Stock Market and Mutual Fund Investment » Indices

What Does Charts Tell You? Correction or Breakout

Shabbir Bhimani — Mon, 02 Aug 2010 05:30:00 +0000

If we look at the above Nifty chart for last one year we see a clear and definite pattern. Nifty after the gap of 3 months corrects 7-8%. The dips were on

Nov 3, 2009
Feb 15, 2010
May 25, 2010

So now my question is
Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.

I myself do see a correction and so August will be the month when I offload my portfolio and remain cash heavy (close to 50% in cash).

You do not need to agree on my views because when I discussed the same with my friend he totally disagreed and has contrasting views on the above chart. He told me that this time as we are more in a tight range for last 6 months and there is no bad news expected in results season and so the market should break out on the higher side.

Which opinion do you support? Share your thoughts in comments below.

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What you think of 2010 market?

Shabbir Bhimani — Thu, 07 Jan 2010 11:00:34 +0000

Last year I suggested what we could expect from 2009 but this time I will do something different.

Instead of me saying all the things I would ask my readers what you think of 2010 market? What you expect for Sensex and Nifty or even any other stock?

Don’t be afraid to speak your heart out because no one can predict market perfectly and you may be wrong like I have been many times.

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Difference between Bonus and Stock Split

Shabbir Bhimani — Sun, 29 Nov 2009 09:38:24 +0000

Reliance Industries went Ex-Bonus on Thursday 26th November 2009 and stock was trading close to 2200 on 25th November and next day opened at close to 1100. I was bombarded with so many questions in emails as well as in the article Reliance Bonus Issue and Dividend.

So let’s take each of them and try to clarify them.

Apart from the queries related to whether I would get bonus shares or not there were quite a few of other interesting questions and I would mention few.

What is the difference between Bonus and Stock Split?
Why Reliance Industries Fell by 50%?
Should the bonus shares just mean I would get extra shares without prices changing from 2200 to 1100 odd?

And so on.

First understand what is Bonus Shares and Stock Split?

Bonus: Bonus shares is a very misleading term and there is no bonus when it comes to shareholder’s value since the increase in stock quantity is arithmetically neutralized by the proportionate fall in stock price but it is true that bonus issues are generally bullish for the share price in the near future.

There is no concept of bonus in many developed market and they term the bonus as stock split.

Stock Split: Stock split is reduction in denomination (face value) of the shares. Shares in IPO are issued in standard denominations of Rs. 10 but prices of such shares goes up by a margin which can be beyond the scope of retail buyers and so companies tend to decrease the face value by splitting the shares.

In India we still have face value variations but in more developed market all share have face value of unity (Re. 1). Now as there is no concept of face value in more developed market and split (bonus as we term here in India) is used to reduce the price of the shares. What we call a 1:1 bonus in India is actually 2 for 1 split in US.

Example

Say you own a company whose share price is 1000 and face value is 10. Your investor would need to pay a premium of 990 Rs (1000 Rs for a share of 10 face value) which can be a mental block for many small investors. So you decide to split i.e. you split the stock of face value 10 to face value of 1 and the price of your stock is now at 100 Rs and premium is 99 Rs. This is split. You are decreasing the face value or denomination from 10 to 1.

Say again after the split your price went up to 1000. (Yeah I know it’s too bullish ). Now what? You cannot split the stock anymore. So now instead of doing a split you issue new shares. New shares are given to your investors but that does not mean your company grew by that many times overnight. Before split you had 100 floating shares in the market and now you decide to make it 1000 shares. So the price of each of your shares will fall to 100 from 1000 and now you will have 10 times more shares floated.

Short answer to all such questions is to remember that you cannot double your portfolio overnight which means if any company gives bonus shares that does not mean you would have the shares just added to your portfolio and share would be at the price before the bonus or split.

If you still have any questions post them in comments and I would be more than happy to clarify them.

