THESIS PROPOSAL

ON
CORRECT TIMING FOR PROFITABLE INVESTMENT IN COMMON
STOCKS USING MOVING AVERAGE TECHNIQUE
(REFERENCE TO THE COMMON STOCKS OF COMMERCIAL BANKS IIN
NEPAL)

Submitted by:
Yashmin Dangol
MBA Term 6
Ace Institute of Management

Submitted to:
Mr. K.B. Manandhar
Thesis Guide

4th March, 2011

 CHAPTER 1: INTRODUCTION

1.1 BACKGROUND

The term Investment means putting money on something with the expectation of getting
some return in future. Investment is the long term decisions. Any investment is made
with the primary objective of earning returns on the invested sum. Based on the type of
investment instruments, returns can vary. Investment is done in any area of the economy
like stock, bond, financial derivatives etc. The returns can be of two types, repetitive cash
receipts, capital gain or loss. The gain or loss of capital makes the difference between the
purchase price and the selling price of the security. In present day, investment in the
common stock of the commercial banks is increasing. Investment in common stock or
equity investment is one of the riskiest types of investment which are available.
Investment on bonds, deposits are considered as less risky than the equity investment.

Investment in stock is challenging, risky, interesting and rewarding. It is challenging

because it involves huge investment and high competition. It is risky because stock price
depends on the environmental factors so investors have to make track of stock prices. It is
interesting because of its dynamic nature and it is rewarding because of the possibility of
the return or financial gain in future. While investing in stocks the more you are ready to
take risk, the more the return an investor can get. Depending on the degree of risk an
individual can take an investor can be classified as a risk taker, risk averter or indifferent
towards risk. Risk takers usually prefer to invest in risky securities like shares and risk
averters invest in risk free securities. In common stock, who invest wisely makes a lot
and earn even more in the future and replicate its invested capital. From the study, it is
found that success in investment in stock is possible only thing that needed s rational
decision making in duration of investment, management ideas, financial knowledge,
financial ratio analysis, mathematical and technical skills and stock knowledge.

Personal investment is affected by the level of knowledge an individual investor

possesses about different investment instruments. The knowledge of the relationship
between risk and return along with the knowledge of industrial sectors, economic
indicators, companies performance analysis techniques, portfolio management
techniques, etc., affect the investment decisions of individuals. The sources of
information regarding investment avenues also guide the investment decisions. Tax
liabilities of an individual and the effect of taxation on the income generated from
investment along with its understanding influences an individual's investment decisions.

Security or safety is also very important in investing because; if someone is going to

invest their hard money then definitely he/she will expect good returns. The safety of the
funds invested should be the first priority of any investment and then the returns should
be in proportion to the level of risk taken.

Investment decisions made by investors are based on:

1. Investors commonly perform investment analysis by making use of fundamental

analysis, technical analysis and gut feel.
2. Investment decisions are often supported by decision tools. The portfolio theory is
often applied to help the investor achieve a satisfactory return compared to the
risk taken.

This thesis is on the topic timing for profitable investment in common stocks using
moving average technique which is base on technical analysis. Moving average is used as
a technical analysis of financial data which is based on the past data of the market indices
which resembles the future trend and reversal of trends. A moving average is the average
price of a security over a set amount of time. By plotting a security's average price, the
price movement is smoothed out. Once the day-to-day fluctuations are removed, traders
are better able to identify the true trend and increase the probability that it will work in
their favor. Moving average is an approach to determine when a trend is about to change
the direction and the basis of trend following system. A trend in motion tends to continue
whether it may be towards up or down trends. Stock prices are expected to continue its
state of motion either in upward or downward. Hence being able to detect a secret of
trend that is starting to rise or fall is the first step toward making a profitable investment.
1.2 OBJECTIVE OF STUDY:

The main objective of this thesis report is to explore theoretical knowledge of investment
analysis into practical application. The specific objectives of the study are as follows:

