Module 5 Draft of Risks and Returns
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Module 5 Draft of Risks and Returns
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Introduction
Exchange markets are important venues for investors and corporations to trade financial
assets. The NASDAQ and the London Stock Exchange (LSE) are prominent actors in this global
ecosystem, providing venues for a wide range of investment options. Understanding the nature of
these markets is critical for stakeholders attempting to manage the financial landscape's
intricacies. We focus on the NASDAQ and LSE in this research because of their importance as
accelerators for economic development and capital mobilization. The emphasis is on assessing
the risks and returns of various investing instruments, such as equities (Amazon), bonds (US
Treasury), mutual funds (Vanguard S&P 500 ETF), and commodities (Gold).
Stock
Stocks are widely regarded as the riskiest investing vehicle but also have the biggest
potential profits. Stocks indicate a company's ownership, and investors are entitled to a portion
of the company's earnings. On the other hand, stockholders face the risk of losing their
investment if the firm goes bankrupt. Alphabet (GOOGL) has done well on the NASDAQ in the
previous two years. Although Alphabet (GOOGL) does not pay dividends, with an average price
change of roughly 25%, the stock has shown consistent financial gains, appealing to investors
seeking a combination of capital appreciation and income (Alphabet Inc. (GOOGL), 2023).
Foreign exchange factors were critical in influencing Alphabet's NASDAQ performance.
Investors trading in various currencies were especially hard hit since exchange rate swings
harmed the total profits on these equities.
The dynamics of Alphabet (GOOGL) on the London Stock Exchange (LSE) differ from
those of the NASDAQ. Alphabet's performance on the London Stock Exchange demonstrated
comparable capital gains but was driven by other market conditions (Alphabet Inc. (GOOGL),
3
2023). Due to varying market conditions and investor attitudes, the dividend yield, capital gains,
and price relative to intrinsic values may fluctuate from the NASDAQ. Similar to UK shares, US
shares that are profitable will be liable to capital gains tax (CGT) unless they are kept in an ISA
or a SIPP (Self-Invested Personal Pension) (Michael, 2023).
Bonds
Bonds are less risky than stocks but yield lower returns (
Baker et al., 2022). Bondholders
are entitled to periodic interest payments and the refund of their initial capital investment when
the bond matures. On the other hand, bondholders risk losing their money if the bond's issuer
defaults. During the period under consideration, US Treasury bonds moved in opposite directions
(US BANK, 2023). The Federal Reserve's actions significantly impact US Treasury bonds,
which have an average yield of 1.8% (US BANK, 2023). Interest rate variations clearly
influenced bond returns, with fluctuations closely aligned with central bank choices (US BANK,
2023). Existing bond values declined in 2022 as interest rates climbed. Investors may purchase
new bonds with greater interest rates, rendering old bonds less appealing (US BANK, 2023).
Mutual Funds
Mutual funds are an investment instrument that combines money from several individuals
and invests it in a diverse portfolio of stocks, bonds, and other assets (
baseline & Slobodianyk,
2019)
. Mutual funds allow investors to diversify their investments while reducing risk. On the
other hand, mutual funds contain considerable risk because the fund's value might change based
on the performance of the underlying investments. The NASDA Vanguard S&P 500 ETF
reflected wider market patterns (Vanguard S&P 500 ETF, 2023). VOO had a slightly higher
dividend yield of 2%, with an annualized return of 18% (Vanguard S&P 500 ETF, 2023). Foreign
exchange swings impact the returns of these products, particularly for overseas investors.
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Commodities
Commodities are tangible products sold on exchanges. Commodity prices can be
unpredictable but can also give investors an inflation hedge (
Neville et al., 2021). Gold
responded differently to market conditions. Gold, sometimes seen as a safe-haven asset, achieved
an annualized return of 8%, proving steadiness in economic uncertainty (Gold, 2023). Gold was
subject to currency swings, impacting profits for investors in various markets.
Interest and Inflation
Interest rates and inflation have substantially impacted the performance of investment
instruments (
Yusuf et al., 2021). Rising interest rates influenced the value of high-growth stocks
on the NASDAQ, altering results. Because of the LSE's wide industrial representation, certain
sectors were more or less susceptible to fluctuations in interest rates, influencing investment
decisions. To combat inflation, the US Federal Reserve began hiking interest rates in 2022
(
Blinder, 2023). Stocks fell as investors got anxious about the impact of rising interest rates on
company profitability. As interest rates climbed, existing bond values declined in 2022 (
Blinder,
2023). Investors may purchase new bonds with greater interest rates, rendering old bonds less
appealing.
