This chapter brings an introduction on background of the study followed by problem statement, research objectives, organization of study, research significant and also limitation and future research implication.
1.1 Background of the study
Stock market plays an important role within the economy. The stock market is one of the most important sources for companies to raise money and investor to earn massive income. The attractive features of investing in stocks encourage more investors to invest more in security market and some companies actively involved in the stock market to increase liquidity by trading in their own shares.
Stock valuation is an important part on the dynamics of economic activity. The stock market can be considered as the major indicator of a country's economic strength and development. The stock market is also an indicator that how well is the country's economy is doing. Investors will buy stocks if they are confident of that country’s economy.
Investing is making your money work for you by getting your money to generate more money. Bursa Malaysia indicated that investing in stocks has consistently proven to be one of the most profitable forms of investment available. Every investor no matter is individual or organization hope to maximize their expected returns at some preferred level of risk when trading in the stock market. However, it is risky while investor putting money into an uncertainty investment. Normally, investor wish that they will get high return with low risk exists. In fact, investors will only get the higher return with the higher risk.
In order to maximize their profit, the traders must sell the share when the price is high and to buy it when is low. Investments in shares are the riskiest compared to other investments such as bond and debenture. Therefore, a lot investors invest in share with prediction that stock’s price will be increased in the future. However, most of the time, investors are unprepared for the complexity of the numerous factors which are involved in stock price fluctuation.
There are various reasons that stock price will be affected. In fact, it is difficult to limit the factor into one specific reason for the fluctuation of stock prices. As a result, investors always concern the factors that will affect share price and stock valuation model. For many new investors, this is likely to be one to be first question they will ask about stock price.
Stock market prediction is very important for entire industry. The stock value is believed that to have intrinsic value that can be determined by using a certain valuation model. The share price can be forecasted by analyzing publicly disclosed financial investment through some valuation models such as Gordon Valuation Model. Investor, analyst and investment banker extensively employ the valuation model to make an investment decision to predict the fluctuation of stock prices and evaluate the potential return of the stock market.
Gordon’s model which developed by J.Gordon was used to determine the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. According to Gordon (1959), a dividend per share is payable within one year, and the assumption that the dividend grows at a constant rate in perpetuity; the model solves for the present value of the infinite series of forthcoming dividends. There is also assumption that the required rate of return for the stock remains constant at k, which is equal to the cost of capital of the firm.
Gordon Valuation Model works best for mature companies that paid hefty portion of its earning as dividends, such as a utility company (Aduda and Kimathi, 2011). This model is widely accepted tool used by investor and analyst to forecast stock price based on net present value of the future dividends.
1.2.1 Concept of emerging market
The usual definition of...