Share Trading Assignment – M30270 Financial Investment Project
You are given a notional 拢100,000 to invest in the UK/US stock markets. You need to build a diversified investment portfolio, which consists of at least 10 companies based on fundamental analysis. The aim is to maximise the returns of the investment and try to beat the market, e.g. achieving a greater return on average than the market return during the period of trading. It is important you can demonstrate that you understand why you invest in those companies and are able to justify your share selections. You need to make explicit reference to Efficient Market Hypothesis (EMH) in your analysis.
- You are given a notional £100,000 to invest in the UK/US stock markets.
- You should demonstrate your understanding in equity investment and be able to explain why you buy and sell the selected shares. You can use the main market indices as performance benchmark, i.e. FTSE100, S&P500 etc. If you do not beat the market return you will not lose marks. You must calculate the return on the market from your first trade to your last trade in order to determine whether you have beaten the market or not.
- Your investments should be based upon fundamental analysis.
- The portfolio must contain at least 10 companies in this assignment.
- You need to build your portfolio and start buying shares as early as possible, to make sure you have approximately 3-4 months trading period. This means that you are more likely to use short-term investment strategies. You can choose to invest on companies with a mid/long term vision as long as your investment decisions are justified.
- Your need to justify the holding period of individual shares you bought, which should reflect the trading strategies/selection criteria used to build up your investment portfolio.
- As part of trading record, a monthly review on the portfolio performance is required and you should also document how your investment decisions might change based on the monthly review.
- You are allowed to trade as many times as you like, bearing in mind the transaction costs and stamp duties associated with each trade.
- Write a 2,500-word share trading report on the investments you make, which takes up 70% of the total mark of this module.
- There is a 5-minute individual presentation (15% of total mark) based on the share trading assignment, which takes place between Week 4 and Week 6 in Teaching Block 2 (TB2). More details to be followed at the beginning of TB2.
Word Limit: 2,500 words excluding footnotes and references. The word count should be stated on the cover page of your submission. Failure to state a word count will result in a penalty of 5% of the original mark awarded. A falsely stated word-count is an assessment office which may result in a penalty, including the reduction of the mark to 0%. Note, that footnotes should be used to reference sources only. Examiners are free to disregard footnotes that contain inappropriate information or information that should belong in the main text. Coursework that is over the stated word limit will result in a penalty of 10% of the original mark awarded. For the avoidance of doubt, the penalty will be applied to any work that exceeds the stated word limit of 2,500 words excluding footnotes and references. Students are NOT permitted to exceed the word limit by 10% or any other amount.
The record/evidence of your trades and monthly trading review should be included as appendix. And they are not included in the word count.
This is NOT a piece of group coursework. You will need to complete your coursework independently.
Referencing requirements: Students must reference all sources using the APA 7th Edition. Guidance on this method of referencing can be found at
https://library.port.ac.uk/referencing. Reference should be made to the primary source, except when the primary source can no longer be obtained. Poor citation of sources will result in a loss of marks.
Referencing is required to give intellectual credit to your source, help your reader recover your source easily and to avoid being accused of plagiarism.
Students are reminded that the University will not tolerate academic dishonesty in any form. This is cheating.
Formatting: The work should be word processed. Font size should be between 11 and 14 and ‘easy to read’ e.g. Calibri, Arial, Times New Roman. Line spacing should be between 1.5 and 2 with (approx.) 4 cm margins all round. The Header must include the student number and the Footer must include a page number.
Electronic Copy of Work: Students should retain an electronic copy of their coursework, so that it may be checked by a member of staff should a member of staff feel the need to do so. Tutors are entitled to request an electronic copy of coursework if they have any doubt about the accuracy of the stated word count and/or any suspicion of plagiarism. Failure to send an electronic copy of the coursework to a member of staff who has asked for a copy may result in a penalty.
If any student has a query about any of the above matters and wishes to obtain clarification or further information, please contact your Module Co-ordinator or personal tutor.
Feedback: Marking will be done in accordance with and the University of Portsmouth grading criteria for UG level 6. Marks and feedback will be available by Tuesday 18 May 2021.
