Saturday, April 30, 2016

Pros And Cons of Growth Versus Value Investing

How well do you know the differences between growth and value investing? Want to determine if one of these strategies is suitable for your investment goals? Let’s explore the principles of value and growth investing as well as the pros and cons of each of these renowned and debated investment strategies.


Studies have shown that value investing has done better over time compared to growth investing.But it should come as no surprise that exceptions can occur and under-valued companies aren’t always winners.
What’s the fundamental concept of value investing? The framework was formed in the 1930s by two finance professors at Columbia University, Benjamin Graham and David Dodd.
The basic idea is for investors to identify and purchase companies that the markets have undervalued. If and when the markets adjust upwards to the true valuation of those companies, value investors can earn profits on those price increases.

Cheap Prices Don’t Necessarily Indicate Good Value

Keep in mind, value investing isn’t about buying every stock that has fallen or is priced low. After all, low share prices can be due to legitimate reasons such as underlying issues with a company’s financial health and prices may remain low if solutions aren’t put in place.
Value investors look for companies with strong fundamentals that the market hasn’t fully reflected in the price. They analyze a company’s intrinsic value by looking at various aspects such as its cash flow, earnings, book value, and business model, looking for clues that the current stock price is undervaluing its full worth. A few guidelines that some value investors utilize to select investments include:
• D / E ratio < 1
• PEG ratio < 1
• Market Cap < Book Value
• Cash > Market Cap
• Current assets at least two times current liabilities
Now let’s take a look at some of the pros and cons of value investing.

Pros of Value Investing

• Value investors can take advantage of devalued assets when others are panicking.
• The hype and herd mentality do not have much of an effect on a value strategy.
• Day-to-day price fluctuations and market volatility are not much of a concern to value investors because they are focused on the value of a business instead of external factors.
• Value investors can experience steady and consistent gains that may outperform benchmarks such as the S&P 500.

Cons of Value Investing

• Value investors may lose out on larger returns due to searching for companies with a margin of safety.
• The under performance of a company’s share price could last for years or may never rise to the investor’s estimate of fair value.
• There may be a lack of liquidity due to the stock’s under performance or low market cap.
• It can be difficult to determine if a stock has bottomed out or could continue falling further down.
• Finding investments can require a lot of time spent on research and analysis.


Thomas Rowe Price, the founder of T. Rowe Price Associates, has been dubbed by many as “the father of growth investing.” Price’s growth philosophy was based on investing in companies that he believed would grow faster than the economy and inflation.
Some of the aspects Price looked for included well-paid employees coupled with low labor costs, limited competition, protection from government regulation, earnings per share growth, consistent high profit margins, and a minimum 10% return on invested capital.

Diamonds In The Rough

Growth investing is typically focused on a company’s potential down the road, and not so much on its current share price. Growth stocks also tend to be younger companies that reinvest their earnings into the company instead of paying dividends and are identified as growing significantly faster than their competition (aka Growth At A Responsible Price). They may also be a part of industries such as technology that are experiencing fast expansion.
Examples of guidelines that some growth investors follow when selecting investments include:
• Historic earnings growth. For example, a minimum of 7% earnings per share (EPS) growth for companies between $400M – $4B.
• Companies with an expected 10-12% earnings growth rate over the next five years.
• Industry leaders that have beat pre-tax profit margins for five years.
• Steady or rising ROE.
• Expectations that the stock price can double in five years.
Here are some noteworthy pros and cons of growth investing investors should consider:

Pros of Growth Investing

• Successful investments may appreciate much faster than the overall market by the very definition of growth investing.
• Investment selection is focused on attractive companies with above average earnings and sales growth.
• Investors can gain exposure to cutting edge industries that are rapidly evolving and are exciting to watch.

Cons of Growth Investing

• Higher risk and volatility.
• Dividends are uncommon as most growth companies reinvest their earnings.
• Time intensive to evaluate the credibility of various growth projection estimates.
• Valuations could be much higher than the market average to reflect projected growth that may never materialize.