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Open Interest

Shabbir Bhimani — Tue, 29 Sep 2009 07:36:28 +0000

Saurav asked here

Is there any relationship between the performance of a stock with its open interest and volume?

And so I would try to answer this question in as simple terms as I could.

First I would like to tell there is not much inference you can derive from volume. The only thing it helps is if stock moves with good volume it suggests there are lots of activity within the stock.

Now coming to open interest its a large area but I would try to keep it as simple and short as possible. First the Definition from Stock Market Terms

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.

From the definition its quite clear that if open interest is 1 implies 1 long or 1 short position and so there is nothing much that can be inferred from this but if you combine open interest with price movement of stock you can get the idea of how the stock can move in future.

Price Move	Open Interest	Inference
Up	Increase	Increase in long positions as many new investors are putting in new money into the market. Truly Bull Pattern
Down	Increase	Shorting is main reason for prices to move down but as there is increase in open interest short squeezes some time soon and bull patter would start. This should be good time to get into the market.
Up	Decrease	Mainly a bearish outlook and people are covering their short positions which is main reason for increase in price.
Down	Decrease	Complete bearish sign as short positions are only built in the market.

I have tried to create a chart for open interest rules but the above Rules are not complete and there are many other rules about sudden price movement and open interest change. You can read all of them by Martin Pring in his book Martin Pring on Market Momentum.

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How to Calculate Stop Loss and Target Level

Shabbir Bhimani — Thu, 03 Sep 2009 05:33:26 +0000

On TV if you see many analyst suggest Stop Loss and Resistance price and I got an email from a blog member Srinivas where he asked.

… I would like to know how to calculate the stop loss and Target price of any stock. I have seen in TV, analyst are telling buy XYZ stock on X rate, Stop loss is Y, n Target is Z.
Is there any calculation behind these?

There is definite calculation behind it but its not mathematical calculation but its based on charts and patterns.

Say the Stock XYZ is currently priced at 100. Now the stop loss for the stock would be something less than 100 where the Stock XYZ traded in large volumes and spent some time before coming to 100. Say when the stock was between 82 to 88 it spent 10 trading sessions and was trading on averagely good volume and then broke out and so the stop would be anything between 82 and 88.

Now the target for the price would be based on more previous history as to how much in percentage terms it moves each time it breaks out and so if it broke out of 90 and history shows it moves 20% previously when it broke out of range before hitting resistance then it would be 108 ( 90 + 20% of 90 ) the target for the stock.

Now lets take a real time example.

DISH TV one of my favorite stock is in a range of 42 – 48 for quite some time now and so once it crosses 50 it should hit 57 easily.

Again If we take the example of Nifty you would see that it is not able to cross 4700 currently and it is spending time between 4500 and 4600 and so once there is a substantial breakout above 4700 and remains above it for some trading session then the stop loss would be anything between 4600 and 4500.

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Mutual Fund Terms

Shabbir Bhimani — Sun, 30 Aug 2009 07:45:03 +0000

After Clarifying many Stock Market Terminologies I had so many emails asking what does some of the below mentioned terms means and so I thought it would be better to have them here. So here they are:

Account statement

A document issued by the mutual fund, giving details of transactions and holdings of an investor.

Annual return

The percentage of change in net asset value over a year’s time, assuming reinvestment of distribution such as dividend payment and bonuses.

Appreciation

When an investment increases in value, it appreciates. For example, a equity share whose price goes from Rs. 20/- to Rs. 25/- has appreciated by Rs. 5/-.

Asset

Property and resources, such as cash and investments, comprise a person’s assets; i.e., anything that has value and can be traded. Examples include stocks, bonds, real estate, bank accounts, and jewellery.

Asset allocation

When you divide your money among various types of investments, such as stocks, bonds, and short-term investments, you are allocating your assets. The way in which your money is divided is called your asset allocation.

