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Greed = Loss at the stock market

2009-02-15T08:43:00.000-08:00

ou win some. You lose a lot.

This epigram is the perfect explanation for my pitiful experience as a day trader.

Let's bust the jargon

Before I start my saga, let me explain some of the terms I will be using.

Day traders are those who buy/ sell stocks during the day and square up their position by the end of the day. Which means they either book a profit or a loss.

This breed traditionally likes a volatile market; it helps them rake in the moolah. And to say the markets were volatile those days would be an understatement.

K-10 refers to infamous broker Ketan Parekh's favourite stocks.

They spanned a spectrum that included software, media, banks and pharmaceuticals. To name a few: Silverline Technologies, Aftek, Infosys, Pentamedia Graphics, HFCL, Global Telesytems, Zee Telefilms, Global Trust Bank and Ranbaxy.

Buying into any of the K-10 stocks in the morning and selling them by evening (with the sole intention of making a huge profit) was how day traders like me evolved and finally perished.

Those who buy first and sell later are said to go long on that particular stock. They expect the share price to rise. So they buy shares at a low rate, hope the price will rise and sell when it does.

Those who sell first (without owning the shares) and buy later are said to go short on that stock. They expect the share price to fall. So they sell at the current rate, expect the price to fall, and buy them again at the lower rate.

The day begins

Now, that we have the jargon clear, let's flashback to my very first day as a day trader.

I went short on (sold) five shares of Infosys when it was worth some Rs 6,000, hoping to cover (buy) them at a lower price by the time the market closed for trading at 3.30 pm. I did this after a pink daily (a business newspaper) recommended going short on Infosys at that particular level.

Back then, the market regulator, the Securities and Exchange Board of India, was rather smug and complacent; most pink journals (business newspapers and magazines) offered their own recommendations on what to buy and what to sell.

After an initial nervousness following the earthquake, the market resumed its upward journey catching short sellers like me on the wrong foot. The stock closed higher than what I had sold it for.

Never one to accept defeat -- and to proclaim my fortitude to my peers -- I decided to wait until Friday to close my position (decide what I finally wanted to do).

Here I would like to remind you, dear reader, that you did not have settle your trade at the end of the week (pay for what you bought and take money for what you sold). All you had to do was pay a small amount (a margin) and you could settle it the next week. I did this hoping the price would fall the next week. This was called badla financing.

Finally, though, I reluctantly booked my losses (and there were many more that followed) on Friday as the stock did not come under selling pressure (nobody was interested in selling so the price remained high).

My first debit came to around Rs 1,200 (5 shares x the difference of Rs 240 at which I bought those shares to cover my position).

Got the picture?

I sold the shares at around Rs 6,000 and instead of buying them later at a lower rate (I had betted on the rates falling), I ended up buying them at a higher rate.

Thankfully, at the cost of snubbing my own ego, I'd decided not to go for badla financing. The stock climbed further the following week and my losses would also have climbed accordingly.

The sins of a day trader

Smarting from my first loss and determined to make up for it (the most unforgiving sin I ever committed in retrospect), I decided to go long on GTL and HFCL the next week at a very high price.

As luck would have it, the prices of both the stocks did increase and I would have definitely made up for my losses if I had the sanity to sell them. But then I remembered Gordon Gekko and his dictum: Greed is good. In fact, I went a step further and declared: Greed is God (another sin that a day trader should never commit).

No points for guessing right. I lost again. Lost in the sense that the prices fell down from their stratospheric levels and I had to sell them at a small profit (remember a bird in the hand is worth two in the bush; likewise book your profits when you see them. Don't be greedy).

I -- and many like me -- failed to read the coming correction.

I made a neat profit of some Rs 700 after paying brokerage and service tax: my first profit after the initial loss. My happiness knew no bounds that day and my chest grew an inch wider.

Thenceforth, I learned a lot of lessons in day trading from my peers who'd visit the same trading terminal, but never put them into practice. I went on making one mistake after another (always thinking that I knew better), kept losing money week after week until 9/11 happened (I had also lost a fortune following the Ketan Parekh scam, but that's another story).

Not that I made money after that devastating attack on the World Trade Centre.

What I did was to make up was my mind to finally quit day trading, but not before my losses had reached almost Rs 2,00,000 (I have preserved my final debit bill like a souvenir). Then, I knew I had only one option left. It was a wise one; I decided to put an end to my crazy punting ways.

This is what happened...

Reality hit home

A few days before 9/11, I had gone short on (an addiction I picked from my sub-broker, who went short on any stock that took his fancy) Aurobindo Pharma, Infosys (yet again), Moser Baer, Digital Equipment (now Digital Globalsoft), Ranbaxy and what have you...

I had made (notionally) a tremendous profit on Moser Baer itself, on which I had gone Rs 275 short. The price now was Rs 240. In the next few days, MBIL's market price plummeted to Rs 179.80 but, once again, I was possessed by Gordon Gekko and did not cover my position by buying the stock.

As my misfortune would have it -- though I think it was a blessing in disguise -- the stock started rising, as quickly as it had plummeted. I ended up covering my position at a marginal loss.

Even though I made profit on other stocks that I'd gone short on, the entire episode diminished my appetite for day trading.

Also, realisation had sunk in -- a day trader always wins some and loses a lot. I know of many punters who'd agree with me.

PS: Not satisfied with my own losses in Silverline Technologies -- of which I bought 50 shares at Rs 380 -- I convinced my aunt to buy 50 more at Rs 185. I told her what a value buy it was at that level and promised her that she would be soon selling it at double the price. Even as I write this piece the stock's quoting at Rs 4.05. Not to mention the fact that it is still languishing in my portfolio!

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Make money with shares

2009-02-14T08:37:00.000-08:00

ood question indeed. Why do people buy shares?

In a line: Because they can make big money on it.

There's a huge difference between the gains and losses you can make by investing in the stock market as compared to your returns from bank fixed deposits.

In stocks, you can make unbelievable money -- it's not uncommon for people to have doubled their money in the last one year.

On the flip side (there is always one), when the markets crashed in May, many people lost more than a quarter of their investment.

Compare this with your bank fixed deposit. Your FD will only fetch you around five to six percent per annum, but you can be sure of getting your money back.

When you put your money in a bank deposit, you loan the money to a bank for a fixed return (rate of interest) and a fixed tenure (number of months or years). At the end, you get back your original amount and you are paid interest on the same.

When you invest in stocks, you do not invest in the market (despite what you think). You invest in the equity shares of a company. That makes you a shareholder or part-owner in the company.

The good news is that since you own a part of the assets of the company, you are entitled to a share in the profits those assets generate.

The bad news is that you are also expected to bear the losses, if any.

Now, if you are a shareholder, there are two ways you can benefit from the profits of the company: capital appreciation or dividend.

Dividend

Usually, a company distributes a part of the profit it earns as dividend.

For example: A company may have earned a profit of Rs 1 crore in 2003-04. It keeps half that amount within the company. This will be utilised on buying new machinery or more raw materials or even to reduce its borrowing from the bank. It distributes the other half as dividend.

Assume that the capital of this company is divided into 10,000 shares. That would mean half the profit -- ie Rs 50 lakh (Rs 5 million) -- would be divided by 10,000 shares; each share would earn Rs 500. The dividend would then be Rs 500 per share. If you own 100 shares of the company, you will get a cheque of Rs 50,000 (100 shares x Rs 500) from the company.

Sometimes, the dividend is given as a percentage -- i e the company says it has declared a dividend of 50 percent. It's important to remember that this dividend is a percentage of the share's face value. This means, if the face value of your share is Rs 10, a 50 percent dividend will mean a dividend of Rs 5 per share.

However, chances are you would not have paid Rs 10 (the face value) for the share.

Let's say you paid Rs 100 (the then market value). Yet, you will only get Rs 5 as your dividend for every share you own. That, in percentage terms, means you got just five percent as your dividend and not the 50 percent the company announced.

Or, let's say, you paid Rs 9 (the then market value). You will still get Rs 5 per share as dividend. That means, in percentage terms, you got just 55.55 percent as dividend yield and not the 50 percent the company announced.

Capital Gain

As the company expands and grows, acquires more assets and makes more profit, the value of its business increases. This, in turn, drives up the value of the stock. So, when you sell, you will receive a premium over (more than) what you paid.

This is known as capital gain and this is the main reason why people invest in stocks. They want to make money by selling the stock at a profit.

It is not as easy as it sounds. A stock's price is always on the move. It could either appreciate (increase in value) or depreciate (decrease in value) with respect to the price at which you purchased it.

If you buy a stock for Rs 10 and sell it for Rs 20 after a year, then your return from that stock is Rs 10, or 100 percent.

Or, if you buy a stock for Rs 10 and sell it for Rs 9, you lose Rs 1, or your loss is 10 percent.

Now look at both: Dividend and Capital Gain

If you buy a stock for Rs 10 and sell it for Rs 20 after a year, then your return from that stock is Rs 10, or 100 percent.