Two Sides Of The Same Coin

If you don’t find yourself strongly preferring value investing to growth or vice versa, the good news is you don’t have to choose one over the other. Some investors choose to diversify and apply both methods to their portfolio’s stock selection.
Warren Buffet is known for not associating with one specific strategy and stated in his 1992 Chairman’s letter, “…the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive. In addition, we think the very term “value investing” is redundant. What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid?".

Saturday, April 16, 2016

9 Mistakes First-Time Investors Make

    Courtesy :

Investing in the stock market is no easy game. Many enter with high hopes, only to find themselves crushed and broke after a few months of trading. That is the harsh reality for would-be investors who do  not exercise caution, and who do not strive to find knowledge and understanding before they pump their money into the first "hot" share.
There is money to be made in the stock market, but competition is strong and fierce, and experienced traders have been learning the tricks of the trade for a long time. First-time stock market investors often enter this strange world of numbers with false expectations and ideals that ultimately lead them towards common mistakes.
Those who are new to the world of the stock market would do well to learn from these errors before they find themselves astray. Here are nine mistakes that first-time stock market investors frequently make:

 1. Not Having A Plan
Successful stock market investors have a solid plan, and they stick to it. Newbie investors on the other hand tend to go in blind, like a boat without a compass, and therefore get lost and stranded at sea.
A personal investment plan helps you to map your goals and objectives, your entry and exit points, the amount of capital you will invest in a certain trade, any potential risks, the maximum amount you are willing to lose, and your plans to diversify your portfolio. With these details you will be able to invest with purpose, according to and against your own principles. New investors who make a plan may also struggle to stick to it, and change their course whenever the market dips, or whenever an investment doesn't go exactly as they expected. Sticking to your plan will help you to navigate the stock market even when times are tough. Not having one can cause you to flail out and make emotional decisions that are detrimental to your aims

 2. Playing The Guessing Game
Playing the guessing game with your stock market investments is exactly the same as gambling. It is your ability to work with stock market data and other relevant channels of information that distinguishes the two.
A real investment is not made on speculation, or on the basis of a rumor that you heard, but on a valuable opportunity that you have researched, and which looks like it will pay enough long term profits to justify the risk.New stock market investors tend not to do their homework very well, or at all. You should never take a stab in the dark with the stock market; you may as well play roulette. Instead, try to gather and monitor enough data that you can start to make informed decisions about where you will invest your money.
 Do your homework, stick to the plan, and your investments just might pay off.

 3. Not Understanding Risk.
Every investment comes with a certain amount of risk. That is the nature of the stock market, and of all investments. Newcomers often don't properly evaluate the risk of their investments, or their own tolerance to that risk. This can cause them to make flamboyant moves with serious life savings that quickly land them in the dump.
On the other side of the coin, risk aversion can create a psychology of scared money, in which the first time investor is frightened to take an opportunity that looks lucrative because they don't want to risk the losses.
 There is a balance to be found, and it lies in knowing that every investment is a risk, and also in knowing the margins that you are willing to push.
There are safe bets out there; investment options that come with very little risk. One example is to purchase blue-chip stocks from a very well established company. There is always some risk involved, but you can be fairly confident that these stocks will rise, or that the company will pay dividends.
Investments in which you stand to gain more, generally (but not always) come with a higher amount of risk. New investors fail to think about what they stand to lose as well as what they stand to gain. Your risk tolerance will likely determine, at least to some extent, your style of investment.


4. Not Knowing How Much Is Too Much.
If you are new to stock market investments, and you play with only money that you are willing to invest, then you at least only stand to lose what you can afford. The single most devastating error that a first time investor can make, is to play with money that they cannot afford to lose. This is a direct ticket to complete emotional turmoil, irrational decision making, and perhaps even financial destruction.Whatever you do, only play with money that is yours. Do not take out loans to invest in stocks, especially if you are a beginner. Don't invest your own reserves. Even experienced investors keep a liquid asset stream.