Asset Management Company / AMC

It is the investment manager for the mutual fund. It is a company set up primarily for managing the investment of mutual funds and makes investment decisions in accordance with the scheme objectives, deed of Trust and other provisions of the Investment Management Agreement.

Automatic Investment Plan

Like Systematic Investment Plan. Under these plans, the investor mandates the mutual fund to allot fresh units at specified intervals (monthly, quarterly, etc.) against which the investor provides post-dated cheques. On the specified dates, the cheques are realized by the mutual fund and on realization, additional units are allotted to the investor at the prevailing NAV.

Balanced fund

A mutual fund that maintains a balanced portfolio, generally 40% bonds and 60% equity.

Benchmark

A parameter with which a scheme can be compared. For example, the performance of a scheme can be benchmarked against an appropriate index.

Bond

An interest-bearing promise to pay a specified sum of money — the principal amount — due on a specific date.

Bond funds

Registered investment companies whose assets are invested in diversified portfolios of bonds primarily fixed income securities.

Closed-Ended Mutual Fund

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

CORPUS

The total amount of money invested by all the investors in a scheme or a fund.

Current load

Load structure applicable currently. Funds keep revising the load structures from time to time.

Current market value

The amount a willing buyer will pay for a bond today, which may be at a premium (above face value) or a discount (below face value).

Debt /Income funds

Funds that invest in income bearing instruments such as corporate debentures, PSU bonds, gilts, treasury bills, certificates of deposit and commercial papers. These funds are the least risky and are generally preferred by risk-averse investors.

Diversification

Diversification is the concept of spreading your money across different types of investments and/or issuers to potentially moderate your investment risk.

Dividend

Income distributed by the Scheme on the Units

Dividend plan

In a dividend plan, the fund pays dividend from time to time as and when the dividend is declared.

Dividend reinvestment

In a dividend reinvestment plan, the dividend is reinvested in the scheme itself. Hence instead of receiving dividend, the unit holders receive units. Thus the number of units allotted under the dividend reinvestment plan would be the dividend declared divided by the ex-dividend NAV.

Entry load

It is the load charged by the fund when one invests into the fund. It increases the price of the units to more than the NAV and is expressed as a percentage of NAV.

Equity schemes

Schemes where more than 50% of the investments are done in equity shares of various companies. The objective is to provide capital appreciation over a period of time.

Expense ratio

Annual percentage of fund’s assets that is paid out in expenses. Expenses include management fees and all the fees associated with the fund’s daily operations.

Exit load

It is the load charged by the fund when one redeems the units from the fund. It reduces the price of the units to less than the NAV and is expressed as a percentage of NAV.

Fund manager

Appointed by the AMC, he is the person who makes all the final decisions regarding investments of a sche

Growth fund

A mutual fund whose primary investment objective is long-term growth of capital. It invests principally in common stocks with significant growth potential. Growth Stocks of companies that have shown or are expected to show rapid earnings and revenue growth. Growth stocks have relatively more risk than other conventional forms of investment.

Income fund

A mutual fund that primarily seeks current income rather than growth of capital. It will tend to invest in stocks and bonds that normally pay high dividends and interest.

Index fund

A type of mutual fund in which the portfolios are constructed to mirror a specific market index. Index funds are expected to provide a rate of return over time that will approximate or match, but not exceed, that of the market, which they are mirroring.

New Fund offer price

The price at which units of a scheme are offered in its Initial Offering Period.

Liquid funds / Money market funds

Funds investing only in short-term money market instruments including treasury bills, commercial paper and certificates of deposit. The objective is to provide liquidity and preserve the capital.

Load

A charge that may be levied as a percentage of NAV at the time of entry into the Scheme/Plans or at the time of exiting from the Scheme/Plans.

Lock in period

The period after investment in fresh units during which the investor cannot redeem the units.

Management fee

Money paid by a mutual fund to its investment manager or advisor for overseeing the portfolio. A management fee is usually between one-half and one percent of the fund’s net asset value.

