Tuesday, 18 November 2008

The Power of Less

All of a sudden, I have started to feel like a saint. I leave it to your perception but its somewhere on those lines.

It takes me about 30 minutes to reach my office in the morning. The road I travel is quite wide, about 6 lanes on each side. They say that when your view is large your vision becomes larger (never heard of it? My quote!).

I was sitting quietly next to the glass window seat thinking about nothing. I was in a solace. I was feeling the oneness with myself. My thoughts were slowly getting audible to me. It was like somebody whispering in surround sound in my ears. The special effect is not that important than what I heard. If you had read one of my previous ramblings you would notice that I was searching for "what next?". Although I haven't completely found the answer but I have moved a bit closer towards the subset of a probable answer. I am not sure if its an outcome of my misadventures with life or just another thought. It could be both or neither.

I heard that its very critical to be ambitious. Ambition drives you and lets you become what you are, and it gives you the future course of action. It blesses you with a goal, sometimes an objective. I would take this opportunity to explain that ambition is a general term, and has nothing to do with personal requirements or achievements. More often than not, we see ambitious people as self-centered(more polite word for selfish!).

I am not sure, but this is how I used to see this word in my rear mirror(the one that says "Objects in this mirror are closer than they appear"). We are exploring the positive nature of this word. Mayavati's ambition(to be the PM of this country... ha ha) can make her self-centered, but Mahatma Gandhi's ambition to see this country free can't come into this category. Its what you call Philanthropy. What you see is what you believe. The glass is always half filled.

Wednesday, 8 October 2008

Wake Up Call

I never thought that I will ever write this.

The fact of the matter is that we have to start acting on it now. I am sure you must have heard about The Great Depression of 1929. It all started around 1920, and was at its peak during 1933. This was one of the prime reasons of the World War II. Don't panic yet, but you'll. During that time the world was engulfed in unemployment and chaos. Things were so cheap, but there was no money to buy.

It started in the United States then and it has started again in United States. The great economic boom of 1920 gave in to the great depression then, and the great economic boom of all economies and so called "emerging economies" may again lead to depression. Obviously enough the world is in recession now. That time it was triggered by debt and reasonably enough this time its also triggered by debt. This time however we have a funky two letter crisis-word: Sub-prime Crisis.

You will be amazed to see the striking similarity between what happened then and whats happening now. The ambiance might have changed but the process is same. The only silver lining in dark cloud is that this time they have a reference book that suggests what-not-to-do. The biggest flaw that time was impotence of the Fed. It just didn't do anything. Although this time they are planning a bail-out, but it remains to be seen how effective it turns out to be. As per an estimate more than $300 billion has been written off by various banks in sub-prime crisis. But, that's just it - an estimate. It reported pretty much as casualties are reported in a terrorist attack - deflated.

You know its coming when you see huge umbrellas striping. Banks started to fail then, and they have started to fail again. Then about 744 banks were busted, now 3 are done - and counting! Its a domino effect. The big ones fall, then the smaller ones, then industrial production is effected - to a halt, and then the middle class is rendered jobless. Nothing has changed. It happened in the same fashion then and its going the same route all over again.

I don't know if you have heard this or not -  a house in US was sold for about $1.76 only. That's about INR 82. In India, it appears that the property prices are declining to go down, but its just that - a bubble. They don't come down, they defy gravity, and they burst. With the lending rate going higher, and inflation firmly in place, the bubble has got its days numbered. If you think that the flat you bought 2 years ago will give you a 100% return on investment then you must be living on an island. Go, and try to sell it, you'll get to know what I am talking about. You'll struggle to get the principal.

You must have noticed the nosedive of Equities market. Why doesn't there seem to be an end to the free fall of Stock exchanges all over the world. All the banks are heavily into stocks and related instruments. People then didn't keep any money in banks, because of the fear of losing it altogether.

Banks lend money to each other at an interest rate function of Libor/Euribor/Mibor. We call it money market. Money is lent for a period of 1 day to 1 year. The interest rate is currently at about 5+%, easily an all time high. Banks fear of counter-party risk. There is very tight liquidity, hence the bail-out. That's the reason why the RBI eased off the CRR yesterday by about 50 basis points. This measure is to ease liquidity, so that there is money in the market. The other way to increase liquidity is to buy government bonds - RBI does it, so that money is injected into the system. US Fed didn't do it in 1929, this is happening now - hopefully a good sign.

Its time to talk to your father, and ask him why he always kept you from going under debt, from taking any loans, but you didn't realise. You thought that you get salary in astronomical figures, nothing can ever go wrong. People all over US, and Europe and "emerging economies" thought the same. You used to get cheap credit, but no longer. The damage has already been done. That time, people couldn't repay their debts as the companies/factories where they used to work were busted, because banks were busted. We have seen the fate of a lot of banks in US already. We are following the same f**king pattern, all the f**king over again.

This time they had devised a "Sub-prime customer" to lend money at higher interest rate, hoping to reap a rich crop. Rest is history. That's one of the differences between 1929 and 2008. And the difference is huge. Prime borrowers became sub-prime and the latter went bankrupt. Debt is taking its toll.

I have known myself as the biggest optimist who ever walked the face of this planet; but no longer! I can't keep my eyes closed. I have started to sense the inevitable. Its shocking!

Try these 10 tips to survive a recession.

