PowerYourTrade is one of the most known stock tips website among Indian investors because it is very heavily promoted on moneycontrol.com. My honest review about their service would certainly mean my account can have some trouble but I think my readers deserve to know the truth and that is more important to me than my account status in PowerYourTrade.

I opted for yearly option for combo offer of PWT (PowerYourTrade) just to make sure I am not judging their service on a very small time frame.

My Account Status

On 26th Jan 2012, my account status is as follows.

I am a member of PWT for last 90 days now and it is quite a long time for me share my review about their service. So let me share some of the key facts about the service.

The Sales Page

When you are not a paid member in PWT you are mainly driven into being a member by the following recommendations.

You see multibaggers that have gained few hundred percentages over a period of few years. Not only that if you see previous multibaggers here, you see everything green. On Jan 26th 2012 I see it as follows.

Click On Image to View Complete Screenshot

Reality of Multibaggers

Reality of Multibaggers as on 26th January 2012 when logged in is…

Click on Image to View Complete Screenshot

The obvious question that you may have – Is the first screenshot wrong? No it is not wrong. You may have not noticed one thing that makes first image correct, which is the date of recommendations by experts. If you note the recommendation date you will see that those gains are for stocks recommend in June 2011 and beyond and nothing after that. It means very few Multibaggers have done anything substantial in the current market scenario.

Many can argue that that having dates means they have the accurate information but that is also not the case all the time.

The Hidden Truth

On April 19th 2011 SP Tulsian initiated a buy call on FAG Bearings, which is up by 30% now. The reality is on April 29th 2011 SP Tulsian initiated a sell call on the same stock and so even if you purchased the stock on his call you would have sold it anyway and it means the recommendation is not at all a reality where you make 30% but as guest you only see that a recommendation is up by 30%. See the screenshot below for sell call for the same stock after 10 days on 29th April 2011.

This actually reveals the secret to gains of 2000% as well. They recommended the stock at some point and that stock is now up by 2000% but that does not mean they have not initiated any sell call in between and you can actually make 2000% in reality. There may be buy and sell call but they only show the calls they have taken some time back that has gained few hundred percentage.

2009 Multibaggers

You can view 10 pages of Multibaggers stocks recommended over time and as of today I see the following calls in Multibagger calls from 2009.

Click on Image to View Complete Screenshot

Very few have performed from 2009 till date.

Final Thoughts about PowerYourTrade

You can subscribe to PowerYourTrade tips if you understand that every multibagger stock suggestion is not a multibagger and they are just any other stock suggestion. Apart from that Hem Securities Multibagger calls are more reliable and works far better than any other calls. This is my personal experience based on some tracking that I did for last 3 months.

Update: I don’t share any stock tips and so please do not email me for any stock ideas. I am a personal blogger who let you understand how to trade and invest in market but don’t prefer sharing what stocks you should be trading in market.

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1. Sharekhan PMS Review – My Experiment with 500,000 Rupees
2. Stock Broker’s Review

In Sharekhan PMS Review I raised a point about the performance of PMS compared to Nifty and few of the best funds.

Many reader’s had the question – why I was complaining on a 45,000 Rupees gain in couple of months on an investment of 500,000 Rupees. The answer was (and is) – I could easily beat that. So today I will share with you how.

Let me first show my trades. I Purchased 615 share’s of TTK Prestige around price range of 1995.

Click on images to enlarge.

Hold for a day and sold off at close to 2080.

I thought I purchased 600 units only and did not realized that I had few more in my account and so finally sold rest of my shares the next day. You can see the date and time for my trades.

How and Why?

Reason for my purchase of TTK Prestige was purely technical. Look at the 6 months chart of TTK Prestige. Shows a break out chart pattern above 1974 and was consolidating above the breakout level. So I took an anticipated trade (You know how to handle anticipated trades from my chart pattern book). I saw positive sentiments in the market especially the consumer durables sectors and timed my entry into the stock almost perfectly.

I could not time my exit well enough or else my profit would have been 50% more but I was not ready to risk my huge profit.

Performance

When I reviewed Sharekhan PMS I did a lot of performance comparison and so it would be unfair if I don’t compare my own performance.

I made a gain of roughly 4%. Nifty for the complete week Nifty was up by almost 4.8% and though I did not trade much on the Friday still I would say I could not better Nifty for the week yet was not very far behind but still a miss mainly because of a huge upswing on Nifty on Friday.

Let us compare my performance with one of the best performing fund i.e. DSPBR Small and Mid Cap Fund Growth. It had a NAV of 16.31 on 22nd March and 16.82 on 25th of March i.e. I would have gained 38k on my investment whereas I made more than 50k for myself. I would also have been charged an exit load of 12k as well. Clear an out-performance by a BIG BIG margin.

Final Thoughts

Remember I am not a full time trader and my main job is online blogging and so If I could perform in the market better than the best fund then anybody who is willing to learn can. There is lot of money to be made provided you are willing to learn.

Charts by Interactive Broker’s Trader Workstation.

No related posts.

If you are regular reader of shabbir.in you may know from some of my previous posts and comments about the new book I was working for. This is it.

A book that helps you make more money from equity markets by making you understand – When is the right time to invest in a stock and at what right price and when is the right time to come out of the stock.

Click Here To Download Your Copy Now

Benefits

If you purchase this book right now it comes with lot more of benefits.

1. It comes with a life time free upgrades. This means as I update the book in the future you get the new copy of it delivered in your inbox for free.
2. Needless to say it comes with a money back guarantee. If you don’t like the book you can ask for a refund and yet keep a copy of book. Note money back guarantee option is not available with NEFT and Cheque payment option.

Click Here To Download Your Copy Now

It’s only $19.97 as of now which according to me is even less than the least possible loss you may have done in the equity market. Correct me if I am wrong.