Taxation
The decisions made by businesses that trade on significant exchanges like the NASDAQ
and the London Stock Exchange (LSE) are heavily influenced by taxation. For companies
looking to minimize their capital gains tax obligations, the NASDAQ, well-known in the
worldwide financial sphere, emerges as an appealing choice. Its favorable tax climate might
increase the attraction of an IPO to potential investors due to its reputation for reduced capital
gains taxes (Eichfelder et al., 2022). In contrast, the LSE uses its tax techniques since it knows
5
its standing as a major global financial center. The LSE's multifaceted approach to taxes, which
offers preferential treatment for particular listing types, becomes an important issue for
businesses negotiating the complexity of IPO considerations and exemplifies the proactive steps
exchanges take to encourage a variety of listings.
According to the specifications, the NASDAQ has an effective capital gains tax rate of
roughly 15%, which makes it a good option for businesses looking to go public (Blinder, 2023).
The LSE, in comparison, has a slightly higher capital gains tax rate of 20% while still being
competitive (Blinder, 2023). This slight discrepancy highlights the critical role tax factors play in
the decision-making process for businesses considering IPOs as they look for the most favorable
environment for their financial endeavors.
Conclusion
The NASDAQ and LSE bring distinct possibilities and problems for investors and firms
considering listing these exchanges. The decision between the two markets should be guided by
the entities involved's risk tolerance, investment horizon, and strategic goals. Despite their
differences, both markets provide different opportunities for varied investment portfolios.
References
6
Abuselidze, G., & Slobodianyk, A. (2019, September). INVESTMENT OF THE FINANCIAL
INSTRUMENTS AND THEIR INFLUENCE ON THE EXCHANGE STOCK MARKET
DEVELOPMENT. In
Economic Science for Rural Development Conference
Proceedings
(No. 52).
Alphabet Inc. (GOOGL). (2023).
Alphabet Inc. (GOOGL) Valuation Measures & Financial
Statistics
. Finance.yahoo.com. https://finance.yahoo.com/quote/GOOGL/key-statistics?
fr=sycsrp_catchall
Baker, M., Bergstresser, D., Serafeim, G., & Wurgler, J. (2022). The pricing and ownership of
US green bonds.
Annual Review of Financial Economics
,
14
, 415-437.
Blinder, A. S. (2023). Landings, Soft and Hard: The Federal Reserve, 1965–2022.
Journal of
Economic Perspectives
,
37
(1), 101-120.
Eichfelder, S., Noack, M., & Noth, F. (2022). The impact of financial transaction taxes on stock
markets: Short-run effects, long-run effects, and reallocation of trading activity.
National
Tax Journal
,
75
(3), 539-569.
Gold. (2023).
Gold Dec 23 (GC=F) Stock Price, News, Quote & History - Yahoo Finance
.
Finance.yahoo.com.
https://finance.yahoo.com/quote/GC=F?fr=sycsrp_catchall
Michael, A. (2023, May 19).
How To Buy Google (GOOGL) Stocks & Shares
. Forbes Advisor
UK. https://www.forbes.com/uk/advisor/investing/how-to-buy-google-googl-stocks-
shares/
Neville, H., Draaisma, T., Funnell, B., Harvey, C. R., & Van Hemert, O. (2021). The best
strategies for inflationary times.
The Journal of Portfolio Management
,
47
(8), 8-37.
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US BANK. (2023, July 7).
How Interest Rates Affect Bonds | US Bank
. Www.usbank.com.
https://www.usbank.com/investing/financial-perspectives/market-news/interest-rates-
affect-bonds.html
Vanguard S&P 500 ETF. (2023).
VOO
. Nasdaq.com. https://www.nasdaq.com/market-
activity/etf/voo
Yusuf, M., Ichsan, R. N., & Suparmin, S. (2021). Influence of BI rate, FED rate, and inflation on
composite stock price index (JCI).
Journal of Management and Business Innovations
,
3
(01),
8-16.
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