Crash, boom, bang!

It has been a while since I posted. Just like our stock market, I crashed! The reason being the market itself. I spent few days finding out the possible reasons and how worse it could get and guess what, I am still as optimistic as ever.

The sensex is down more than 5000 points compared to the highest level it attained towards the end of 2007. Evidently it is a big blow to the traders, investors, funds, IPO’s and most of all to the tempo in the country. The Finance Minister has been trying hard to keep the optimism levels from going down far too much by assuring that our growth rate for the coming FY08-09 is posed at a very promising rate of 8.75% (There has been many statements with a different rate each time, but this one seems to be the final projection).

Now, what really happened?
Recession in the US which is caused by words declared as used the most number of times last year – “subprime crisis”, lies at the root of the problems. In simple terms, ‘subprime’ means loan given to a person who is not eligible for it, because of his low creditworthiness, income or any other unhealthy financial situation. Ironically these loans are given to the same person at a rate higher than the market(reasoning- risk involved). Since US real estate valuations were blown out of proportion and were simply not affordable by subprimes, there developed a crisis. This in turn created lot of pressure in the banking industry that indulged in a lot of subprime borrowing and did not have enough funds to lend to businesses and other consumers who needed them for growth. So slowly the economy began to dip and then crashed. Businesses didnt do well and large number of employees were laid off. Incomes and consumer demand fell and since many countries in the world depend a lot upon the US, exports being the main share of their GDP, those economies also crashed. India was among the least affected as our exports to the US are comparatively less.

There is a reason why our stock market took some time to take the hit. Towards the end of 07, there was a lot of optimism in the our market due to large purchases by institutional buyers, foreign investors, excellent performances by some large cap and mid cap companies, promises and prospects reflected by the Government and a lot of hype. This lead to an illogical overvaluation of stock prices; illogical because they were high not as a result of the company doing well but as a result of speculation. It was like a bubble that had to burst at some point in time. After the Subprime, lot of American investors started pulling away their investments from other countries. This, in hand with the rising oil prices and blow to the software industry, in terms of declining projects, employee lay off and rupee value appreciation paved way to a much needed correction.

This is more or less like a world correction and a lot of people including me are still optimistic because our nation has all eyes focussed on development and stability. This is an opportunity to buy shares of promising companies.
Corrections like these are just nature’s way of telling us not to get carried away but to focus and do things the right way!

(to read more about subprime crisis check http://en.wikipedia.org/wiki/Subprime_Crisis )

 

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PC, our phenomenal FM

 I am so glad my friend Suchitra and I have these discussions outside work; discussions about work itself, friends, fun, nations-economies-investments-shares(in our own sweet way), cricket, movies, family and recipes. We agree, disagree, exchange online articles and videos and at the end of the day, its interesting because our chat history turns out to be truly historical !!

Today’s chat history was a milestone because we had this heated discussion about India and America, our economies, politics, culture and almost every other broad aspect we could think of(rather, using every keyword we have come across in our textbooks(i of course used google too)). It got really interesting because we were mostly disagreeing with each other and in the meantime many points came up. And while exchanging all the heat, cold and warmth Suchitra sent me this youtube link – an hour long interview of our Finance Minister, Mr. P Chidambaram by an American interviewer, Charlie Rose interview taken circa 2005.

Its been 6 hours since we ended our discussion and I have already watched this interview thrice, and i wholeheartedly feel it is a must watch for everyone. One hour of time spent on this interview is totally worth it, and i have two points to justify this. But first, watch the interview –

You would probably have guessed by now

point 1 – PC’s communication skills, articulation, confidence, eloquence and clarity

point 2 – the magnitude of content, simplification of economics, relativity of issues, representation of facts and reality

I found it phenomenal! Didnt you?

Stock Picking

I had mentioned ‘Technical analysis’ (and my ignorance about it) in my previous post and had promised to do some reading and get back on the topic in my next post.

 

Today, I’m happy that I finally could comprehend the funda in my very first attempt, and sad to think that I couldn’t grasp it during college, in spite of reading multiple times, from multiple books, sitting in multiple locations, both with and without my spectacles.

 

But before we jump into the meaning, let’s understand the context.

If you had Rs.10000 to invest in shares and more than 6000 stocks to choose from, how would you go about it? Let’s look at certain thoughts that would hover while you try to make the right decision –

  

• Why am I looking at this option?
• What is the kind of growth in value I am looking at?
• Am I interested in short term or long term investment in shares?
• Do I have the time or patience for day trading?
• Do I want the facility of ‘no tax on long term capital gains’?
• Am I going to keep in pace with the news that affect my stocks?

  

A person who has no clue as to what is happening in the economy/market/country/world would want to take a look at it before he looks at his investment options. From what I found, literally everything around us has an implication in the stock market. So, keeping oneself reasonably in pace with it becomes necessary for making the right choices.

  

From an economy point of view, taking a look at indices like –

·     growth rate – will tell us whether there is optimism and opportunity in the economy

·     gdp – can tell us what the percentage of income contributed by each sector of our economy is

·     inflation rate – tells us how high the money supply in the economy is
similarly, bank rates, interest rates etc.

 

From a political point of view, budget allocations, government policies, coalitions, foreign policy, support to industry etc.
From an industry point of view, supply and demand levels, tax benefits, raw materials and work force supply, performance of related industries, etc.
From a company point of view, financial position, competitors, marketing strategies, funds available, staff motivation, performance etc.
 

