THREE GOLDEN RULES OF INVESTING :
- INVEST EARLY
- INVEST REGULARLY
- INVEST FOR LONG TERM
2008-03-18
2008-03-16
Follow up on Options Trading
Call option : loss limited, profit unlimited.
Put option : profit limited, loss unlimited.
When to Buy a Call Option.
(The quotes are fictitious)
If you are Bullish on a particular Scrip/Index. For example, you are Bullish on Reliance (CMP- Rs.350/-) and expecting it to touch 450 in a month's time (or any particular period say 2/3 months). So you will Buy Reliance Call Option for 1 month (or any particular period) by paying a premium of Rs.10/share (Say). During the course of month you will get Right to excercise your Call Option to Buy Reliance at 350 from the seller of Call Option. Suppose it does not move up, you are free NOT to excercise your option to Buy and your loss is limited to the Premium you have paid.
When to Buy a Put Option.
(The quotes are fictitious)
If you are Bearish on a particular Scrip/Index. For example, you are Bearish on ACC (CMP -Rs.150/-) and expecting it to touch 100/- in a month's time. So you will Buy ACC Put Option for 1 month by paying a premium of Rs.5/share (Say). During the course of month (you are Free to Buy ACC from market any time at lower price) you will get Right to excercise your Put Option to Sell ACC at 150/- to the seller of Put Option. Suppose it does not decline, you are free NOT to excercise your option to Sell and your loss is limited to the Premium you have paid.
When to Sell a Call Option.
(The quotes are fictitious)
If you are Bearish on a particular Scrip/Index. For example, you are Bearish on Infosys (CMP- Rs.3800/-) and expect that it will not move up significantly(or rather decline) in a month's time. So you will Sell Infosys Call Option at a strike rate Rs.3900/- (say) for 1 month and Receive the Premium. (Say Rs.100/share). During the course of month Buyer of Call Option will have Right (Not the Obligation) to take Infosys at 3900/- from you and you are obliged to honour your commitment. Remember that you are Holding risk of umlimited loss if Price of Infosys moves up significantly just at the cost of Premium you have received.(you should sell Call Option Only if you are sure that Price of Share will Fall/or not move up or you are holding shares with you to part with, if required)
When to Sell a Put Option.
(The quotes are fictitious)
If you are Bullish on a particular Scrip/Index. For example, you are Bullish on Satyam (CMP - Rs.200/-) and expect that it will not Decline significantly (or rather move up) in a month's time. So you will Sell Satyam Put Option at a strike rate Rs.215/- (say) for 1 month and Receive the Premium. (Say Rs.12/share). During the course of month Buyer of Put Option will have Right (Not the Obligation) to Sell Satyam at 215/- to you and you are obliged to honour your commitment. Remember that you are Holding risk of umlimited loss if Price of Satyam goes down at the cost of Premium you have received. (you should Sell Put Option Only if you are sure that Price of Share will Move up or you will take Delivery of shares, if required)
Options in Options:
1. You can exercise your right to buy/sell at strike price.
2. You need not exercise your right, but you are going to lose the premium paid upfront.
3. Most people resell the right at a higher premium.
Ex : Lets take the first example of reliance.
Here you have bought rights buy paying Rs.10 as premium.
Now lets say reliance price goes to say Rs.400, then the premium amount would have
also gone up, to say Rs.30. Then you can resell the right at 30 and book your profits.
Options market is more riskier market to cash markets. On the bright side the percentage of return is very high compared to the investments you put in. Options should be used for speculation and hedging and a low percentage to your total investments should go into options. Finally Options isn't for newcomers.
2008-03-09
Trading in Options
An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price.
Parties involved :
While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him.
Options are of two types - Calls and Puts options :
1. ‘Calls’ give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date.
2. ‘Puts’ give the buyer the right but not the obligation to sell a given quantity of the underlying asset, at a given price on or before a given future date.
Option premium : The premium is the price for acquiring the right to buy or sell. It is price paid by the option buyer to the option seller for acquiring the right to buy or sell.
Who decides the premium amount ?
It is calculated using a complex formula called the Black-Scholes formula.
http://en.wikipedia.org/wiki/Black-Scholes
It considers both intrinsic value and time value of a stock.
Time period : The options calendar always ends on the last Thursday of a month and you can buy/sell options for 'x' no. of months.
Strike price : It is the price of the underlying asset at which the same can be bought or sold if the options buyer excercises his right to buy/sell on or before the time period expiration.
