Saturday, April 22, 2017

Are you a lay investor? Trading in derivatives could make your money vanish...

Courtesy: Economic Times
Those who study narcotics addiction have invented the term ‘gateway drug’. It seems that many drug-users start with mild narcotics like marijuana and gradually move up to harder stuff like heroin and crack. It so happens that there’s an almost exact equivalent to this in equity investing as well, except that the first stage is actually beneficial.

The default Indian saver saves all of his or her money in deposits with banks or post offices or the government. Some of these people—perhaps about two crores of them—start investing in equity funds. The gateway investment to equity funds is often a tax-saving fund—one of the so-called ELSS funds.

As ELSS investments come with a lock-in, they are forced to stay put for three years, which is a reasonably long period to see good gains. For most of these investors, the idea that equity funds can get you good returns becomes an obvious. So far, so good.
A certain proportion goes beyond this gateway stage—generally with the help of equity investment’s equivalent of a drug dealer. This person often goes by the name of a wealth manager or a relationship manager or something like that and is generally employed by a bank or a stockbroker.
The logic given is simple: why are you wasting your time? Since you know that equity returns are better than a bank deposit, let me introduce you to the form of equity that can get you the highest possible returns from equity, which is effendo.
Even though ‘effendo’ sounds like a magical spell from Harry Potter (like Confundo or Diffindo), it is not. It is actually the popular way to pronounce F&O, otherwise known as futures and options, or derivatives. Effendo is closely related to a Harry Potter spell called Evanesco which makes things vanish.

Effendo can make money vanish as if by magic, as it regularly does for investors lured into short-term trading using these types of investment avenues. Actually, effendo does not make money vanish, as much as it transfers it magically into the bank accounts of your broker.
Now I know the whole shpiel about how derivatives provide depth and breadth to the stock markets, but for a vast majority of small investors, they are none of that. Instead, as Warren Buffet pointed out, they are nothing but financial weapons of mass destruction. But aren’t derivatives meant to be a good thing?

The answer to that question lies in one of the distortions that have crept it into the Indian stock markets ever since derivatives trading began. Derivatives like futures and options can be used to protect traders against risk, acting like an insurance policy.

However, they can also be used to enhance risk and returns, effectively as an instrument that offers a chance of higher gains, but also a high risk of huge losses, including completely wiping out the investor’s capital.

The real problem is not that using futures and options in this manner is possible, but that almost every part of the equities trading industry is dedicated to getting customers into this kind of trading. Practically every broker—and that definitely includes banks’ ‘wealth management’ units—does this and certainly, all the stock exchanges have spared no effort in getting as many people to trade as speculatively as possible.

This kind of institutional behaviour is certainly disappointing, but not surprising. So much of the behaviour of India’s big financial players is sub-ethical that one suffers from a bit of outrage fatigue.

However, the important point is that savers should save themselves from being herded into such kind of trading. It’s certainly not a natural extension of safe and sensible investing of the kind that one does in a tax-saving or other equity fund. There will be people who will try and tell you stories and earn fat commissions out of your money but it’s your job to show them the door.

Those who study narcotics addiction have invented the term ‘gateway drug’. It seems that many drug-users start with mild narcotics like marijuana and gradually move up to harder stuff like heroin and crack. It so happens that there’s an almost exact equivalent to this in equity investing as well, except that the first stage is actually beneficial.

Monday, April 10, 2017

7 Stock Buying Mistakes And How To Avoid Them



Courtesy : Investopedia

Making mistakes is part of the learning process. However, it's all too often that plain old common sense separates a successful investor from a poor one. At the same time, nearly all investors, new or experienced, have fallen astray from common sense and made a mistake or two. Being perfect may be impossible, but knowing some of common investing errors can help deter you from going down the well-traveled, yet rocky, path of losses. Here are some of the most common stock buying mistakes.

1. Using Too Much Margin


Margin is the use of borrowed money to purchase securities. Margin can help you make more money; however, it can also exaggerate your loses - a definite downside. The absolute worst thing you can do as a new investor is become carried away with what seems like free money - if you use margin and your investment doesn't go your way, you end up with a large debt obligation for nothing. Ask yourself if you would buy stocks with your credit card. Of course you wouldn't. Using margin excessively is essentially the same thing (albeit likely at a lower interest rate).Additionally, using margin requires you to monitor your positions much more closely because of the exaggerated gains and losses that accompany small movements in price. If you don't have the time or knowledge to keep a close eye on and make decisions about your positions and the positions drop, your brokerage firm will sell your stock to recover any losses you have accrued.As a new investor, use margin sparingly, if at all. Use it only if you understand all its aspects and dangers. It can force you to sell all your positions at the bottom, the point at which you should be in the market for the big turnaround.

2. Buying On Unfounded Tips.


We think everyone makes this mistake at one point or another in their investing career. You may hear your relatives or friends talking about a stock that they heard will get bought out, have killer earnings or soon release a groundbreaking new product. Even if these things are true, they do not necessarily mean that the stock truly is "the next big thing" and that you should run to the nearest phone to call your broker.Other unfounded tips come from investment professionals on TV who often tout a specific stock as though it's a must-buy, but really is nothing more than the flavor of the day. These stock tips often don't pan out and go straight down after you buy them. Remember, buying on media tips is often founded on nothing more than a speculative gamble.Now this isn't to say that you should balk at every stock tip. If one really grabs your attention, the first thing to do is consider the source. The next thing is to do your own homework. Make sure you "research, research and research" so that you know what you are buying and why. Buying a tech stock with some proprietary technology should be based on whether it's the right investment for you, not solely on what some mutual fund manager said on TV.
Next time you're tempted to buy a hot tip, don't do so until you've got all the facts and are comfortable with the company. Ideally, obtain a second opinion from other investors or unbiased financial advisors.

