Dr.Ram Mohan.K.P

General points on investments Brief history of indian stock markets and

indices Market sentiments and their causes General financial analysis of companies Trading patterns and derivative trading What to and what not to do in stock

markets Personal impressions on stock investing

The money you earn is partly spent and the rest saved for meeting future expenses.

Instead of keeping the savings idle you may like to use savings to get return on it in the future. This is called Investment

Why should one invest -earn return on your idle resources, generate a specified sum of money for a specific goal in life and make a provision for an uncertain future

A lot of people call or believe investing in stocks is gambling. A true investor would appreciate it being called risky.

It’s like the belief, that getting into sea waters or a pool is risky. But someone

with the right swimming skills would know, when and where to swim to enjoy it

Over Long terms, Equities have outperformed, the other asset classes by a handsome margin. However, having said that it requires tremendous patience, discipline, good advise, and avoiding some costly mistakes in between to achieve those returns. 

Definition of risk is the chance that an investment's actual return will be different than expected.

High risks are associated with high potential returns; Low risks are associated with low potential returns

High risk also means higher potential losses.

This risk free rate (10 Yr Govt Securities)is used as a reference for equity markets whereas the overnight repo rate is used as a reference for debt markets. Approx-6%

An individual investor needs to arrive at his own individual risk return trade-off based on his investment objectives, his life-stage and his risk appetite

The potential risks can be minimized by

Diversification Rupee cost averaging Asset allocation

Stock Markets came into existence because Companies or Businesses needed them.

The little profits, if any they make, in early stages of a company wouldn't be enough to fuel the ambitious expansion plans they must have had.

Taking debt or loans from Banks is one option. But, it sadly needs to be paid back with interest. So the option is……..

Raise funds from public

Infosys made an IPO on February, 1993 and was listed on stock exchanges in India on June, 1993. The offer was priced at Rupees 95 per share

Assuming, one invested Rupees 10000, in 1993 Infosys IPO and has been holding till date, it would be worth over 2 Crores today(Including dividends around 25 lakhs).

At the same time 99% of stocks listed in Indian Stock Markets, are not worthy of staying invested at all times.

People without the basic knowledge of Stock Market, would fall into the 99% of non-worthy stocks, which will erode their investments, ending up in losses.

The art of investing is to identify evergreen companies, with profits growing consistently.

Primary Market: it deals in the issuance of new securities and bring the savers and users of capital together.

Secondary Market: it is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold.

It provide liquidity to the investors. .

The stock market is one of the most important sources for companies to raise money.

This allows businesses to be publicly traded, or raise additional financial capital for expansion byselling shares of ownership of the company in a public market.

The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities.

This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.

History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood.

An economy where the stock market is on the rise is considered to be an up-and-coming economy. In fact, the stock market is often considered the barometer of a country's economic strength and development.

Rising share prices, for instance, tend to be associated with increased business investmentand vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behaviour of the stock market

ISSUE TYPE OFFER PRICE DEMAND PAYMENT

Fixed Price Issues

Price at which the securities are offered and would be allotted is made known in advance to the investors

Demand for the securities offered is known only after the closure of the issue

100 % advance payment is required to be made by the investors at the time of application.

Book Building Issues

A 20 % price band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding.

Demand for the securities offered , and at various prices, is available on a real time basis..

10 % advance payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance along with the application.

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.

A group(Large cap companies with significant market capitalization)

B1 Group (medium Sized, Inconsistent profit, less liquidity)

B2 Group (Small companies, very low trading, poor in profit generation)

T group—highly volatile stocks where carry forward is not allowed Z Group (non compliance, poor companies) F Group (debt Market)

The SENSEX, short form of the BSE-Sensitive Index, is a "Market Capitalization-Weighted" index of 30 stocks representing a sample of large, well-established and financially sound companies. It is the oldest index in India and has acquired a unique place in the collective consciousness of investors.

SENSEX is considered to be the pulse of the Indian stock markets as it represents the underlying universe of listed stocks at The Stock Exchange, Mumbai.

Further, as the oldest index of the Indian Stock market, it provides time series data over a fairly long period of time (since 1978-79).

