To invest in mutual funds, you need to first understand what they are, and how they work.
Even more basic is your grasp of stocks and bonds. Very quickly, stocks stand for shares of ownership in a public company, and bonds are money lent to the government or company, on which you receive interest. These are the two most common forms of investment, owned and loaned (real estate and precious metals being examples of others), but we are presently concerned with these instruments, since most mutual funds invest in stocks and/or bonds.
Simply, mutual funds act as intermediaries and facilitate investments in various securities (stocks and bonds). The logical question here would be: why do I need a mutual fund? Why can't I just invest directly?
The mutual fund advantage
Investing in a mutual fund allows you to minimise risk and maximise returns, because it acts as a middle man for a group of investors with a shared and predefined investment objective. If your main objective is security in investment but you don't know how to begin, a mutual fund is one way to go.
Typically, a fund manager will maintain the fund, and since you are one shareholder in the fund, you have the added advantage of easy investment, and lower trading costs.
Who are these fund managers?
Asset management companies (AMCs) approved by the Securities and Exchange Board of India (Sebi) manage the funds by making investments in various types of securities. This means that all recognised AMCs are monitored by higher authorities and stringent regulations, and funds are managed by professionals who have the necessary expertise.
How is your risk minimised?
Typically, investing in a mutual fund means investing in more than one stock. Some fund managers will diversify and spread your investment further by buying a mosaic of stocks and bonds. Investing in a large number of assets, or diversification, means that a loss incurred on one investment is minimised by gains in others.
How are trading costs reduced?
Since the AMC buys and sells large amounts of securities at a time, transaction costs are reduced, and the benefit is extended to the investor, because the average cost of the unit is lowered.
There are three ways in which you will see returns on your investment in a mutual fund:
Through dividends on stocks and interest on bonds;
Through capital gains, if the fund sells securities that have increased in price and the fund distributes these gains; and
By selling your shares when the holdings increase in price.
Mutual funds can either be open-ended or close-ended in nature. With open-ended funds, you can either enter or exit the fund any time during the scheme period, by buying/ selling fund units -- this means a high degree of liquidity. Close-ended funds, as the term implies, means that an exit is possible only when the scheme period is over.
Mutual fund schemes in India are varied and cater to a wide range of requirements and profiles, based on financial position, tolerance to risk, and expectations of returns. Each mutual fund has a specific stated objective.
The fund's objective is laid out in the fund's prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance.
High on risk and high on return are Equity funds. Also known as Growth Schemes, the aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.
They may be further classified into Diversified Equity Funds, Mid-Cap Funds, Sector Specific Funds and Tax Savings Funds (ELSS).
Debt funds, or Income Schemes, invest in debt instruments, typically issued by the government, private companies, banks and other financial institutions, and promise low risk and a stable income.
These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Further classification includes Gilt Funds, Income Funds, MIPs, Short Term Plans and Liquid Funds.
Balanced funds are a mix of both equity and debt funds. They invest in both equities and fixed income securities, providing both growth and stability.
Money Market Schemes promise high liquidity, preservation of capital and a moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
Tax-saving schemes offer tax rebates to the investors under tax laws. For example, under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.
Index schemes track and emulate the performance of a particular index such as the BSE Sensex. The stocks in these portfolios will mirror those in the Index, as will the percentage of each stock retained. Returns will therefore mirror the movement of the Index.
Finally, a further benefit from investing mutual funds is the 100 per cent income tax exemption on all mutual fund dividends. For Equity Funds, short-term capital gains are taxed at 15 per cent. Long-term capital gains are not applicable.
For Debt Funds, short-term capital gains are taxed as per the slab rates applicable to you. Open-ended funds with equity exposure of more than 65 per cent are exempt from the payment of dividend tax for a period of three years from 1999-2000.
Thursday, May 21, 2009
How investing in stocks can make you rich
Stocks are volatile, which is another way of saying they're likely to experience wide swings in value. However, over long periods of time, there's good reason and evidence to believe stocks also will appreciate dramatically faster than any other type of asset. That makes it easier to attain your long-term wealth goals.
When you buy a share, or stock, you are buying a piece of the issuing company. Admittedly, it's probably a small piece, but that share you purchase gives you the right to participate in the company's wealth (or fiscal decline) and vote on matters of some importance - directors, company auditors, and some shifts in corporate policy.
In some cases, you are also entitled to dividends - payments of cash or stock to shareholders. Some companies also provide their shareholders with perquisites, such as tickets to the company's theme parks or discounts on its merchandise.
Why share prices go up
Because companies tend to grow and prosper over time - and because a share of stock allows you to participate in the prosperity - stock prices, in the aggregate, tend to appreciate over long periods of time. However, individually, some companies prosper; others fail.
If you buy a share in a loser, you could lose all, or a significant portion, of your initial investment. In other words, when you invest in stocks, you risk losing your initial investment, but because you are taking a bigger risk, you get the opportunity to earn far bigger rewards.