Please pray to God that I am wrong, that all my apprehensions are bullsh*t. I mean it.

Friday, 11 July 2008

My Best Shots

The Nature Inc.

Salman Rushdie wins booker again. Good news, but I don't care. I am into writing blogs, but I can't read books. A very good friend of mine sometimes used to read novels. I wondered how? So many pages of dull text, even the font is not very good. I like cartoons. Its not that I like reading comics either, but it should be colorful, short, and crisp.

I don't know what was the topic of his book: Midnight's Children. Who cares? What I care about is that he is "communicating" with Riya Sen a little too often. Some people are born lucky!!! It has nothing to do with Riya anyways, its about the undue leverage God has given to some people. Even Charles Sobhraj is talking about girls at 64. I can't stop myself from talking about Shane - The Warne. I don't know how India survived him for 6 weeks while he was playing in IPL. But, as soon as he went back home, he started doing what he does best - yielding to nature. People say he is the best captain Australian cricket never had.

Its not about the Salmans, or Charles, or Warnes of the world, its about nature. We are animals - alright, social animals, happy? We live in houses, wear clothes, make buildings and computer systems. But never find any happiness in what we create.

I don't know about everyone, but I think a cool natural breeze can give you what an AC can't. Alright, what would you prefer? Constant bombardment of chilling air on your face inside a room or lovely, cool, fragrant breeze near a mountain/hill/whatever? Do you prefer watching snow clad mountains on your 42" LCD TV or being there to feel it? What about watching Katrina Kaif on TV than seeing her in person? Oh my God. What? I only said "seeing her in person".

The real thing is that nothing gives you more peace and satisfaction than Nature. There are no alternatives to Natural beauties of the world. Your alignment might differ - you may prefer a man or a woman/women, hills, cliffs, mountains, oceans, sandy beaches... All the beautiful things in life that God has given to us. You can't ever get enough of it. I love natural beauties of the world - did you guess my preference?

Don't forget to share your preference. What do you like?

Thursday, 10 July 2008

Lively By Google.

Allow me the privilege of presenting to you: The Google Lively

Its a new chatting platform that allows you to create 3D ambiance and let you and your friend's avatars to communicate with each other.

They can show emotions(animated emotions) as you chat. Other features like File sharing has never been this exciting. Its not like what you have seen or done before. Have you ever seen your avatar moving inside the room you created?

I am sure it going to be loved by one and all. Its like playing a video game while chatting - its more interactive and a gives you a richer feeling.

For more information see this.


Tuesday, 8 July 2008

The God Of Small Things

What makes you happy? What possibly can make you happy? Is it the accomplishment of a goal or achievement of something that you always asked for? I feel its relative. It tends to vary from person to person. As I am not a professional psychiatrist, I will talk about myself. However, I have a feeling that people who shared my kind of upbringing and values will definitely agree at some points.

I have grown up in a small town, in a middle class family where less was more. Now I am growing up in a larger town, own a middle class family where more is less. I have been like this for a long time now. However, I had been influenced by a person in a big way - for good. I am an improved person now, but still there are some things that were never exposed to the person in question so they are just hanging around. People around me feel that I have matured, have immense patience and never show off emotions easily. But there are certain other things that have cropped up, and growing. I am into a phase where more is indeed less.

I have grown in patience but my quest for the next big thing is increasing by the moment. The only question I keep asking myself is: Great, What Next? I am enjoying a rather successful career. Wait, I beg to differ with the word "enjoying". Once I wanted to work with the "best company"(another relative thing) in the world, I did. Once I got into it, I thought What Next? I worked harder, tried to prove myself among a bunch of super-minds, got it done, What Next? I wanted to work for a huge bank(currently world #1 in terms of assets), joined it, and currently working for it. Learned quite a few investment banking skills, now what next? The next thing in my mind is to assume a big and influential role in the organization. I am working hard to achieve it.

The question remains the same - What Next? Is there any upper limit to ambition? Am I doing anything strange that others aren't? I don't think its a problem. I think its a bliss. But for how long? What if I indulge too much into it? What if it spills over to other aspects of my life? I hope its good for me and my family as long its with my career.

When I was in school, I used to get happy when I managed to get a day off from school. Weekends were the best part, but if I could manage a weekday, I used to be very happy. I could do a lot of things. I was in a habit of exploring, so I used to explore the already visited areas of my neighborhood and tried to find something new. A new face or an old friend was enough for the day. So finding people used to make me happy. People were very important to me, I used to give all my toys to my friends and cousins so that they can spend whole day with me. In fact they have played with my toys more than I ever did. But I was happy because I wanted to be with them.

Gradually the toys gained importance in my life. I started to lose my friends and cousins since then. These things are known to keep you away from humans. But reality is that toys can never replace humans.

I can still remember the day when I was insisting my father to buy me a computer. He said: Thanks to God that you are studying Computers; what if you had decided to study Aeronautics? I would have to buy a plane for you!!! It took me about 2 months to get it. It was my prized possession.

But only after 2 months I thought - What Next? That was the end of small town me. Then I fell in love. Got it too, but lost it because I didn't deserve it. That episode changed a lot of me for good.

Never mind, realization is the bliss. The fact that I am writing about it makes me aware of it. The inner turmoil will be put to rest soon once I achieve my next objective.