Add the Rs 5 per share you have received as dividend, and your total return will be Rs 10 plus Rs 5 = Rs 15 or 150 percent (Rs 15 divided by Rs 10 multiplied by 100).

If you buy a stock for Rs 10 and sell it for Rs 9 after a year, you would lose Rs 1 per share.

However, you would have got Rs 5 as dividend. So you would net Rs 4 as earnings from the company.

In percentage terms, your return would be 40 percent (Rs 4 divided by Rs 10 multiplied by 100).

Tax

One last point.

If you are a tax payer, the finance minister has made it very easy for you to invest in the stock market. There is no tax on dividend. Neither will you be taxed on long-term capital gains. This means, if you buy a share, hold it for at least a year and sell it at a profit, you don't have to pay any tax on the profit your make. If you sell it within a year, the short-term capital gains tax is only 10 percent.

Contrast this with fixed deposits, where you have to pay tax on the interest at your marginal tax rate. This means that, if you are in the 30 percent tax bracket and your interest income exceeds Rs 12,000 in a year, you'll have to pay tax on your interest income at that rate (including the surcharge, the cess, etc, the rate works out to almost 35 percent).

Investing in stocks may be more risky, but it is more tax-friendly. Besides, there is the potential to get a higher return on your investment.

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Want to buy a stock? Read this first

2009-02-13T08:35:00.000-08:00

eciding you want to invest in the stock market and deciding which stocks to buy are two very different decisions.

The first is easy.

The second is not so easy.

A smart investor should never invest in (buy stocks of) companies he doesn't know much about. Relying on 'advice' from friends is not always a great idea. Do some groundwork yourself.

Where does one begin?

The best place to get information about a company is from the horse's mouth: the company -- especially if an expert certifies what the company management is telling you is true.

We are talking here about the company's annual report or its profit and loss statement and balance sheet, which have been audited by chartered accountants.

There is a wealth of information in a company's annual report.

The chairman's statement will tell you about the management's future plans.

The directors' report will tell you how the company performed in the preceding year.

For a personal analysis of the company's earnings and profits (or lack of them), there is no substitute to the profit and loss account and the balance sheet.

What is a P&L account?

Simply put, it gives the company's performance over a period of time, usually a year. It tells you whether the company made a profit or loss over the period.

How does a business make a profit? Well, its income needs to be more than its expenses. If its expenditure is more than its income, then the company is running on a loss.

You don't have to be an accountant or have a degree in commerce to read a company's financials. It is quite easy to grasp the basics.

A sample P&L account

Profit and Loss Account for the year ended March 31. All figures in Rs/lakh.

	2004	2003
Income
Sales	110	80
Less: Excise Duty	10	8
Net Sales	100	72
Other Income	20	18
	120	90
Expenditure
Materials	50	40
Other Expenses	30	25
Interest	5	10
Depreciation	10	10
	95	85
Compensation paid under VRS	20	-
	115	85
Profit for the year before tax	5	5
Tax	2	2
Profit for the year	3	3

Income

Under this heading, you will find that sales are the biggest item. Sometimes, people talk about gross sales and net sales.

Gross sales = Total sales including excise duty.

Net sales = Total sales - excise duty.

'Other income' refers to all those items that contribute to income but do not form a part of the company's sales. This could include dividends or interest income from the company's investments, profits from sale of assets or investments, sale of scrap items, income from services and so on.

The point to remember is that, usually, most items in 'other income' are items not directly related to the company's business. For instance, a manufacturing company may earn income from some smart investments.

In other words, 'other income' may not necessarily recur every year.

Expenditure

Expenditure is the expense on raw materials, wages, salaries, administrative expenses, advertisements and publicity, charges for power consumption and so on.

The item 'interest' refers to the interest the company pays on its loans.

Depreciation refers to the wear and tear of the equipment used by the company (this is just a notional estimate). The need to provide for depreciation arises because a company needs to set aside a sum every year so that it can buy new machinery when needed.

Exceptional items

In the above example, we have another item: Compensation paid for VRS in 2004. This is reported separately from other items of expenditure because it is an 'exceptional item'. Which means, it does not occur every year.

For instance, in the example, it didn't occur in 2003.

Profit

Deducting expenditure from income gives the profit.

In the example, profit before exceptional items is Rs 15 lakh (120 - 95) in 2004, while it is Rs 5 lakh (90 - 85) in 2003. Despite the fact that profits before tax are the same in both 2003 and 2004, it is only because of the lump sum VRS payments made in 2004; otherwise, the profit this year would have Rs 20 lakh.

If this payment is left out of the picture (as it should be, because a VRS payments means the wage bill in succeeding years will decrease), the company has performed much better in 2004 than in 2003.

Please remember that profits by themselves carry little meaning. You will always have to compare profit in a particular period with those in the preceding period to arrive at any conclusions.

In the above example, we can see the company has done better in 2004. Sales have gone up by 38.8%, while profit before exceptional items has gone up by 200%.

How to invest in an IPO

You can now analyse a company's P&L account.

1. Did sales increase?
2. Did it result in higher profits?
3. Have profits been artificially boosted by higher 'other income'?
4. Have exceptional items led to lower profits?
5. Have interest costs gone up?
6. Have raw material costs been contained?

What are quarterly earnings?

The quarterly earnings reports are nothing but the P&L account for a particular quarter (three months).

Also read the 'Notes to the Accounts' at the end of the P&L account or quarterly earnings reports. These tell you whether the company has changed its methods of accounting, or other material factors that have affected the profits of the company.

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Spot a good stock. Win big!

2009-02-12T08:34:00.000-08:00

etween MTV and Channel [V], you might have sometimes come across, say, CNBC.

You might have noticed a band that runs at the bottom of the screen containing the stock prices.

This is called the ticker.

Watch this ticker for some time, and you will find that stock prices are constantly going up or down. Rarely do they stay put.

Which brings you to the common question: when should you buy stocks?

Pose this question to any stock market guru (even someone who falsely professes to be one), and you will get this answer: Buy Low. Sell High.

That means you should buy stocks at a low price and sell them at a high price.

Easier said than actually done, of course.

Which brings us to the next question: how do you know if a stock is worth buying?

One, look at the 'fundamentals' of the stock: check the underlying factors behind the stock price.

In other words, find out what it is about this stock that makes it hot.

Let me introduce you to three ways by which you can figure that out.

1. Earnings per Share (EPS): How well the company is doing

Company XYZ Ltd.

Capital: Rs 100 crore (Rs 1 billion).

Capital is the amount the owner has in the business.

As the business grows and makes profits, it adds to its capital.

This capital is subdivided into shares (or stocks).

For a clearer understanding of capital, read What's in a share? Money!

The capital is divided into 100 million shares of Rs 10 each.

Net Profit in 2003-04: Rs 20 crore (Rs 200 million).

EPS is the net profit divided by the total number of shares.

EPS = net profit/ number of shares
EPS = Rs 20 crore (Rs 200 million)/ 10 crore (100 million) shares = Rs 2 per share

Lesson to be learnt

If a company's EPS has grown over the years, it means the company is doing well, and the price of the share will go up. If the EPS declines, that's a bad sign, and the stock price falls.
Companies are required to publish their quarterly results. Keep an eye out for these results; check for the trend in their EPS.

2. Price earnings ratio (PE ratio): How other investors view this share

Two stocks may have the same EPS. But they may have different market prices.

That's because, for some reason, the market places a greater value on that stock.

PE ratio is the market price of the stock divided by its EPS.

PE = market price/ EPS

Let's take an example of two companies.

Company XYZ Ltd
Market price = Rs 100
EPS = Rs 2
PE ratio = 100/ 2 = 50

Company ABC Ltd
Market price = Rs 200
EPS = Rs 2
PE ratio = 200/ 2 = 100

In the above cases, both companies have the same EPS.

But because their market price is different, the PE ratio is different.

Lesson to be learnt

In the case of EPS, it is not so much a high or low EPS that matters as the growth in the EPS. The company's PE reflects investors' expectations of future growth in the EPS. A high PE company is one where investors have hopes that earnings will rise, which is why they buy the share.

3. Forward PE: Looking ahead

The stock market is not nostalgic. It is forward looking.

For instance, it sometimes happens that a sick company, that has made losses for several years, gets a rehabilitation package from its bank and a new CEO.

As a consequence, the company's stock shoots up.

Why? Because investors think the company will do better in the future because of the package and new leadership, and its earnings will go up.

And they think it is a good time to buy the shares of the company now.

Suddenly, the demand for the shares have gone up.

Because stock prices are based on expectations of future earnings, analysts usually estimate the future earnings per share of a company. This is known as the forward PE.

Forward PE is the current market price divided by the estimated EPS, usually for the next financial year.
Forward PE = Current market price/ estimate EPS for the next financial year.

To illustrate what we��ve been talking about, let's take the example of Infosys Technologies.

Trailing 12-month EPS = Rs 56.82 (EPS of the last four quarters)
Closing price on January 6 = Rs 2043.15
PE = Price/EPS = 2043.15/ 56.82 = 35.95
The PE of Infosys [Get Quote] as on January 6 = 35.95

Clear? Now be alert:

Estimated EPS for 2004-05 = Rs 67
Estimated EPS for 2005-06 = Rs 90
These figures are according to brokers' consensus estimates (you can find those in the business daily, Economic Times).

