Month: September 2006

 

Almost everyone who has been in the market must have noticed that shares fall faster than they rise.  This article looks at a couple of reasons because of which this happens. 

One reason why this happens is because of traders buying shares on margin money. This happens as follows. Suppose you have shares worth Rs. 1 lakh, on these shares your broker will allow you to take positions of say up to Rs. 40000. What this simply means is that you can buy and sell shares worth Rs.40000 without actually having to cough up this amount. This is called playing on margin money. In the above example the margin is 40%, which means that you can play up to 40% of the shares that you own. Every time the margin decreases below 40% you have to either square off the position or you have to keep extra cash with your broker. Now assume that you have also entered into such a trade where you had shares of say HLL worth Rs.1 lakh and you have bought shares of Infosys for Rs.40000 with the margin hoping to sell them off later in the day and make a quick buck. Unfortunately for you however the market falls and the value of HLL now remains only Rs.90000 whereas you have bought Infosys worth Rs.40000. To maintain the margin of 40% your broker calls you to pay up additional margin money (called margin call in market parlance). You decide that its not worth it and sell the Infosys that you have, further creating downward pressure and lowering the price of Infosys. If you look at the bigger picture and see the market as a whole there certainly will be another person who was holding Infosys worth Rs. 1 lakh and HLL worth Rs.4000, because of your decision this person would need to sell his HLL now. This is a vicious cycle in which many traders will now get trapped and what started off as a correction would result in a big fall. This is one of the prime factors why markets fall off sharply in a single day, the fall being anywhere close to 300 to 800 points on the BSE. 

Another reason why the market falls rather sharply is what is known as “Panic Selling”. What this means is that small and new investors in the market see that the market is falling and they think that there is no end to the fall. Often these investors enter the market with the lure to make big money and know little about what companies they are buying and have little confidence in their investment decisions. Such investors tend to sell all of their holdings in such falls and bail out of the markets. In the process they tend to drive the prices of the shares that they hold further down and end up pushing the prices abysmally low. 

There exist several myths about IPOs, which lure the investors into applying for each and every IPO that come in their way. The general perception is that IPOs are a fail-safe way to make money and that if one invests money in an IPO returns are guaranteed.

This is the greatest myth about IPOs. Many IPOs will result in losses for the investors, the prices of the same will go down because of several reasons like a weak company, over pricing, weak management or simply because the price fell along with the general markets. A look at the table below shows you how many IPOs have failed in the past.

A second myth about IPOs is that if one steers clear of the smaller companies and invests only in IPOs of well-known companies one will make guaranteed profits. This is also not true as we can see that a lot of well-known companies like HT Media, Provogue, OBC, Allahabad Bank, Jindal Polyfilms, T.V. Today Network are listed in the table below.

These are all big companies and chances are that most investors would have heard of them before the IPO. But still they figure in the list and the most likely reason is that the issue was over priced.

This is an important learning for all of us. Even our team got carried away and gave a good recommendation for Jet Airways, which was trading below the issue price some days back and made the same mistake. However we learnt from our mistake and investors who would have taken a hard look at our recommendation for Provogue would have avoided burning their fingers.
We will keep this article shorter than the average size of most of our other articles simply because we feel that these are two very very important things for investors to keep in mind and its best that these two points sink in and are internalized by all investors so that they can avoid burning their fingers in the stock market and especially with IPOs.

 

S.No.	Name	Price as on 27th Oct 2005	Issue Date	Issue Price
1	HT Media Ltd.	427.35	04/08/2005 to 10/08/2005	Rs.530
2	Shri Ramrupai Balaji Steels Ltd.	17.3	08/07/2005 to 14/07/2005	Rs.22
3	Nectar Lifesciences Limited	199.35	22/06/2005 to 28/06/2005	Rs.240
4	Provogue (India) Ltd.	136.25	10/06/2005 to 16/06/2005	Rs.150
5	Jindal Poly Films Ltd.	289.9	09/06/2005 to 15/06/2005	Rs.360
6	Oriental Bank of Commerce	235.15	25/04/2005 to 29/04/2005	Rs. 250
7	Allahabad Bank	76.85	06/04/2005 to 12/04/2005	Rs.82
8	Jai Prakash Hydro-Power Ltd.	30.3	22/03/2005 to 29/03/2005	Rs. 32
9	Datamatics Technologies Ltd.	87.7	12/04/2004 to 19/04/2004	Rs. 110
10	Dishman Pharmaceuticals & Chemicals Ltd.	131.9	29/03/2004 to 07/04/2004	Rs. 175
11	T.V. Today Network Ltd.	76.9	18/12/2003 to 27/12/2003	Rs. 95
12	D-Link (India) Limited	126.75	20/2/2001 to 27/2/2001	Rs. 300
13	Creative Eye Limited	9.1	03/11/2000 to 09/11/2000	Rs. 50
14	Pritish Nandy Communications Limited	49.6	04/09/2000 to 11/09/2000	Rs. 155
15	MRO TEK Limited	70.65	04/09/2000 to 09/09/2000	Rs. 95
16	Shree Rama Multi Tech Limited	15.7	15/01/2000 to 21/01/2000	Rs. 120