You will be happy once you start to enjoy the small things in your life. The day a new flower in your balcony puts a smile on your face is the day you should be looking for. Money, fame and power can never make anybody happy. There is no upper limit to beauty, money, fame and power. There is no upper limit to lust. There is no upper limit to ambition. But there is a upper limit to the number of words I can write here!!! So, take care, and look within.

Friday, 4 July 2008

How to make money in a falling market?

First things first - you may make money by following the suggestions if you are lucky enough. I have been losing money ever since I figured out how to make money in a falling market. So apart from the various instruments, you need to have a great timing to enter the market.

You need to be informed and take calculated guesses. A very obvious news might not move a market, an unexpected news does. For example, everyone knows that crude/bbl will continue to move around $140-$150 this week if it reaches $160 this week you can expect a crash. Same goes with inflation, the market will react if it reaches 14% instead of 12% this week as everyone has already guessed.

In one of my previous blogs I wrote about "Positions" in a market. It could be either Long or Short. You go long in a rising market. You expect that the price of a stock will rise, so in that speculation you buy at lower levels and sell at higher levels. In other words, you go Long. An active Demat account is a prerequisite.

In recent time markets have been witnessing a free fall, obeying Newton's laws of gravity. Just like migratory birds go south during summer, the market is going south these days. The reasons are many. So, going long is a bad idea. But the scenario can change any time. Once people start to think that its over-sold you will see an uptrend. The market fundamentals are strong and in safe hands.

So the strategy for the season is to go Short. You speculate that the market will fall, so instead of buying first, you sell. Yes, this is possible. You take a short position and expect the price of the stock to go down. Sounds like a winning idea? Not always. Just as you can't guess when its going to rise, you can't guess when is it going to fall. There are millions of factors that drive the market, so you need to be well informed of all the major business activities around the world. As I said, I have been losing as I always enter the market at the wrong time :(

Alright, so you have the strategy in place, but you don't know the products. The products that I know are: Individual stock, Index and Commodities. You can short "n" number of an individual stock like Reliance Capital, but you will have to square it off(perform equal and opposite trade) within a specified time frame.

However, in Futures contracts you can keep the contract until expiry. Its usually a 3 month contract with 3 contracts active at any point in time. Depending upon the market trend and your position in the market you can continue to make or break money. If the market is going up and you are long you will make money. No points in guessing, if the market is going down and you are holding a short position you will make money till the time you hold the contract before expiry.

Whenever equity is in tatters, commodities take over. Have you checked Gold, and Crude these days? Futures in commodities promises to be a hedge for any possible risks in Futures in Equities.

Just an FYI. The crude oil price is touching new heights each day due to speculation and futures trading. You must be aware of the fact that OPEC doesn't control price of crude anymore... US does. For in depth analysis read this: The real reason why oil prices are rising

All the best.

Thursday, 3 July 2008

Do you believe in ghosts?

Do you believe in ghosts?

I can't say for sure whether I do or not. I may tend to say no. People who claim to have witnessed it will say that its just a matter of time when you see one. Scientists and researchers may attribute it to anomalous magnetic and electric fields at certain locations. They do not believe in God either. They never have found any proof!!!

When I was in college, I studied about Id, Ego, and SuperEgo. Id is stubbornness, ego is based on the moral values you gain over time - the good and bad of things, and SuperEgo is all about beliefs. It could be your belief in religion, its teachings. These are the various states of your mind. Id tends to overpower your sensibilities and you may end up crying for moon. Ego provides a healing touch and explains to you that you can't have moon because: its too large, too far, impossible to bring to earth, and simply because its not yours!!! I am unsure if everybody can have SuperEgo - the inner eye that can see God and can seek his answers.

Believing in Ghosts could be a state of mind. Is it the Id in you? It can't be Ego, or SuperEgo for sure. If its Id then it has to be intense and it is. Its a known fact that hatred is the easiest and the most intense emotion. It usually comes naturally. Its the Id in you. It simply captivates your mind. Love on the other hand is a milder emotion. What about Fear? What about devotion?

If there is good, there has to be some evil to balance the world. You may call them the positive and negative forces. Even atoms - the building blocks of matter have them in equal proportion. The constant shift of balance provides the energy necessary to keep things moving.

I think if you believe in God, you have to believe in the negative forces also. Ghosts could be one of them. Existence of Gods is an entirely different and debatable story altogether. Its your brain that decides. Let it decide.

In the meantime take a look at the picture below. I captured this in London.

Doesn't it seem like I photographed a ghost? Its 100% original photograph, and explains a lot a camera can do. There are technical limitations to a camera. This image is of a fast moving car with a person sitting inside it as it passes by me.

This is what I see as proofs presented by a lot of people around in various articles over the Net, be it the ghosts of Bhangarh, or Scotland. Never mind, the real proof is in your head. Its how you see or feel or perceive things around you.
If you believe in it, you will feel it someday. If you don't you will not. But, its not as easy. Even if you don't and if you are subjected to such a circumstance that has led others to believe, chances are that you will tend to believe in it too. Why? Your brain might not have a ready-made answer, and you have been hearing stories about it for years. So, you will end up believing.

How many times have you been scared within your own home when the light goes off and there is darkness all around? Don't you feel sometimes that a pair of eyes is watching you at that moment? There is no ghost around but you feel like having one. Your brain is a smart thing...

