At times it's very impressive to see what the "sentiments" can do to the equity markets. Coming from quite a conservative society that have strong affinity to sentiments, I'd easily relate this to the markets. Sentiments can either drive markets irrationally higher or drive down with utter panic. On days when sentiments are very powerful, fundamentals and technical charts take a backstage.
The week that just ended on 03/04/2009, was a classic example of swinging sentiments within a couple of trading sessions. Monday's session resembled panic selling with Indian markets down by almost 5%. Again, the banks bore the brunt of the assault. The markets have been riding high on a wave of euphoria across the globe, until the run broken by a big fall on Monday. Suddenly, the market looked weak and set to dive down to lows, or at least that is what the "experts and analysts" predicted.
With a lot of hype surrounding the G20 meeting which was to announce its communique on Thursday, the markets prodded along the next two days on Tuesday and Wednesday. There was no clear sense of direction on these two sessions. Without knowing the extent of the policy changes coming out of G20 communique it would have been a pure gamble to go either for a buying spree or shorting.
Thursday, the day the G20 meeting was to end and come out with its communique, saw the markets, globally, gain around 3%-5% with more than average volumes of late. Our own Indian markets closed higher with around 5% gains. This was all before the communique got released after the sessions ended in Asia. This was another show for how powerful the sentiments could be, in this instance, driving the markets to higher levels. This has brought the "experts and analysts" to come up with fantastic predictions, some going as far as saying that the Indian markets are likely to gain another another 10% to 20% from the current levels.
Nothing much had changed, globally and locally, during the week. Fundamentals of many of the stocks has been the same for the last few weeks. Personally, I don't read too much into technical charts, so can't comment much about it. When sentiments are very strong as seen twice last week, there is no room for strong or weak fundamentals, there is no room for strong or weak technical charts. It is up to the individuals to weigh up the risk/rewards and enter or exit the markets. Those who took the risk of entering the markets late on Monday after markets got beaten down, would have been generously rewarded by the close on Thursday.
The lesson is that Sentiment like Liquidity is a powerful player in the markets. So don't ever forget the importance of this.
Showing posts with label Financial Investments. Show all posts
Showing posts with label Financial Investments. Show all posts
Saturday, 4 April 2009
Saturday, 28 March 2009
Technical terms in stocks - A Basic Guide
The moment one decides to manage his funds deployed directly in Equities, it is imperative that one understands the risks and the various technical terms associated with it. Treat the exercise of Equity investments as part of learning your financial life. As in any walks of our lives, we are bound to make mistakes. But that should not deter from venturing out, sensibly, to learn and perhaps gain from this experience. One piece of advise is that do not stretch yourself financially or leverage or expose yourself to more than what you can afford. Always remember to have money in various asset classes before venturing into equities as an asset class.
After making a decision to commit certain funds, take time to learn some of the basic terms. The list here is not comprehensive but should be good enough to get you started.
Stock Exchange: The place where the stocks of companies are listed and transacted.
Market Capitalisation: This is the market value of the company at any given time based on the price of shares issued by the company. This is one of the main factors to be considered while selecting a stock in a particular exchange. Based on this, the stock on a particular exchange can be classified as Large, Medium and Small Cap. Small Cap stocks are more riskier compared to the Mid Cap which in turn is comparatively riskier than Large Cap.
Face Value: This is the basic value of the share issued by the company. Once the shares start trading in an exchange, usually the share price trades above this value. This value also determines how much money is paid when a dividend is declared. For example, consider a stock "A" that has Face Value of Rs.10. When a 50% dividend is declared, then Rs.5 (50% of Rs.10) will be paid out per share.
Book Value: This is the total value of the assets belonging to the company. If the company were to be liquidated, this value would be the likely amount generated. For technology stocks or telecommunication stocks, the ratio of Share Price to Book Value will be very high when compared to heavy industries. Sometimes, the Share Price/Book Value ratio is considered while selecting a stock.
Price: Market value of one unit of share traded in an exchange. This varies almost every second and is usually more than its Face Value. Usually, the company that is perceived, by the Market, to be good in the current or near term, commands a premium to the Face Value.
Earnings Per Share (EPS): The amount earned for the investment of one share. This is very useful in finding out the earnings capacity of the company. The higher the value the better. For example, if Face Value of a stock "A" is Rs.10 and its EPS is 50, then it means that for every Rs.10 invested, the company is making Rs.50.