How big a reward? In the case of the US, for example, the Chicago-based research company Ibbotson Associates has tracked the performance of US stocks from 1926 onwards. The period till the turn of the century included the Great Depression, the New Deal, World War II, the Korean conflict, the Vietnam War, the Kennedy assassination, Reaganomics, and the Gulf War, not to mention the lunar landing, the break-up of Ma Bell, the Watergate scandal, and the dismantling of the Iron Curtain.
In other words, it is a fairly diverse period that has had its share of ups and downs, just like any period in history. During that time, the average annual return on small-company US stocks was about 12.4 per cent. The average annual return on big-company stocks was 11.2 per cent. Over the same period, inflation rose 3.1 per cent per year, and the return on U.S. Treasury bills was 3.77 per cent.
To put it another way: If you had a diversified portfolio of large-company stocks during that period, the value of your investment portfolio rose 8.1 percentage points faster than the rate of inflation. For every $100 you put in the market, you hiked your buying power by $8.10 each year. At the end of twenty years, your real (inflation-adjusted) buying power increased fivefold, to $503 from $100, without any additional payments from you.
Although investing is as much an art as a science, it's reasonable to expect that future investment returns will mirror historic returns over long periods. In other words, it's reasonable to assume that stocks will continue to appreciate faster than the rate of inflation and other types of traditional investments.
The downside: it is also reasonable to assume that stocks could repeat their short-term historic performance over shorter periods, too. And that's been far less illustrious than the long-term performance. To be specific: the market crash of 1929 so depressed stock prices that investors who put $100 in the market then saw the value of their securities fall to less than $20 at the market's nadir in 1932.
It took roughly eight years before securities prices rose back to ground zero, where $ 100 invested in 1929 was worth $100 again. And then the market took another sickening slide, from which it didn't recover until after World War II had ended. From start to finish, it was a full fifteen years of pain for stock market investors.
The market also took a sharp, decade-long dive in 1969. And it experienced short-term 'crashes' in 1987, 1989, and 1990. But its performance in 1995 was enough to make an investor beam. Stock values as measured by the Standard and Poor's 500 index were up more than 37 per cent.
The following years till 2000 were almost as impressive. Big-company stocks posted a 23 per cent gain in 1996, a 33 per cent gain in 1997, a 28 per cent gain in 1998, and a 21 percent gain in 1999.
Incidentally, although investors in small companies have done better than investors in large companies over the long haul (average annual returns of 12.4 per cent versus 11.2 per cent, respectively), at various points in time, small-company stocks do worse than big-company stocks. They fall farther and faster, and they stay depressed longer.
How to deal with price yo-yos
These heady climbs and sickening slumps are called volatility. When an investment is as volatile as the stock market, it is unwise to invest unless you have a fairly long time horizon that allows you to wait out the price swings and go for the long-term price appreciation.
How long is a 'fairly long' time horizon? That depends on you and why you are investing. Let's say you want to buy a house in five years, and you're trying to determine where to invest the down-payment money.
The stock market would be a good place for all or part of that money if you wouldn't be crushed if your home-buying plans had to be put off because of a market slump that depressed the value of your investment portfolio and thus reduced the amount you had saved for the down payment.
What if you would be crushed if you couldn't buy the home as planned? Then put the down payment money in bonds that mature (or pay back their principal) at the same time as your plans do.
Stocks are also ideal to have in your retirement portfolio. The younger and farther from retirement you are, the more stocks you can handle. And they're a good choice for college funds for young children.
However, if you are investing in individual stocks rather than mutual funds, you must diversify your portfolio by buying stocks in several different companies that do business in several different industries. That ensures that your net worth won't crash if one industry, whether it's oil, technology, or retailing, hits a slump.
Experts suggest you own shares in at least eight to ten different companies. Ideally, those companies should be operating in substantially different industries.
Do it the equity mutual fund way
Mutual funds are investment companies that pool the money of many investors and buy securities in bulk. The securities that a fund buys are determined by the fund's investment objectives. These investment objectives are spelled out in the prospectus and by the fund manager, who makes the investment decisions.
So-called equity funds - also known as growth or aggressive growth funds - buy stock in companies. When you buy a share in an equity fund, you're actually buying an interest in all of the different stocks held by that fund.
That gives you the benefit of broad diversification, which reduces the risk that your investment portfolio will be savaged by a single bad stock. In essence, if you buy the right mutual fund, you may not need to diversify the stock portion of your portfolio further. One fund could do it all.
There are lots of other benefits and tricks to buying mutual funds. However, let it suffice to say that investing in equity mutual funds is an alternative to investing in individual stocks. It is a particularly good alternative for those who don't want to spend a lot of time picking individual shares or for those who are starting out and don't have a lot of money.
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When you buy a share, or stock, you are buying a piece of the issuing company. Admittedly, it's probably a small piece, but that share you purchase gives you the right to participate in the company's wealth (or fiscal decline) and vote on matters of some importance - directors, company auditors, and some shifts in corporate policy.
In some cases, you are also entitled to dividends - payments of cash or stock to shareholders. Some companies also provide their shareholders with perquisites, such as tickets to the company's theme parks or discounts on its merchandise.