Online Trading is a recent phenomenon and many investors have started to open trading accounts with companies, which provide online trading facilities. 

If you have a computer with a decent Internet access online trading can ease a lot of your troubles, which you face with the traditional offline brokers. It is particularly useful for those people who regularly invest in IPOs. Anyone who has invested in an IPO will tell you how easy and convenient it is. 

One of the biggest problems faced in offline brokerages is that the IPO is opened for a very short period of time and very often investors are scrambling for application forms or making cheques or drafts in the name of the company for which the IPO is there. Very often these cheques / drafts have to be made for escrow accounts and the names are not very straightforward. Quite a few investors end up making mistakes in entering the names and although it seems like a silly small thing many investors end up losing the opportunity to invest because of this reason. This hassle is not at all present in online investment as you do not have to write cheques or drafts, just simply decide the number of shares that you want to buy and apply. The money is automatically transferred and there is no need to write any cheques. 

Another perpetual problem especially with those IPOs, which are in high demand, is that the application forms invariably finish by the time you get to your broker’s office and you have to again run around to get a copy of the same. This is a story, which is oft repeated at every popular IPO, and getting an online account is a good way to get rid of this problem as you do not have to worry about the form and can apply without one just by a few clicks. 

Whenever you log onto your account you get to see which are the IPOs which are open currently and therefore it becomes easy for you to keep a track of these IPOs and the likelihood of your missing investing in one “just because you didn’t know” decreases. 

Another problem that people who invest in IPOs face is the refund money (because of the difference in the shares applied for and shares allotted). Some investors have faced the problems of misplaced cheques or getting them after a long delay whereas in the online accounts you get this refund pretty quickly and your trip to deposit the cheque in the bank is also saved as your money is transferred automatically in the bank account that is linked to your trading account. 

Penny Stocks have long been the attraction of a lot of investors because of the tremendous returns that these stocks can generate in a short period of time. The reason that some of these stocks are able to generate such high returns which goes as high as five or even ten times the amount invested is the price and the volume of these stocks are low.
 

Because the volumes are low in such stocks when interest is generated in such stocks and people start investing the sudden spurt in volume leads to a large increase in price of such stocks.  

 

And that is the danger that exists while investing in these stocks. Because one can raise the prices many folds just by investing a few lakhs. Many a time these stocks are the target of Promoter manipulation.  

 

The modus operandi is quite simple. A few promoters group together and generate artificial interest in a particular penny stock. Suppose there are two promoters who hold majority of the stock in their company where the volumes in the markets are low. Now one promoter will start selling his stock in the open market and the other promoter will keep on buying this stock at progressively higher prices. Since the volume is low the promoters are easily able to jack the prices by doing this. At the same time they also engage in spreading rumors about the company and create interest among the ordinary investors. They are easily able to prop up the prices from a low of say Rs.5 to a high of Rs.20.  

 

You can think of the two promoters as husband and wife and think that the husband has sold off all his shares to the wife and the wife has paid for the stocks. The net effect remains the same as the stocks of the couple remain with them and so does the money. Although in the real world the trade is more complex this analogy helps us to understand what exactly is going on in this transaction.  

 

Now at the same time there is “real” demand for the stocks of the company in the market by investors other than the wife and it is at this time that the “wife” starts selling off chunks of her shares to the public at these propped up higher prices. Now because there is a genuine demand for those stocks in the market the prices do not fall as suddenly as they went up and this gives a good opportunity for the wife to get out of the stocks at a higher price than what they had originally had the shares for.  

