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In this section, know more about shares, stock markets and market indexes. The term ‘stock
market’ appears in the news every day. What is a share? What is a stock market? Why do we
need a stock market? Where does the stock come from to begin with, and why do people
want to buy and sell it? What is a market index? What is Sensex? How is index constructed?
If you have questions like these, then, the following articles will open your eyes to a whole
new world.
Some truths about stock markets
Stocks-explained
Basic charcteristics of shares
Should you invest or trade in stocks?
Benefits of owning shares
Stock markets in india
What is a stock index?
BSE stock classifications
What is Sensex? How is it calculated?
What is nifty? How is it calculated?
Do stock indices tell the right story?
Bulls, Bears and Stags
How much money should you invest in stock markets?
What drives the stock market ?
What are Blue-chip shares?
Invest for a long term or short term?
Ethical Stock Investing
Indirect way to invest in stocks –Mutual funds.
The Only 2 ways to buy stocks – Primary markets & Secondary markets.
Stock Market timings.
Hi there,
From this post onwards, I am going to kick off the discussion on shares as an option to create
wealth. Let me start by saying 7 straight truths about stock markets.
First, nobody gets rich quickly in stock markets. Some of your friends might have blindly
invested in some stocks which, to their luck, gave them exceptional profits. Yet, they never
became rich. Did they? So that’s the first truth about stock markets – it’s not a place where
you get rich quickly.It takes time to grow your money.
Second, it isn’t easy for beginners to make money on the stock exchange. If it was such a
simple exercise, Mr. Warren buffet wouldn’t have become so famous. It takes genuine effort
to spot profitable investments.
Third, your broker, friends, neighbor, colleagues et al would come up with ‘sure shots’
everyday; there are too many stock analysts out there giving out fee based stock
recommendations. It’s easy to get tempted by all these people around you. After many years
in the market, my thoughts keep wavering when somebody comes up with such ‘sure shots’.
Should I explain the fate of a beginner? It’s important to stay off from these temptations. It
implies that you ought to have ‘independent thought’. Independent thought is something very
hard to carry through.
Fourth, most of the investors are a bit too casual with stock markets. They ‘play’ in stock
markets. Stock exchange is a wrong place to have fun, speculate and try luck. The Stock
market is actually a place dominated by big investment houses and financial experts. This is a
place where the world’s brightest finance professionals put their best efforts to make right
investment decisions. Nobody is playing around. So, to be successful, you too, need to be
serious. You have to view it as a business. When you buy shares, you are buying a company
to that extent. Buying a company is no Fun!
Fifth, realise the fact that broker’s income is the commissions you give. The more you trade,
the more they get. When I was serving as the manager of a broker, I used to get monthly
targets for the volume of brokerage that should be generated. If I don’t do that, my salary
payment gets delayed. Each branch was viewed as a profit center. Myself and my colleagues
used to hit our targets but our investors rarely did! Most of the brokerage houses encourage
their clients to do as many trades as possible whether it’s good for them or not, and keep
doing it until you have used up all their money. If you get too many frequent ‘Sure shot
market tips’ thru sms, mails and phone calls – think twice. Your broker may be interested
only in generating commissions. Make sure you don’t get into such traps. Do have faith in
your broker, but don’t blindly follow them. They can give you advice but they can’t
guarantee that you will make a return on any investment in the stock market.
Sixth, as you begin to study the principles, you’ll hear about derivative instruments like
futures and options. Instruments like options and futures are NOT for beginners with limited
resources. They are highly technical, involve the potential to lose all of your investment
quickly and need constant monitoring. Playing Futures and options without adequate working
knowledge is like gambling at Las Vegas.
Finally, you have to keep on working on your stock picking skills. Keep following the
market developments. You’ll also need to study some basics on economics, accountancy,
income tax and mathematics.
So, # No quick riches in stock markets # it’s not the place to have fun with money # you
shouldn’t be blindly believing your broker’s recommendations # never try your luck #and,
learning is the only way -to make right choices in stock markets.
So, let’s begin from the roots. My next post would explain what shares are.
Before you take the plunge, think about what’s said above. To succeed in stocks, you’ll have
to put maximum efforts to learn the game and be serious with investments.
May God help you to achieve your goals.
Stocks-explained
by J Victor on August 2nd, 2010
INTRODUCTION
The first step for anyone who aspires to invest in stocks , is to understand stocks ! The words
stocks and shares mean the same thing. Share means a portion of anything. In our context,
share means a portion of ownership of a company.Now,it would be better to discuss this
concept with the help of an example. This will help you to get a clear idea of what a share is.