Recommend Report Format
Introduction – i.e., A brief overview on the investments you made, the investment strategies used in trading and summary of the trading performance for each portfolio.
Method – i.e., How did you select the companies for your portfolio? You should explain the stock selection criteria, or the investment strategies used in setting up the portfolio. You need to justify your stock selection criteria/investment strategies, and this should be done by making direct references to the journal articles/books/business reports/news read.
Results – i.e., How did the portfolio perform? Did the portfolio outperform the market? Which company performed particularly well or bad, and why? Try to link the trading results with the investment strategies used and the latest developments in the market, which would help to reflect on how you have been doing in your investments.
Conclusion – i.e., You could tie your results back to the literature you have read on the type of analysis you have used. Limitations on the investment strategies applied etc
Appendix – Spreadsheet of your trading record. This should include the company name, date of purchase/sell, number of shares bought/sold, share price, trading costs (i.e., transaction fee, stamp duty), profit and loss for each of the companies invested and final profit/loss for the portfolio
Sources of Data
Yahoo Finance http://uk.finance.yahoo.com/
Hargreaves Lansdown: www. hl.co.uk/shares
Morning Star http://companyintelligence.morningstar.com/client/portsmouth you need to access this from the university
Financial Times: you will have free access to FT.com as UOP student (register via https://join.ft.com/46f97b26-fa94-4240-b542-6559e2806f95 )
Bloomberg Terminal – on campus (Bloomberg Suite RB1.08) or remotely access.
S&P Capital IQ online access: http://profile.standardandpoors.com/universityofportsmouth
Company and Industry Analysis
When you start analysing a company you are, in essence, comparing the current value of projected future income, against the current value of the business (on a per share basis), and attempt to determine whether the market is over, or under-valuing the company.
Typically historical information is used, which is a flaw, and therefore can only provide an indication of how the future might look. Analysis does provide some insight into how the company manages things and some context in your research, but we are most interested in the future growth and risks that face the company, including their strategy and the wider industry.
The financial analysis is a quantitative, factual exercise. But the qualitative aspects are crucial to make a considered decision, including:
- the industry the company operates in
- their competitive strength (their market)
- competence of the management team
Beware of biases in reporting, or conflicts of interest – understand where the information is coming from and the independent source of that information.
Primary source of information – company reports – gives a good overview of the company and because of required accounting rules, especially for listed companies, you can obtain detailed information on the company. The key is to determine the key financial data that you are most interested in (in line with your investing discipline) and get the answers you are looking for from your key questions.
You will learn to sift through the assumptions used, and accounting interpretation – meaning some detective work may be needed!
An annual report is published by all listed companies each year. They can release interim reports more frequently, but the annual report is a key financial document, audited by an independent accounting firm to verify its accuracy. The report follows specific accounting guidelines so that investors can compare companies knowing that the same accounting rules have been followed.
An example of an annual report for BP, can be found here:
All of the companies that you consider will have an annual report (normally found in the “corporate” and /or “investor” section on their website) that has various sections to be considered and we will cover them in the next few sections, before we look at the most common financial analysis that should be considered.
Key Financial Reports
There are three financial reports found in an annual report:
- Balance Sheet, or Statement of Financial Position
- Income Statement, or Profit and Loss
- Cash flow Statement
Supplementary to these financial statements are notes to the accounts, where specific rules or changes that have been implemented in the accounts are explained, along with director’s reports and the auditors report.
It is important to note that considering a single annual report in isolation doesn’t really tell you too much about a business. It is only analysing and comparing annual reports over many years that you can identify trends of management action and understand how they are managing the business, and ultimately whether or not you believe this will lead to a good investment, or not.
An example of trend analysis is below. It allows you to see trends that are taking place year-on-year. For examples, the analysis below shows a decline in sales of 7.26%. Had you just looked at sales for 2018, you would not have known sales have declined unless you compared sales to the previous year, therefore these trends are important to identify and analyse.
Key Financial Reports
Profit and Loss
This financial statement tracks all revenue and costs with the last year and calculates the profit of the business.
Your text book starts the discussion about profit and loss statements here:
It is important you familiarise yourself with some of the key terms and “line items” of the income statement.