Forward PE = current market price/ esimated EPS for next financial year
Forward PE for 2004-05 = 2043.15/ 67 = 30.49
Forward PE for 2005-06 = 2043.15/ 90 = 22.70

With an EPS growth of over 30%, a forward PE of 22.7 is not high, indicating that there is scope to be optimistic about the stock's price.

Lesson to be learnt

Sometimes, investors look out for a low PE stock, expecting that its price will rise in the future. But sometimes, low PE stocks may remain low PE stocks for ages, because the market doesn't fancy them.

Keep tab on the business news to check out the company's prospects in the future.

That was the basics of fundamental analysis. Not too mind boggling, is it?

Next time you want to buy the shares of a company, at least do this groundwork.

Please watch out for ratios and how to calculate shares in the coming pieces.

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Should I buy shares now?

2009-02-11T08:29:00.000-08:00

hen I read how investors are reacting to the current market trend, there is only word that comes to mind: bewilderment.

Some are laughing all the way to the bank, others are falling over each other as they scramble to buy more mutual fund units.

A newspaper article said that in November mutual fund investors in Mumbai withdrew huge amounts from their equity mutual funds. Almost Rs 4,000 crore went out from the fund houses.

Those investors were smart. They sold their mutual fund units back to the fund houses, booked profits and deposited the moolah in the bank.

But the mutual fund companies still had reason to smile. Even as they bid goodbye to a few investors, they were busy saying hello to many more.

The article went on to explain that, in cities other than Mumbai, the inflow (fresh investments into mutual funds) was Rs 2,228 crore.

Who are the wise men?

The ones entering the market or the exiting it?

Quite a few are echoing the sentiment that it is not a good idea to book profits (to sell your mutual fund units/ shares). They believe the markets will stay strong for a while and the Sensex will rise even higher.

Sensex? What's that?

Others are saying the situation is shaky and it's a smart idea to exit now.

That brings us to you. What must you do with your shares?

You have three options

1. Get rid of the junk now

This would be the wisest move you could make.

In hindsight, a lot of our decisions appear rather unappropriate or downright stupid. This applies to investments too.

So, if you have stocks that cause you tremendous embarrassment, it is a good time to sell now.

For the sake of an example, let's say you have shares of Videocon Appliances.

In May 1995, the price was around Rs 92. The price has consistently fallen over the years and in May, this year, it touched Rs 15.

Well, the good news is that it has crept up to Rs 25. So, even if you are making a loss, it is a good time to sell now.

This is a good time to book profits or even minimise your loss if the price of your shares has not risen sufficiently to give you a profit. But, just because the price has risen, don't change your mind about selling your shares if you have already decided you don't want them.

2. Sell and make a profit

This would be the safest move.

And, if the mutual fund numbers in Mumbai are to be believed, that seems to be what a fair number of people are doing.

The temptation to stay invested in a bull run is high. Many find this temptation too strong to resist. There is always the possibility that the Sensex may climb higher and one would rake in better returns (make more money).

On December 22, the Sensex touched a high of 6480. Predictions abound that it will touch 6500 by the end of this month or early January.

While it could very well be true, it's better to be pragmatic. You never know how high the market will rise, so you might as well enjoy the going while it is good. This, in simple words, means: Sell those shares.

3. Sell some, hold on to some

How about the best of both worlds?

If you own some stocks that promise to rise in value in the future, hold on to them. You then have the option of selling them if the Sensex rises even more.

If you really want them to be part of your investments for a long time, then be prepared to ignore the highs and lows of the market over the next few years.

Now that you've selected your chosen few, sell the rest and make a profit.

What you can also do is sell portions of your portfolio at various stages.

Say you have shares of 10 companies. Sell the shares of three companies now and hold on to seven.

If the Sensex continue to rise, sell another three and hold onto four.

This way, you can take part in the rally without selling at one go. It also means you don't miss out completely if the Sensex continues to climb.

Should you buy?

You do like to live dangerously, don't you?

Before you actually go and buy some more shares, let me throw you a few questions.

1. Why do you want to buy shares now?

If the answer is that you don't want to feel left out or want to brag to your in-laws that you 'play the market', steer clear. You are not thinking logically.

If you think you can make a fast buck in no time, you are kidding yourself. To make a quick buck, you need a lot going in your favour.

For starters, you need to invest huge amounts for even a small price rise to give you a good return.

Otherwise you need the price to move up drastically. This is something you have no control over.

Thirdly, you must be willing to take the risk of making a loss (something everyone chooses to ignore).

2. Will you be willing to hold on to your shares if the market comes tumbling down?

Okay, that was an exaggeration. No one really believes that will happen.

Right now, as the bulls and bears fight it out, there is a lot of dust being kicked up. And the bulls clearly winning. When the dust settles, it would be safe to pick up some shares.

In technical terms: The correction (a short-term drop in stock market prices) is bound to come but the market will bounce back. And, if predictions are to be believed, the Sensex should touch 6,700 by December 2005.

What you can do is wait for the correction to buy shares. Alternatively, you could pick them up now if you are prepared to hold onto them and sell them maybe a year later, when the Sensex rises to a level higher than what it is today.

Learning from history

Interestingly, have you noticed we are entering 2005 on the same note on which we entered this year?

On January 1, the Sensex touched a high of 5936 and climbed up to 6249 on January 9. By May 31, it dropped to 4830 and began picking up in July. On November 12, it touched 6001 and, on December 22, it was 6480.

(Note: The above levels are the highest the Sensex reached on that particular day.)

If you expect the trend to repeat itself this year and foresee the Sensex touching a higher level next December, then you can probably go share shopping for Christmas.

A word of caution: Don't try to imitate the savvy trader. Select your stocks carefully. Avoid rumours or you could get slaughtered in the market.

On a closing note, I have to make mention of what a friend once told me, "The moment the grocer or the panwallah asks you about the booming stock market, sell your shares and book profits."

He was not being biased against any socio-economic class when he said that. All he meant was that when it reaches that stage, it is a good indication the bull run has peaked.

So, what has your grocer being saying to you lately?

Illustration: Dominic Xavier

DON'T MISS!

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Growth stocks can make you rich!

2009-02-10T07:35:00.000-08:00

t must have been drilled into your head by now that equity is the best investment. Invest in shares and you could make great returns.

That's true.

An investment in debt (bonds, fixed deposits, etc) provides a fixed rate of return. If it is eight percent per annum and you invest Rs 1 lakh, you will get Rs 8,000 per annum.

But if you invest in the right stock, the return could be substantial. In fact, an investment of Rs 1 lakh could grow to Rs 2 lakhs or more in a year.

Did you know that if you had invested Rs 5,000 in the public issue of Colgate in 1978, by 1994, your investment would have be worth Rs 43,52,000.

What is not true is the belief that each and every stock will give you the same return.

Investing in any and every stock that comes your way won't leave you smiling.

Equities, as a form of investment, offer the best rate of return only if you have made your investments wisely and in growth oriented companies.

Which brings us to the question: How do you identify which company is on the growth path?

Let me use a simple example to try and explain this.

You start with cost and profit

Company XYZ is capable of producing (has a production capacity of) 10,000 motorcycles.

It utilises 100 percent of its production capacity. That means it produces 10,000 motorcycles.

If it produced less than that, say 9,500 motorcycles, it would be operating below its capacity.

Each motorcycle is sold for Rs 30,000.

Total turnover = Rs 30,000 x 10,000 = Rs 30 crore.

Now, from this turnover, the company will minus its cost and taxes to arrive at its net profit.

Let's say the net profit amounts to 10 percent of turnover. This will amount to Rs 3 crore.

Then, you look at its equity base

Assume the company had Rs 5 crore worth of shares (50 lakh shares x Rs 10 per share).

The net profit of Rs 3 crore on its existing equity base of Rs 5 crore translates into an earning of Rs 6 per share.

Let's say the market price of each share is Rs 50.

The price earnings ratio is 8.33. How did I arrive at this figure? You take the market price of the share (Rs 50) and divide it by the earnings per share (Rs 6). This gives you 8.33.

You buy the shares

When you buy the shares, it costs you Rs 50 per share. You buy 500 shares and pay Rs 25,000 for them.

The demand for motorcycles is growing. Now, the company decides to produce more motorcycles. To do this, it has to expand its facilities. So it begins to borrow from financial institutions and banks.

Over the next five years, the company hikes its production capacity from 10,000 motorcycles to 50,000 motorcycles. This increase in its facilities was possible because of the money it borrowed.

In simple terms, when you purchased the shares five years ago, you were the part owner of a company with a production capacity of 10,000 units. Five years later, you are the part owner of a company with a production capacity of 50,000 units without any further investment on your part.

In other words, your investment has grown five times over a period of five years or 100 percent annually.

How would that work out in money terms?

The price of each motorcycle has gone up and the company is now selling motorcycles at the rate of Rs 40,000 per unit. Its production capacity is now 50,000 units. So it makes and sells 50,000 motorcycles (operating at 100 percent of its production capacity).