Market Capitalization:. Liquidity:

Continuity: Industry Representation:

Listed History:  Track Record: 

SENSEX is calculated using a "Market Capitalization-Weighted" methodology. The level of index at any point of time reflects the total market value of 30 component stocks relative to a base period

The base period of SENSEX is 1978-79. The actual total market value of the stocks in the Index during the base period has been set equal to an indexed value of 100.

Automobiles- Bajaj Auto, Maruti Suzuki, Mahindra &Mahindra, Tata Motors, Hero Motorcorp

Banking- Axis Bank, Hdfc Bank, ICICI Bank, SBI, HDFC

Eng.&Capital goods—BHEL, Larsen&Toubro I&T- Infosys, TCS, Wipro, Bharati Airtel Metals—Coal India, Hindalco, Sesa Sterilite, Tata

Steel Pharma- Cipla, Dr.Reddy’s, Sunpharma Petroleum-ONGC, Reliance Industries, GAIL Power—NTPC, Tata Power FMCG—ITC, Hindustan Unilever

The index has increased by over 13 times from June 1990 to today.

Using information from April 1979 onwards the long run rate of return on the BSE sensex can be estimated to be 0.52%per week (continuously compounded) with a standard deviation of 3.67%.

This translates to 27%per annum, which translate to roughly 18% pa after compensating for inflation.

The terms "bear" and "bull" are thought to derive from the way in which each animal attacks its opponents.

First of all, let's remember that bears are sluggish and bulls spirited and burly

That is, a bull will thrust its horns up into the air, while a bear will swipe down.

These actions were then related metaphorically to the movement of a market: if the trend was up, it was considered a bull market; if the trend was down, it was a bear market.

Nobody has been able to predict future behavior of markets with certainty

Even Astrology has been tried during start of each Samavat year

There are TWO widely used scientific methods to predict future stock movements

1.Fundamental analysis 2.Technical analysis

Fundamental analysis is a method of finding out the future price of a stock which an investor wishes to buy.

It relates to the examination of the intrinsic worth of a company to find out whether the current market price is fair or not, whether it is overpriced or under priced.

The presumption behind fundamental analysis is that a thriving economy fosters industrial growth which leads to development of companies.

Estimate of real worth of a stock is made by considering the earning potential of the company

Theoretically, the value of a company, hence its share price, is the sum of the present value of future cash flows discounted by the risk adjusted discount rate

 if a company receives regulatory approval for a new product, a fundamental trader might expect the company's stock price to rise.

Conversely, if a company has a financial scandal, a fundamental trader might expect its stock price to fall.

Fundamental traders need access to all of the available information as soon as it is available, and are therefore often institutional traders with large support teams, rather than individuals are better equipped to analyze  in this way

Technical traders use trading information (such as previous prices and trading volume) along with mathematical indicators to make their trading decisions.

This information is usually displayed on a graphical chart and is updated in real time throughout the trading day.

Technical traders believe that all of the information about a market is already included in the price movement, so they do not need any other fundamental information (such as earnings reports).

Stock charts gained popularity in the late 19th Century from the writings of Charles H. Dow in the Wall Street Journal, later known as "Dow Theory", alleged that markets move in all kinds of measurable trends and that these trends could be deciphered and predicted in the price movement seen on all charts.

A stock chart is a simple two-axis (x-y) plotted graph of price and time

Stock charts can be created in many different time frames

Stock chart analysis can be applied equally to individual stocks and major indices

One of the most common buy or sell signals in all chart analysis is the MOVING AVERAGE CROSSOVER. 

These occur when two moving averages representing different trends criss-cross.

For example, when a short-term average crosses BELOW a long-term one, a SELL signal is generated. Conversely, when a short-term crosses ABOVE the long-term, a BUY signal is generated.

The concept of SUPPORT AND RESISTANCE is essential to understanding and interpreting stock charts. 

Just as a ball bounces when it hits the floor or drops after being thrown to the ceiling, support and resistance define natural boundaries for rising and falling prices.

 Support defines that level where buyers are strong enough to keep price from falling further.

Resistance defines that level where sellers are too strong to allow price to rise further.

Support and resistance are created because price has memory. Those prices where significant buyers or sellers entered the market in the past will tend to generate a similar mix of participants

When a level of support or resistance is penetrated, price tends to thrust forward sharply as the crowd notices the BREAKOUT and jumps in to buy or sell.