What is in the book

A 15 Chapter book which covers

1. Introduction
2. Understanding Charts – Convention used in the book
3. Moving Average Indicator – Simple and Exponential
4. Fibonacci Levels
5. Bollinger Bands
6. Spike and breakout pattern
7. Morning panic and Afternoon fade pattern
8. Higher Top Higher Bottom Chart pattern
9. Lower Top Lower Bottom Chart pattern
10. Volume patterns
11. Cup and handle Pattern or U pattern
12. Double bottom or W-bottom Pattern
13. Application of Multiple Chart patterns – Complete Sample
14. Insider Trading Tips that Always works for me
15. Summary – Points to remember

Click Here To Download Your Copy Now

What is not in the book

It is important to understand what not to expect from the book. Understanding Chart Pattern book does not talk anything about mutual funds and is not for investors looking for tips on mutual funds. This book concentrates only on stocks and teaches how you can predict the market based on historical performance. It is more about how to get into a stock at the right price, let the profit ride and come out of the investment.

Click Here To Download Your Copy Now

If you have any queries, questions or any suggestions, please do post them in comments below.

No related posts.

Being from a non-finance background I always look for making more money in equity and so I thought of going for a portfolio management service or PMS. I hardly could find any information or review about the portfolio management services and so I was only left with doing the experimentation myself. In my recent review about stock brokers my top pick was ShareKhan and so I thought let us experiment a PMS with them and see.

The process started when I called up the ShareKhan customer care numbers and left the message that I am interested in doing a portfolio management service with ShareKhan and soon the sales team gave me a call. I verified that this call is directly from the ShareKhan team by asking some details about my account in Sharekhan and I was certain that I am talking directly with the Sharekhan in-house people and not to any sub-broker. You will soon realize why I mentioned this here.

I will share with you all my numbers and account statement as I think I should be as transparent as possible.

To start with Sharekhan offers 2 PMS products -

1. Fundamental PMS – Brokerage of 0.5% with 20% profit sharing after 15% profit hurdle is crossed and a 2.5% per annum AMC charges.
2. Technical PMS – Brokerage of 0.05% and flat 20% profit sharing.

Now looking at the fees I was certain that by no means I will opt for fundamental PMS. If I opt for fundamental PMS I need to pay AMC of 2.5% but will save 20% on the 15% profit. So doing the maths 15% profit on 5 lakh is 75,000. Now assume that if I make a profit of 15% then for technical PMS 20% of 75,000 is what they will charge me i.e. 15,000 and for fundamental PMS I will pay 14,375 (roughly as charges are deducted quarterly) AMC charges no matter what I gain. Market was at 5400 Nifty and I was not sure if the correction was on the cards and so I opted for a technical PMS where they assured me that charges are only on profit sharing and for losses they charge nothing and you loose just the small brokerage amount.

Apart from the fees fundamental PMS has high brokerage because it mainly deals in delivery based whereas technical PMS is more of a trading PMS. As I had the feeling of market correction I thought of trading PMS will be a better option than an investment based PMS.

So there was no doubt in my mind that I will opt for technical PMS and on July 21st 2010 my account started and as expected I started to see major issues and things told by sales people were all wrong.

Issue 1. Wrong Information

The sales person who visited my house (and including the customer care people who gave me a call from Mumbai after my interest in PMS) told me that I will be given a username and password to see my portfolio online. After everything is done I got a welcome email with only userid and no password. After calling every possible number I could I realized that this facility is not available for technical PMS account type and is only available for fundamental PMS.

I confirmed the same with the person who visited my house for account opening procedures and she confirmed that in training she was told that customers are given username and password for all PMS type. The more experienced guy explained to me everything on why username and password cannot be given for trading PMS and though I could not agree much to it I was left with no choice.

The only service they could provide me was to change my technical PMS to fundamental PMS if I insisted on having a login details but I was more than certain that I will never opt for fundamental PMS and so finally I settled without login details. Can you imaging I could not check what is happening to my money.

Issue No 2. No one knows the product in detail

The sales people who visited my house told me that I will be able to give my inputs as to which sector and stocks I am more inclined to but then as expected nothing like that happened and when I asked the answer was same again – this facility is not available for technical PMS and is only available for fundamental PMS.

The sales people even told me that I will be able to meet the fund manager in a month’s time and I never expected that to happen but this made me to believe that my inputs may be taken. The only concern I had here is I wanted to avoid investing in companies dealing in alcohol and tobacco but I could not control that by any means.

Issue No 3. Lock-in Period

My account started on July 21st and in few days I had all sorts of issues and wanted to close my account the next day but I was told that this is not possible and you have to be with us for next 6 months (read: forced to be with us) as there is a lock-in period. I had idea about the lock-in period before hand but I think having an exit load is better option than a lock-in period. I was ready to pay anything at that time to close on my account but I just could not.

Issue No 4. No Clarity with Charges and Deductions

Sharekhan PMS web page clearly tells that ShareKhan books profit on quarterly basis but sales person I talked with emphasized that Sharekhan charges 20% whenever I withdraw my profit. When I told about the statement they have online is not matching with what they telling I got variety of answers. One was that this is new product (actually not true because technical PMS sub products are new but not technical PMS as a whole is new) and other was that it is after every 3 months from the inception of your fund you will be charged but the actual fact is they charge you fiscal quarterly i.e March, June, September & December

One more thing which I think I should mention is that you can only withdraw in multiples of 50% of 25k profit but they charge every quarter on total profit.

Issue No 5. Double Demat Account

With the kind of issues I had with my PMS account I found that for fundamental PMS you have to have a second demat account and you cannot use your existing trading account linked demat account.

Issue No 6. Performance of PMS

The 5 issues I mentioned above could have been easily digested by me provided I got good returns, but to my surprise I could do better than what they could do for me.

Let us take some actual numbers and deal in some maths.

The above screenshot is from the official Sharekhan PMS report and you can also look at the complete report here.

I invested 5 lakh Rupees on 21st July 2010 and the on 30th September 2010 it is 525,646. So I got an absolute return of 5.13%.

Now let us compare the same with Nifty and Sensex returns.

Aren’t the numbers speaking for themselves? A 50% less return than the index but yet let us see what I could have got if I invested in my preferred (or diversified) mutual funds.

*Nav are taken from Historical Date from AMFIIndia for growth option

All of my preferred funds outperforms the PMS numbers by a big big margin and guess what; they charge you 20% of your profit for this crappy services and performance.

Drop a comment if you have any queries or questions and don’t forget to share your views and feedback.

I hope this will help lot of fellow investors and blog readers.

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1. ShareKhan Review
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3. Motilal Oswal Review

A friend of mine over a phone asked me about insurance and whether he should invest in LIC’s xyz insurance scheme? This question comes to me many a times and I always suggest them few of my articles where I have shared the answer in bits and pieces but today I will answer this question with all the possible options and outcomes.

