Managing Personal Finance - Essay Example

FINANCE REPORT Asmaa Alkuwari Fatema Alamadi Shaikha Alnami Noora Alnabit Personal finance FINA 402 Dr. Aruna Dhade Qatar 18\6 Table of Contents Chapter 1 – Managing Personal Finance…………………………………………………….……3 Chapter 2 – Investment Portfolio……………………………………………………………….…5 First Investment Option – Stock Market Exchange………………………………...……..5 Second Investment Option – Bank Deposits……………………………….……………13 Third Investment Option – Gold Trade………………………………………………….15 Fourth Investment Option – Forex Markets………………………………….………….17 Chapter 3 – Return Outcomes……………………………………………………………………18 Appendix…………………………………………………………………………………………19 Reference List………………………………………………………………………..…………..20 CHAPTER I: MANAGING PERSONAL FINANCE This research paper reviews a hypothetical situation on an investment group, which has in its hands, QR 1,000,000 and wants to put all this cash in an investment platform in order to make some considerable income as revenues from the capital. We have a number of trading options to invest in so that it can make some lucrative income at the end of the day. Some of the viable possibilities of investment that we can take include investing in the stock markets, such as the Qatar Stock Exchange, investing in bank deposits, such as the Qatar National Banks (QNB), investing in gold and other metals, as well as, investing in Forex markets (currencies). We divided its capital into four equal portions of QR 250,000 each to invest in each of the four investment platforms available. As such, we invest QR 250,000 in the Qatar Stocks Exchange, which is the principle stock market of Qatar. It invests another QR 250,000 in Qatar National Banks as bank deposits. It then invests the third portion of their capital, another QR 250,000 in gold and other metals. Some of these gold businesses are international and not available within the country. Furthermore, it invests the last portion of their quarter million in Forex markets, mainly dealing with currencies exchange with the Qatar Riyal. We has an investment philosophy that is of a risk taking capacity, which means that we will easily go for the high risk investments because of the high returns associated with these investments. Furthermore, we is aware that these high-risk investments may either lead to the loss of all the invested capital, or lead to a significant profit way beyond their imagination. We practices on the “risk-return tradeoff” investment strategy. This investment strategy operates on the principle that the potential of returns raises with an increase I the risk of investment. As such, lower levels of uncertainty, such as loss risk investments, have a high likelihood of bringing in low potential returns on the other hand, high levels of uncertainty, such as in high-risk investments, there is a high likelihood that the investments will yield high potential returns. Consequently, in accordance with the concept of “risk-return trade off” in business investments, money invested by an investor can render higher profits only if it is subject of a high possibility of losses. This model of business investment strategy requires traders to be always aware of their personal risk tolerance whenever they make choices of their investment portfolios owing to the risk-return tradeoff. This is majorly because taking on some risks usually forms the price of achieving some considerable returns. The golden principle of this concept holds that if an investor wants to make some significant amounts of money, then they should be willing and ready to face all the risk, as it is impossible to cut out all risk. As such, the goal behind this investment strategy is to locate an appropriate balance within the investments that a trader makes, and ensure that it generates some profits; whilst at the same time allows them time to sleep at night without always worrying about the state of their investments. CHAPTER II: INVESTMENT PORTFOLIO First Investment Option We has a period of one month to make well their investments and collect some significant profits at the end of the day starting Thursday 1, May and ending Saturday 31, May 2014. This is the investment return calculation period, which entails the period through which an investor will put their money on their chosen investment and wait for its return at the end of the investment period. Under this period, this we targets to make the maximum possible returns from its investment as opposed to other investments owing to its investment strategy of a risk-return tradeoff. We select to invest in stocks market exchange, and to trade in the high risk portfolio shares within the stocks market. As such, it targets the shares of a company that has high risks due to the volatility and high risks involved in its business environment. Before making a jump into the stocks market investments, it is imperative for we to study and forecast the business environment in order to come up with the right strategy to mitigate or reduce the incidence of risk, preferably that they may have