The turnover at full capacity amounts to Rs 200 crore (50,000 motorcycles x Rs 40,000). With a net profit margin of 10 percent, the net profit works out to Rs 20 crore.

So, now, the net profit of Rs 20 crore on its existing equity base of Rs 5 crore translates into an earning of Rs 40 per share.

If the same price earning multiple of 8.33 is applied, the stock price would quote at Rs 333.

Now, multiply your 500 shares with the market price of Rs 333 and your investment value works out to Rs 1,66,500 compared to the original investment of 25,000.

This may not be the end.

Growth could continue faster in the years ahead.

This example is just to prove the powerful returns equities can generate if the selection is proper.

Here are some stocks you can consider investing in this year.

Please remember that these are merely suggestions. We would advise you to do your own research into these companies before you decide to make an investment.

FMCG	Colgate
	Gillette
Aluminum	NALCO
	Hindalco [Get Quote]
Software	Infosys [Get Quote]
	TCS [Get Quote]
Cement	ACC
	Gujarat Ambuja [Get Quote]
Steel	TISCO [Get Quote]
	SAIL [Get Quote]
Petrochemicals	IPCL [Get Quote]
	Reliance [Get Quote]
Refineries	Hind Petro
	Bharat Petro
	Indian Oil [Get Quote]
Pharmaceuticals	Pfizer [Get Quote]
	GlaxoSmithKline [Get Quote] Pharma
Exploration & Gas	ONGC [Get Quote]
	GAIL
Banking	State Bank of India [Get Quote]
	HDFC Bank [Get Quote]
Shipping	Great Eastern Shipping
	Shipping Corporation of India [Get Quote]

Tread cautiously

Sure. Equity can give the highest return. But it is also the riskiest form of investment, since no return is guaranteed.

A young investor can afford to take a higher level of risk, whereas an older investor who is on the brink of retirement or has already retired, cannot afford to take unnecessary risks.

A young individual can place as much as 80 percent of his investments in equity. In the case of the older investor, the debt component will be higher as the capacity for risk is limited.

The author is director of the broking firm Altina Securities Pvt Ltd.

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The Market is bullish. What does this mean?

2009-02-09T07:33:00.000-08:00

n these times of a booming stock market, I can't help but think of Snow White's stepmother gazing dreamily into the mirror and asking, "Mirror Mirror on the wall, who's the fairest of us all?"

I know what you're thinking: What does a narcissist like her have to do with the stock market?

Nothing, actually. It's the mirror I am after.

Come on, would you not want to look into that mirror and ask, "Mirror Mirror on the wall, can you tell me when the Sensex will fall?"

I, for one, have no such mirror and have to rely on what the experts say. Interestingly, they all seem pretty unified as far as their broader observations are concerned.

So bear with me as I try to echo their sentiments in plain and simple English.

1. A bull run is definitely on

A bull market refers to an extended period (months or years) of a general increase in the price of the shares.

Now everyone knows that. But, what the experts are saying is that they do not expect this rising price trend to get change (start falling) in the near future.

2. We expect a lot of volatility in the future

This means the Sensex could suddenly come crashing down. If you have shares, don't panic and sell them. The Sensex will soon begin its upward climb. This behaviour is referred to as a 'correction' in technical terms.

The term correction is used to describe a relatively short-term drop in stock market prices. It tends to happen when prices have been consistently rising for a period of time.

Experts are also making predictions on the band (the upper and lower limit) within which the Sensex will fluctuate.

Some very bullish analysts feel that, for the next year, the Sensex will fluctuate within the 7,200 to 8,000 range. Some are pretty confident of the Sensex touching 8,000 by the end of 2005.

Others are more conservative and feel the Sensex will stick to the 6,800 � 7,200 range over the next year.

Then there are those who say that, soon after the correction (which should happen anytime soon), the Sensex will hover between 6,600 � 6,900.

Yet others prefer to sit on the fence.

One analyst said he does not rule out a strong bull run but feels one year is too long a timeframe. Anything could happen. To make his point, he reminds us that recent bull markets have rarely lasted over a year.

The verdict: He is smart. Whatever he says could turn out to be right.

3. The market is running on good fundamentals

Fundamentals refer to the financial characteristics of a company -- things like how much money it owes its lenders, how much of a profit it is making, etc.

If a company is going deeper into debt and making less money each year, its fundamentals are said to be deteriorating.

Investors today have noticed that Indian companies have seen huge gains in productivity over the last three or four years. This is because of a number of factors like improved management performance and inventory management.

Inventory management refers to the handling of all functions related to the tracking and management of raw material and other products. It ensures the availability and smooth flow of such goods.

What the experts mean when they say the market is running on good fundamentals is that this is not a case of smoke without fire. Companies are actually performing well.

It has also been pointed out that almost every sector (industry) has participated in this bull run, which began in May 2003.

The bull run reflects the state of corporate (business) India. Many experts feel the Indian economy is going to experience rapid growth in the coming years.

4. The FIIs are here to stay

Don't say who cares. If you have invested in the stock market (or would like to), you should. Care, that is.

In 2003, foreign institutional investors (foreign companies registered in India and who have permission to buy and sell shares of Indian companies) invested $ 9.949 billion in Indian equity (companies that are listed on the stock exchange). This year, the figure has touched $ 8 billion till date.

This is a big reason as to why the Sensex has risen.

The reasons why FIIs are courting India is no secret.

They see India as a good destination to invest in and make money. They are happy with the Indian government's commitment to economic reforms.

They are also looking closely at sectors (and companies within these sectors) which they think have potential. In fact, the growing competitiveness of Indian companies is an enticing factor.

Don't forget the tax factor. Long-term capital gains tax -- which is the tax you pay when you sell your shares after more than a year -- has been abolished; you can sell your shares without having to pay the government any kind of tax if you do so after a year.

Then, of course, there is the push factor. The dollar has been falling in value vis-a-viz other currencies. As a result, FIIs don't find the thought of investing in the US market all that attractive. They know they will make more money if they invest elsewhere.

Let's use an example to make this clearer.

Let's say $ 1 = Rs 50. If the value of the dollar falls until $ 2 = Rs 50, it means the dollar has weakened and the rupee has strengthened.

If the value of the dollar rises and $ 1 = Rs 100, then the dollar has stregthened and the rupee has weakened.

If the dollar is weak, FIIs end up with more dollars when they convert the rupees they make into dollars. If the dollar is strong, they get less dollars for their rupees.

Hence, they will invest in India when the dollar is weak and the rupee is strong vis-a-viz the dollar.

But what if the tables turn? What if the dollar becomes stronger? What if India no longer looks unattractive as an investment option?

Well, the FIIs will not bat at eyelid about ending their passionate affair with the Indian stock market. They will set up shop wherever greener pastures beckon.

What the cynics have to say

Investment player Morgan Stanley (Morgan Stanley Investment Management Private Limited) stands apart from the crowd. The firm has warned that Indian stocks are already overpriced, inflation could hamper the growth of the economy and, should the dollar strengthen, the FIIs will disappear.

But, like I said, Morgan Stanley seems to stand alone. Between January and September 2004, the number of FIIs registered in India went up from 527 to 608.

India is shining, money is pouring in, the good times are rolling and the Sensex is galloping.

So says the mirror.

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Here's why the Sensex rises

2009-02-05T07:30:00.000-08:00

he Sensex likes to climb uphill like those nursery rhyme characters, Jack and Jill. And then, just like them, it comes tumbling down (causing many heartbroken Jack and Jills to lose their wallets in the bargain).

Have you ever wondered what makes the Sensex move and who decides how it should move?

Undoubtedly, you have heard your share of eerie stories. Like the one about the mysterious unseen hand that moves the market. Or how the market has a mind of its own.

In reality, though, 30 stocks decide what the Sensex does.

In Sensex? What's that?, we explained what the Sensex is made of. Now, let's see what makes it move.

As you know, the Sensex comprises of 30 stocks. When the prices of these stocks increase, the Sensex goes up. When the prices decrease, the Sensex falls.

It sounds simple but it still does not answer the 'how' question.

Well, there is the market cap method

Each of the 30 stocks in the Sensex has a weight attached to it. This weight depends on the market capitalisation of the stock.

Market capitalisation refers to the number of shares of a company multiplied by its market value (the price of each share). For instance, if a company has 10 million shares whose value is Rs 30 per share on November 1, 2004, it will have a market cap of Rs 300 million on November 1, 2004.

If the market cap of the 30 Sensex stocks is Rs 3,00,000 crore and the market cap of ITC (which is one of the 30 shares that make up the Sensex) is Rs 20,000 crore, then ITC's weight in the Sensex is 6.66 percent.

The rise or fall in the price of ITC's shares will impact the Sensex to that extent.

This is referred to as the full market capitalisation methodology.

Now, let's check free-float weightage

The Sensex shifted to the free-float weightage method on September 1, 2003.

Here, a company's entire lot of shares are not taken into account (which means we are not looking at the entire market capitalisation). Only the shares readily available for trading are considered.