Let us begin with a very simple question which is why a need for insurance. The answer lies in any combination of the following options:

1. Investment
2. Tax Benefit
3. Insurance Benefit

I am sure your step towards insurance is guided by permutation and combination of above three options. Let us take each one of them one by one.

Investment

People make a mistake of investing in insurance for variety of reasons. I see many people give a very silly reasons like it makes them more systematic to investing on a regular basis and some have good genuine reason like they want a good solid lump-sum amount after an elongated time frame for some cause like marriage or child’s higher education…

No matter what your investment objective is, it should not cost you much and returns should be inline with other investment options available at your disposal. I am sure there will very few who would disagree on this and those who disagree are likely to be the insurance agents.

Now ask for yourself. Does your insurance investment satisfy the above criteria?

I don’t think so. Why? Because insurance as a whole has a cost of being insured as well as many other administrative charges which a normal investor is unaware-of. If you know the charges you will feel like killing yourself for it (Pun Intended). For majority of policies it is close to 20% of the premium amount.

Tax Benefit

The next category of people who invest in insurance is tax payers. Many fall into the trap of Insurance as an option to save tax. I have couple of questions for them:

1. How much of your initial investment is actually invested?
2. Which funds your policy invests into to get returns they quote?

The answer to first question is always close to 80%. This means out of one lakh of your investment you only invested 80,000.

The answer to second question is they list me few funds. I can invest in similar to those funds directly or choose even better than those funds. If you have an insurance policy which invests in few selected category of funds why don’t you select those funds on your own and save 20k Rs. If you want me to suggest few good funds for 20,000 I will give you 50% discount as well.

So next time someone asks you about insurance as a way to save tax don’t forget to ask him the two questions and then tell him bye-bye.

Insurance Benefits

So what if you need insurance? Go for Term Insurance. Ask your broker to get you a term insurance. Nothing more nothing less. If he is one among those brokers who suggest products based on what commission he will get, then you can be rest assured he will not get you the Term Insurance. He will suggest you lot of products and even compare them how bad is term insurance for you and may go ahead to add few misinformation (See how here). He will even tell you that you will be paying the premium without any return but the reality is here you are paying the money knowingly and in other policies you will still be paying the same amount but unknowingly.

Again going blindly for term insurance is not what I advise but go for an all possible combination and calculation. Let us say that you go with term insurance coupled with some other investment. Consider all your expenses and see which one gives you maximum benefits with least possible expense. You will see that most of the time it will be non-insurance product that wins.

Final thoughts

Insurance is something where you can live poorly so you can die rich and investment is something where you can build your wealth. Both cannot go hand in hand and so invest wisely. Share your thoughts in comments below.

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There is no golden rule that “Mutual Funds Are Better Than Stocks” but for majority of investors you can safely say that “Mutual Funds Are Better Than Stocks” and so let us discuss more on this today. Before I begin let me make it very clear that investing in mutual fund is no difference than investing in stocks and if share market crashes today then mutual funds would also crash and the crash in funds may be more than some individual stocks.

First let me explain the concept of mutual fund in a very simple possible language.

Mutual fund is a pool of money contributed to by investors of various type and sizes. There will be a fund manager hired to invest this accumulated cash with a goal of this fund manager is to maximize return with minimalistic risks. To do this funds are primarily composed of variety of stocks but depending on the type of fund it may also include debt and other fixed income part to maximize return with minimize risks.

Mutual funds have an edge over stocks for majority of investors and so it is important to understand the advantage mutual fund have over direct investment in stock.

1. Less Volatile – Mutual funds by its nature is bound to be less volatile because it is not an investment into a single company or management. This actually means that mutual funds do not have sharp movement on either side (Up or Down) like movement in any individual stock or sector.
2. Diversification – Experienced investors will agree that keeping all egg in one basket is never a good option and if you can you should diversify your income potential. In mutual funds as you are not investing in any particular stock or company. Sharp movement of a volatile stock is counter balanced by other stock giving you low beta movement of your investments.
3. Tax Benefits – It becomes difficult to remain invested in one particular stock for a period of one year and more and so for gains made on returns, you need to pay capital gain tax. But for mutual funds remaining invested for one year is fairly simple and so you can save on your capital gain tax. After New Direct Tax Code this will change.
4. ELSS Funds – You have equity linked ELSS funds where you can save tax and still get the advantages of investing in equity market but you have nothing for investing in stocks and yet save tax.
5. Managed by experts – Funds are managed by fund managers with years of experience and so they have higher chances of selecting the right stock at the right time and at the right price which may not be possible for every one of us.
6. Systematic Investments – One of the biggest advantages of investing in Mutual Funds is, you have an option to invest small amounts over an elongated period of time. Check out the Benefits of SIP or systematic investment plan.

Mutual funds are not all glittering gold and they also come with disadvantages

1. No trading possible – If you are not only an investor but also looking for some trading activity mutual funds is not for you.
2. Fees of Fund Managers – Fund managers with years of experience come at a price and knowingly or unknowingly you are paying the price from your returns.

Over to you

Share your views and opinion in comments below.

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2. Mutual funds can ensure a good long-term health of a portfolio
3. Mutual Funds – Best of 2009 at shabbir.in

When it comes to making money with equity one of the important aspect is your stock broker’s service at your disposal and so this time I have decide to review all the stock broking house that I have used in the past couple of years. Believe me I have used majority of them and I will give in depth review of each of them in the next few days.

This is a series of 8 posts where I will share one review in each post and finally decide the best broking house. As I make the posts I will update this page with the link to the review. If you want you can bookmark this page for now.

Posts so Far

1. Religare Review
2. AnandRathi Review
3. Reliance Money Review
4. Indiabulls Review
5. HDFC Securities Review
6. Motilal Oswal Review
7. ICICIDirect Review
8. ShareKhan Review

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1. Review of all stock brokers’

Thought would try to define some of the commonly used terms in equity arena and I am sure this would be handy for new comers as well as to those who are looking at some definitions.

Acid Test Ratio

Ratio of company’s current Asset to current liabilities. It reflects the financial strength of the company and is also known as quick ratio.

Annual Report

Financial results of the company.

