Paisa Vasool

Your right to get right information while choosing a stock

2009-06-22T07:38:00.000-07:00

In my last blog I promised that we will discuss more about what are all the things that need to be considered before buying stock/equity/shares. Moreover, this log will be revolve more around the financial jargons that one must know if he/she is involved in any kind of share trading.
First thing that comes to someone’s mind when we talk of a Stock listed company is – “Market Capitalization”.

Market Capitalization: Market Capitalization is something which people look at in order to assess the size of the company. It is actually the product of the no of outstanding shares of the company and that of the current price of the company’s stock. As there is highs and lows in the market price of the company, the market capitalization also vibrates the same way. This tells the company’s worth in terms of its shares. Now, what are “outstanding shares”?
Outstanding Shares: Outstanding shares are those shares that can be traded freely in the open market (stock exchanges) BUT are not owned by the company or are not repurchased by the company itself. Hence, the stocks that are owned by the company are not the traded openly (in public).. The outstanding share also include the “Restricted Shares”.

Restricted Shares: These are those shares/stocks that are typically given to the executive officers and directors of the company or sometimes to certain employees also. These are termed as restricted because there are restrictions attached to these stocks in terms of selling and purchasing these shares. There are some rules and regulations that have to met in order to transfer the ownerships of the shares or to sell it to the open market.
Note: These shares can be sold to open markets only after getting the approval of SEC ( Securities and Exchange Commission).
Floating Shares: Sometimes, people look at the “floating shares” instead of the outstanding shares for assessing the MCAP (Market Capitalization). This is actually the shares that are traded in open markets.
Note that the market capitalization of accompany may be found form the company’s web site or are published by company along with the financial results.
The next two jargons are dependent on whatever we discussed till now.
EPS (Earning per share): As the name suggests, EPS (Earning per share) is the net PAT divided by the outstanding share of the company (Pat is explained below). Note that PAT should be adjusted with dividends paid by the company in the duration under consideration.
PAT – Profit After Tax.
PE (Price Earnings Ratio): It is the ratio between the current market price of the company’s stock and the EPS (Earnings per share). In order to judge whether the PE is higher or lower, compare it with the industry’s PE in that period.
All this data can be procured from the exchange websites or company’s website.
Happy Trading!!!.
Regards.

Reference: Outlook Money June'09

Watch, be aware and think before buying a stock

2009-06-06T06:27:00.000-07:00

Many of my friends asked from me to touch some lighters topics, so proceeding in the same lines, in this blog we will talk of about stock trading and the things you must factor before going to the market for buying a stock.

As we all know that stock market is very sensitive due to its susceptibility to external (market/economic/business related) conditions. Each stock that is traded in the stock market is affected by the performance and efficiency of the related company. Now we will discuss about various factors that may should be kep in mind before buying that stock.

First of all, the price of the stocks runs on the very basic principle – “Demand and Supply”. As the demand of the stocks increases, the prices go up and just reverse in the other case. Now, we will ride through these factors.

The product/commodity/service the company deals in, may be one of the factors that may affect the company’s performance and returns. HOW? Let us say Company A deals in manufacturing of the product P. Also, the product P has a very high dependency on a raw material, say M. Now suppose that there is a shortage of this M or the price of M is too high. This will have a direct impact upon the cost/rate of production and ultimately may slash down the profitability of the company. Hence the stock price may be affected. Fuel price is one of the major constituents that contribute to the manufacturing/transportation of products and hence the crude oil prices in the international market may have an impact on the profitability of the company.

The growth and development strategies followed by the company also impact the company’s performance. For example, the company is introducing a new product/service or the company is opening a new unit for production or the company has grabbed a big project from some tempting clients. These factors may give a little bit assurance that the company’s profitability will increase. Hence, the stocks of this company may grab more interests.

Mergers and acquisitions may have a mixed affect on the stock prices. Some investors may think that merger/acquisition of the company is beneficial for the future performance of the company and hence may attract investors and sometimes may impact stock price movements. On the other hand, if the market players think that the same may incur a substantial harm to the company’s performance then the investors will behave accordingly and this may impact the stock’s price.

Apart from this, the movements of the company’s stocks in the past should also be taken care will buying a stock. Because this may provide an insight into the possible movements of the stock price in the future.

All the above studies are generic. For all this you need to be aware of the current market and economic affairs involved in the country. You should keep a good watch on the news related to economy and the business world. You may also refer the official websites of NSE and BSE exchanges for stock related information.

One of the major factors may also be the financial results of the companies being published annually or quarterly. This may provide us a clear vision on the recent performance of the company in terms of turnover and returns. These factors also have a great impact on the mindset of the investors.

These were some of the basic “fundas” to be factored before buying a stock. In the next blog we will talk about some more sophisticated business jargons that have a deep relationship with company and its stocks.

Happy Trading!!!

