Showing posts with label Learn Stock Markets. Show all posts
Showing posts with label Learn Stock Markets. Show all posts

Monday, 29 August 2016

7 Misconceptions about Mutual Fund SIP

23:56:00
Systematic Investment Plan or Mutual Fund SIP is fast becoming a common term in the investment market. But a lot of people are still uncertain - some are cynical of the “new thing” in the market while most are just confused. With so many misconceptions on what Mutual Fund SIP is about, how and who can use it, it’s high time to clear out a few myths!
What is Mutual Fund SIP?
A Systematic Investment Plan (SIP) is not an investment; it is a method of investing in Mutual Fund SIP is not an investment scheme, just an investment strategy. Let us determine a few myths surrounding Mutual Fund SIP that can hold us off from attaining financial freedom.
i: SIP stands for SYSTEMATIC Investment Plan
This is one of the biggest mistakes that people do when considering systematic investment plans. People think that Mutual Fund SIP is for investing small sum of money. Mutual Fund SIP can be done for investing Rs 1000 per month, 1 lac per month and even for 1 crore per month.
Mutual Fund SIP is just a concept for a periodical, well-disciplined, long-term investment not limited to the amount of investment.
Irrespective of the amount invested, it is important to understand that the investment is into an underlying asset. And instead of timing the purchase, we are simply averaging the ‘per unit cost’ of the investment. The rupee cost averaging works alike for all. Regular investment through ups and downs, whether it is a small or big amount, using Mutual Fund SIP, results in better long term returns.
ii: Penalty if I stop my Mutual Fund SIP in between?
This is another prevalent myth about Mutual Fund SIP investment. Considering Mutual Fund SIPs in equity funds, if you have committed to an investment for a period of say 10 or 20 years, then you cannot change its tenure or the amount. And if you do, you will be penalized. This is not true.
You can continue, or stop, or adjourn the Mutual Fund SIP, as and when you wish to do so. This can be done by giving a written request duly signed, allowing about one month for the fund to adhere to this instruction. And,
or changing the amount, all you need to do is stop the existing Mutual Fund SIP to start with a new one.
iii: Lump sum or SIP?
There are two questions that need to be answered before we decide to make a choice between Lump sum and SIP.
Can you be sure of your lump sum investment today, to fetch guaranteed positive returns after 5 years?
By investing as a lump sum, there is a possibility that, you may enter the market at a very wrong time. Whereas by investing in SIP, you are restricting yourself to enter everything at a wrong time. Mutual Fund SIP reduces the risk by diversifying our investments on different timelines.
Timing the market is very risky due to its volatility – you can never be sure what the state of the market will be after 5 years. But by investing the same amount in installments regularly over 5years, you can use the market volatility to your advantage. You would be participating not only in the upswings of the market but also restricting the losses in a falling market. So, the robust returns in case of Mutual Fund SIP, are received despite the fact that the investments would be subject to volatility at different levels.
The second question is whether everyone has large, lump sum amounts to invest at one go? It is easier on your everyday budget to invest smaller amounts regularly.
iv: My returns are low – SIP isn’t working for me!
People tend to keep looking at their investments to see how much their returns are. If you invest in SIPs, looking at the absolute returns after short intervals is not going to make you feel good. SIPs are based on the Internal Rate of Return (IRR) of the investments.
Usually, in a short term SIP, the absolute returns seem lower than the IRR. This is because in an SIP, you invest at various points in time, not the whole of it at one go. Therefore, there is no one point-to-point annualized return. The returns will look good, if you consider the varying intervals of investment, after a long term.
v: Markets are high! SIP can wait
People ask – when should we start investing in SIP? The right answer is – Any time is a good time! If we could predict the markets, then the concept of SIP wouldn’t exist! It is not the time at which you invest that is important but the duration for which you invest regularly.
The volatility of the market is used to an advantage by investing in an SIP. The ups and downs of the market make sure that in the long term the price fluctuations don’t affect you because of the concept of averaging the cost of investment.
What you think NOW, as the market high will be a lowest point of investment, 5 YEARS LATER.
vi: Mutual Fund SIPs are ONLY for long term
Mutual Fund SIPs need not be continued for long term. Even Mutual Fund SIPs can be enrolled for a minimum of 6 months. However, the investments made in that 6 months need to stay for long term.
In other words, the “investing” time of Mutual Fund SIP can be short term. The “holding” time of an investment done through Mutual Fund SIP should for long term.
vii: No for Mutual Fund SIP as I have a variable surplus every month
This is again a misconception. I have a variable surplus every month. So SIP is not suitable for me. Because SIP accepts only a fixed investment every month.
The point I would like to highlight is, you can commit a lower sip every month and add whenever you have surplus. For e.g. your surplus/savings varies every month from Rs 5000 to Rs.7000 to Rs.10000. In this case commit an SIP for Rs.5000 and make additional investment of Rs.2000 in the months you have surplus of Rs 7000. Similarly do an additional investment of Rs.5000 when you have a surplus of Rs.10000.
You can make SIP and additional lump sum investments under the same folio.
SIP: Smart Investment Plan
It is important to take well-informed decisions about your hard-earned money. Thus, it is necessary that we are free of any myths and misconceptions. Whether the amount is small or big, by investing the same regularly and giving it adequate time, you will reap the benefits of SIPs in the long term. Getting away with trivial myths, can also help us believe SIPs to be SMART Investment Plans !!! Also, to be a successful long term investor, having a well drafted financial plan will be of immense help.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached atramalingam@holisticinvestment.in
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Sunday, 19 June 2016