 5. Short-Term Thinking.
Many new investors rush to make their first stock market investments. The stock market isn't some sort of get-rich-quick playground.New investors often enter with high hopes for a steep and rapid profit, and they want to make it big with short-term investments. This makes for bad investment decisions at the best, and for many leads to nothing but a quick exit from the marketplace.More established investors have a totally different idea about what makes a short-term and a long-term investment. In their view, a long-term investment might be 20 or more years, and even when they consider an investment to be short-term they will probably be looking to stick with it for three-to-four years.
If you thought you were going to turn a quick profit in a few months then it is time to re frame your approach to time. Be in it for the long run, or don't be in it at all. Investment is best seen as a process of long-term wealth accumulation.

6. Selling Out In A Panic.
If you do have a long term plan in place, and you understand that stock market movement is best understood over the course of years and not weeks and months, then you probably won't be in much of a panic if stocks start to decline. Stocks rise and fall all of the time.
First-time investors, if they have a short-term attitude towards investments, or obsessively monitor their stocks for daily movement, can often get more than a mild case of hysteria if they spot a downward trend. This can cause them to sell out their position blindly, without properly considering whether or not they are likely to rise back up.Very short-term trends are not great indicators overall, and experienced investors may see opportunity for recovery. Whatever happens you shouldn't panic. Now is the time to make wise, sober-minded decisions

 7. Failing to Cap Losses.
The opposite to selling out in a blind panic, but just as damaging when the tides are against you, is to hold on to a losing stock even when market indicators suggest that the share is unlikely to pick up again. Did you see the keyword there? "Market indicators." This is what an experienced investor uses to decide whether a downward trend is just a temporary blip, or whether it is a long-term loser.
Experienced investors cap their losses, and move onto the next investment idea. When a share is depreciating, knowing when to cut your losses is essential.
 8. Failing to Diversify Investments.
This really is a huge mistake that a lot of first time investors tend to make. It is never clever to put all of your money in one investment, or even one type of investment. Markets can crash, and stocks for a single company can go down the drain. If your whole investment strategy revolves around one company, or even one industry, then a single movement could cause you huge trouble.
More savvy investors tend to diversify their investments across several industries and sectors, and have a portfolio that involves stocks in a variety of different companies.Investors who feel intimidated with the market can reduce their risk and increase their diversity by investing some of their money in mutual funds and index funds, as well as making their own choices in a diverse way. It is also useful to keep assets outside of the stock market; keep some money separate, and invest in hard assets such as gold to diversify even further.

 9. Investing In Alluring Stocks.
First-time investors, if they are not making their decisions based on the proper information and stock market data, often do so based on what looks like a good deal. The problem with this is, those which look good at first glance, are not often the most lucrative investment opportunities.
Many new investors think that a low stock price makes for a great opportunity, but this is not necessarily true. Value is key, not price. Sometimes high priced stocks offer a high potential for return, and low priced stocks can be worthless investments.

Following the herd is another mistake, and can lead new investors into paying too much for a "hot" stock that will not hold its value in the long term.


Saturday, April 9, 2016

5 Characteristics of a Successful Stock Market Investor


There is no doubt that some people simply are better at playing the role of a stock market investor than others. When talking about somebody who has successfully worked his way through investing in the stock market, it is never a matter of luck but rather certain personal characteristics that decide how successful they are. While the best investors seem born with all the right characteristics, it is possible to discover and implement them yourself. Believe it or not, much of what you need to know is just stock market investing basics.

Personal Preparation.

The key is to always have a plan when you invest. Before you do anything, you need to know when you will purchase stock and when you want to sell. Equally important is knowing what you will do should things go wrong. And most importantly, you always need to know what your ultimate goals are, and be sure that all your investment roads lead to that end.


You should never invest in a company without knowing where it’s coming from, where it’s going, how their products stack up against competitors. It is also important to know how that particular market is doing in general. Ultimately, you are putting your faith in a company that will make you money over some period of time, but it does not have to be based on complete blind faith. Do your research, and make an informed investment.


