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The bases of securities selection

The bases of securities selection
Security selection refers to the choice of the most suitable stocks for investment in anticipation of some future return. Normally, portfolio managers make investment decisions using various investment models such as a capital asset pricing model and arbitrage price model to evaluate the most desirable portfolios for investment (Lawton and Todd, 56). Additionally, the portfolio manager selects the most suitable portfolios basing on the firm’s objectives and associated risk from a given investment portfolio. From a financial perspective, high returns from a given portfolio leads to an increase in the risk inherent (Gibson, 36). Therefore, it is prudent to evaluate the anticipated returns and risks associated with a given portfolio prior to investment. There are several bases on which both individual and corporate investors may use to select the most profitable securities for investment. Portfolio managers may conduct prior portfolio assessments basing their assessment on the investment objectives, firms’ risk tolerance, and the target industry. The basis of investment objectives varies among different firms (Maginn, 46). The basic investment objectives, which many firms apply when selecting investment portfolios, are diverse. They include capital appreciation objectives, speculation objectives and current income objectives (Maginn, 65). Capital appreciation objectives involve investing in securities and holding those securities for a long period in anticipation of higher returns. Speculative objectives involve investing in securities while anticipating quick returns. Finally, the current income objectives involve investing in securities that pay high rates of dividends consistently. In addition, firms may select securities on the basis of the firms’ risk tolerance. Firms with high risk tolerance may go for securities with higher returns. On the other hand, firms with low risk tolerance may go for securities with insignificant returns (Elton, 69). This is because the higher the returns, the higher risk and vice versa. Securities may also be selected on the basis of industry. In this case, firms may diversify their portfolios by investing into different industries in order to minimize the investment risk (Elton, 78).
Stock analysis
Stocks analysis may help to determine the stocks that are undervalued, overvalued, and those stocks that are correctly priced. The undervalued stocks are those that give higher returns than anticipated. On the contrary, overvalued stocks tend to give lower returns than the anticipated. Finally, correctly priced stocks have anticipated returns equal to the actual returns (Lawton and Todd, 68). The four securities from the table below may help to determine the undervalued securities and overvalued securities.

Securities
Dividends
Yield
P/E
ROE
Net profit margin
Market cap
Prices
Day price change

Application
software
 
1.82%
17.50
24.90%
23.20%
624.1B
10.51
0.00

Publishing periodical
6.05%
21.90
25.70 %
53.10%
20.4B
8.07
0.00

 
Reit Diversified
 
 
 
6.51%
 
 
0
 
 
9.10%
 
 
29.00%
 
 
1982.6B
 
 
1.66
 
 
-0.02

Closed
End Funds Foreign
 
3.25%
 
13.90
 
3.70%
 
38.30%
 
197.2B
 
0.48
 
-3.26

 
Source: finance.yahoo.com. Industry Summary. July 11, 2012
An Analysis for stock selection.
Before selecting securities to invest in, it is essentially important to conduct securities analysis to determine which securities are more desirable and profitable. The stocks above were selected from a list of several stocks on the basis of price earning ratio and net profit margin. Additionally, the market capitalization and dividend yield were also considered to select the herein stocks. The price earning ratio helped to determine the undervalued and overvalued securities. From the above securities, it can be observed that, the securities of Reits diversified were highly undervalued. This is because, their price earning ratio is substantially lower as compared to other fims.This means that if we invest in Reits diversified securities the actual returns will be more than the anticipated returns. The securities of publishing periodicals were selected because, the firm net profit margin is higher and this means that the firm is able to meet its operating cost without difficulties. This further means that, the firm is stable and will continue to pay dividends for a longer period. Additionally, securities for application software were selected because, the returns on equity are substantially higher as compared to majority of the companies. This means that, equity share holders can obtain higher returns for their investment. The securities for application software were selected because there is a zero fluctuation on prices, this means that volatility is lower and hence, less risky. The reason for using the various basis of selecting the herein securities is to help to diversify risk. Therefore, investors may select the best securities, not only on the basis of anticipated returns and risk associated with each security, but also on the basis of analysis of the undervalued and overvalued securities (Lawton and Todd, 86).
Firm activities that may help to increase stock prices
The firm activities that may help to increase the stock prices include historical price analysis. In this regard, the firm may analyze the past prices and compare them with the current prices. This is aimed to establish whether there will be a possibility of increasing stock prices (Lawton and Todd, 110). Additionally, the firm may participate in corporate social responsibilities so as to build its reputation that may indirectly lead to increase in company’s profits. Also, the firm may start may decrease dividends payout and reinvest for increased gains (Maginn, 112).

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