is increasing. Investment in common stock or
equity investment is one of the riskiest types of investment which are available.
Investment on bonds, deposits are considered as less risky than the equity investment.
This thesis is on the topic timing for profitable investment in common stocks using
moving average technique which is base on technical analysis. Moving average is used as
a technical analysis of financial data which is based on the past data of the market indices
which resembles the future trend and reversal of trends. A moving average is the average
price of a security over a set amount of time. By plotting a security's average price, the
price movement is smoothed out. Once the day-to-day fluctuations are removed, traders
are better able to identify the true trend and increase the probability that it will work in
their favor. Moving average is an approach to determine when a trend is about to change
the direction and the basis of trend following system. A trend in motion tends to continue
whether it may be towards up or down trends. Stock prices are expected to continue its
state of motion either in upward or downward. Hence being able to detect a secret of
trend that is starting to rise or fall is the first step toward making a profitable investment.
1.2 OBJECTIVE OF STUDY:
The main objective of this thesis report is to explore theoretical knowledge of investment
analysis into practical application. The specific objectives of the study are as follows:
• Determine the correct timing for investment i.e. buying and selling of the
common stock in the market
• Application of knowledge of investment analysis in the buying and selling of the
common stock
• Application of the theoretical knowledge of moving average technique for the
correct timing of investment in the common stock
• Study the stock market, trend of price, causes of fluctuations
1.3 STATEMENT OF THE PROBLEM
Investment in common stock is a risky and challenging. Investment involves buying and
selling. The main problem arises in deciding the correct time for buy and sell. The buying
decisions include what to buy, at what price to buy, when to buy and what type of
common stock to buy. Similarly the selling decisions include when to sell, at what price
to sell, when to sell and how to sell. Buyers always want to buy at low price and sellers
want to sell at high price so the main statement of problem of the study is related with
the buying and selling of the stocks at right price at right time in order to make
profitable returns in the market.
Investment in common stock is not an easy task. It involves huge investment of money.
In investment the investors can be risk takers, risk averters. Depending on the degree of
risk an individual can take, an investor can be classified as a risk taker, risk averter or
indifferent towards risk. Generally investors seek higher return at lower risk. There are
very few investors who seek lower return at high risk.
The decision to make investment by investors is made by the fundamental analysis,
technical analysis or gut feeling. Fundamental analysis is the cornerstone of investing. In
fact, some would say that you aren't really investing if you aren't performing fundamental
analysis. It includes the analysis of the financial statements its management and
competitive advantages, and its competitors and markets. Fundamental analysis is
performed on historical and present data, but with the goal of making financial forecasts.
As per fundamental analysis, almost all the available stocks are generally found above the
fundamental values. If investors want to buy the common stock of the desired company at
only fundamental value, it may not be possible at all time because market values are
likely to found above the fundamental value almost all the time. The next analysis is done
by technical analysis. While fundamental analysts examine earnings, dividends, new
products, research and the like, technical analysts examine what investors fear or think
about those developments and whether or not investors have the resources to back up
their opinions. Technical analysis analyses price, volume and other market information,
whereas fundamental analysis looks at the actual facts of the company, market, currency
or commodity. Dow Theory, relative strength analysis, volume analysis and moving
average analysis are the important tenets of technical analysis. The study is done by
focusing only on the moving average technique for forecasting the stock trend to know
how investors can make profitable buying, holding and selling of the common stocks in
the market.
Therefore, Investment means use of money in correct time in the hope of making money
in future. The investors use fundamental analysis and technical analysis while using
Investment. The main objective of the fundamental analysis is to appraise the intrinsic
value of a security. The intrinsic value is the true economic worth of a financial asset.
The fundamentalists maintain that at any point of time every share has an intrinsic value
which should in principle be equal to the present value of the future stream of income
from that share discounted at an appropriate risk related rate of interest. The
fundamentalists attempt to estimate the real worth of a security by considering the
earning potential of a firm which in turn will depend on investment environmental factors
such as growth of national economy, political environment, growth potential, industrial
analysis etc.
Technical analysis is based on the past information on prices and trading volume of
stocks which gives a picture of what lies ahead. It attempts to explain and forecast
changes in security prices by studying only the market data rather than information about
a company or its prospects. The technical analysts believe that the price of a stock
depends on supply and demand in the market place and has little relationship to value.
The technical thinks that the only important information to work from is the picture given
by price and volume statistics. The technical analyst sees the market, and noticeable
trends which continue for significant periods. A trend is believed to continue either
uptrend or downtrend. The direction of price change is very important in technical
analysis.
The assumptions of technical analysis are as follows:
• The market or individual stock acts like a barometer rather than a thermometer.
Events are usually discounted in advance with movements as the likely result of
informed buyers and sellers at work.
• Before a stock experiences a mark-up phase, whether it be minor or major, a
period of accumulation usually will take place. Conversely, before a stock enters
into a major or minor downtrend a period of distribution usually will take place.
Uptrend in prices denotes a balance buying while a downtrend is indicative of
extreme supply.
• The third assumption deals with the scope and extends of market movements in
relation to each other.
The technical analysts explain the investment decision by many techniques. But the study
in the given thesis is more focus to the exponential moving average. Exponential moving
average gives more emphasis to the recent data. This type of moving average reacts faster
to recent price changes than a simple moving average.
CHAPTER 2: LITEREATURE SURVEY AND THEORETICAL FRAMEORK
3.3 INSTRUMENTATION
The secondary data will be more used in the thesis report. The source of the secondary
data will be the investment analysis and portfolio management book written by Reilly
and Brown, investopedia.com, wikipedia, Nepal stock exchange, website of the
respective bank. The questions will be open ended, structured and the respondents will be
the investors.