Ask MumbaiTrader – 28th January 2012.

I am a 32 year old software engineer working with a leading IT company. I bought a flat and am paying EMI on it. I want to start investing in stocks. I have heard that it is possible to make high profits in daytrading, I am comfortable with software and computers. Should I try to do day trading?

Congratulations on buying a house and planning your next investment steps! However, day trading is extremely risky especially for new investors.

Day trading requires 2 major items – i) stock analysis skills ii) Extensive time investment – day trading is often a full time job! If you are seriously interested in day trading, you should begin with practising stock analysis in a practice trading environment like the one at http://mumbaitrader.com/Trade.aspx

From an investment perspective, you can begin with investing in stocks or mutual funds with a long term horizon. Choose stocks that are low risk and that have long term growth prospects.

I will be retiring this year and will be getting a lumpsum as a retirement benefit. I am trying to decide how to invest this amount. The banks are offering a good rate on fixed deposits. I have never invested in stocks, but my colleagues tell me that it is a good way to invest my money. Is this a good idea at my age?

Growing your retirement funds is a very important task, especially if you do not have  a regular pension. With life expectancies increasing, it is quite a challenge to make sure your retirement funds grow enough to meet all your needs.

If you were to live another 20 years, you will need this money for regular expenses as well as large ticket items like healthcare etc. Assuming that the bank interest will cover your regular expenses, you’ll still need to grow the principal to meet your other needs.

Investing in stocks is a good way to achieve this target. We will recommend investing in low to medium risk mutual funds and stocks with a 1-5 year horizon.

Submit your question – Ask MumbaiTrader.

Please email your queries to ask@mumbaitrader.com.

Ask MumbaiTrader.

Do you have a question related to stocks, markets, investments or the economy?

The stock markets can be very interesting and intimidating at the same time. While it may be exciting to be an investor during good times, it could get equally frustating during bad times.

Do you wish to seek some advice, ask a question, or discuss a topic in general?

This is an effort to create a medium to address common concerns of investors. Send in your queries that are generic in nature and would benefit fellow investors. We will answer them and the most popular ones will be published in the blog.

Submit your question – Ask MumbaiTrader.

Please email your queries to ask@mumbaitrader.com.

Money Manager, Investment Advisor or Broker?

As a new investor, one of the important decisions to make is whether to use the services of a money manager, investment advisor or a broker? All of these entities offer services tailored to the individual investor.

MONEY MANAGER:

i) Who is a money manager?

A money manager, as the name suggests, manages the money of several individual investors. A money manager can be an individual or a firm. Individual money managers are often experienced investors who typically manage the funds of friends and family. Institutional money managers offer their services to both individuals as well as institutions.

ii) What are the services offered by a money manager?

Money managers charge a fixed annual fee for their services and may also charge an additional commission on any profits accrured. They may also offer downside protection by guaranteeing a minimum return on the invested amount.

iii) Who should use the services of a money manager?

A money manager’s services is useful for individuals who wish to invest in the markets but do not have the time and expertise to follow up on a regular basis. Risk averse investors can opt for investments in money management funds of large banking institutions.

INVESTMENT ADVISOR:

i) Who is an investment advisor?

An investment advisor is an individual who offers investment advisory services to clients. An investment advisor can be an independent or can work for a firm.

ii) What are the services offered by an investment advisor?

An investment advisor offers a variety of services like designing an investment portfolio based on the client’s profile, recommending stocks to buy or sell, recommending different financial products like insurance, stocks, bonds, mutual funds etc.

Investment advisors typically have access to sophisticated tools and research and are hence in a position to provide a better insight to clients.

iii) Who will benefit from the services of an investment advisor?

An investment advisor’s services are useful for clients looking for additional information and advice to support their investment decisions.

BROKER:

i) Who is a stock broker?

A broker is an intermediary between the client and the exchange. Exchange traded stocks, bonds and derivatives can only be bought through a stock broker.

ii) What are the services offered by a broker?

A broker could be a regular brokerage firm or an online brokerage firm. Brokers sometimes offer minimum advisory services like research reports and market updates to clients.

iii) Who will benefit from a broker’s services?

A broker’s services is sufficient for experienced traders and investors.

Investment Style – what is yours?

One could be a miser, a spendthrift or even a wise man when it comes to personal finances. Similarly, stock investors can be classified based on their investment style.

Investment style is generally determined based on a variety of criteria such as investment goals, investment time line, risk objectives as well as some personal investor traits.

The following are some popular classifications.

1. ACTIVE vs PASSIVE: Active investors are well informed and typically believe in their ability to outperform the market. They actively follow the market and look for various ways to exploit market inefficiencies.