 

Once you have a decent idea about these, you will be in a position to ‘relate’. When it comes to economy and investments, it is very important to be able to relate data to deduce informed opinions. ‘To relate’ would mean – to make out what pattern/news around the globe, in the economy, government, industry, competitor or people can affect a given stock. This is called fundamental analysis.

 

While many people think that fundamental analysis is sufficient to find out if a stock is worth buying, there is another school of thought that believes that whatever conclusion one has made out of a fundamental analysis is already reflected in the price of stock. This school of thought proposes to consider the actual price behaviour of the stock. That is, no matter how many highs and lows a stock price has, it will still follow a particular trend; and this trend helps determine whether the stock will do well in the future. This is called technical analysis.

 

Still confused? I guess this chart will make it clearer –

 

  

While the small dips and rises represent the stock price’s reaction to market news, the overall trend which is in an upward direction, shows that the stock is bound to do well and people would want to buy more shares of this company. The time period on the x axis of the graph can be minutes, hours, days or even years.

While some analysts use technical methods to make decisions others depend on economic factors only; still others use a combination of both.

 

Basic Investment fundas

Finance and investments can get a bit intimidating if not understood properly. I myself have been a prey to this. But for the past couple of months I have been investing more time into understanding investments 🙂 , only to find out that I have been missing out on a lot.

 

 

There are certain prerequisites with respect to our mindset before we start off.

 

·     Its all about thinking clear, using logic and common sense

·     Its involves meticulous planning and discipline

·     It should be understood that there are risks involved

·     It is a must to keep oneself updated with whats happening around, at least in the economy point of view

·     And finally, its not about what others are doing but what’s best for you.

 

 

What’s investing?

Investing basically means putting your money to work. The money you earn and save after your expenses for a livelihood, need not be kept aside idle. It can be put to work and can earn a profit over itself.

Why invest?

By investing, one is making sure he continues his current standard of living even after retirement. He is ensuring that he is secure at the time of emergencies. Investing is a slow process, which bears tremendous results over a period of time.

Investment needs

Given that there are so many investment avenues, making a choice about where to invest in what amounts, for what period and all depends on the person’s needs or objectives, time, his current situation and personality.

·     Needs/ Objectives –General objectives for investments could be to generate current income, safety of capital or retirement planning.

·     Personality – Some people are risk averse or conservative investors, they would rather invest to generate less income if it is at the cost of keeping their money safe. Some people are vice versa.

·     Timeframe – How much time you have left, for your retirement is a crucial point in decided how to invest. Like, the lesser time you have, the more conservative you should be in planning it out. But if you have just started earning, there is time for making up for losses or investing in avenues that are riskier.

 

Types of investments <this section is referred from another site>

Bonds

Grouped under the general category called “fixed-income” securities, the term “bond” is commonly used to refer to any founded on debt. When you purchase a bond, you are lending out your money to a company or government. In return, they agree to give you interest on your money and eventually pay you back the amount you lent out.

The main attraction of bonds is their relative safety. If you are buying bonds from a stable government, your investment is virtually guaranteed (or “risk-free” in investing parlance). The safety and stability, however, come at a cost. Because there is little risk, there is little potential return. As a result, the rate of return on bonds is generally lower than other securities.

Stocks

When you purchase stocks (or “equities” as your advisor might put it), you become a part owner of the business. This entitles you to vote at the shareholder’s meeting and allows you to receive any profits that the company allocates to its owners–these profits are referred to as dividends.

While bonds provide a steady stream of income, stocks are volatile. That is, they fluctuate in value on a daily basis. When you buy a stock, you aren’t guaranteed anything. Many stocks don’t even pay dividends, making you any money only by increasing in value and going up in price–which might not happen.

Compared to bonds, stocks provide relatively high potential returns. Of course, there is a price for this potential: you must assume the risk of losing some or all of your investment.

Mutual Funds

A mutual fund is a collection of stocks and bonds. When you buy a mutual fund, you are pooling your money with a number of other investors, which in turn enables you (as part of a group) to pay a professional manager to select specific securities for you. Mutual funds are all set up with a specific strategy in mind, and their distinct focus can be nearly anything: large stocks, small stocks, bonds from governments, bonds from companies, stocks and bonds, stocks in certain industries, stocks in certain countries, and the list goes on.

The primary advantage of a mutual fund is that you can invest your money without needing the time or the experience in choosing investments. To know more about mutual funds, please visit our learning centre.

Alternative Investments: Options, Futures, FOREX, Gold, Real Estate, Etc.

So, you now know about the two basic securities: equity and debt, better known as stocks and bonds. While many (if not most) investments fall into one of these two categories, there are numerous alternative vehicles, which represent more complicated types of securities and investing strategies.

The good news is you probably don’t need to worry about alternative investments at the start of your investing career. They are generally high-risk/high-reward securities that are much more speculative than plain old stocks and bonds. Yes, there is the opportunity for big profits, but they require some specialized knowledge. So if you don’t know what you are doing, you could get yourself into a lot of trouble. We would therefore suggest that you start with simpler investment avenues and leave these investment vehicles for the experts.

 

Now that we have a basic idea, in my coming posts I discuss about options available under each of these investment vehicles, their pluses and minuses, trends and analyses.