In every company, a certain amount of shares are not available for trading on the stock exchange. These shares could be held by the government or the promoters of the company. Under the free-float weightage method, they are not taken into account.

How does the stock exchange arrive at this weightage?

In this case, the market cap is multiplied by the free float factor (which is the proportion of a company's shares that can be readily bought and sold).

The Sensex's free float market cap at close of business on December 3 was Rs 3,66,124 crore.

Unlike the Sensex, the 50 stocks in Nifty -- the index of the National Stock Exchange -- is based on the market cap method and not the free-float method.

Sounds scary, does it not? Just 30 stocks can send the Sensex soaring or plummeting. What makes the difference is the fact that these are the most actively traded stocks in the market.

In fact, they account for half the BSE's market capitalisation. They also represent 13 sectors of the economy and are leaders in their respective industries. Which means they are fairly representative of the stock market.

Now, that doesn't sound too bad -- does it?

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A demat account: what's in it for you

2009-02-05T07:27:00.000-08:00

ave you decided to buy shares this year?

Or at least decided that you want a part of the Initial Public Offering (IPO) pie, which promises to be big this year.

If yes, this is what you need to do.

First, open a demat account.

Let's tackle a few questions that come to mind.

What's the difference between a depository and a depository participant?

A depository is a place where the stocks of investors are held in electronic form.

The depository has agents who are called depository participants (DPs).

Think of it like a bank. The head office where all the technology rests and details of all accounts held is like the depository. And the DPs are the branches that cater to individuals.

There are only two depositories in India -- the National Securities Depository Ltd (NSDL) and the Central Depository Services Ltd (CDSL). There are over a 100 DPs.

What's a demat account?

Demat refers to a dematerialised account.

Just as you have to open an account with a bank if you want to save your money, make cheque payments etc, you need to open a demat account if you want to buy or sell stocks.

So it is just like a bank account where actual money is replaced by shares.

You have to approach the DPs (remember, they are like bank branches), to open your demat account.

Let's say your portfolio of shares looks like this: 40 of Infosys [Get Quote], 25 of Wipro [Get Quote], 45 of HLL [Get Quote] and 100 of ACC.

All these will show in your demat account.

So you don't have to possess any physical certificates showing that you own these shares. They are all held electronically in your account.

As you buy and sell the shares, they are adjusted in your account.

Just like a bank passbook or statement, the DP will provide you with periodic statements of holdings and transactions.

Is a demat account a must?

Nowadays, practically all trades have to be settled in dematerialised form.

Although the market regulator, the Securities and Exchange Board of India (SEBI), has allowed trades of upto 500 shares to be settled in physical form, nobody wants physical shares any more.

So a demat account is a must for trading and investing.

Where do I begin?

Look for a DP to have an account with

Most banks are also DP participants, as are many brokers.

You can choose your very own DP.

To get a list, visit the NSDL and CDSL websites and see who the registered DPs are.

A broker is separate from a DP. A broker is a member of the stock exchange, who buys and sells shares on his behalf and on behalf of his clients.

A DP will just give you an account to hold those shares.

You do not have to take the same DP that your broker takes. You can choose your own.

But many brokers offer special incentives in the form of lower charges for opening demat accounts with their DPs.

Get your documents in place

Once you approach your DP, you will be guided through the formalities of opening an account.

You must fill up an account opening form and sign an agreement with your DP.

The DP will ask for some documents as proof of your identity and address.

Check with them what they require. For instance, some may accept a driver's license, others may not.

Here is a broad list (you won't need all of them though):

� PAN card

� Voter's ID

� Passport

� Ration card

� Driver's license

� Photo credit card

� Employee ID card

� Bank attestation

� IT returns

� Electricity/ Landline phone bill

While they only ask for photocopies of the documents, they will need the originals for verification.

You will have to submit a passport size photograph on which you sign across.

How many shares you need to have to open an account

When opening an account with a bank, you need a minimum balance.

Not so with a demat account. A demat account can be opened with no balance of shares.

And there is no minimum balance to be maintained either. You can have a zero balance in your account.

What will it cost?

The charges for account opening, annual account maintenance fees and transaction charges vary between DPs. To get a comparative idea, visit the websites of NSDL and CDSL.

Can I nominate?

Sure. You can nominate whoever you like by filling up the nomination details in the account opening form.

This is to enable the nominee to receive the securities after the death of the holder of the demat account.

All set?

When you open an account, the DP will allot a unique BO ID (Beneficial Owner Identification) Number, which you need to quote for all future transactions.

If you want to sell your shares, you need to place an order with your broker and give a 'Delivery Instruction' to your DP.

The DP will debit your account with the number of shares sold. You will receive the payment from your broker.

If you want to buy shares, inform your broker about your Depository Account Number, so that the shares bought are credited into your account.

It's that simple.

Now get that account!

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What's in a share? Money!

2009-02-05T07:22:00.000-08:00

ou must have heard stories of the fabulous returns made in the stock markets in recent months. And you longed wishfully for a piece of the action.

But you could also have heard horror stories of how a friend lost his shirt in the stock market.

And were promptly thankful that you didn't lose yours.

Let's set the record straight.

Wisely chosen (those are the key words), stocks are a must for any serious investor.

They add that extra zing to your collection of investments.

Study after study has revealed that over the long term, stocks outperform all other assets. That means you can expect to earn more from shares than from bonds, fixed deposits or gold.

No doubt the risk is higher with shares. But if you are in for the long haul, so are the potential returns.

But before you take the plunge and invest in the stock market, get your basics right.

This series will tell you about the basics of investing in stocks.

1. Stocks are not only for the brilliant

Stocks are far from being rocket science.

The strategies you need to know to maximise your wealth and the pitfalls you need to avoid are not beyond comprehension.

Even if you feel that you don't have the time, and prefer to entrust your money to a portfolio manager or mutual fund, the least you need to know is which funds are better, how to choose your fund manager, and keep a tab on his performance.

2. So what is a share?

Any business has a lot of assets: The machinery, buildings, furniture, stock-in-trade, cash, etc.

It will also have liabilities. This is what the company owes other people. Bank loans, money owed to people from whom things have been bought on credit, are examples of liabilities.

Take away the liabilities from the total assets, and you are left with the capital.

Assets - Liabilities = Capital.

Capital is the amount that the owner has in the business. As the business grows and makes profits, it adds to its capital.

This capital is subdivided into shares (or stocks).

So if a company's capital is Rs 10 crore (Rs 100 million), that could be divided into 1 crore (10 million) shares of Rs 10 each.

Part of this capital, or some of the shares, is held by the people who started the business, called the promoters.

The other shares are held by investors. These investors could be people like you and me or mutual funds and other institutional investors.

3. What does this mean for me?

You must have realised by now that owning a share means owning a share in the business.

When you invest in stocks, you do not invest in the market. You invest in the equity shares in a company. That makes you a shareholder or part owner in the company.

Since you own part of the assets of the company, you are entitled to the profits those assets generate. Or bear the loss.

So, if you own 100 shares of Gujarat Ambuja Cement, for example, you own a very small part -- since Gujarat Ambuja has millions of shares -- of the company. You own a share of its assets, its liabilities, its profits, its losses, and so on.

Owning shares, therefore, means having a share of a business without the headache of managing it.

Your Gujarat Ambuja shares, for instance, will rise in value if the company makes good profits, or may do badly if people stop building houses and demand for cement falls.

4. What do mean by rise in value?

If the company has divided its capital into shares of Rs 10 each, then Rs 10 is called the face value of the share.

When the share is traded in the stock market, however, this value may go up or down depending on supply and demand for the stock.

If everyone wants to buy the shares, the price will go up. If nobody wants to buy them, and many want to sell the shares, the price will fall.

The value of a share in the market at any point of time is called the price of the share or the market value of a stock. So the share with a face value of Rs 10, may be quoted at Rs 55 (higher than the face value), or even Rs 9 (lower than the face value).

If the number of shares in a company is multiplied by its market value, the result is market capitalisation.

For instance, a company having 10 million shares of a face value Rs 10 and a market value of Rs 30 as on November 1, 2004, will have a market capitalisation of Rs 300 million as on November 1, 2004.

5. So how does one buy shares?

Alright, you have decided you want part of the action. Shares are bought and sold on the stock exchanges -- the two main ones in India are the National Stock Exchange (NSE), and the Bombay Stock Exchange (BSE).

You can use three different routes to buy shares: Through your broker, trade directly online, or buy shares when a company comes out with a fresh issue of shares. This is called an initial public offering (IPO).

Now that we have demystified the key words -- shares, face value, market value and market capitalisation -- in the subsequent articles, we will explore how to buy and sell stocks, and how to subscribe to a new issue.

Stay tuned!

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Sensex? What's that?

2009-02-05T07:18:00.000-08:00

emember Freddie Mercury of Queen belting out these lyrics, "Don't stop me now, I'm having a good time, I'm having a ball"? Well, that seems the Sensex's song at the moment.

The Sensex, which has crossed the 6,000 mark, seems unstoppable.