Asking Price

Price at which someone is willing to sell his securities.

Bear Market

Continuous phase of declining share prices.

Bid

Highest price at which someone is willing to buy the securities. When Asking price and Bid price match there is a deal.

Blue-Chip

Stock of well known companies with stable business.

Bonds

Bond holder is the creditor of the company and normally bonds are issues with a minimum of 3 years time frame with specific interest rate.

Bonus Shares

Bonus shares are shares given to share holder at no extra cost.

Book Value

It is the value at which you carry the asset into the balance sheet. The book value is calculated by dividing the equity reserve of the company by the number of shares issues for the same.

Brokerage

Brokerage is the commission charged by the broker for a transaction which can be upto 2.5% as per SEBI.

Bull Market

Continuous phase of rising share prices.

Buyback

Repurchase of its own company or bonds from the holders.

Carry forward

The process of postponement of purchase from one settlement to other by paying a charge.

Circuit

The limit imposed by exchanges to control the fluctuation of share prices.

Closing price

Last traded price of a stock.

Close Ended Funds

Close ended funds are funds where investors can subscribe only during the New Fund Offer (NFO) period only.

Demat trading

Demat trading is trading of shares in electronic or dematerialized form.

Dividend

Dividend is the amount of money that any company gives to the share holders for each share held.

Equity / Stock / Share

Representation of ownership of a company.

ETF

Exchange Traded Fund: A mutual fund that is traded on a stock exchange and holds a basket of securities like mutual funds. They can be traded like a stock in trading hours of the day. Price movement is like stock varying on a trading basis and not like Mutual Fund which is once everyday.

Face Value

The nominal value of share. This is the actual price of the share. Many west countries allow the face value to be consistent and of Re. 1 but in India we have Face value in range of Re. 1 to Rs 10.

Forward Trading.

The Scrip is traded today would be settled at future date which can even be settled or carried forward.

IPO

Initial public offer which refers to the first offering of equity shares to the general public. Top 5 Indian IPO’s

Nifty

What is Nifty

Open Ended Funds

Investors can purchase and sell units even after the New Fund Offer (NFO) period.

Open Interest

Open interest are open contracts which refers to the total number of contracts, that have not been settled or squared off. For each buyer there must be a seller. So when either of the buyer or seller opens the contract and till he does not square off the contract, it is open and sum total of all such open contracts is called open interest.

P/E Ratio

Price of the stock divided by the net earning of the company.

Resistance

Resistance, is the point at which sellers (bears) take control of prices and prevent them from rising higher.

SEBI

Securities and exchange board of India.

Sensex

What is Sensex

Settlement and Settlement Date

The date at which transaction between users is settled by deliver of shares.

Share Premium

Premium paid over the face value for acquiring the share in the company.

Support

Support is a level at which bulls (i.e., buyers) take control over the prices and prevent them from falling lower.

Undervalued Shares

Shares which are traded lower than the book value.

Volume

The number of shares or contracts traded in a security or an entire market during a given period of time.

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When it comes to Tax Saving and ELSS Funds I prefer to invest in funds where I get maximum dividend and that way I do not need to invest my full amount and also get the Tax benefit of full amount invested. Read how if you still have not read – Full tax saving without investing one lac. Now many people ask me about how to know the dividend history of funds and so for them I have Dividend History of Mutual Funds.

So now using the methods discussed in the above two articles I would list some of the best Tax Saving funds. The list of funds I have selected are based on criteria of consistent dividend for a longer period of time.

Birla Sun Life Tax Relief 96

Best Dividend ever by any Tax saver fund I know off.

Principal Personal TaxSaver

One more best dividend Tax saver fund I know off. Principal Personal TaxSaver has given probably the best dividend in the most difficult time.

SBI Magnum Tax gain

Yet another fund by SBI Mutual Fund house which has very good track record when it comes to return as well as dividend.

HDFC Tax Saver

Not into one of the best dividend rate like above funds but very consistent when it comes to dividend and also return of this fund is also worth investing.

Canara Robeco Equity Tax Saver

Not as good as above ones, but best when it comes to return of the fund.

Apart from the above old funds I also expect some good returns for some of the new tax saving funds which till date have not recorded good dividend but that is may be because of the current market situation for last one year or so and so they deserve mentioning.

Fidelity Tax Advantage

DSP Blackrock Tax Saver

Kotak Tax Saver

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After reading Nifty Listed Companies people asked me to also have the list of companies in Sensex and so I thought of referring them to Official website or even at Wiki but could not find the list in a very comprehensive manner and so thought would add them here only. Following are the listed companies in Sensex as of 20th July 2009.

1. ACC (Associated Cement Companies)
2. Grasim
3. Hindalco
4. HLL ( Hindustan Unilever Ltd. )
5. ITC ( I T C Ltd. )
6. L&T ( Larsen & Toubro Ltd. )
7. RIL ( Reliance Industried Limited )
8. Tata Motors
9. Tata Steel
10. Bajaj
11. BHEL ( Bharat Heavy Electricals Ltd. )
12. Gujarat Ambuja
13. ICICI Bank
14. Ranbaxy
15. Reliance Energy
16. SBI ( State Bank of India )
17. Infosys
18. Dr. Reddy’s
19. Cipla
20. HDFC ( Housing Development Finance Corporation Ltd. )
21. Hero Honda
22. Bharti Airtel Ltd.
23. HDFC Bank
24. ONGC ( Oil & Natural Gas Corporation Ltd )
25. Wipro
26. Maruti Suzuki India Ltd.
27. NTPC ( NTPC Ltd. )
28. TCS (Tata Consultancy Services)
29. Reliance Communications
30. Sun Pharmaceutical

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Everyday when you watch TV for Financial news you specially hear couple of terms very frequently aka Fundamental and Technical analysis and today I would try to explain them in very newbie’s terminology here for every one to refer to.

Before I start some short definitions.

Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action which take into account price of instruments, volume of trading and, where applicable, open interest in the instruments.
Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply demand chain of whatever underlies the financial instrument.

