STOCK VALUATION AND ITS APPLICATION IN FINANCIAL MARKET
CHONG HUI ZHI
SUPERVISOR: DR NOR SHAMSIDAH BINTI AMIR HAMZAH
A proposal submitted in partial
fulfilment of the requirement for the award of the
Degree of Bachelor of Science in Mathematic Technology
Faculty of Applied Sciences and Technology
University Tun Hussein Onn Malaysia
Research Background 1-2
Research Significant 4
CHAPTER 2LITERATURE REVIEW
2.1.1Dividend Discount Model
2.1.2Exponential Moving Average
3.1 Dividend Discount Model
3.2 Exponential Moving Average
CHAPTER 4 EXPECTED RESULTS
1.1 Research Background
A wise man once said: Risk comes from not knowing what you’re doing (Warren Buffett). No one denied Warren Buffet’s capabilities and influences in investment sector. Great quantities of interest and effort in business and investment showed by him since young age. Undeniably, Warren Buffett always been everyone’s role model for future career and lifestyle. According to the 80/20 Rule, in the financial management, 20% of the people use their assets to do investment for increment of their net worth, while 80% of the people didn’t utilize their assets. These people saved their money in bank, buy new houses, cars or other material needs which indirectly increasing their debt. No crisis consciousness is the biggest life crisis for everyone. When one did not manage the asset properly, they will suffer from financial crisis. It explained why the rich will become richer and the poor become poorer.
Valuation plays an important role in numerous finances field, such as corporate finance and portfolio management. Stock valuation is the process of determining the current worth of an asset or a company. There are two types of valuation, which include fundamental analysis (FA) and technical analysis (TA). The example of the first one is top-down approach and bottom-up approach for the second. FA is more enhance than TA as it involve the financial and economic analysis to visualize the movement of stock prices, while TA is more on forecasting future prices based on the inspection of past price movements while avoiding losses. TA is focused in this research, Dividend Discount Model (DDM) is one of the examples. DDM is the most commonly widely used fundamental stock valuation model in practice. Although this method is a bit old-style, in fact, there are also specified companies remain DDM model as a useful tool for estimating value of the stock. DDM is a procedure for valuing the price of a stock by using the predicted dividends and discounting them back to the present value. Then, the answer obtained is compared with the current stock value. If the answer is higher than the current stock prices, it means the stock is undervalued. Hence, it is the suitable time to buy the stock and vice versa for overvalued.
Stock Valuation And Its Application In Financial Market is a very interesting topic because in stock market, some people can lose all the investment with stocks. The flip-side of this, some people can make a lot of money if they invest in the right company. Therefore this research is for investors to learn the way to evaluate the stock by simple calculation. Hence, investors will know when is the suitable time to buy or sell. Try to become a smarter, more informed and savvy investor. Of course, there is risk involved, as there is in all investment, but the most important thing is to counterpoise the amount of risk one’s willing to take with the return one’s aiming for.
For another approach of TA, moving averages are the workhorses of technical analysis. Moving average is a lagging indicator that smoothing price numbers so that investor can see and measure the trend. When the market is in a strong and sustained uptrend, the MA indicator line will also show an uptrend and vice-versa for a down trend. Many authors have recommended to involve moving average in investment decision making. The two fundamental used moving averages are the simple moving average (SMA) and exponential moving average (EMA). SMA is an arithmetic moving average calculated by adding the closing price of the stock for a period of time and then dividing its total by the number of time periods. EMA is a type of moving average that is similar to SMA, except that more weight is given to the latest data (Investopedia).
1.2 Problem Statement
The main purpose of this paper is to have a clear picture on the application of DDM and EMA for stock valuation. The reason is because many investors do not know how to value a stock, when to buy or sell to get the profitable outcome. Hence, this research explains from the very basic. With the demonstrated of application of DDM and EMA in examples, investors will have better understanding towards stock assessment. Moreover, DDM have three different stages based on the assumptions towards the future dividends. The first stage DDM is designed to value stock with zero growth of firm, which means the dividend of the company will not grow at all over time. The second stage DDM is applied for firm which is stable with constant growth rate, while the third stage is a variable growth type, which means the dividend growth varies over time. EMA will be discussed in this research because EMA react rapidly in regard to the latest price changes. Therefore, it can provide an earlier indication of likely future price prediction.
1.3 Research Objectives
The objectives of this research is aimed:
To preview the future stock price by using DDM and EMA.
To analyse and compare the forecast stock price between DDM and EMA.
To identify the differences between DDM and EMA in stock valuation.
1.4 Research Scope
FA is not included in this research as the parties involved is too wide. There are various ways to assess the stock, however, only one method is chosen, the most popular or commonly used among them, which are DDM. Next, EMA is chosen because it is important in identifying the newest stock price and the potential for a change in the build trend.
1.5 Research Significant
This study helps investor to have a fundamental knowledge about DDM and EMA have. By making comparison, this will enable investors to have a clear path in making decision for their investments choice.
PLANNING (GANTT CHARTS)
Task FYP 1
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Choose suitable title Introduction Determine the research objectives, problem statement, scope and significant of study Planning Come out with literature review Methodology Show the expected result Correction of proposal Submit proposal Proposal presentation