If you don’t know what the market is doing right now, you have no business investing in it. Everybody pretty much has the same information, but everybody interprets that information a little different, which is where some investors succeed where others fail. The key is to find information that is as unbiased as possible, and milk it for everything it is worth.

Be Emotion-less.

Using unbiased information is useless unless you are going to be equally unbiased. Do not allow  past exploits and failures get you down or hold you back. And, you cannot allow success to sway you either. Just because you made a decent bank on a particular investment from ten years ago, is no reason to continue putting up your money for them. It is also no reason to be getting headstrong and overly confident about your investment practices.

Be Realistic

You must also be realistic. No investor is going to strike it rich right away, and no investor is going to have a perfectly flawless track record. Understand that sooner or later, you’re going to lose a little money. But if you follow the first four steps of this guide, combined with a little common sense, you can minimize how much that loss is and go on to reap greater rewards.

These five basic principles should help you to get on the road to proper stock market investing and help you remember your focus.

Saturday, April 2, 2016

What Is Your Risk Tolerance?

Courtesy : Investopedia

Risk tolerance is a topic that is often discussed, but rarely defined. It is not unusual to read a trade recommendation discussing alternatives or options based on different risk tolerances. But how does an individual investor determine his or her risk tolerance? How can understanding this concept help investors in diversifying their portfolios? 

Risk Tolerance by Time frame

An often seen cliché is that of what we'll refer to as "age-based" risk tolerance. It is conventional wisdom that a younger investor has a long-term time horizon in terms of the need for investments and can take more risk. Following this logic, an older individual has a short investment horizon, especially once that individual is retired, and would have low risk tolerance. While this may be true in general, there are certainly a number of other considerations that come into play. 

First, we need to consider investment. When will funds be needed? If the time horizon is relatively short, risk tolerance should shift to be more conservative. For long-term investments, there is room for more aggressive investing. 

Be careful, however, about blindly following conventional wisdom. For example, don't think that just because you are 65 that you must shift everything to conservative investments, such as certificates of deposit or Treasury bills. While this may be appropriate for some, it may not be appropriate for all - such as for an individual who has enough to retire and live off of the interest of his or her investments without touching the principal. With today's growing life expectancies and advancing medical science, the 65-year-old investor may still have a 20-year (or more) time horizon.

Risk Capital

Net worth and available risk capital should be important considerations when determining risk tolerance. Net worth is simply your assets minus your liabilities. Risk capital is money available to invest or trade that will not affect your lifestyle if lost. It should be defined as liquid capital, or capital that can easily be converted into cash. Therefore, an investor or trader with a high net worth can assume more risk. The smaller the percentage of your overall net worth the investment or trade makes up, the more aggressive the risk tolerance can be.

Unfortunately, those with little to no net worth or with limited risk capital are often drawn to riskier investments like futures or options because of the lure of quick, easy and large profits. The problem with this is that when you are "trading with the rent" it is difficult to have your head in the game. Also, when too much risk is assumed with too little capital, a trader can be forced out of a position too early.
On the other hand, if an undercapitalized trader using limited or defined risk instruments (such as long options) "goes bust", it may not take that trader long to recover. Contrast this with the high-net-worth trader who puts everything into one risky trade and loses - it will take this trader much longer to recover.

Understand Your Investment ObjectivesYour investment objectives must also be considered when calculating how much risk can be assumed. If you are saving for a child's college education or your retirement, how much risk do you really want to take with those funds? Conversely, more risk could be taken if you are using true risk capital or disposable income to attempt to earn extra income.
Interestingly, some people seem quite alright with using retirement funds to trade higher-risk instruments. If you are doing this for the sole purpose of sheltering the trades from tax exposure, such as trading futures in an IRA, make sure you fully understand what you are doing. Such a strategy may be alright if you are experienced with trading futures, are using only a portion of your IRA funds for this purpose and are not risking your ability to retire on a single trade. 