Maturity or Maturity date

The date upon which the principal of a security becomes due and payable to the security holder.

Maturity value

The amount (other than periodic interest payment) that will be received at the time a security is redeemed at its maturity. On most securities the maturity value equals the par value.

Mutual funds

An investment company that pools money from its unitholders and invests that money into a variety of securities, including stocks, bonds, and money-market instruments. This represents a way of investing money into a professionally managed and diversified pool of securities that hopefully will provide a good return on unitholders’ money.

Mutual fund regulations

Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 as amended up to date and such other Regulations, as may be in force from time to time, to regulate the activities of the Mutual Fund.

NAV

Net Asset Value of the Units in each plan of the Scheme is calculated in the manner provided in Offer Document or as may be prescribed by Regulations from time to time.

NAV Change

The difference between today’s closing net asset value (NAV) and the previous day’s closing net asset value (NAV).

NAV Change %

The percentage change between today’s closing net asset value (NAV) and the previous day’s closing net asset value (NAV)

Net worth

A person’s net worth is equal to the total value of all possessions, such as a house, stocks, bonds, and other securities, minus all outstanding debts, such as mortgage and revolving credit lines.

Net yield

Rate of return on a security net of out-of-pocket costs associated with its purchase, such as commissions or markups.

Open-ended Schemes/ Funds

Scheme of a mutual fund where purchase or sale of units is allowed on a continued basis. Funds that do not have any fixed maturity and are continuously open for subscription and redemption. The key feature is liquidity. One can conveniently buy and sell the units held at the NAV related price.

Opening NAV

The NAV disclosed by the fund for the first time after the closure of an NFO.

Portfolio

It refers to the total investment holdings of the fund.

Portfolio churning

It refers to the changes made to the portfolio keeping in view the market conditions. It includes both buying and selling of holdings and is aimed at giving a better yield to the investor.

Redemption

The paying off or buying back of units of a mutual fund / bond by the issuer.

Redemption Fee

A fee charged by a limited number of funds for redeeming, or buying back, fund units.

Redemption Price

The price at which a mutual fund’s units are redeemed (bought back) by the fund. The redemption price is usually equal to the current NAV per unit.

Returns

The dividend and capital appreciation accruing to the investor on the investment held by him.

Scheme

A mutual fund can launch more than one scheme. With different schemes, in spite of there being a common trust, the assets contributed by the unit holders of a particular scheme are maintained and managed separately from other schemes and any profit/loss from the assets accrue only to the unit holders of that scheme.

Systematic Investment Plan (SIP)

Program that allows an investor to provide post-dated cheques to the mutual fund to allot fresh units at specified intervals (usually monthly or quarterly). On the specified dates, the cheques are realized by the mutual fund and additional units at the prevailing NAV are allotted to the investor. This enables him to invest as little as Rs 1000 a month and take advantage of rupee cost averaging.

Systematic Withdrawal Plans (SWP)

A plan offered with some schemes under which post-dated cheques for fixed amounts (as may be fixed by the fund) are issued to the investors for monthly, bi-monthly or quarterly withdrawals. The withdrawals are as per the requirements of the investor specified by him/ her at the time of investment.

Unit

A Unit represents one undivided share in the assets of the Schemes.

Unit holder

A person who holds Unit(s) under any plan of the Scheme.

52 Week High

The highest market value of a unit (in terms of NAV) during the immediately preceding 52 weeks.

52 Week Low

The lowest value of a unit (in terms of NAV) during the immediately preceding 52 weeks owns, the more volatile the investment.

Yield

Distributions form investment income, usually expressed as a percentage of net asset value or market price. Unlike total return, yield has the single component of investment income and does not include capital gains distributions or capital appreciation of underlying shares.

Bookmark this page for future reference and also look at Stock Market Terms for explanation of more such terminologies.