10 Tips for the Successful Long-Term Investor

20:41:00
Courtesy : Investopedia 

While it may be true that in the stock market there is no rule without an exception, there are some principles that are tough to dispute. Let's review 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.

1. Sell the Losers and Let the Winners Ride!

Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:
  • Riding a Winner - Peter Lynch was famous for talking about "tenbaggers", or investments that increased tenfold in value. The theory is that much of his overall success was due to a small number of stocks in his portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting. 
  • Selling a Loser - There is no guarantee that a stock will bounce back after a protracted decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.
In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses

2. Don't Chase a "Hot Tip."

Whether the tip comes from your brother, your cousin, your neighbor or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; do your own research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run. 


3. Don't Sweat the Small Stuff.

As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few cents difference you might save from using a limit versus market order.
Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

4. Don't Overemphasize the P/E Ratio.

Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued. 

5. Resist the Lure of Penny Stocks.

A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you've lost 100% of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

6. Pick a Strategy and Stick With It.

Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed.

7. Focus on the Future.

The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.
A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with Subaru demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought Subaru after it already went up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that." The point is to base a decision on future potential rather than on what has already happened in the past. 

8. Adopt a Long-Term Perspective.

Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.
Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire. 

9. Be Open-Minded.

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades from 1926-2001, small-cap stocks in the U.S. returned an average of 12.27% while the Standard & Poor's 500 Index (S&P 500) returned 10.53%.
This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Index, and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains. 

10. Be Concerned About Taxes, but Don't Worry.

Putting taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you'll want to put tax considerations above all else when making an investment decision .

The Bottom Line

There are exceptions to every rule, but we hope that these solid tips for long-term investors and the common-sense principles we've discussed benefit you overall and provide some insight into how you should think about investing.
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Wednesday, 9 March 2016

Market Capitalisation Explained

17:58:00

We all know that there are different categories of stocks like large caps, mid caps, small caps and micro caps. When you analyze a company, we should be clear on which category the stock falls. This is highly important as the risk associated with a stock mainly depends on which category it belongs to. Normally large caps are low return, low risk stocks as the growth rate would be minimal but consistent. Small caps and micro caps are high return, high risk stocks as they can deliver high growth or a total collapse.

Why We Should Understand Market Capitalization
We might have heard the word "large cap" plenty of times. But what does this "cap" mean? The "cap" part is short term for capitalization, which is a measure by which we can measure the size of a company. A common misconception of retail investors is that the higher the stock price, the larger the company.



Stock price may misrepresent a company's actual worth. If we compared the two companies by simply looking at their stock prices only, we would not be comparing their true values, which are affected by the number of outstanding shares each company has. Say for example, the stock price of Maruthi Suzuki is Rs. 3946 and that of ITC is Rs.324 That does not mean that Maruthi Suzuki more valued than ITC. Infact, ITC is almost double in market value compared to Maruthi Suzuki

What is Market Capitalization and how it is calculated
Market capitalization is the total market value of the shares outstanding of a publicly traded company. it is equal to the multiplied value of share price and the number of shares outstanding. For example, consider company A has 1000 shares and the stock price is Rs.20. Here the Market Capitalization is the company is 1000*20 = Rs.2000

Market Capitalization Formula 
MC = N \P, where MC is the market capitalization, N is the number of shares outstanding, and P is the current price per share.

Different Types of Market Capitalization in Indian Scenario
Below the widely accepted standards for each Market Capitalization
  • Large Cap Stocks
  • Mid Cap Stocks
  • Small Cap Stocks
  • Micro Cap Stocks

What are Large Cap Stocks in Indian Market
BSE-Sensex/BSE-100/Nifty 50/Nifty next 50 Indexes are reference points for large cap stocks. Market capitalisation for stocks in the BSE-100 Index, for instance, ranges from Rs 200 bn to Rs 4300 bn. These are stocks of usually large and well-established companies that have a strong market presence for a long time and are generally considered as safe investments. Eg: TCs, Infosys, State Bank of India.

