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.