• Determine the correct timing for investment i.e. buying and selling of the
common stock in the market
• Application of knowledge of investment analysis in the buying and selling of the
common stock
• Application of the theoretical knowledge of moving average technique for the
correct timing of investment in the common stock
• Study the stock market, trend of price, causes of fluctuations
1.3 STATEMENT OF THE PROBLEM
Investment in common stock is a risky and challenging. Investment involves buying and
selling. The main problem arises in deciding the correct time for buy and sell. The buying
decisions include what to buy, at what price to buy, when to buy and what type of
common stock to buy. Similarly the selling decisions include when to sell, at what price
to sell, when to sell and how to sell. Buyers always want to buy at low price and sellers
want to sell at high price so the main statement of problem of the study is related with
the buying and selling of the stocks at right price at right time in order to make
profitable returns in the market.
Investment in common stock is not an easy task. It involves huge investment of money.
In investment the investors can be risk takers, risk averters. Depending on the degree of
risk an individual can take, an investor can be classified as a risk taker, risk averter or
indifferent towards risk. Generally investors seek higher return at lower risk. There are
very few investors who seek lower return at high risk.
The decision to make investment by investors is made by the fundamental analysis,
technical analysis or gut feeling. Fundamental analysis is the cornerstone of investing. In
fact, some would say that you aren't really investing if you aren't performing fundamental
analysis. It includes the analysis of the financial statements its management and
competitive advantages, and its competitors and markets. Fundamental analysis is
performed on historical and present data, but with the goal of making financial forecasts.
As per fundamental analysis, almost all the available stocks are generally found above the
fundamental values. If investors want to buy the common stock of the desired company at
only fundamental value, it may not be possible at all time because market values are
likely to found above the fundamental value almost all the time. The next analysis is done
by technical analysis. While fundamental analysts examine earnings, dividends, new
products, research and the like, technical analysts examine what investors fear or think
about those developments and whether or not investors have the resources to back up
their opinions. Technical analysis analyses price, volume and other market information,
whereas fundamental analysis looks at the actual facts of the company, market, currency
or commodity. Dow Theory, relative strength analysis, volume analysis and moving
average analysis are the important tenets of technical analysis. The study is done by
focusing only on the moving average technique for forecasting the stock trend to know
how investors can make profitable buying, holding and selling of the common stocks in
the market.

1.4 SIGNIFICANCE OF THE STUDY

This thesis report will be significant for all those people who would like to invest in
common stock. It will give an insight about the correct time for investors to invest their
hard earned money in shares of commercial bank. The thesis describes the fundamental
as well as the significance of the technical analysis in investment therefore the study is
significant for the investors in making investment decisions by looking up the technical
analysis.

1.5 SCOPE OF THE STUDY

Investment is a very broad subject. Investments are done in shares, real estate, bonds,
government securities, gold, silver etc. But the scope of the study is confined in investing
in common stocks and the technical analysis is taken to support the study. In technical
analysis also there are number of techniques such as relative strength index, MACD,
moving average. For the study the author has used moving average technique.
In the process of conducting study, various quantitative and qualitative techniques will be
used. Facts and figures will be presented in the form of various charts, diagrams and
tables as per the study. Nepal stock exchange, daily newspapers and Investopedia.com is
used to obtain information about the investment decisions and other relevant information.

1.6 LIMITATION OF THE STUDY

The thesis is done for academic purpose. It is an outcome of the author’s theoretical
knowledge in the practical application. The limitations of the study are as follows:
• Moving average is a lagging indicator
• Moving average gives hint to the market and stock prices very late. So the change
in market trend will be seen only after it has happened.
• Moving average techniques include simple moving average, weighted average
and exponential moving average. Among these techniques the study is based on
the exponential moving average technique.
• Nepse indices are taken for studying the market movements
• Study is limited to the closing price of only one commercial bank
• The thesis is done in three months which is quite limited time for the author

1.7 RESEARCH QUESTIONS OR HYPOTHESES

Following research questions are designed for the study:
1. How do investors find out the correct time for buying and selling the stocks for
profits?
2. What techniques are most suitable for the investment?
3. When to enter and exit from the market?

