Archive for March, 2008

The Bear and Bull Market03.26.08

The sentiments in the Stock Market is  broadly classified into two types:

  • Bear Market
  • Bull Market

Bull Market sentiments are when everyone is feeling good and share prices, indexes keep going up north as a result of strong economic fundamentals. It is a time when investor is happy with investing in companies, when the trading volumes are high.

Bear Markets are the opposite where everything is in the red.  Investors sell their stocks and book profits, no one buys anything and prices tumble. This is accompanied with poor faith of investors on different issues.

Formula for getting the most of this market trends is get into the market when the prices are at a reasonable low,  holding them as they rise in value and sell when the profit price is right. Said easy, but it involves a good and solid guess as no one can time the market ever. But most investors do the mistake of buying stocks when the price is going high and selling when it starts a downward bearish trend.

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Dividends03.26.08

When a company makes profit in its operations annually or in a quarter, it pays dividend to the investors who hold stocks in the company. The amount of dividend you get on a company stock will depend on a lot of factors like how much money is being set aside for dividend payments, how many stock investors the company has and how much stock you own. If a large number of investors are there, the dividend paid per share will be very less and those with a higher number of stocks get higher dividends, but the payout per share is usually equal.

The frequency of dividend payouts differ from company to company. While theoretically they can pay dividends every quarter since thats the time they file their profit and loss reports. While most companies pay annually, the time gap between two dividends show the profiability of the companies business and financial strength.

A company pays dividends to usually to thank its investors and to incite others to invest in it since paying dividends is closely associated with the financial well being of the company. This will bring in more investors and hence drive the share value of the company stocks.

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Stocks03.26.08

Companies sells a part its ownership to the public in the form of shares. Each unit of share entitles you to a part ownership in the company. Higher the number of shares you own, higher your percentage ownership in the company. The company can also issue a lot of different types of shares which have changes in the type of privileges they carry with them.

The company can issue as many number of shares as they fancy as long as there are buyers for the shares in the company. If the company makes a profit in the future, it has a choice of putting the money back into the business or reward its investors with dividends.

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Stock Broker03.26.08

A stock Broker is a individual person or a large firm that trades in stocks on behalf of you, the client. Clients inform their interest to invest in certain stocks and shares, and the stock broker buys and sells as per requirements of the individual client. Some brokers also give you value added services like financial advices and stock tips for which you pay a fee.

Some years back, trading was a cumbersome process making you dependent on the full time broker who did the job well, but charged a killer fee for it. These days with the advent of Online Stock Trading and other easy processes, you can easily issue the buy/sell order yourself. But these stock brokers have evolved with time and their experience in the field to understand trends and hence their financial advices are still popularly sought after.

Stock brokers are of different types where they provide services like stock calls and tips, or just plain trading services or provide you with a Electronic Communication Networks or ECNs which allow you with faster data transfer. The later is usually used for intra-day trading.

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Primary and Secondary Market03.25.08

For the shares, its possible for investors to buy them from  two different sources. From the company itself and then from other investors. First one is called the Primary Market and the later is known as Secondary Market.

PRIMARY MARKET

This is the market where initial shares and bonds are sold by companies themselves directly and hence the proceeds of the same goes to them, the issuer. This is the place where the company gets cash for selling its financial assets

SECONDARY MARKET

This is the place where shares and bonds are bought by investors from other investors. This is the place of high activity when compared to the primary market. It is a organized market for securities. New York Stock Exchange (NYSE), Bombay Stock Exchange (BSE),National Stock Exchange NSE, bond markets, over-the-counter markets, residential mortgage loans, governmental guaranteed loans etc. are some examples.

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Premium Issue03.25.08

All shares have a face value at which they are usually traded. But the public is not always given these shares at the face value. A company can give out shares to the market and general public investors at a higher or premium  price. This difference in the price is called the premium and the issue thus called a premium issue.

As per the SEBI guidelines, to provide a premium issue:

  • The promoter company has a 3 years consistent record of profitable working.
  • The promoter takes up at least 50 per cent of the shares in the issue.
  • All parties applying to the issue should be offered the same instrument at the same terms, especially regarding the premium.
  • The propectus should provide justification for the propose premium. On the other hand, exisiting companies can make a premium issue without the above restrictions.

The company issuing premium can take advantage of the additional cash inflow when required. In a good and a market in highs, its easy to gain a high premium for companies.