P/E: Price to Earnings Ratio (P/E Ratio) is the ratio between the Share Price at any given time to the established EPS. This ratio is one of the important factors in selecting a stock. Every sector or industry has an industry-wide P/E and the individual company's P/E are weighed against this. Generally, higher the P/E, greater is the risk or the company's prospects are exceptional as perceived by the Market. Some sectors inherently have high or low P/E. Before selecting a stock, it is worth checking both the industry P/E and the individual company's P/E.
Price/Book Value: This is the ratio between the Share Price to the established Book Value. For some sectors or industries, like heavy industries, this ratio could be useful in determining if the stock is worth the buy.
Dividend: The amount paid out as a percentage of the Face Value of the stock. A 50% dividend on a stock whose Face Value is Rs.10, will fetch Rs.5 as dividend per share.
Dividend Yield: Usually, calculated as a percentage of the most recently paid dividend to the current share price. If one wants to invest in historically high dividend yield stocks, then this could be one of the factors to look into consideration.
Announcement Date: The date on which the dividend, if any, was announced by the company. This announcement will also contain the Effective Date.
Effective Date: This is the date on which the shares should be in ones possession to get the dividend payout.
After making a decision to commit certain funds, take time to learn some of the basic terms. The list here is not comprehensive but should be good enough to get you started.
Stock Exchange: The place where the stocks of companies are listed and transacted.
Market Capitalisation: This is the market value of the company at any given time based on the price of shares issued by the company. This is one of the main factors to be considered while selecting a stock in a particular exchange. Based on this, the stock on a particular exchange can be classified as Large, Medium and Small Cap. Small Cap stocks are more riskier compared to the Mid Cap which in turn is comparatively riskier than Large Cap.
Face Value: This is the basic value of the share issued by the company. Once the shares start trading in an exchange, usually the share price trades above this value. This value also determines how much money is paid when a dividend is declared. For example, consider a stock "A" that has Face Value of Rs.10. When a 50% dividend is declared, then Rs.5 (50% of Rs.10) will be paid out per share.
Book Value: This is the total value of the assets belonging to the company. If the company were to be liquidated, this value would be the likely amount generated. For technology stocks or telecommunication stocks, the ratio of Share Price to Book Value will be very high when compared to heavy industries. Sometimes, the Share Price/Book Value ratio is considered while selecting a stock.
Price: Market value of one unit of share traded in an exchange. This varies almost every second and is usually more than its Face Value. Usually, the company that is perceived, by the Market, to be good in the current or near term, commands a premium to the Face Value.
Earnings Per Share (EPS): The amount earned for the investment of one share. This is very useful in finding out the earnings capacity of the company. The higher the value the better. For example, if Face Value of a stock "A" is Rs.10 and its EPS is 50, then it means that for every Rs.10 invested, the company is making Rs.50.
P/E: Price to Earnings Ratio (P/E Ratio) is the ratio between the Share Price at any given time to the established EPS. This ratio is one of the important factors in selecting a stock. Every sector or industry has an industry-wide P/E and the individual company's P/E are weighed against this. Generally, higher the P/E, greater is the risk or the company's prospects are exceptional as perceived by the Market. Some sectors inherently have high or low P/E. Before selecting a stock, it is worth checking both the industry P/E and the individual company's P/E.
Price/Book Value: This is the ratio between the Share Price to the established Book Value. For some sectors or industries, like heavy industries, this ratio could be useful in determining if the stock is worth the buy.
Dividend: The amount paid out as a percentage of the Face Value of the stock. A 50% dividend on a stock whose Face Value is Rs.10, will fetch Rs.5 as dividend per share.
Dividend Yield: Usually, calculated as a percentage of the most recently paid dividend to the current share price. If one wants to invest in historically high dividend yield stocks, then this could be one of the factors to look into consideration.
Announcement Date: The date on which the dividend, if any, was announced by the company. This announcement will also contain the Effective Date.
Effective Date: This is the date on which the shares should be in ones possession to get the dividend payout.
Thursday, 26 March 2009
Financial Technical Analysis
In this blog entry, I'd like to share my personal thoughts about the financial technical analyses produced by various stock brokerages and fund houses and experts. I don't have any personal grudge against them - they are doing a professional job for their companies. Should the traders and investors read these analyses and take the contents by the face value - my opinion would be No. As the name suggests these are analyses only and are widely variying in their nature. More often than not, the report or outlook of a company keeps changing over time. Do your own research and act on your own rather than following the reports blindly.