Lets try to explain that with the story of a company called ‘Say-it-with-flowers’.
SCENE 1- The beginning
A group of girls decides to start a business. Since they knew floral decorations, they decide to
start a flower shop. They name their business as ‘Say-it-with-flowers’. For initial expenses,
they borrowed some money from the local bank and opens their shop in a small space. The
business was successful. However, they made little profit because; all the earnings were
invested back into business since the customers were increasing and they had to meet the
growing demand for their floral decorations.
SCENE 2- A decade after.
Ten years later, the bank loan has been paid off. Profits are over Rs 10 lakhs per year. It also
has a book value of Rs 50 lakhs. (Book value is the net value of what the company owns-
machinery, furniture, building less any loans). Having made their business a success, the
girls now wants to expand their business. Their idea is to open two more branches at
neighboring towns. After a detailed study, they find out that it’s going to cost over Rs 52
Lakhs to open two outlets. To find this 52 lakhs, they had two options- one, take out a loan
from the bank. Two, sell part of their company. Since interest rates are high, they decide to
take the second route. But how? What would be the cost of a share in say-it-with-flowers?
Who will do the valuation? There were several questions to be answered.
SCENE 3-The big leap
To sell part of their company, the company has to be valued. The person who values a
company is called an ‘underwriter’. So they approach an underwriter who checks their past
records, future prospects, background of the promoters etc, The underwriter decides that the
company is worth 10 times its current profits.
The current profits is 10 lakhs. So 10 times 10 lakhs is 1 crore. This one crore is actually an
estimate based on various qualitative factors. Add book value to it, and you arrive at Rs
1crore and 50 Lakhs. This means, “Say-it-with-flowers” is worth Rs 150 lakhs.
40% of 150 is 60 lakhs. So, the girls decide to sell 40% of their company.A group of
investors who were willing to buy the 40% shares in that company gives a check for Rs 60
lakhs. The girls still have control over the operations of the company since they still have
60% share.
SCENE 4- The benefit
Now, For the girls, 40% stake is lost but they get 60 lakhs in cash. They have the money to
expand their business.As planned, they opened two new outlets for Rs 52 lakhs.The balance 8
lakhs is used for day to day operations of the three shops.
Both the new stores hit a profit of 10 lakhs a year. That means the total profit of the company
Say-it-with-flowers is now Rs 30 lakhs. ( 10 lakhs x 3 shops ). The value of the business is
now Rs. 450 lakhs (3 shops x 10 lakhs x 10 times + 50 lakhs x 3) and the couple’s 60% stake
is worth Rs 270 lakhs.(450 x 60%)
SCENE 5 – At the stock market.
Since the investors who bought 40% of the share for 60 lakhs, is now worth 180 lakhs, the
shares of say-it-with-flowers is in great demand. Since the company increased the wealth of
shareholders 3 times, there are investors who are willing to purchase the shares even for an
amount higher than 180 lakhs. Each day, shares of say-it-with-flowers are sold to the highest
bidder. The place at which the bidding and buying process takes place is called the stock
market.
SCENE 6 – You as an investor..
Let’s assume that the total shares of the company are 50,000 shares. So, 40% available to the
public is 20,000 shares. The issue price was Rs 300 (60 lakhs/20000) but, now the share is
worth Rs 900(180 lakhs / 20000). Since a section of the public feels that this winning streak
of the company would continue, there is heavy demand for the share and due to this, the price
keeps moving up.
Suppose the price is Rs 1250 now. Should you buy?
The answer is –no. Why? Because, the shares are trading above the ‘real value’ of Rs 900.
This real value is also called ‘intrinsic value’.
Price drops to Rs 750. Should you buy?
Now, one day, due to some rumors, the stock market crashes, and consequent to that, the
price of the share plummets to Rs 750 per share.
Should you buy? May be, yes! Why? Because, now the share price is below the real value
and some time later , you can expect the rumors to settle and that will result in the prices
moving back to it’s original level of Rs 1250 or more.
Where should you sell?
Although the price may move back to Rs 1250, your selling point theoretically should be at
Rs 900 . Why? Because that’s the actual value point. The price rise above Rs 900 may be due
to several reasons like investor sentiment which should be ignored.
CONCLUSION.