some sleep at night without worrying about the nature of their investments. As such, they have to be aware of some of the terminologies used in stock market trade, as well as, how to relate these terms to their respective investments. Some of the most rational terms used in stock markets investments are outstanding share, dividends, and earnings per share, market capitalization, and price to earning ration. Outstanding shares refer to the total number of shares of a particular company that investors hold. This index is critical as it aids in the calculation of other key metrics such as the Earnings per share, as well as, price to earnings ratio. A dividend is another critical term in share trade in business investments. A company chooses to start paying dividends to its shareholders once it reaches a certain level of profitability and stability. During the period of growth, a company will most likely reinvest its profits in order to grow the company. However, once the company stabilizes, it may choose to pay dividends to shareholders. On the other hand, shareholders may choose to reinvest these dividends in order to get even more shares of stock. As such, for an investor seeking to start out on the stocks market, he or she should evaluate the market and select to buy a stock that has potential of receiving a high dividend payout during the investment period. Earnings per share refer to the amount of money a company earns per share of its stock. the calculations of the earning per share is by considering the net income of the company minus the dividends paid out on the preferred stock dividend by the average of the outstanding shares. For instance, if we selects to trade in the stocks of a company that makes $ 50 million, and the company has 18 million outstanding shares, then it will make an equivalent of $ 2.78 for every single share from the income of the company. Market capitalization is the current share price of the company multiplied by all the outstanding shares. This helps in providing the investors with a general idea of the size of the company. This is majorly the case considering that market capitalization can be instrumental in comparing the size of two major companies as opposed to their respective share prices. Price to earnings ratio is the current price of the shares of the company divided by its earnings per share. This amount always shows what amount investors are willing to pay per dollar of their earnings. Furthermore, this index also assists investors in determining whether a company is a case of over valuation or under valuation, and with what range. Once an investor knows about these terminologies, then they know what to expect in their investments, as well as, be in a position to calculate the actual returns by themselves. We can either do this by them or engage the services of an experienced stockbroker to undertake the trading on their behalf. We can contract the services of the Ahli Brokerage Company in making its investments on the Qatar Stocks Exchange. The establishment of the Ahli Brokerage Company came up when the Ahli Bank QSC wanted to form a brokerage arm that would assist its clients in making investments at the stocks exchange. The bank wanted to provide its clients with high quality service, as well as, allow them to access the local equity market without facing risks. This is also in line with the mission of the company, which targets to be a major securities brokerage company in Qatar, as well as, across the wider gulf region. In fact, this brokerage firm ranks among the top-most securities brokerage companies in the country and is an active participant of the Qataraization program. By contracting the services of a brokerage firm, we have to be aware of the charges and commissions it will have to pay the broker for their service. This may include the account minimums, commission, and mutual funds fees. Account minimums refers to the basic minimum amount of investment that a stockbroker allows the investor to make before opening for them an investment account. As for the case of Ahli Brokerage Company, we will deposit $ 1000. In trading stocks, the investor will select the type of stockbroker that they require to handle their investment account. Incidentally, stockbrokers come in two flavors, the full service stockbroker and the discount stockbroker. We go for the full service stockbroker owing to the value of their investment. A full service stockbroker provides the clients with much more in the way of service, which dictates their concentration to high net worth clients. In fact, some of these full service brokers require an investor to make a deposit of their basic minimum of investment at $ 50,000. A brokerage firm also allows its investors to purchase mutual funds and bonds with similar rules relating to stocks. However, in case we do not want to purchase mutual funds and bonds through the stockbroker, then they can do this through a local bank, especially if they already have an existing rapport with the bank. Apart from