IRA

IRA stands for Individual Retirement Account and it allows individuals to make contributions towards an account in a tax deferred manner.

What this means is that individuals will not be taxed on the amount that they deposit in an IRA or the income generated from it till the time that they withdraw the money from their IRA. There is a certain maximum limit of the contribution and age restrictions for the individual who can contribute to an IRA.

Why the market falls faster than it rises?

 

Almost everyone who has been in the market must have noticed that shares fall faster than they rise.  This article looks at a couple of reasons because of which this happens. 

One reason why this happens is because of traders buying shares on margin money. This happens as follows. Suppose you have shares worth Rs. 1 lakh, on these shares your broker will allow you to take positions of say up to Rs. 40000. What this simply means is that you can buy and sell shares worth Rs.40000 without actually having to cough up this amount. This is called playing on margin money. In the above example the margin is 40%, which means that you can play up to 40% of the shares that you own. Every time the margin decreases below 40% you have to either square off the position or you have to keep extra cash with your broker. Now assume that you have also entered into such a trade where you had shares of say HLL worth Rs.1 lakh and you have bought shares of Infosys for Rs.40000 with the margin hoping to sell them off later in the day and make a quick buck. Unfortunately for you however the market falls and the value of HLL now remains only Rs.90000 whereas you have bought Infosys worth Rs.40000. To maintain the margin of 40% your broker calls you to pay up additional margin money (called margin call in market parlance). You decide that its not worth it and sell the Infosys that you have, further creating downward pressure and lowering the price of Infosys. If you look at the bigger picture and see the market as a whole there certainly will be another person who was holding Infosys worth Rs. 1 lakh and HLL worth Rs.4000, because of your decision this person would need to sell his HLL now. This is a vicious cycle in which many traders will now get trapped and what started off as a correction would result in a big fall. This is one of the prime factors why markets fall off sharply in a single day, the fall being anywhere close to 300 to 800 points on the BSE. 

Another reason why the market falls rather sharply is what is known as “Panic Selling”. What this means is that small and new investors in the market see that the market is falling and they think that there is no end to the fall. Often these investors enter the market with the lure to make big money and know little about what companies they are buying and have little confidence in their investment decisions. Such investors tend to sell all of their holdings in such falls and bail out of the markets. In the process they tend to drive the prices of the shares that they hold further down and end up pushing the prices abysmally low. 

The above two reasons are quite common and can be witnessed in every big fall that the market has. Its for you to understand these reasons and the next time you enter a trade be aware of such reasons and play the market carefully. Anyone who has been in the market will tell you that it is almost impossible to avoid such losses. So maybe you will lose money on such transactions as well. Considering the way the market has risen these days it is probable that the situation confronts you in the near future. You must not completely shun away from the market after such a situation but must understand the reasons, learn from them and not repeat the mistake. 

IPO Myths

There exist several myths about IPOs, which lure the investors into applying for each and every IPO that come in their way. The general perception is that IPOs are a fail-safe way to make money and that if one invests money in an IPO returns are guaranteed.

This is the greatest myth about IPOs. Many IPOs will result in losses for the investors, the prices of the same will go down because of several reasons like a weak company, over pricing, weak management or simply because the price fell along with the general markets. A look at the table below shows you how many IPOs have failed in the past.

A second myth about IPOs is that if one steers clear of the smaller companies and invests only in IPOs of well-known companies one will make guaranteed profits. This is also not true as we can see that a lot of well-known companies like HT Media, Provogue, OBC, Allahabad Bank, Jindal Polyfilms, T.V. Today Network are listed in the table below.

These are all big companies and chances are that most investors would have heard of them before the IPO. But still they figure in the list and the most likely reason is that the issue was over priced.

This is an important learning for all of us. Even our team got carried away and gave a good recommendation for Jet Airways, which was trading below the issue price some days back and made the same mistake. However we learnt from our mistake and investors who would have taken a hard look at our recommendation for Provogue would have avoided burning their fingers.
We will keep this article shorter than the average size of most of our other articles simply because we feel that these are two very very important things for investors to keep in mind and its best that these two points sink in and are internalized by all investors so that they can avoid burning their fingers in the stock market and especially with IPOs.

