THESIS PROPOSAL

ON

CORRECT TIMING FOR PROFITABLE INVESTMENT IN COMMON

STOCKS USING MOVING AVERAGE TECHNIQUE

(REFERENCE TO THE COMMON STOCKS OF COMMERCIAL BANKS IIN

NEPAL)

Submitted by:

Yashmin Dangol

MBA Term 6

Ace Institute of Management

Submitted to:

Mr. K.B. Manandhar

Thesis Guide

4th March, 2011

CHAPTER 1: INTRODUCTION

1.1 BACKGROUND

The term Investment means putting money on something with the expectation of getting

some return in future. Investment is the long term decisions. Any investment is made

with the primary objective of earning returns on the invested sum. Based on the type of

investment instruments, returns can vary. Investment is done in any area of the economy

like stock, bond, financial derivatives etc. The returns can be of two types, repetitive cash

receipts, capital gain or loss. The gain or loss of capital makes the difference between the

purchase price and the selling price of the security. In present day, investment in the

common stock of the commercial banks is increasing. Investment in common stock or

equity investment is one of the riskiest types of investment which are available.

Investment on bonds, deposits are considered as less risky than the equity investment.

Investment in stock is challenging, risky, interesting and rewarding. It is challenging

because it involves huge investment and high competition. It is risky because stock price

depends on the environmental factors so investors have to make track of stock prices. It is

interesting because of its dynamic nature and it is rewarding because of the possibility of

the return or financial gain in future. While investing in stocks the more you are ready to

take risk, the more the return an investor can get. Depending on the degree of risk an

individual can take an investor can be classified as a risk taker, risk averter or indifferent

towards risk. Risk takers usually prefer to invest in risky securities like shares and risk

averters invest in risk free securities. In common stock, who invest wisely makes a lot

and earn even more in the future and replicate its invested capital. From the study, it is

found that success in investment in stock is possible only thing that needed s rational

decision making in duration of investment, management ideas, financial knowledge,

financial ratio analysis, mathematical and technical skills and stock knowledge.

Personal investment is affected by the level of knowledge an individual investor

possesses about different investment instruments. The knowledge of the relationship

between risk and return along with the knowledge of industrial sectors, economic

indicators, companies performance analysis techniques, portfolio management

techniques, etc., affect the investment decisions of individuals. The sources of

information regarding investment avenues also guide the investment decisions. Tax

liabilities of an individual and the effect of taxation on the income generated from

investment along with its understanding influences an individual's investment decisions.

Security or safety is also very important in investing because; if someone is going to

invest their hard money then definitely he/she will expect good returns. The safety of the

funds invested should be the first priority of any investment and then the returns should

be in proportion to the level of risk taken.

Investment decisions made by investors are based on:

1. Investors commonly perform investment analysis by making use of fundamental

analysis, technical analysis and gut feel.

2. Investment decisions are often supported by decision tools. The portfolio theory is

often applied to help the investor achieve a satisfactory return compared to the

risk taken.

This thesis is on the topic timing for profitable investment in common stocks using

moving average technique which is base on technical analysis. Moving average is used as

a technical analysis of financial data which is based on the past data of the market indices

which resembles the future trend and reversal of trends. A moving average is the average

price of a security over a set amount of time. By plotting a security's average price, the

price movement is smoothed out. Once the day-to-day fluctuations are removed, traders

are better able to identify the true trend and increase the probability that it will work in

their favor. Moving average is an approach to determine when a trend is about to change

the direction and the basis of trend following system. A trend in motion tends to continue

whether it may be towards up or down trends. Stock prices are expected to continue its

state of motion either in upward or downward. Hence being able to detect a secret of

trend that is starting to rise or fall is the first step toward making a profitable investment.