Wednesday, 11 June 2008

The Realty Check

Yes, its time now for some Realty check. It doesn't need a rocket scientist to figure out the slowdown in the real estate market. For some reason the term "slowdown" is being widely used now. We tend to refer everything as a slowdown if its not progressing the way it was projected. I beg to differ. I am sure others will too.

I am referring to the ever booming real estate market in India. After all, a house is one of the basic needs. But, a 1 crore house may not be a basic need. Its a wish. Its luxury and a perfect display of affluence.

The other day I was reading an article that talked about top 10 countries in terms of inflation. Zimbabwe is right at the top with 355,000%. Their government just rolled out a $ 500 million note. Oh yes, their currency is also dollar - the Zimbabwe dollar. The 10th country in the list is Serbia with an inflation of about 15%. We are now competing with them. For all practical purposes the inflation has touched 10% here. So, in days to come everyone will be crore-pati in India. We will become the land of millionaire/billionaires/whatever again. Imagine an auto rickshaw charging 50,000 for a ride from Chandni Chowk to Red Fort(its about 100 meters). Love Story 2050, anyone?

The point I wanted to make is the exorbitant real estate prices in some (sub)prime(its a doomed term by the way!) locations in our new age country. The other day I was watching CNBC Awaaz, and they came up with a nice report on hammering on real estate sector. Although the real estate developers are running out of cash, a substantial number of projects are delayed, new ones are waiting endlessly for buyers but still the price refuses to ease. They say that they are waiting for Diwali - they expect buyers to turn up by then.

They are ready to incur losses and let the projects be delayed than lower down the price. The reason is simple: they don't want the prices to go down. If it happens once then the real estate prices will become susceptible to market conditions as all other commodities - good for the customers. But, if they stop it from happening now, they think they will keep the prices isolated and unaffected by market conditions, and continue to reap rich dividends. I am sure you'll agree that the prices are atleast double of what they should be. Every broker or an agent is a market maker. They decide on price on the run. If you drove to them on a Santro - you'll get a different quote from someone who drove-in on a Sonata.

I am sure this will not happen for a long time. They are a part of the system after all. They will have to correct themselves or the market will force a correction. Buyers are well aware of the fact and they are expecting the prices to go down soon. But, it seems unlikely before Diwali this year. Lets hope for the best. Lets hope that the customer becomes the king again.

Friday, 6 June 2008

Margin and a day - II

Welcome back.

Let me talk a bit about the going long and short again. As you now now when you go long you must have bought something, and when you went short you sold something. To add to your disbelief, they can be separate transactions.

Allow me to make things clear the Bunty and Babli way. Going long comes naturally but the trick is about going short. Its a like selling The Taj Mahal. Do you own it? No. Can you go short on it? Yes.

No, I am not playing with your emotions. I am playing a trader. I was excited when I heard about it a few days ago. I was astonished when I executed the trade on my own, and I was overwhelmed when I saw the result in the ever falling market.

What else do you need? You don't have to pay the entire amount of trade - you have margin. You don't have to own the stock you want to sell. What else do you need? Luck.

You have a very nice platform to ply around, and they encourage you to put money. They guarantee you of prompt service but what they can't give you is the wisdom and luck to win. Even masters of the trade can't always win. The reason is simple - the stock market depends on thousands of factors - on supply/demand, on sentiments, on breaking news!!! Countless. So you end up guessing. But, the trick lies in taking calculated guesses.

Chamanlal asked: How can you ever sell Taj Mahal? Its not yours. I replied: But, I can borrow it from Government of India for a day and then do whatever with it with a promise to return by the end of the day.

Margin trading, also called Day trading or Intraday trading is considered a very risky affair. It indeed is. The rules involved make it riskier. Whatever position you take, you have to "square off" the position by the end of the trading day. In India, trading starts at about 10 am and ends at about 3pm excluding weekends. As you don't have sufficient time to recover from your losses, you end up losing - its intraday what did you expect? Squaring off is the process of performing the equal and opposite trade e.g. if you sold 10 stocks of XYZ, you have to buy it back by the end of the day.

Chamanlal says: Alright, I have sold Taj Mahal, now do you want me to buy it back? Ruthless. What will I do with it? I can't sleep with Shahjehan. I said: Grasshopper, you don't have to keep it, remember its not yours, you borrowed it from someone. You have to return it. All you end up keeping is the profit/loss(P/L) that you generated during the day.

You have to keep in mind that apart from margin you need to pay a minimal brokerage. Your P/L is adjusted from the margin. The good thing is that your P/L can't go beyond 16%. So, if a stock moves more than 16% since you last traded, it will be automatically squared off. So, for every 100/- you can gain or lose 16/-. Other features include stopping your losses, and placing Limit orders for Buying and Selling.

So irrespective of the market position you have the chance to make money. If the market is falling, you short at a higher price and then square it off at a lower price. Similarly if the market is moving up, you can go long at the lower price and then square it off at a higher price. Exciting strategy isn't it? Did I say that margin/day traders are the ones who are worst affected by any strong adverse movement of the market? So research, make calculated and informed choices, and use only your risk capital(money you can afford to lose) to make profits.

As per general perception and lot of text written over Intraday trading, its a widely accepted fact that 90% of the traders lose money. This is an adventure sport and must be played only when you are ready to lose but wont mind winning at times.

Wednesday, 4 June 2008

Margin and a day - I

Warning: Cigarette smoking is injurious to health.