Why share prices go up
Because companies tend to grow and prosper over time - and because a share of stock allows you to participate in the prosperity - stock prices, in the aggregate, tend to appreciate over long periods of time. However, individually, some companies prosper; others fail.
If you buy a share in a loser, you could lose all, or a significant portion, of your initial investment. In other words, when you invest in stocks, you risk losing your initial investment, but because you are taking a bigger risk, you get the opportunity to earn far bigger rewards.
How big a reward? In the case of the US, for example, the Chicago-based research company Ibbotson Associates has tracked the performance of US stocks from 1926 onwards. The period till the turn of the century included the Great Depression, the New Deal, World War II, the Korean conflict, the Vietnam War, the Kennedy assassination, Reaganomics, and the Gulf War, not to mention the lunar landing, the break-up of Ma Bell, the Watergate scandal, and the dismantling of the Iron Curtain.
In other words, it is a fairly diverse period that has had its share of ups and downs, just like any period in history. During that time, the average annual return on small-company US stocks was about 12.4 per cent. The average annual return on big-company stocks was 11.2 per cent. Over the same period, inflation rose 3.1 per cent per year, and the return on U.S. Treasury bills was 3.77 per cent.
To put it another way: If you had a diversified portfolio of large-company stocks during that period, the value of your investment portfolio rose 8.1 percentage points faster than the rate of inflation. For every $100 you put in the market, you hiked your buying power by $8.10 each year. At the end of twenty years, your real (inflation-adjusted) buying power increased fivefold, to $503 from $100, without any additional payments from you.
Although investing is as much an art as a science, it's reasonable to expect that future investment returns will mirror historic returns over long periods. In other words, it's reasonable to assume that stocks will continue to appreciate faster than the rate of inflation and other types of traditional investments.
The downside: it is also reasonable to assume that stocks could repeat their short-term historic performance over shorter periods, too. And that's been far less illustrious than the long-term performance. To be specific: the market crash of 1929 so depressed stock prices that investors who put $100 in the market then saw the value of their securities fall to less than $20 at the market's nadir in 1932.
It took roughly eight years before securities prices rose back to ground zero, where $ 100 invested in 1929 was worth $100 again. And then the market took another sickening slide, from which it didn't recover until after World War II had ended. From start to finish, it was a full fifteen years of pain for stock market investors.
The market also took a sharp, decade-long dive in 1969. And it experienced short-term 'crashes' in 1987, 1989, and 1990. But its performance in 1995 was enough to make an investor beam. Stock values as measured by the Standard and Poor's 500 index were up more than 37 per cent.
The following years till 2000 were almost as impressive. Big-company stocks posted a 23 per cent gain in 1996, a 33 per cent gain in 1997, a 28 per cent gain in 1998, and a 21 percent gain in 1999.
Incidentally, although investors in small companies have done better than investors in large companies over the long haul (average annual returns of 12.4 per cent versus 11.2 per cent, respectively), at various points in time, small-company stocks do worse than big-company stocks. They fall farther and faster, and they stay depressed longer.
How to deal with price yo-yos
These heady climbs and sickening slumps are called volatility. When an investment is as volatile as the stock market, it is unwise to invest unless you have a fairly long time horizon that allows you to wait out the price swings and go for the long-term price appreciation.
How long is a 'fairly long' time horizon? That depends on you and why you are investing. Let's say you want to buy a house in five years, and you're trying to determine where to invest the down-payment money.
The stock market would be a good place for all or part of that money if you wouldn't be crushed if your home-buying plans had to be put off because of a market slump that depressed the value of your investment portfolio and thus reduced the amount you had saved for the down payment.
What if you would be crushed if you couldn't buy the home as planned? Then put the down payment money in bonds that mature (or pay back their principal) at the same time as your plans do.
Stocks are also ideal to have in your retirement portfolio. The younger and farther from retirement you are, the more stocks you can handle. And they're a good choice for college funds for young children.
However, if you are investing in individual stocks rather than mutual funds, you must diversify your portfolio by buying stocks in several different companies that do business in several different industries. That ensures that your net worth won't crash if one industry, whether it's oil, technology, or retailing, hits a slump.
Experts suggest you own shares in at least eight to ten different companies. Ideally, those companies should be operating in substantially different industries.
Do it the equity mutual fund way
Mutual funds are investment companies that pool the money of many investors and buy securities in bulk. The securities that a fund buys are determined by the fund's investment objectives. These investment objectives are spelled out in the prospectus and by the fund manager, who makes the investment decisions.
So-called equity funds - also known as growth or aggressive growth funds - buy stock in companies. When you buy a share in an equity fund, you're actually buying an interest in all of the different stocks held by that fund.
That gives you the benefit of broad diversification, which reduces the risk that your investment portfolio will be savaged by a single bad stock. In essence, if you buy the right mutual fund, you may not need to diversify the stock portion of your portfolio further. One fund could do it all.
There are lots of other benefits and tricks to buying mutual funds. However, let it suffice to say that investing in equity mutual funds is an alternative to investing in individual stocks. It is a particularly good alternative for those who don't want to spend a lot of time picking individual shares or for those who are starting out and don't have a lot of money.