Key Financial Reports
This statement is important because it tracks where cash comes in from, where it has been spent, or received and the free cash available in the business. While profit or loss can be an accounting concept, cash is the lifeblood for business, and this statement ensures that the cash of the business is being tracked accurately.
It allows you to identify unnecessary spending of the business by management and free cash flow is often considered a key financial indicator that investors might track.
The textbook section on cash flow is here:
The cashflow statement is separated into three different activities: operations, investing and financing, which helps identify which aspect of the business is adding or subtracting from overall positive cash flow.
A final important point is that because profit or loss is an accounting concept, a business can be profitable and still be cash flow negative, or vice versa, i.e. unprofitable and cash flow positive.聽https://ereader.perlego.com/1/book/398193/266
From the financial pages
There are a few key investment ratios/measures (or sometimes known as investor ratios) that are given daily or weekly in the financial press. These mostly relate to the share price:
- Price-earnings ratio
- Earnings yield
- Dividend yield
- Dividend cover, payout ratio and retention ratio
The text book covers the key ratios starting in Chapter 12:
The price-earnings ratio (P/E ratio or PER) compares a company’s share price with its latest annual earnings per share (eps). The eps is the profit attributable to shareholders, as shown in the income statement, divided by the number of shares in issue.
PER= Current market price per share/Last year’s earnings per share
For example, if a listed company had earnings per share of 20p as shown in the latest accounts and the share price is currently trading at 200p, the PER= 200p/20p = 10. This basically implies that the market prices the company at 10 times of their latest earnings. Hence, P/E ratio is also known as earnings multiple.
When economic indicators for the sector in which it operated suddenly took a downturn, investors reacted in such a way that the share price fell to £1.60 causing the PER to fall to 160p/20p = 8.
There would have been no immediate effect on the company’s declared profits the fall in the PER being caused by the market’s reduced expectations for profit growth in the future.
The higher the P/E ratio, the greater the market’s expectations are for the earnings (profits) of that company to increase.
Where there are two companies earning stable profits and operating in the same market sector with similar prospects, you would usually expect them to have similar P/E ratios. If the companies sharing similar prospects have very different P/E ratios, this might represent a good investment opportunity as the one with lower P/E ratio is likely to undervalued. Obviously, this needs to be investigated more closely before any investment decision being made, as there are many factors that can lead to a lower share price hence lower P/E ratio, i.e. recent scandal/reputation damage, major change on senior management team, law suits etc.
P/E ratio can be very different across companies in different industries, which is likely to reflect the market expectation on the industry/company’s grow prospective. As you can see from the list below with their P/E ratio as of 1st Oct 2020, Tesla’s P/E ratio is far beyond the other companies which shows current market mood and the very high expectation market had on its future growth potential. Having said that, can Tesla be over-priced?
|AstraZeneca||Pharmaceuticals & Biotechnology||66.48|
|BAE System||Aerospace & Defense||12.75|
|Tesla||Automobiles & Parts||1,103.82|
Source: Financial Times market data
Some analysts prefer to swap the top and bottom of the PER ratio to create the earnings yield. This shows the profits attributable to each £1 invested buying a share:
Earnings yield = earnings per share/current market price per share
So, to take our earlier example, for every £1 spent buying a share last year’s company profits are 7.56p (historic earnings yield):
Earnings yield = 68p/900p = 7.56%
The eps figures used by the press are usually basic earnings (reported earnings) . These include a deduction from profit of one-off exceptional items, so they present a warts-and-all picture.
The dividend yield is the amount of dividend paid on each share as a percentage of the share price:
Dividend yield = Dividend per share (pence) / Current share price (pence) x 100
So, in the case of a company where the dividend paid is 34p per share and the current share price is 900p:
Dividend yield = 34p/900p x 100 = 3.78%
The dividend figure is the total of all dividend payments declared for the year. There may be two payments: an interim dividend (say, 14p per share) following the first half of the year, and the final dividend (say, 20p). There may be four payments in the case of those companies declaring dividends quarterly.
Dividend yield is important because it is the near-term cash return you are actually receiving from a company. You may hope to make capital gains as well, but this is somewhat theoretical – dividend income is real. The yield offered on a share can be compared with other shares, sectors or the market as a whole. It can also be compared with other investments such as government bonds or building society accounts.
