Assured income from Stock Market

Assured income from Stock Market

BIG BAAAAAANG, two planes hit twin towers of the World Trade Center at USA on 11^th September 2001. The whole world was glued to the television, engrossed in seeing the live updates, wanting to hear everything behind it. Intelligence agencies were working overtime to trace who had masterminded such a dastardly act. Top investigative agencies failed to get any major breakthrough. Soon after, hands were laid on 13 prime suspects. It was not the premier investigative agencies which detected prime suspects but analysts of Futures and Options in the stock market that have done this job. Analysts observed that some group had traded on derivative market in the related area which could not have been possible if the prior information about the attack was not available on hand. The investigative agencies are believed to have deciphered that these group of men were directly associated with Al-Qaeda and had first hand knowledge of the attack.

The stock market not only leads to tracing conduits but also brings lot of money to an investor wanting to make a decent standard of living by absorbing the knowledge about stock market. The Capital market in popular analogy is known as STOCK MARKET. It’s a wise investment option and it is worth exposing your disposable savings a tinge of capital market. But the very word ‘share market’ for a common man sends a shiver because the capital market is equated with gambling, horse trading, or speculation. The answers for the above fears are both ‘yes’ and ‘no’.

If you are buying and selling shares daily to make money on hearsay then it’s really GAMBLING. But if one makes investment based on a small study then it’s an INVESTMENT. What differentiates an investment from SPECULATION? Speculation starts with IGNORANCE which is driven by GREED and FEAR as an attitude towards INVESTMENT. When the KNOWLEDGE and informed opinion precedes an investment then there has to be BENCHMARKED PROFITS with COURAGE.

For any beginner the word ‘finance’ itself may look quite difficult, if it is so, then the STOCK MARKET will be no less than a BOUNCER. I’m sincerely attempting to make it simple. So it is necessary to give honest feedback after going through the write-up, and convey whether my expressions were simpler?

Let me first introduce you with small connotations which will make understanding of capital market easier. These are as follows:-

1. Stock exchange – A Stock exchange is a place where Public limited companies list their shares. It’s a place where buying and selling of shares takes place. Just like any other market for e.g. Big Bazaar, Forum etc. Principle stock exchanges in India are National Stock Exchange (NSE) and Bombay Stock Exchange (BSE)

2. Share/Scrip. It’s the smallest component of capital of a listed Company (A public limited company, which has gone public and collected monies from general public as part of capital.). A group of shares becomes a STOCK.

3. Stock Broker- A Stock Broker is a person who is a member of stock exchange through whom shares can be bought and sold from stock market.

4. Sensex- The Sensex is abbreviation of Sensitivity index. It is composed of 30 of the largest and most actively-traded stocks on the BSE. Initially compiled in 1986, the Sensex is the oldest stock index in India.

5. Nifty- The 50 stocks that were most favored by institutional investors in the 1960s and 1970s. Companies in this group were usually characterized by consistent earnings growth and high Price earning ratios.

Why invest in stock market?

Business gives more earning than any profession as potential for risk and return is more in this segment. Business is a jungle and the weak cannot survive as weak gets eaten by the strong overnight. Stock market comprises of businesses which have been surviving over decades. Investment in stock market has been more lucrative than investing in gold/bullion or any investment based on studies globally.

Live example is, if one had invested Rs. 100 in Sensex in 1986, its value today would have been Rs. 14,500. This shows that money grew 145 times in 20 years. With the present growth trend of industry the Sensex with all corrections, is all set to touch 25000 by the year 2010-2012. The same trend of rise has not been experienced in gold/bullion market for the same period.

Other benefits are:-

· If an investment is held for more than a year, then profits out of capital market are totally exempt from Income-tax.

· If it’s sold between within a year the profits are taxable only @ 10%.

· Any other sale of capital asset attracts Income-tax @ 20-30%.

· Profits distributed as dividends are free from tax as it’s taxed in the hands of a company.

How does a stock market work?