 

This is a neat way promoters have come up of making money in the penny stocks but at the same time other investors who are not well informed about the stock market become victims and lose their money in the deal.  

 

The stock markets are at all time highs and just like the last time around when the market was at its previous high every one thinks that nothing can go wrong and there is just one way where the market can go which is UP.

 Nothing could be farther from the truth and this will be clear from the way the market behaves in the next few months. Here are a few tips that would hopefully save you from losing a lot of cash in the current frenzy. 

Time and again investors have burnt their fingers in the markets and here are some tips to you so that you do not end up burning your fingers in this market. 

The number one tip at this point would be to sell if you have stocks and not to buy them if you have cash. The golden principle in the markets is “Buy when everyone else sells and sell when everyone else buys”. Simple enough right? Not really. Why? Because of peer pressure pure and simple. When everyone else around you seems to be having a ball at the markets you would feel like a fool if you didn’t participate now. 

OK so you can’t resist buying at this time then at least do yourself a favor and stay away from unknown Penny Stock and hot tips that your barber gave you. True that the stock has tripled in the last fifteen days but that was before people like your barber started buying the stock. Chances are that the Promoter of the company have started buying into the stock and have spread rumors like acquisition or a big export order to fool investors and sell out to them at a later date. 

Another tip that would serve useful is to value a stock based on its future growth and not its past performance. For instance many investors say that I will not buy stocks of X company because it has doubled in the last year. Well it may have doubled in the last year but that should not be the thing you should be telling yourself. Rather you should ask yourself why has this doubled in the last year and can it do so again? There should be a solid answer to your question like the launch of a new product or reduction in the prices of raw material. And indeed if the answer is in the positive then by all means go ahead and buy that stock regardless of what has happened in the last year. 

Another tip would be to remember what you are buying. Quite simply investors often forget that when buying a stock they are simply buying ownership in the companies. Most of you would know that nothing spectacular would happen in the company that you work for, in a month, they are not going to double their revenues and certainly not double your salary every month. Then why expect anything different from the companies that you are investing in. Why expect the prices to double in a month or two. Give time to your investments; don’t reduce it to a gamble. Only when you invest in fundamentally sound companies and then give the investments sufficient time to grow will you see some healthy returns on your investments. Ideally a minimum horizon of one year is a good time. 

 

 

The individual investor often makes certain typical mistakes that will eventually cause him to give up or to lose everything.

 Believing every investment you make is 100% safe
Any investment implies a certain risk factor that is determined by a multitude of factors. Disregarding these factors leads to wrongly evaluating the wining possibilities. 

Great expectations
Those investors that neglect risks also have great expectations regarding the general profits. In this case disappointment will occur, maybe even sadness or desperation when they lose the final investment also. 

Not doing your homework
You must be as informed as possible about your investment, about its risks and the credibility of the brokers and company administrators. 

Not diversifying the portfolio
When we say investment portfolio, we mean all the investment a certain person has made.
Through diversification the investor will attempt to cover through profits some companies that might register losses. Regarding the optimal rapport between winning and security, a portfolio will have a pyramidal distribution of the stock types. The biggest investment will be done in companies with minimum risk and maximum security like governmental bonds. Climbing the risk stair the number of investments will decrease. Investments in extremely risky companies will represent a low percentage of the portfolio. 

Being greedy and/or being afraid
Greed never pushes to safe investment. Through greed you will only make investments that don’t stand a chance. Fear will determine a rather calm and secure behavior that won’t bring you losses but will cause you to flip over great opportunities. 

Investing because of a “tip”
An investment has to be done accordingly to the needs and risk tolerance of every individual. These two elements are unique and like fingerprints are always different, the same way there can’t be two persons with identical needs and risk tolerance. So, if an investment is an opportunity for the one that who told you the tip, it doesn’t mean it is for you too. 

Not giving up on time
This is a mistake that can be hardly eliminated. It’s hard because the market fluctuates anyway and investors can’t say when it’s just a normal day or if the stock price is really going down. Many people won’t admit they made a financial mistake and don’t want to give up their stocks. It has been statistically proven that in these cases things go from bad to worse.
Avoiding such situations is difficult even for a pro who usually has more information that the individual investor. 

Investing only short term
Avoiding, or reducing this risk can be achieved by investing long term in profitable stable companies. In these cases, bad yearly evolutions can be recovered through better years. 

