Investment management and capital markets

Part A

This part of assignment will be done based on Autonomy Corporation (AU.L) from the London stock Exchange. Autonomy Corporation was launched in 1996 using exceptional mixture of technologies from study performed at Cambridge University. The entity at this time has a market cap of $6 Billion and it is the second largest pure software company in Europe and has branches in over the world. Autonomy's place as the market leader is broadly accepted by main industry analysts, saying that the Autonomy is the fastest growing public company. (An Introduction to Autonomy (2010). Uniqueness of the company is that it has risen with innovative scheme, namely to mechanize operational procedures of hardware equipment in order to decrease costs, put aside time, raise speed. Also, the entity offers solutions to mechanize data management operations, the update of documents or Internet portals for electronic commerce and Customer Relationship Management. Forced by these uncommon products, Autonomy is active all over the world in Europe, Australia, Latin America Pacific Asia, USA and Middle East and is equipped with a portfolio of the most high-status customers such as Volkswagen, US Navy, Lloyds, BSkyB and AstraZeneca. (Autonomy CORP Company Profile).

Using Moving Average strategy, there was performed technical analysis of the Autonomy Corporation (AU.L) on the share over the past 5 years of different lengths (5-200 days). According to the Robert Davis Edwards (2001) "A Moving Average is the average price of the security at a specific point in time. A moving average shows a trend. The purpose of Moving Average is to show the trend in a "smoothed manner", with less apparent volatility."

"In a moving average strategy a buy signal is generated when the short-term average crosses above the long-term average, while a sell signal is triggered by a short-term average crossing below a long-term average." (Moving Average Strategies (2010).

Results of the obtained charts were tabulated in the graph presented below. (Moving average length, signals, and success-ratio). In the length of 5, 10 and 20 days were obtained too many signals. In the length of 50 days, were obtained 15 signals, with success ratio of 0, 93, with the length of 100 days, were received 9 signals and success ratio of 0,66, and with the length of 200 days, were received 7 signals and success ratio of 1. So, the most successful result was received in the Moving Average length of the 200 days. The graph of this result is provided below.

To conclude, the Moving average remains one of the most useful indicators for market analysts. Moving average is very helpful strategy for investors, as the trader can maximize profits by identifying the signals of crossovers and can be very useful for long-term projections. Moving averages are a great instrument for analyzing the trend in a security. It provides useful support and it is very easy to use. The most popular days that are used when creating moving averages are the 50-day, 100-day, and 200-day. 50-day average of a quarter of a year, a 100-day average of a half a year, the 200-day average is a fine measure of a trading year. Concerning Autonomy Corporation on the presented graph, it can be noticed, that the stock prices of the company is expected to rise, it will be very profitable to invest in the stocks of this corporation.

Part B

Every index begins with the effort to be a correct indicator of a market and the degree by which an index is accurate depends on how it is built. Each index provider has its own construction methodology, its own unique measure of a market. These indexes were designed to give information about how companies traded on the stock market are doing in general.

Dow Jones Industrial Average was invented in 1896 by the Charles H. Dow. This index provided a benchmark for comparing individual stocks with the over-all market and for comparing the market with other economic indicators. Dow Jones started with just 10 stocks, then was extended in 1916 to 20 stocks, and finally to 30 in 1928. Today DJIA still includes 30 companies and calculated through a process of simple mathematical averages (Eugene F at al., (2008)).

The S&P 500 was created in 1926, and regarded much broad-based index comprising of the 500 top companies in US. The stocks in S&P 500 are selected by the Standard & Poor Index Committee for being the leading companies in the leading industries and for accurately reflecting the U.S stock market. S&P|S&P 500| United States (2010) [Online]. Most professionals use this index than the Dow Jones for the performance benchmarks, general trading and stock investment decisions. Fund managers and hedge funds also prefer to use S&P500 to hook their performance against and usually managers judge their performance against to the S&P500 stock index. The S&P500 stock index also makes the basis for the S&P500 futures contracts traded at the Chicago Merchantile Exchange. (Major US Stock Indices: S&P 500, Dow Jones, Nasdaq Composite Index (2010). This index was designed using the weights to each stock according to their market value and has wider range of sector representation. (What is difference between the Dow Jones Industrial average and S&P 500?)