Derivatives: Hoping for the best

2009-05-18T07:17:00.000-07:00

In my last post, I mentioned that I will talk about the possible future aspects of derivatives trading in India. For your information, it was the year 2000 in which derivatives trading was introduced in the stock exchanges in India.
The scale at which the derivative is being traded in India as well as the popularity it has gained, clearly indicates that it is has been evolving and reformed regularly and hence it has reached to such an advanced state. Yet, there is a lot of space under this vast umbrella.
In my last post, I also talked about the settlement (derivatives) types that are prevailing in India. I relation with that, we will discuss go ahead on the way to derivatives trading.

Till now in India, it was cash settlement that was prevailing. But now there are recommendations and possibilities that “physical settlement” is introduced. For the new viewers, I would like to tell that - currently the derivatives are exercised and settled through cash settlement process. It means instead of the physical transfer of the asset involved in the factures contracts, the difference between the spot price and the agreed upon price forms the basis of the settlement i.e. the cash is transferred instead of the assets.
But this introduction of the physical transfer, I accomplished, is likely to be in a step by step manner. It has been proposed that at first it will be introduced for stock options. Then keeping a watch for six months, it might be introduced in stock futures also.
But apart from all this, the physical settlement will also bring some challenges that need to be addressed. First of all, due to the actual movement of the assets there will be greater impact on the demand supply ration and hence it may result in a sudden increase in prices of the assets and this is what is called as “short squeeze” as I discussed in my previous post. Another challenge may be that the prices of the assets may be influenced deliberately in order to get more benefit out of these settlements.
On the other hand, the cash settlement is a bit easier to carry out and hence physical transfer requires being substantially easier as it is thought of.

In my next blog we will be discussing about the foreign investment modes that are prevailing.
Let us hope for the best!!!!!
Happy trading in derivatives!!!!!!!!!!

Reference: (Business Today,May'09)

Derivatives: Good Terms

2009-05-04T04:03:00.000-07:00

The complexity involved as well as the success story of the derivatives invokes me to get into the depth of the derivatives. Besides this, there are many interesting jargons that are used in relation with the stock markets. I would like to discuss some of these, right here.
Some of my friends ask me that who is regulator of the stock market and other financial trading involved in the stock market. The answer is – one and only one SEBI (Securities and Exchange Board of India).
Out of the various stock exchanges in India, BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) are the most significant ones. Out of these two, NSE is the preferred one for the derivatives trading.

Back to derivatives !!!!!
In my previous blogs, I discussed about the various intricacies involved in derivative trading in a simpler way. But one meticulous and FAQ is –
“How are the derivative contracts exercised?” So, we will look into it right now.
Derivatives may be exercised in one of the either way – “Cash Settled” or “Physical Transfer”.

Cash Settlement: This is the easier way of exercising a derivatives contract because it does not require the physical transfer of the underlying asset involved in the contract. Actually, if the seller of the contract, in case of the CALL option wishes to keep the underlying asset with himself, he, along with the consent of the buyer, will involve in the cash settlement. The seller will now pay the difference between the strike price and the spot price to the buyer.
The other way is – Physical Transfer.
Physical Transfer: This includes the actual transfer of the underlying asset involved in the contract. The settlement will be at the strike price of the contract. Hence, now the buyer of the CALL option if the owner of the asset that is being transferred.
Cash settlement is simpler and cheaper than the physical transfer and hence is well known and widely accepted.

Let us see some more interesting ones !!!!!
In my previous blog Derivatives:Digging In, I discussed about two mindsets – speculation and hedging. Apart from this, there is one more mindset – Arbitrage.
Arbitraging: It basically means earning the profit due to the price differences of and asset/commodity at two different places (markets). So, the investor buys a commodity (or a financial instrument) from the market that is exhibiting its low price and then sells it the market exhibiting high price and hence earning the amount equal to the difference of the two prices.

There are some more jargons that are very frequent in the stock market world such as:

Leverage: The literal meaning of leveraging infers – to be at a vantage point due to the proper use of something. So, financially, if a firm borrows funds and then re-invests this fund for earning a better return from the existing assets – is called leveraging. The leveraging may also benefits the shareholders is there is an increase the "ROA (Return on Assets) "due to the extra investment which in turn, attracts the investors. But, sometimes leveraging may also prove to be risky.
Squeeze: In financial and market terms, squeeze may refer to the sudden rise or fall in the prices of the stocks due to the substantial imbalance between demand and supply.

I will be discussing about the settlement ways in another blog that will talk about the current scenario in India and the reforms being taken. Enjoy Trading!!!!!

(References from : www.investopedia.com)

Derivatives: Digging In…

2009-04-23T06:51:00.000-07:00

Derivatives: Digging In…
This blog is with the reference of my previous blog Derivatives: More On To Move On .
Some of my friends asked a few questions and on the basis of that we will be digging into derivatives.