1.8 OPERATIONAL DEFINITION AND ASSUMPTIONS

In the topic Investment decisions many writers have explored and gave their concepts.
They have explained the risk and return associated with investment, measuring the risk of
expected rates of return, factors affecting investment decisions, valuation of stock market,
estimating the intrinsic value, technical analysis and so on. In the thesis the author will
take definition and concepts from the various books related to the thesis topic.
Regarding the investment many writers have defined the term investment. As per the
Reilly and brown the term investment is:
An investment is the current commitment of dollars for a period of time in order to derive
future payments that will compensate the investor for (1) the time the funds are
committed, (2) the expected rate of inflation and (3) the uncertainty of the future
payments.

Therefore, Investment means use of money in correct time in the hope of making money
in future. The investors use fundamental analysis and technical analysis while using
Investment. The main objective of the fundamental analysis is to appraise the intrinsic
value of a security. The intrinsic value is the true economic worth of a financial asset.

The fundamentalists maintain that at any point of time every share has an intrinsic value
which should in principle be equal to the present value of the future stream of income
from that share discounted at an appropriate risk related rate of interest. The
fundamentalists attempt to estimate the real worth of a security by considering the
earning potential of a firm which in turn will depend on investment environmental factors
such as growth of national economy, political environment, growth potential, industrial
analysis etc.

Technical analysis is based on the past information on prices and trading volume of
stocks which gives a picture of what lies ahead. It attempts to explain and forecast
changes in security prices by studying only the market data rather than information about
a company or its prospects. The technical analysts believe that the price of a stock
depends on supply and demand in the market place and has little relationship to value.
The technical thinks that the only important information to work from is the picture given
by price and volume statistics. The technical analyst sees the market, and noticeable
trends which continue for significant periods. A trend is believed to continue either
uptrend or downtrend. The direction of price change is very important in technical
analysis.
The assumptions of technical analysis are as follows:
 • The market or individual stock acts like a barometer rather than a thermometer.
Events are usually discounted in advance with movements as the likely result of
informed buyers and sellers at work.
• Before a stock experiences a mark-up phase, whether it be minor or major, a
period of accumulation usually will take place. Conversely, before a stock enters
into a major or minor downtrend a period of distribution usually will take place.
Uptrend in prices denotes a balance buying while a downtrend is indicative of
extreme supply.
• The third assumption deals with the scope and extends of market movements in
relation to each other.

The technical analysts explain the investment decision by many techniques. But the study
in the given thesis is more focus to the exponential moving average. Exponential moving
average gives more emphasis to the recent data. This type of moving average reacts faster
to recent price changes than a simple moving average.
 CHAPTER 2: LITEREATURE SURVEY AND THEORETICAL FRAMEORK

2.1 LITERATURE REVIEW

The thesis study is concentrated on correct timing for investment in common stocks of
the listed commercial bank in order to achieve profit. Also it is emphasized on correct
timing for the entering and exiting the market. The main concern of the study is the
correct time to invest money in common stock. The study is supported by using the
technical analysis where the author will use moving average. In moving average also
exponential moving average will be used as it gives more concrete result and analytical
the concepts of the uptrend and downtrend, crossover and penetration of the price and
moving average will be discussed. The rules of investment especially buying and selling
the stocks on the basis of moving average techniques will be discussed. The course book
of investment analysis and portfolio management, corporate finance, financial
management will be taken as reference. Similarly to track the price of the listed bank
daily newspapers and the website of Nepal stock exchange will be used. Various internet
website will be browsed for the charts. Relevant citation of the authors will be cited from
the books.