Powered by : VisionbookIndia
Wednesday, May 20, 2009
Stock Market Investment Guide
From the level of 14,000 in Sept 2008 the Indian markets fell to a level of 8,000 in October 2008 because Lehman Brothers of USA went bust. Between October 2008 and February 2009, the Indian market bounced around 8,000 and 10,000 levels three times. By March 2009 the Indian market broke through the 10,000 levels and was 12,137 before the election results were announced. i think we are in a new range of 14,000 to 16,000 till budget day - sometime in July. If the budget is good the market will head towards 18,000... if the budget is not so exciting the market will head towards 14,000. I do not believe the market can head towards the 10,000 to 12,000 range till there are some MAJOR political and social shocks.
My concern over companies like DLF is they have huge land banks bought at prices which may not be publicly visible and the estimated selling price of the finished, constructed product may not be what they initially thought. Basically, the value of assets may not be as high as investors expect and the profitability from those assets may not be as great as investors expect. Not my preferred sector.
There are many ways to bring your hard earned money from all the corruption and deals that you have done. One easy way is to tell your Swiss bank to remit the money to your foreign bank account in India. Of course the problem with that is that you will attract all the smart smooth-talking private client wealth managers and they will reach your house before your money from your secret numbered Swiss bank acocunt gets to you. Which means that before you can even touch your money it will have vanished in fees and bad advice. The other way of bringing your money back to India is to tell your Swiss banker to buy you P-Notes and use your hard earned money to punt in the Indian stock markets. The risk there is that you will end up buying stocks of your friends who also have Swiss bank accounts and knowing how intelligent they are (just like you) they will fund ways to use your money to siphon it into their own Swiss bank accounts. By the way, pl do not invest in Quantum Long Term Equity Fund because you will fail our KYC norms. Best wishes.
ICICI is a fairly aggressive bank that has, in the past built a business based on maximizing market share. That scares me. Bankers are not supposed to go around the company boasting how many accounts and clients they have. A banker's job is to ensure that they have collected money which they had lent out. I am not sure whether ICICI Bank [Get Quote] is reformed now - like a teenage child that matures and gets more steady. I would prefer putting my money in a relatively more stable financial company like HDFC.
Nothing is safe. There is risk in everything one does in life. Buying equity shares - either individual stocks directly based on equitymaster research or investing in Quantum Long Term Equity Fund - is also risky. They key is to understand the risk and to "price" the risk correctly when trying to estimate your potential gain or potential loss from such an investment. But yes it is a good time to buy into the stock market.
The real estate market is in an excess built and over capacity mode across the country. Many people with great political connections used foreign money to buy raw land; used their connections to convert this useless land into valuable zoned land. They then sold this at a huge profit. They used these profits to buy more land at higher prices and hoped to play the same game. However, in most cities their there is too much construction and excess supply of apartments, homes and office space at available prices which people cannot afford to buy or rent. These real estate companies have used money from the public banks to bail them out of their problems. While the banks - under guidance from the government - can give more loans to the developers to keep them afloat, consumers still cannot afford the high priced product. Therefore real estate developers will have to sell their available square feet at lower prices (there is no shortage of buyers at lower prices) and this reduction in selling price will hurt their profit margin. This is the logic why I do not really like real estate stocks. However, the money power of real estate developers is very tempting to most politicians and this money power may bail out these stuck real estate developers and their battered share prices.
My concern over companies like DLF is they have huge land banks bought at prices which may not be publicly visible and the estimated selling price of the finished, constructed product may not be what they initially thought. Basically, the value of assets may not be as high as investors expect and the profitability from those assets may not be as great as investors expect. Not my preferred sector.
There are many ways to bring your hard earned money from all the corruption and deals that you have done. One easy way is to tell your Swiss bank to remit the money to your foreign bank account in India. Of course the problem with that is that you will attract all the smart smooth-talking private client wealth managers and they will reach your house before your money from your secret numbered Swiss bank acocunt gets to you. Which means that before you can even touch your money it will have vanished in fees and bad advice. The other way of bringing your money back to India is to tell your Swiss banker to buy you P-Notes and use your hard earned money to punt in the Indian stock markets. The risk there is that you will end up buying stocks of your friends who also have Swiss bank accounts and knowing how intelligent they are (just like you) they will fund ways to use your money to siphon it into their own Swiss bank accounts. By the way, pl do not invest in Quantum Long Term Equity Fund because you will fail our KYC norms. Best wishes.
ICICI is a fairly aggressive bank that has, in the past built a business based on maximizing market share. That scares me. Bankers are not supposed to go around the company boasting how many accounts and clients they have. A banker's job is to ensure that they have collected money which they had lent out. I am not sure whether ICICI Bank [Get Quote] is reformed now - like a teenage child that matures and gets more steady. I would prefer putting my money in a relatively more stable financial company like HDFC.