If you are looking for more definitions related to markets refer stock market terms

Main differences between the two types of analysis:

Technical analysis

A technical analysis is based on three axioms:

• Movement of the market
• Movement of price or sector.
• History does repeats itself

Bull / Bear Trends

A bull trend is identified by a series of rallies where each rally exceeds the highest point of the previous rally. The decline, between rallies, ends above the lowest point of the previous decline. In short it forms higher highs and higher lows
The start of an up trend is signaled when price makes a higher low (trough), followed by a rally above the previous high (peak):

Start of Bull Phase = higher Low + break above previous High.

The end is signaled by a lower high (peak), followed by a decline below the previous low (trough):

End of Bull Phase = lower High + break below previous Low.

A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and then retreats below the previous low. The end of a bear trend is identical to the start of a bull trend.

In short the Technical Analysis can be summed up as

• A bull trend starts when price rallies above the previous high
• A bull trend ends when price declines below the previous low
• A bear trend starts at the end of a bull trend (and vice versa).

Fundamental analysis

No industry or company can exist in isolation and so there are external factors which determine to an extent growth of a company and so fundamental analysis is a method of forecasting the future price movements based on economic, political, environmental and other factors and statistics that effects the basic supply demand chain.

Some of the factors which can effect Analysis are.

• External factors
  1. Political condition
  2. Foreign Exchange
  3. Government Policies in general
  4. Government Policies pertaining to the sector
  5. Inflation
  6. Interest Rates
  7. Taxation
• Internal Factors
  1. The Management
  2. How a company is perceived by its competitors?
  3. Is market leader in its products or in its segment
  4. Company Policies
  5. Employee / Labour Relations
  6. Where the company is located and where its factories are?
  7. Financial Statements like Cash Flow / Balance sheets

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3. How does one differentiate between a bull market correction and bear market Phase?

Before I start this article is seriously long (over 4000 words), but you’re sure to get your money’s worth (hehehe). If you don’t have time to read it now, feel free to bookmark it or print it out for later reading.

Definition

SEBI (Mutual Fund) Regulations 1993 defines Mutual Fund as “a fund established in the form of a trust by a sponsor to raise money by the trustees through the sale of units to the public under one or more schemes for investing securities in accordance with these regulations” The rationale behind a mutual fund is that there a large number of investors who lack the time and or the skills to manage their money.

Hence, professional fund managers, acting on behalf of the Mutual Fund, manage the investments (investor’s money) for their benefit in return for a management fee. The organization that manages the investment is called the Asset Management Company (AMC). Thus, a Mutual Fund is the most suitable investment for the common person as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. Anybody with an investible surplus of as little as a few thousand rupees can invest in mutual fund .Each mutual fund scheme has defined investment objective and strategy.

A Draft offer documents is to be prepared for launching a fund. Typically, it specifies the investment objectives of the fund, the risk associated, the cost involved in the process and the broad rules for entry into and exit from funds and others areas of operation. As you probably know, mutual funds have become extremely popular over the last couple of decades what was once just another obscure instrument is now part of daily lives. More than 80 million people or one half of the household in America invest in mutual funds. That means that, in the United States alone, trillions of dollars alone are invested in mutual fund. In fact, too many people, investing means buying mutual funds After all, its common knowledge that investing in mutual fund is (or at least should be) better than simply letting cash waste away in a saving account but for most people, that’s where the understanding of fund ends.

Mutual fund is a mechanism for pooling the resources by issuing unit to the investors and investing funds in securities in accordance with the objective as disclosed in offer document. Investment in securities is spread across a wide section of industry and sector and the risk is reduced. Diversification reduces the risk because all stock may or may not move in the same direction in the same proportion to their proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investor of mutual are called unit holders.The profit or losses are shared by the investors in proportion to their investment. The mutual fund usually comes out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with the SEBI, which regulates securities markets before it can collect fund from the public.

A mutual fund is nothing more than a collective stock and /or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stock, bonds and other securities Each investors owns shares which represent a portion of holding of the fund.

In India, SEBI (Mutual Fund) Regulations, 1996 regulates the structure of mutual funds. Mutual funds in India are constituted in the form of a Public Trust created under The Indian Trusts Act, 1882.

History of mutual funds

The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry.

In the past decade, Indian mutual fund industry had seen dramatic improvements, both quality wise as well as quantity wise. The mutual fund industry in India started in 1963 with the formation of unit Trust of India, at the initiative of the government if India and reserve bank.

1. First phase (1964-1987)

• The Unit Trust if India (UTI) was established in the year 1963 by passing an act in the parliament.
• In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI.
• The first scheme launched by UTI was Unit Scheme 1964, which is popularly known as US-64.
• At the end of 1988 UTI had Rs.6, 700 crores of assets under management.

2. Second phase (1987-1993)

• In the year 1987, public sector mutual funds setup by public sector banks, life insurance Corporation of India and general insurance of India are came in to existence.
• The end of 1993 marked Rs.47, 004 as assets under management
• The following are the non-UTI mutual funds at initial stages.
  1. SBI mutual fund in June 1987.
  2. Can bank mutual fund in December 1987.
  3. LIC mutual fund in June 1989.
  4. GIC mutual fund in June 1990
  5. Punjab National Bank mutual fund in august 1989.

3. Third phase (1993-2003)

• Entry of private sector funds- a wide choice to Indian investors in mutual fund.
• 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed
• The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.
• As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.

4. Fourth phase (since 2003 February)

Following the repeal of the UTI act in February 2003, it was UTI bifurcated into 2 separate entities.

• One is the specified undertaking of the UTI with asset under management of Rs.29835/- crass at the end of January 2003
• The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations.
• At the end March 2000 UTI had more than Rs.76,000 crores of AUM.

As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes

TYPE OF MUTUAL FUND SCHEMES

Wide variety of mutual fund schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. the table below gives an overview into the existing types of schemes in the industry.

By structure

• Open-Ended schemes
• Close-Ended schemes
• Interval schemes

By investment objectives

• Growth/Equity schemes
• General purpose
• Money market
• Guilt funds
• Balanced schemes

Other schemes

• Tax saving schemes
• Sector specific schemes
• Index schemes

Open-ended schemes

A type of mutual fund where there are no restrictions on the amount of shares the fund will issue. If demand is high enough the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell.

Most of the funds available in the marketplace are open-end funds. Open-end funds are generally managed actively and are priced according to their net assets value (NAV). Open-end funds are wide ranging. Some open-end funds are more conservative and provide consistent returns with low risk, and some are more aggressive in seeking to make capital gains through constant trading.