the minimums of investments, we have also to consider the fees it will incur when undertaking its transactions. This means the costs it will have to incur for hiring the services of a broker to assist them in their investments. Every stockbroker charges a commission for every service they undertake on behalf of their client. This means that for the QR 250,000 that we are willing to put up for trading to the Qatar Stocks Exchange, the Ahli Brokerage Company will charge them a commission for their services, which is a percentage of the total amount put up for investment. In the event we also decides to make purchases of the mutual funds and bonds, it will also have to incur mutual fund fees, such as the Management Expense Ratio (MER), a management fee charged by the management team on an annual basis considering the amount of assets invested within the mutual fund. A higher MER spells doom for most investors as it increases their parameters of risks and losses. In addition, investors also have to cater for the number of sales charges referred to as loads as additional fees charged whenever trading in mutual funds. With this knowledge and information, we are now set to undertake its investments in the Qatar Stocks Exchange market. The next step for this investment group to make is to select a volatile stock trading at the Qatar Stocks exchange and invest in the stock. By volatile, it means that the stock is a high-risk investment, and as such, can lead to either a significant loss in the investments of the group, or a high profit margin for us depending on the market tidings. The Qatar Stocks Exchange, formerly known as the Doha Securities Market, is the principal stock market through which investors in Qatar can make stocks investments. The incorporation of this market was in 1997. The former name of the securities exchange firm is attributable to its location, which is at the capital city of the country, Doha, commonly abbreviated as the DSM. Ownership portfolio of the market provides that the NYSE Euronext owns nearly 25% of the DSM. Now, the market currently hosts forty-two companies listed on the stocks exchange. The company made a change of names in June 2009 after changing into a shareholding company renamed the Qatar Stocks Exchange. One of the companies listed in the Qatar Stocks Exchange is the Al-Khaliji Holdings Company. This is the former name for the Qatar’s Investors Group QSC as listed on the DSM. This shareholding company based in Qatar involves itself primarily in the production and distribution of cement and other related products for construction purposes. The company operates alongside its subsidiaries. This company operates within seven business segments, which are industrial, cement, contracting and engineering, real estate investment, marine and aviation, investment, as well as, other business segments. Furthermore, the company also involves itself in setting up factories, importing and exporting activities. Branded products of the company include the Standard Portland White Cement, Mineral Resistant Cement, and the Gray Portland Cement. By the end of the fiscal trading year 2013, the company managed to acquire more subsidiaries inclusive of the Al Khaliji Cement SPC, the OIG Properties SPC, the Investors SPC, as well as, the International and Trading Company SPC, among other subsidiaries. We decide to purchase and trade in this stock because it meets their threshold of a risky stock with a potential of high returns. furthermore, the portfolio of the company provides that it has more potential to increase and stabilize its, and as such, secure the investments made by we through the purchase of their stock. The company also operates in a wide diverse of industries, from construction to investments, which expands the earning capacities of the company in such a way that its investors stand a high chance of making high potential gains. For instance, the construction industry in the Middle East is fast on the rise, and as such, there will be high demand for construction services and construction materials. The main product apparently for the company is cement, and as such, the current boom experienced in the construction industry is just a good sign of the better days to come for the company, as it will have to sell more of its products owing to the expansive construction market in the Middle East. The trading name of the company as listed on the stocks exchange is Al-Khaliji Holdings Limited. As at the start of the investment period, the shares of the company were trading at the stocks exchange for QR 64.50. At the end of business that day, the company stock closed at QR 63.00, recording a negative change of -1.5. This percentage change was -2.27%, and as such, earned the company the title of the biggest loser of the day. The trading volume for the share of this company is 605,275,000 and its market capitalization is 8.21 billion. The volume of shares traded during this period is 8,512,130, with the earnings per share as 1.82 whereas the P/E ration