Prajna Capital - An Investment Guide

· Don't trade on rumors. If you have, ask yourself this: "Over the long run, have I made money or lost money trading on rumors? O.K. then, stop it. · Beware of all tips and inside information. Wait for the market's action to tell you if the information you've obtained is accurate, then take a position with the developing trend. · Don't trade unless you're well financed...so that market action, not financial condition, dictates your entry and exit from the market. If you don't start with enough money, you may not be able to hang in there if the market temporarily turns against you. · Be more careful if you're extra smart. Smart people very often put on a position a little too early. They see the potential for a price movement before it becomes actual. They become worn out or "tapped out," and aren't around when a big move finally gets under way. They were too busy trading to make money. · Never a...

· Recognize that fear, greed, ignorance, generosity, stupidity, impatience, self-delusion, etc., can cost you a lot more money than the market(s) going against you, and that there is no fundamental method to recognize these factors. · Learn the basics of futures trading. It's amazing how many people simply don't know what they're doing. They're bound to lose, unless they have a strong broker to guide them and keep them out of trouble. · Standing aside is a position. Patience is important. · Client and broker must have rapport. Chemistry between account executive and client is very important; the odds of picking the right Account Executive ( AE ) the first time are remote. Pick a broker who will protect you from yourself...greed, ego, fear, subconscious desire to lose (actually true with some traders). Ask someone who trades if they know a good futures broker. If you find one who has room for you, give him your account. · Some...

· Cut losses short. Most importantly, cut your losses short, let your profits run. It sounds simple, but it isn't. Let's look at some of the reasons many traders have a hard time "cuttings losses short." First, it's hard for any of us to admit we've made a mistake. Let's say a position starts going against you, and all your "good" reasons for putting the position on are still there. You say to yourself, "it's only a temporary set-back. After all (you reason), the more the position goes against me, the better chance it has to come back – the odds will catch up." Also, the reasons for entering the trade are still there. By now you've lost quite a bit; you sell yourself on giving it "one more day." It's easy to convince yourself because, by this time, you probably aren't thinking very clearly about the position. Besides, you've lost so much already, what's a little more? Panic sets in, and then co...

· Apply money management techniques to your trading. · Do not overtrade. · Take a position only when you know where your profit goal is and where you are going to get out if the market goes against you. · Trade with the trends, rather than trying to pick tops and bottoms. · Don't trade many markets with little capital. · Don't just trade the volatile contracts. · Calculate the risk/reward ratio before putting a trade on, then guard against the risk of holding it too long. · Establish your trading plans before the market opening to eliminate emotional reactions.Decide on entry points, exit points, and objectives. Subject your decisions to only minor changes during the session. Profits are for those who act, not react. Don't change during the session unless you have a very good reason. · Follow your plan. Once a position is established and stops are selected, do not get out unless the stop is rea...

The second quarter has come to an end and there is an expectation in the air. The anxiety is more pronounced this time as the markets have not shown signs of recovery for the second quarter in a row. Needless to say, this has been one of the challenging periods for the stock markets across the globe and in the case of India, the challenge has been compounded due to the high rate of inflation, election year and concerns of fiscal deficit. As a result, the local stock market has failed to cheer up even on days when global markets have shown signs of recovery. If industry sources are to be believed, there is lack of patience for a long-term investment strategy despite the fact that many stocks in mid-cap and large-cap are available at two-year-old levels. Much of the problem is also due to the unexpected weakness, which entered the markets after January highs which has left many staring at a weak portfolio. As a result, broking houses are advising their high net worth clients to boo...

It is common knowledge that mutual funds are benchmarked against particular market indices. In general, diversified funds are benchmarked against Sensex or Nifty, while sectoral funds are benchmarked against their particular sector index. It is fair to then assume that the ups and downs of any index will affect the funds that are benchmarked against it. In other words, if the Sensex falls, you can expect a diversified fund like HDFC Equity (which is benchmarked against the Sensex) to fall as well. But while some funds might be affected more by an index's volatility, others might not. So, then how does an investor get an idea of how volatile a fund is with respect to its index? Here is where Beta enters the picture. Beta is the measure of a fund's (or stock's) volatility relative to the market or benchmark. For example, if a fund is benchmarked against the Sensex, a beta of more than 1 would imply that the fund is more volatile than the index. And of course, a beta of less ...

Margin trading increases your buying power, but it enlarges your risk as well. When to give in to the temptation of this high-risk trading strategy, and when to avoid Double gain; Double pain. This is how the concept of margin trading can best be described. As the name suggests, margin trading enables you to trade with borrowed funds/ securities or, in other words, by paying only a part of the total investment amount. It is, in fact, a leveraging mechanism which enables you to take exposure in the stock market over and above what is possible with your own resources. However, while margin trading increases your buying power, it enlarges your risk as well. In a way, amplifying your gains and losses to the same degree. That is why it is still not a recommended way of trading, although the lure of big money has always drawn investors into the lap of margin trading. So much so that an increasing number of small investors are now giving in to the temptation of this high-risk trading...