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Stock Market Terms

Shabbir Bhimani — Tue, 18 Aug 2009 17:05:20 +0000

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-Ship: 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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Important week for Indian Markets

Shabbir Bhimani — Mon, 27 Jul 2009 10:45:13 +0000

I heard Warren Buffet saying on CNBC-TV18 that he would prefer to own equities over Government bond for a long term investment goal and even did mention and I quote

I didn’t know what was going to happen the last two years. Why should I know what’s going to happen the next two years?

If he makes such statements, you can easily infer that no one knows whats going to happen in next couple of years but then its always equity investments for a long term horizon which gives substantial return over any other Asset classes.

This week ( Starting Today 27th July 2009 ) we have Future and Options Expiry and so all predictions can go wrong but then also I think I would share upcoming events. In the expiry week we have some triggers for the market.

Earnings season ( Which is very much on )
RBI Policy on Tuesday
Global Cues

Depending on how the news come out we can see if the market moves up or down.

Earnings season is more likely to be positive and we have results of Reliance Industries, Tata Steel, DLF coming up which all are expected to be a positive triggers for the market.

On Tuesday we would see credit policy announcement and that could be one of the triggers for the market.

Last but not the least Global Cues which should be positive for us to move higher.

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Sensex Listed Companies

Shabbir Bhimani — Tue, 21 Jul 2009 14:32:42 +0000

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.

ACC (Associated Cement Companies)
Grasim
Hindalco
HLL ( Hindustan Unilever Ltd. )
ITC ( I T C Ltd. )
L&T ( Larsen & Toubro Ltd. )
RIL ( Reliance Industried Limited )
Tata Motors
Tata Steel
Bajaj
BHEL ( Bharat Heavy Electricals Ltd. )
Gujarat Ambuja
ICICI Bank
Ranbaxy
Reliance Energy
SBI ( State Bank of India )
Infosys
Dr. Reddy’s
Cipla
HDFC ( Housing Development Finance Corporation Ltd. )
Hero Honda
Bharti Airtel Ltd.
HDFC Bank
ONGC ( Oil & Natural Gas Corporation Ltd )
Wipro
Maruti Suzuki India Ltd.
NTPC ( NTPC Ltd. )
TCS (Tata Consultancy Services)
Reliance Communications
Sun Pharmaceutical

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Free float Nifty

Shabbir Bhimani — Thu, 25 Jun 2009 04:58:42 +0000

I have been getting lots of queries as to what is the free float Nifty and what does it mean when I read the following in Newspaper.

The National Stock Exchange (NSE) was switching to a free float market capitalisation methodology for calculating the value of the S&P CNX Nifty against the full market capitalisation weighted methodology previously.

Recalling the Definition of Nifty from What is Nifty

Nifty is an index or an indicator of the performance of the companies listed in national stock exchange situated in delhi. Nifty constitutes of 50 companies and the change in the Nifty index ( Up or down ) indicate the trend in the majority of the stocks.

So now the weightage of the 50 stocks which are in Nifty cannot be equal. Which means the weightage of each of the stock in Nifty is different. The current announcement just changes the way the weightage would be calculated.

Before

The weightage was proportional to the market capitalisation of the company.

Now from 26th Jun

The weightage of a stock in the Nifty will be proportional to the public shareholding (non-promoter holding) in that company and not on the market capitalisation of the company.

So what would be the effect

A company with low public shareholding, but high market capitalisation had higher weightage in Nifty like ONGC and NTPC where public shareholding is low and led to skewness in Nifty towards them.

Sensex is already on free float market capitalisation methodology for Sensex. Due to the different formulae for calculating the Nifty and Sensex, there is a huge disparity in the weightages of some of the stocks. Because of a higher proportion of public shareholding, Infosys has the second-highest weightage in the Sensex at 9.5% while it comes at number five in the Nifty. With the new formulae in effect Infosys will have the second-largest weightage, replacing ONGC, while ITC will be the third largest, replacing NTPC.

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