is 36.28. Even though this share was the biggest loser of the day owing to some shortfall in its business environment, the company is still a worthy investment for we as it guarantees some significant results. The closing share price at the end of the trading period, on 31st of May 2014 was QR 77.8 per share (a hypothetical figure used to show the high potential gain in high-risk investments). The share price rose significantly owing to the rising boom in the construction industry, especially after the company won a contract to refurbish the Qatar National Airport. The calculations for the earnings made by us during this period are as follows: Amount invested = QR 250,000 Opening price per share = QR 64.5 Number of share bought by we= (250,000/64.5) = 3,876 shares. We hold these shares during the trading period until it reaches a lucrative price Closing share price at the end of the trading period = QR 77.8 Sale of shares = (3,876*67.8) = QR 301,552.80 Investment profit = (301,552.80-250,000) = QR 51,552.80 We made a lucrative profit from the investment option it took for investing in the stocks of the company, especially considering the high-risk period on which the company made the investments. As such, the company made a potential high gains from the purchase of the shares of this particular company owing to the tides in the business environment of the company. The company won a tender to refurbish an airport, (a hypothetical scenario) and this led to the rise in share price of the company. Even after subtracting all the trading expenses that we incurred after contracting the services of a contractor to undertake their trading of shares, we still takes home a lucrative investment from the QR 51,552.80 that it makes as profits at the end of the trading period. It is imperative to note that this investment platform is very lucrative majorly because of the high risks involved. As such, it requires an extensive level of speculation and monitoring, especially on the movements and changes experienced in the exchange market. As such, investors taking this option have to be very keen on every detail affecting the general operations of the company, especially every change or transaction that has an effect, whether positive or negative, on the share price of the company. This includes events such as declaration of dividends pay out by the board of directors of the company, which is a positive event, and as such, leads to the rise in share price of the company. This is because people will want to buy more of the shares of the company in order to take advantage of the dividend payout, which in turn escalates the market demand for the few available listed shares of the company, hence a rise in demand owing to the prevailing market forces. Negative events, on the other hand, lead to the fall in share price of the company. For instance, if the company records losses instead of profits during a given financial year, and as such, does not declare any dividends. This demoralizes the investors, and as such, many shy away from buying the share. This leads to a low demand of the company’s shares, and curving to market forces, the share price drops significantly. In fact, those investors currently holding the shares of the company move quickly to offset their shareholding by selling their shares at a low market price, just in order to relinquish their shares before the price drops any further, and thus, thrust them into losses. Second Investment Option The second investment option explored by we are that of investing in bank deposits. As such, we take the second portion of its QR 250,000 and invest the money in bank deposits from the Qatar National Bank. This is almost unlike its investment strategy because unlike the stock market, which is volatile and highly risky, bank deposits are an assured source of income with little or no risk, because we trades directly with the government. However, these bank deposits also come along with a number of merits to us investors, factors that would also lead to a significant score on their investment at the end of the trading period. Bank deposits have a low risk of investment, even though this concept goes against the investment strategy of the group of risk-return tradeoff. Bank deposits also have a capital guarantee that protects investors’ deposits through the RBI Deposit Guarantee Scheme. As such, it is a secure form of investment without any loopholes of losses or fraud. Bank deposits are liquid in nature as one can invest in them for a short period, sometimes as short as one month. It is also possible for an investor to withdraw these bank deposits prematurely before the lapse of the prescribed period of investment. Finally, bank deposits have good returns on investments especially when an investor buys and holds these deposits for a longer period such as for two or more years. The Qatar National bank offers investors a platform to invest in bank deposits and reap the revenues from this investment portfolio. As such, we can walk into any bank