Nothing is safe. There is risk in everything one does in life. Buying equity shares - either individual stocks directly based on equitymaster research or investing in Quantum Long Term Equity Fund - is also risky. They key is to understand the risk and to "price" the risk correctly when trying to estimate your potential gain or potential loss from such an investment. But yes it is a good time to buy into the stock market.
The real estate market is in an excess built and over capacity mode across the country. Many people with great political connections used foreign money to buy raw land; used their connections to convert this useless land into valuable zoned land. They then sold this at a huge profit. They used these profits to buy more land at higher prices and hoped to play the same game. However, in most cities their there is too much construction and excess supply of apartments, homes and office space at available prices which people cannot afford to buy or rent. These real estate companies have used money from the public banks to bail them out of their problems. While the banks - under guidance from the government - can give more loans to the developers to keep them afloat, consumers still cannot afford the high priced product. Therefore real estate developers will have to sell their available square feet at lower prices (there is no shortage of buyers at lower prices) and this reduction in selling price will hurt their profit margin. This is the logic why I do not really like real estate stocks. However, the money power of real estate developers is very tempting to most politicians and this money power may bail out these stuck real estate developers and their battered share prices.
Wednesday, May 13, 2009
10 don'ts for smart stock market investing
This is a great check list of 10 habits, impulses and tendencies you steer clear of in order to keep your investments healthy.
1. Don't be arrogant
The market teaches humility and that is how you must approach it. As soon as you believe you know why the market acts the way it does, you will be proven wrong. Arrogance can kill a portfolio. You must be able to admit defeat and preserve enough capital to fight again.
Following point and figure charts, which depict the battle between supply and demand, helps keep you out of the 'I know why' attitude of investing.
2. Don't wait until you feel comfortable to buy when a sector reverses up
Falling into the waiting trap is a great way to ensure that you buy the stock at a higher price. When sectors reverse up from oversold levels, it is often when the news is the most dire.
Conventional wisdom would suggest this is the last place in the world you would want to invest. Buying at this time is gut wrenching, but to be successful you must act with complete confidence.
As the sector moves higher, the comfort level increases. If you use comfort level as your guidance, however, you will for sure leave a lot of money on the table, or worse, buy as the sector peaks.
3. Don't be afraid to buy strong stocks
Don't avoid stocks just because they have gone up. Doing so will keep you out of the long-term winners. In the United States, for example, this mentality would have kept you out of General Electric, which was up 188 per cent between January 1995 and December 1997 only to see it rally another 96 per cent by the end of 2000. It also would have kept you out of Cisco, which was up 376 per cent between January 1995 and December 1997, and then it moved up another 312 per cent by the end of 2000. These are only two examples, but there are many others.
More important than how much the stock is up is its supply and demand relationship. By evaluating the point and figure chart, you can gain insight into this relationship and whether or not the stock is likely to move higher. Stocks that double can easily double again. Don't miss out on these great opportunities.
4. Don't sell a stock simply because it has gone up
Doing this cuts profits short. Buying a stock right is only half the battle. You have to be able to sell it right to win the war. Just because a stock has rallied 30 per cent or 50 per cent, don't be tempted to take your trade off for that reason alone.
Consider trimming the position and leave part on the table to continue in the uptrend. Let profits run.
5. Don't buy stocks in extended sectors because 'it's different this time'
On the surface, the stock market appears different all the time. The leadership changes: in come new stocks into the Nifty 50, and then out they go. Small-cap stocks outperform for a while, then it's back to the large caps.
However, the underlying forces that drive the stock market are always the same. They are true and time-tested and do not change. They are supply and demand. That's why buying sectors that are extended (overbought) will not be different this time.
6. Don't try to bottom fish a stock in a downtrend
'The trend is your friend' is a true statement. So don't go against it without some inkling that the trend has changed.
Bottom fishing a stock in a downtrend is the opposite of being afraid to buy strong stocks. Do not buy a stock just because it fell sharply. You want to buy a stock that is likely to move higher, not one that is not likely to fall further.
At a minimum, wait for the stock to show a sign that demand is back in control and suggesting higher prices. That may be a simple buy signal on the chart or a reversal back to the upside after holding an area of support. Also remember why you initiated the position. Be careful not to let a trade turn into something else.
7. Don't buy a stock simply because it is a 'good value'
These days, value is in the eyes of the holder, and therefore it is a subjective term at best. If a stock has become a good value, ask why. This is important, because a stock can stay a good value by not moving for the next decade, or worse, become a better value by dropping another 20 per cent.
The true value of a stock is determined by its capital appreciation potential, not numbers on a balance sheet. The basis for capital appreciation lies in the supply and demand relationship of the stock. Appreciation can occur only if demand grows stronger for the stock and buyers are willing to pay a higher price. Watch the point and figure charts to determine if a stock is likely to move higher in price and become a good value.
8. Don't hold on to losing stocks and hope they come back
Hope is eternal, but your portfolio is not. Holding on to a losing stock is the best way to let your losses run. Combine this mistake with selling a stock that has gone up and you can create a portfolio of dogs.
When buying stocks, there will always be some losers: Count on it. However, how you manage that loss often determines the success or failure of the overall portfolio. Keep losses small so that you have the capital to play again. Hanging on to losing positions, hoping that they will come back, can be deadly.