The good investor’s job is to identify companies like say-it-with-flowers that are selling
below their true worth due to some illogical reason and invest in such stocks.
Hope We’ve made it clear.
SHARES OR STOCKS?
That’s right. The first step is to clarify that point. ‘Shares’ and ‘stocks’ mean the same thing.
Shares are collectively called stocks. So if your friend says that he owns stocks, what he
means to say is that he has bought shares in many companies. But if he says he owns shares,
he’s being specific there. What he means to say is that he has bought shares of a particular
company.
CHARACTERISTICS OF SHARES
Shares have these following distinctive characteristics:
Ownership rights.
When you buy a share, you are buying a piece of that company – you become its part owner.
That ownership gives you certain rights, including voting on important matters of the
company and participating in the profits.
High profit potential.
When you buy stocks, you become the owner to that extent and when the company makes
more and more profits and expands, the demand for its shares will also rise. As a result, the
share prices also move up. As an owner, you already have rights in its profits. Now, as the
demand for the shares goes up, a second benefit in the form from of appreciation in capital
invested opens up.
For example: Many of the early employees of Infosys are millionaires because their stock has
gone up dramatically.
Risk
However what if the company dint make profits as expected? There won’t be much demand
for it’s shares nor it will carry a high rate of profit share. Hence, along with the potential for
extraordinary gain comes the potential for high loss. These two go hand in hand. If you are
not careful in choosing a company, you can lose money by investing in stocks. Not only in
stocks, in fact, have even the safest savings deposits carried unseen risks. When you account
for inflation and taxes, you’ll find that most of the so called risk free investments are not so
safe.
Source of Income
We have already explained that. Since share holders are part owners of the company, they are
entitled to get a part of the annual profits of the company. Shareholders get income by way of
dividends and bonus shares.
KNOW IT
Shares and stocks mean the same thing. Shares are collectively called stocks.
Shares give you right to ownership, voting, decision making and profits in a company.
Investment in shares can be risky if recklessly done.
Share investments have the potential to make you millionaires.
It gives you income in the form of dividends and bonuses.
What are the benefits if you own shares? There are many other benefits as we have explained
in the following paragraphs:
EARN DIVIDENDS.
Dividends are nothing but a part of company’s profits distributed to its share holders. The
company’s management may declare dividends either in between a financial year (called
interim dividends) or at the end of the financial year (called final dividends).However, it is
not mandatory for the companies to pay dividends. It can use the profits for alternative uses
like expansion. The decision to pay or not to pay dividends is taken at the annual meeting by
the majority voting of the shareholders. Blue-chip companies (large companies) generally are
consistent dividend payers.
CAPITAL APPRECIATION.
As the company expands and grows, it acquires more assets and makes more profit. As a
result, 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 what you paid. This is known as capital gain
and this is the main reason why people invest in stocks. They aim capital appreciation.
RECEIVE BONUS SHARES
For the time being, let us understand that bonus shares are – Free shares are given to you
.Later on we will discuss about bonus shares in detail.
RIGHTS ISSUE
A company may require more funds to expand it’s business and for that, it may need more
funds. I such cases, the company can issue further shares to the public. However, before
approaching the public, the existing shareholders will be given a chance to subscribe to more
shares if they want. That’s called a rights issue. This is done in order to ensure that the
existing shareholders maintain the same degree of control in the company. Thus you can
maintain the participation in the company profits.
SHARES CAN BE PLEDGED
Shares are considered as assets and hence, banks accept shares as security for raising loans.
Should there be an an emergency, shares can quickly pledged to raise funds. Apart from that,
Brokerage firms allow you to borrow money from their account based on the current share
holding you have in your demat account maintained with them. If you want to utilize a
sudden surprise opportunity in markets, but if you don’t have the cash right now, you can
adopt this route.
HIGH LIQUIDITY
Shares are highly liquid. It can be converted into cash in no time. With online trading, all it
takes is the click of button to sell you holdings. You can receive your cash in two days.
CAPITAL APPRECIATION OR DIVIDENDS?
The above mentioned income sources may not be present in every company you buy. For
example- if you’re buying company that has a huge potential to grow, it may not pay it’s
surplus as dividends. Instead, it will be used for further growth. In such cases, huge capital
appreciation may happen. So depending upon your investment strategy, you’ll have to choose
what you want. It’s always wise to go for capital appreciation rather than dividends.
STOCK INDEX.
