Finance 1750 3day Essay Example | Topics and Well Written Essays - 1750 words

Finance 1750 3day - Essay Example Close follow up shows that China’s economy has slightly outdone Japan’s, in terms of the GDP. This achievement suggests that in a few years to come China will only be a step behind the United States in terms of the largest economy. According to Lai and Yang’s (2009) report, after the two main stock exchanges Shenzhen Stock Exchange and Shanghai Stock Exchange that were launched in 1990, the state owned enterprises have been developed and supported by this two markets financially to a great extent. Taking a closer look at China’s stock markets and real estate it is not clear whether this two components are correlated or not. In this paper, we use volatility models to compare results between the two markets and finally establish whether the two are correlated as we further establish their potential variation effects. In this case we monthly data sets ranging from the year 2005 to 2010. From the data, several statistical test is applied to measure the rate of return on the correlation between the two markets, stock markets, and real estate. Stock Investment In general, investors purchase common stock from the stock market in terms of stock investments, which generate dividends that earn those profits or capital gain because of positive shift in the stocks’, selling price. ... The second advantage is that it is possible to minimize the risk on a portfolio greatly by having diversification where several types of stocks are held (Bodie, et al., 2009). The third important advantage is that it is now very possible to sell common stock on secondary markets with minimum transaction costs. This is possible due to the high liquidity of stocks. The other important advantage is that, when compared to other investments, the pricing of common stock is not only affected by shifts in interest rates but is also affected by performance of the firm and earning prospects. Stock Market Stock markets are also referred to as equity markets. They normally provide a platform where shares can be issued, and many investors can come and trade their shares and securities. The markets are divided into two depending on how they carry out transactions. The first is exchange market, and it is usually physical where investors can come and freely trade with their securities. The second on e is referred to as over the counter market. In this case, transactions are normally carried out over the phone or through the internet on the computer. The markets are also divided into two main parts, and these are primary and secondary. The primary market issues new securities such as initial public offering (IPO) while secondary markets offer securities that were previously offered and are being presented subsequently for trade. Returns and Risks of Stock Investment The first thing we need to understand is as an investor, there are two ways in which one can gain from their investment, and this is through dividends and capital gains. A capital gain is achieved because of an increase in the value of a capital asset such as stocks