and request to invest in bank deposits as one of the available financial platforms for investments The Qatar National Bank provides the rates on bank deposits for each period held by the investor. As for the case of the investment group that holds these bank deposits for only one month, we will earn a profit of 0.65 percent on their investment, which is in the range of 50,001 to 500,000 QR for a period of one month starting May 1, 2014 to May 31, 2014. Invested amount = QR 250,000 Rate of investment = 0.65% Interest made = P*R*T = (250,000*0.65%*1/12) = QR 13,541.67 We end up making QR 13,541.67 as the profit from its one-month investment in the bank deposits offered by the Qatar National Bank. This is a low risk investment option, and as such, characterized by low returns. Investors who want to make or more money from such an investment platform need to be patient, and invest heavily. For example, the returns rate varies in accordance to the period through which an investor holds the bank deposits. The longer an investor holds his or her bank deposits, the higher the rate of interest applied on the bank deposit, and therefore the higher the return on investment that he or she will earn from the bank deposit. Taking a case example of the above scenario, the investment group bought and held bank deposits for a period of one month, and period through which their investment only grew by a 0.65%. On the other hand, investors who held their bank deposits for a period of twelve months earned more than eight percent on their investments at the end of the trading period. Consequently, the investor holds the choice of the amount of return or the rate of return on investment that they expect from a given investment in bank deposits. Short-term investments fetch lower returns on profits as opposed to long-term investments. It is therefore advisable for these investors to take on longer investment period when investing in bank deposits in order to guarantee fetching higher returns on their investments, which in turn reflects on a high profit portfolio for their investment platform. This is one of the secure modes of investment owing to the assured return on investment for the investors. Third Investment Option We can also explore the third option of investing in gold and other precious metals with its third portion of the QR 250,000. As the market within Qatar is not big enough to sustain large purchases of gold and other metals, we can opt to purchase gold from other international markets. Otherwise, as for this investment, we selected a local market to make their purchase of Gold for their investment. Most investors and savers opt for gold because of a number of reasons, two of the main ones being the way investors view gold as an ultimate safe haven traditionally, especially during times of economic volatility, and as such, acted as an important wealth preserver. On the other hand, gold plays a critical role in hedging against the US dollar, which is the common currency used in making most international transactions. Gold is not a risky investment as its business booms even when stocks market are experiencing hard economic times, such as the recently concluded Global Economic Crisis of 2008. The high demand for gold in the market shows that the traders investing in this business will always have a smile while walking to the bank to collect their earnings. This is because there are no supplies of gold to meet the global demand of the commodity, thereby making gold trade one of the most lucrative businesses to buy and invest. Trading in gold is similar to trading in shares. One buys a gold bar of a given size and weight at a given market price. the investor can then smelt the gold an use it on ornaments such as necklaces and earrings, or hold the gold until the market prices rise again and resell it at a profit. As for the case of the investment group, we purchases gold worth QR 250,000 holds the gold for one month, and then resells the gold at a higher price than they bought in order to make a profit from the change in market prices of the gold. One of the local gold markets in the country is Al Fardan Exchange, located at the heart of Doha. it sells gold in different sizes such as 10/20/50/100 gram, 1 oz (31.1g), 1/2 and 1 kilogram and 1/2/3/5/10 tola (1 tola = 11.66g) 24 karat bars and 8g Gold British Sovereign 22 carat coin, which are available at their gold purchasing counter (counter 6). One ten tola of gold goes for QR 4,856.25 in the gold bars and trading market. As such, we can purchase several portions of the ten-tola gold, hold it for some time then sell it at a profit. Pick a hypothetical price of QR 4,927.75 as the price per one ten tola of gold as at the end of trading period in 31 May 2014. Buying price of ten tola gold = QR 4,856.25 Selling price of ten tola gold = QR 4,956.75 Number of ten tola units of gold purchased = (250,000/4856.25) = 51.5 units Sale made from trading gold = (51.5*4,956.75) = 255,173.75 Profit made from trading gold = (255,173.75-250,000) = QR 