19-04-2012, 11:11 AM
A STUDY ON STOCK PRICE BEHAVIOR OF DIVIDEND YIELDING STOCKS DURING ANNOUNCEMENT PERIOD
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Investors determine stock price on the basis of the expected cash flows to be received from a stock and the risk involved. Rational investors should use all the information available with them or can easily obtain through other sources. This information set consists of both known information and beliefs about the future prospects.
An efficient market is defined as one in which the prices of all securities quickly and fully reflects the available information about the assets. This concept postulates that investors will assimilate all relevant information into prices in making their buy or sell decisions. Therefore, the current price of stock reflects:
i. All known information including:
(a) Past information (e.g. last year’s quarterly results.)
(b) Current information as well as events that have been announced but are still forthcoming.
ii. Information that can reasonably be inferred.
The present study is conducted to know the dividend yield stock’s behavior using quarterly results and dividend announcement because it helps to update and adjust projections of future performance. Moreover, these are the key sources of information to determine the stock price.
NEED OF THE STUDY
The present study on the dividend yielding stocks behavior helps us for the following purposes:
i. Helps to assess the performance of the dividend yielding stocks during results and dividend announcement periods.
ii. Helps the investors to select the stocks which would give good returns.
iii. Helps to build strong portfolio.
INTRODUCTION TO THE VARIABLES
STOCKS
In finance, a stock represents a share in the ownership of an incorporated company. In industrial societies wealth used in production is owned in the aggregate mostly by corporations rather than by individuals because of the huge investments required. This trend began in 17th-century England when merchants formed JOINT-STOCK COMPANIES, pooling capital to be used jointly in trading and manufacturing. Participants then received dividends, shares of the common PROFIT proportionate to their original investments
The wealth of individuals includes claims against, or investments in, corporations. These are called securities, the two most common being bonds and stocks. Corporate bonds are evidences of corporate debt to the bondholder. Stocks are evidences of ownership, or equity. Investors buy stock in the hope that it will yield income from dividends and appreciate, or grow, in value.
DIVIDEND STOCKS
Dividend stocks are less volatile due to the fact that companies that pay out cash result in investors more willing to hold dividend stocks through bear markets. Dividend stocks tend not to rise as quickly as non-dividend stocks during roaring bull markets. Dividend stocks also do not fall as far as rapidly as non-dividend stocks. Investors are now looking for downside protection due to slow economic growth.
Dividends are paid on earnings per share meaning the more shares of a particular stock that we have the more we will receive when dividends are paid. This normally occurs quarterly, during earnings season, and when businesses report earnings and profits or losses on dividend stocks. Some dividends are paid on certain bonds or other investment options that are done through a money market account. These dividends are a form of interest for the investment. In most cases, dividends are paid into a money market account so that they can withdraw them reinvest them.
DIVIDEND YIELD
The dividend yield on a company stock is the company's annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. It is often expressed as a percentage.
Historically, a higher dividend yield has been considered to be desirable among investors. A high dividend yield can be considered to be evidence that a stock is under priced or that the company has fallen on hard times and future dividends will not be as high as previous ones. Similarly a low dividend yield can be considered evidence that the stock is overpriced or that future dividends might be higher.
Dividend yield fell out of favor somewhat during the 1990s because of an increasing emphasis on price appreciation over dividends as the main form of return on investments.
The importance of the dividend yield in determining investment strength is still a debated topic. The persistent historic low in the Dow Jones dividend yield during the early 21st century is considered by some bearish investors as indicative that the market is still overvalued.
SHARE PRICE/ STOCK PRICE
A Share Price is the price of a share. These are usually quoted with two prices the Buy and Sell price.
The Buy price is the first, and lower, price and represents the amount that we would receive if we sold the share. It is the price that someone else is prepared to pay to buy our share.
The Sell price is the amount that we would need to pay to obtain the share. It is the amount someone is asking to sell the share to us.
There is also a Mid Price, which is the middle amount between the Buy and Sell prices. This is usually used to quote the current value of the share. For example a price of 110/120p would generally have a Mid price of 115p. It is this price that is generally quoted in newspapers and used for calculating the Indexes.
TECHNICAL ANALYSIS
Technical analysis of the market is based on some basic tenets, namely, that all fundamental factors are discounted by the market and are reflected in prices. Secondly, these prices move in trends or waves which can be both upward and downward depending on the sentiment, psychology and emotions of operations or traders. Thirdly, the present trends are influenced by the past trends, and the projection of future trends is possible by an analysis of past price trends. Analysis of historical trends confirmed the above principles and the Random Walk Theory explaining the randomness of price changes has been found to be not applicable by the technical analysts in practice.
History of Technical Analysis
The technical analysis is based on the doctrine given by Charles. H. Dow in 1984, in the Wall Street Journal. He wrote a series of articles in the Wall Street Journal. A. J. Nelson, a close friend of Charles Dow formalized the Dow Theory for economic forecasting. The analysts used charts of individual stocks and moving average in the early 1920’s. Later on, with the aid of calculators and computers, sophisticated techniques came into vogue.
CANDLESTICK
Introduction to Candlesticks
A candlestick chart is a style of bar-chart used primarily to describe price movements of equity over time.
It is a combination of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity and currency price patterns. They appear superficially similar to error bars, but are unrelated.