When a level is penetrated but does not attract a crowd of buyers or sellers, it often falls back below the old support or resistance. This failure is known as a FALSE BREAKOUT.

Support and resistance exist in all time frames and all markets. Levels in longer time frames are stronger than those in shorter time frame

Elliott concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves

This information (about smaller patterns fitting into bigger patterns), coupled with the Fibonacci relationships between the waves, offers the trader a level of anticipation and/or prediction when searching for and identifying trading opportunities with solid reward/risk ratios.

Japanese Candlestick Charting

 It refers to the same chart with more than one time compression (e.g. daily or weekly). When both the weekly and the daily charts are in harmony, the chances of success can be greatly enhanced.

The essence of the strategy is easy: Use the higher time frame price activity to define the tradable trend as well as potential support and resistance

you should invest so that your money grows and shields you against rising inflation.

The rate of return on investments should be greater than the rate of inflation, leaving you with a nice surplus over a period of time

Whether your money is invested in stocks, bonds, mutual funds or certificates of deposit (CD), the end result is to create wealth for retirement, marriage, college fees, vacations, better standard of living or to just pass on the money to the next generation

Time horizon is the time period between the age at which you would like to start investing and at the age by which you would need a consolidated amount of money for any said purpose of yours.

One should also find out if there are there any short-term financial needs?

Will be a need to live off the investment in later years? 

Age Portfolio

below 3080% in stocks or mutual funds 10% in cash10% in fixed income

30 t0 4070% in stocks or mutual funds 10% in cash20% in fixed income

40 to 5060% in stocks or mutual funds 10% in cash 30% in fixed income

50 to 6050% in stocks or mutual funds10% in cash40% in fixed income

above 6040% in stocks or mutual funds 10% in cash 50% in fixed income

It could be growth, income or both It's only human if your first reaction on an

adverse market movement is to sell and run away.

To shield yourself against short term trading risks one has to take a long-term view. Renowned experts such as Benjamin Graham and Warren Buffet rarely shuffle their portfolio unless there is some change in the fundamentals of a company.

Once you see the kind of returns you can generate over time, you'll come to realize that it really doesn't matter if your stock drops or rises over the course of a few hours or days or weeks or even months

Yes, he can.. E-broking is one solution to the lay investor as these websites provide online information, expert investment advice, research database which is available with the institutions. and has bridged the gap between institutions and the retail investor.

A fund manager is faced with many disadvantages.

A fund manager will not buy high-growth stocks, which are available in small volumes.

In some cases an attractive position cannot be capitalized by a fund as the situation might be ultra vires to the fund’s objectives.

Sometimes, the fund manager’s risk exposure is high in particular scrips and volumes held, high too. Hence his liquidity is curbed while smaller volumes give the individual investor a higher level of liquidity.

A researched view can tilt the scales in favour of the small investor.

Revenues/Sales growth Bottom line growth

The bottom-line is the net profit of a company

ROI - Return on Investment Volume--Volume is also an indicator of the

liquidity in a stock and is a key way to measure supply and demand, often the primary indicator of a new price trend.

When a stock moves up in price on unusually

high volumes it could indicate that big institutional investors are accumulating the stock. When a stock moves down in price on unusually heavy volume, major selling could be the reason

Market Capitalization. Market value is the total number of shares multiplied by the current price of each share

Company management

Return on Equity Supposedly Warren Buffet's favorite number, this measures how much your investment is actually earning. Around 20% is considered good. 

Debt-to-equity ratio is arrived by dividing the total debt of the company with the equity capital.

You're looking for a very low number here, not necessarily zero, but less than .5  

If you see it at 1, then the company is still okay. A D/E ratio of more than 2 or greater is risky. It means that the company has a high interest burden, which will eventually affect the bottom-line.

Not all debt is bad if used prudently

The Beta factor measures how volatile a stock is when compared with an index.

The higher the beta, the more volatile the stock is. (A negative beta means that the stock moves inversely to the market so when the index rises the stock goes down and vice versa). 

This ratio determines what the company is earning for every share. For many investors, earnings is the most important tool. EPS is calculated by dividing the earnings (net profit) by the total number of equity shares

 The P/E ratio takes the stock price and divides it by the last four quarters' worth of earnings.