Stop-loss orders are like health policies for stocks, which come at zero premium. Besides reducing your losses, they also help you to lock in your profits Talk to investors and we find thousands of instances where people just ignored one basic principle of investing: Setting stop losses and sticking to it. What is stop loss? It is a pre-defined order to automatically sell a stock when it falls to a certain level. When the stock reaches the point, the stop-loss order becomes a market order and the trade is executed. It’s a very important investment tool, especially if you are typically trading in a bullish market situation, which helps to save the larger part of the pain in case the sentiment turns How it helps? Stop loss is an important risk-management tool used to exit a stock before it falls any further. This not only helps in reducing your losses but also to lock in your profits. Consider you bought a stock sometime ago at Rs 100 and the stock is now trading at Rs 140. Now some n...

KEYNES, the most talked-about economist in these days of bankruptcies and bail-outs, once said, “markets can remain irrational longer than you can remain solvent.” While this theory is applicable to both bears and bulls, the underlying message is undoubtedly clear that rational investors can succeed if they can keep irrationalities out. The broader investment decision of whether to invest in equities as an asset class at a given point in time should depend on the prevailing stock market activity. While I also agree with the learned view that a retail investor should not try to time the entry and exit in a particular stock, I strongly argue that every investor can time the market to enter/exit equity markets. Stock markets historically have peaked at a time when interest rates also peaked or tended to peak due to higher demand for market related credit fuelled by over confidence. There is an example of this not so “knowledgeable” investor friend who sold all his equity investments wh...

AN OPEN offer can take place if any of the promoters of a company want to increase their stake or if non-promoters increase their stake to 15% or the company is going to delist from the stock exchange. An open offer is nothing but the exit route, which is given to the existing shareholders by the acquirer of shares through a public announcement. AN OPEN offer can take place if any of the promoters of a company want to increase their stake or if non-promoters increase their stake to 15% or the company is going to delist from the stock exchange. An open offer is nothing but the exit route, which is given to the existing shareholders by the acquirer of shares through a public announcement. What are the requirements for making an open offer? For making an open offer, an acquirer is required to make a public announcement, which should include offer price, number of shares to be acquired from the public, purpose of acquisition, identity of the acquirer, future plans, details about target com...

Bear market bottom or not, one thing is abundantly clear. Whether things get worse or not, there is a lot value available in the stock markets. Stock prices of strong companies have fallen along with those of overpriced ones. Hence, bargains abound. Benjamin Graham, father of value investing, believed in buying stocks that were quoting at their liquidation values. Liquidation value means the price you pay for a company that is not operating any more. Having invested at near liquidation values, value investors wait patiently for the value to emerge and make handsome returns. Investing at the time of the Great Depression, Graham got many such opportunities. Today, despite the sharp fall, the share prices are quoting much higher than their liquidation values, but definitely below their fair values. Taking a leaf from Graham's book, you can look for companies whose book values and market capitalisation are equal. In fact, there are instances of companies whose market capitalisati...

In a volatile stock market, choosing a potential scheme is more challenging. Investors need to look beyond short-term returns There has been plenty of talk about the falling returns from mutual funds with most funds posting negative returns for one year duration. In the case of systematic investment plans ( SIP ), the picture is no different, though investor gets to invest over different market periods. However, the negative returns from SIPs can't be blamed as they generally tend to offer handsome returns over the long run. On the other hand, in a booming market environment, even SIPs tend to give excellent returns. Needless to say, many investors were used to such whopping profits from SIPs even over the short term, and hence, the current market environment has been a cause for worry. In the present market scenario, choosing the right mutual fund has become more challenging as no scheme has managed to hold on to its leadership status beyond a few weeks. So, the time has come for...

Investing for long term goals needs patience, commitment and more importantly, tenacity Finding the right investment option is always a tough exercise. The challenge gets tougher when it comes to long-term investment planning. An investor needs to take into account a number of factors such as inflation, risk, liquidity and more importantly, needs to sustain the investment process over a long period of time. While such an exercise gets simpler when an investor has a long tenure at his disposal, it is not easy if the tenure is less than a decade. While it may be wrong to use the word long-term planning in such a scenario, many investors end up thinking about long-term planning only when they have less than a decade at their disposal. The classic example is retirement planning which gains focus for many just prior to retirement. Start early: Needless to say, the entire process of long-term planning turns easy when an individual starts thinking about it early in life. While long-term is a ...

IT IS a blend of value investing with aspects of behavioural finance . It tends to be bearish when the market is bullish and vice-versa. Welcome to the world of contrarians — who believe in going against the wind. Although it is never easy, remember what doesn’t kill you makes you stronger . The-60 year-old (a contrarian investor) is a firm believer that to be successful, you should invest in out of flavour stocks or sectors that are not of prime interest to most investing community. Rather than investing in then popular sector stocks such as realty, banking and others invested a large chunk of money in sugar stocks in January, when the market was at its peak. His intellectual independence with a healthy dash of agnosticism about consensus views reaped dividends. Unlike the other sector stocks, which are bleeding right now, His decision to invest in sugar, stock saw his portfolio’s worth increasing by almost 30-40%. Here’s an insight into the contrarian world of investing, what...