The stock index function as an indicator of the general economic scenario of a country /
region / sector. If the stock market indices are growing, it indicates that the overall general
economy of the country is stable and that the investors have faith in the growth story of the
economy. If, however, there is a plunge in the stock market index over a period of time , it
indicates that the economy of the country is in troubled waters. It’a also an indication of what
the corporates in that country are facing.
A stock index is created by selecting a group of high performing stocks . For example – The
FTSE 100 ( the stock index of London stock exchange) is constructed from the top 100
companies trading in the London stock exchange. If the FTSE 100 records a jump over a
period of time, it indicates that most of the top 100 companies in England are doing well at
that point of time and that the investors are positive about putting their money in England.
TYPES OF INDICES
There are different types of indices and FTSE 100 was just an example. Stock indices can be
constructed -
For the entire world ( global indices)
For an entire continent ( regional indices – for example S&P Latin america 40)
For an entire country ( national indices – for example Sensex & Nifty for India )
For a particular sector in a country – ( sectoral indices – for example BSE BANKEX
which tracks top banking companies in India)
For any other theme / group of economy / companies you want to track. ( example
Dow Jones Islamic world market index)
The MSCI global and the S & P Global 100 are examples of world stock indices which tracks
the largest companies in the world irrespective of their country of origin . The MSCI global
id an index with over 6000 stocks included from different parts of the developed world. It
specifically excludes companies from emerging economies.
When stock indices are constructed to track the performance of the economy of a country
( like Sensex in India), it called a national index.
Irrespective of the type of index, the purpose of any index is the same. It provides to the
public, a quick view of how the economy ( based on which the index is constructed) is
functioning. A sudden slide in indices denotes that the investors have lost faith . There could
be several reasons for that like poor economic reforms , high inflation, high borrowing
costs, amendments in laws that not well received by the business community, downgrades by
world credit rating agencies, scams , corruption .. the list is end less.
These indices also serve as benchmarks for measuring performance of fund managers or for
measuring the performance of an individual’s stock portfolio.
CONSTRUCTION OF STOCK INDEX
A stock index can be calculated in two ways -
By considering the price of the component stocks alone. This method is called the
price-weighted method.
By considering the market value or size of the company – called the capitalization
weighted method.
To conclude, stock indices are barometers to measure general economic performance of an
particular country / sector. It’s updated every second throughout on every trading so as to
reflect the exact picture of the economy. It’s also a permanent record of the history of
markets – it’s highs and lows, booms and crashes.
NIFTY
In the last post, we discussed what Sensex is and how it is calculated.
Just like the Sensex which was introduced by the Bombay stock exchange, Nifty is a major
stock index in India introduced by the National stock exchange.
NIFTY was coined fro the two words ‘National’ and ‘FIFTY’. The word fifty is used
because; the index consists of 50 actively traded stocks from various sectors.
So the nifty index is a bit broader than the Sensex which is constructed using 30 actively
traded stocks in the BSE.
The methodology for calculating the Sensex was given in our earlier post. Nifty is calculated
using the same methodology adopted by the BSE in calculating the Sensex – but with three
differences. They are:
The base year is taken as 1995
The base value is set to 1000
Nifty is calculated on 50 stocks actively traded in the NSE
50 top stocks are selected from 24 sectors.
The selection criteria for the 50 stocks are also similar to the methodology adopted by the
Bombay stock exchange.
LATEST LIST OF NIFTY STOCKS
If you want the list of 50 stocks that have been included in the nifty, here’s the direct link.
Hi there,
Let’s catch up with ‘Bulls’ and ‘bears’. The two most commonly used terms in stock markets.
A common story is that the terms ‘Bull market’ and ‘Bear market’ are derived from the way
those animals attack. Bulls are supposed to be aggressive and attacking while bears would
wait for the prey to come down.
Another story is that long back, bear trappers would first trade in the market and fix a price
for bear skins, which they actually din’t own. Once the price is fixed , they would go hunting
for bear skins. So eventually even if the prices go down, they will still be able to sell if for a
high price. This term eventually was used to describe short sellers and speculators who sell
what they do not own and buy it when the price comes down and makes money in the
process.
However, it was Thomas Mortimer,in his book called ‘Every Man His Own Broker’ (1775)
who first officially used the terms Bulls and bears to describe investors according to their
behavior.
BULL MARKETS
When can you say it’s a bull market? When the prices of stocks moves up rapidly cracking
previous highs , you may assume that it’s a bull market.If there are many bullish days in a
row you can consider that as a ‘bull market run’. Technically a bull market is a rise in value
of the market by at least 20%.