Passive investors are typically very long term investors who invest in stocks that they intend to hold for a long period.

2. GROWTH vs VALUE: Active investors can be either growth or value seeking. Growth seeking investors look for high-growth companies hoping to get a high return on their investment in a short period of time.

Value investors on the other hand look for under-priced stocks or ‘bargains’. Value stocks are typically identified through fundamental analysis techniques.

Are you a regular investor? What is your investment style?

Stock Investments MTerview with Kayar Harikrishna of mumbaitrader.com

Name: Kayar Harikrishna
Profession: Founder & CEO, mumbaitrader.com
Website: www.mumbaitrader.com

1. Briefly describe your investment experience.
I have been investing in the Indian as well as the American markets for the past 10 years. I invest primarily in stocks and bonds. I have seen the markets through the dot com bubble, the SENSEX bull run as well as the current financial crisis.

I have an MBA in Finance from New York University and have experience managing trading and trading strategy systems for large investment banks as well as smaller investment firms in wall street.

2. What are your investment goals?
My primary investment goal is to build and maintain long-term financial stability. I invest in stocks in order to build a portfolio that can serve as a nest egg. One of the main purposes of my investments is to provide for my retirement.

3. Tell us about your investment style and risk profile.
In the past, I had been an active investor with a high risk profile. Due to lack of time and other commitments, I am currently a passive investor and am fairly risk averse. I do a thorough analysis before making an investment and follow the ‘buy and hold’ strategy with my investments.

4. What tools and analysis methods do you use for stocks picking?
I use both fundamental and technical analysis for picking stocks to invest.

First, I use several valuation models to value a stock and identify investment opportunities. I then use technical analysis to look for any potential short-term impact on my stock picks.

I use custom software tools as well as Excel to perform analytics.

5. What advice would you give first time investors?
I will encourage first time investors to actively participate in building their portfolio. I would suggest the following:

• Maintain a practice portfolio like the one available at mumbaitrader.com.
• Learn the basics of stock investments.
• Understand both your short-term and long-term investment goals.
• Adopt an investment style that best suits your risk profile and investment goals.
• Maintain a well diversified portfolio that includes investments in stocks, bonds and traditional assets like gold, real estate etc.
• Track your portfolio on a daily basis to understand the impact of various events on stock prices.

Good Luck!

Financial Instruments – the basics.

As an investor you have several options when it comes to investments. The following is a list of investment options available in the capital markets.

1. COMMON STOCK: Common stock is a financial instrument that represents ownership in a corporation. Holders of common stock own a portion of the corporation. They have voting rights in board member elections and other corporate policy decisions. They receive dividends from the corporation. However, in the event of a liquidation of the corporation, the holders of common stock are lower in the order or priority compared to preferred stock and other bond holders.

2. PREFERRED STOCK: Preferred stock is a financial instrument that represents ownership in a corporation. Holders of preferred stock own a portion of the corporation. They have no voting rights. In the event of a liquidation of the corporation, the holders of preferred stock have a superior claim over the firms’ assets compared to the holders of common stock.

3. BONDS: A bond is a debt instrument that is issued by a corporation or the government in order to raise money from the public. Holders of a bond are merely lenders who have lent money to the institution that issued the bond under the terms specified in the bond issue documents.

Some examples of bonds are government securities, corporate bonds, commercial paper, treasury bills, strips etc.

4. FUTURES: A future is a financial contract in which the buyer agrees to buy an underlying financial instrument on a certain future date for a certain fixed price.

5. OPTIONS: An option is a financial contract that gives its buyer the right, but not the obligation, to buy an underlying financial security at a certain price, on or before a certain date.

6. MUTUAL FUNDS. A mutual fund is a professionally managed investment fund that pools the money of several investors and makes investments on their behalf. Individual investors in the mutual fund own ‘shares’ in the fund and receive a return in proportion to their investment.

Mutual Funds – the basics.

What is a mutual fund?
A mutual fund is a professionally managed investment fund that pools the money of several investors and makes investments on their behalf. Individual investors in the mutual fund own ’shares’ in the fund and receive a return in proportion to their investment.

Why should I invest in a mutual fund?
Investing in a mutual fund has the following advantages:

i) Professionally managed – Mutual funds are managed by professionals. Individual investors benefit from the high quality research and analysis that goes into their investment process.

ii) Well diversified – The large pool of funds provides the opportunity to make a wide array of investments. Mutual funds are very well diversify such that a loss in a particular investment will be offset by profits from other investments. The net return is thereby beneficial to the individual investor.

iii) SEBI regulated – Mutual funds are regulated by the SEBI. This protects the individual investor from ponzi schemes and other potential fraud.

iv) Liquid – Mutual funds are highly liquid and so the individual investor can convert their investment to cash with relative ease.