In order to understand the working of a stock market please just visualize how a telephone exchange works. It’s just replica of it. In order to communicate you must have two connections from a telephone exchange and then speaker and listener can communicate. From this telephone connection any person can communicate. Similarly, two interested persons get enrolled in stock exchange as members, through whom an investor can invest in a stock market. Ever since online trading has come only National Stock Exchange and Bombay Stock Exchange are more functional than other stock exchanges.

What are the necessities for dealing in a stock market?

Following are the pre-requisites in order to transact in a stock market:

· A bank account

· A PAN card from Income-tax Department

· A de-mat account (Dematerialized account- It is share certificates in electronic form, replacing the physical share certificate). Central Depository Services (I) Ltd. (CDSL) and National Securities Depository Ltd. (NSDL) are the principal companies for dematerialization of their securities.”

· A client identification number from a stock broker.

Any recognized broker/sub broker will facilitate you to go through the above formalities.

Why should we deal only through a stock broker?

It’s a rule of a stock exchange that one has to trade through stock broker. In turn stock brokers are regulated by stock exchanges as per SEBI guidelines.

· In every transaction of a stock market there is need for accountability as it deals with public money. Interest of an investor and the credibility of the transaction have to be given supremacy. So it is easy to make a person accountable in a case of default in honoring a commitment to a contract. Therefore, there are stringent checks about the financial strength about a person getting enrolled as a stock broker in any Stock Exchange.

· The philosophy behind trading through stock broker is that it’s not possible for an investor to individually search for a buyer and seller for acquiring and selling share at local, national and at global level.

· It’s also not easily viable/ feasible to become a member of stock exchange, as one has to shell down lot of money for stock market license.

Since it’s an online trading, a stock broker operation is totally transparent hence absolutely free from the risk of manipulation. Security Exchange Board of India (SEBI) has placed systemic control which has totally minimized any fraud to take place. Shares in electronic format (Demat) have further strengthened the working of capital market.

How to buy shares?

Shares can be directly bought from a public limited company which makes a direct public offer. Buying directly from the source is known as PRIMARY MARKET. Next, when there’s no public offer then the same can be acquired from stock market via a stock broker. Trading directly from stock market is known as SECONDARY MARKET.

Why do initial investors with little knowledge about stock market make losses in a stock market?

Let’s look how general investor makes an investment. Stock market is just like our hand with five fingers - denoting fall and rise in the stock market. Investors without knowledge enter the market on hearsay and sees market rising from thumb finger to first finger but actually make investment at middle finger - when the market is static. Further, the investor sees the market has started falling at the fourth finger but actually sells at the fifth finger when the market has touched the lowest. Result, - the investor has bought SHARE at peak and sold at LOWEST.

Therefore, MOOLAH MANTRA is “one has to buy the industry specific share when the market has fallen and sell when the market is at peak”. The following guideline can be followed to make investment more lucrative:

· Decide well in advance which industry specific share to buy at what rate and sell at what rate i.e. both HIGH and LOW for the preceding 1/2/3/4/5 years.

· Generally gaining knowledge around 15-20 scrips is sufficient enough to make good income in one’s lifetime.

· Never put all your money in one scrip rather spread investment in 4-5 industry specific stocks?

· Decide how long you are going to hold the investment

§ > than a year,

§ > 6 months

§ < 6 months

· Dispose your share dispassionately when the share reaches a desired level. ENCASH YOUR PROFITS AT THE EARLIEST. The greed for further profit or loss can reduce your surplus and erode your capital?

· Invest equal amounts every month as investor as this method of investment will take care of all fluctuations experienced by the stock market in any given year.

How to select your share/stock?

Selecting of a share is just similar to parents selecting a groom for a daughter. Parents enquires about family, education, health, vision etc. about the groom.

Similarly, in order to select a share/stock, try to gather little information about the company in which one is investing. Hence, what is to be known about a company is, what is the activity of the company, its profits, growth, expansion etc.?