BEAR MARKETS
A bear market is the opposite of a bull market. When the prices of stocks moves crashes
rapidly cracking previous lows , you may assume that it’s a bear market. Generally markets
must fall by more than 20% to confirm that it’ a bear market.
STAGS
This is another category of market participant. The stags are not interested in a bull run or a
bear run. Their aim is to buy and sell the shares in very short intervals and make a profit from
the fluctuation. It’s a daily tussle for stags in the stock market.
MARKET TIMING
The basic idea behind stock market investment is simple- Buy low, sell high and make
money. So to make money, you buy stocks in a bear market when stock prices are low and
sell stocks in a bull market when stock prices are high.
However, knowing the exact time when a bear market would start or when a bull market run
would come is not possible. Just when you thought the markets would go up, it may surprise
you by trading low. Your strategy should be to pick up shares in the bear market and sell it
when there’s a bull market run.
HERE’S THE CRUX..
Technically a bull market is a rise in value of the market by at least 20%.Anything
less than 20% would be considered as a minor rally.
A market launches into a bull phase when sentiment turns buoyant, which is usually
because of a series of positive developments that beat expectations
Reverse is also true. A 20% or more fall in value is considered as a bear market.
Anything less than 20% would be considered as a ‘correction’.
Bear markets occur when news flow tends to be worse than expectations, causing
investors to sharply punish stocks or sectors. This has happened in the US where more bad
news on the sub-prime front and US economy data has stifled even the briefest of market
recoveries.
To confirm a bear market, this weakness should persist for at least two months. In
bear markets, liquidity is extremely tight, volumes tend to be low and market breadth tends to
be poor
Some experts believe that for emerging markets such as India, which tend to be more
volatile, the correction needs to be steeper at 30-35 per cent.
In every bear market, there tends to be bear market rallies or a bear market pullback,
where the market rises 10-15 per cent only to decline yet again. The bounce-back usually
occurs when some stocks or sectors are ‘oversold’, to borrow a term used by technical
analysts.
Worst bear market conditions are followed by great bounce backs.
That covers Bulls, bears and stags.
There is an old saying which would further give authenticity to our bear story-
“Never sell a bear skin unless you have one.”
People often end up investing majority of their savings into stock markets, especially if they
get a handsome profit on their first trade itself.They also commit more money to recoup all
the loses they made earlier.
Both these situations are dangerous. More than 80% of the retail investors in India have this
problem of committing more. In the first case, they do it because they are excited about
making more money quickly and in the second case they do it out of despair – to somehow
recoup the losses and get out of the market. Ask any broker whom you know personally – he
will have a list of hundreds of clients who came in –opened de-mat accounts and vanished in
a year’s time.
HOW MUCH ? IS THERE A FORMULA?
So what we are trying to give you is a set of two tips that would help you have control over
your money invested in stock markets:
First of all – never try the ‘daily money making process’ in stock markets. I know quite few
of them who has tried ‘playing in stock markets’ to make a daily income-and lost all their
money.
Secondly, There is a limit to which you should expose your money in stock markets. There’s
no hard and fast rule as to how much should be exposed. However to help you out, here’s a
formula which gives you a rough calculation about how much money should go into stocks
based on your age.
It is:
90 –(minus) YOUR AGE = % of income to be exposed In stock markets.
So, if you are 35 years old , you can expose a maximum of 50% of your income into stocks.
Ok. Fine. so does that mean you can expose 15% of your income at 75? May be not.
Investments in stock markets ideally should be stopped at the age of 65 or 70 maximum.
Again , as I said earlier , investing is entirely personal. If you have the money, health and will
to invest at 70 or even at 90 , Go ahead ! ! Sir Warren Buffet is 81 years old now, and he
hasn’t stopped investing !
Clearly, when you are young , you can afford to take more risk and hence, you should be
investing in stocks rather than debt funds. when you grow older, the proportion of money
invested in stocks should be brought down and the the debt or fixed income potion in your
investments should be increased.
The stock market is a discounting mechanism where it’s not the current earnings but, the
ability of a company to generate earnings in the future keeps driving it. The present has
already been discounted by the market 6 or 12 months ago. So, if investors expect a good
season in the future, the stock prices will respond by an increase in price now. Should they
expect the reverse, the stock price would tumble. This is a continuing process in the markets
– and will be so in the future.