Close-ended schemes

Under this scheme the corpus of the fund and its duration are prefixed. In other words the corpus of the fund and the number of units are determined in advance. Once the subscription reaches the pre-determined level, the entry of investors is closed. After the expiry of the fixed period, the entire corpus is disinvested and the proceeds are distributed to the various unit holders in proportion to their holdings. Thus, the fund ceases to be a fund, after the final distribution.

Close end schemes are usually more illiquid as compared to open-end schemes and hence trade at a discount to the NAV. This discount towards the NAV closer to the maturity date of the scheme.

Interval schemes

These schemes combine the features of open ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV based prices.

Growth/Equity schemes

These schemes also commonly called growth schemes, seek to invest a majority of their funds in equities and a small portion in money market instruments. Such schemes have the potential to deliver superior returns over the long term. However, because they invest in equities, these schemes are exposed to fluctuations in value especially in the short term.

Equity schemes are hence not suitable for investors seeking regular income or needing to use their investments in the short term. They are ideal for investors who have a long term investment horizon. The NAV prices of equity fund fluctuates with market value of the underlying stock which are influenced by external factors such as social, political as well as economic.

General Purpose Equity Schemes

The investment objectives of general purpose equity schemes do not restrict them to invest in specific industries or sectors. They thus have a diversified portfolio of companies across a large spectrum of industries. While they are exposed to equity price risks, diversified general purpose equity funds seek to reduce the sector or stock specific risks through diversification. They mainly have market risk exposure.

These schemes, also commonly known as income schemes, investment in debt securities such as corporate bonds, debentures and government securities. These schemes are ideal for conservative investors or those who are not in a position to take higher equity risks. However, as compared to the money market schemes they do have a higher price fluctuations risk and compared to gilt fund they a higher credit risk.

These schemes invest in money market, bonds and debentures of corporate companies with medium and long term maturities. These schemes primarily target current income instead of capital appreciation. Hence, a substantial part of the distributable surplus is given back to the investor by way of dividend distribution. These schemes usually declare quarterly dividends and are suitable for conservative investors who have medium to long term investment horizon and are looking for regular income through dividend or steady capital appreciation. Reliance income and income plus fund are examples this schemes.

Money Market Schemes

These schemes invest in short term instruments such as commercial papers, certificates of deposits (CD’S), treasury bills (T-bill) and over night money (call). These schemes are the least volatile of all types of schemes because of their investments in money market instruments with short term maturities. These schemes have becomes popular with institutional investors and high net worth individuals having short term surplus funds.

Guilt Funds

These primarily invest in government debts. Hence, the investor usually does not have to worry about credit risk since government debt is generally credit risk free. Reliance Gilt Securities Fund – Short Term Gilt Plan & Long Term Gilt Plan are best example of such scheme.

Balanced Schemes

These schemes invest in both equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation. Such schemes are ideal for investors with a conservative long term orientation. Reliance balanced fund is an example of such schemes.

Tax Saving Schemes

Investors (Individuals and Hindu undivided families (HUFs)) are being encouraged to invest in equity markets through equity linked savings scheme (ELSS) by offering them a tax rebate. Units purchased cannot be assigned/ transferred/ pledged/ redeemed/ switched-out until completion of 3years from the date of allotment of the respective units. The scheme is subject to securities and exchange board of India (Mutual Funds) regulations 1996 and the notifications issued by the Ministry of Finance (Department of economic Affairs), government of India regarding ELSS. Subject to such conditions and limitations, as prescribed under section 88 of the income tax act, 1961, subscriptions to the units not exceeding Rs.10000 would be eligible to a deduction, from income tax an amount equal to 20% of the amount subscribed. Reliance Tax Saver (ELSS) Fund is an example of such fund.

Sector specific equity schemes:

These schemes restrict their investing to one or more pre defined sectors e.g. technology sector. They depend upon the performance of these select sectors only and are hence inherently more risky than general purpose equity schemes. These schemes are ideally suited for informed investors who wish to take a view and risk on the concerned sector. Reliance Banking Fund, Reliance Diversified Power Sector Fund, Reliance Pharma Fund, Reliance Media & Entertainment Fund are perfect examples of sector specific funds.

Index schemes:

An index is used as a measure of performance of the market as a whole, or a specific sector of the market. It also serves as a relevant benchmark to evaluate the performance of mutual funds. Some investors are interested in investing in the market in general rather than investing in any specific fund. Such investors are happy to receive the returns posted by the markets. As it not practical to invest in each and every stock in the market in proportion to its size, these investor s are comfortable investing in a fund that they believe is a good representative of the entire market. Index funds are launched and managed for such investors. An example to such a fund is the Reliance index fund.

Advantages of investing in a Mutual Fund are:

• Diversification: The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value.
• Professional Management: Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell.
• Regulatory oversight: Mutual funds are subject to many government regulations that protect investors from fraud.
• Liquidity: It’s easy to get your money out of a mutual fund. Write a check, make a call, and you’ve got the cash.
• Convenience: You can usually buy mutual fund shares by mail, phone, or over the Internet.
• Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index
• Transparency: mutual fund provide information on each scheme about the specific investment made there-under and so on
• Flexibility: currently most funds have regular investment plans, regular withdrawal plans and dividend reinvestment scheme. A great deal of flexibility is assured in the process.
• Choice of schemes: mutual funds offer a variety of schemes to suit varying needs of investors.
• Tax benefits: Tax Benefit under 80C
• Well regulated: The funds are registered with the Securities and Exchange Board of India and their operations are continuously monitored.

Mutual funds have their drawbacks and may not be for everyone:

• No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.
• Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or “loads” to compensate brokers, financial consultants, or financial planners. Even if you don’t use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.
• Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.
• Management risk: When you invest in a mutual fund, you depend on the fund’s manager to make the right decisions regarding the fund’s portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.