1.2 OBJECTIVE OF STUDY:

The main objective of this thesis report is to explore theoretical knowledge of investment

analysis into practical application. The specific objectives of the study are as follows:

Determine the correct timing for investment i.e. buying and selling of the

common stock in the market

Application of knowledge of investment analysis in the buying and selling of the

common stock

Application of the theoretical knowledge of moving average technique for the

correct timing of investment in the common stock

Study the stock market, trend of price, causes of fluctuations

1.3 STATEMENT OF THE PROBLEM

Investment in common stock is a risky and challenging. Investment involves buying and

selling. The main problem arises in deciding the correct time for buy and sell. The buying

decisions include what to buy, at what price to buy, when to buy and what type of

common stock to buy. Similarly the selling decisions include when to sell, at what price

to sell, when to sell and how to sell. Buyers always want to buy at low price and sellers

want to sell at high price so the main statement of problem of the study is related with

the buying and selling of the stocks at right price at right time in order to make

profitable returns in the market.

Investment in common stock is not an easy task. It involves huge investment of money.

In investment the investors can be risk takers, risk averters. Depending on the degree of

risk an individual can take, an investor can be classified as a risk taker, risk averter or

indifferent towards risk. Generally investors seek higher return at lower risk. There are

very few investors who seek lower return at high risk.

The decision to make investment by investors is made by the fundamental analysis,

technical analysis or gut feeling. Fundamental analysis is the cornerstone of investing. In

fact, some would say that you aren't really investing if you aren't performing fundamental

analysis. It includes the analysis of the financial statements its management and

competitive advantages, and its competitors and markets. Fundamental analysis is

performed on historical and present data, but with the goal of making financial forecasts.

As per fundamental analysis, almost all the available stocks are generally found above the

fundamental values. If investors want to buy the common stock of the desired company at

only fundamental value, it may not be possible at all time because market values are

likely to found above the fundamental value almost all the time. The next analysis is done

by technical analysis. While fundamental analysts examine earnings, dividends, new

products, research and the like, technical analysts examine what investors fear or think

about those developments and whether or not investors have the resources to back up

their opinions. Technical analysis analyses price, volume and other market information,

whereas fundamental analysis looks at the actual facts of the company, market, currency

or commodity. Dow Theory, relative strength analysis, volume analysis and moving

average analysis are the important tenets of technical analysis. The study is done by

focusing only on the moving average technique for forecasting the stock trend to know

how investors can make profitable buying, holding and selling of the common stocks in

the market.

1.4 SIGNIFICANCE OF THE STUDY

This thesis report will be significant for all those people who would like to invest in

common stock. It will give an insight about the correct time for investors to invest their

hard earned money in shares of commercial bank. The thesis describes the fundamental

as well as the significance of the technical analysis in investment therefore the study is

significant for the investors in making investment decisions by looking up the technical

analysis.

1.5 SCOPE OF THE STUDY

Investment is a very broad subject. Investments are done in shares, real estate, bonds,

government securities, gold, silver etc. But the scope of the study is confined in investing

in common stocks and the technical analysis is taken to support the study. In technical

analysis also there are number of techniques such as relative strength index, MACD,

moving average. For the study the author has used moving average technique.

In the process of conducting study, various quantitative and qualitative techniques will be

used. Facts and figures will be presented in the form of various charts, diagrams and

tables as per the study. Nepal stock exchange, daily newspapers and Investopedia.com is

used to obtain information about the investment decisions and other relevant information.

1.6 LIMITATION OF THE STUDY

The thesis is done for academic purpose. It is an outcome of the author’s theoretical

knowledge in the practical application. The limitations of the study are as follows:

Moving average is a lagging indicator

Moving average gives hint to the market and stock prices very late. So the change

in market trend will be seen only after it has happened.

Moving average techniques include simple moving average, weighted average

and exponential moving average. Among these techniques the study is based on

the exponential moving average technique.

Nepse indices are taken for studying the market movements

Study is limited to the closing price of only one commercial bank

The thesis is done in three months which is quite limited time for the author

1.7 RESEARCH QUESTIONS OR HYPOTHESES

Following research questions are designed for the study:

1. How do investors find out the correct time for buying and selling the stocks for

profits?