Explaining the options concept with a simple example:
Let's say you have an item 'X' of worth Rs.10, I now give you Re.1 to gain control of 'X' for 1 month. This Re.1 is for you to keep, you never have to return it. Within this 1 month, I can do whatever I want with 'X', including selling it. On the expiry day, I would have the OPTION to give you back 'X', or Rs.10, this is what we were agreed upon. Within this 1 month, if I have sold the cup for Rs.12, on the expiry day, I'd have to give you Rs.10 and I'd keep Rs.2, subtracting that Re.1 I've given to you earlier, I've made 100% in 1 month.
2008-03-05
BSE sensex
30 companies making up the index are :
1. Associated Cement Companys Ltd.
2. Bajaj Auto Ltd.
3. Bharat Heavy Electricals Ltd.
4. Bharti Tele Ventures Ltd.
5. Cipla Ltd.
6. Dr Reddy’s Laboratories Ltd. (NYSE: RDY)
7. Grasim Industries Ltd.
8. Gujarat Ambuja Cements Ltd.
9. HDFC
10. HDFC Bank Ltd. (NYSE: HDB)
11. Hero Honda Motors Ltd.
12. Hindalco Industries Ltd.
13. Hindustan Lever Ltd.
14. ICICI Bank Ltd. (NYSE: IBN)
15. Infosys Technologies Ltd. (NASDAQ: INFY)
16. ITC Ltd.
17. Larsen & Toubro
18. Maruti Udyog Ltd.
19. National Thermal Power Corp. Ltd.
20. ONGC Ltd.
21. Ranbaxy Laboratories Ltd.
22. Reliance Energy Ltd.
23. Reliance Industries Ltd.
24. Satyam Computer Services Ltd. (NYSE: SAY)
25. State Bank of India
26. Tata Consultancy Services Limited
27. Tata Motors Ltd. (NYSE: TTM)
28. Tata Power Co. Ltd.
29. Tata Steel Ltd.
30. Wipro Ltd. (NYSE: WIT)
2008-03-04
Secondary markets
Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.
In equity markets, one can buy/sell shares of company through a stock broker.These shares can be equity shares, rights issue, bonus shares, etc..Now a days all shares are dematerialised and all trading is screen based. An investor needs to pay the broker a small brokerage for each transaction conducted by the client. This brokerage shouldn't exceed 2.5%.
Next coming to the factors influencing the price of a share are:
(1) stock specific: The stock-specific factor is related to people’s expectations about the company, its future earnings capacity, financial health and management, level of technology and marketing skills.
(1) stock specific: The stock-specific factor is related to people’s expectations about the company, its future earnings capacity, financial health and management, level of technology and marketing skills.
(2) market specific: The market specific factor is influenced by the investor’s sentiment towards the stock market as a whole. This factor depends on the environment rather than the performance of any particular company. Events favourable to an economy, political or regulatory environment like high economic growth, friendly budget, stable government etc. can fuel euphoria in the investors, resulting in a boom in the market. On the other hand, unfavourable events like war, economic crisis, communal riots, minority government etc. depress the market irrespective of certain companies performing well. However, the effect of market-specific factor is generally short-term. Despite ups and downs, price of a stock in the long run gets stabilized based on the stock- specific factors.
Other terminologies :
1. Contract Note
It is a confirmation of trades done on a particular day on behalf of the client by a trading member.It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades.
This contract note generally consists of :
- Name, address and SEBI Registration number of the Member broker
- Name of partner/proprietor/Authorised Signatory
- Contract number, date of issue of contract note, settlement number and time period for settlement.
- Order number and order time corresponding to the trades.
- Trade number and Trade time.
- Brokerage and Purchase/Sale rate.
- Signature of the Stock broker/Authorized Signatory.
2. Portfolio
A Portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor's goal(s). For most investors a portfolio has come to signify an investment in financial instruments like shares, debentures, fixed deposits, mutual fund units. Its important to have a diversified portofolio so that risk is spread out across the portfolio and losses are limited.
3. Equity Shares
An equity share, commonly referred to as ordinary share, represents the form of fractional ownership in a business venture.
4. Rights Issue/ Rights Shares
The issue of new securities to existing shareholders at a ratio to those already held, at a price. For e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. 125 per share.
5. Bonus Shares
Shares issued by the companies to their shareholders free of cost based on the number of shares the shareholder owns.
2008-02-26
IPO : Initial Public Offer
What's a public issue?
Most companies are usually started privately by their promoter(s). However, the promoters’ capital may not be sufficient for setting up or running the business over a long term. So companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite share capital from the public is through a ‘Public Issue’. Simply stated, a public issue is an offer to the public to subscribe to the share capital of a company. Once this is done, the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI.
