Investment and Security Trading An Interactive Qualifying Project Submitted to the Faculty of Worcester Polytechnic Institute Submitted By: Zhao Huang: …………………………………… Renzhi Jiang: …………………………………… Han Yang: .…………………………………... Submitted to: Project Advisor: Hossein Hakim: ………………………………… March 14, 2011 Table of Contents List of Figures ........................................................................................ V List of Tables ...................................................................................... VII 1. INTRODUCTION ............................................................................ 1 1-1 Summary of financial markets ............................................................................................................ 1 1-2 Project Description ............................................................................................................................. 2 2. BACKGROUND ............................................................................... 4 2-1 Overview of Corporate Finance Basics .............................................................................................. 4 2-1.1 Forms of Business Organization .................................................................................................. 4 2-1.2 The Ways of Corporation Raises Money ..................................................................................... 6 2- 1.3 Risk and Return of Stocks ........................................................................................................ 10 2-2 Fundamental Analysis ...................................................................................................................... 13 2–2.1 Financial Statement ................................................................................................................... 13 2 –2.2 Financial Management and Short-term Financial Planning ..................................................... 22 2-3 Financial Markets ............................................................................................................................. 27 2-3.1 Stock and stock market .............................................................................................................. 27 2-3.2 Forex Market ............................................................................................................................. 30 2-3.3 Future Market ............................................................................................................................ 31 2-4 Indicator Categorization and explanation ......................................................................................... 32 2-4.1 Definition and functions ............................................................................................................ 32 2-4.2 Indicator types ........................................................................................................................... 33 2-4.3 Oscillator Types ......................................................................................................................... 34 2-4.4 Oscillator Signals ....................................................................................................................... 35 2-5 Important Indicators ......................................................................................................................... 38 2-5.1 Aroon and Aroon Oscillator ..................................................................................................... 38 2-5.2 Average True Range .................................................................................................................. 40 2-5.3 Chaikin Money Flow ................................................................................................................. 41 2-5.4 Commodity Channel Index ........................................................................................................ 42 2-5.5 Coppock Curve .......................................................................................................................... 43 2-5.6 Detrended Price Oscillator ......................................................................................................... 44 II 2-5.7 Average Directional Index ......................................................................................................... 45 2-5.8 Bollinger Bands ......................................................................................................................... 46 2-5.9 Donchian Channel ..................................................................................................................... 48 2-5.10 Ease of Movement ................................................................................................................... 48 2-5.11 Force Index .............................................................................................................................. 49 2-5.12 Keltner channel ........................................................................................................................ 50 2-5.13 Mass index ............................................................................................................................... 51 2-5.14 Money Flow Index ................................................................................................................... 51 2-5.15 Moving average ....................................................................................................................... 52 2-5.16 Multiple indicators application ................................................................................................ 53 2-6 Company and stock .......................................................................................................................... 56 2-6.1 Stock price Factors .................................................................................................................... 56 2-6.2 Case study of Apple Inc. ............................................................................................................ 57 3. Methodology ..................................................................................... 59 3.1 Instruction ......................................................................................................................................... 59 3.2 Data Collecting & Processing ............................................................................................................ 59 3.3 Decision Making ................................................................................................................................ 59 4. RESULTS and ANALYSIS ........................................................... 60 4-1 Weekly Reports ................................................................................................................................ 60 4-1.1 IQP Weekly Report November 22 ............................................................................................. 60 4-1.2 IQP Weekly Report November 29 ............................................................................................. 60 4-1.3 IQP Weekly Report December 6 ............................................................................................... 64 4-1.4 IQP Weekly Report December 13 ............................................................................................. 67 4-1.5 IQP Winter and Weekly Report January 24 .............................................................................. 70 5. Conclusion and Recommendation ................................................. 73 5-1 Trading Recommendation ................................................................................................................ 73 5-2 Conclusion ........................................................................................................................................ 74 6. Bibliographies ................................................................................. 76 APPENDIX ........................................................................................... 78 A. Trading History .................................................................................................................................. 78 III B. Trading Statistics ................................................................................................................................ 89 IV List of Figures Figure 1 Value of a Bond with 10 Percent Coupon Rate for Different Interest Rate ................................... 8 Figure 2 Risk of Stocks Chart ..................................................................................................................... 12 Figure 3 Carrying Costs and Shortage Costs .............................................................................................. 25 Figure 4 Policy F Performance ................................................................................................................... 26 Figure 5 Policy R Performance ................................................................................................................... 26 Figure 6 Forex Market Example Chart ....................................................................................................... 31 Figure 7 Example of Momentum Indicator in NYSE Index ....................................................................... 33 Figure 8 Example of Lagging Indicators in S&P 500 Index ......................................................................