Which makes it the right time to give you some dope on the hot new craze in town.

What's so hot about the Sensex?

It is the benchmark index for the Indian stock market. It is the most frequently used indictor while reporting on the state of the market.

The index has just one job: To capture the price movement. So a stock index will reflect the price movements of shares while a bond index captures the manner in which bond prices go up or down.

If the Sensex rises, it indicates the market is doing well. Since stocks are supposed to reflect what companies expect to earn in the future, a rising index indicates investors expect better earnings from companies.

It is, therefore, also a measure of the state of the Indian economy. If Indian companies are expected to do well, obviously the economy should do well too.

In case you are wondering why a stock market index has a provocative term like Sensex, let me tell you it stands for something quite mundane -- The Bombay Stock Exchange Sensitive Index.

What is the Sensex made of?

Thirty stocks. That's right. Just 30 stocks tell you how the market is faring.

Before you throw up your hands in protest, there is something you should know about these 30 stocks.

For one, they are the most actively traded stocks in the market. In fact, they account for half the BSE's market capitalisation (To understand the term market capitalisation, read What's in a share? Money!).

Besides, they represent 13 sectors of the economy and are leaders in their respective industries. Now that sounds fair, doesn't it?

Who selects these 30 stocks?

They are selected by the Index Committee.

This committee consists of all sorts of individuals including academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets.

How do they select these 30 stocks?

Well, they definitely don't do it on the basis of their individual whims and fancies. Some of the criteria they follow include:

~ The stock should have been traded on each and every trading day (the days on which the stock market works) for the past one year.

~ It should be among the top 150 companies listed by average number of trades (buying or selling of shares) and the average value of the trades (in actual rupee terms) per day over the past one year.

~ The stock must have been listed on the BSE for at least one year.

Does the Sensex have any contemporaries?

In terms of age? No.

The Sensex is the oldest index in the country. It was born in 1986.

In terms of popularity, the Nifty follows close.

The Nifty? What's that?

Well, the National Stock Exchange has an index called the Nifty (officially called S&P CNX Nifty). This name can be credited to the 50 stocks that comprise its index.

Isn't that a broader representation than the Sensex?

You're right. The Nifty has 50 stocks covering 24 sectors, as against 30 stocks and 13 sectors for the Sensex.

In case you are shaking your head about 50 also being too small a number, let me remind you these 50 stocks account for around 60 percent of the market capitalisation.

If these indices tell us about the market, why do people talk about sectoral indices?

The price of every stock price increases or decreases for two possible reasons:

~ News about the company, like a product launch, closure of a factory, the government providing tax or duty exemptions to the sector so more profits expected, a feud among the company's top bosses, etc. This will be stock specific news.

~ News about the country, like testing a nuclear bomb, a terrorist attack, a budget announcement, etc. This will be called index news.

The job of an index is mainly to capture the news about the country. This will reflect the movement of the stock market as a whole.

A good index will only capture news that is common to all stocks in India. This is what the Sensex and the Nifty do.

What about stock specific news then?

This is where the sector-specific indices come into the picture. They reflect the performance of the stocks in a particular sector only

For example, the BSE's IT Index captures the price movements of information technology stocks while its Bankex represents the change in the prices of bank stocks.

So a look at the specific sector index will tell you about that particular sector. For instance, bank stocks may not be performing and that will be reflected in the Bankex falling or remaining stagnant even though the Sensex might have gone up.

Did you know the NSE has a mid-cap index that is made up of mid-sized companies?

This index has run up smartly in recent months, rising even more than the Nifty, which shows that people have been investing more in smaller companies. This could be because the price for the stocks of bigger companies has increased recently.

Now, let's see how globally savvy you are.

Guess the countries these indices represent -- Dow Jones Industrial Average, the FTSE (Footsie) and the Nikkei?

The US, the UK and Japan.

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Want a broker? Read this!

2009-02-05T07:14:00.000-08:00

o you are all set to buy your first set of shares.

Here's the thing: you can't do so directly. People like you and me cannot go to a stock exchange and buy and sell shares.

If we want to do so, we have to get in touch with a member of the stock exchange. Which means you need a stockbroker.

Stockbrokers buy and sell shares for themselves to make a profit. They also buy and sell shares on behalf of other people and take a commission for doing so.

So how do you get yourself one?

This is where we come in. Before we proceed, a strong word of advice:

Take your time selecting a broker. Choosing a broker is, in many ways, similar to choosing a bank.

The first, most important quality is a broker must have a good reputation.

You will be trusting him with large sums of money and with your stocks, so you need a person you can trust completely.

1. Broker or sub-broker?

There are many horror stories of sub-brokers (these are people licensed by brokers to work under them), cheating their customers. Even if the intention is not to cheat, there are instances of delayed payments, trades not being put through on time, phone calls not being taken, wrong advice given and excess charges.

It's best, therefore, to choose a broker directly registered with the Securities & Exchange Board of India.

Every stockbroker has to be registered with SEBI, the stock market regulator. SEBI's main function is to make sure those who invest in the stock market follow the rules and no scams take place.

It is supposed to act as a watchdog on behalf of the investors.

2. Snoop around

You could choose a broker in two ways -- depend on friends, relatives or trustworthy acquaintances who have had good working relationships with brokers, or you could decide to stick to reputed brokers.

The Bombay Stock Exchange directory or the National Stock Exchange web site will give you a list of brokers affiliated to them. Most of them entertain retail clients.

The trade-off between a large institutional broker and your well-known neighbourhood broker is that while the former has the reputation, the latter can provide you with personalised service. Big is not necessarily better.

If you do rely on friends for references, make sure you ask them searching questions. Typical ones will be:

i. How often do they use the broker's services?

ii. Is he easily available?

iii. Have they had any delays when placing a buy or sell order?

iv. Does the broker provide sound advice?

v. Is the broker helpful?

3. How convenient is it for you?

Will your broker be available all the time for your transactions? Some brokers even offer services after market hours.

i. Check out how many phone lines a broker has. It will tell you about his ability take your calls.

ii. Find out whether his office is nearby, whether you can drop in at his office for a chat or to pick up your contract notes. These are the documents that record every sale and purchase of stocks. They are proof of the transaction.

It is absolutely essential that you collect a contract note for every transaction you make.

iii. If the office is not near, does the broker deliver the contract note to your home or office?

Stock exchange rules mandate that all brokers have to dispatch by post or hand deliver the contract notes within 24 hours of the trade.

iv. How will he collect your cheques? Does the broker have ample staff to enable him to service his clients?

4. Does he extend a helping hand?

Find out whether your brokerage will be able to offer you other important resources, like research reports and analysis.

Some of them provide regular newsletters. They update clients on new issues in the market. Some even advise their clients on which stocks make good investments, taking the client's current stock market investments into account.

Check out whether finance can be arranged for new issues. If you want to invest in mutual funds, you might want a broker who will help you do that as well.

5. What about the costs?

Everything costs money.

i. Brokerage is the fee the broker will charge for doing the buying and selling of the shares on your behalf. They are usually in the range of 0.5% for all trades that result in delivery and are much lower (around 0.1%) for intra-settlement trades.

Usually, when you buy shares they are delivered to your demat account. Or you sell them and get paid for it. This is known as trades for delivery.

But if you buy shares and sell them the same day, it will square off your position and attract lower charges. These are intra-settlement trades, which have to be settled within three days (including the day you bought or sold the share).

ii. Charges also come down for higher volumes. For delivery volumes above Rs 1 crore (Rs 10 million), charges could be as low as 0.25%.

iii. A service tax of 10.2% is payable on the brokerage amount.

iv. A securities transaction tax of 0.075% of turnover is charged in addition to brokerage on all delivery trades. This tax is 0.015% of turnover on the sale of all non-delivery trades. If the stock exchange sets a no-delivery period for a stock during this period, trading is permitted in that security. But these trades (known as non-delivery trades) are settled only after the no-delivery period is over.

Be careful. Some brokerages charge extra for opening an account; others club the fees for demat transactions with the brokerage. Then there are maintenance fees for the demat account.

It makes sense to club the brokerage and demat fees that you pay and then make a comparison.

If you do not have a demat account, you can approach a broker who is also a depository participant. Some waive the demat fees. Many brokers are open to negotiation, depending on the volume of business you give them. Basically, you must sit down with your brokers and find out details about his service charges.

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Why you need a stockbroker

2009-02-05T07:10:00.000-08:00

ou must have heard this question quite often: How was the market today?

The person asking this question could be referring to the debt market (comprising fixed income instruments like fixed deposits and bonds), the forex market (where currencies are bought and sold), or the stock market (where shares are bought and sold).

What we are specifically referring to in this article is the stock market.

When someone talks about the market, they are not referring to an actual physical place where people meet to buy and sell. The term stock market is a generic term to denote trading (buying and selling of shares).

What makes up the market?
The stock exchanges.

The stock market will have either one or a number of stock exchanges.

In India, the most famous are the Bombay Stock Exchange and the National Stock Exchange.

