Friday, October 17, 2014

Buy low; sell high: fundamental rule for security investments

News
How to play safe with equity investments
Adhil Shetty

BankBazaar.com

With the stock markets achieving high growth and a sustained bull run, a lot of investors are seeking ways to maximize their gains. While making gains in such a cycle is a great opportunity, investments must be done with due diligence and thoughtfulness. Equity markets irrespective of the high sensex figures remain a highly volatile and high risk investment market that must be planned carefully. A lot of first time investors in their quest for making a quick buck often end up burning their fingers and losing their investment in the market. So, before making any equity market investment, make sure you understand the risks involved in the market and do a complete study of the underlying investment securities.  

While there is no single rule that can guarantee safety in equity market investments, following a dedicated and principled path can make sure the investment has a higher chance to stay safe and offer better returns all through the year. Let us look at some of the ways one can play safe in the equity markets.

Mutual funds versus stocks

One of the basic dilemmas almost every new investor has is to choose the best suited security for investment. Shares versus stocks seem to be an age old debate, but the answer is that there is one clear winner. Both equity stocks as well as mutual funds have their advantages and disadvantages. It all depends on the investor and how familiar he or she is with the stock markets and its day to day functioning.  

For a new investor, mutual funds offer a safer alternative to enter the equity markets. Mutual funds are not only managed by professional fund managers who know their job of investing in the right sectors at the right time, but mutual funds also offer a systematic investment plan allowing fixed monthly investments rather than a lump sum investment in case of equity markets.

However, for the more advanced investor who knows the fundamentals and market dynamics of any company and its growth prospects, investing in shares of that company directly could lead to a better growth cycle compared to mutual funds.

Diversify your investments

If there is one advice that can act as a golden rule for investing, it has to be about the power of diversification. The market moves in various waves and cycles. One must always plan his or her investment in such a way that all broader bases are covered. For example some part of the investment portfolio must be allocated to low risk securities like debt funds, bank fixed deposits and government bonds. Some part of investment can be devoted to gold and mutual funds while a similar share can be allocated towards shares and securities.

Even while investing in shares and mutual funds, make sure to maximize the coverage by covering all possible sectors to increase chances of growth and covering risk in case of bad market performance.

Tips on choosing the right funds

Choosing the right mutual fund has a direct correlation between success and failure in the equity market. A lot of people venture into mutual funds by following the crowd, without doing any fundamental study on the sectors the fund is associated with. Before choosing the mutual fund it is imperative to check the various sectors that the fund invests into, the past performance of the funds and its underlying sectors as well as the previous performance of the fund manager managing the mutual fund. All details of the fund manager and the portfolio of the mutual fund are made available on the website of the concerned mutual fund house and in its prospectus.

Stay put or book profit? 

With the market entering a bull run cycle, one of the biggest dilemma faced by almost every investor is to have a balance between exiting the security and stay invested in the same. The key to exiting the right time is averaging your overall investment goals. There is also a case of doing some research and brushing up the knowledge of various technical tools like candlesticks and Fibonacci charts to make sure you are exiting at the right time.

‘Buy low; sell high’ remains the fundamental rule for security investments and many investors often get their timing right. In case you did not get your timing right for one stock, do not get disheartened and try to understand the market dynamics and technical trends in more details to make sure you know the best time to exit the market.

Keep your expectations realistic

There is no magic formula to double your investment in six months or one year. Slow and steady wins the race is the golden rule for equity market investments. Always make sure to keep your expectations realistic so that you are not disappointed in the long run.

Remember, investment is a journey and you will gain some and loose some as you go along. Make sure to make a steady attempt to maximize your gains and minimize your loses to emerge as a winner at the end.

Stay informed

A lot of investors invest in a particular company share or mutual fund and forget about it. It is always wise to keep a track on your investment and the fundamental sectors to see if any big change is about to emerge or that sector. Foreseeing a positive change can make a difference between a winning stocks or a losing one. Keep yourself informed and up to date with news and analysis rather than acting as a passive investor.