One can select their investment by knowing how the industry is performing in general. Further a good magazine, website, business news channel and daily newspaper can enhance the skill level. Let me further cite an example about picking the industry specific stock:-

1. Power Sector: - India is a developing country and has huge potential to grow based on its industries internal demand. The industry will be growing which needs power as it is in tremendous shortage.

2. Communications: Every person irrespective of being poor or rich wants to be in touch. Mobile phones have made boundaries very narrow at a very affordable cost. Therefore, the communication sector will be another area which has huge potential for growth

3. Infrastructure: India needs good AIR/SEA PORTS, ROADS, DAMS, POWER PROJECTS etc. Hence the investment can be made into this select sector also.

I would gather information about the reputed companies which are part of the above industries involved in manufacturing and trading activity. After looking into financial, I would invest in the company related with specific industries.

How are shares grouped?

The shares are grouped generally under A B as per the market capitalization. Every company needs CAPITAL to start a business. When entire CAPITAL of all the listed companies is totalled together it is known as MARKET CAPITALISATION. The following are the grouping of shares

1. Group – A: The ‘A’ group includes companies with capital of more than Rs. 30 Crores come under this category. There are approximately 250 companies under this category.

2. Group – B1 and B2: The ‘B1 and B2’ group includes companies with capital less than Rs. 30 Crores come under this category. Majority of companies in the stock exchange comes under this category.

3. Group – S: The ‘S’ group includes companies which have exclusively listed shares under B1 and B2 group having a capital between Rs.3 to Rs. 30 Crores, where trading is done under BOLT (block over the counter trades)

4. Group – Z: The ‘Z’ group includes companies which have failed to comply with the listing requirements of the Exchange and/or have failed to resolve investor complaints or have not made the required arrangements with both the Depositories, viz., CDSL and NSDL for dematerialization of their securities.”

5. Group – T: The ‘T’ group includes companies whose scripts are traded on trade to trade basis.”

6. Group TS: The ‘TS’ group includes companies which are settled on a trade to trade basis as a surveillance measure.”

How the stock market behaves when market falls and recovers vis-à-vis the different group of shares?

It can be observed that the values of Group Z scrips erodes the maximum followed by Group T/B1/B2 correspondingly.

While recovering, it is the reverse as Group A recovers the fastest and then followed by B1, B2, T and Z. I have personally observed that whenever the Z group shares start going up where the PE Ratio goes beyond 25+, the market will correspond with new peak in SENSEX and NIFTY. This is the first indicator that market has peaked out and the speculators have taken over. The market sentiment is now driven by GREED than INVESTMENT.

This is a beautiful sign where an INTELLIGENT INVESTOR must exit the market by encashing the profit. The investor now has to have patience to re-enter the same scrips at the lowest value in couple of months time.

What is P/E ratio? How the P/E ratio is classified?

The P/E ratio (price-to-earnings ratio) of a share is a measure of the price paid for a share relative to the annualnet income or profit earned by the company per share. The P/E ratio can alternatively be calculated by dividing the market price per share (MPS) by its total annual earnings (EPS - earning per share).

Following are the zone for classification of a P/E ratio:

N/A	A company with no earnings has an undefined P/E ratio. By convention, companies with losses (negative earnings) are usually treated as having an undefined P/E ratio.
0-10	Either the stock is undervalued or the company's earnings are thought to be in decline. Alternatively, current earnings may be substantially above historic trends or the company may have profited from selling assets.
10-17	For many companies a P/E ratio in this range may be considered fair value.
17-25	Either the stock is overvalued or the company's earnings have increased since the last earnings figure was published. The stock may also be a growth stockwith earnings expected to increase substantially in future.
25+	A company whose shares have a very high P/E may have high expected future growth in earnings or the stock may be the subject of aspeculative bubble.

What is the net worth of a company?

In business, net worth (sometimes called as net assets) is the total assets minus total outside liabilities of an individual or a company. It means that after entire debt in the form of loans are paid by a company, and then what is still left in hands in the form of various assets is known as net worth. Generally the book value is also equated with net worth. If the accumulated losses exceed the shareholder's equity, it is a negative value for net worth.