Looking for an investment avenue when the stock markets are choppy? A fixed maturity plan not only guards against the unforeseen but also gives good returns. STOCK market opportunities may look like a mirage in a desert. In fact, what may look like a lifetime opportunity can turn into a black hole, and swallow your hard-earned money. But it shouldn’t deter you to make a foray on Dalal Street. A smart investor is one who holds his fort secure while keeping an open eye for better avenues. Fixed maturity plan ( FMP ) is one such investment that guards your portfolio against unforeseen risks and gives the good returns on your investments. Here’s a low down on what you need to know before taking an exposure in FMPs. MATURE OUTLOOK Financial planners say that FMPs, which have been offering high yields during the last couple of years, have become an important investment avenue. Though all segments of investors can benefit from them, this investment option is especially advantageous to those w...

Following a balanced approach to investing in equities, investors can recoup the amount invested in stocks in few years DIVIDEND IS a tax-free income in the hand of shareholders. However, Indian companies are known for not having a regular dividend paying policy. Nonetheless, dividends are far more profitable today than it would have been in the last four years. This is because the stock prices have crashed in last one year, as result the dividend yield (dividend per share divided by price per share) has gone up. Therefore, the dividend per rupee of investment is much more today than it was earlier. However, investors should not aim at accumulating stocks with high dividend yield because such high yields may not be sustainable in case profit falls due to economic slowdown. Consistent in paying dividends and in some cases have also increased the payout ratio. A high payout ratio means a higher percentage of profits are distributed among shareholders as dividends. The table shows the ...

Beta is a statistical term ; it measures the volatility of stock (or fund) relative to the market (or the benchmark). The value of beta of a stock or mutual fund is always stated against its benchmark. The beta of benchmark or market is always equal to 1. If a stock is benchmarked against Sensex and has a beta value greater than 1 (say 1.5), this indicates that the stock is 50 percent more volatile than the market as the beta of Sensex is 1. The stated stock will deliver 15 percent return if the market has delivered a 10 percent return in same time period. Its opposite is also true if Sensex delivers 10 percent negative return, then the stated stock will fall by 15 percent in the same time period. A beta of less than 1 implies lesser volatility. The desirable value of beta depends upon the individual risk bearing capacity. So while you can expect a high return from a stock that has a beta of 2, you will have to expect it to drop much more when the stock market falls.

IF you want to invest in equities, there are only four things you need to remember. 1. Choose the right company Look for superior and profitable growth. The company should earn at least 20% return on its shareholders’ capital. Ideally a long-term investment perspective (more than five years) allows you to participate in the company’s growth. At the short end (3-6 months), share performance is driven more by market sentiment and less by company fundamentals. In the long run, the relevance of the right price diminishes. 2. Be disciplined Stock investing is a long, learning experience. You will make mistakes, but also learn from them. Here is what you can do to ensure a smooth ride. --Diversify your investments. Do not put more than 10% of your corpus in one stock, even if it’s a gem. On the other hand, don’t have too many – they become difficult to monitor. For a passive long long-term investor, 15-20 is a healthy number. Use this asset allocation tool to find out if you need to invest b...

Average Gain Between Any Two Downturns Has Been 186% IF you have lost a fortune in shares by now, the best way to make it up perhaps could be by buying some more. Since the Great Depression of 1929, the world has undergone 12 major bear market phases. The average bear market has lasted about 22 months, and the market has fallen by an average of 51%. However, the average gain during the bull market between any two downturns has been an eye-popping 186%. The index here in question is the S&P 500. Bull markets — after every recessionary phase — have always been good for investors. All major bull rallies since end-1930 have resulted in markets gaining between 50-500%. Historic numbers show that the magnitude (size or breadth) of a bull market is much heavier than that of a bear market. The million dollar question is: Are we at the threshold of another bull market rally? Markets could go up intermittently, but convincing rallies will take time to happen. The current bear phase is...

In these uncertain and volatile market conditions, investors are flocking to invest in debt securities to ensure not only stable and certain returns but more importantly capital protection THE GLOBAL MELTDOWN Across the globe, financial and economic markets have taken a severe beating and there are expectations of recession in developed countries. In this backdrop, the Indian markets have also been affected but not as badly as the others. BETTER SAFE THAN SORRY Investors have seen their wealth, especially in shares, erode faster than they would have imagined or liked. Thus, investors are now increasingly flocking to invest in debt securities. So what are their options and the pros and cons of each investment avenue. Let’s take a look at some of the attractive ones: Government Securities: The bond yield on short term (1-year) government securities ( g-secs ) is currently approximately 8% to 9% p.a. Due to the inverse relationship between bond prices (carrying fixed interest rates) and ...