However, if you are applying your entire IRA to futures, have little or no net worth and are just trying to avoid tax exposure for that "sure thing" trade, you need to rethink the notion of taking on this much risk. Futures already receive favorable capital gains treatment capital gains rates are lower than for regular income, and 60% of your gains in futures will be charged the lower of the two capital gains rates. With this in mind, why would a low net worth individual need to take that much risk with retirement funds? In other words, just because you can do something doesn't always mean you should. 

Investment Experience

When it comes to determining your risk tolerance, your level of investing experience must also be considered. Are you new to investing and trading? Have you been doing this for some time but are branching into a new area, like selling options? It is prudent to begin new ventures with some degree of caution, and trading or investing is no different. Get some experience under your belt before committing too much capital. Always remember the old cliché and strive for "preservation of capital." It only makes sense to take on the appropriate risk for your situation if the worst-case scenario will leave you able to live to fight another day. 

Careful Consideration of Risk Tolerance.

There are many things to consider when determining the answer to a seemingly simple question, "What is my risk tolerance?" The answer will vary based on your age, experience, net worth, risk capital and the actual investment or trade being considered. Once you have thought this through, you will be able to apply this knowledge to a balanced and diversified program of investing and trading.

Spreading your risk around, even if it is all high risk, decreases your overall exposure to any single investment or trade. With appropriate diversification, the probability of total loss is greatly reduced. This comes back to preservation of capital.Knowing your risk tolerance goes far beyond being able to sleep at night or stressing over your trades. It is a complex process of analyzing your personal financial situation and balancing it against your goals and objectives. Ultimately, knowing you risk tolerance - and keeping to investments that fit within it - should keep you from complete financial ruin.

Wednesday, March 23, 2016

How To Construct A High-Risk Portfolio

 Courtesy : Investopedia

A lot of investment advice centers on producing as much return as possible for as little risk as possible. But what about the other side of the coin? What about embracing the possibilities of risk and actively seeking to build a high-risk investment portfolio? Such a portfolio could hold considerable promise for market-beating returns, but investors need to keep a few ideas in mind when approaching this type of investment portfolio.

Why Seek Risk?

The linkage between risk and reward is not always perfect or predictable, but there is a time-tested correlation between risk and reward. If investors want higher returns, they have to be willing to take on higher risk. Said differently, though, if an investor can accept higher risk, he or she can also potentially realize considerably higher returns.

A low-risk/high-return portfolio is more often about fantasy (or fraud) than reality. Moreover, not all risk is bad for an individual investor. The key, then, is taking on the right risks. After all, risk only becomes problematic if, or when, an investor is wrong. There are also different ideas of risk; holding an all-cash portfolio is actually quite risky if that cash is being eroded by inflation. 

Large institutions cannot afford the risks that go with low liquidity, but that threshold is much lower for an individual. Even a small fund may be unable to invest in a $20 stock that trades 50,000 shares a day, but there is no reason that an individual investor cannot take on that liquidity risk. Likewise, many institutional investors cannot invest in low-priced stocks, pink sheet/bulletin board stocks or stocks in certain industries (particularly for certain ethical funds), but individuals have no such statutory restrictions.

It is also important to understand another key detail of "high-risk" portfolios – volatility is NOT risk. True, many academics and market participants do use volatility as a proxy for risk (beta, for instance), but in many respects volatility is a poor analog to risk. Risk, as most investors would define it, is either the probability of loss or the probability of an asset (or collection of assets) providing less than the expected return. 
Some stocks can go through wild up and down swings, but still produce handsome rewards for investors. In other cases some stocks just quietly and steadily fade into oblivion. In many respects, then, volatility is like the turbulence experienced on a plane ride, whereas risk is the actual chance of crashing.

Seek Out Smart Risk / Not All Risk Is the Same

One of the most important concepts in building a high-risk portfolio is that not all risk is the same. A close corollary is that investors should only seek out the smart risks, the risks they get compensated for taking. For instance, investing in the equity of bankrupt companies almost never pays off; yes the stocks trade for pennies and the companies often survive, but the bankruptcy process almost always completely wipes out equity investors and there is not enough wiggle room in that "almost" to validate the risk.