When a stock's P-E ratio is high, the majority of investors consider it as pricey or overvalued. Stocks with low P-E's are typically considered a good value. 

 History of the company and line of business Product portfolio's strength Market Share Top Management Intrinsic Values like Patents and trademarks held Foreign Collaboration, its need and availability for future Quality of competition in the market, present and future Future business plans and projects 

The stocks are of companies whose potential for growth in sales and earnings is excellent.

Companies growing faster than the rest of the stocks in the market or faster than other stocks in the same industry are the the Growth Stocks.

These companies usually pay little or no dividends, since they prefer to reinvest their profits in their business. 

 Value investors look to buy stocks that are undervalued, and then hold those stocks until the rest of the market (hopefully!) realizes the real value of the company's assets.

The value investors tend to purchase a company's stock usually based on relationships between the current market price and certain fundamentals. They like P/E ratio being below a certain limit; dividend yields above a certain limit; Total sales at a certain level relative to the company's market capitalization, or market value. 

There are many people who buy stocks primarily because of the stream of dividends they generate.

Called income investors, these individuals often entirely forego companies whose shares have the possibility of capital appreciation for high-yielding dividend-paying companies in slow-growth industries. 

 Market leaders who dominate their niche. The big tend to get bigger, win more contracts and have the largest R&D budgets.

 Earnings that are growing, at an increasing rate, every year.

 Revenue growth that exceeds the industry average.

 Strong management.   Competing in an high and long-term growth

oriented industry sector The key to making the big money with these stocks

is to own them for a long time, letting them continue to grow. Even if you buy only a few shares, over time you can do very well as the stock grows, splits, and grows again. (Many Infosys shareholders started with 10 shares and now own hundreds)

Investment involves putting money into an asset in order to enjoy the series of returns in the long term. This is for average individuals

Speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum and is usually short run phenomenon and is done in expectation of an extra ordinary return and carry considerable potential risks-suitable for operators

Strong long-term and short-term earnings growth

Impressive sales growth, profit margins and return on equity

New products, services or leadership Leading stock in a leading industry group  High-rated institutional sponsorship Positive market.

When the price in the market for the securities is an historical high

When the future expectations no longer support the price of the stock

when yields fall below the satisfactory level When other alternatives are more attractive

than the stocks held When there is tax advantage in the sale for the

investor Sell if there has been a dramatic change in the

direction of the company  If the earnings aren't improving over two to

three quarters Cut losses at the right level. But do not sell on

panic. The usual rule for retail investor is to sell if a stock falls 8% below the purchase price. If you don't cut losses quickly, sooner or later you'll suffer some very large losses

A stop loss is an order to buy (or sell) a security once the price of the security climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order is entered as a market order (no limit) or a limit order (fixed or pre-determined price)

With a stop order, the trader does not have to actively monitor how a stock is performing because the order is triggered automatically when the stop price is reached.

Stop loss orders are great insurance policies that cost you nothing and can save you a fortune. Unless you plan to hold a stock forever, you should consider using them to protect yourself

If you sell a stock you don't own, you are selling short. (Yes, it's legal.) You are now short the stock.

A short seller sells a stock that he believes will fall in value. He does not own the stock before he sells it. Instead, he borrows it from someone who already owns it.

Later, the short seller buys back the stock he shorted and returns the stock to close out the loan. If the stock has fallen in price since he sold short, he can buy the stock back for less than he received for selling it. The difference is his profit

A short sale reverses the order of a typical stock purchase: the stock is sold first and bought later.

Short selling is a marginable transaction When you open a margin account, you

must sign an agreement with your broker which says you will maintain a cash margin or pledge your stocks as margin.

The two primary reasons for selling short are opportunism and portfolio protection

Short selling just like long buying is essential for proper functioning of the stock market. It provides essential liquidity

Day Trading involves taking a position in the markets with a view of squaring that position before the end of that day.  

A day trader typically trades several times a day looking for fractions of a point to a few points per trade, but who close out all their positions by day's end.  

The goal of a day trader is to capitalize on price movement within one trading day. 

Unlike investors, a day trader may hold positions for only a few seconds or minutes, and never overnight.