One of the forms of public issue is IPO i.e., Initial Public Offer.
An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities. The sale of securities can be either through book building or through normal public issue.
Diff b/w book building and normal public issue :
- In normal public issue, the company and Lead Merchant Banker fix a price (called fixed price).All investors should buy the shares at this price only.
- In book building issue the company and the Lead Manager (LM) stipulate a floor price or a price band and leave it to market forces to determine the final price.
- How book building issue works : It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date. Thus this method is an efficient way of price discovery of an IPO.
Few terminologies involved :
1. Face value : it is the original cost of the stock shown on the certificate issued by the company. Its usually 2, 5 or 10.Rs.
2. Floor price : Floor price is the minimum price at which bids can be made.
3. Price band : In book building issue, the issuer fixes a price band b/w which investors can bid.
4. Cut-off price : This is the effective price at which stocks are finally issued after effectively finding the price by book building method of issue. Its also called Issue price.
5. Lock in : Indicates a freeze on the sale of shares for a certain period of time.Done to ensure that promoters continue to hold some percentage share of the company even after the public issue.
Other features of an IPO :
- The Book in a book building process should remain open for a minimum of 3 days.
- An investor should know in about 15 days time from the closure of issue, whether shares are allotted to him or not.
- If not allotted, he should recieve the refund in the same duration of time.
- It would take around 3 weeks after the closure of the book built issue for the stock to be listed in the exchange.
Lets take an example of an IPO and see how it works : RELIANCE POWER
- Largest IPO in India.
- Market capitalisation of over Rs.94000 crores ( current price * no. of shares)
- Issue price of Rs.450 for retail investors.
- Unfortunately listed at a discount of Rs.20 i.e., Rs.430. (happened coz investors' sentiments changed that the IPO was over valued)
- To compensate for losses, board has agreed upon bonus issue of 3:5 (for every 5 shares held, 3 bonus shares recieved).
- Therefore bringing down the value per share to Rs.269.
2008-02-07
History of BSE
History of BSE :
Bombay Stock Exchange is one of the oldest stock exchanges in the world with a history of around 133 years ( where as London Stock Exchange being the oldest with a history of over 300 years ). BSE is also the biggest stock exchange in the world in terms of number of companies listed with around 4,800 listed as of August 2007. Its market capitalisation is over 1.6 trillion USD. It is also the first exchange in the country to be granted permanent recognition under the Securities Contract Regulation Act, 1956.
BSE was established in 1875. The place where BSE is located is aptly called as Dalal street (similar to wall street) and is located in central Mumbai. Although now all the transactions are electronic, it wasn't like this always. BSE is traced back to those days where a group of brokers used to trade under the shade of banyan trees. the number of brokers increased, they had to shift from place to place, and wherever they went, through sheer habit, they overflowed in to the streets. At last, in 1874, found a permanent place, and one that they could, quite literally, call their own.
Although they had a permanent place now, they still followed the old system of OUTCRY method of trading.Here in this system the entire floor was divided into groups of different stocks where brokers used to shout out their bids. There was absolute chaos in this system. In the adjacent picture you can see the number of brokers that are being fit into this small hall. All this changed in 1995, when OUTCRY system was replaced by totally automated trading called as BSE Online trading (BOLT). This system is more efficient, faster and transparent than the previous system.
BSE SENSEX : (index)
The BSE SENSEX (also known as the BSE 30 index) is a value-weighted index composed of thirty scrips, with the base value at April 1979 = 100. The set of companies which make up the index has been changed only a few times in the last twenty years. These companies account for around one-fifth of the market capitalization of the BSE.
As i write this blog, the index is around 17.5k.
BSE now :
Important milestones:
The index crossed 1000 points in 1990.
2000,3000,4000 in1992.
5000 in 1999.
6000 in 2000.
7 - 9k in 2005.
10-14k in 2006.
15 -20k in 2007.
Thus BSE trading is not gambling (as is the misconception), but is just another business with a rich history to look into!!!
2008-02-05
THE BIG BULL
RAKESH JHUNJHUNWALA
'The Warren-Buffet of India'. 'The big bull'. 'One man army of Indian stock market'
These are a few terms often associated with this brilliant investor and chartered accountant from India.
He currently is a partner in his asset management firm called Rare enterprises (named after Rakesh and his wife rekha).He is the 51st richest man on earth according to Forbes magazine's 2007 rankings.
Inspite of all these he is a humble man with down to earth attitude.
He started his investing with meagre amount of Rs.5000. Now his assets are estimated at $1.1 billion. Now that's one helluva Rags-to-riches story that you often hear about.