Investors should also guard against laziness and complacency. High-risk investing demands responsiveness and attention to detail. So while building a portfolio without thorough due diligence and then ignoring it is certainly high-risk investing, it is not a kind of risk that will earn extra rewards.

Types of High-Risk Portfolios


It is possible to create a high-risk portfolio without really changing investment styles. Heavily investing in a single sector/industry can certainly amp up risk and increase return potential. Investors who over weighted into technology stocks during the late 1990s (and got out in time) did quite well, as well as investors who successfully play cyclical commodity runs.

Perhaps it goes without saying, but this strategy is predicated on really understanding an industry well and having a good sense of the industry's place in the business cycle. Likewise, it is important to have a good sense of market psychology and moods; over weighting an unpopular sector is not likely to boost returns.  

Momentum investing - is another option for a high-risk portfolio. The basic idea of momentum investing is to invest in stocks already showing strong price action. The risk from this strategy is often due to the above-average valuations that popular stocks carry, but expensive popular stocks can often trade up to "very expensive" or "extremely expensive" before fading.
Momentum investing requires strong sell discipline (using tight stop-losses when momentum fades, for instance). Investors can also look to diversify across sectors to lower absolute risk, but a general market decline will hit a momentum portfolio hard unless an investor is nimble enough to go short. 

Penny Stocks

Most financial information sites go to great lengths to dissuade investors from investing in penny stocks, highlighting the prevalence of fraud, corruption, and hype as well as the overall illiquidity of these stocks.

While those are valid issues, some times the enormous risks of this investment type do pay off. Penny stock investing requires exceptional commitment to due diligence, and diversification can help reduce the risks.

Emerging Ideas

Risk-seeking investors can also take a page from venture capital and look to invest in emerging technology companies. At their best, these companies can give investors something close to a "ground floor" opportunity in new technologies and products. Once again diversification matters, as investors have to be patient and willing to accept a low "batting average", as most emerging technology companies fail. Investors should also focus on companies that have capital and/or access to capital on good terms as many of these companies are pre-revenue and torrid cash-burners.

Bottom LineInvestors with the financial capacity to take on risk should not shy away from it. Over time, intelligent and disciplined risk-seeking behavior can produce substantially above-average returns. The key, though, is "intelligent" and "disciplined"; investors must seek out the risks that can earn them better returns and strictly avoid (or minimize) those risks that do not add any money to their pocket.

Saturday, March 19, 2016




How to book stock market losses and make money

Courtesy :

Booking losses at the right time forms the most important part of wealth management strategy.

Do you book profit or book loss?

You have bought the shares of ABC Ltd at a rate of Rs.100 per share. The current market price is Rs.150 per share. Also you have bought the shares of XYZ Ltd at a rate of Rs.200 and the current market price is Rs 125.
Do you book profits by selling ABC or book losses by selling XYZ.
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1: Warren Buffett
This quote from Warren Buffet is the essenceof selling loss-making investments as part of wealth management. However, to the contrary, most of us tend to sell those investments that make us money and prefer to hold on to those that are already making losses.It is just probably a feeling that we could not have gone wrong and the investment would revive, or on the other hand a feeling that we have been fooled and do not want to be fooled again and do not want to take action.

What to do with loss making investments?

" It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong" - George Soros

I recollected this saying when an investor told me that he always invested in right investments at the right time. I acknowledged his prudent nature, but felt that he and many other financially prudent persons needed to know that they also required to regularly review their investments to eliminate non-productive ones for productive and paying ones.
Wealth management is all about making money work best for you.
George Soros's lessons of prudent wealth management lie in not allowing your investment to depreciate (fall in value).This involves being ready toleave your comfort zone and revise your investment decision with the right attitude of being proud of the right investment and at the same time not being disgraced or regretful in making revisions or corrections in decisions already made.