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NAV:NET ASSET VALUE03.25.08

 NAV is a term usd by investment companies to calculate their net assets. It is calculated by subtracting liabilities from the value of a fund’s securities and other items of value and dividing this by the number of outstanding shares.

One place where you can see this term NAV is in most mutual fund tables where they use it to assign a price on unit share for the fund. Collective investment fund based on the market price decides the value of collective investment fund. Open Ended Funds are calculated on this basis. Closed asset values do have a NAV, but have a different market value. NAV for each share is calculated by the number of ordinairy shares. Investment trusts can be traded at a premium or at a discount to NAV.

Mutual Fund Value or Purchase Price. 

In Mutual Funds, NAV depends on each day of trading in the stock exchange market. It is calculated at the end of the day by taking the closing price of all the securities held plus the additional assets like cash and reducing the liabilities. The final result which is the total net assets is then divided by the number of shares outstanding.

Calculating NAVs – Take the current market value of the fund’s net assets and divide by the number of shares outstanding. So if a fund had net assets of Rs.35 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is Rs.35.00.

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Online Stock Trading03.25.08

These days online stock trading is gaining popularity by leaps and bounds. It is a facility provided by most DPs for buying and selling stocks online without having a middleman in the process. You are in command in this case since stock prices vary by the second when the market is open. The absence of middleman makes the brokerages involved in the buy and sell of stocks and shares considerably low.

These days buying and selling stocks through the Internet is fairly easy to get started with. In India, you need a PAN card and it will get you a Online Trading Account from a lot of companies like ICICI DEMAT accounts, Canara Bank and a lot of others. I use ICICI Demat account myself. Once you get your account, its easy to buy and sell shares online and almost in real time.

But my best advice before you start is grab a notepad and do a small research on the companies you plan to invest in. This will help you in the long run and if your fundamentals are strong, you will get a good return on your investment. Get started today!

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DEMAT Account03.19.08

Dematerialized account or a DEMAT account is a account which holds your securities in a demat mode. A company is obliged to give away shares in both modes like physical and DEMAT modes, the general preferred choice of holding stocks these days are through demat mode.

To hold your securities in DEMAT mode, it is necessary that you have a depository and a depository participant(DP) with whom your depository account is maintained. To start a DEMAT account is no big deal these days, its as simple as starting a bank account. With a DEMAT account you can buy and sell shares when you want to. Though to start a DEMAT account, a PAN card is compulsory as per the government regulations.

Once you start a DEMAT account with a DP who will provide you a virtual account wherein your shares are listed. This means you do not have to safeguard the physical copies of your share. As you buy or sell stocks, the same reflects on your account as credits and debits of the particular share. Like withdrawing or depositing money in a bank, this account maintains your shares and stocks.

With the advent of Internet and electronic media, not many prefer to keep shares in physical forms as they run the risk of getting stolen or faked. So owning a DEMAT account these days is as important as having a bank account since it will help in investment and trading.

Also most banks are (Depository participant)DP these days like ICICI Bank, Canara Bank and as are many individual broking companies like JRG and the like.

NSDL and CDSL websites have a comprehensive list of registered DPs. A broker is different from a DP in the way that broker is a member of the exchange and buys and sells stocks for himself and for his clients whereas a DP will only give you a account.

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Stock Option03.19.08

Stock Option refers to a stock as a instrument of security. It is known as a “call contract” when bought and “put contract” when sold. It is a contract where the buyer has a option to buy stocks at a pre-determined rate. This can also mean that a member holding stock option can sell the same after a specific time period. There maybe restrictions guided by agreements for the call and put contracts.

Infact There are two definitions of stock options.

1. The right to purchase or sell a stock at a specified price within a stated period. Options are a popular investment medium, offering an opportunity to hedge positions in other securities, to speculate on stocks with relatively little investment, and to capitalize on changes in the market value of options contracts themselves through a variety of options strategies.

2. A widely used form of employee incentive and compensation.In some Companies, Stock options constitute part of remuneration.
Employee stock options are stock options for the company’s own stock that are often offered to upper-level employees as part of the executive compensation package. An employee stock option is identical to a call option on the company’s stock, with some extra restrictions.

Also there are Performance Stock Options which are vested only if a pre decided measure of performance is achieved. The options can be only exercised only if those performance goals are reached.

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