Please don't mind the relation between margin trading and cigarettes - I am in a habit of deriving inferences from real world entities. As I have clarified earlier, my writings are for those who are new to Equities and Futures. That's why a cigarette.

There is a theory revolving risk and profit. The more risks you take the more profit you make. Or in simpler words, or for the lack of better words - No risk No gain!!!

Warning: I am in no way trying to convince you to indulge in Margin trading.

What the heck is "Margin Trading" - I just heard you say. So, here you go. We have a very smart exchange called NSE(National Stock Exchange) that has most stocks available to trade in margin. It makes sure that the stocks are good and they have a proven track record of NOT killing their investors. So, in a way they have taken the very first step for you. These stocks are not of any fake company, they are perfectly real.

Lets take a simple example to explain this concept. Suppose you want to buy shares of a company called XYZ. The price of a single stock of this company is at about 1200. To make some generous investment you would like to have at-least 50 shares of this company. It amounts to: 1200*50 = 60,000. But, didn't I just say that my target audience are novice? So I can't expect them to shell out(read: Risk) this relatively large amount of money at once. NSE and other major exchanges in the world are very much aware of this fact, that's why they have devised many investment/trading instruments. In this concept of margin trading they don't expect you to give them the entire amount, but a margin.

So, if the margin of this stock at NSE is 21%(it usually ranges from 21% to 35%) you need to pay: 0.21*60,000 = 12,600. The riskier the stock the more the margin.

Great. So you just started off with 12,600 taking a position on about 50 shares of a coveted company.

Dude, I have 12,600 and I now want to trade. But how? Do I have a platform? Yes. There are many like ICICIDirect, Reliance Money, and ShareKhan called De-mat account providers. To get started, you need to open a De-mat account to trade stocks and invest in stocks. PAN card is mandatory these days.

Bloke, you just said "position" whats that? Is it another of your jargons? Or just a position? Doesn't make much sense to me. Grasshopper, don't worry I am coming to it. Its a jargon, and we "take" a "position". You can either take a "short" position or a "long" position.

When you buy a stock you are said to have taken a "long" position, and when you sell you take a "short" position. Its at the center of all the trading and investment strategies. So, its a very important concept.


Friday, 30 May 2008

Wednesday, 28 May 2008

Financial Markets - The Intermediaries

The last important part of our discussion is the role of market intermediaries. These are interesting people, often the most important ones. They are:
  • Market Makers
    • They are a firm(sometimes an individual in certain unorganized markets like real estate) who offers(or makes) a price to a financial instrument or commodity.
    • They quote 2 prices - a bid and an offer.
    • Their intention is to make profit on the bid/offer price spread. e.g. the bid/offer price for USD/INR may be 42.2 and 42.1. Price spread = 0.1
  • Distributors/Sales Staff/Brokers
    • Often a trader/dealer doesn't have any direct contact with the customer. They need sales staff.
    • These are the people who interact with clients and market makers.
    • They receive requirements from clients and fetch price from a market maker.
    • Quite often, they "broker" between two different clients by introducing each other if an offsetting requirement is met without involving the market maker.
    • They may be in touch with different market makers to fetch the best price for their client.
  • Structurers/Research
    • This is a critical part. With various risks involved in the market, all institutions need research personnel to device ways to cut risk.
    • They take market data as input and provide highly customized solution to a given problem/risk.
    • Researching for derivatives to device a way out is a common practice.
  • Middle/Back Office
    • After the transaction is complete, it needs to verified, cleared/settled in bank account of counter-parties. There are other related office/paper work involved in a transaction that is taken care of by the Middle/Back office staff.

Financial Markets - The Need

Why do we need a market?
There are a lot factors that contribute towards the need of a Financial market. Some of them are:
  • Price Discovery and Asset valuation
    • There is a golden rule to the market: The value of an asset is no more than somebody is willing to pay for it. As markets bring people together, it allows "price discovery".Now you may understand why SEBI allows 1 day(the day of listing or re-listing) for price discovery. Some stocks like KGN may take undue advantage nevertheless. However, they are shown the real value in subsequent days.
  • Capital Opportunities
    • Financial instruments like Equities, and Debt help raise money to fulfill capital opportunities(of firms or governments) like building a factory or providing civic amenities(trains, roads, electricity etc.).
  • Short term financing
    • Its required for fulfilling any immediate cash requirement.
  • Investment opportunities
    • People who have surplus cash can invest in various products thus building their own asset portfolio.
  • Risk Management
    • The market always innovate and offer new products that may minimize various risks.

There are two types of Financial markets: Primary and Secondary. The former takes care of issuance of Securities(a common stock!) and the latter takes care of trading of those issued securities.

Financial Markets - Introduction

The last time we met, I advocated your attention towards stocks. I mean if you start giving it a thought, you will certainly explore a lot of small things that matter on your own. All you need is to think in a rational manner towards realizing your goals.

Let me extend my helping hand a little further by offering you something on the Markets, types of risks involved and the kind of traders in the market.

A Market is a social arrangement where exchange of goods takes place between buyers and sellers. The market type we are interested in is Financial Markets.

Its a social arrangement because man is a social animal. Whenever humans interact or need to interact they form small social groups - the society may comprise of only 2 people, or may be 3. This brings us to the concept of market participants.