 

S.No.NamePrice as on 27th Oct 2005Issue DateIssue Price
1HT Media Ltd.427.3504/08/2005 to 10/08/2005Rs.530
2Shri Ramrupai Balaji Steels Ltd.17.308/07/2005 to 14/07/2005Rs.22
3Nectar Lifesciences Limited199.3522/06/2005 to 28/06/2005Rs.240
4Provogue (India) Ltd.136.2510/06/2005 to 16/06/2005Rs.150
5Jindal Poly Films Ltd.289.909/06/2005 to 15/06/2005Rs.360
6Oriental Bank of Commerce235.1525/04/2005 to 29/04/2005Rs. 250
7Allahabad Bank76.8506/04/2005 to 12/04/2005Rs.82
8Jai Prakash Hydro-Power Ltd.30.322/03/2005 to 29/03/2005Rs. 32
9Datamatics Technologies Ltd.87.712/04/2004 to 19/04/2004Rs. 110
10Dishman Pharmaceuticals & Chemicals Ltd.131.929/03/2004 to 07/04/2004Rs. 175
    
11T.V. Today Network Ltd.76.918/12/2003 to 27/12/2003Rs. 95
12D-Link (India) Limited126.7520/2/2001 to 27/2/2001Rs. 300
13Creative Eye Limited9.103/11/2000 to 09/11/2000Rs. 50
14Pritish Nandy Communications Limited49.604/09/2000 to 11/09/2000Rs. 155
15MRO TEK Limited70.6504/09/2000 to 09/09/2000Rs. 95
16Shree Rama Multi Tech Limited15.715/01/2000 to 21/01/2000Rs. 120

Online Trading in Stocks

Online Trading is a recent phenomenon and many investors have started to open trading accounts with companies, which provide online trading facilities. 

If you have a computer with a decent Internet access online trading can ease a lot of your troubles, which you face with the traditional offline brokers. It is particularly useful for those people who regularly invest in IPOs. Anyone who has invested in an IPO will tell you how easy and convenient it is. 

One of the biggest problems faced in offline brokerages is that the IPO is opened for a very short period of time and very often investors are scrambling for application forms or making cheques or drafts in the name of the company for which the IPO is there. Very often these cheques / drafts have to be made for escrow accounts and the names are not very straightforward. Quite a few investors end up making mistakes in entering the names and although it seems like a silly small thing many investors end up losing the opportunity to invest because of this reason. This hassle is not at all present in online investment as you do not have to write cheques or drafts, just simply decide the number of shares that you want to buy and apply. The money is automatically transferred and there is no need to write any cheques. 

Another perpetual problem especially with those IPOs, which are in high demand, is that the application forms invariably finish by the time you get to your broker’s office and you have to again run around to get a copy of the same. This is a story, which is oft repeated at every popular IPO, and getting an online account is a good way to get rid of this problem as you do not have to worry about the form and can apply without one just by a few clicks. 

Whenever you log onto your account you get to see which are the IPOs which are open currently and therefore it becomes easy for you to keep a track of these IPOs and the likelihood of your missing investing in one “just because you didn’t know” decreases. 

Another problem that people who invest in IPOs face is the refund money (because of the difference in the shares applied for and shares allotted). Some investors have faced the problems of misplaced cheques or getting them after a long delay whereas in the online accounts you get this refund pretty quickly and your trip to deposit the cheque in the bank is also saved as your money is transferred automatically in the bank account that is linked to your trading account. 

These are some of the benefits that the author has experienced while using www.icicidirect.com The author has not used or does not recommend any other online account and is in no way related to www.icicidirect.com 

Penny Stocks

Penny Stocks have long been the attraction of a lot of investors because of the tremendous returns that these stocks can generate in a short period of time. The reason that some of these stocks are able to generate such high returns which goes as high as five or even ten times the amount invested is the price and the volume of these stocks are low.
 

Because the volumes are low in such stocks when interest is generated in such stocks and people start investing the sudden spurt in volume leads to a large increase in price of such stocks.  

 

And that is the danger that exists while investing in these stocks. Because one can raise the prices many folds just by investing a few lakhs. Many a time these stocks are the target of Promoter manipulation.  

