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Stock Markets

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Stock Markets

Executive summary

Stock markets entail the brokers and the traders buying and selling shares of stocks, bonds as well as other securities. Where the stock of companies is listed, we refer to it as a stock exchange. His hence makes it easy more liquid for the investors. A stock is a share in company ownership an hence this is what is shown in the large corporations that we have. In the different markets, share indices vary, this discussion evaluated historical share indices of three markets that are; FTSE 100, S&P 500 and STOXX 500. The trend will be evaluated and thus factors that have contributed to this will also be evaluated. Therefore based on the trend, the discussion will bring forth the best investment market choices.

In general, each of the market share indices had an increasing trend since September 2015 to around August 2018 but then the trend seems to have started to drop again. The reasons as to why the trend seems to have started to drop again could be attributed to the midterm results in the US elections and the growing America-Sino Trade dispute. However, there are many other factors as well that the will be presented.

Looking at the indices charts, there are key risks that the investors face, this hence requires that there may be best recommendations to regions that seem to be good for investment based on the amounts of risks that may be faced. For instance, in the STOXX 50, the indices chart shows that its stock market is still too low here, the amounts of stock shares bought or sold here are in very small volumes thus it is Kiley to face market risk. There needs to venture into ETFs, DVY, and VYM to minimize this risk. For S&P 500, the stock volumes are relatively high thus likely to experience inflation risk (Bathe, 2013). However, so as to hedge this, it is recommended to work with ETFs like SPDR S&P 500 ETF and VTI. For FTSE 100, the stock volumes are so high so are the share indices, as such, it means that the volumes of stock shares being traded are very large. This is likely to result in liquidity risk due to the late sale of the investment. The best recommendation for this is to diversify into other stock options like SPY and VTI (Bathe, 2013).

Based on the above options, the best option to invest in is the S&P 500 whereby the number of stocks traded are optimal thus the number of risks are not big to bear and the returns are good.

Market development

In the recent past, there have been numerous developments in the stock markets, which has seen a rise in the market share indices within the last three years. An increasing price of the shares is a good indication that indeed the investors are making a good return. Many factors worldwide have been a major contributor to this trend. The figure below shows the various share indices as recorded by three markets (FTSE 100, S&P 500 and STOXX 50.

The figure is a historical indices chart for the three above mentioned markets with a range from the 10th of September 2015 to 11th of November 2018. The three charts are the best comparison tool that shows how big the markets are as depicted from the levels of the trend lines.

It can clearly be established that the market that has the least volume of shares being traded is STOXX 50. This is because its historical share prices recorded are the lowest along the period of three years as compared to the other two markets. Similarly looking S&P 500, it is the second largest market portfolio after FTSE 100 which is the largest.

One important thing about this indices is the way they are arrived at. This also tells why the trend can be seen to be rising higher all through and then suddenly appears to drop. So as to clarify it better, the different markets under this discuss an also be considered to as an index, therefore, their share price index that have yielded the trend lines are the indicators of how well each one of them is doing. Hence so as to get a share price index, the following are considered; the market cap weighted index and the price-weighted index.

A graph of historical share price index for FTSE 100, S&P 500 and STOXX 50

The market cap weighted index

Here we first establish the market capitalization on every stock in the index whereby we multiply the price of the stock by the total number of shares. Then the market caps are added together. Then the official industrial average’s divisor number are noted as published, so the sum of the market case is divided by the divisor, therefore the answer gotten is the share average index average.

Then we go to the second metric which is the calculation of the price-weighted index. Here the most current prices f the stocks are noted and then added together, the sum of the stock prices are then divided by the market divisor to get the index average.

The components of each market

The three markets operate in different regions of the world and hence influence different economies. For example, STOXX 50, it is a stock market in Eurozone and has 50 constituents, the five of the fifty members include ALV Allianz SE, ABI Anheuser-Busch InBev, ASML Holdings, CS AXA and MTS Arcelor Mittal SA (LU) (Del & Negro, 2003).

For S&P 500, the constituents are companies that make up the US stocks market and are more than 500 members. Some of its members include Apple Inc., Microsoft Corporation, Amazon.com Inc., Johnson and Johnson, and Facebook Inc.

For FTSE 100, these are companies that control the US economy and are listed in London Stock Exchange. They are more than 100 members and a few members include 3I GRP. A.B.FOOD, ANGLO AMERICAN, BARCLAYS, and BURBERRY GRP (Del & Negro, 2003).

Analysis of S&P 500

This market has an optimum level of productivity as depicted by the trend of the index chart. It, therefore, does not expose the investors to also risk nor does it guarantee them huge profits. However, the characteristics are seen are due to the increased growth rate of the global economy, the impact on the market constituents and the impact of the currency. For the global economic growth, just after the economic recession, many companies worldwide started investing in projects that helped bring them back to terms. The central banks have been buying up the safe government debt so that the economic growth could be increased as well as the inflation.

In many countries, the political temperatures have been could down and this has made people concentrate on their business. The amount of money in the circulation was increased which made the purchasing power of consumers to increase.

Basing on the impact of the market constituents, many companies hired employees and increased the pay for their employees. Due to a reduced unemployment, consumers increased their spending habits as investor diversified their portfolios. The rate of unemployment is a negative indicator of the growth of the economy (Berkin, Swedroe & Asness, 2016). Therefore when the unemployment is going down, then there is a relative improvement of the global economy. Thus as constituent companies absorb more people, then economic indicators for growth showed positive results.

In regard to the impact of the currency, the powerful dollar exchange rate across the world enabled many companies to be able to import as well as export raw materials from the source markets and also the finished products to the desired markets. This made the movement of commodities more efficient and hence the business environment led to increasing stock markets business.

Factors for share price index

The ever-increasing trend of the share price index has been gradually increasing until August of 2018 when the chart indicated a drop in the trend. This can be attributed to a number of reasons that include the midterm results of the US elections. When the politics were heightened, the value of the share price indices dropped since many investors were not willing to make stock purchases (Berkin, Swedroe & Asness, 2016). This made selling them difficult forcing the observed characteristics. Also, the America-Sino Trade dispute could largely have resulted in the observed trend. This is because investors who are caught up in this dispute will be unwilling to purchase stocks form the American stock markets.

However, this market characteristics do not mean that the stockholders are going to have a huge return on investment, there are risks that are associated with this kind f position. One of the risks that are so common here include inflation risk. However, this may be controlled by stock options like SPY and VTI.

Conclusion

Based on the above establishment about the general structure of the hereby year period stock market behavior, I find that the best choice of the market to invest in is the S&P 500. This is important since the risks are relatively weak to handle and also the returns here are superbly high.

References

Bathe, D. (2013). Common risk factors in the german stock market. Place of publication not identified: Grin Verlag Ohg.

Berkin, A. L., Swedroe, L. E., & Asness, C. (2016). Your complete guide to factor-based investing: The way smart money invests today.

Del, N. M., & Negro, M. D. (2003). Firm-Level Evidence on International Stock Market Comovement. Washington: International Monetary Fund.

Haugen, R. A. (2002). The inefficient stock market: What pays off and why. Upper Saddle River, N.J: Prentice Hall.