What are Mid Cap Stocks in Indian Market
Mid caps companies lie between large cap stocks and small cap stocks. Mid cap stocks generally have a market capitalisation within the range of Rs 50 bn and Rs 200 bn. These represent mid-sized companies that are relatively more risky than large cap as investment options yet, they are not considered as risky as small cap companies. Nifty Midcap 100 Index can be considered as reference points for mid cap stocks. Eg: Apollo Hospital, Britannia, MRF.

What are Small Cap Stocks in Indian Market
Small cap stocks generally have a market capitalisation within the range of Rs 1 bn and Rs 50 bn. These represent small-sized companies that are relatively more risky than mid cap as investment options. But there can be true multibaggers in this segment as well. Investors have to carefully study before investing in these stocks. Nifty Smallcap 100 Index can be considered as reference points for small cap stocks. Eg: Aban Offshore, Bajaj Hind, Ceat.

What are Micro Cap Stocks in Indian Market
Micro cap stocks generally have a market capitalisation below of Rs 1 bn. These represent very small-sized companies that carry high risk reward ratio. Investors have to carefully study before investing in these stocks. Micro caps and Small caps can be real wealth creators. For example Havells India Ltd was trading at Rs 7 in 2003. In 2013 the stock was trading at Rs. 665. So in just 10 years, the stock has given a return of 8915%!!!

Top 10 Indian Companies by Market Capitalization

Market Capitalisation as on Feb 02 2016
* 1 Billion = 100 Crores
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Wednesday, 23 December 2015

Retracement Or Reversal: Know The Difference

22:22:00

Most of us have wondered, at some point, whether a decline in the price of a stock we're holding is long term or a mere market hiccup. Some of us have sold our stock in such a situation, only to see it rise to new highs just days later. This is a frustrating and all too common scenario, but it can be avoided if you know how to identify and trade retracements properly.




What Are Retracements?Retracements are temporary price reversals that take place within a larger trend. The key here is that these price reversals are temporary, and do not indicate a change in the larger trend. 




The Importance of Recognizing RetracementsIt is important to know how to distinguish a retracement from a reversal. There are several key differences between the two that you should take into account when classifying a price movement:

FactorRetracementReversal
VolumeProfit taking by retail traders (small block trades)Institutional selling (large block trades)
Money FlowBuying interest during declineVery little buying interest
Chart PatternsFew, if any, reversal patterns - usually limited to candlesSeveral reversal patterns - usually chart patterns (double top, etc.)
Short Interest*No change in short interestIncreasing short interest
Time FrameShort-term reversal, lasting no longer than one to two weeksLong-term reversal, lasting longer than a couple of weeks
FundamentalsNo change in fundamentalsChange or speculation of change in fundamentals
Recent ActivityUsually occurs right after large gainsCan happen at any time, even during otherwise regular trading



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Monday, 30 November 2015

Why bonus issues make investors happy?

19:15:00

If you've attended an annual general meeting of any company, one question that shareholders never fail to sally forth is, "Chairman saab, is saal bonus issue hai kya?" This sometimes also takes the sarcastic tone of "Bahut deri se aap ne hum chhote shareholders ko koi bonus nahi diya?"

The big "bonus" question seems so important to most shareholders that we thought we should evaluate why they make this supernormal demand. But before we get into the relevance of a bonus issue, we'll touch upon what a bonus issue is and why companies have been issuing bonus issues since time immemorial.
What's a bonus issue?
Bonus is an issue of free shares by a company to its shareholders in proportion to their existing holdings. In short, it means that the company has turned part of the profits and reserves to capital. So while the reserves stand reduced, the capital has increased.
For example: You own 100 shares in a company and the current price is Rs1,000 per share. If the company announces a “one for one” bonus issue and issues you 100 more shares, you now own 200 shares. Does that mean your holding doubles in value? No, because the market will adjust the price of the shares so that the total value of your holding remains what it was before. In the above example, the share price would adjust to about Rs500 per share, so you still have a holding worth Rs100,000. Similarly, the dividend per share will adjust pro rata.
Suppose company A, with an equity of Rs60 crore and reserves of Rs120 crore, announces a 1:1 bonus, there is no change in the net worth but the earnings per share changes. But hold on, the change has been to the extent of the change in the share price. So effectively, there is no change in the share value of the shareholder.
Company (A)
Pre bonus
Ex bonus
Equity
60
120
Reserves
120
60
Profit
450
450
New worth
180
180
Book value
30
15
Price per share
1,000
500
EPS
For shareholders
No of shares
100
200
Value of holding
100*1000
200*500
-
= 100,000
= 100,000
What good a bonus issue does?
Wait; there may be something positive about a bonus issue. Let's dwell into this argument further and provide reasons for the relevance of a bonus issue. The main objective of having a bonus issue is to make the shares more marketable. With more shares in circulation and a lower share price, a company expects better liquidity and higher investor interest in its shares. Let's take the example of ABC's shares, which see little activity owing to the illiquid nature of the stock (the company's equity is only Rs4.24 crore). But if ABC were to issue a bonus issue the liquidity in the stock would improve. Also the company would then be trying to signal that it is now capable of servicing a large shareholder base.
Picking the finer points
So far so good. But the important question is: Is that company capable of servicing a large customer base? If so, can it maintain its dividend ratio? Remember, in the next year, the company would have to shell out a larger part of its profits to the shareholders, even if it maintains its previous dividend ratio.
If it does maintain its ratio, it is possible that the company might be putting back a relatively smaller part of profit back into the business. This, in turn, might have other implications for the company.
Let's take the case of XYZ. The company issued its fifth bonus issue in 2012. The bonus of 1:1 was issued to reward its shareholders on its 100th year of operation. But the point is the company was well aware that it would not be able to service its customer base and would not be able to continue with the dividend ratio. The net result: the following year, the dividend ratio fell by 60% to 10% and last year the company gave a dividend of just 6%.
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Saturday, 28 November 2015