Is it necessary to know about all the shares listed in a stock exchange for entering the stock market?

Stock Market is an ocean. It is not at all possible to know all the information about companies even to an expert. The information about company is only based on NEED TO KNOW BASIS for every investor investing in industry specific scrips. Usually an average investor need not deal, more than 20-30 scrips in one’s lifetime. The investment can earn around 30% income from Group A and B scrips.

How to know LOW and HIGH about scrip in a stock market?

The Internet is a boon because so much information is available on a click of a button. On the internet I have relied on the website www.moneycontrol.comfor obtaining the information about high and low of a stock market. Any principal website will give the information about a share price for any given period.

One has to make their own notes of HIGHS and LOWS for preceding 1/2/3/4/5 years. This will give a complete knowledge about the respective share about when to PURCHASE and SELL scrip.

What aspects to see in a financials while buying a share?

Annual earnings in the form of profits are the basic ingredients for investing. While evaluating one has to also observe the average industry earning by looking into the financials of peer companies.

One has to keep a tab on their investment by knowing whether there are any concessions/ being given/withdrawn by the government to the industry, superior technology being introduced, any new tie-up in the form of collaboration etc.

What should an investor totally refrain from doing in the stock market?

Investor must never involve in INTRA-DAY trading as it is pure GAMBLING which is an incurable DISEASE. The attitude of investor is on sheer impulsive buying on hearsay or taking just a chance to recover losses of the previous day or make profit by chance once again.

What is the general cycle of a stock market in India?

Generally market falls and rises whenever events happen locally, nationally and globally. In a normal scenario, market picks up between June to October, as lots of festivals and good monsoon kicks start business activity. It gets corrected by a fall before December, as foreign investors sell their holdings to have financial closure of their books ending on 31^st of December.

It again picks up in January and lasts till end of February i.e. till the Indian Budget is announced. Indian companies have financial closure of books on 31^st March, hence the market does correction as the performance of each company is informally announced. This makes market a bit volatile.

Between March to June, school holidays starts and businessmen take a break for vacation. It is also peak of summer and absence of major festivals. All these reasons bring stock market generally to its lowest point. Usually all major market crashes are observed during this period. This phase is the right time for an investor to enter into the market as it is at its lowest point.

Generally, every company has to pay tax in advance to the Income-tax Department in four quarters which is June 15^th, September 15^th, December 15^th and March 31^s which is an indicator of their financial health. Investors can make comparisons with the corresponding earning in the previous year. The market may become a little volatile during this phase as a lot of media channels will be airing expert’s opinion out of the amount filed as advance tax.

Above working of a stock market in brief would have given a sense of respite that your investment basket i.e. Investment in the form of Land, Gold, Fixed Deposits, NSC Certificate, LIC Policy, etc. is incomplete if your investment excludes investment in stock market. Returns out of stock market are phenomenal as it is directly linked to performance of an economy. Since our country has tremendous growth potential for next two to three decades it strongly suggested that investors must not miss the bus. Information is power for any intelligent investor so logging on to internet with any website will facilitate acquiring information on the trends of any industry for investment purpose. I have logged on to www.moneycontrol.com and you can choose any by exploring the Google search engine.

For additional information an investor is given a tip for following suggested reading:

1. One up on wall street – Peter lynch

2. Intelligent investor- Benjamin Graham

3. The warren buffet way- Robert Hagstrom

Money is like a sixth sense, without which you cannot make a complete use of the other five.

W. Somerset Maugham (1874 - 1965),

Of Human Bondage', 1915

A reading of the above write up may throw up doubts, suggestion and feedback. Your suggestions are highly solicited as it will facilitate me to make this write up more better before publishing. The suggestions can be mailed to my email- id lovebunty@hotmail.com.

Hari Rao

22.02.2007 re-edited on 31.10.2011