2. What techniques are most suitable for the investment?

3. When to enter and exit from the market?

1.8 OPERATIONAL DEFINITION AND ASSUMPTIONS

In the topic Investment decisions many writers have explored and gave their concepts.

They have explained the risk and return associated with investment, measuring the risk of

expected rates of return, factors affecting investment decisions, valuation of stock market,

estimating the intrinsic value, technical analysis and so on. In the thesis the author will

take definition and concepts from the various books related to the thesis topic.

Regarding the investment many writers have defined the term investment. As per the

Reilly and brown the term investment is:

An investment is the current commitment of dollars for a period of time in order to derive

future payments that will compensate the investor for (1) the time the funds are

committed, (2) the expected rate of inflation and (3) the uncertainty of the future

payments.

Therefore, Investment means use of money in correct time in the hope of making money

in future. The investors use fundamental analysis and technical analysis while using

Investment. The main objective of the fundamental analysis is to appraise the intrinsic

value of a security. The intrinsic value is the true economic worth of a financial asset.

The fundamentalists maintain that at any point of time every share has an intrinsic value

which should in principle be equal to the present value of the future stream of income

from that share discounted at an appropriate risk related rate of interest. The

fundamentalists attempt to estimate the real worth of a security by considering the

earning potential of a firm which in turn will depend on investment environmental factors

such as growth of national economy, political environment, growth potential, industrial

analysis etc.

Technical analysis is based on the past information on prices and trading volume of

stocks which gives a picture of what lies ahead. It attempts to explain and forecast

changes in security prices by studying only the market data rather than information about

a company or its prospects. The technical analysts believe that the price of a stock

depends on supply and demand in the market place and has little relationship to value.

The technical thinks that the only important information to work from is the picture given

by price and volume statistics. The technical analyst sees the market, and noticeable

trends which continue for significant periods. A trend is believed to continue either

uptrend or downtrend. The direction of price change is very important in technical

analysis.

The assumptions of technical analysis are as follows:

The market or individual stock acts like a barometer rather than a thermometer.

Events are usually discounted in advance with movements as the likely result of

informed buyers and sellers at work.

Before a stock experiences a mark-up phase, whether it be minor or major, a

period of accumulation usually will take place. Conversely, before a stock enters

into a major or minor downtrend a period of distribution usually will take place.

Uptrend in prices denotes a balance buying while a downtrend is indicative of

extreme supply.

The third assumption deals with the scope and extends of market movements in

relation to each other.

The technical analysts explain the investment decision by many techniques. But the study

in the given thesis is more focus to the exponential moving average. Exponential moving

average gives more emphasis to the recent data. This type of moving average reacts faster

to recent price changes than a simple moving average.

CHAPTER 2: LITEREATURE SURVEY AND THEORETICAL FRAMEORK

2.1 LITERATURE REVIEW

The thesis study is concentrated on correct timing for investment in common stocks of

the listed commercial bank in order to achieve profit. Also it is emphasized on correct

timing for the entering and exiting the market. The main concern of the study is the

correct time to invest money in common stock. The study is supported by using the

technical analysis where the author will use moving average. In moving average also

exponential moving average will be used as it gives more concrete result and analytical

the concepts of the uptrend and downtrend, crossover and penetration of the price and

moving average will be discussed. The rules of investment especially buying and selling

the stocks on the basis of moving average techniques will be discussed. The course book

of investment analysis and portfolio management, corporate finance, financial

management will be taken as reference. Similarly to track the price of the listed bank

daily newspapers and the website of Nepal stock exchange will be used. Various internet

website will be browsed for the charts. Relevant citation of the authors will be cited from

the books.

2.2 THEORETICAL/CONCEPTUAL/OPERATIONAL FRAMEWORK

Theoretical perspective that has taken in analysis of data in the thesis work is applying

moving average technique for forecasting stock price trends so as to determine accurate

time in for entering and exiting the market for profitable investment decision. The

investment analysis and portfolio management book, corporate finance, financial

management books are taken as reference and to cite the important concepts related to the

study. Different authors claimed differently in timing of the entry and exit the market for

investment. Moving average is one of the most popular and easy to use tool to the

technical analyst.