Every stock brokerage and fund house have in-house technical analysts who sift through various financial reasearch reports and produce technical analyses. There are television channels that are dedicated to financial news. Invariably these channels provide a running commentary on the performance of various stocks in a trading session. My personal opinion is do not read too much into the analyses produced by these so called experts and analysts. If one were to read a technical report produced by all, or at the least some, of these brokerages, one is very likely to be perplexed.
There is certainly no harm in reading the research reports about the companies. But what I'd personally insist is that the individual trader/investor make the decision rather than take the tip of an analyst. The moment one decide to step into equities asset class, the responsibility is firmly with the individual to look after the funds. You may make mistakes in choosing a wrong stock or entering at a wrong time, but at least you know that you have not fallen to the tip of some analyst.
The other point to consider while taking the research reports by their face value is how good they are for the (prevailing) market conditions. Are you reading these as an investor or a trader or a "day jobber"? The reports may be giving their price target for the next one or two financial years. If the analysts are providing tips for "short-term" trading, invariably they all mention the price target albeit the target date.
If one were to closely follow these analysts, one can find that they keep changing their price outlook and targets almost on a daily basis. If the analysts are horribly wrong, they may not be seen for days together. So why take their tips seriously.
Always remember that Markets behave the way they like. If the Markets were that predictable all the time, then everybody who got into the Equities asset class would have been mega millionaires. So read the research reports, listen to the analysts but make the decision yourself - it is your money.
Every stock brokerage and fund house have in-house technical analysts who sift through various financial reasearch reports and produce technical analyses. There are television channels that are dedicated to financial news. Invariably these channels provide a running commentary on the performance of various stocks in a trading session. My personal opinion is do not read too much into the analyses produced by these so called experts and analysts. If one were to read a technical report produced by all, or at the least some, of these brokerages, one is very likely to be perplexed.
There is certainly no harm in reading the research reports about the companies. But what I'd personally insist is that the individual trader/investor make the decision rather than take the tip of an analyst. The moment one decide to step into equities asset class, the responsibility is firmly with the individual to look after the funds. You may make mistakes in choosing a wrong stock or entering at a wrong time, but at least you know that you have not fallen to the tip of some analyst.
The other point to consider while taking the research reports by their face value is how good they are for the (prevailing) market conditions. Are you reading these as an investor or a trader or a "day jobber"? The reports may be giving their price target for the next one or two financial years. If the analysts are providing tips for "short-term" trading, invariably they all mention the price target albeit the target date.
If one were to closely follow these analysts, one can find that they keep changing their price outlook and targets almost on a daily basis. If the analysts are horribly wrong, they may not be seen for days together. So why take their tips seriously.
Always remember that Markets behave the way they like. If the Markets were that predictable all the time, then everybody who got into the Equities asset class would have been mega millionaires. So read the research reports, listen to the analysts but make the decision yourself - it is your money.
Equities as an Asset Class
I'd like to share some basics in share trading and investing. Some of these have been taken from several media and some are my personal opinion. I'd like to strongly insist that you do not follow these blindly and do your own proper research before trading and investing in shares. The blog is intended to those who want to act as fund managers to their own funds. Some of the information is written from an Indian market perspective. I welcome your comments or remarks.
Identify the purpose:
Identify the purpose as why you want to enter into the equities asset class. For example, you want to create a nest for your retirement, for providing higher education to your children, build a dream house or just want to increase the wealth.
Risk and reward:
Equities as an asset class is inherently risky. It is possible to loose all or part of the money you have put in equities. But there is also the possibility of rewards that come with the risk. This is the most important aspect one has to take into account before getting into this asset class.
Funds allocation and time frame:
Consider how much amount you can comfortably allocate to this asset class. Also consider the time frame that you can be sure of not relying on this allocated funds. There are numerous scenarios that could be considered but for illustration purposes let us consider the following scenarios.
Scenario 1: Person A is comfortable in committing Rs.100,000 and does not need this money within the next 3 years. This money can be carefully traded/invested in equities asset class with a good chance of beating the returns offered by standard bank interest rates. The time frame allows opportunities to meet reasonably set targets and also doesn't force the individual to make hasty decisions should the market doesn't behave as expected.
Scenario 2: Person A is comfortable in commiting Rs.100,000 but requires this money without fail within the next 3 months. It is quite risky to enter into equities asset class for such a short time frame. It may be better to keep the money parked in a bank account.
Scenario 3: Person A can allocate Rs.100,000 towards equities but may require the allocated funds with very short notice, say, a week or a few days. It may not be adviseable to enter into equities if there is uncertainity about the time frame for which the funds can be allocated.