3. Day Trading.


If you insist on becoming an active trader, think twice before day trading. Day trading is a dangerous game and should be attempted only by the most seasoned investors. In addition to investment savvy, a successful day trader needs access to special equipment that is rarely available to the average trader. Did you know that the average day-trading workstation (with software) can cost in the range of $50,000? You'll also need a similar amount of trading money to maintain an efficient day trading strategy.The need for speed is the main reason you can't start day trading with simply the extra $5,000 in your bank account: online brokers do not have systems fast enough to service the true day trader, so quite literally the difference of pennies per share can make the difference between a profitable and losing trade. In fact, day trading is deemed such a difficult endeavor that most brokerages who offer day trading accounts require investors to take formal trading courses.Unless you have the expertise, equipment and access to speedy order execution, think twice before day trading. If you aren't particularly adept at dealing with risk and stress, there are much better options for an investor looking to build wealth.

4. Buying Stocks that Appear Cheap.


This is a very common mistake, and those who commit it do so by comparing the current share price with the 52-week high of the stock. Many people using this gauge assume that a fallen share price represents a good buy. But the fact that a company's share price happened to be 30% higher last year will not help it earn more money this year. That's why it pays to analyze why a stock has fallen.Deteriorating fundamentals, a CEO resignation and increased competition are all possible reasons for the lower stock price - but they are also provide good reasons to suspect that the stock might not increase anytime soon. A company may be worth less now for fundamental reasons. It is important always to have a critical eye since a low share price might be a false buy signal.Avoid buying stocks that simply look like a bargain. In many instances, there is a strong fundamental reason for a price decline. Do your homework and analyze a stock's outlook before you invest in it. You want to invest in companies which will experience sustained growth in the future.

5. Underestimating Your Abilities.


Some investors tend to believe they can never excel at investing because stock market success is reserved for sophisticated investors. This perception has no truth at all. While any commission-based mutual fund salesmen will probably tell you otherwise, most professional money managers don't make the grade either - the vast majority underperform the broad market. With a little time devoted to learning and research, investors can become well equipped to control their own portfolio and investing decisions - and be profitable. Remember, much of investing is sticking to common sense and rationality.
Besides having the potential to become sufficiently skillful, individual investors do not face the liquidity challenges and overhead costs large institutional investors do. Any small investor with a sound investment strategy has just as good a chance of beating the market, if not better, than the so-called investment gurus.Never underestimate your abilities or your own potential. That is, don't assume you are unable to successfully participate in the financial markets simply because you have a day job.

6. When Buying a Stock, Overlooking the "Big Picture"

For a long-term investor one of the most important - but often overlooked - things to do is qualitative analysis, or "to look at the big picture." Fund manager and author Peter Lynch once stated that he found the best investments by looking at his children's toys and the trends they would take on. Brand name is also very valuable. Think about how almost everyone in the world knows Coke; the financial value of the name alone is therefore measured in the billions of dollars. Whether it's about iPods or Big Macs, no one can argue against real life.So pouring over financial statements or attempting to identify buy and sell opportunities with complex technical analysis may work a great deal of the time, but if the world is changing against your company, sooner or later you will lose. After all, a typewriter company in the late 1980s could have outperformed any company in its industry, but once personal computers started to become commonplace, an investor in typewriters of that era would have done well to assess the bigger picture.Assessing a company from a qualitative standpoint is as important as looking at the sales and earnings. Qualitative analysis is a strategy that is one of the easiest and most effective for evaluating a potential investment.

7. Compounding Your Losses by Averaging Down.


Far too often investors fail to accept the simple fact that they are human and prone to making mistakes just as the greatest investors do. Whether you made a stock purchase in haste or one of your long-time big earners has suddenly taken a turn for the worse, the best thing you can do is accept it. The worst thing you can do is let your pride take priority over your pocketbook and hold on to a losing investment, or worse yet, buy more shares of the stock since it is much cheaper now.Remember, a company's future operating performance has nothing to do with what price you happened to buy its shares at. Anytime there is a sharp decrease in your stock's price, try to determine the reasons for the change and assess whether the company is a good investment for the future. If not, do your pocketbook a favor and move your money into a company with better prospects.Letting your pride get in the way of sound investment decisions is foolish and it can decimate your portfolio's value in a short amount of time. Remain rational and act appropriately when you are inevitably confronted with a loss on what seemed like a rosy investment.

The Bottom Line



With the stock market's penchant for producing large gains (and losses) there is no shortage of faulty advice and irrational decisions. As an individual investor, the best thing you can do to pad your portfolio for the long term, is to implement a rational investment strategy you are comfortable with and willing to stick to. If you are looking to make a big win by betting your money on your gut feelings, try the casino. Take pride in your investment decisions and in the long run, your portfolio will grow to reflect the soundness of your actions.

Monday, April 3, 2017

RAMKY INFRASTRUCTURE - UPDDATE

As per company's today's announcement submitted to stock exchanges , Ramky reduced more than Rs.200 Cr debt by way of selling one non core asset of its subsidiary . I believe ,it is an important step in the right direction and it  indicating  management's intention to bring back the company  into the right track once again.

Disc: Holding Shares of Ramy Infrastructure

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