Strategy for Stock Market Challenge
A-1.
The key aspects of my strategy are very simple. First of all, before I purchase a stock, I will look into the company intensely. I will look at their history (i.e. the last time their stock fell and by how much), what they are involved in (what kind of business), their current position in the market (if they just went into a slump and stock is low, then I'll buy low and sell high), also, the size of the company, and how well known it is (if it is not well known and is doing well, then there is a possibility to make lots of money). Overall, I will be in between a moderate risk taker, which is between a conservative risk taker and a high-risk t 13313g66n aker. For the first half of the challenge, I will be a higher risk taker and towards the end of the challenge, I will lean more towards a conservative risk taker. I am going to be a risk taker at first because the higher the risk the higher the return.
A-2
During the first week in the challenge, I will be in between a higher risk taker. With reference to the amount of stocks I will be purchasing during the first week, I will probably purchase between five and seven stocks. The reason I am being a higher risk taker for the first week is because I want to make money right from the get go and I have a better chance to make a lot more money being a risk taker than being a conservative player. Hence the rule the less amount of stock one buys, the higher the risk is. Also, the higher the risk the higher the return. I also want to see which stocks are doing the best and I can find this out by being a higher risk taker. I will purchase a certain number of shares at the beginning of the first week then as soon as I see which ones are doing well near the end of the week, I will then invest more money in that stock. That is a sneak preview of my proposed portfolio in the first week.
A-3
Overall, as the challenge progresses, I will become more conservative and investing in more companies. I am using this strategy because I want to make my money during the early weeks of the challenge so I can basically coast throughout the rest of it. By being a higher risk taker at the beginning and finding out which stocks are doing the best, I can invest more money into those stocks and cash out whenever I feel my option is at its peak. So while I am making that money, I can find other stocks which are doing well also and invest and make money off of them. I will start by investing a smaller portion of money in them first, but if they do really well, then I will invest a lot. By the halfway point of the challenge, I will own about ten to thirteen stocks, thus making me a more moderate risk taker. However, in the later weeks of the challenge, I will invest in more companies, about fifteen or seventeen of them; thus, making me a more conservative risk taker. The more stocks one buys means the less of a risk taker he/she is and therefore, the less money he/she could make. By using options, I will hope to at least double the $100,000 given to us in the beginning.
B. Economic/ Financial Information Sources
B-1.
Three economic/financial web sites are:
https://www.the-researchpro.com
https://www.proquest.co.uk/products/viewproduct.asp?key=889
https://www.comp.nus.edu.sg/~ipng/data.htm
B-2.
Three non-electronic economic/financial sources:
-The Toronto Star Newspaper.
-Annual reports of certain businesses.
C. Use of Margin
C-1.
If I feel that a companies stock is about to hit a very high peak and it will make me a lot of money if I invest a lot in it, then I would definitely buy on margin. For the most part, I would only purchase on margin during the first half of the challenge because that is how my strategy works. As a reminder, my strategy is be risk for the first half and then be conservative the second half. So during the first half of the challenge I would buy on margin. However, if I am three quarters through the challenge and I notice that a companies stock is absolutely skyrocketing, and I would be stupid not to buy on margin, then I would. I would do that because I can buy more stock by borrowing additional funds using my current stock holdings as collateral. That is one of the best advantages to buying on margin. However, in my example when I was in the last quarter of the challenge and I saw a companies stock skyrocketing, if I bought it, there would always be fear of the stock price going down as soon as I bought it. Then if I don't make more money than the amount of interest I pay on the borrowed money, then I would have lost money and it wouldn't have been worth while. That's the biggest disadvantage to buying on margin.
C-2.
In reference towards purchasing on margin to buy equities and options, one can buy on margin to purchase equities; however, one can't buy on margin to purchase options.
D. Use of Options
D-1.
In terms of my use of options throughout the investment challenge, I will definitely be using them. It has been shown that by using them, one can gain a lot by using them. Yes they are very risky, but for the first half of the challenge, but so am I. It is as simple as this, whenever I notice that a stock has been doing well but just started going down in price, that is when I will buy options. If the company has shown that every time after a drop in price it shows a major increase, then I will definitely buy options when it has gone down. Hopefully, there is the same pattern as there was in the past. When the stock has climbed like it should, then I will sell my option. Hence buy low and sell high. One can make and loose so much money using options rather than buying stock. However, the way I'm playing my cards, I won't loose money. Near the end of the challenge I will probably ease of the purchasing of options because that's the time when I am going to be more conservative.
D-2.
For the most part of the challenge I will be using mostly calls; however, I will also be using puts but not in as many early circumstances as calls. As for index options.
D-3.
Some methods for ensuring sufficient purchases of options are that I will be a higher risk taker at the start of the challenge so I will know what companies I should buy options in within the first week or so.
E. Use of Diversification
E-1.
During the first week of the challenge, I may need and use diversification just to see what kind of industry is performing the best (i.e. Internet, computer software and hardware, automobiles, etc). Also, I may need to diversify during the first week to see what countries has the best performing industries and which ones have the worst (i.e. after the incident of Sept. 11, the travel industry fell quite a bit; Japan's automobile industry is very high because cars are quality made and inexpensive). In relation to it risk, the rule is, the more one diversifies, the less the risk there is, and the less one diversifies, the higher the risk there is.
E-2.
In relation to the proposed use of diversification across countries, across industries, and across corporations, diversification is used across countries and across industries. Diversification is not used across corporations.
H. Stocks You will Use or Watch Closely
H-1.
Three pre-contest favorites:
Air Canada; Symbol AC. I expect them to rise because after the incident of Sept.11, people would be afraid to fly on American airlines. Also, Air Canada is one of the last well-known Canadian airlines left. Its only Canadian competitor was Canada 3000 but it just recently went out of business.
I. Tracking Performance
I-1.
Two methods I will use to judge my performance during the contest are:
See if I make or lose money early in my investment then buy more or sell it all depending on if I am gaining or losing.
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