Trade or invest:
There is widespread support for both trading and investing. Personally, I’d call money parked in shares for more than a year as an investment and anything less than that as trading. There are many books on financial investments and one can read these books at their own leisure. My personal opinion is that if one can identify a potential multi-bagger (means the share price increases several fold in the long term), then staying invested for years together could be very good.
Lost Opportunity:
As anything in life, do not worry about the lost opportunity to make money or minimise the losses. Treat it as part of your learning experience and try not to repeat.
Setting Targets:
Set reasonable targets for the money allocated in equities. As a minimum, this target should beat the official inflation figures by at least 10%.
Terminology:
Get used to the terminology. Understand what is m-cap, P/E ratio, EPS, Face Value, Book Value, Dividend, Dividend Yield, Price/Book Value, Dividend Announcement Date, Dividend Effective Date, etc.
M-cap groups:
The companies are grouped as large, medium and small based on their Market Capitalisation. Understand the risk/reward associated with the companies in these groups before committing the funds.
Do Research:
The reason why you buy shares of a particular company is because you want to share its profits. So do good research about the company. Some of the things to consider are: owner(s) or promoters, directors, companies past performance, future plans, their financial position, how they compare against their peers, etc.
Identify the purpose:
Identify the purpose as why you want to enter into the equities asset class. For example, you want to create a nest for your retirement, for providing higher education to your children, build a dream house or just want to increase the wealth.
Risk and reward:
Equities as an asset class is inherently risky. It is possible to loose all or part of the money you have put in equities. But there is also the possibility of rewards that come with the risk. This is the most important aspect one has to take into account before getting into this asset class.
Funds allocation and time frame:
Consider how much amount you can comfortably allocate to this asset class. Also consider the time frame that you can be sure of not relying on this allocated funds. There are numerous scenarios that could be considered but for illustration purposes let us consider the following scenarios.
Scenario 1: Person A is comfortable in committing Rs.100,000 and does not need this money within the next 3 years. This money can be carefully traded/invested in equities asset class with a good chance of beating the returns offered by standard bank interest rates. The time frame allows opportunities to meet reasonably set targets and also doesn't force the individual to make hasty decisions should the market doesn't behave as expected.
Scenario 2: Person A is comfortable in commiting Rs.100,000 but requires this money without fail within the next 3 months. It is quite risky to enter into equities asset class for such a short time frame. It may be better to keep the money parked in a bank account.
Scenario 3: Person A can allocate Rs.100,000 towards equities but may require the allocated funds with very short notice, say, a week or a few days. It may not be adviseable to enter into equities if there is uncertainity about the time frame for which the funds can be allocated.
Trade or invest:
There is widespread support for both trading and investing. Personally, I’d call money parked in shares for more than a year as an investment and anything less than that as trading. There are many books on financial investments and one can read these books at their own leisure. My personal opinion is that if one can identify a potential multi-bagger (means the share price increases several fold in the long term), then staying invested for years together could be very good.
Lost Opportunity:
As anything in life, do not worry about the lost opportunity to make money or minimise the losses. Treat it as part of your learning experience and try not to repeat.
Setting Targets:
Set reasonable targets for the money allocated in equities. As a minimum, this target should beat the official inflation figures by at least 10%.
Terminology:
Get used to the terminology. Understand what is m-cap, P/E ratio, EPS, Face Value, Book Value, Dividend, Dividend Yield, Price/Book Value, Dividend Announcement Date, Dividend Effective Date, etc.
M-cap groups:
The companies are grouped as large, medium and small based on their Market Capitalisation. Understand the risk/reward associated with the companies in these groups before committing the funds.
Do Research:
The reason why you buy shares of a particular company is because you want to share its profits. So do good research about the company. Some of the things to consider are: owner(s) or promoters, directors, companies past performance, future plans, their financial position, how they compare against their peers, etc.
Investments - Asset Classes
We work to earn for a good living. A good living is relative to every individual. Irrespective of that relativity, everyone should subscribe to the thought of making an effort to save a portion, however tiny it may be. There are various ways to save the cash and build a portfolio suitable to the individual in various asset classes. These asset classes could be cash savings in a bank account, mutual funds, pension contributions, liquidity account, immoveable assets, gold, art, etc. Allocating funds to any of these asset classes depends upon the personal circumstances of an individual and should be carefully consulted with someone who has good financial expertise and is aware of the individual's needs. I'm not going to provide the ratios for funds allocation to these various asset classes. I'll be giving some basic tips on considering some of these assets classes.