One of his mottos is the famous "Buy right and hold tight". This often is reflected in his portfolio which has always been long term investing. He is well invested in the growth sectors like banking, infrastructure, retailing, etc...
Recently in an interview he said that "Trading is against human nature". He explains this as :
"All risk taking is associated with two human conditions, viz the greed for profits and the fear of losses. The ability to strike the right balance between fear and greed is the most vital determinant of profitable risk taking. Human nature operates on the chance of a gain rather than maximizing gains.
There is lack of focus on the magnitude of gains and losses, which is why I maintain that successful trading and investing requires you to go against the basic tenets of human nature. We are programmed to learn, and we learn to a pain. But in trading and investing, you have to learn to take a loss.
In trading, the first and the last principle is that trading is trend and price based, and not opinion based. This requires you to square an unfavorable trade regardless of your opinion. This means that if I buy a stock at Rs 100, and then the price falls to Rs 95, I take my loss and square off my trade. This is counter-intuitive to most people and This is the one common quality of all successful traders."
That's one smart investor with a keen eye on stock market and human nature in general!!
2008-02-04
online market tracker
For software engineers like me, I have always wished there is an excellent tool to track my favourite scrips. Unfortunately had found none. ( I know there is one from reliance money on moneycontrol, but dint like it much)
Well after a lot searching for a perfect tool, I found
BLOOMBERG
Here's the link:
http://www.bloomberg.com/
Using this tool, you can create multiple portfolios, track your favourite stocks, get various kinds of charts to analyse your market capitilisation, graphs to pulls historic data, headline stories of your stocks, gains/loss incurred,amongst many other features, and its almost realtime:refreshes/updates every 3 minutes.
The best part is its free.
The tool though requires a little effort to get used to, am sure will help you.
Reader comments are always welcome...
CK
2008-02-03
Biggest multibaggers on bse/nse..
BIGGEST MULTIBAGGERS IN LAST 3 YEARS !!
3 YEARS AGO,CORE PROJECT :
PRICE AT THAT TIME ---> 0.18
THEN IN 34 MONTHS : 420
RETURN --127126%
RETURN (AFTER SPLIT/BONUS)THOSE WHO HAVE INVESTED 1 LAC 3 YEARS AGO.........HE WOULD GET 229 CRORES !!
JAI CORP PRICE AT THAT TIME ---> 7
THEN IN 34 MONTHS : 1252
RETURN --24809 %
RETURN (AFTER SPLIT/BONUS)THOSE WHO HAVE INVESTED 1 LAC 3 YEARS AGO.........HE WOULD GET 50 CRORES !!
UNITECH PRICE AT THAT TIME ---> 7
THEN IN 34 MONTHS : 519
RETURN --24066 %
RETURN (AFTER SPLIT/BONUS)THOSE WHO HAVE INVESTED 1 LAC 3 YEARS AGO.........HE WOULD GET 48 CRORES !!
2008-01-29
TATA NANO
By now I assume that everyone in the sub-continent would have heard of the People's Car : Tata Nano and its impending impact on automobile industry.
Thanks to the facts used in promoting the car at its launch in 9th annual Autoexpo in New Delhi :
-Tata Nano priced at Rs.1.43L (on road) in bangalore saves you a cool Rs.80000 on its closest rival Maruti 800.
-The Nano has 21% more interior space and an 8% smaller exterior, when compared with the Maruti 800.
-Tata motors claim an excellent mileage of 23 kmpl.
Tata Nano is not all hunky-dory story. It has got its share of controversies around it :
-Its conceptualisation started in 2003 and many aren't happy with the design of the car. Many consider it is a 4 wheeled Auto.( Comes from the fact that its a back engine vehicle with storage space in the front )
-Environmentalists have predicted a steep increase in the Congestion and Pollution its going to add in the already crowded cities.
-Its safety has always been questioned.
-The manufacturing unit in Singur is severly opposed by the locals coz its going to throw about 15000 peasants out of their occupation and land/home.They fear low/no compensation.
And what about the competition in this segment of cars :
-Mahindra - Renault wants to come up with a 1.3L car.
-Not many know about the Wuling van by GM in JV with SAIC of China.
Its priced at $3700 USD and GM can use it to compete with Nano.
Whatever be the consequences of release of this car, one thing's for sure- A lot of middle class families in urban and sub-urban areas of India are going to jump on this dream vehicle from Tata's. And NANO in every sense of the word is going to change the way India travels.
Waiting for its release in the second half of this year ( like millions of others ),
CK
2008-01-28
Few Resources to learn about investments.