A $50 stock that is stopped out at $40 is a 20 per cent loss. It's a bad trade, but it is manageable. In order to recoup that loss you would have to make 25 per cent on a $40 stock. What if you held on to that $50 stock, hoping that strong earnings would come in and turn it around, but instead it continued lower to $25?
Finally, you decide to exit, but now it takes a 100 per cent return from a $25 stock just to get back to even. Those results are hard to find, and if you are able to find one, you don't want to waste it on getting back to even
Learn to recognize your losing positions for what they are. If a stock cannot trade above its support line or is not outperforming the averages, find one that is and swap it.
9. Don't pursue perfection
There are two types of mistakes to discuss here. The first is the constant belief that there is a better system out there, and you need to find it.
Using a new system to invest each week will not get you to your goal. You will become good at nothing and moderate to bad at everything. To be good requires that you stay focused, disciplined, and skilled at whatever methodology you choose.
You need to have the strength of conviction in your chosen discipline to learn from mistakes rather than to run away from them and find another methodology. There is no Holy Grail in investing.
The second mistake is to wait for the perfect trade. There is no such thing. If you only buy stocks that have all positive attributes you will maintain a portfolio of cash. Rarely, if ever, do you find a stock that has all the pluses on its side.
Look for the big ones like relative strength, trend, and signal. Also remember that 80 per cent of the cause of price movement in a stock is based on the market and sector. You are better off being approximately right than precisely wrong.
10. Don't do anything based on a magazine cover
Following the hot news that appears on magazine covers is a shortcut to the poor-house. Why should you follow the advice of someone who has just moved from the society pages to the business section?
1. Don't be arrogant
The market teaches humility and that is how you must approach it. As soon as you believe you know why the market acts the way it does, you will be proven wrong. Arrogance can kill a portfolio. You must be able to admit defeat and preserve enough capital to fight again.
Following point and figure charts, which depict the battle between supply and demand, helps keep you out of the 'I know why' attitude of investing.
2. Don't wait until you feel comfortable to buy when a sector reverses up
Falling into the waiting trap is a great way to ensure that you buy the stock at a higher price. When sectors reverse up from oversold levels, it is often when the news is the most dire.
Conventional wisdom would suggest this is the last place in the world you would want to invest. Buying at this time is gut wrenching, but to be successful you must act with complete confidence.
As the sector moves higher, the comfort level increases. If you use comfort level as your guidance, however, you will for sure leave a lot of money on the table, or worse, buy as the sector peaks.
3. Don't be afraid to buy strong stocks
Don't avoid stocks just because they have gone up. Doing so will keep you out of the long-term winners. In the United States, for example, this mentality would have kept you out of General Electric, which was up 188 per cent between January 1995 and December 1997 only to see it rally another 96 per cent by the end of 2000. It also would have kept you out of Cisco, which was up 376 per cent between January 1995 and December 1997, and then it moved up another 312 per cent by the end of 2000. These are only two examples, but there are many others.
More important than how much the stock is up is its supply and demand relationship. By evaluating the point and figure chart, you can gain insight into this relationship and whether or not the stock is likely to move higher. Stocks that double can easily double again. Don't miss out on these great opportunities.
4. Don't sell a stock simply because it has gone up
Doing this cuts profits short. Buying a stock right is only half the battle. You have to be able to sell it right to win the war. Just because a stock has rallied 30 per cent or 50 per cent, don't be tempted to take your trade off for that reason alone.
Consider trimming the position and leave part on the table to continue in the uptrend. Let profits run.
5. Don't buy stocks in extended sectors because 'it's different this time'
On the surface, the stock market appears different all the time. The leadership changes: in come new stocks into the Nifty 50, and then out they go. Small-cap stocks outperform for a while, then it's back to the large caps.
However, the underlying forces that drive the stock market are always the same. They are true and time-tested and do not change. They are supply and demand. That's why buying sectors that are extended (overbought) will not be different this time.
6. Don't try to bottom fish a stock in a downtrend
'The trend is your friend' is a true statement. So don't go against it without some inkling that the trend has changed.
Bottom fishing a stock in a downtrend is the opposite of being afraid to buy strong stocks. Do not buy a stock just because it fell sharply. You want to buy a stock that is likely to move higher, not one that is not likely to fall further.
At a minimum, wait for the stock to show a sign that demand is back in control and suggesting higher prices. That may be a simple buy signal on the chart or a reversal back to the upside after holding an area of support. Also remember why you initiated the position. Be careful not to let a trade turn into something else.
7. Don't buy a stock simply because it is a 'good value'
These days, value is in the eyes of the holder, and therefore it is a subjective term at best. If a stock has become a good value, ask why. This is important, because a stock can stay a good value by not moving for the next decade, or worse, become a better value by dropping another 20 per cent.
The true value of a stock is determined by its capital appreciation potential, not numbers on a balance sheet. The basis for capital appreciation lies in the supply and demand relationship of the stock. Appreciation can occur only if demand grows stronger for the stock and buyers are willing to pay a higher price. Watch the point and figure charts to determine if a stock is likely to move higher in price and become a good value.
