Historically, on a long term horizon equities have given higher return than other asset classes
Basics of the Stock Market
Stocks : It is a term used to symbolize an investor’s ownership of a company.
Stock Market : It is the place where buying & selling of these shares happen. (also known as stock Exchanges)
(Issues in Market Design )
Primary: security markets where new issues of securities are initially sold.
Secondary: A market where securities are resold. E.g. the NSE.
Basics of the Stock Market
Market Capitalization :
No.of outstanding shares X Current Market Price
Small Cap : Market Capitalization less than 75 crores
(High Risk high returns )
Mid Cap : Market Capitalization between 75 to 7500 crores
(Medium Risk Medium Returns)
Large Cap : Market Capitalization more than 7500 Crores
( Low Risk Low returns )
Classification of Shares
The Trading Process
The elements of the trading process can be
divided into 4 components:
Some Issues in Stock market design
The way the market is designed will affect
what type of traders participate, the overall
trading process and the behaviour of prices.
2 factors to consider:
Day High / Day Low
Types of Orders
Market Orders :
Most common type of order placed by an investor
on the NSE. It is an order to buy or sell at the best price currently
Limit Orders :
This is an order to buy/sell at a maximum/minimum
price. These orders control the price paid or received, but investor
has no way of knowing when the order will be filled.
Delivery orders : Trades for which the investor takes or gives delivery of shares depending upon the trade he has entered into.
IntraDay Orders : Trades which have to be squared off on the very same day
Types of Orders
Investors / Clients
Aims at converting the Open Outcry system of trading to a screen based trading system.
Now what is Online Trading
Buying & Selling of stocks, options, bonds, and other financial instruments using online broker’s web sites and systems
Management guru Tom Peters, "distance is dead".
How is it Done
Online trading can be done through
A Trading Platform ( Software )
Why trade online
In a market where every second counts, you have to constantly be up to speed.
OBJECTIVES OF ON LINE TRADING
Leads to transparent deals in the market.
Improves liquidity in the market
Increases the market depth through quote-continuity
Instantaneous dissemination of information through channels.
Structured MIS reports for analysis.
Service Providers in India
Evaluate the Brokers
Select the best broker
Open a Demat A/c & Trading A/c with the broker.
Open a savings Bank A/c which is linked with the Broker
Approach the DP .
Must for trading and investing .
Scenario 1 – 3 Entities for D / T / S ( T + 2 ) Shares Come to your demat A/c 9 th Jan Shares come in your trading A/c 5 th Jan Money comes to your account 3 rd Jan Give cheque to the broker 1 st Jan Particulars Date
Scenario 2 – 2 Entities – D/T – S(nl) ( T + 2 ) Shares come in your trading A/c (same day transferred to demat A/c) 5 th Jan Money comes to your account 3 rd Jan Give cheque to the broker 1 st Jan Particulars Date
Scenario 3 – 2 Entities – D/T –S (l) Shares come in your trading A/c (same day transferred to demat A/c) You may sell the shares off on the same day 3 rd Jan Give an online instruction money comes in your trading A/c, You purchase the share that day itself. 1 st Jan Particulars Date
Investor HDFC Bank (S avings a/c ) SHAREKHAN ( Demat a/c ) Puts BUY order on www.sharekhan.com SHAREKHAN Savings account Balance checked & blocked Contract note is sent through E-mail Buy order executed & Savings a/c debited Shares credited on T+2 day SHAREKHAN (Trading a/c )
YOUR SAVINGS A/C TRADING A/C WITH BROKER YOUR DP A/C MONEY COMES IN PURCHASE SHARES SHARES TRANSFERRED INTO DEMAT A/C
Photo ID Proof - Election Card , Driving Licence, PAN
Residence Proof – Ration Card, MTNL bill, Electricity bill
Bank A/c proof (Statement)
PAN Card - MUST
Comparative analysis of broking firms
Comparative Analysis of different Broking Firms
Following Broking Firms are taken for the purpose of comparative analysis :-
IDBI paisa builder.