Review your investments with the current outlook

Most of us make investments that are based on the information available to us at a given point in time. But it is important to know that with times the profitability or loss of an investment could change. It definitely proves useful to review and revise our decisions when we find that we are holding on to something that no one would buy or invest in now.
It is right that it is human to make mistakes, but holding on to a mistake just for emotional reasons cannot be pardoned. Subsequent events might alter the attractiveness of the investment.
Should we be possessive in our attachment to those investments for which the outlook has changed now? So I would say that if you need to create wealth and manage it, there is nothing wrong in being a fair weather friend; investments have to work for you and not accomplishing this goal means getting out of these investments for better avenues.

Do I need to book losses when the market is falling?

However I wish to be excused when I say it is not good to sell when the prices on the whole have fallen down. However it is again important to believe that poor stocks would surely be losing more than good ones; fall in price just does not indicate a downturn, it is a combination of various factors like production, sales and profits also; so poor stocks or small companies may find it difficult to recoup even when we experience favorable times in the market.
Again during the fall in the market it is common for us to see that even good stocks may be available at a discount. I would say such times are ideal to liquidate poor performing stocks that are not doing well and purchase good stocks.

Why should you book loss?

Booking losses in poor performing investments has got some advantages. So as to quit the poor performing investments, you are forced to quit your ego and admit that you have made a wrong investment decision.
As you admit your mistake, you learn a lesson. As you learn a lesson you do not take similar wrong investment decisions in the future.
The advantage of booking losses is you move out of poor performing investments and moving into better performing investments. So you will be able to recover your losses faster.

How to Get Tax Gains from Your Losses in Shares

Courtesy : NDTV

 For the purpose of tax computation of total income of an individual, all incomes are classified under five heads, under the Income Tax Act: salary, income from house property, income from business or profession, capital gains and income from other sources. The total income under all these five heads of income are added and after allowing deductions the total income tax is calculated based on the tax slabs.

However, tax laws allow setting off of losses against gains in the same category, based on different criteria. If an income is tax-exempt, it however cannot be adjusted against any loss from an income that is taxable. For tax computation, profit or losses in shares are clubbed under the head of capital gains.

If an investor has held shares for less than 12 months from the date of buying, then the resulting loss on its transaction on stock exchanges, if any, is termed as short-term capital loss (STCL).

This loss can be adjusted against the short-term capital gain (STCG) or long-term capital gain (LTCG) from shares, if any, thus lowering the tax outgo. Short-term capital gains from equities are taxed at 15 per cent. (If an investor has held shares for more than 12 months, then the resulting gain/loss is termed long-term capital gain/loss.)

If the short-term loss cannot be set off in the same fiscal, then the balance can be carried forward to subsequent eight years. In each of these, the said short-term losses can be set-off against short-term capital gain (STCG) or long-term capital gain, if any.

To reduce outgo, many investors set off gains made from equities in the fiscal against losses occurred in same year or previous year. They book losses, if any, on existing holdings and then later repurchase the stock to keep their holdings intact.

For example, an investor has already booked short-term profit (by selling within 12 months) of Rs. 10,000 in some stocks. At the same time, the investor is sitting on un-realized loss of Rs. 4,000 in some other stocks.

In that case, the investor has to pay short-term capital gains tax at 15 per cent on Rs. 10,000 profit. To reduce short-term capital gains tax liability, the investor can sell the stock on which he is incurring Rs. 4,000 of losses. In that case, the investor's has to pay tax on Rs. 6,000 (Rs. 10,000 - Rs. 4,000), not Rs. 10,000. To keep his holding intact, the investor can later repurchase the stock.

However, long-term capital losses on shares can only be set off against long-term capital gains, if any. Further, any long-term capital losses that cannot be set off against long-term capital gains arising in the same fiscal can be carried forward to subsequent eight years.

Disclaimer: "Investors are advised to make their own assessment and counter checks before acting on the information. - Tax Rules are subject to changes "



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