Moving average is the effective tool for forecasting the correct timing of buying and

selling the common stocks and it is the effective statistical tool for analyzing and

interpreting the stock price trends. The main purpose of the moving average is smooth

out the values of adjacent statistical observations and so eliminates minor random

fluctuations. In moving average a set number of the most recent closing prices on a

security are averaged each day. For example daily closing prices during the 200 day may

be used. 200 day is used to determine long term trend. It smoothes out the short term

fluctuation to help the trend more clear. In moving average also there are three types

which are as follows:

Simple moving average: a simple moving average is formed by computing the

average price of a security over a specified number of periods. A simple moving

average is calculated by adding the closing price of the security for a number of

time periods and then dividing this total by the number of time periods.

Weighted moving average: a weighted average is any average that has

multiplying factors to give different weights to different data points.

Exponential moving average: Exponential moving average gives more emphasis

to the recent data. This type of moving average reacts faster to recent price

changes than a simple moving average.

Therefore literature is related with the correct timing of investment in the common stock

of commercial bank by the help of technical analysis. In technical analysis also

exponential moving average is used. Relevant information are taken from the books. To

study more logically and analytically the listed commercial bank will be used.

CHAPTER 3: METHODOLOGY

3.1 REASEARCH PLAN AND DESIGN

For the study the research will be done, all the data will be quantitative in nature. On the

basis of the historical data the research will be conducted. Exploratory research design

will be used. Exploratory research design will be applied as there has been used

secondary data regarding the market indices and closing prices of the stocks. Market

indices will be taken from trading information published in daily newspapers like

kantipur, kathmandu post, samacharpatra etc and Nepal stock exchange. The research

will be based on the data of market indices of Nepal stock exchange of last five years.

The data will be used for the study of market movement. Calculations will be done on the

basis of moving average. The average values and actual indices will be plotted in the

same chart to study the market movement and its trend. For analysis of the overall market

movement, market index for Nepal stock exchange (NEPSE) will be used.

Similarly the past data of one commercial bank will be used for analyzing the individual

stock price movement. Closing price of one commercial bank will be taken for the study.

Special reference will be taken for analyzing the commons stock of the respective bank.

The study of the respective bank will be the prime focus of the study. There are 30 listed

commercial banks in Nepal but since it is not appropriate to analyze all the individual

stocks of commercial bank in the thesis writing only one commercial bank will be taken

for the study.

3.2 DESCRIPTION OF THE SAMPLE

For the research the total sample is the listed companies in Nepal stock exchange. But for

this study the author will take only the listed commercial bank in Nepal stock exchange.

3.3 INSTRUMENTATION

The secondary data will be more used in the thesis report. The source of the secondary

data will be the investment analysis and portfolio management book written by Reilly

and Brown, investopedia.com, wikipedia, Nepal stock exchange, website of the

respective bank. The questions will be open ended, structured and the respondents will be

the investors.

3.4 DATA COLLECTION PROCEDURE AND TIME FRAME

In the process of conducting study, data will be collected mainly from one bank in which

the study will be done, Nepal stock exchange and the financial websites. The source of

data will be secondary in nature. Original stock prices and market indices are published

in the daily newspaper and the website of Nepal stock exchange so information on stock

price and market indices will be taken from the respective source. After the data will be

collected it will be calculated by using mathematical tools and the result will be present

in graphs, charts, tables for the clear understanding to the reader. The conclusion will be

drawn from the findings from the analysis of research and recommendation will be made.

3.5 VALIDITY AND RELIABILITY

The validity of the thesis report will be checked by the help of secondary data, research

questions, and investment analysis book. The thesis is not copied and assures reader that

it is valid and reliable and helps them in making investment decisions.

3.6 ANALYSIS PLAN

In this thesis report, Exponential moving average will be used as a tool for analysis. The

reason for using this technique is it gives more weight to present data. It is more

analytical and scientific.