Zero Overnight Risk Since positions are closed prior to the end of the trading day, news and events that affect the next trading day's opening prices do not effect your portfolio.

Increased Leverage Day Traders have a greater leverage on their trading capital because of low margin requirements as their trades that are closed in the same market day.

Profit in any market direction Day trading often will utilize short-selling to take advantage of declining stock prices. The ability to lock in profits even as markets fall throughout the trading day is extremely useful during bear market conditions

Swing Trading takes advantage of brief price swings in strongly trending stocks to ride the momentum in the direction of the trend.

Swing trading combines the best of two worlds -- the slower pace of investing and the increased potential gains of day trading.

Swing traders hold stocks for days or weeks playing the general upward or downward trends.

Trend trading depends on identifying and catching the trend after it has started and getting out of the trend as soon as possible after the trend reverses. Trend Trading involves taking a position in the markets with a view of holding that position for weeks to months for larger than normal gains.

Trend traders or investors generally trade the long term or secular trends and are not concerned with the day to day market volatility

Normally to buy and sell shares, you need to have the money to pay for your purchase and shares in your demat account to deliver for your sale.

However as you do not have the full amount to make good for your purchases or shares to deliver for your sale you have to cover (square) your purchase/sale transaction by a sale/purchase transaction before the close of the settlement cycle.

In case the price during the course of the settlement cycle moves in your favor (risen in case of purchase done earlier and fallen in case of a sale done earlier) you will make a profit and you receive the payment from the exchange.

In case the price movement is adverse, you will make a loss and you will have to make the payment to the exchange. Margins are thus collected to safeguard against any adverse price movement. Margins are quoted as a percentage of the value of the transaction.

When markets start rising, more people step aboard. And when the indices start falling there is panic selling.

Contrarians buy on bad news, and sell on good news. “Buy low, sell high”.. The herd mentality usually restricts us from pursuing a contrarian investment strategy, though it consistently beats the market..

The contrarian strategy advises you to look at a company's business fundamentals, stocks trading at below-market multiples of EPS, cash flow, book value, or dividend yield before taking an investment decision. Historically, stocks that are cheap by any of the above measures tend to outperform the market.

To do contrary, you would require to go against the crowd, buying stocks that are out of favour and sell a few of Dalal Street’s darlings. This requires overriding powerful instincts.

Behavioural Finance is the study of the influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets

Psychological factors can actually explain why different investors behave in different ways which affect their investment decisions

One of the most common investor behaviors is overconfidence in their judgment towards the market.

This actually happens when they actually underestimate the risk of the investment. The major mistake; they tend to trade too much which will lead them to high transaction costs. The transaction costs might even exceed the returns that they gained.

The second behavior is the investor tends to have biased self- attribution which means that they will take all the credit for the returns that they received and they will blame others for their losses that they encountered.

This kind of investors will usually support the information that favor their beliefs and they will underestimate or not considering the information that are against them. They usually see the failure to get the returns as the result of the factors that are beyond their control.

The third behavior is known as loss aversion. This behavior often happens to the investors that dislikes the losses much more than the gains.

For example, when a person lose Rs2000, the loss that he experience will have a bigger impact on him compare with when he is gaining Rs2000.

The investor will usually hang on to the losing stock hoping the price of the stock will bounce back. They will sell the gaining stock rather than the losing stock.

. This actually means that the investor will

just simply ignore the information that is against their existing belief.

They will even avoid finding any new information because they afraid that the new information is against their initial opinion.

Once the investor has decided that they make the right choice, they will believe it even though there is evidence proving that their choice is wrong.

Einstein said 'There are three great forces in the world: stupidity, fear and greed. ' Stupidity (at least in hindsight) leads people into situations where fear and greed are the roots of their downfall.

There is an old saying on Wall Street that the market is driven by just two emotions: fear and greed.

Fear is a response to threat. Greed is a response to opportunity.

Fear seeks to preserve the self. Greed seeks to expand the self (via owned acquisitions).

Fear leads to avoiding. Greed leads to attraction.

When fear and greed compete, fear often wins

Warren Buffet made a very pertinent comment when he said 'Be fearful when people are greedy, and greedy when they are fearful'. When people are greedy, bubbles happen. When they are fearful, they sell at low prices. Understanding this can lead to a wiser investment strategy.