Parameters Used 100 Total 20 Customer service 20 Range of services offered (BSE, NSE, F&O, Commodities, PMS Etc.) 30 Brokerage 30 Portal Weightage given Parameters Used
1st Parameter :- Quality of Portal USER FRIENDLINESS 24 80 2 nd HDFC Securities* 6 20 5 th India Bulls 30 100 1 st IDBI paisa builder. 24 80 2 nd Sharekhan 12 40 4 th Kotak Securities Total Weighted score (Scores * 30%) Scores Ranking Name of the Firm
2nd Parameter :- Brokerage Charged 24 80 2 rd HDFC Securities 30 100 1 st India Bulls 24 80 2 nd IDBI paisa builder. 24 80 2 nd Sharekhan 18 60 3 rd Kotak Securities Total Weighted score (Scores * 30%) Scores Ranking Name of the Firm
3rd Parameter :- Range of Services Offered 20 100 1st HDFC Securities 08 40 4 th India Bulls 12 60 3 rd IDBI paisa builder. 16 80 2 nd Sharekhan 12 60 3 rd Kotak Securities Total Weighted score (Scores * 20%) Scores Ranking Name of the Firm
4th Parameter :- Customer Services 16 80 1 st HDFC Securities 12 60 3 rd India Bulls 08 40 4 th IDBI paisa builder. 20 100 1 st Sharekhan 16 80 2 nd Kotak Securities Total Weighted score (Scores * 20%) Scores Ranking Name of the Firm
COMPARISON OF TOTAL WEIGHTED SCORE OF ALL THE FIRMS
1 st 84 16 20 24 24 HDFC Securities 4 th 56 12 08 30 6 India Bulls 2 nd 74 08 12 24 30 IDBI paisa builder. 1 st 84 20 16 24 24 Sharekhan 3 rd 58 16 12 18 12 Kotak Securities Relative Ranking Total Weighted score Weighted Score on Customer Services Weighted Score on Range of Services Weighted Score on Brokerage Weighted Score on Portal Name of the firm
What is a Depository?
‘… ..a facility for holding securities which enables securities transactions to be processed by book entry.’
Physical securities may be immobilised by the depository or securities may be dematerialised (so that they exist only as electronic records).
Depositories in India
Industrial Development Bank of India
Unit Trust of India
The National Stock Exchange of India
State Bank of India
Global Trust Bank Limited
Standard Chartered Bank
HDFC Bank Limited
The Hong Kong and Shanghai Banking Corporation Limited
The Stock Exchange – Mumbai (BSE)
Bank of India
Bank of Baroda
State Bank of India
Standard Chartered Bank
Global Trust Bank
Union Bank of India
Bank of Maharashtra
The Calcutta Stock Exchange Association Ltd.
REGULATOR OF THE MARKET…..
Protecting the interest of the investors.
Promoting and developing securities
regulation of securities market
28 exchanges in India
Major exchanges are
Welcome to a NEW INDIA ∞ Real GDP Growth 6.5 to 7.5% ∞ Inflation estimates at ~ 5% ∞ Nominal GDP Growth at 12.5% ∞ Corporate earnings growth at 15 –18% India –An Investment Opportunity
∞ Capital expenditure –To grow
IIP(Industrial Index of Production) Growth to pick up again, will need capacity expansion …..