The NSE is the country's largest exchange, which means it sees the most amount of shares bought or sold in a day. The BSE stands second but is the oldest; it was established way back in 1875.

Then there are regional exchanges like the Ahmedabad Stock Exchange, Calcutta Stock Exchange and the Cochin Stock Exchange.

The two most prominent ones are the BSE and NSE. Together, they account for most of the stock trades in the country. Which means that if they catch a cold, exchanges all over the country will sneeze.

What makes up a stock exchange?
Its members, the stock brokers

People like you and me just cannot go to a stock exchange and buy and sell shares. If we want to do so, we have to get in touch with someone who is a member of the stock exchange. Which means we need to talk to a stockbroker.

Stockbrokers buy and sell shares for themselves to make a profit. They also buy and sell shares on behalf of people like you and me and take a commission for doing so (more on this on another day).

Every stockbroker has to be registered with the Securities and Exchange Board of India, which is the stock market regulator. SEBI's main function is to make sure those who invest in the stock market follow the rules and no scams take place. It is supposed to act as a watchdog on behalf of the investors.

Readers from Mumbai may have seen the imposing stock exchange building called Jeejeebhoy Towers. That's the home of the BSE.

But you would be disappointed if you think you can step inside the building and watch the market excitement firsthand as brokers frenziedly trade stocks. That's because all stock markets in India are now electronic.

Brokers have BSE computer terminals in their offices, from which they trade. They also have BSE terminals in other cities and don't have to be physically present in Mumbai to trade on the BSE. This means that even if you stay outside Mumbai, you can contact a BSE broker and buy or sell stocks on the BSE.

Years ago, the BSE was a place where brokers physically bought and sold stocks and shares through a system known as 'open outcry'. As a result, the market then resembled a fish or vegetable market.

If you watch CNBC, you'll find that the New York Stock Exchange still follows that system, with traders rushing around on the trading floor, scribbling trades on little slips of paper.

Actually, the improvements in the BSE came about when the government promoted the NSE. The NSE was an electronic exchange from the beginning and it started competing with the BSE, which in turn forced the BSE to tone up its act.

How the stock exchange protects you

Stock exchanges make sure your transactions are safe and secure and brokers follow the rules while trading.

The function of stock exchanges is to ensure brokers have enough capital (money) to enable them to conduct their business satisfactorily. Of course, that hasn't been able to prevent scams, but that's another story.

You also have a better chance of getting a good price.

Let's suppose you have a stock which very few people want to buy. But when your sell order is placed on the BSE, it is viewed by thousands of brokers on their computer screens and, if the right price, someone may decide to buy. Sell or buy orders in an exchange reach a large audience and that can work to your benefit.

When you buy or sell stocks through a stock exchange, your trades are guaranteed.

Suppose, for example, your broker has sold stocks on your behalf to another broker and the second broker's business fails. In this case, your trade is protected and you will get your money back because all trades on a stock exchange are guaranteed by the Clearing Corporation, which settles transactions between brokers.

Internationally, some of the most well-known stock exchanges are the New York Stock Exchange, the NASDAQ or the US stock exchange where the shares of mostly technology companies are listed, and the London Stock Exchange.

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What you should know about fund IPOs

2009-02-05T07:03:00.000-08:00

ndian fund investors are in the middle of an unprecedented IPO mania.

Like Sergei Bubka's pole vault record, equity fund (a fund that invests in the shares of companies) IPO subscriptions have managed to cross the barrier a little more every time these days.

When an Asset Management Company (mutual fund house) comes out with a new fund, it is referred to as an IPO.

Take a look at these figures

Enter IPOs, exit existing funds.

In the past six months, equity funds have amassed over Rs 10,048 crore just from IPOs.

During this period, existing equity funds have seen an outflow (investors sold their fund units) of Rs 4,003 crore.

Since December 2004, fund IPOs have managed to raise more money than they could have imagined.

Tata Infrastructure Fund raised Rs 772 crore in December. In January, relatively small fund houses like Cholamandalam and Sundaram raised Rs 102 crore (Chola Multi-cap) and Rs 356 crore (Sundaram SMILE) while Kotak Mid-cap collected Rs 577 crore.

In February, Franklin Flexi-Cap set a new record as it collected Rs 1,950 crore in its IPO.

Unfortunately, there is no way you can judge the IPO on past performance since it is a brand new offering.

So what most investors eventually go by when investing in an IPO is how well-known the fund house is and how appealing the ad campaign.

Before you jump at the next fund IPO, do keep this in mind.

They all want your money

AMCs make their money by managing investors' money.

Management fees are taken as a percentage of the Assets Under Management. The AUM refers to the total amount of money currently being held with a mutual fund.

On an average, equity funds charge 0.99% of the AUM as the management fee.

The more the assets under management, the higher the income for the fund house.

Obviously, it is in the managers' interest to earn higher revenue for the company.

What you should know

The AMC just wants you to invest with them. You will have to use your discretion and decide where your limited amount of money is to be deployed. Ensure that the fund house is reliable before you part with your money.

They love to make a noise

Mutual funds are sold, not bought. Investors are still not comfortable with mutual funds and prefer post office saving schemes and bank fixed deposits.

And, at the rate mutual funds are being churned out, investors are getting even more confused. That is why each fund house ensures that it makes a lot of noise to get top-of-the-mind recall.

This attracts investors who invest on the basis of popularity or recollection.

What you should know

Just because a fund has a great ad campaign and attractive billboard displays, it does not mean it will make a great investment.

They capitalise on market sentiment

Retail investors are attracted to stock markets and equity funds when the markets are high.

As they watch their friends and neighbours benefitting from stock market investments, there is a feeling of being left out. It is difficult to stay away from the lure of easy money, so they hop onto the next bandwagon.

One should not get carried away with market trends and stock-of-the-month or hot funds and quick tips. All these are certainly the easy way to doom.

What you should know

Investing is not a seasonal activity. Making wealth is about having a plan, investing regularly and maintaining discipline.

Mutual funds use the no-load spiel

There are two loads when investing in a mutual fund. The entry load is the fee you pay when you buy the units of a fund and the exit load is when you sell your units.

This fee is a percentage of the amount you invest. So if it is 1% and you invest Rs 10,000, the entry load will be Rs 100.

When funds come out with IPOs, they do not charge a load.

If you are investing for three to six months in an equity fund IPO, then the absence of load would be a benefit.

For long-term investors of equity funds, no-load will not matter as much as buying the right fund. For example, if you invested in an average equity fund for the last five years, you would have earned a return of 88% after excluding the 2% load.

The point? Load has little impact on returns if you are a long-term equity fund investor. How well your fund performs is more important.

What you should know

Generally, funds do not charge both entry and exit loads; they charge either one.

Chances are that even if you do not pay an entry load for an IPO, you may pay an exit load when you sell.

Even if you don't, don't let this be your investment criteria. Invest in a fund because you believe in it.

They push their sales agents to achieve targets

Every time your mutual fund advisor or agent comes selling you IPOs, remember he has a vested interest. He makes more money selling IPOs than selling an existing fund.

The reason is that the AMC spends more money during IPOs and does not hesitate to spend a little more to get more money.

For example, mutual fund agents will gets 1% to 2% of the money they collect for an existing equity fund. When it comes to an IPO, that percentage can go as high as 3% to 5%.

What you should know

Don't believe every word your mutual fund agent tells you. Remember, he is more interested in his incentives and commissions than in your portfolio.

Do remember that when you invest in an existing fund, it is easy to check out the fund's portfolio -- either in their quarterly reports or on their Web site. In a fund IPO, you will not know what shares will be bought till the fund manager actually invests the money.

Finally, when you do invest in an IPO, your fund manager could wait a while to invest the money for whatever reason.

It could be that he has to wait for the entire issue to close (especially it if is open for a few weeks) before he can start investing.

Maybe he feels the market is too high and is waiting for it to cool down so he can pick up shares at a lower rate.

In the meanwhile, your money remains idle and does not earn a return

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How to invest in an IPO

2009-02-05T06:54:00.000-08:00

f you have not already been asked these questions by now, here goes: Do you plan to invest in IPOs?

Which IPO are you going to invest in?

Maybe even, What is an IPO?

If that is your question too, read on.

~ Clear the jargon first!

If a brand new company or a company already in existence, but with no shares listed on the stock exchange, decides to invite the public to buy shares, it is called an Initial Public Offering (IPO).

It is the first time that it is approaching the public for money. That is why the company is also referred to as 'going public'.

If a company that is already listed (has its shares for buying and selling on the stock exchange) is coming out with a fresh tranche of shares, it is called the new issue.

Then, there are the disinvestments -- where the government sells its stakes in public sector companies in the market. Although these are not technically new issues, they too create a buzz in the market.

~ Every company needs money

A company needs money to grow and expand -- to purchase new machinery, land or even repay its loans.

To do that, one of the options it has is to ask the public for money.

It comes out with a public or new issue. The company offers shares and the public buys those shares. These shares are listed on the Stock Exchange.

People who invest in the company get rewarded (as dividends) by the company, or sell the shares as the share price rises.

~ How can I buy these shares?

