THE NAME OF THE UNIVERSITYBANKING & FINANCEMECHANISMS USED BY INVESTORS IN STOCK MARKETSTUDENT NAMEADMISSION CODELECTURER NAME8/31/2012 Describe the mechanisms used by investors in the share market to analyse and manage systematic and unsystematic risks. How do these risks affect share prices? Question: Describe the mechanisms used by investors in the share market to analyse and manage systematic and unsystematic risks. How do these risks affect share prices? IntroductionThe main reason of the investors trading on share market is to secure a way of raising funds for their businesses through the buying and selling of shares.
The share market also helps them to evaluate the worth of their businesses in terms of shares and securities traded, because of the latest updates on share prices. The share market behavior will fluctuate time and again (fall and rise), a tendency that is known as volatility. Volatility in most share markets around the world makes it hard for price-setter to clear interpretations, sometimes resulting to erroneous economic signals (Barnett et al, 2010). The investment process is therefore surrounded with a number of risks, for example, systematic and unsystematic risks, which should be well analyzed and managed by investors.
These risks sometimes undermines a fundamental maxim of share market that states “buy when price is low and sell when price is high” because one who buy cheaply but risks incorporated in them is high. Assaf and Cavalcante (2005, p. 6) asserts that the share market is to some extent multifaceted system which itself is a part of a multifaceted system of the economy. Under this notion, investors employ a number of mechanisms that help them to analyse and manage the risks of the stock market.
As such, the mechanisms help to foresee the future of the share market by establishing the underlying discrepancies and improvising models to base their market predictions. Stock marketThe stock market is an establishment where investors transact their business (stock exchanges), that is, buy and sell securities or equities. These equities are in allotment of shares of different firms. Each share is measured as a unit of possession of a firm’s value or revenues. Stock exchanges are perceived to be parameters geared towards marshalling financial resources to aid a most favorable and lucrative investment.
Especially in the case of developing nations, which are in dire need of finances to sponsor their development projects, stock exchanges come in handy. In general, stock market encourages cooperation among investors by creating a neutral ground for investment in respective securities. It also develops a platform for entrepreneurs to mobilize or raise capital through provision of a trading system that ensure easy and accurate business transactions (Kidwell et al, 2010). Share market anomaliesThe rapid advances in technology have eased the mobility of financial flows around the world.
As a result, financial markets find themselves in a catch-22 situation of a severe competition. This development has forced some stock exchanges to double the listing of firms in the market and increase cooperation among them as a response to a competitive environment. Such chinks in the share market have appeared to instigate some anomalies on stock market. According to Barnett et al (2010), the stock market anomalies refer to investment elements that constantly make returns above the expected one beside investment risks involved. For example, research has pointed out that stocks with low price-earnings (P. E) ratios will perform better than those with high price-earnings ratios.
Also, those stocks with low market capitalizations perform better than those with high capitalization firms. Other anomalies that features most is the peculiar patterns in the timing of stock returns, as returns of one year could be achieved in one month or in one day or in hours. This implies that investors may use available public information to benchmarks performance of their investment.