2.2 THEORETICAL/CONCEPTUAL/OPERATIONAL FRAMEWORK

Theoretical perspective that has taken in analysis of data in the thesis work is applying
moving average technique for forecasting stock price trends so as to determine accurate
time in for entering and exiting the market for profitable investment decision. The
investment analysis and portfolio management book, corporate finance, financial
management books are taken as reference and to cite the important concepts related to the
study. Different authors claimed differently in timing of the entry and exit the market for
investment. Moving average is one of the most popular and easy to use tool to the
technical analyst.
Moving average is the effective tool for forecasting the correct timing of buying and
selling the common stocks and it is the effective statistical tool for analyzing and
interpreting the stock price trends. The main purpose of the moving average is smooth
out the values of adjacent statistical observations and so eliminates minor random
fluctuations. In moving average a set number of the most recent closing prices on a
security are averaged each day. For example daily closing prices during the 200 day may
be used. 200 day is used to determine long term trend. It smoothes out the short term
fluctuation to help the trend more clear. In moving average also there are three types
which are as follows:
• Simple moving average: a simple moving average is formed by computing the
average price of a security over a specified number of periods. A simple moving
average is calculated by adding the closing price of the security for a number of
time periods and then dividing this total by the number of time periods.
• Weighted moving average: a weighted average is any average that has
multiplying factors to give different weights to different data points.
• Exponential moving average: Exponential moving average gives more emphasis
to the recent data. This type of moving average reacts faster to recent price
changes than a simple moving average.
Therefore literature is related with the correct timing of investment in the common stock
of commercial bank by the help of technical analysis. In technical analysis also
exponential moving average is used. Relevant information are taken from the books. To
study more logically and analytically the listed commercial bank will be used.
CHAPTER 3: METHODOLOGY

3.1 REASEARCH PLAN AND DESIGN

For the study the research will be done, all the data will be quantitative in nature. On the
basis of the historical data the research will be conducted. Exploratory research design
will be used. Exploratory research design will be applied as there has been used
secondary data regarding the market indices and closing prices of the stocks. Market
indices will be taken from trading information published in daily newspapers like
kantipur, kathmandu post, samacharpatra etc and Nepal stock exchange. The research
will be based on the data of market indices of Nepal stock exchange of last five years.
The data will be used for the study of market movement. Calculations will be done on the
basis of moving average. The average values and actual indices will be plotted in the
same chart to study the market movement and its trend. For analysis of the overall market
movement, market index for Nepal stock exchange (NEPSE) will be used.
Similarly the past data of one commercial bank will be used for analyzing the individual
stock price movement. Closing price of one commercial bank will be taken for the study.
Special reference will be taken for analyzing the commons stock of the respective bank.
The study of the respective bank will be the prime focus of the study. There are 30 listed
commercial banks in Nepal but since it is not appropriate to analyze all the individual
stocks of commercial bank in the thesis writing only one commercial bank will be taken
for the study.

3.2 DESCRIPTION OF THE SAMPLE

For the research the total sample is the listed companies in Nepal stock exchange. But for
this study the author will take only the listed commercial bank in Nepal stock exchange.

3.3 INSTRUMENTATION
The secondary data will be more used in the thesis report. The source of the secondary
data will be the investment analysis and portfolio management book written by Reilly
and Brown, investopedia.com, wikipedia, Nepal stock exchange, website of the
respective bank. The questions will be open ended, structured and the respondents will be
the investors.

3.4 DATA COLLECTION PROCEDURE AND TIME FRAME

In the process of conducting study, data will be collected mainly from one bank in which
the study will be done, Nepal stock exchange and the financial websites. The source of
data will be secondary in nature. Original stock prices and market indices are published
in the daily newspaper and the website of Nepal stock exchange so information on stock
price and market indices will be taken from the respective source. After the data will be
collected it will be calculated by using mathematical tools and the result will be present
in graphs, charts, tables for the clear understanding to the reader. The conclusion will be
drawn from the findings from the analysis of research and recommendation will be made.

3.5 VALIDITY AND RELIABILITY

The validity of the thesis report will be checked by the help of secondary data, research
questions, and investment analysis book. The thesis is not copied and assures reader that
it is valid and reliable and helps them in making investment decisions.

3.6 ANALYSIS PLAN

In this thesis report, Exponential moving average will be used as a tool for analysis. The
reason for using this technique is it gives more weight to present data. It is more
analytical and scientific.