So if you ask us which is the best time to buy stocks, our answer is – it’s when the earnings
are declining and when the economy is in recession.
OTHER FACTORS.
Earnings are not the only factor that drives markets. Other factors that drive stock markets
include sentiments, valuation, interest rates, inflation and the economic policies in general.
In this, Sentiments has more to do with investor’s psychology. Sentiments represent a
collective view of all the participants at a give point of time. The moment there’s a change in
stock prices, common investors would assume that it’s going to continue for a long time and
would react accordingly. For example – if the stock market responds with a 50 point slide due
to increase in interest rates, investor’s negative sentiments may kick off a series of downfalls
since, they would keep selling their positions expecting further damage.
VALUATION
Investors will be attracted to the option which appears cheap in valuation. Valuation can be
relative valuation or absolute valuation. By relative valuation we mean comparing the stock
market to other form of investments like gold or real estate. By absolute valuation we mean,
valuating the stock itself with its past price and present and expected performance.
MONETARY POLICIES AND INTEREST RATES
If the interest rates are increased, it affects the borrowing costs of companies and hence, high
borrowing cost would bring the earnings down and it will also prompt the companies to post
pone their expansion plans. Changes in interest rates will also affect the rate at which future
earnings are discounted by the market.
Fixed income earning instruments like fixed deposits become more attractive at high interest
rates and that would impact the markets negatively. Investors would move their money from
the markets and will park it in fixed instruments since the rate is high.
One major cause of high interest rates is inflation. As inflation in a country increases, the
government will be forced to keep the interest rates high in order to restrict the money flow
into the economy. As we said earlier, higher interest rates are not good for the stock markets.
When the interest rates are low, fixed income instruments are no longer attractive and this
would induce investors to enter stock markets.
So the interplay of all these factors keeps driving the stock markets.
BLUE CHIPS
‘Blue-chips’ is one word that you’d be hearing a lot of times once you start following the
stock markets. So this post is about blue chips or ‘bellwethers’ as it is sometimes called.
Blue chip stocks are large companies whose shares are considered to be relatively safe than
normal shares. It gains that status from its past record of being a high growth, high dividend
paying company. These companies would be leaders in its field. For example-Infosys
technologies is described by Medias as an ‘IT bellwether’. It reflects the investor’s
confidence in that company’s capacity to maintain its status as the leader of the pack and its
past record of excellent management and of giving good returns to it’s share holders.
The term ‘blue-chip’ is coined from a game called poker where the chip with the highest
value is blue in color. In stock markets, the term is used to describe the stock that has highest
quality – in terms of investor confidence.
There is no hard and fast rule to find out which a blue chip company is and which one is not.
A blue-chip typically would have stable earnings and dividend history, a strong asset
position, high credit rating and an excellent record of being a leader in its field. These are
huge companies in terms of market capitalization and revenues.
All the 30 stocks in Sensex index can be considered as blue-chip companies. You can also
see the Dow Jones list of Indian blue chips at –
http://www.bluechiplist.com/indices/dow-jones-india-titans-30/
ARE THESE SHARES SAFE FOREVER?
No. These shares may be assumed to be relatively safer than others, provided, the positive
factors that drive the company remain intact. Just like any other company, a blue chip
company can also run into financial troubles and become dead one day. No one can guarantee
you that a blue-chip will remain like that in future also.
May be, some of the future blue chips are hidden in mid caps right now. If you have managed
to spot them right now, you have a chance to become a millioner soon.
SHOULD YOU INVEST IN BLUE-CHIPS?
Of course, Yes! You must have some portion of your investments in Blue-chips. They bring
the required solidity in your portfolio, since they do not fluctuate heavily like mid caps or
small caps.
Investing in blue chip also requires lot money because; typically these shares will cost more.
Hence, there is a necessity to valuate it meticulously.
ETHICAL INVESTING
Ethical investing or socially responsible investing is also known as sustainable, socially
conscious investing – an investment strategy which seeks to maximize both financial return
and social good.
Some investors feel that there are no standards which can be created for ethical investing
since each individual has their own set of values and morals. If no standards are created,
however, then even the most harmful investments can be called “ethical” by some. Anyone
who tries to invest responsibly faces the ethical investment dilemma. This dilemma really
revolves around two simple questions. They are: ‘What is or is not ethical?’ and’Who
decides?’