Liquid Assets:
Those asset classes in which cash is readily available can be termed as liquid assets. These could be liquidity accounts, cash savings accounts or current accounts.
Liquidity Account:
Maintain a bank account which pays some decent interest and allows withdrawal of money, any number of times, without any penalty. This account will provide the liquidity should something go wrong with your regular source of income, that may be your job or business. Depending upon the nature of your job or business or industry, it may be adviseable to have at least 6 months of living expenses in this account. Do not count this money as part of your investment(s). The sole purpose of this account is to provide you the liquidity in an emergency. The monthly living expenses should be comprehensive that should include any regular, weekly, monthly or quarterly outgoing. Examples are rent/mortage, loan repayment, subscription/membership fee, health insurance, vehicle expenses, etc.
Cash Savings Account:
Regularly save cash in a savings account that pays good interest. This should be part of your long-term investments. Interest rates on savings are subjected to change. Weigh the options of parking in a fixed-term savings account and a non-fixed-term savings account. More often than not, the returns on such accounts do not beat the inflation. This is the least risky investment. Having said that, should the bank go bust, only a pre-determined amount would be returned to investor. For example, by current law, banks operating in India covers only the first Rs.200,000 in an account per person per bank.
Semi-liquid Assets:
Those asset classes that are not ready cash but can easily be converted to cash can be termed as semi-liquid assets. These could be bullion, gold/silver/platinum jewellery, shares, etc. As the value of these assets is subject to international market forces, there is an inherent risk to these asset classes.
Bullion:
Silver, Gold, Platinum can be treated as semi-liquid assets as they can be quite easily sold to convert to cash. The value of these vary on a daily basis.
Jewellery:
Jewellery made of precious metals can be easily sold to convert to cash. Again the value of these vary on a daily basis. There is always a chance for loss of value while selling jewellery.
Shares:
Shares can be easily converted to cash in the equity markets as long as the company that issued the shares has not gone bust and is still trading on the stock exchange on which the company shares were bought.
Immoveable Assets:
Real estate, residential/commercial properties form some of the immoveable assets. Over a long period of time frame, say, 10 or 20 years, this asset class could give good returns on the investment. Again the value of these are subject to various local forces.
Liquid Assets:
Those asset classes in which cash is readily available can be termed as liquid assets. These could be liquidity accounts, cash savings accounts or current accounts.
Liquidity Account:
Maintain a bank account which pays some decent interest and allows withdrawal of money, any number of times, without any penalty. This account will provide the liquidity should something go wrong with your regular source of income, that may be your job or business. Depending upon the nature of your job or business or industry, it may be adviseable to have at least 6 months of living expenses in this account. Do not count this money as part of your investment(s). The sole purpose of this account is to provide you the liquidity in an emergency. The monthly living expenses should be comprehensive that should include any regular, weekly, monthly or quarterly outgoing. Examples are rent/mortage, loan repayment, subscription/membership fee, health insurance, vehicle expenses, etc.
Cash Savings Account:
Regularly save cash in a savings account that pays good interest. This should be part of your long-term investments. Interest rates on savings are subjected to change. Weigh the options of parking in a fixed-term savings account and a non-fixed-term savings account. More often than not, the returns on such accounts do not beat the inflation. This is the least risky investment. Having said that, should the bank go bust, only a pre-determined amount would be returned to investor. For example, by current law, banks operating in India covers only the first Rs.200,000 in an account per person per bank.
Semi-liquid Assets:
Those asset classes that are not ready cash but can easily be converted to cash can be termed as semi-liquid assets. These could be bullion, gold/silver/platinum jewellery, shares, etc. As the value of these assets is subject to international market forces, there is an inherent risk to these asset classes.
Bullion:
Silver, Gold, Platinum can be treated as semi-liquid assets as they can be quite easily sold to convert to cash. The value of these vary on a daily basis.
Jewellery:
Jewellery made of precious metals can be easily sold to convert to cash. Again the value of these vary on a daily basis. There is always a chance for loss of value while selling jewellery.
Shares:
Shares can be easily converted to cash in the equity markets as long as the company that issued the shares has not gone bust and is still trading on the stock exchange on which the company shares were bought.
Immoveable Assets:
Real estate, residential/commercial properties form some of the immoveable assets. Over a long period of time frame, say, 10 or 20 years, this asset class could give good returns on the investment. Again the value of these are subject to various local forces.
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