When Investors get greedy, fueling further greed and leading to securities being grossly overpriced, which create a bubble.

This get-rich-quick mentality makes it hard to maintain gains and keep to a strict investment plan over the long term, and amid such a frenzy, there is an "irrational exuberance" of the overall market

Just as the market can become overwhelmed with greed, the same can happen with fear ("an unpleasant, often strong emotion, of anticipation or awareness of danger"). When stocks suffer large losses .

This mass exodus out of the stock market shows a complete disregard for a long-term investing plan based on fundamentals

All of this talk of fear and greed relates to the volatility inherent in the stock market. When investors lose their comfort level due to losses or market instability, they become vulnerable to these emotions, often resulting in very costly mistakes

Avoid getting swept up in the dominant market sentiment of the day, which can be driven by a mentality of fear and/or greed, and stick to the basic fundamentals of investing.

Stock prices drop A LOT! Price drops are sudden and

unexpected Crashes create panic People lose money they have

invested in stocks

Economists agree that supply and demand forces may lead to future crashes because stock market prices are based, in great part, on expectations.

This increased demand continues until stock prices become too high for the value of the related corporation.

“Over valued” stocks create market situations called “speculative bubbles” – and bubbles can burst!

Bubbles burst when investors expect prices to stop increasing

Monday, October 19, 1987, when stock markets around the, world  crashed shedding a huge value in a very short time.

The crash began in Hong Kong and spread west to Europe, hitting the U S after other markets had already declined by a significant margin. The Dow Jones Industrial average (DJIA) dropped by 508 points to 1738.74 (22.61%).

Savers: Savers are those people who spend the majority of their life slowly growing their nest egg in order to ensure a comfortable

retirement. Speculators: Unlike Savers, Speculators choose to take control of their investments, and not rely solely on time.

Specialists: Specialists believes that the

key to successful investing is education and experience. The Specialist generally picks a single investing area, and becomes an expert in that area.

Many investors react to market conditions like lemmings: Stampeding up the high mountain when markets are rising and down into the cold deep sea when

markets are falling

This "herd" mentality can be extremely dangerous Because investors often get into the market too late and get out too early! You should never let emotions cloud your trading judgment.

Furthermore, if a movement starts in one direction, it tends to pick up more and more investors with time and momentum.

The impact of this lemming-like behavior has been made worse in recent years because financial,economic, and other news affecting investor psychology travel faster than ever before

Capital can also flow now between nations with surprising ease, so that international markets respond more quickly to sudden changes with a domino effect in the direction of investor buying and selling

The retail investors in India generally start investing when the stock market go up.

They exit when the markets crash.

These results in generation of heavy losses for the retail investors & this may also be the reason on account of which the retail investors perceive the stock market to be very risky.

Above behavior of Indian retail investors exhibits their irrational approach towards investment and their herd mentality.

Appropriately an investors should enter into stock market when the market is down as such a market creates good buying opportunities & should exit the market when the market goes up

Trading or investing is so exciting that it often makes amateurs feel high. But I hope you realize that nobody can get high and make money at the same time.

Emotional trading is your own worst enemy. Greed and fear are bound to destroy any trader or investor. Conquering your emotions of fear and greed will help you on the road 

Do you have trouble taking a loss? You are not alone. Large corporations have trouble taking losses too.

Behavioral economists have shown that companies go bankrupt rather than admit that their corporate identity and business plan need reworking.

Bankers refuse to write off bad loans because they don't want to admit to their superiors that they mistakenly lent it to people who were a bad risk.

And institutional money managers leave losses on paper because they are afraid to own up.

  When you lose money on a trade, you naturally

start to feel guilty and a little panicked. It is as if you are unnecessarily risking your

safety and that of your family. It's quite understandable, but if you would like

to be a successful professional trader, you must change your thinking regarding this issue.

You must fight against your natural inclinations and learn to take losses.

Losses are a business expense. It's like a personal investment in your trading business. 

It's like paying tuition in order to learn important trading lessons

Futures : A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. All the futures contracts are settled in cash

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.

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.

“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

“Puts” give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date

Hedging is buying and selling futures contracts to offset the risks of changing underlying market prices. Thus it helps in reducing the risk associated with exposures in underlying market by taking a counter- positions in the futures market.