Fortunately, there are several basic values that most people share:
Avoid Causing Illness, Disease & Death
Avoid Destroying or Damaging the Environment
Avoid Treating Honest People with Disrespect etc..
So, arms makers, polluters, tobacco companies, pesticides manufacturers, companies with
poor management record such as Enron and satyam, oil companies are some examples of
businesses which are generally excluded.
In 2010, the OIC announced the initiation of a stock index that complies with Islamic law’s
ban on alcohol, tobacco and gambling. The Dow Jones Islamic Market World Index is
another example.
Another important trend is strict mechanical criteria for inclusion and exclusion to prevent
market manipulation. Ethical indices have a particular interest in mechanical criteria, seeking
to avoid accusations of ideological bias in selection, and have pioneered techniques for
inclusion and exclusion of stocks based on complex criteria. Another means of mechanical
selection is mark-to-future methods that exploit scenarios produced by multiple analysts
weighted according to probability, to determine which stocks have become too risky to hold
in the index of concern.
Critics of such initiatives argue that many firms satisfy mechanical “ethical criteria”, e.g.
regarding board composition or hiring practices, but fail to perform ethically with respect to
shareholders, e.g. Enron. Indeed, the seeming “seal of approval” of an ethical index may put
investors more at ease, enabling scams. One response to these criticisms is that trust in the
corporate management, index criteria, fund or index manager, and securities regulator, can
never be replaced by mechanical means, so “market transparency” and “disclosure” are the
only long-term-effective paths to fair markets.
ETHICAL INVESTING ENTERS INDIA
There is growing market demand for Socially Responsible Investment (SRI) and more
investors are willing to invest over the longer term in the organisations that contribute
positively to sustainable development, public benefit and environmental protection.ABN
Amro launched India’s first SRI fund (called ABN Amro Sustainable Development Fund).
Global index provider Dow Jones indexes and Dharma Investments, a private investment
company, in Jan, 2008 announced the launch of Dow Jones Dharma index for measuring the
performance of companies selected according to the value systems and principles of Dharmic
religions, especially Hinduism and Buddhism. This index has been put together by
Wallstreet. Stocks will be screened on industry, environmental and corporate governance
parameters before being included in the Dharma indexes. The index constituents would be
reviewed on a quarterly basis.
CONCLUSION
Ethical investing depends on an investor’s views; some may choose to eliminate certain
industries entirely or to over-allocate to industries that meet the individual’s ethical
guidelines. A good way to start with an ethical investing policy is to write down the areas you
want to avoid as well as where you want to see your money invested. From there you can
come up with an asset allocation plan and begin researching individual securities.
What is it?
The term itself gives some hint about its nature. “Mutual” means combined and “Funds”
means money. So, mutual funds are the collective investment contributed by many investors
and managed by professional individual or company (your fund manager). The fund manager
invests this combined money in stocks, bonds, short-term money market instruments, and/or
other securities
What’s the advantage?
You do not have to constantly keep an aye on the stock market. The fund manager
will invest the funds wisely and in profitable companies.
The funds are invested in various companies and that too by the professionals. So, you
are not keeping all your money in one pocket. This minimizes the risk of huge loss
investment loss. Even your Rs 5000 invested is diversified.
You can plan and invest systematically. (That can be done in share markets to, but
SIP process in mutual funds works well)
Unlike companies, mutual funds will not close down. Rather they would be merged
into another successful fund
Normally the NAVs do not show a significant rise or crash
Any Disadvantages?
You don’t have a say in deciding where your money is invested. The fund manager
decides for you and he may be wrong, thus causing a loss
You don’t own shares directly, so you are not eligible for any rights due to the owner.
Dividend is optional and if chosen will affect the value of your investment by the
amount of dividend declared
Scheme philosophy
Whenever a mutual fund scheme is launched there is a specific mandate (philosophy of
investing) based on which investing is done by that mutual fund. This mandate outlines the
debt-equity mix and the type of instruments that the fund would invest.For example, the
prospectus of a mutual fund will always mention the stock universe that fund invests in viz,
large cap, mid cap, small cap, sector funds etc.. or it will have a ‘theme’ for example –
‘energy opportunities fund’ or ‘emerging leaders fund’ etc.. From the name itself,you could
get a basic idea of where your money will be invested. Since Mutual funds offer a whole
bouquet of products , you must first decide on the types of funds that would suit your needs.
Only then should you start selecting the best funds within those categories.
The Only 2 ways to buy stocks – Primary markets & Secondary markets.