8. Don't hold on to losing stocks and hope they come back
Hope is eternal, but your portfolio is not. Holding on to a losing stock is the best way to let your losses run. Combine this mistake with selling a stock that has gone up and you can create a portfolio of dogs.
When buying stocks, there will always be some losers: Count on it. However, how you manage that loss often determines the success or failure of the overall portfolio. Keep losses small so that you have the capital to play again. Hanging on to losing positions, hoping that they will come back, can be deadly.
A $50 stock that is stopped out at $40 is a 20 per cent loss. It's a bad trade, but it is manageable. In order to recoup that loss you would have to make 25 per cent on a $40 stock. What if you held on to that $50 stock, hoping that strong earnings would come in and turn it around, but instead it continued lower to $25?
Finally, you decide to exit, but now it takes a 100 per cent return from a $25 stock just to get back to even. Those results are hard to find, and if you are able to find one, you don't want to waste it on getting back to even
Learn to recognize your losing positions for what they are. If a stock cannot trade above its support line or is not outperforming the averages, find one that is and swap it.
9. Don't pursue perfection
There are two types of mistakes to discuss here. The first is the constant belief that there is a better system out there, and you need to find it.
Using a new system to invest each week will not get you to your goal. You will become good at nothing and moderate to bad at everything. To be good requires that you stay focused, disciplined, and skilled at whatever methodology you choose.
You need to have the strength of conviction in your chosen discipline to learn from mistakes rather than to run away from them and find another methodology. There is no Holy Grail in investing.
The second mistake is to wait for the perfect trade. There is no such thing. If you only buy stocks that have all positive attributes you will maintain a portfolio of cash. Rarely, if ever, do you find a stock that has all the pluses on its side.
Look for the big ones like relative strength, trend, and signal. Also remember that 80 per cent of the cause of price movement in a stock is based on the market and sector. You are better off being approximately right than precisely wrong.
10. Don't do anything based on a magazine cover
Following the hot news that appears on magazine covers is a shortcut to the poor-house. Why should you follow the advice of someone who has just moved from the society pages to the business section?
Tuesday, May 12, 2009
Fixed deposits: Are they for you?
With the stock markets in a downward spiral, it comes as no surprise that few want to invest in equity markets. This crash in the share prices, however, has proved to be a boon for banks, whose fixed deposits were ignored by the investors in favour of equities for higher returns.
These banks came out with various FDs, offering attractive rates. This has tempted many investors to opt for FDs. However, every investor in a fixed deposit must remember that FDs are also an investment option and as with any investment option, they too have their own pros and cons.
So be prepared to get the complete overview of this investment option before opting for it.
What is an FD?
An FD, or fixed deposit, is also a term deposit. It is similar to a savings account, except that your money is locked in for a certain period, also called 'term'. Hence the name term deposits.
However, while you cannot access your money, the bank rewards you by giving you a higher interest rate than it gives you on your savings account.
Is it the best investment option?
Remember, diversification is the name of the game when it comes to investment. Just putting your money in FD will not help you get the best overall returns.
You also need exposure to equities to get the growth in capital and beating inflation in the long run. Hence, it is advisable to invest into both equities and debt.
It will help you get higher returns from equities, while enjoying the capital safety offered by FD.
What are the advantages of an FD?
An FD has various benefits that make it an ideal investment option for those looking for capital safety.
Low risk: An FD is comparatively lot safer than equities, as your deposit up to Rs 1 lakh (Rs 100,000) is insured by Deposit Insurance Credit Guarantee Corporation. So, in case the bank fails, your money is still secured. This makes FD an ideal investment option for senior citizens.
Regular income: Unlike dividends given by the companies, the interest earned on an FD is fixed, as the rate of interest for the particular term is constant. Even if the rates increase or decrease subsequent to your opening an FD, your rate of interest will not be affected.
So you are guaranteed a regular income, making it an ideal investment option for those looking for regular income.
Availability of loan: Are you looking for a secured loan? Then you can avail of a loan by offering your FD as collateral. While your FD continues to earn interest, the rate of interest for the loan will be a few notches higher than that of the FD.
Hence this type of loan works out cheaper than any other type of loan, since the bank has the assurance of claiming your deposit if you fail to repay the loan.
Saves taxes: For those looking for an efficient tax saving investment option, FD is a good option. While ELSS (Equity-Linked Savings Scheme) has the shortest lock-in period of three years, your capital is not secured.
On the other hand, PPF (Public Provident Fund) offers capital security, it has a lock-in period of 15 years.
The tax-saving FD offers the best of both the world, as your money is locked for just five years, while your capital is safe.
Are there any drawbacks?
While an FD does have a lot of pros, it does have its share of cons. Here are some of them:
Erosion of worth of capital due to inflation: Inflation means a loss in the purchasing power of the money. When inflation goes up, the purchasing power of money goes down. As the interest rates on FDs are lower than the rate of inflation, the purchasing power of your deposited money does go down. As a result, you end up eroding the worth of your capital.