There could be buyers, sellers and intermediaries that can bring buyer and sellers together. Do you remember the last time you went for house hunting? You needed one desperately but you didn't know anyone in the town. So you went straight to an estate agent. He gave you a couple of options, and you visited those places, and eventually you got a rented accommodation. This is a simple example of a Market type. We can loosely refer to it as a Real Estate Market. You were the buyer, the agent was the intermediary and the house owner was the seller.

A Financial market comprises of the following:
  • People
    • Just like the previous example we have buyers - people in need, sellers - people with excess, and intermediaries - people who bring them closer.
    • Key agents who look to raise money through Financial markets are: Private Sector Institutions, Governments and Supranational Entities.
  • Products
    • These help to raise money, and the urge to trade.
  • Places
    • There must be some market place for the deal to be executed.

Monday, 26 May 2008

Popular misconceptions about the Stock Market

Somebody said "Information is a bliss". If you haven't heard of it, then simply take it as my quote. Its true.

About 10 years ago in India, if somebody talked about doing any job that's not a government job - he was considered a loser. A loser in a sense that he is doing a non-government job only because he couldn't secure it on merit. If you are my age(about 25-27), you will understand what I am talking about. If you are younger, talk to your parents. In today's India, nobody, almost nobody wants to do a government job. I don't need to elaborate on this as you all are aware of the reasons.

Stock market is another doomed territory. It was like this 10 years ago, and its like this even now. What will happen to you when you drive a car in a busy street if you can't drive? Boom, crash, thud!!! How did you learn cycling? You learnt it with the help of your elder brother, may be your good friend. Where did you go cycling before you hit the road? You might have tried lane less visited first, and then when you had sufficient courage/confidence then only you ventured the street. Great.

They say that Stock market is unpredictable. So is the street you drove on to reach your destination today. Do I sound convincing? Read on...

When you are in your car, you feel safe as you are actually safe and in control of things. You know the best route forward, and you know the complications of over speeding or rash driving. You know everything about driving on road. What you don't know is what is going to happen at the next turn. But that doesn't stop you from driving on road. You say that it still is the best and safest mode of communication.

Stock market is much like driving a car. In a car you know how to change gears, when to apply brakes. Here you need to know about it too. While driving a car, you need to see the street condition, here you need to see market condition. You need to be well informed on road about traffic jams after the next stop light, here you need to be well informed of any negative news/sentiment for any company. Simply avoid going there.

My dad told me - "its a gamble". He said - "my elder brother invested in some company about 10 years ago at a rate of Rs. 200 per share and the very next month it dropped down to Rs. 150 per share, and he had to incur losses eventually. He vowed never to invest in stocks again!!!"
I checked the current price of the stock, and it was trading at Rs. 1200 today!!! He then said - "do you also gamble?". I said - "No". But I then wanted to explain him about "investment" and "trading" - the Warren Buffet way. I don't know if he was convinced, but then I thought of writing this blog.

You need to clear off your misconception about stock market. Its neither a magic wand nor axing your foot. Its somewhere in the middle. Its more on you than on stocks. Its about how prepared you are to take on the road. It depends whether you are good driver or a crasher.

The world's richest man Warren Buffet started "investing" at the age of 11. The word "investing" is in double quotes because it has a special meaning. Investments are always long term. Its done only after a good research either by yourself or by your financial planner. By long term I mean at-least 3 to 5 years. You always see that the market is highly volatile and if you see the daily graph of a stock, its like a heart beat of a mouse - sometimes of a dieing mouse. Frequent ups and downs and going down eventually. But if you see an yearly graph you will see a trend. You will see that although the stock has performed badly sometimes but it is going up. So daily volatility doesn't affect you at all. In-fact you don't need to be affected by that.

You must have heard that many traders went bankrupt this 18th January - the famous stock bloodbath day. I would like to mention 2 things: they were not investors, they were traders - day traders doing intra-day trade where its mandatory to square off the position by end of the day. Secondly - they didn't adhere to the basic principles of investing.

I will continue this captivating discussion in my next post. But, I am sure I have given you certain pointers to think about. Did I say that contrary to popular belief in India, Equities/Stocks have been giving the highest return in the last 15 years, even more than real estate investments? Think about it, or should I say start researching :)

The Aarushi Story

I have been following this story quite closely ever since it happened. Initially it appeared like yet another story of cold blooded murder. It is indeed a cold blooded murder - or murder in cold blood?

For some reason, I have a habit of observing people. I observe people on street, in an elevator, within office, in a sweet shop, and even when I myself ain't aware of it. Its not that my observations always hit the bull's eye. Its not actually meant for that. My observation is limited to certain expected behavior, and my perception of how will a person react to a given circumstance. Try that, its fun. The more others speak, they allow a wider surface area for you to play on - or speculate. If they don't speak, their body language may provide some pointers.

Well, coming back to Aarushi's story - there are 2 theories doing the rounds. Either its an honor killing or its not.

These brutal, clinical, and extremely well executed murders are not only complex but its also confusing. Its complex because of the lack of(or the lack of knowledge of) motive, and its confusing because of Noida police. The senior police office was referring to Shruti instead of Aarushi the other day in a press conference. You call it slip of tongue, I call it negligence and lack of preparation. Its confusing because of their pivotal role in confusing the episode. The killer or killers got at-least 2 days to clear off their traces. It was after a couple of days that they "realized" that even the servant, Hemraj is murdered. The crime scene was almost set clear to be cleared.