How to Play Index Options with minimal risk?

13:23:00
As many of you know buying options is not so profitable unlike writing options

Why buying is not attractive?

Reason 1.Option writers are intelligent most of the times

Reason 2.Your view may be true but it also should become true within your expected time frame else you are loosing the time value to somebody who has written

Every side has its risk whether buying or selling

Risk on Sell Side

Unlimited loss : In buying you pay a fixed amount of premium which is the maximum amount lost but on sell side the option can result unlimited losses too.

Margin Requirements : Option writing requires margins which are high for eg : Nifty Nov 1 lot shorting requires Rs.50000 Approx

VIX very low : When VIX is trading below 17 It is somewhat risky to Write Options because when VIX Increases rapidly option prices will move up rapidly but this is not a worry if Strategy 2 is followed as on Expiry there will be no time value in option prices 

You can resort to shorting if you at least have more than Rs.150000(Strategy 1) Rs.300000 ( Startegy 2)

Why option shorting is better than option buying?

1.You get the time value without the actual change in spots

2.You are protected for the risk (Read Below)

3.Very good when index is not very volatile

So If you have decided to write options then read on.......

I'm going to give you a basic strategy on Nifty for the coming month...

Strategy 1 (More Profitable and Risky than Strategy 2)

Going short CE or PE based on the trend

Nifty closed around 8100 on Oct expiry

Lets assume Nifty continues its downtrend and is expected to close below sychological support 8060 level seeing the day's trend

then it implies nifty is getting ready for a bearish move but it takes little time bcz it is a short term trend reversal level so you have to make use of the time value

You can short 8300 CE or 8400 CE and gain the time value

Normally everyone will buy 8000 Put and hold if the market reverses upside due to some news you lose both time value as well as the intrinsic value

But if you are short you can gain the time value  during the market is range bound

To Put it more simple

For Eg you have sold nifty 8300 CE at say Rs.74

Scenario 1: the market is in range for 2 days in between 8050-8100 then this option loses 4-5 Rs. day and comes to Rs.50 and even if Nifty moves to say 8125+ the option value is still Rs.120 that is you cost..

Scenario 2 : Nifty continues downtrend you will make more profit than Scenario 1

Scenario 3 : Nifty gives a sudden up move say 100+ points the next day you sell the option

What to do ? Jus Hold untill an uptrend is clearly confirmed Say Now if nifty goes above 8220 uptrend will resume again

Untill Nifty is trading below 8220 trade in Nifty Futures in the respective side here it is BUY so buy on support and book on resistance ( Use Open Interest Analysis to decide the trend changes You can get the analysis on www.Niftytrader.in Live minute to minute )

Simple rule for OI If calls OI is increasing at a specific strike then that is the resistance and If Puts OI is increasing at a strike that is the support

Strategy 2
(Less Profitable and Riskless ) (Stoploss Strategy)

Going short on multiple strikes and holding till expiry

For Eg you think Nifty will not break 8400 this expiry Short 8400CE and downside you think it will not break 7700 then short 7700PE

What if Nifty is about to cross 8400 levels Buy Nifty futures if 8340 is sustained

What if nifty is about to break 7700 levels Sell Nifty when it is about to break 7700 levels say 7745 levels

Note : The option prices will sky rocket when index is nearing your strike Don't worry you are hedged with futures

To explain it

You have bought nifty futures at 8340 and expiry is above 8400 say 8450 on Expiry day option will be worth Rs.50 Maximum and your futures position is in Rs.110 profit Net profit is Rs.60 per lot

On the other side Nifty expiry is at 7600 your put will be worth Rs.100 maximum and your futures position is in profit of Rs.145 , So Net profit here is Rs.45

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