 

 

For those who never had the opportunity to read one of Peter Lynch’s books, the well-know American fund manager, let’s take a peak at his golden rules for success, meant to be of use to the nonprofessional investors, according to Peter Lynch.

 

 

Lynch has led the investment fund “Magellan”, of the administrative society “Fidelity” during 1982 – 1992. This fund grew in that period from 50 million dollars to 50 billion dollars, and the annual growth factor was of about 29%. He clearly knew what he was doing, so his words are not to be taken lightly.

 

 

He wrote a book : “One Up on Wall Street” and in his book, next to investment strategies and theories, he included some guidelines for the amateur investor, guidelines that over the years brought so many people to success.

 

 

Before investing in a company we have to inform ourselves about the business area it belongs to, taking into consideration the factors that stick to that area and to the macro-economical environment. Let’s briefly review some selecting methods and norms.

 1. Business Area – when referring to this we must reflect upon four aspects that appear in its sector: 

 – Competition: It always helps to know how much of the market our company has and if it has or not an advantage that can make it superior to others. 

– The customer power: How much does the company depend on customers? Could a customer buy a concurrent company to integrate production? 

– If the products being offered by the company are threatened by the state, society or some kind of substitute goods that might exist on the market. 

– If hurdles exist on the market area the company has placed its business in. 

2. The structure of share holders: Companies that have most of their shares on the stock market should be preferred. This is because there will be more liquidity in such stocks and in times of crisis one will not be “stuck” with these shares. 

3. Financial performance: You should watch the growth and efficiency indicators over a relevant interval of 3 to 5 years of that company and of its peers. Also it’s important to know the debt if any, the health of the transactions, and the cash balance variable factor. 

4. How is the company evaluated by the market? – To correctly answer we have to look through three further factors: – The P/E Multiple of a stock, notion that has as theoretical interpretation the number of years in which the starting costs are paid back with the profits. 

– The price/book value which generally depends on the efficiency of the company.  – The dividend yield that only occurs when we are talking about companies that give their shareholders dividends for every share. 

This type of looking at the problem consists of selecting the stocks based on information regarding the financial situations of the company, its area of activity, and also on comparing the price with other similar ones from the market. The fundamental analysis is useful when investing in stocks for a long period of time (at least a year). Those who use this type of analysis have themselves different objectives of evolution and profit, using mostly certain criteria.

Buying stocks – based on the fundamental analysis

Certain criteria are to be taken into consideration. There are three important categories that can be used alone or in combination.
1. Value investing: Some long term investors are determine the value of the business they are placing their money in, searching to buy the stock at the greatest discount possible compared to the calculated value. In other words, the question here is how much do the companies’ goods will be worth if they were to be sold? An estimated answer can be given evaluating active elements they posses (such as lands, fixed transportation means, floating actives) at a correct market price, adding to that the funds the company has. Investors who use this criterion think that the respective business has a future in efficiency if the stock holders are to be chanced, if the economic environment is changed and improved or any other major alteration, at which moment the company would value at least three times as much as in the beginning.

2. Growth Stocks are used by the investors preoccupied with identifying companies belonging to areas that tend to increase and to expand. They are focusing on the rhythm of evolution of the business figure and profit, determining the growth rate in real terms. This can be forecasted upon the future, but it is necessary to also identity the economic and legislative risk factors that could appear and alter the graph. Also investors reflect upon the quality of that company and their advantage or disadvantage compared to concurrent companies. Usually, growing companies don’t give dividends, the profit remaining just the difference between the buying price and the selling price of a stock. These companies are the most risky ones, especially because of the lack of dividends, which could’ve added some stability.
3. Income Stocks: Income stocks are dividend stocks. Investors prefer these stocks because they give them some stability and a clear benefit. These stocks are recommended if the stock price is lower than the estimated dividend price, and if they belong to mature companies. Usually, when investing in such stocks you are making a long-term investment.

Selling stocks – based on the fundamental analysis

A stock has to be sold if analyzing the situation fundamentally when the answer to the question Why am I buying this stock? is not true anymore. The following situations can also be reasons to sell:
– a newsflash about a company or about the entire economic area modifies initial expectations
– the price for the stock has been over evaluated
– over evaluation can be determined by comparing it with the ones from other companies