For example, an investor who has purchased a portfolio of stocks may have a fear of adverse market conditions in future which may reduce the value of his portfolio.

He can hedge against this risk by shorting the index which is correlated with his portfolio, say the Nifty 50.

In case the markets fall, he would make a profit by squaring off his short Nifty 50 position. This profit would compensate for the loss

Since the investor is required to pay a small fraction of the value of the total contract as margins, trading in Futures is a leveraged activity since the investor is able to control the total value of the contract with a relatively small amount of margin.

Thus the Leverage enables the traders to make a larger profit (or loss) with a comparatively small amount of capital

 Not being disciplined and failing to cut losses at 8-10% below the purchase price

 Do not purchase low-priced, low quality stocks Do not let emotions or ego get in the way of a

sound investing strategy Invest in equities for long term and not short

term . Patience is a virtue in investing.

Do not put all your money on the same horse. Diversify your portfolio ideally into five industries and ten stocks.

Margin is not a luxury, it is a deep-seated risk, Greed is dangerous; it may wipe out the gains

already made. Once a reasonable profit is made the investor should get out of that stock quickly

1. Never chase a stock. 2. Buy when markets are in the grip of

panic. 3. Only buy fundamentally strong stocks,

which are undervalued. 4. Buy stocks grown in top line and bottom

line over the past years. 5. Invest in companies with proven

management. 6.Go for quality stocks and not

quantity

6. Avoid loss-making companies. 7. PE Ratio and Growth in earnings per

share are the key. 8. Look for the dividend paying record.

9. Buy when everyone is selling and sell when everyone buys.

10. Invest a fixed amount each month.

Less than Rs. 20,000 1 or 2 stocks Rs. 20,000 to Rs. 50,000 2 or 3 stocks Rs. 50,000 to Rs. 2,00,000---3 to 5 stocks Rs. 2,00,000 to Rs. 5,00,000--5 to 7

stocks Rs. 5,00,000 or more--7 to 10 stocks

1. Do zero research on the company 2. Execute Market Trades 3. Buy High and Sell Low – 4. Invest in companies facing

bankruptcy 5. Treat Proxy Statements and Annual

Reports as spam 6. Invest in one sector 7. Trade Penny Stocks – 8. Buy in one lump sum 9. Invest in only domestic stocks 10. Trade with fear

Financial risk tolerance is defined as the maximum amount of uncertainty that someone is willing to accept when making a financial decision

risk tolerance decreases with age females have a lower preference for risk

than males risk tolerance increases with education

level risk tolerance increases with income level

and net assets single (i.e., unmarried) investors are

more risk tolerant than married

guard against Promise of unrealistically High Return Promise to invest in opportunities based on

secretive information Getting euphoric about certain companies and

investment Your involvement not required in decision to

buy or sell Guaranteed high returns (like double in three

months) Promise of no risk, complete capital protection Statements like life time opportunity requiring

you to sign papers and part with money immediately

Overly consistent returns even during adverse market conditions

Recent era witnessed a remarkable growth in inter-regional flows of capital and equity investments

Several economic as well as political developments and reforms that had taken since about the beginning of 1980s, have made these regions more open to foreign influence and foreign investments.

improvements in information and communications technology that had lowered the cost of cross-border information flows and financial transactions, and the expansion in the multinational operations of major corporations

These socio-political, economic and technological developments and reforms towards globalization, have clearly galvanized the tendency for stock markets to move together internationally

It is an investment strategy where an investor buys stocks and holds them for a long time.

This is based on the view that in the long run financial markets give a good rate of return despite some volatality. It says that investors will never see such returns if they bail out after a decline.

This viewpoint holds that market timing, i.e. the concept that one can enter the market on the lows and sell on the highs, does not work; Attempting such timing gives negative results, at least for small or unsophisticated investors, so it is better for them to simply buy and hold.

One argument for the strategy is the efficient market hypothesis (EMH): If every security is fairly valued at all times, then there is really no point to trade. Some take the buy-and-hold strategy to an extreme, advocating that you should never sell a security unless you need the money.

