Question

Suppose, you are acting as a financial analyst for a company. One of your roles is to suggest and decide on investments in the bond market and in the share market. Discuss at least three and no more than five economic and/or other factors or issues which you think are important to consider during investing in the share market.

·         In your response, please also indicate the reason you feel the factors or issues are important to consider in investment decisions.

·         Please also suggest why you think you would prefer to invest in the share market as compared to a risk-free investment or in the bond market while making an investment decision.

·       Additionally, indicate how your chosen factors or issues may directly or indirectly influence the prices of shares and consequently your investment. If applicable, please also indicate whether you can take any measure to reduce any negative influence linked to your chosen factors or issues.

Answer 1

Ans: As an Financial analyst few factors have to be considered before investing in share market are:

a.Inflation and Deflation:Inflation is the rate at which the price of goods and services increases. It is the result of several factors, including a rise in the cost of manufacturing, transporting and selling goods. When inflation is at a low rate, the stock market responds with a surge in selling. High inflation causes investors to think that companies may hold back on spending; this causes an across the board decrease in revenue and the higher cost of goods coupled with the drop in revenue causes the stock market to drop. Deflation is when the cost of goods drops. While deflation sounds like it should be welcomed by investors, it actually causes a drop in the stock market because investors perceive deflation as the result of a weak economy.

b.Foreign Markets:Economic trends in foreign markets can have an effect on the stock market. When the economies in foreign countries are down, companies cannot sell as many goods overseas as they used to. This causes a drop in revenue, and that can show up as a drop in the stock market. Foreign stock exchanges also have an effect on the American stock market. If foreign exchanges start to fail or experience sharp drops, then that kind of activity can cause investors to anticipate a ripple effect, resulting in a drop in the stock exchange.

c.Interest rates:Higher interest rates means that money becomes more expensive to borrow. To compensate for the higher interest costs, companies may have to cut back spending or lay off workers. Higher interest rates also mean that a company's money cannot borrow as much as it used to, and this has an adverse affect on company earnings. All of this adds up to a drop in the stock market.

d.Industry or sector analysis: Before investing in share market the analyst need to know about various sectors in which shares are traded e.g. IT,Agriculture,Banking etc... Currently which sector is performing well.The current demand for the particular sector in the market, yearly growth in percentage of this sector etc.. Proper study has to be made or else there will be huge losses.

.Investment in share market includes huge risk and high profits. When the company performs well the return generated from shares are more than the bonds and other investments.It is necessary for analyst to suggest investment where the economy of the country is more stable and reliable.