Tax liability: Except for the tax-saving FDs, the interest earned is taxed. So you end up incurring tax liability. You are particularly affected if you are a high income earner.
What should I do?
The best option for you is to invest as per your goals. If you have any short-term goals -- i.e. goals that have to be met within three years, like buying a car, or going on a holiday -- then the FD is your best bet.
On the other hand, for long-term goals like retirement planning or your child's education, go for equities.
These banks came out with various FDs, offering attractive rates. This has tempted many investors to opt for FDs. However, every investor in a fixed deposit must remember that FDs are also an investment option and as with any investment option, they too have their own pros and cons.
So be prepared to get the complete overview of this investment option before opting for it.
What is an FD?
An FD, or fixed deposit, is also a term deposit. It is similar to a savings account, except that your money is locked in for a certain period, also called 'term'. Hence the name term deposits.
However, while you cannot access your money, the bank rewards you by giving you a higher interest rate than it gives you on your savings account.
Is it the best investment option?
Remember, diversification is the name of the game when it comes to investment. Just putting your money in FD will not help you get the best overall returns.
You also need exposure to equities to get the growth in capital and beating inflation in the long run. Hence, it is advisable to invest into both equities and debt.
It will help you get higher returns from equities, while enjoying the capital safety offered by FD.
What are the advantages of an FD?
An FD has various benefits that make it an ideal investment option for those looking for capital safety.
Low risk: An FD is comparatively lot safer than equities, as your deposit up to Rs 1 lakh (Rs 100,000) is insured by Deposit Insurance Credit Guarantee Corporation. So, in case the bank fails, your money is still secured. This makes FD an ideal investment option for senior citizens.
Regular income: Unlike dividends given by the companies, the interest earned on an FD is fixed, as the rate of interest for the particular term is constant. Even if the rates increase or decrease subsequent to your opening an FD, your rate of interest will not be affected.
So you are guaranteed a regular income, making it an ideal investment option for those looking for regular income.
Availability of loan: Are you looking for a secured loan? Then you can avail of a loan by offering your FD as collateral. While your FD continues to earn interest, the rate of interest for the loan will be a few notches higher than that of the FD.
Hence this type of loan works out cheaper than any other type of loan, since the bank has the assurance of claiming your deposit if you fail to repay the loan.
Saves taxes: For those looking for an efficient tax saving investment option, FD is a good option. While ELSS (Equity-Linked Savings Scheme) has the shortest lock-in period of three years, your capital is not secured.
On the other hand, PPF (Public Provident Fund) offers capital security, it has a lock-in period of 15 years.
The tax-saving FD offers the best of both the world, as your money is locked for just five years, while your capital is safe.
Are there any drawbacks?
While an FD does have a lot of pros, it does have its share of cons. Here are some of them:
Erosion of worth of capital due to inflation: Inflation means a loss in the purchasing power of the money. When inflation goes up, the purchasing power of money goes down. As the interest rates on FDs are lower than the rate of inflation, the purchasing power of your deposited money does go down. As a result, you end up eroding the worth of your capital.
Tax liability: Except for the tax-saving FDs, the interest earned is taxed. So you end up incurring tax liability. You are particularly affected if you are a high income earner.
What should I do?
The best option for you is to invest as per your goals. If you have any short-term goals -- i.e. goals that have to be met within three years, like buying a car, or going on a holiday -- then the FD is your best bet.
On the other hand, for long-term goals like retirement planning or your child's education, go for equities.
Monday, May 4, 2009
Market Trendz Today - 05-05-2009
The market is in an uptrend now but investors should wait for the election results before investing, says Ambareesh Baliga of Karvy Stock Broking on CNBC Awaaz.
The market is in a strong uptrend now, says Sudarshan Sukhani, technical analyst, on CNBC TV18. Buy on dips during the day, he adds. He advises waiting for a 30-40 point decline before buying.
The market is in a strong uptrend now, says Sudarshan Sukhani, technical analyst, on CNBC TV18. Buy on dips during the day, he adds. He advises waiting for a 30-40 point decline before buying.
All about the New Pension Scheme
From May 1, Indians have access to another investment avenue to plan for retirement in the New Pension Scheme (NPS).
The scheme has been in the pipeline for at least five years but it finally took shape in 2007-08. Although the government was pushing for the scheme after a law providing statutory backing to the regulator was enacted, the Left parties, which were supporting the United Progressive Alliance government, did not allow the passage of the Bill.
So, last year, the government decided to go ahead by allowing the NPS Trust to enter management agreements with fund managers. What benefits does the NPS offer? Who is eligible? Business Standard provides a ready-reckoner.
The scheme has been in the pipeline for at least five years but it finally took shape in 2007-08. Although the government was pushing for the scheme after a law providing statutory backing to the regulator was enacted, the Left parties, which were supporting the United Progressive Alliance government, did not allow the passage of the Bill.
So, last year, the government decided to go ahead by allowing the NPS Trust to enter management agreements with fund managers. What benefits does the NPS offer? Who is eligible? Business Standard provides a ready-reckoner.
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