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Investment Project

Investment Project

Twenty first century has brought people the investment alternatives, which were formerly reserved for the wealthy individuals only. With the course of time, the traditional investment vehicles have been modernized. Today, all the financial alternatives are divided into three broad categories: financial assets, real assets, and speculative assets. Financial assets are special claims such as equity shares, mutual fund shares, and corporate debentures, deposits with banks, insurance policies, and derivative instruments. And real assets are tangible assets like commercial property, gold, precious stones, and art objects. Speculative assets are bought for the sake of possible price changes. The speculative assets include currency, precious metals, stocks, bonds, certificates for the collective investments etc.

Investment Process

While discussing the issue of investment alternatives, the process of choosing the company, and the factors that influence the client’s decision should be discussed. At first, it is worth noting that in order to attract the possible investments the company should have a well-developed and long-term plan for the future. It is really essential for the potential investors, as they become more confident in their actions and their future success. The company should have a good reputation in the community. The thing is that the shady companies bring the investors the risk of losing their profits. For that reason, they should choose carefully the company.A lot depends on the domestic policies within the country, where the enterprise is located. It is not a secret that investors choose the most stable countries for making their investments.

Factors that influence investment

An efficient investment depends on the following factors.

A) First of all, the amount of investment depends on the distribution of income received, consumption, and savings. Revenue growth increases the savings.

B) The expected rate of the net profits is also essential for the investment. The higher the expected rate is, the greater the revenues become.

C) Another factor to be mentioned is the inflation rate. It affects the dynamics of the investment. The higher the score is, the greater the investment returns become.

D) The risk factor should be taken into account when considering an investment. There exist two types of risk: diversifiable and non-diversifiable. The diversifiable risk is not really essential for the informed investors, as they might eliminate its effects by diversifying it away. The non-diversifiable risk should be taken into account as investors cannot eliminate it. The investment risk is directly related to the possibility of earning some extra money. Researchers Besley and Brigham in their work “Essentials of Managerial Finance” (2008) point out:

“Investment risk, then, is related to the possibility of earning an actual return other than the expected one. The greater the variability of the possible outcomes, the riskier the investment” (p. 307).

Selection of Asset

While discussing the issue of investment, the selection of asset should be mentioned. There exist different categories, where the money might be invested. They include:

  • Bonds
  • Stocks
  • Real Estate
  • Precious Metals

The above graph shows a Contrast in Asia and Latin America rate of investment. A lower dependency rate is not always associated with high rate of investment.

Bonds.

Bonds show that the owner has a debt relationship. When an individual buys a bond, he/she lends his finances to a particular firm or company. The bondholder is a lender and he/she is entitled to interest on the sum lent and the repayment of principal at the end of the loan period.

Stocks.

When a person owns stocks, it means that he/she is a holder of a share. It means that this person owns a piece of the company. As a part owner, this individual obtains the right to get the share of the company’s profits, which might be paid in the form of dividends or prospects for growth.

Real Estate.

This is a special category of assets. It possesses both great amount of risk and return benefit. For this category, risks in pricing is more essential than marketability, transaction costs, and taxes.

Precious metals.

Gold and precious metals is another asset’s category, which is generally perceived as the strategic asset. In order to gain profit from the precious metals, its holders should recognize the dynamics of precious metals markets, and develop certain strategies.

It should be noted that investment in bonds, stocks, and mutual funds are three most popular methods of investing. David Van Knapp in his book “Sensible Stock Investing: How to Pick, Value, and Manage Stocks” (2008) points out: “The reason to use stock investing to build wealth is that every historical measure shows that stocks have been the most profitable long-term investment, where “long-term” is measured in years. There is little reason to expect that stocks will not continue to outperform other assets over the long time frames. Stocks in general have provided average 10-11 percent annual returns since before the Great Depression, and the market has risen in about seven out of every ten years. Prior to the three-year bubble leakage of 2000-2002, it had not taken more than two years for stock market pieces to go up since 1939-1941″ (p. 7).

Investing in bonds has a number of disadvantages which include:

  • Purchase through a broker presupposes commissions;
  • Additional fee for the broker;
  • Large investment for the diversified bond portfolio;
  • Inability to reinvest the dividends;
  • Additional fee for the tax-deferred account;
  • Hidden markups and spreads payment.