The theories put forward for the possible "motive" behind the twin murder aren't convincing. Lets put sentiment aside and think rationally. Aarushi was constantly in touch with Anmol - her friend. She was only 14, and perfectly normal human being. Not to mention the fact that she must be ambitious as all other kids of her age. These and some other arguments that you have started to make up in your mind already - rules out any theory of Aarushi - Hemraj links. I won't call it absurd, but it doesn't seem feasible.

When I fear somebody, and once I am out of my mind, I will think of "resolving" the conflict. The resolution depends on the person at the receiving end. If you are suspecting the person for the murder of his own child, you need to know the person. You need to understand how he has behaved earlier when things went out of his hand. You will have to prove the ill nature of the person in question. Simply because there are no circumstantial evidence, and no eye witness. Nobody is standing against that person as he appears to be very popular as a well behaved person to them.

Its imperative that there are majority of people who tend to do things differently in public and in private - majority could be 99% but numbers don't matter. Can you prove that? If that person is not committing, there is no way you can prove it. What about hypnotism? Not a bad idea though. As nobody broke in to the house, so they think it has to be him. They think so because Hemraj himself was murdered, and the lady in the house can't have the same clinical precision. Hey wait, she is also a doctor. Alright, she doesn't have the physical ability and mental toughness to kill both. But how do you know that the suspect has both - physical ability and mental toughness?

If its just a sudden rush of blood that evoked such a murderous response - its indeed unimaginable. Equally unimaginable is the fact that he hadn't shown this kind of behavior earlier in other circumstances in a different way. Lots of thinking needs to be done, and lots of evidence needs to be gathered.

But, generally its a pointer towards the increasing restlessness among our people. There is always a better alternative than killing - it doesn't serve any purpose. You will be eventually caught and the secret that you always wanted to hide is unearthed. Lets calm our souls. There are lessons to be learnt from episodes like this.

Friday, 23 May 2008

The KGN Story

Imagine a stock moving up by 117115% in a single day of trade.

"KGN"(Khwaja Garib Nawaz) Industries opened at INR 100, moved to an intraday low of INR 72, and then shoots up to intraday high of INR 55,000 and then closed at INR 21,000. Dreamy affair. But, is this normal? What would have happened? Is it a flaw in the rulebooks of the regulatory authority, that allowed this to happen? Or is this just fine?

I was shocked, amazed, puzzled, and scared to see this all at the same time. They say that the promoter has already accumulated a wealth worth 5.5 K Crores. Can anybody else repeat this? If yes, then how? They say that the price is high because the volume is low. Only 847 shares are in circulation, on that day(May 21, 2008) there were only 819.

I am no expert in economics, but as a layman I can understand that the worth of an article is as much an investor or buyer is keen to pay. There is a "Fair Price" to every article. In a free market, or where there is ample competition, the bid/offer price(s) always converge(s) towards the Fair Price. (Just to clarify: Bid is the amount one is ready to pay to buy an article, and Offer is the amount at which the seller is selling. Yes, you can have 2 prices to an article. See you soon on this.) For a small company with a turnover of about 186 Crores in March 2007 and an employee strength of 20, is this a fair price? Certainly not - I am not an expert, but I am sure you will agree. That makes its price to earnings ratio, which measures how expensive a stock is, look ridiculously exorbitant: Rs 22,060.

Lets try to investigate what would have happened. This stock was re-listed on BSE(Bombay Stock Exchange) after 7 years, and after this astronomical shootout, the trading on this stock had to be suspended. BSE confirmed that there is no price band on scrips on the opening day of trading in order to allow price discovery. KGN used it to its benefit to the fullest extent possible.

BSE had to intervene when they saw that order were placed at "unrealistic prices". So somebody was offering a Lamborghini price for a Nano!!!

This has happened quite a few times before. Once with a company called "Ahluwalia Contracts" that started off at 101 shoots to 611 and closed at 577 - not substantial but its still more than 500%. The other one was MMTC, and it touched 56,931 on November 12!!!

BSE had a couple of recommendations on these lines that are yet to be implemented. SEBI(Securities and Exchange Board of India - The primary governing authority in India) has proposed to impose a 20 per cent circuit filter on the first day of re-commencement of trading in stocks in all cases of revocation of suspension, de-merger, amalgamation, capital reduction and scheme of arrangements as decided by stock exchanges through a concept paper brought out last year in April.

Thursday, 22 May 2008

Investor and Borrower

The world is divided among 2 entities: An Investor - those who have that extra bit of money, and a borrower - those who need money. Sometimes they interact directly - like you and your friend. Sometimes, they interact via a governing/regulatory agency like a bank or an exchange. This has just led us to a new concept: Market Types.
We can either have an Exchange traded/regulated market or an Over The Counter(OTC) market.

So, whenever you need money you go to your friend and ask for it. He may or may not lend you. If he does, he can lend you interest free(almost always) or on an interest(he is not your friend). Lets redraw this picture. You need money and you go to a bank - you are a borrower. You have some spare cash, and you have no idea what to do with it. You then decide to put that money in a Bank Fixed Deposit. You just became an investor.

There are a number of ways to borrow or lend money. Borrowers can generate money for themselves by issuing a Bond, or a Stock.