How is Mr. TAKEIT benefitted?
In case of ‘Options’, Mr. TAKEIT (Seller) gets the benefit of the cost or the premium that is paid by Mr. NEEDY. Supposedly, we may consider the cost incurred by Mr. NEEDY (Holder) as the compensation given to Mr. TAKEIT in lieu of being on the riskier side.
But in case of ‘Futures’, Mr. TAKEIT may get the benefit if the cost of the underlying asset comes down as Mr. NEEDY is obliged to exercise the contract.

What is Speculation?
The literal meaning of speculation illustrates that speculation means expressing something or the other in spite of having weak or no evidence. In finance and marketing, speculation actually refers to the high appetite of high returns instead of having substantial risks involved. If someone is speculating, that means he/she is very much certain of what he thinks. So, whatever he/she thinks the direction of the market will be, he/she also dives in that direction.
What is hedging?
Hedging basically refers to taking such steps that will help in mitigating the risks or minimizing the potential loss that is involved in the risk. Sometimes, we find ourselves in a “do it or not do it” position, so if we take some effective measures that will help us in minimizing the losses, then we are hedging. So, it will keep a sense of balance between what we can gain and we can lose.
Besides all this, in my previous blog I forgot to explain one important thing i.e. some terms involved in the Derivatives.

Holders and Writers: The investors who buy the options contract are called Holders as well as the investors who sell the options contract are called Writers.

Please do not get confused with the buyers and sellers of the options contract with the buyers/sellers of the asset underlying the contract. Buyers (Holders) of the contract may do both – buy/sell the underlying asset.

Now, this brings us to another set of terms – “Call” and “Put”.
The options derivative itself may be of two forms – “Call” or “Put”.
In Call option the holder of the contract has the prerogative to BUY a certain underlying asset at an agreed price.
In Put option the holder of the contract has the prerogative to SELL a certain underlying asset at and agreed price.
Of course, in both the cases the holder is not obliged to buy/sell the underlying asset.

(References from : www.investopedia.com)

Derivatives: More On To Move On

2009-04-22T06:08:00.000-07:00

Derivatives: More and More…..
This post will talk about the “derivatives” trading. These days trading in derivative is at the hot seat. Derivatives have something for everyone who is aware of the knowhow involved in it, whether he/she has mindset of a speculator or of a hedger.

What is a Derivative?
As the name suggests, a derivative is a financial instrument whose value is derived on the basis of the underlying entity involved in the contract of the derivative. These underlying may be a commodity, a stock, or even a stock market index.

Trading in derivatives has been a grand success in Indian Stock markets. Generally, Derivatives may be categorized on the basis of the underlying entity:
1.) Stock Derivatives: If the underlying asset/entity involved in the derivative contract is a stock (equity).
2.) Index Derivatives: If the underlying asset/entity involved in the derivative contract is an index of a stock market.
3.) Credit Derivative: If the underlying asset/entity involved in the derivative contract is a loan, bond or other such type of credit.

If we may consider the derivative as generalized term; derivatives are of the following form:
1. Futures,
2. Options,
3. Forward,
4. Swaps

In this blog, for the kickoff, we will be concentrating more on – Futures and Options.
Before getting into the definition of these instruments, we will consider the following scenario:
Say Mr. NEEDY needs a car worth Rs.5lac. But he doesn’t have enough cash reserve with him for the next 6 months. On the other side of the story, there is a car owner, say Mr. TAKEIT. So, Mr. NEEDY may sign a contract with Mr. TAKEIT stating that Mr. NEEDY has the right to buy the car for Rs. 5 lac, within the next 6 months. Mr. NEEDY also pays a signing amount of say Rs. 10,000/-. Apart from this the contract also has the 6 months as the expiry time of the contract. This contract (in plain English) says that Mr. NEEDY has the right to own the car any time (within the 6 months) and Mr. TEKEIT is obliged for the same and that to on the agreed price – Rs 5lac.

Now, consider two possibilities:

Case 1: Assume that the car comes out to be the only diesel car in the town so all of sudden people are behind the car and are ready to pay even Rs. 7 lac. for the same car. On one hand, Mr. TAKEIT ‘cannot’ sold the car to anyone until he is in the contract and on the other hand, Mr. NEEDY, seeing the high resale value of the car has the right to own the car for Rs. 5lac. So Mr. NEEDY exercises the contract and owns the car and again sells it to Mr. SECOND for Rs. 6lac. So, this way Mr. NEEDY makes a profit of Rs.5, 90,000 (6lac – 10,000).

Case2: All of a sudden Mr. NEEDY come to know that the car’s mileage is substantially lower, so Mr. NEEDY now thinks that he does not need the car any more. As a result, he does not go for exercising the contract and contract also allows him to do so.
The scenario above, more or less, is a type of Options contract.
There is also a second kind of derivative – Futures.
Each of them – Options and Futures are a type of contract having an expiry date. Both have an underlying entity involved in the contract.

The difference: In Options, the holder/buyer of the Options contract has the right but not the obligation to exercise the contract while in Futures; the holder is also obliged to exercise the contract.
The other difference may be that the holder/buyer has to incur a cost in the Option contract while this is not the case with the Futures contract.