Strong order book log improves revenue visibility
∞ Consumption –To get stimuli
Per capita income has grown by 7% CAGR over the past
decade; positive demographics
Rising aspiration, availability and affordability of Indians
∞ Competitiveness –Adds business confidence
Compelling and sustainable Cost and Skill advantage
Brand India gaining more acceptability globally
∞ Continuation of structural reforms
VAT –a good beginning; abolition of LTCG( Long Term Capital Gains ) in equity
Thrust on infrastructure creation
Political will to push reforms despite resistance
Fundamentals: “4 C” Effect Welcome to a NEW INDIA
Liquidity: More to come ∞ Indian households are under-invested in equity, thanks to high interest rate regime in the past ∞ Cumulative FII holdings in India: ~ 40bnUSD against total FII stocks globally: ~ 35trUSD. India still not rated as an investment grade ∞ More domestic institutional funds to come –Insurance, Pension Funds, AMCs etc ∞ Long term global investors like pension funds and institutional trusts also have started participating in “ Opportunity India” Welcome to a NEW INDIA India –An Investment Opportunity
∞ India has come a long way –from near bankruptcy in early 90’s to being one of the fastest growing economy in the world ∞ 64% of India’s GDP is consumption-led; providing sustainability to economic growth ∞ Average EPS growth rate of Sensex companies over the last 5 years: 18% CAGR ∞ Healthy balance sheet and operating efficiency –improved capacity utilisation, cash up, debt / equity down, growing profitability Welcome to a NEW INDIA India –An Investment Opportunity Valuation: Supported by Earnings
∞ GDP growth to remain strong
∞ Changing lifestyle to boost consumption
∞ Capital spend to lead to increased demand for capital goods
∞ Continuation of structural reforms
∞ FDI to be more relaxed
∞ Market cap / GDP ratio still low
∞ Liquidity to continue
∞ Valuations –Fair but not stretched
Welcome to a NEW INDIA Way Ahead India –An Investment Opportunity
Expectation of high Interest Rates
Expectation of high Oil Prices
High Fiscal and Current Account Deficits
Possibility of Liquidity Withdrawals
Reduction in leveraged positions
Flight to non-risky assets
Huge Volatility –A Key Deterrent
Case for Investing
Should we invest in equity?
If ‘ in-the market ’, possibility of capital loss!!!
If ‘ out-of the market ’, possibility of opportunity loss!!!
HOW MUCH SHOULD YOU EARN
TO FIGHT INFLATION - 6%
BANK INTEREST – 7%
Hence, you have to earn 13% just to stay afloat.
Your real gain is the extra that you earn above 13%. Equities gives you atleast 18 – 25% on a conservative estimate.( Moneylender calculation )
Must be DRIVEN BY
Your Financial Goals
Your Risk Appetite
Hence, Time, Rate of Return & Risk
ASSET ALLOCATION DECISION
Success of any Investment
Quality of Growth
i.e. : Which Stocks ?
Sustainable Competitive Ability
Scalability and Operating Leverage
Management Quality and Capital efficiency
Price and Value Divergence( What we buy and at what price we buy ? )
What to Invest In ?
What options do we have today ?
Investment with Limited Understanding and many uncertainties.
Our entry pricing must give us a margin of safety
Reduce LOSS and EXTENT OF LOSS
LONG TERM rather than SHORT TERM
WHY INDIA ???
INDIA is a confluence of CAPITAL EXPENDITURE and CONSUMPTION CYCLE in INDIA is the highest.
One of the several booming sectors therefore are: FMCG, Power, Construction and Engineering sector (infra).
Place greater emphasis on Superior Business Models rather than sectors for investing decisions.
An Entrepreneur makes an invaluable difference to the investment returns.
Eg.: INFOSYS, ADITYA BIRLA NUVO,BIOCON, BHEL
Recognise the passion and the skills of the entrepreneur and then believe in the VISION and BELIEFS of the entrepreneur, and above all VALIDATE THE RISKS that may or may not have been perceived by the entrepreneur.
Understand the broad drivers of PROFIT & GROWTH.
Drivers for Indian Equities
Lack of Investment alternatives for India’s growing Savings
Rising Risk Appetite
Equity Participation by Indian & Foreign Investors is still at a fairly nascent stage.
Equity Valuations are still far away from their Peak Valuations.
Superior Investment Returns are from a combination of
WISDOM and PATIENCE
INTELLECT & EXPECTATIONS of QUICK & HIGH RETURNS .