Others have advocated buy-and-hold on purely cost-based grounds,. Costs such as brokerage are incurred on all transactions, and buy-and-hold involves the fewest transactions for a given amount invested

Taxation law also has some effect; tax for long-term capital gains may be nil, and tax may be due only when the asset is sold (or never if the person dies).

Warren Buffett is an example of a buy-and-hold advocate who has built his fortune by investing in companies at times when they were undervalued

Top-down investing involves analyzing the "big picture". Investors using this approach look at the economy and try to forecast which industry will generate the best returns. These investors then look for individual companies within the chosen industry and add the stock to their portfolios

Conversely, a bottom-up investor overlooks broad sector and economic conditions and instead focuses on selecting a stock based on the individual attributes of a company. Advocates of the bottom-up approach simply seek strong companies with good prospects, regardless of industry or macroeconomic factors. 

Do not invest money set aside for a specific purpose into equity markets

Do not invest borrowed money in stock market.

Book profits when markets are high, maybe few months or years before your goal time, because the time of your goal need not coincide with the market peaks

Selling is as important as buying; if you do not do so, your profits are just on paper!

Cutting your losses are as important as booking profits!

Averaging is a bad habit; even if your loss- percentage appears less, your overall loss is likely to go up! Sell your loss making stocks and re enter at a later date if you need to!

Never have any emotional or sentimental attachments to the stocks you own; the only motive for you to be in market is for “Profits”

You cannot aim for profits in all the stocks you buy; if you can have profits in6-7 stocks out of 10 you buy, it is reasonable.

Stock markets react on news and not in actual happenings; So it is a good idea to buy on some good actuals rather than news

Usually most people who are in stock trading will boast of their profit making and never disclose their losses; Do not get perturbed by this

Everybody into stock investing have burnt their fingers

There will be numerous advisors during a booming market phase but none when the sentiments are bad.

Portfolio management services cannot be blindly believed as they are more interested in rotating your stocks rather than making long term profits

Best time to buy is when the market is beaten down

Phased investments are less risky than lump sum investment.

Better avoid NFO offerings as it is always better to put your money in proved funds

Avoid thematic funds unless you are sure about a particular story.

No added risks in buying a fund with higher NAV than one with smaller NAV because for a given price, we are buying the assets of the same value

An established Fund house with impeccable credentials, A fund manager who has proved his stock picking abilities and open ended, diversified growth fund with long track record are all desirable qualities

IT IS BASICALLY THE FRAUD DONE IN THE CAPITAL MARKET WITH THE INVESTORS BY MANUPULATING THE FACTS IN ORDER TO ATTAIN ENORMOUS PROFITS

TAKING ADVANTAGES OF LOOPHOLES IN THE BANKING SYSTEM, HARSHAD AND HIS ASSOCIATES TRIGGERED A SECURITIES SCAM DIVERTING FUNDS TO THE TUNE OF RS 4000 CRORES FROM THE BANKS TO STOCK HOLDERS BETWEEN APRIL 1991 TO MAY 1992

Ketan Parekh

.

He targetted smaller exchanges like the Allahabad Stock Exchange and the Calcutta Stock Exchange, and bought shares in fictitious names.

His dealings revolved around shares of ten companies like Himachal Futuristic, Global Tele-Systems, SSI Ltd, DSQ Software, Zee Telefilms, Silverline, Pentamedia Graphics and Satyam Computer (K-10 scrips).

Ketan borrowed Rs 250 crore from Global Trust Bank to fuel his ambitions. Ketan alongwith his associates also managed to get Rs 1,000 crore from the Madhavpura Mercantile Co-operative Bank.

 He is widely considered the most successful investor of the 20th century. Buffett is the chairman, CEO and largest shareholder of Berkshire Hathaway and consistently ranked among the world's wealthiest people

In 1962, Buffett became a millionaire and a billionaire in 1990 through his holdings in his company Berkshire Hathaway

In 2008, Buffett became the richest person in the world, with a total net worth estimated at $62 billion, overtaking Bill Gates

In 1999, Buffett was named the top money manager of the Twentieth Century in a survey by the Carson Group, ahead of Peter Lynch and Jhon Tempeleton

In June 2006, he announced a plan to give away his fortune to charity, with 83% of it going to the Bill & Melinda Gates Foundation.  (worth approximately US$ 30.7 billion as of June 23,2006),making it the largest charitable donation in history