Module 5 Draft of Risks and Returns

docx

School

Nairobi Institute Of Business Studies *

*We aren’t endorsed by this school

Course

330

Subject

Finance

Date

Nov 24, 2024

Type

docx

Pages

Uploaded by AdmiralUniverse3234

1 Module 5 Draft of Risks and Returns Student’s Name University Course Professor Date

2 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.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

4 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.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

7 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.