Hi there,
So far what I have discussed is about share markets or secondary markets. I haven’t talked
about primary markets in detail. That’s a basic topic which I should have discussed earlier.
So let’s catch up with the topic.
If you recall our story on shares, in scene 3, the couple raises 52 lakhs by selling 40% of their
shares to the public. When they did that, they tapped money from the primary market.
Basically the primary market is the place where the shares are issued for the first time.
INDIAN MARKETS
Trading on the Indian equities segment takes place on all weekdays.
There is No trading on Saturday, Sunday and Published Indian Stock Market Holidays
declared by the Indian Stock Exchange in advance.
The Market Opens at: 09:15 hours and Closes at: 15:30 hours
Pre open trade session will be from 09:00 ~ 09:15 hours
Pre-open trade session is a 15 minute trade session from 9:00AM to 9:15AM on the 50
stocks of NIFTY index .
Only 50 stocks of the NIFTY index can be traded during this time on both NSE and BSE.
Normal trading for all other stocks will start at 9:15AM till 3:30PM.
WHY PRE MARKET SESSION?
In case a major event or announcement comes overnight before market opens, such events are
likely to bring heavy volatility on the next day when the market opens. Special events include
merger and acquisition announcements, open offers, delistings, debt-restructurings, credit-
rating downgrades etc which may have a deep impact on investors wealth. In order to
stabilize this, pre open call auction is conducted to discover the right price and to reduce
volatility.
BREAK-UP OF 15 MINUTES
The 15 minutes of pre open session is broken into 8 + 4 + 3.
The first 8 minutes: During this session investors can place/ modify /cancel orders on the
basis of which the exchanges would determine the rates at which trading would happen.
Orders are not accepted after this initial 8 minutes.
Limit orders will get priority over market orders at the time of execution of trades .All orders
shall be disclosed in full quantity, i.e. orders where revealed quantity function is enabled, will
not be allowed during the pre-open session
In the next four minutes, orders are matched, executable price is discovered and trades are
confirmed. The next 3 minutes is just a buffer period for transmission from pre-market
session to normal market session.
PRICE DISCOVERY
The equilibrium price shall be the price at which the maximum volume is executable. That is,
the price at which there are maximum number of buy orders and sell orders.
In case of more than one price meets the said criteria, the equilibrium price shall be the price
at which there is minimum order imbalance quantity (unmatched qty).
Further, in case more than one price has same minimum order imbalance quantity, the
equilibrium price shall be the price closest to previous day’s closing price. In case the
previous day’s closing price is the mid-value of a pair of prices which are closest to it, then
the previous day’s closing price itself shall be taken as the equilibrium price. In case of
corporate action, previous day’s closing price shall be the adjustable closing price or the base
price.
If the price is not discovered in pre-open session then the orders entered in the pre-
open session will be shifted to the order book of the normal market following time priority.
The price of the first trade in the normal market shall be the opening price.
Price band of 20% shall be applicable on the securities during pre-open session.
In case the index breaches the prescribed threshold limit upon the closure of pre-open
session, the procedure as prescribed in SEBI Circular Ref. No.SMDRPD/Policy/Cir-37 /2001
dated June 28, 2001 shall be applicable from the time continuous normal market opens.
what the circular says is about circuit limits. In case of 20% movement in the index,
trading will be halted for reminder of the day.
There is also a 15 minute video on this topic by Dr. Sayee Srinivasan , Head Product
Strategy, at BSE. Watch it here.
REGIONAL STOCK MARKETS
Apart from the BSE and NSE, there are 21 regional exchanges which open at normal hours
9:15 to 15:30 hrs.
WORLD MARKET TIMINGS
Apart from this, global trends in stocks also affect the Indian market when it opens. Here’s a
list of opening time of stock markets around the world.
WORLD STOCK MARKET TIME ACCORDING TO IST.
Shanghai stock exchange – Opens at 7.30 Am
Hong Kong stock exchange - Opens at 7.55 Am
Tokyo stock exchange - Opens at 5.50 Am
South Korea – Opens at 5.50 Am
NYSE, New York – Opens at 8.30 Pm
NASDAQ – Opens at 8.30 Pm
BOVESPA , Brazil – Opens at 7 Pm
Bogota, Columbia – Opens at 7 Pm
Dow Jones – Opens at 7.30 Pm
You can also get the market timing of any other stock or commodity exchange
at marketclocks.com