 

The modus operandi is quite simple. A few promoters group together and generate artificial interest in a particular penny stock. Suppose there are two promoters who hold majority of the stock in their company where the volumes in the markets are low. Now one promoter will start selling his stock in the open market and the other promoter will keep on buying this stock at progressively higher prices. Since the volume is low the promoters are easily able to jack the prices by doing this. At the same time they also engage in spreading rumors about the company and create interest among the ordinary investors. They are easily able to prop up the prices from a low of say Rs.5 to a high of Rs.20.  

 

You can think of the two promoters as husband and wife and think that the husband has sold off all his shares to the wife and the wife has paid for the stocks. The net effect remains the same as the stocks of the couple remain with them and so does the money. Although in the real world the trade is more complex this analogy helps us to understand what exactly is going on in this transaction.  

 

Now at the same time there is “real” demand for the stocks of the company in the market by investors other than the wife and it is at this time that the “wife” starts selling off chunks of her shares to the public at these propped up higher prices. Now because there is a genuine demand for those stocks in the market the prices do not fall as suddenly as they went up and this gives a good opportunity for the wife to get out of the stocks at a higher price than what they had originally had the shares for.  

 

This is a neat way promoters have come up of making money in the penny stocks but at the same time other investors who are not well informed about the stock market become victims and lose their money in the deal.  

 

This is not to say that all penny stocks will end up in losses, only to exercise caution while investing in the same and do some basic research before jumping into such penny stocks, which promise to triple in a month just because they have doubled in the last month. You need to look into why is it that they have doubled in the last month and get a sense of the safety that they offer before buying into it.  

Stock Market Tips

The stock markets are at all time highs and just like the last time around when the market was at its previous high every one thinks that nothing can go wrong and there is just one way where the market can go which is UP.

 Nothing could be farther from the truth and this will be clear from the way the market behaves in the next few months. Here are a few tips that would hopefully save you from losing a lot of cash in the current frenzy. 

Time and again investors have burnt their fingers in the markets and here are some tips to you so that you do not end up burning your fingers in this market. 

The number one tip at this point would be to sell if you have stocks and not to buy them if you have cash. The golden principle in the markets is “Buy when everyone else sells and sell when everyone else buys”. Simple enough right? Not really. Why? Because of peer pressure pure and simple. When everyone else around you seems to be having a ball at the markets you would feel like a fool if you didn’t participate now. 

OK so you can’t resist buying at this time then at least do yourself a favor and stay away from unknown Penny Stock and hot tips that your barber gave you. True that the stock has tripled in the last fifteen days but that was before people like your barber started buying the stock. Chances are that the Promoter of the company have started buying into the stock and have spread rumors like acquisition or a big export order to fool investors and sell out to them at a later date. 

Another tip that would serve useful is to value a stock based on its future growth and not its past performance. For instance many investors say that I will not buy stocks of X company because it has doubled in the last year. Well it may have doubled in the last year but that should not be the thing you should be telling yourself. Rather you should ask yourself why has this doubled in the last year and can it do so again? There should be a solid answer to your question like the launch of a new product or reduction in the prices of raw material. And indeed if the answer is in the positive then by all means go ahead and buy that stock regardless of what has happened in the last year. 

Another tip would be to remember what you are buying. Quite simply investors often forget that when buying a stock they are simply buying ownership in the companies. Most of you would know that nothing spectacular would happen in the company that you work for, in a month, they are not going to double their revenues and certainly not double your salary every month. Then why expect anything different from the companies that you are investing in. Why expect the prices to double in a month or two. Give time to your investments; don’t reduce it to a gamble. Only when you invest in fundamentally sound companies and then give the investments sufficient time to grow will you see some healthy returns on your investments. Ideally a minimum horizon of one year is a good time. 

Hope these tips will prove helpful and you will make a lot more in the stock markets than you have already been making. Happy Investing! 

MUTUAL FUND TYPES

Any investor when making financial investments can follow only three important and distinctive objectives: keeping the value of the invested money (investing in a monetary system that is stable to protect the income in under-evolved economies) 

gaining a profit from the invested money (most typical example are the bank deposits that regulate pay out income under the name of interest)  increasing the value of the invested money (when investments are made in stocks or land/buildings) 

To satisfy the diversified objectives of the investors, the mutual funds administrators created three big fund types that have as a purpose meeting the respective objectives through different placement politics. Technically speaking the three types are: 

Ø Monetary Funds The monetary funds have as an investing objective keeping the value of the invested money. These types of funds are generally addressed to investors that, because of aversion towards risk or other motives (like needing the invested money in a short time), don’t want the value of their investment to decrease. Until now, in the USA, there has never been a monetary fund that ever signalized a decrease in the title value. 