Whenever a Bond is issued the borrower expects investors to lend money. The borrower has an obligation to return the money with an interest. This is one of the safest mode of investment, but doesn't give you a high return on investment. The rate of interest hovers around 6-10%. Government issued bonds are also very popular as it is very safe.

Whenever Stocks are issued by a company, it expectes the investors to buy stocks and become its part. As you are a part of the company you either gain or lose on a daily basis depending upon its performance. If you own the largest number of shares then you become the owner of the company!!! It becomes answerable to you. There is no limit of how much can you gain or lose in this type of investment.

Bonds are safer because it get paid first, and then the remaining amount is distributed to stock holders. If the company loses money till it becomes insolvent, it will pay you first with interest.

First walk in the morning

All these years I have been thinking of the movements(read crashes and bombings) in the stock market. You know how .Net gets into blood streams of the developers so everything else doesn't really matter. Everything else in this world just becomes Objects, and Patterns, and Frameworks and "Object reference not set to an instance of an object" exceptions.

Well, that reminds me of Centrifugal Force and Frame Of Reference in class XII Physics. My frame of reference has a new angle now - Domain knowledge. The motive of .Net or any other OOP development is "object-ification of real world entities". What real world? If you are writing software for Real World, you need to know the Real World.

In my case the real world is Finance - Investment Banking to be precise. The term gives you a rich feeling - you feel like money is floating around. If thats not all, try - Equity, Wealth management, Futures, Options, Speculation, Hedging, Arbitrage, Foreign Exchange, Debt, Stocks, Bonds... the world is not enough.

Although my specialization is limited to Futures and Options, but its not restricted to it. I like to dive deeper into things. I have found a few pearls, and I'll share it with you.

My target audience are the ones who are new to this world. If you are an expert, I welcome your suggestions and feedbacks, and if you are a learner I will wait for your questions.

I am planning to key-in the extracts of domain knowledge I gain over time. Be with me to make this journey exciting. See you soon with me series of posts over fundamentals.

Futures - Introduction

I used to be a plain, simple software engineer working for Microsoft. Then RBS happened to me. Then everything around me changed. Instead of ASP.Net Futures I was thinking of Futures. And Options. And Equity. And stuff built around money honey!!!

Exploration of Arbitraging and Speculation and Hedging were obvious next. Too many keywords? Never mind, if I got into it, you are better placed than I ever used to be. Reason: This blog never existed when I started.

To all my readers in India, I am sure RBS could be just "another" company for you. But, its just not "just another" company. Its the 4th largest bank in the world, and world's largest company in terms of assets. Almost 4 trillion, to be precise 3.8. Yeah, 12 zeros after 3. Try this: The Global 2000.

The last time we went shopping we bought ABN Amro. Another giant that was about 200 years old, and used to be among top 10 banks in the world. Its part of our group now. You must have heard of NatWest(Remember Sourav Ganguly waving his shirt and his hairy whatever in the Finals against England in 2005? Oh yeah, Cricket, my dear). The last time we went shopping we bought them. The list is long and time is short. We are entering India, and we may be visiting the malls soon!!!

Folks, we were to talk about Futures. Lets get back to it. In simplest terms a "Futures" is a contract between two parties(we call each side a "counterparty") for sale/purchase of an article at a future date but at a price agreed today.

Sounds like a plan? It is. Sounds like its good only for either counterparty? Its not.

When I was in in school, in class IX, in Biology I read about Symbiosis - a natural agreement between two species where each gets benefited. Have you seen Discovery channel's "Planet Earth" kind of shows? Yes, I do remember one such show where small fishes(of a particular type) used to move around Shark's mouth. They eat the dirt from Shark's mouth who in turn avoids bad breath. Now you know bad breath is a turn off even for Sharks.

Lets take a classic example of a Farmer(Hillary), and an owner of an Ice cream shop(Obama) on a beach to explain Futures. Each time it rains it makes Hillary happy, but ice cream sales go down so Obama is sad. When it doesn't rain for some time and the sun is at its best, Hillary is sad and Obama smiles. They continued to do so for a long time(in years) and incur losses, until they met McCain.

McCain told him - Nerds why don't you guys strike a Futures agreement? As usual Hillary and Obama had no clues what he was talking about. They were looking at him with their jaws dropped and eyes wide open. Obama said - What agreement? It seems like there is no Future, sometimes I lose sometimes she does. McCain said - Betel nuts, its not about losing its about winning. Imagine Obama paying you some $ when it doesn't rain and you pay him when it does. So strike a Forward contract with him. Although there are risks involved, but there are a lot of ways to cut risks.

So even whenever Obama makes money you do too, and whenever you make money he also does.

Well, that was some fun. Now some facts.

  • Futures is a Forward contract that is regulated by an Exchange. In Futures, the counterparty is always an Exchange. So, the basic difference between Forwards and Futures is that the previous is bilateral, and works on trust while the latter is more regulated and managed.
  • Futures and Options are traded since middle ages.
  • They are not new by any stretch of imagination. They are immensely successful "Hedging" instruments.
  • Chicago Mercantile Exchange is the largest Futures exchange in the world. In Europe we have LIFFE and Eurex. Its traded in India also. The volume is enormous - in trillions.
  • Futures is an traded over an Exchange and its never traded Over The Counter(OTC).

The next time we meet I will elaborate a lot of fundamental Financial terms so that you can have a head start. I will also write a series on Equities.