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Tuesday, October 14, 2014

Glossary about Stock Market

Stock market terms you must know

February 16, 2007 09:54 IST

Ever come across words like Sensex, Nifty, correction, rally et al?
Well, a regular reader of business newspapers must have come across these and a host of other terms that describe the stock market activities.
You must have also come across research reports from brokerage houses that talk of buying, selling and holding of a company's share.
Let us go through a few of these terms used in routine stock market parlance.
Sensex
It is an index that represents the direction of the companies that are traded on the Bombay Stock Exchange, BSE. The word Sensex comes from sensitive index.
The Sensex captures the increase or decrease in prices of stocks of companies that it comprises. A number represents this movement. Currently, all the 30 stocks that make up the Sensex have reached a value of 14,355 points.
These companies represent the myriad sectors of the Indian economy. A few of these companies and the sector they represent are: ACC (cement), Bajaj Auto, Tata Motors, Maruti (automobile), Infosys, Wipro, TCS (information technology), ONGC, Reliance (oil & gas), ITC, HLL (fast moving consumer goods) etc.
Each company has a weight assigned to it. Companies like Reliance, Infosys, and HLL have higher weightages compared to others like HDFC, Wipro, or a BHEL.
The increase or decrease in this index, the Sensex, is the effect of a corresponding increase or decrease in the stock market price of these 30 companies.
Nifty
It is the Sensex's counterpart on the National Stock Exchnage, NSE.
The only difference between the two indices (the Sensex and Nifty) is that the Nifty comprises of 50 companies and hence is more broad-based than the Sensex.  
Having said that one must remember that the Sensex is the benchmark that represents Indian equity markets globally.
The Nifty 50 or the S&P CNX Nifty as the index is officially called has all the 30 Sensex stocks.
The NSE Nifty functions exactly like (explained above) the BSE Sensex.
Bull
A particular kind of investor who purchases shares in the expectation that the market price of that company's share will increase.
S/he sells her/his stock at a higher price and pockets the profit. Simply put, the bulls buy at a lower price and sell at a higher price.
For instance, if a bull buys a company's share at Rs 100, s/he would prefer selling the same stock at Rs 120 or any price higher than Rs 100 to make a profit.
Usually, a bull buys first at a lower price and sells later at a price higher than her/his cost of purchase.
Bulls are happy when the markets (the Sensex and Nifty) move upwards. A falling market takes bulls into hibernation.
Bear
Bull's counterpart is the bear.
A bear sells stocks first that s/he owns or borrows from, say a friend, and then purchases the same quantity of shares at a lower price.
If a bear sells first, say 100 shares of Ranbaxy at Rs 400, and later purchases the same number of shares at Rs 375, then her/his profit is Rs 25 (400-375) per share.
This way s/he has got back the 100 shares of Ranbaxy and simultaneously made a profit of Rs 2500. The shares can later be returned to the bear's friend if s/he had borrowed the same from a friend.
There are bears in the market that sell shares first without actually owning them unlike in the above example. Such selling is called naked short selling or going short on a stock.
Bears are happy in a falling market.
While individual investors can engage in selling first and buying later (also referred to as short selling), mutual funds and foreign institutional investors are not allowed this luxury in India yet.
Squaring off
A process whereby investors/traders buy or sell shares and later reverse their trade to complete a transaction is called squaring off of a trade.
Indian equity markets remain open between 9:55 am and 3:30 pm normally (At times there are sun outages when satellites fail to link with ground infrastructure of the two exchanges (the servers where buy and sell orders are matched). During these times the trading period is extended till 4:15 pm to compensate for the time lost in between).
If you purchase 50 shares of say Infosys and sell them later before the market closes then you have squared off your buy position.
Similarly, if you sell 100 shares of Maruti and purchase them later then you have squared off your sell position.
Equity market rules in Indian allow investors/traders to engage in day trading.
Day trading is a mechanism whereby investors/traders can buy, say 100 shares of a company as soon as the BSE, NSE opens (the working hours are 9:55 am to 3:30 pm in normal times) and sell the same amount of shares later (bulls) before the two stock exchanges close. However, a stock bought on the BSE cannot be sold on the NSE and vice-versa.
Similarly investors/traders can also sell first and buy later (bears) during the course of the day to square off their sell positions.
Rally