"An investable U.S. equity benchmark, the S&P Composite 1500 combines three leading indices, the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600 to cover approximately 90% of the U.S. market capitalization. It is designed for investors seeking to replicate the performance of the U.S. equity market or benchmark against a representative universe of tradable stocks." S&P|S&P 1500| United States (2010)

To conclude initially the Dow has been the main index, but most practical and essential analysts tend to observe the S&P index when looking on the all US market and stock market from the point of view of financial theory.

References:

Books:

  1. Eugene F. Brigham, Michael C.Ehrhardt. (2008) Financial management: theory and practice. Thomson South-Western. 12th Edition. P. 27
  2. Robert Davis Edwards et. al. (2001), Technical analysis of stock trends, 8th Edition, CRC Press LLC, p.608.

Web:

  1. Autonomy CORP Company Profile| AU.L| GB0055007982|Yahoo! Finance UK (2010) [Online] (Accessed on: 09/03/10). Verified on : http://uk.finance.yahoo.com/q/pr?s=AU.L
  2. An Introduction to Autonomy (2010) [Online] (Accessed on: 09/03/10). Verified on : http://www.autonomy.com/content/Investors/about-autonomy/index.en.html
  3. Moving Average Strategies (2010) [Online] (Accessed on: 09/03/10). Verified on : http://www.investopedia.com/university/movingaverage/movingaverages4.asp
  4. S&P|S&P 500| United States (2010) [Online] (Accessed on: 09/03/10). Verified on : http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--
  5. S&P|S&P 1500| United States (2010) [Online] (Accessed on: 09/03/10). Verified on : http://www.standardandpoors.com/indices/sp-composite-1500/en/us/?indexId=spusa-15--usduf--p-us----
  6. What is difference between the Dow Jones Industrial average and S&P 500? (2010), [Online] (Accessed on: 16/03/10). Verified on: http://www.investopedia.com/ask/answers/130.asp
  7. Major US Stock Indices: S&P 500, Dow Jones, NASDAQ Composite Index (2010), [Online] (Accessed on: 02/04/10). Verified on : http://bannronn.com/market_basics/stocks/major_us_stock_indices.html

Bibliography:

  1. Eugene F. Brigham, Michael C.Ehrhardt. (2008) Financial management: theory and practice. Thomson South-Western. 12th Edition.
  2. Bodie, Kane, Marcus (2008), Investments, (8th Edition), McGraw-Hill Companies P.398-400.
  3. Jones, C.P et al. (2006) Investment: Analysis and Management, 10th edition, `John Wiley and Sons
  4. Robert Davis Edwards et. al. (2001), Technical analysis of stock trends, 8th Edition, CRC Press LLC, p.608.

Web:

  1. Autonomy CORP Company Profile| AU.L| GB0055007982|Yahoo! Finance UK (2010) [Online] (Accessed on: 09/03/10). Verified on : http://uk.finance.yahoo.com/q/pr?s=AU.L
  2. An Introduction to Autonomy (2010) [Online] (Accessed on: 09/03/10). Verified on : http://www.autonomy.com/content/Investors/about-autonomy/index.en.html
  3. Moving Average Strategies (2010) [Online] (Accessed on: 09/03/10). Verified on : http://www.investopedia.com/university/movingaverage/movingaverages4.asp
  4. S&P|S&P 500| United States (2010) [Online] (Accessed on: 09/03/10). Verified on : http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--
  5. S&P|S&P 1500| United States (2010) [Online] (Accessed on: 09/03/10). Verified on : http://www.standardandpoors.com/indices/sp-composite-1500/en/us/?indexId=spusa-15--usduf--p-us----
  6. What is difference between the Dow Jones Industrial average and S&P 500? (2010), [Online] (Accessed on: 16/03/10). Verified on: http://www.investopedia.com/ask/answers/130.asp
  7. Major US Stock Indices: S&P 500, Dow Jones, Nasdaq Composite Index (2010), [Online] (Accessed on: 02/04/10). Verified on : http://bannronn.com/market_basics/stocks/major_us_stock_indices.html

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