Is my money safe with a mutual fund?
Mutual funds are regulated by the SEBI and are under strict regulatory supervision. They are required to fully disclose the details of all investments and are overseen by a board of trustees that should comprise of more than two thirds of independent directors.

What are the disadvantages of investing in a mutual fund?

i) Additional Costs – Fund management adds an overhead to the investment process and this additional cost is borne by the individual investors in the form of management fees.

ii) Taxes – Investment decisions do not take into account the tax liabilities of individual investors. Hence it is often not possible to minimize tax liabilities on mutual fund investments.

Stock Investing – learn the language.

1. MARKET CAPITALIZATION: Market capitalization is used to measure the economic size of a corporation. It is defined as the current market value of a corporation’s total outstanding shares. It is calculated by multiplying the total outstanding shares of a corporation by its current market price per share.

2. DILUTION: EPS or earnings per share is a commonly used metric to measure the performance of a corporation. It is calculated by dividing the corporation’s reported earnings by its total outstanding shares. Whenever the number of outstanding shares of a corporation increases, the EPS is said to be diluted.

The total outstanding shares of a corporation can increase due to i) issuance of additional shares ii) conversion of convertible securities.

3. LIQUIDITY: Liquidity is defined as the ability to convert an asset to cash quickly. In the case of the equity markets, liquidity or market liquidity is the ability to buy or sell a share quickly.

4. DIVIDEND: Dividend is a payment received by a shareholder from the corporation. A corporation can decide to distribute a portion of its income or earnings as dividends to its shareholders. The actual dividend received is proportionate to the shareholding in the corporation. Dividend income is taxable.

5. BUYBACK: A corporation may decide to buyback or repurchase a certain number of its outstanding shares from the market. A buyback may be to increase shareholding percentage or to decrease supply in a highly volatile market.

6. OUTSTANDING STOCK: Outstanding stock is the total number of shares that have been issued by the corporation and is currently held by the investors.

7. IPO: Initial public offering or IPO is the first time a private corporation makes its shares of stock available, for investment, to the public.

8. MARGIN: Margin is the amount deposited as collateral by an investor in order to trade certain types of securities.

9. PRIMARY MARKET: Primary market is the market that trades in the very first or initial issue of stocks of a private corporation.

10. SECONDARY MARKET: Secondary market is the market that trades in the stocks of a public listed company.

Stock Split – is it good for you?

What is a stock split?
A stock split happens when a corporation decides to increase its number of outstanding shares. The price per share will be adjusted such that the market capitalization of the corporation stays the same. In effect, a stock split does not alter the financial position of either the corporation or the shareholder.

Example.
If an investor owns 100 shares of company ABC at a current market price of Rs.350, a 2 for 1 stock split will leave the investor with 200 shares. The new price per share after the split will be Rs. 175. Hence the total investment value will remain the same at Rs.35,000.

Why do stocks split?
Corporations announce stock splits to decrease share prices either to attract smaller investors or to keep their share prices at levels comparable to competition.

Is it good for you?
A stock split results in a lower share price and may attract more investors. This in turn creates a positive market sentiment that may drive the share price upwards. This is the rationale behind the strategy of investing in a share around the time of a split. Although there is data to support the theory that the stock price surges after a split, there is no actual change to the fundamental value of the company and so any investment made should be speculative rather than value based.

Financial Ratios – what do they tell you?

What are financial ratios?
Financial ratios are standard ratios that are calculated using information in a company’s financial statements. Information presented in financial statements can be non-standard and confusing. Financial ratios provide a structure to analyze and understand the information presented in a company’s financial statements.

What are financial ratios used for?
Financial ratios are used for a variety of different purposes. They are used by company management to understand the overall health and performance of a company. They are used to compare the performance of a company against the general industry performance. They are used to compare a company with its competitors.

Financial ratios are also used by investors to analyze a company’s performance and thereby assess its value.

What are the different types of financial ratios?
The following are some common types of financial ratios:
i) Profitability Ratios measure a corporations ability to maximize its profits. A higher ratio is a sign of a profitable corporation.
ii) Liquidity Ratios measure a corporation’s ability to generate cash to pay off its short-term debt. A higher value indicates higher liquidity and thereby a greater ability to pay off short-term debt.
iii) Activity Ratios measure the time taken to convert goods produced to either sales invoices or cash.
iv) Debt Ratios measure the proportion of a company’s debt in relation to its assets.
v) Market Ratios compare market parameters eg. price with book parameters, or parameters from financial statements.