Question

Please make a REACTION PAPER of investment management in stocks. Expound on below learning and add other learning.

*In PARAGRAPH please

• risk management, minimize losses and maximize profits
• Parameters set for stock pic and stick to minimize risk
• Elliot wave, MACD. RSI as useful toools in choosing stocks
• Diversify portfolio
• More learnings

Answer 1

The stock price reaction is larger for joint venture announcements. The market response is also larger for non-state owned companies and when the announcement is released in a period of rising stock prices. The announced investment has no impact on the non-voting shares but increases the voting shares' market price through a significant revaluation of their vote-segment. We find some evidence that new investments lead to management's private benefits rather than towards firm value. This is consistent with the typical Italian corporate governance structure, where a majority shareholder safely controls a listed company while having only a fractional claim on the firm's cash flows.

Even if you have a good handle on quality information, you can still get burned when inaccurate information or basic uncertainty hits the market. Inaccurate information still hits the market, even though the time to correction/exposure is often shorter. Inaccuracies can be honest mistakes, malicious rumors, or even financial fraud on the part of corporations. More importantly, the financial markets are so addicted to the constant information flow, that often an interruption in the flow or genuine moments of uncertainty can be worse than bad news.

Market reactions have always been extreme, but the increasingly global reach of information has given investors more reasons to overreact per hour than at any other time. It doesn't take a great leap of imagination to see good or bad consequences with every headline that pops up in the feed.

Risk management, minimize losses and maximize profits

Risk Management is crucial not only to minimise losses but also to maximise profits.

As a trader/investor, it is impossible to avoid volatility in the markets. We are daily exposed to the wild up and down swings in the market. We are often present for each tick, each bit of breaking news, and every gossip heard on the street emanating from all corners of the world that triggers outrageous market variances. Those very market fluctuations help a trader to earn his bread and butter. There are numerous factors at work in the markets which causes volatility; fear, greed, supply and demand are among the most evident and generally known. In reality, these factors drive much of the day-to-day activities, but it is important to understand that they are not the only forces at work. Other factors such as government’s reforms, geopolitical risks, political tensions, global economic policy, macro and micro economic principles are all contributing factors to what make the stocks we trade go up and down.

Risk management is a process which involves two important things; first thing is, where an investor or trader determines his/her risk exposure in a particular trade and once the investor/trader has determined his exposure, the second thing is determining the suitable method to apply for mitigating that risk as best as one can. In other words, the trader or investor needs to identify areas of risk, assesses impact and then prioritize necessary remedial action.

Types of risk exposures in markets:
 Market Risk
 Operational Risk
 Legal or Legislative Risk

Elliott Wave Theory provides analysts with the tools they need to identify market trends and leverage this knowledge as part of smart investing. Although there is no surefire method for predicting the actions of the marketplace, the Elliott Wave Theory is one of several tools which can help investors maximize their returns and reduce risk.

The Basics of Elliott Wave Predictions

On a fundamental level, Elliott defined two primary forms of waves that influence market behavior: impulse waves and corrective waves.

An impulse wave can be defined as a significant swing in the price of an asset which largely coincides with more broad trend lines of the asset or market. According to Elliot Wave Theory, there is no specific limitation on the time frame that must be used in order to assess the appearance of or legitimacy of an impulse wave. For example, impulse waves can be observed on a scale ranging from hours to years and even decades.

Generally speaking, it is possible to label market activity as an impulse wave if it continues in the same direction as market trends by at least one additional degree. In order for an impulse wave to exist, it must consist of five individual sub-waves which, as a whole, demonstrate net movement in the direction of the trend line for the market as a whole.

MACD

Developed by Gerald Appel in the late seventies, the Moving Average Convergence/Divergence oscillator (MACD) is one of the simplest and most effective momentum indicators available. The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter one. As a result, the MACD offers the best of both worlds: trend following and momentum. The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals. Because the MACD is unbounded, it is not particularly useful for identifying overbought and oversold levels.

The MACD line is the 12-day Exponential Moving Average (EMA) less the 26-day EMA. Closing prices are used for these moving averages. A 9-day EMA of the MACD line is plotted with the indicator to act as a signal line and identify turns. The MACD Histogram represents the difference between MACD and its 9-day EMA, the signal line. The histogram is positive when the MACD line is above its signal line and negative when the MACD line is below its signal line.

The values of 12, 26 and 9 are the typical settings used with the MACD, though other values can be substituted depending on your trading style and goals.

The moving average convergence divergence (MACD) indicator helps traders see the trend direction, as well as the momentum of that trend. It also provide a number of trade signals.

When the MACD is above zero, the price is in an upward phase. If the MACD is below zero, it has entered a bearish period.

The indicator is composed of two lines: the MACD line and a signal line, which moves slower. When MACD crosses below the signal line, it indicates that the price is falling. When the MACD line crosses above the signal line, the price is rising.

Looking at which side of zero the indicator is on aids in determining which signals to follow. For example, if the indicator is above zero, watch for the MACD to cross above the signal line to buy. If the MACD is below zero, the MACD crossing below the signal line may provide the signal for a possible short trade.

RSI as useful toools in choosing stocks

The RSI is one such indicator that analysts use to determine whether the asset is in an oversold or overbought territory. If it shows a value less than 30, it indicates that the stock, or the index, is in the oversold territory, while a value higher than 70 suggests an overbought status.

The relative strength index (RSI) has at least three major uses. The indicator moves between zero and 100, plotting recent price gains versus recent price losses. The RSI levels therefore help in gauging momentum and trend strength. The most basic use of an RSI is as an overbought and oversold indicator.

The most basic use of an RSI is as an overbought and oversold indicator. When RSI moves above 70, the asset is considered overbought and could decline. When the RSI is below 30, the asset is oversold and could rally. However, making this assumption is dangerous; therefore, some traders wait for the indicator to rise above 70 and then drop below before selling, or drop below 30 and then rise back above before buying.

Divergence is another use of the RSI. When the indicator is moving in a different direction than the price, it shows that the current price trend is weakening and could soon reverse.

A third use for the RSI is support and resistance levels. During uptrends, a stock will often hold above the 30 level and frequently reach 70 or above. When a stock is in a downtrend, the RSI will typically hold below 70 and frequently reach 30 or below.

Diversify portfolio

Portfolio diversification is the process of investing your money in different asset classes and securities in order to minimize the overall risk of the portfolio.

The primary goal of diversification isn't to maximize returns. Its primary goal is to limit the impact of volatility on a portfolio. To better understand this concept, look at the charts below, which depict hypothetical portfolios with different asset allocations. The average annual return for each portfolio from 1926 through 2015, including reinvested dividends and other earnings, is noted, as are the best and worst 20-year returns.

The most aggressive portfolio shown comprises 60% domestic stocks, 25% international stocks, and 15% bonds: it had an average annual return of 9.65%. Its best 12-month return was 136%, while its worst 12-month return would have lost nearly 61%. That's probably too much volatility for most investors to endure.

The fundamental purpose of portfolio diversification is to minimize the risk on your investments; specifically unsystematic risk.

Unsystematic risk—also known as specific risk—is risk that is related to a specific company or market segment. By diversifying your portfolio, this is the risk you hope to cut. This way, all your investments would not be uniformly affected in the same way by market events.