5,173.75 We make a profit of QR 5,173.75 from its trade in the buying and selling of gold. It is a low risk investment, and as such, has a lower return on investment as compared to the first two investment options explored by the group. The graph below (Appendix - Table 1) shows the changing market prices of gold according to demand and supply on global platforms. The secret in making more profits in trading gold bars is trading in bulk. As such, an investor who invests heavily into the business of gold earns more as opposed to an investor who invests lightly in the business of gold. Furthermore, this trade also requires an investor to have longer trading periods. For instance, the price of gold bars fluctuates from time to time depending on the market and demand forces. As such, when the demand is high, then the prices are high, thus the profits too are high. The contrary is vice versa. Therefore, investors should speculate for the market prices of gold bars, ad purchase them when they are in los demand, thus low in price, then hold them until they are high in price, and in high demand, and then sell them at a lucrative profit. Fourth Investment Option The last investment option that the company undertakes is investment in Forex markets. We invest in currencies exchange between other foreign currencies and the Qatar Riyal. the most common foreign currency used in this business option is the dollar because it is the basic and internationally accepted mode of trade for most business entities trading in the country, especially the firms operating in the oil and gas industry that have to export their products. As such, we capitalize in buying and selling US dollars and Qatar Riyal. However, this has to be a daily trade as the exchange rates varies on a daily basis depending on the prevailing economic conditions, as well as, the forces of demand and supply. The current market rates at the start of the trading period provide that one Qatar Riyal is equivalent to 0.27 US dollars. in a hypothetical situation, the market forces push the demand for the dollar lower due to reduced international trade, and as such, the dollar losses its value to the Riyal to trade at 1:0.22 Buying price of the US dollar = 1:0.27 Number of US dollars bought = (250,000*0.27) = US $ 67,500 Sell of US dollars back to Riyal = (67,500/0.22) = QR 306,818.18 Profit made from the trade = (306,818.18-250,000) = QR 56,818.18 We end up making a profit of QR 56,818.18 from its trade in the Forex market. This is a high-risk market, and as such, had a potential for a high return on investment as evidenced by the value of return made on this particular investment platform. CHAPTER III: RETURN OUTCOMES We made the following profits from each platform of investment it took with its QR 1,000,000 as initial investment capital. From the profits, it is evident that we made significant profits in high-risk investments, such as stock market exchange and Forex markets, as opposed to low risk investments, such as gold trade and bank deposits. In general, we made a 12.7% profit in its investments across the four platforms. Stock Market Exchange = QR 51,552.80 Bank Deposits = QR 13,541.67 Gold Trade = QR 5,173.75 Forex Markets = QR 56,818.18 Total profits = QR 127,086.40 % return on investment = [(127,086.40/1,000,000)*100%] = 12.7% All the above investment platforms provide a substantial return on investment. However, some investment options provide more returns on investments as opposed to other investment options. It is therefore advisable for investors to put more capital investments in investment options that guarantee a higher return on profit as opposed to those that guarantee a lower return on profit, this as a strategy of profit maximization and wealth generation. Appendix Table 1: Allocation of Assets Allocation of assets Total amount of capital QR 1,000,000 Investment options Option Investment Nature Amount Profit 1st option Trading in stock markets exchange Risky 250,000 51,552.80 2nd option Trading in bank deposits Not risky 250,000 13,541.67 3rd option Trading in gold and other metals Not risky 250,000 5173.75 4th option Trading on Forex markets Risky 250,000 56.818.18 totals 1,000,000 127,086.18 Table 2: Trading In Gold, Retrieved From www.kitco.com on May 13, 2014 Reference List Baker, H. & English, P., 2011, Capital Budgeting Valuation: Financial Analysis for Todays Investment Projects, Hoboken, New Jersey, John Wiley & Sons. Brown, S., Elton, E., Goetzmann, W. & Gruber, M., 2009, Modern Portfolio Theory and Investment Analysis, Hoboken, New Jersey, John Wiley & Sons Burgess, G., 2010, Trading and Investing in the Forex Markets Using Chart Techniques, Hoboken, New Jersey, John Wiley & Sons. Smith, B., 2004, A History of the Global Stock Market: From Ancient Rome to Silicon Valley, Illinois, University Of Chicago Press. Uwajeh, A., 2014, Investing in Gold and Silver Bullion: The Ultimate Safe Haven Investments - (Personal Finance, Investments, and Business), Business And Economics, New York. Read More