The monetary funds can be successfully used to efficiently evaluate and sustain the current bank accounts (of individuals or companies). There are countries where payments can be made right out of the monetary fund, because sometimes these funds act just like a current bank account. Monetary funds invest usually in stocks that generate income and the variation in profit is very low. Their main investment areas are: national/state bonds, bank deposits, commerce effects emitted by commercial banks or commercial companies with an average withdraw limit of 90 days (they only choose low withdraw limits). 

Ø Income Funds  These funds have as an investing objective gaining a profit from the invested money or generating stable income. They are addressed to those that need supplementary stable income in addition to their current income. Since the majority of the incomes made by the fund are distributed to investors, the stock value doesn’t suffer significant variation. Still, because of the structure of the portfolio, there is a risk that the stock value would decrease.
Generally, investors in income funds are retired persons, young families or families that have to pay for their children’s studies. The investors can opt for cashing the distributed incomes or for reinvesting them automatically in the fund. The income funds will invest mostly in stocks that generate high incomes, but because of the long periods before withdrawal it is possible that they become exposed to value variations. The main investment fields are: bonds, asset mortgages, preferential stocks, common stocks emitted by very good companies with a rule of distributing consistent dividends. 

Ø Growth Funds 

Growth funds have as a primary objective increasing the value of the invested money (the value of the stocks). They mostly address those investors who wish for their investment to grow over time. The stock value will grow or decrease depending on the evolution of the stock market and the abilities of the investor.
The main categories that invest in growth funds are mature families that have already satisfied their basic material necessities (a house, a car and other assets) and they can afford to risk some of their current incomes with an investment that has a higher risk factor. Of course, in these kinds of funds the investors can also be persons with an appetite for risk. Within the category of growth funds we distinguish a different subcategory, named accumulation funds. These funds are the fund in which the investor, with the help of a contract sighed, has the responsibility to regularly invest in stocks (monthly, quarterly). Also they may sound like they belong to a different type, they are nevertheless growth funds.
A growth fund will invest in stocks whose value is considerably variable over time, any types of stocks, convertible bonds, options and futures contracts.
There are many other funds classifications, by the geographical zones they invest in, by the risk factor of the portfolio, etc., but, leaving these details aside, any fund will fit into one of the three categories presented above.  

Common Mistakes made by Investors

 

 

The individual investor often makes certain typical mistakes that will eventually cause him to give up or to lose everything.

 Believing every investment you make is 100% safe
Any investment implies a certain risk factor that is determined by a multitude of factors. Disregarding these factors leads to wrongly evaluating the wining possibilities. 

Great expectations
Those investors that neglect risks also have great expectations regarding the general profits. In this case disappointment will occur, maybe even sadness or desperation when they lose the final investment also. 

Not doing your homework
You must be as informed as possible about your investment, about its risks and the credibility of the brokers and company administrators. 

Not diversifying the portfolio
When we say investment portfolio, we mean all the investment a certain person has made.
Through diversification the investor will attempt to cover through profits some companies that might register losses. Regarding the optimal rapport between winning and security, a portfolio will have a pyramidal distribution of the stock types. The biggest investment will be done in companies with minimum risk and maximum security like governmental bonds. Climbing the risk stair the number of investments will decrease. Investments in extremely risky companies will represent a low percentage of the portfolio. 

Being greedy and/or being afraid
Greed never pushes to safe investment. Through greed you will only make investments that don’t stand a chance. Fear will determine a rather calm and secure behavior that won’t bring you losses but will cause you to flip over great opportunities. 

Investing because of a “tip”
An investment has to be done accordingly to the needs and risk tolerance of every individual. These two elements are unique and like fingerprints are always different, the same way there can’t be two persons with identical needs and risk tolerance. So, if an investment is an opportunity for the one that who told you the tip, it doesn’t mean it is for you too. 