There are two ways:

If you want the shares of a company that is already listed, you can buy them from the Stock Exchange through brokers. This is called buying from the secondary market.

Buying from the primary market means that you buy them directly from companies when they make new issues of shares or come out with IPOs. You can also get rights issues and bonus shares, but more on that later.

Why would you pick up shares through IPOs, rather than buy them from the market?

Because, often, companies issue their shares cheaply and, later, when these shares are listed on the Stock Exchange, they list at a premium (higher than the price at which they were issued).

So you could make a lot of money if you sell those shares.

What if you don't want to sell the shares soon?

Sure. It also happens that companies who are going public or listing their shares for the first time also usually offer their shares cheap, and could go on to become very successful.

IPOs thus offer investors the chance to participate in their prosperity cheaply.

These listing gains are the chief attractions of buying in the primary market.

~ So what's the catch?

The trouble is, there are usually plenty of applicants for good IPOs.

And they are heavily oversubscribed (the demand for the number of shares is more than the number being offered for sale).

And although 25% of the issue has to be reserved mandatorily for the retail investor (those who apply for shares of a value less than Rs 50,000), even the retail portion is oversubscribed several times for good issues.

In this scenario, lots are drawn and only a few individuals are allotted shares.

Hence, you may not get the number of shares you asked for. There is also a chance that you may also not get an allotment at all, in which case your money will be returned to you.

If you don't get any shares, your money will be returned to you within 21 days. This is true even if you get partial allotment (you get only some of the shares you applied for), and the extra money you have paid is returned.

If you do get an allotment, your demat account will be credited with the shares. Once the shares are listed, you can sell them in the market and pocket the gains.

Of course, you can also hold your shares for the long term if you want, but most people opt out if the price on listing is well above the price at which you were allotted the stocks.

Remember, you need to have a demat account before applying for IPOs. Else your form will be rejected.

~ How does one go about it?

It's very simple, really.

1. Keep your eyes and ears open.

IPOs are normally heavily advertised in the media. Not only because it is statutorily required but because companies want maximum publicity to ensure that their issues are a success.

Before applying, be sure to read the prospectus for the issue. This is a document inviting the public to subscribe to the shares of the company and contains plenty of information on the company's financials, its track record, and what the management plans to do with the money that it is raising.

It's free and available on the company's web site or on the SEBI web site.

2. Get an application form.

You can pick up the application forms at any broker's office -- they are even available on some street kiosks in your city's financial area.

Do you have any agents who sell you mutual fund application forms or fixed deposit forms of companies? They too are a good source.

Ask your family, friends or colleagues for their agents.

The forms are all free.

3. Fill it up.

Fill up the form -- the directions are given in the form -- and write a cheque for the amount you want to apply for.

Every issue has a minimum number of shares that you must apply for, which is specified in the application form.

Submit both within the time frame specified.

4. Submit the form.

You will have to submit it to the collecting bankers (a list is given in the form), or to the collecting agents for the merchant bankers (financial players managing the entire issue for the company) to the issue.

~ You can buy online too

If you have trading accounts with online brokerages (sharekhan, Kotak Securities, ICICI [Get Quote] Direct, 5 paise to name a few), you can apply online.

The process is simple, and detailed instructions are available on these brokers' web sites about how to proceed at every step.

Typically, you have to go the site and click on Open IPO, where you will get the list of IPOs open for application. Once you select an issue, you will be directed to the Applications page, where the form can be filled in and submitted online.

~ On a cautious note

Please note that there are plenty of not-so-good companies who come out with IPOs.

Make sure that you know enough about the company and are confident about its management and its growth prospects before investing.

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5 things you must know before buying shares

2009-02-05T06:43:00.000-08:00

A friend of mine recently landed her first job.

She spent her first few paychecks on a new cell phone, and a new wardrobe to go with it. Then, her parents began pressurise her to save.

Her question to me was: which shares can I invest in?

ImageWhen I proceeded to tell her that shares were the riskiest of all investments (bonds, fixed deposits, post office schemes, gold etc), she shrugged.

When I asked her if she even knew what a share was, she confessed she did not.

I could not blame her.

Over the last year or so, the stock market has been hogging the limelight. Companies have been coming out with Intial Public Offerings (which is when the company first makes its shares available to the public by getting them listed on the stock exchange). Everyone wants to join the party and make money.

If you identify with her, here is a tutorial to help you get your basics right. Before you invest in the stock market, you must understand what it entails.

1. You own a part of the business

When you invest in stocks, you do not invest in the market (despite what you think). You invest in the equity shares of a company. That makes you a shareholder; you now own a small part of that business without having to go to work there.

The good news is, since you own part of the company, you are entitled to a share in its profits.

The bad news is that you are also expected to bear the losses, if any.

That is why investing in shares is risky. If the company does well, you benefit. If it does not, you lose. There are no guarantees whatsoever.

2. In the short-run, the price of the share can wildly fluctuate

Let's say the company fixes the price of each share at Rs 10. This is called the face value of the share.

When the share is traded in the stock market, this value may go up or down depending on supply of and demand for the stock.

If everyone wants to buy the shares, the price will go up. If nobody wants to buy the shares, and many want to sell them, the price will fall.

The value of a share in the market at any point of time is called the 'price of the share' or the 'market value of a stock'.

A share with a face value of Rs 10 may be quoted at Rs 55 (higher than the face value) or even Rs 9 (lower than the face value).

So you might have paid Rs 15 for a share which is now quoting at Rs 12. Don't panic and sell. If it is a good company, the share price will eventually rise.

The prices will get influenced by the market sentiment and the general direction of the market. As a result, you may see short-term slumps.

3. Always invest for the long-term

The best way to make money is to buy low and sell high. This means you should buy the share when the price is low and sell it when it is high.

That is why you must buy in a bear market. This is a term used to describe the sentiment of the stock market when it is low and the prices of shares have generally fallen. The best time to sell is in a bull market, when the sentiment is high and the prices of shares are rising.

But it is very difficult to time the market. In fact, no one can do it. If we could, we would all be millionaires, wouldn't we?

That is why, when you invest in the market, it is best to invest for the long-term. Hold on to your shares for a few years before you think of selling them.

Companies increase their sales and book higher profits over the years. This will eventually reflect in the share price, so ignore the short-term slumps.

Once you decide that you are in for the long haul, you can ride over the bear and bull runs with no stress at all. Over time, the price of your shares will appreciate.

If you are getting a good price for your stock, keep selling small amounts at regular intervals. Keep booking profits.

4. Decide how much you want to invest

Always remember one basic rule in finance -- if something gives you higher returns, that's usually because it carries a greater risk.

That's the reason why not-so-good companies will pay you a higher rate of interest for your deposits.

The same reasoning goes for stocks too -- they give higher returns than, say, bank fixed deposits because they are more risky. So the amount of money you invest in the market depends on your capacity to bear the risk.

If you are young with a steady job, you can invest a larger proportion of your income in the stock market than, say your parents who are close to retirement. If you have a lot of debt to repay, avoid putting too much of your money in stocks.

It's best to decide how much of your savings you will allocate to stocks, and stick to that plan. Don't get swayed by how much your friend is investing.

5. Don't rely solely on 'good advice'

A smart investor should never invest buy shares of companies he doesn't know much about. Relying on 'advice' from friends is not always a great idea. Do some groundwork yourself.

It doesn't matter who is buying the stock or who is recommending it. Steer clear of such ways of making a fast buck. These tips will land you in a soup.

When you hear of a 'hot tip', dig further.

Take a look at the company's profit and loss statement, which would have been audited by chartered accountants. There is a wealth of information here. To understand the information in a Profit & Loss Account.

Do some basic calculations on your own. The Earnings Per Share (net profit/ number of shares) and Price/Earnings ratio (market price/ EPS) should give you a fair understanding.

These tips should get you started. Tread cautiously though. If stocks intimidate you, consider a diversified equity fund.

A mutual fund manager will research many companies before investing in their shares. This way, you can participate in the stock market even as you leave the research to professionals.

Illustration: Dominic Xavier

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A S Murty appointed as Satyam's CEO

2009-02-05T05:02:00.000-08:00

NEW DELHI: After a crucial two-day board meet, the six-member Satyam Computer Services board appointed by the government named AS Murty as thenew Chief Executive Officer of the beleaguered firm. AS Murty was formerly, Head, Delivery and Leadership Development of Satyam.

The board has also appointed Homi Khusrokhan and Partho Datta as Special Advisors to the Board, to assist in Management and Finance areas, respectively.

The Special Advisors, along with Boston Consulting Group will work pro bono and will assist the newly named CEO and the Board, in defining priorities and executing them, effectively.

The board today confirmed receiving bank sanctions of Rs 600 crores ($130 mn. approx) as a planned fund infusion towards working capital requirements.

This funding, along with healthy collections, is expected to help the company tide over its financial challenges.

The meeting, the fifth since the Company Law Board dissolved the depleted Satyam board after Ramalinga Raju, its disgraced founder confessed to a Rs 7,000 crore fraud is yet appoint a Chief Financial Officer of the company.