The word suggests the gain made by the Sensex or Nifty during the course of the day. If such gains are made on a regular basis then market participants like investors, brokers etc call it as a market rally.
If the Sensex moves from 14,000 points to 15,000 points in a span of say 14 or for that matter 20 trading sessions (the stock markets remain closed on Saturdays, Sundays and other bank holidays) then the phenomenon is referred to as a rally.
Bulls are always said to be active during a market rally.
Crash
As the word suggests, crash refers to a fall in the value of Sensex and Nifty. In the first three trading days of this week(February 12-14) alone  the Sensex had crashed by more than 700 points.
The Sensex then had plummeted from around 14,700 levels to around 14,000 points. This sudden and violent 700-point fall is referred to as th crash or market crash.
Bears are said to be active and happy during the market crash as their style of trading (sell first and buy later) helps them make good money during a crash.
Correction
A correction (or a measured fall) in the Sensex and Nifty takes place when these indices rise for a few days and then retrace or shave off some of these gains.
Say if the markets rally from 13,000 to 14,000 points in 10 days and the again fall to 13,700 points in the next five-six days then this action is termed as a market correction.
It is like a woman/man resting for some time after running a long distance race. Like human beings the market too needs to take rest after a smart rally.
Market experts consider such corrections healthy because during this period the ownership of shares moves from weak hands (short-term investors) to strong hands (long-term investors). Corrections are generally considered as signs of strength after which the markets (the Sensex and Nifty) gets once again poised for a further rally. 
Bonus shares
These are the free shares that a listed company gives its shareholders.
A bonus is declared after a discussion amongst the board members that make up the management of a company.
A bonus issue is looked upon as a way of rewarding shareholders.
For instance, let us take a company A that has made a profit of Rs 100 crore in the financial year 2007 (April 1, 2006 to March 31, 2007).
Out of this amount the company may need Rs 50 crore for say buying machinery or constructing a new warehouse. And the remaining Rs 50 crore the company puts into its reserve pool or idle cash that the company has no plans to spend.
It can then issue bonus shares out of these Rs 50 crore.
When a company declares a bonus issue it converts this idle cash into shares that are then distributed amongst its shareholders. This process is called capitalising of reserves.
A bonus is usually declared as a ratio. A bonus issue in the ratio of 1:1 means you will get one free share for every one share of the company you own.
A 2:1 bonus issue (or two for every one held) means you will get two free shares of a company for every one that you own. Similarly, a 5:1 bonus issue will give you five free shares for every one share that you own.
Dividend
It is again a way of rewarding a company's shareholders. A dividend is generally issued as a percentage of the face value of a share. Face value is the nominal price of a company's share.
A share can have different face values like Re 1, Rs 2, Rs 5, Rs 10 or Rs 100. An 80% dividend on a share of face value Rs 2 (Rs 1.6) will always be less than a dividend of 20% declared on share of face value Rs 10 (Rs 4).
Like bonus shares, dividend amount also comes from a company's free cash reserves.
Book closure date
This is the date on which a company closes its books for business after it announces a bonus or dividend. The company's registrar keeps a track of who owns how many shares of that particular company.  
Any investor having shares in his/her demat account before this date becomes eligible for the bonus issue or the dividend declared.
Say a company A announces a 1:1 bonus issue and the book closure date is February 28, 2007.
If you don't own this company's share and want to avail of the bonus offer then you must not only buy this share before February 28 but also make sure that the number of shares purchased by you are transferred to your account from the seller before this date.
If the ownership of shares is reflected in your account after February 28 then you will not get any bonus shares. The same is also true for dividend announcements.
This just sums up a few terms used by stock market participants. We shall see some more next week.

Disclaimer


This Blog Spot is meant for publishing news reports about the Stock Markets and its relateed affairs as we collected from the renowned Dailies, Magazines, etc., so as to create an awareness to the general public and also to keep it as a ready reckoner by them. As such the readers may extend their gratitude towards the Original Author as we quoted at the bottom of each Post under the title "Courtesy". Furthermore, the Blog Authors are no way responsible for the correctness of the materials published herein and the readers may verify the concerned valuable sources.