MAJOR PLAYERS

1. Bank Sponsored
   1. Joint Ventures – Predominantly Indian
      1. SBI Funds Management Private Ltd.
   2. Others
      1. BOB Asset Management Co. Ltd.
      2. Canbank Investment Management Services Ltd.
      3. UTI Asset Management Co. Private Ltd.
2. Institutions
   1. Jeevan Bima Sahayog Asset Management Co. Ltd.
3. Private Sector
   1. Indian
      1. Benchmark Asset Management Co. Private Ltd.
      2. Cholamandalam Asset Management Co. Ltd.
      3. Credit Capital Asset Management Co. Ltd.
      4. Escorts Asset Management Ltd.
      5. J. M. Financial Asset Management Private Ltd.
      6. Kotak Mahindra Asset Management Co. Ltd.
      7. Reliance Capital Asset Management Ltd.
      8. Sahara Asset Management Co. Private Ltd
      9. Sundaram Asset Management Co. Ltd.
      10. Tata Asset Management Ltd.
   2. Joint Ventures – Predominantly Indian
      1. Birla Sun Life Asset Management Co. Ltd.
      2. DSP Merrill Lynch Fund Managers Ltd.
      3. HDFC Asset Management Co. Ltd.
      4. Prudential ICICI Asset Management Co. Ltd.
   3. Joint Ventures – Predominantly Foreign
      1. ABN AMRO Asset Management (India) Ltd.
      2. Deutsche Asset Management (India) Private Ltd.
      3. Fidelity Fund Management Private Ltd.
      4. Franklin Templeton Asset Management (India) Private Ltd.
      5. HSBC Asset Management (India) Private Ltd.
      6. ING Investment Management (India) Private Ltd.
      7. Morgan Stanley Investment Management Private Ltd.
      8. Principal Pnb Asset Management Co. Private Ltd.
      9. Standard Chartered Asset Management Co. Private Ltd

Structure of the Indian mutual fund industry

The Indian mutual fund industry is dominated by the Unit Trust of India and which has a total corpus of Rs 700bn collected from more than 20 million investors .The UTI has many fund /schemes in all categories i.e. equity, balanced, income etc with some being open ended and some being closed ended. The United Scheme 1964 commonly referred to as US64, which is a balanced fund, is the biggest scheme with a corpus of about Rs 200bn URI was floated by financial institution and is governed by a special act of the parliament. Most of its investors believe that the UTI is government owned and controlled, which, while legally incorrect, is true for all practical purposes.

The second largest categories of mutual funds are the ones floated by nationalized banks. Can bank Asset management floated by Canara Bank and SBI Funds Management floated by the State Bank of India are the largest of these. GIC AMC floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of the prominent ones. The aggregate corpus of funds managed by this category of AMC’s is about Rs 150 billion

The third largest categories of the mutual funds are the once floated by the private sector and by the foreign asset management companies. The largest of these are Prudential ICICI AMC and Birla SUN LIFE AMC. The aggregate corpus of the asset managed by this category of AMC s is in excess of Rs 250bn.

Recent trends in the mutual fund industry

The most important in the mutual fund industry is the aggressive expansion of the foreign owned mutual fund companies and the decline of the companies floated by the nationalized bank and smaller private sector players.Many nationalized banks got into the mutual fund business in the early nineties and go off to a good start due to the stock market boom prevailing then. These banks did not really understand the mutual fund business and they just viewed it as another kind of banking activity. Few hired specialized staff and generally choose to transfer staff from the parent organization. Some schemes had offered guaranteed returns and their patent organization had to bail out these AMCs by paying large amount of money the difference between the guaranteed and actual returns. The service level was also bad. Most of these AMCs have not been able to retain staffs, float, and new schemes etc.and it is doubtful whether barring a few expectations, they have serious plans of continuing the activity in a major way.

The experience of some of the AMCs floated by private sector Indian companies was also very similar. They quickly realized that the AMCs business is a business, which makes money in the long term and requires deep pocketed support in the intermediate years. Some have sold out to foreign owned companies, some have merged with the others and there is general restructuring going on.

The foreign owned companies have deep pockets and have come in here with the expectation of a long haul. They can be credited with introducing many new practices such as new product innovation, sharp improvement in the service standards and disclosure, usage of technology, broker education etc.In fact, they have forced the industry to upgrade itself and service levels of the organization like UTI have improved dramatically in the last few years in response to the competition provided by these.

Future scenario

The asset base will continue to grow at an annual rate of about 30 to 35% over the next few years as investor’s shift their asset from banks and other traditional avenues. Some of the older public and private sector players will either close or be taken over.Out of ten public sectors players five will sell out, close down or merge with strong players in three to four years. In the private sector this trend has already started with two mergers and one takeover. Here too some of them will down their shutter in the near future to come.

But this does not mean there is no room for other players. The market will witness a flurry of new players entering the area. There will be a large number of offers from various asset management companies in times to come. Some big names like Fidelity, Principal and Old Mutual etc. are looking at Indian market seriously.

The mutual fund industry is awaiting the derivation in India as this would enable it to hedge its risk and this in turn would be reflected in its Net Asset Value (NAV).

SEBI is working out the norms for enabling the existing mutual fund scheme to trade in derivatives. Importantly, many market players have called on the Regulator to initiate the process immediately, so that the mutual funds can implement the changes that are required to trade in derivates.

Role of SEBI in mutual fund

In the year 1992 SEBI act was passed. The objectives of SEBI are – to protect the interest of investors in securities, to promote the development of, and to regulate the securities market. As far as mutual are concerned, SEBI formulates policies and regulation the mutual fund to protect the interest of the investors. SEBI notified regulation for mutual funds in 1993. Thereafter mutual fund sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and been amended. Therefore, from time to time SEBI has also issued guidelines to the mutual fund from time to time to protect the interest of the investors.

All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of regulation. There is no distinction in regulatory requirement of the mutual fund and all are subject to monitoring and inspecting by SEBI. The risks associated with the scheme launched by mutual funds sponsored by these entities are of similar type

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When I talk with many people and tell them that its time to invest in Nifty / Sensex listed companies they have fairly little idea about which companies are listed and so thought I would list them here for reference.

Remember this is as of Today ( December 29th, 2008 ) and at times some scripts replace other.

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Derivatives are financial instruments, traded on or off an exchange, the price of which is based on or directly dependent upon i.e., “derived from” the value of one or more underlying asset, reference rate or index. The underlying asset can include securities, commodities, bullion, currency, livestock, etc., the reference rate includes interest rates, exchange rates and index consist of stock market index, consumer price index(CPI). This trading of rights or obligations based on the underlying product, for hedging, speculating or arbitraging purposes is termed Derivatives Trading, Financial Derivatives or Trading Derivatives. The main types of derivatives are,

1. Forwards
2. Futures
3. Options
4. SWAPs

Derivative trading in India can take place either on a separate and independent Derivative Exchange or on a separate segment of an existing Stock Exchange. Derivative Exchange/Segment function as a Self-Regulatory Organization (SRO) and SEBI acts as the oversight regulator.