Here are the few resources i have come accross :
1. The intelligent investor - by Benjamin Graham [ Must read ]
P.S : Warren buffett, the richest investor in the world considers Benjamin to be his guru.
2. Reminiscences of a stock operator.
3. Google on Rakesh Jhunjhunwala, considered as Warren buffett of India.
4. Few online resources:
1) http://multibaggers.blogspot.com/
2) http://rasoni.blogspot.com/
3) http://www.rupya.com/
4) http://indscan.weblogs.us/
5) http://valueinvestorindia.blogspot.com/
6) http://valueinvestingindia.blogspot.com/
7) http://rtotla.blogspot.com/
8) http://symarketview.blogspot.com/
9) http://www.swaminomics.org/ (Eccentric thoughts)
10) http://journeytowealth.blogspot.com/
11) http://theinvestorblog.blogspot.com/
12) http://fundamentalpicks.blogspot.com/
13) http://readingstockcharts.blogspot.com/
14) http://fibonacci1321.blogspot.com/
15) http://deepwealth.blogspot.com/
16) http://dardashti.blogspot.com/
17) http://ulip.blogspot.com/
18) http://fundooprofessor.blogspot.com/
19) http://www.vinvesting.com/
20) http://www.nasdaqtrader.blogspot.com/
21) http://valuestockplus.blogspot.com/
22) http://deadpresident.blogspot.com/
23) http://india.seekingalpha.com/
24) http://stockstorm.wordpress.com/
5. Material from NSE called NCFM. [ Must read for beginners ]
P.S. NCFM stands for NSE Certification on Financial Markets.
HAPPY INVESTING!!
Online stock market trading in India
Here is a list of some of the best brokerage houses offering facilities for Online Stock Market Trading in India. Online Stock Market Trading has evolved tremendously in India, in the last five years. It is very convenient, comfortable and cost effective way of trading in the stock market. Feel free to share your experiences through comments
Rank 1 : Reliance Money
Rank 2 : Geojit
Rank 3 : Sharekhan
Rank 4 : Kotak Securities
Rank 5 : ICICI Direct
P.S. - I haven’t taken into account the performance / accuracy of equity research and the trading calls that some of these brokerage firms provide for free. I’ve only taken into account safety, brokerage rates and speed of execution. I’ve taken into account only the Online Stock Market Trading facility offered by the above brokerage firms. I haven’t considered their Offline Stock Market Trading facilities.
However, for investing in IPO’s I feel sharekhan is the best, since it allows clients to place orders till 2-3 PM on the final day of subscription of IPO’s.
Disclaimer : This is only my personal opinion. It shouldn’t be considered as a recommendation. Please do your own research before selecting your broker for Online Stock Market Trading.
2007-04-08
WHY BLOGGING?
Why do people blog?
People blog for many reasons- some use it truly as an online dairy,detailing their lives. The mundane-ness of a blog entry is what endears it to the readers - events that offer a slice of life of a citizen in one country can be interesting to people in another. Furthermore, the relative anonymity that the Net offers allows even introverts to open up. Some blog to convey a message to the world, some use it as an alterative mass media channels, as in the case of Chinese bloggers. Some just do for the fun of it..
Herman Melville put it best when he said, "We cannot live for ourselves alone. Our lives are connected by a thousand invisible threads, and along these sympathetic fibers, our actions run as causes and return to us as results." A perfect description of blogging, don't you think?
Will your Web log add to the world of knowledge? WHAT ARE WE BLOGGING ABOUT? The headline from an August 25, 2005, article in the San Francisco Chronicle says it all: “Thanks to new media, we have all become messengers— but what are we saying?”
Technology is allowing anyone with a computer, the ability to type, and an Internet connection to become a published author—of sorts. Web logs, or “blogs,” are the latest way that students, businesses, and many others are publishing their musings.
The term was coined in 1999, and today Webster’s dictionary defines a blog as a “diary; a personal chronological log of thoughts published on a Web page.” More importantly, it says that blogs are “typically updated daily” and that “blogs often reflect the personality of the author.”
Yet, it is the content of blogs that matters, not the tool. The tools allow a broad, non-technical audience to publish news, information, and opinions widely. The content can range from dyed-in-the-wool journalism to stream-of-consciousness revelations. What you really need to consider before blogging, is: Why are you going to do it? To reach individuals with critical information, to express opinions, to teach students writing skills, or simply as an outlet for personal frustrations?
As California teacher (and blogger) Joel Arquillos says, “Ask yourself, ‘So what?’ before you start blogging. Will your blog add to the world of knowledge and learning, or is it just for fun?”
The reason you are here shows that you are interested in blogging...
So ask yourself : WHY BLOGGING?
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