Managers often use dividends to signal to shareholders their confidence in the firm’s future. In years when losses are made dividends are often maintained, or even increased, to signal that the firm had an unusually bad year and all will be well soon.
Dividend cover is the ratio of profit attributable to ordinary shareholders to dividends. It can be calculated by dividing the earnings per share by the dividend per share:
Dividend cover = Earnings per share / Dividend per share
Or, for the company as a whole:
Dividend cover = Profit attributable to ordinary shareholders / Total dividend payment
So, if eps are 68p and the dividend per share is 34p the dividend cover is 2. What does this mean?
Dividend cover highlights the affordability of the current level of dividends. It shows the number of the current dividend payments that could be made out of current after-tax profits. The higher the proportion of profits paid out, the less is available for business investment and growth.
Payout and Retention ratio
Switching around the top and bottom of the above ratio gives the payout ratio. This is the percentage of after-tax profit paid to shareholders in dividends.
Payout ratio = Dividend per share / Earnings per share or Total dividend payment / Profit attributable to ordinary shareholders
After the dividend payments, what is left in the company is the retention ratio:
Hence, Retention ratio = 1- Payout ratio
or Retained profits / Profits attributable to ordinary shareholders
Companies, on average, maintain payout ratios of around 45– 50 per cent, therefore dividend covers are typically around 2 or slightly higher (although they dip in difficult times).
Although it depends on company’s dividend policy, high-growth/high tech companies such as Amazon/Tesla tend to pay little or no dividends. Why do you think their shares remain attractive to potential investors?
Profit Margin Ratios and Measures
There are different profit margins, and it is important to know which one is being referred to in a particular context.
Gross profit margin (or gross margin ) is defined as sales minus cost of sales, expressed as a percentage of sales:
Gross profit margin = Gross profit/Sales x 100
= (Sales – Cost of Sales)/Sales x 100
Gross profit margin can be used to compare the performance of a company with that of its competitors. If it is low, investigate the reason. It may simply be that the company has a mix of products that have a high level of bought-in raw material costs. It could be that the management are less efficient, or, perhaps, pricing power in the market place is low.
Operating profit margin (or operating margin or trading margin ) is operating profit as a percentage of sales. The profit figure used here is profit before interest and tax (PBIT) is deducted. It allows for all the expenses of manufacture, distribution, administration, R&D, depreciation, etc., but not for the financing costs or tax.
Operating profit margin = Operating profit/Sales x 100
= (Sales – All operating expenses)/Sales x 100
If the company has a declining operating profit margin over time and/or relative to its competitors, this may be a sign of serious trouble – cost control or pricing power may be deteriorating.
Financial health ratios and measures
Gearing ratio focuses on the extent to which a firm’s total capital is in the form of debt.
Gearing = Long-term debt /（Long term debt + Shareholders’ funds）
The measure shown above puts gearing within a range of zero to 100 per cent as debt is expressed as a fraction of all long-term capital.
It may be erroneous to focus exclusively on assets when trying to judge a company’s ability to repay debts. Take the example of a successful advertising agency. It may not have any saleable assets at all, apart from a few desks and chairs, and yet it may be able to borrow hundreds of millions of pounds because it has the ability to generate cash to make interest payments. Thus, quite often, a more appropriate measure of gearing is one concerned with the level of a firm’s income relative to its interest commitments,
Interest cover = Profit before interest and tax / interest charges
The lower the interest cover ratio the greater the chance of interest payment default and liquidation.
Current ratio It is useful to know if a company has enough cash and other short-term assets that can fairly quickly be turned into cash to meet its short-term liabilities (does it have liquidity ?). Can the company pay its near-term bills? The current ratio measures this:
Current ratio = Current assets/Current liabilities
A large element of the current assets, that is, inventory (of raw material, half- finished goods, etc.), may not be easy to quickly convert to cash so a tighter measure of immediate solvency (the ability to pay debts when they become due) is used, called the quick ratio , liquid ratio or acid test :
Quick ratio = (Current assets – Stock)/Current liabilities