Not giving up on time
This is a mistake that can be hardly eliminated. It’s hard because the market fluctuates anyway and investors can’t say when it’s just a normal day or if the stock price is really going down. Many people won’t admit they made a financial mistake and don’t want to give up their stocks. It has been statistically proven that in these cases things go from bad to worse.
Avoiding such situations is difficult even for a pro who usually has more information that the individual investor. 

Investing only short term
Avoiding, or reducing this risk can be achieved by investing long term in profitable stable companies. In these cases, bad yearly evolutions can be recovered through better years. 

Thinking you are the smartest
Every investor bases his decisions on information he knows at a certain moment. Not wanting to hear advice or to hear new things, does not make you smarter, it brings you a great disadvantage and you will only put on hazard with your investments. 

Peter Lynch – Golden rules for success in the stock market

 

 

For those who never had the opportunity to read one of Peter Lynch’s books, the well-know American fund manager, let’s take a peak at his golden rules for success, meant to be of use to the nonprofessional investors, according to Peter Lynch.

 

 

Lynch has led the investment fund “Magellan”, of the administrative society “Fidelity” during 1982 – 1992. This fund grew in that period from 50 million dollars to 50 billion dollars, and the annual growth factor was of about 29%. He clearly knew what he was doing, so his words are not to be taken lightly.

 

 

He wrote a book : “One Up on Wall Street” and in his book, next to investment strategies and theories, he included some guidelines for the amateur investor, guidelines that over the years brought so many people to success.

 

 

1. Investment is fun, exciting but as all things that are not boring, it can get dangerous if you don’t research your actions.

2. You hold an advantage and it is not what you are going to get from Wall Street. It is what you already have. You can even be better than experts if you are using your advantage and invest in companies you know all about. The advantage is essentially your not worrying about your boss or peer pressure and the public scrutinizing your every move. Other advantages that an amateur holds is the relatively smaller amounts to invest which he or she can invest in smaller companies which he discovers and which are not so liquid.

 

3. If a stock exists, then there’s a company that holds it. You need to know nothing about the stock itself but everything about the company.

 

4. Often you can’t see why a stock increased when the actual company had fewer sales. If you are looking at just a few months, then you can’t find a pattern. But over years, the pattern is clear. You must be patient and always own successful companies.

 

6. You must know what stocks you are buying and why you bought them.

 

7. Don’t go for a long shot even if it seems to be an opportunity. It will most certainly miss.

 

8. Investing is like children. You don’t make more children than you can take care of, so don’t invest in more than 12 companies overall, and 5 at a time because you won’t be able to track them.

 

9. Don’t invest when you can’t understand the finances of a company. The greatest losses come from companies that are not solvable.

 

10. If the market crashes, don’t panic like all the others do. Take this opportunity and buy cheap stocks from the ones who panicked.


 

11. The more companies you study, the more chances you get to find good ones and companies that are not yet known on Wall Street.


 

12. If you just invest without studying, you will play the market as if you were paying cards without being allowed to actually see your hand.

Picking a Stock

Before investing in a company we have to inform ourselves about the business area it belongs to, taking into consideration the factors that stick to that area and to the macro-economical environment. Let’s briefly review some selecting methods and norms.

 1. Business Area – when referring to this we must reflect upon four aspects that appear in its sector: 

 – Competition: It always helps to know how much of the market our company has and if it has or not an advantage that can make it superior to others. 

– The customer power: How much does the company depend on customers? Could a customer buy a concurrent company to integrate production? 

– If the products being offered by the company are threatened by the state, society or some kind of substitute goods that might exist on the market. 

– If hurdles exist on the market area the company has placed its business in. 

2. The structure of share holders: Companies that have most of their shares on the stock market should be preferred. This is because there will be more liquidity in such stocks and in times of crisis one will not be “stuck” with these shares. 

3. Financial performance: You should watch the growth and efficiency indicators over a relevant interval of 3 to 5 years of that company and of its peers. Also it’s important to know the debt if any, the health of the transactions, and the cash balance variable factor. 

4. How is the company evaluated by the market? – To correctly answer we have to look through three further factors: – The P/E Multiple of a stock, notion that has as theoretical interpretation the number of years in which the starting costs are paid back with the profits. 

– The price/book value which generally depends on the efficiency of the company.  – The dividend yield that only occurs when we are talking about companies that give their shareholders dividends for every share.