Futures Trading & Pricing

A Futures Contract is a standardized agreement between a buyer and a seller; obligating the seller to deliver a specified asset of specified quality and quantity to the buyer on a specified date at a specified place and the buyer, in turn, is obligated to pay to the seller a pre-negotiated price in exchange of the delivery. The trading in these contracts is termed Futures Trading. In this type of trading, the contracting parties negotiate on, not only the price at which the commodity is to be delivered on a future date but also on what quality and quantity to be delivered and at what place.

Based upon their reason for choosing futures trading, people engaging in it can be typically classified as-

1. Hedgers
2. Speculators & Arbitragers

In case of Hedgers, Future contracts are used a risk minimizing tool. For example, in case of commodity as the underlying asset, a wheat farmer and a wheat miller could enter into a futures contract to exchange cash for wheat in the future. The farmer agreeing to sell the wheat is said to assume the short position and the wheat miller agreeing to buy it is said to assume the long position. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the price and a sure buyer, and for the wheat miller, the availability of wheat. Farmers, manufacturers, importers and exporters, etc, are Example of Hedgers who trade in futures for protection from price risks.

Though it minimizes risk, hedging has a black side to it also, if the wheat prices surge in the near future, the farmer will not be able to increase his prices and will lose the excess profit possible in that case and if the wheat prices fall down the buyer will still have to pay the agreed upon price in the contract, thus paying more than the market price.

Speculators, trade with hedgers and other speculators and consider futures trading as a means to earn profits and not for minimizing risk purposes (like hedgers). They aim to profit from the very price change that hedgers are protecting themselves against. Hedgers want to minimize their risk no matter what they’re investing in, while speculators want to increase their risk and therefore maximize their profits.

They speculate the value of the underlying asset and buy if they feel its value will increase, selling later when it has indeed increased and sell when they feel its value will decrease. As the name indicates, this is pure speculation on their part, based on what they perceive as market conditions. If their speculation is right, it will result in profits, else loss. This is a risk they are willing to take in order to earn quick profits.

Arbitragers are those who attempt to profit by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.

Unlike the stock market, where the capital gains or losses from movements in price aren’t realized until the investor decides to sell the stock or cover his or her short position, futures positions are settled on a daily basis, which means that gains and losses from a day’s trading are deducted or credited to a person’s account each day. The profits and losses depend upon the daily movements of the market for that contract and are calculated on a daily basis.

For example, consider the futures contract between a wheat farmer and bread maker of INR 40 per bushel, if in the next day, the price of the futures contract for wheat increases to INR 50 per bushel, the farmer, as the holder of the short position, has lost INR 10 per bushel because the selling price just increased from the future price at which he is obliged to sell his wheat. The bread maker, as the long position, has profited by INR 10 per bushel because the price he is obliged to pay is less than what the rest of the market is obliged to pay in the future for wheat.

On the day the change occurs, the farmer’s account is debited INR 50,000 (INR 10 per bushel X 5,000 bushels) and the bread maker’s account is credited by INR 50,000 (INR 10 per bushel X 5,000 bushels). As the market moves every day, these kinds of adjustments are made accordingly.

Apart from functioning as a risk reduction tool, Futures contracts are used for Price Discovery. Due to its highly competitive nature, the futures market has become an important economic tool to determine prices based on today’s and tomorrow’s estimated amount of supply and demand.

Futures Market is fast-paced and its prices depend upon a continuous flow of information from around the world and thus require a high amount of transparency. Factors such as weather, war, debt default, refugee displacement, land reclamation and deforestation can all have a major effect on supply and demand and, as a result, the present and future price of a commodity. In such a market into which information is continuously being fed, speculators and hedgers bounce off of – and benefit from – each other. The closer it gets to the time of the contract’s expiration, the more solid the information entering the market will be regarding the commodity in question. Thus, all can expect a more accurate reflection of supply and demand and the corresponding price. This process is termed as competitive price discovery or simply price discovery.

Futures prices have a price change limit that determines the prices between which the contracts can trade on a daily basis. The price change limit is added to and subtracted from the previous day’s close and the results remain the upper and lower price boundary for the day and can be revised if the exchange feels it is necessary.

Say that the price change limit on silver per ounce is INR 2.50. Yesterday, the price per ounce closed at INR 50. Today’s upper price boundary for silver would be INR 52.25 and the lower boundary would be INR 47.5. If at any moment during the day the price of futures contracts for silver reaches either boundary, the exchange shuts down all trading of silver futures for the day. The next day, the new boundaries are again calculated by adding and subtracting INR 2.50 to the previous day’s close. Each day the silver ounce could increase or decrease by INR 2.50 until an equilibrium price is found. One drawback is that as trading shuts down if prices reach their daily limits, there may be occasions when it is NOT possible to liquidate an existing futures position at will.

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The discounted cash flow (or DCF) approach describes a method of valuing a project, company, or financial asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give them a present value. The discount rate used is generally the appropriate cost of capital, and may incorporate judgments of the uncertainty (riskiness) of the future cash flows.

Read more from wiki

Now I have developed a small script which can help you to find the fair value of stock provided you know the 3 parameters

1. EPS or earnings per share.
2. Growth Rate of company.
3. How many years of such growth is sustainable.

Now the question comes how do you know all the data.

EPS would be very easy because you will get that in any finance site like moneycontrol.com / rediff money …

Now the most important thing is to get the growth rate of the company. One of the safe way is to keep that as 4 % but other one is, you can get EPS of previous years and based on them you can get the growth rate. Now keeping the no of years as 3 if you have 3 years old EPS and key in the EPS of previous years and checkout the EPS for the current year. Getting the best approx value would be the right and maintainable growth rate.

Now no of years would be your call because everything if is suggested by this small script then it would be GOD but then 3 years is always a better choice.

Note : * This is my script using DCF formula and if any share price does not hold correct instead of questioning me read the Disclaimer first.

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