The next thing to be pointed out is the selection of the company and the investment strategy. While conducting the research such financial statement and cash flow statement, balance sheet, and the income statement were taken into account. The companies’ earnings, sales, debt, and equity were checked. In the course of research two companies were chosen in order to make the portfolio more diversified. These companies include: Toyota Motor Corp. and Coca-Cola Company.

Toyota Motor Corp.: It should be pointed out that Toyota is a global powerhouse, as it has 51 plants in the 26 countries. It is one of the world’s largest car manufacturers, and is targeting nearly 15 % of the world automobile sales by the 2015. This auto manufacturer sells nearly 7 million vehicles around the world (according to researcher Farrell, 2008), and its profits exceed the profits of many others car manufacturers.

Coca-Cola Company: This is a multinational company, and its prices rise constantly. The product was invented in 1886 (according to Robert Dransfield, 2001) and since that time the company has come a long way to success. This company achieved astonishing results due to its ability to differentiate the product from the rivals, its efficient marketing strategy, and strong advertising. The company is currently selling nearly 1 billion servings per year. It is one of the most famous global brands.

Calculations

In the course of investing the passive buy and hold strategy was applied. This strategy presupposes selecting the diversified portfolio of stocks, investing in each, and obtaining the gains and dividends over the certain period of time (in our case this period is 4 months: February, March, April, and May). In order to gain the rich returns the positive business dynamics of the companies was analyzed.

Toyota Motor Corp.

(taken from Bloomberg Businessweek)

Step 1:

calculating the number of shares purchased:

300000AED =81660 USD

41613/98,13 (cost of share in February) = 424

Step 3.

Proceeds from sale:

424*98,13=41607 (February)

424*120,53= 51104 (May)

Step 4.

Gain on sale: 9497$

Step 5.

Dividends: rate * cost of total shares

1,61%*41613= 1,61/100*41613= 670$ (per year)

670/12=56$ 56*4=224$

Step 6.

Total earnings:

9497+224=9721$

The following is the analyst opinion regarding the company.

The following table shows the daily prices of Toyota for May 2013 and the accompanying chart is shown above

Step 7.

It was already mentioned that passive buy and hold strategy was applied. For that reason, at the beginning it was considered that the profits would be gained from the dividends only. However, the price of the shares has increased significantly and resulted in gaining the extra profit.

Coca-Cola Company

Step 1:

calculating the number of shares purchased:

Number of shares purchased = total investment/ price per share;

300,000 AED is approximately 81660$

40000/ 3,754 (cost of share in February) = 1065

Step 2.

Proceeds from sale:

1065 * 37,54=40000

1065 * 42,24=44985

Step 3.

Gain on sale: 4985$

Step 4.

Dividends: rate * cost of total shares

2,47% *40000+ 2,47/100*40000=988$ (per year)

988* 12=82$ ( dividends per month) 82*4= 329

Step 5.

Total earnings: 4985+329=5314$

Step 6. It should be pointed out that in the course of research, the profit from dividends was considered. As the Coca-Cola Company provides 2.47 % profit from dividends, it was planned to gain 329 dollars. However, the price of the shares has increased, and it resulted in the increase in profits. Thus, at the beginning it was planned that the total earning would be approximately 329$, but they turned out to be 5314$.

Portfolio

 

Investment

Shares

Company

Industry

Dividend

Yield

Dividends

1.

41607$

424

Toyota motor Corp.

Auto manufacturing

1,61%

224$

 

2.

 

 

40000$

 

1065

 

Coca-Cola Company

 

Food

 

2,47%

 

 

329$

           

573$

The following is the summary of the Coca-Cola Company.

Conclusion

In conclusion, it should be pointed out that money investment is one of the most efficient ways to gain profit. However, in order to obtain great returns one should consider a number of significant factors, and carefully choose the company. In the course of this research, Coca-Cola Company and Toyota motor Corp. were chosen. These are multinational companies, which have the plants and manufacturing facilities around the world. These are globally famous and popular companies. In the course of research the passive buy and hold strategy was applied. The thing is that this is the first investment experience, and this strategy seemed to be the most suitable one. It is worth mentioning that in the course of investment, 15035$ was gained.

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