USUAL BUY Strategies
INTRA DAY – Buy in the morning when the market opens or during the day BUT selling it before the close of trading hours ON THE SAME DAY
( 9.55a.m to 3.30p.m).
Two options (1) BUY - SELL ----Buy at LCL & Sell at UCL
(2) SHORTSELL – SELL at a High Price in anticipation of a drop in
price as the day goes along.
i.e.: Stock Opens at Higher Level – SHORTSELL and then
BUY at LOWER LEVELS by the AFTERNOON.
INFORMATION With YOU from a RELIABLE Source.
NEWS tickers on NEWS Channels, investment bankers, brokers.
ON DELIVERY BASIS :
For Income Tax Purposes
On Long term gains – NIL Tax
On Short term gains – 10% income tax
On Day Trades gains – The gains are added to your gross income and subjected to tax.( Treated as Business Income )
There was a one hour interview on CNBC with Warren Buffet, the second richest man who has donated $31 billion to charity. Following are some very interesting aspects of his life
He bought his first share at age 11 and he now regrets that he started too late!
Things were very cheap that time Encourage your children to invest
He bought a small farm at age 14 with savings from delivering newspapers.
One could have bought many things with little savings
Encourage your children to start some kind of business
He still lives in the same small 3-bedroom house in mid-town Omaha , that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or a fence.
Don't buy more than what you "really need" and encourage your children to do and think the same
He drives his own car everywhere and does not have a driver or security people around him.
You are what you are
He never travels by private jet, although he owns the world's largest private jet company.
Always think how you can accomplish things economically
His company, Berkshire Hathaway, owns 63 companies. He writes only one letter each year to the CEOs of these companies, giving them goals for the year. He never holds meetings or calls them on a regular basis.
Assign the right people to the right jobs
He has given his CEO's only two rules.
Rule number 1 : do not lose any of your share holder's money.
Rule number 2 : Do not forget rule number 1.
Set goals and make sure people focus on them
He does not socialize with the high society crowd. His past time after he gets home is to make himself some pop corn and watch Television.
Don't try to show off, just be your self and do what you enjoy doing
Warren Buffet does not carry a cell phone, nor has a computer on his desk.
Bill Gates, the world's richest man met him for the first time only 5 years ago. Bill Gates did not think he had anything in common with Warren Buffet. So he had scheduled his meeting only for half hour. But when Gates met him, the meeting lasted for ten hours and Bill Gates became a devotee of Warren Buffet.
His advice to young people:
"Stay away from credit cards (bank loans) and invest in yourself and Remember:
Money doesn't create man but it is the man who created money.
Live your life as simple as you are.
Don't do what others say, just listen them, but do what you feel good.
Don't go on brand name; just wear those things in which you feel comfortable.
Don't waste your money on unnecessary things; just spend on them who really in need rather.
After all it's your life then why give chance to others to rule our life."
Buffet’s maxims for future guidance (2009)
Hard work: All hard work bring a profit, but mere talk leads only to poverty.
Laziness: A sleeping lobster is carried away by the water current.
Earnings: Never depend on a single source of income.. [At least make your Investments get you second earning]
Spending: If you buy things you don't need, you'll soon sell things you need.
Savings: Don't save what is left after spending; Spend what is left after saving.
Borrowings: The borrower becomes the lender's slave. Accounting: It's no use carrying an umbrella, if your shoes are leaking.
Auditing: Beware of little expenses; A small leak can sink a large ship.
Risk-taking: Never test the depth of the river with both feet. [Have an alternate plan ready]
Investment: Don't put all your eggs in one basket.
"The HAPPIEST people DONOT necessarily have the BEST of all.
They simply APPRECIATE what they find on their way”
Let us choose the way to live
Power of Equity
but it has happened
• How much can you make in 26 years by just investing Rs.10,000 initially in any of financial instruments ?
Take a wild guess ???
Let us look at the real example…
If you have subscribed in 100 shares of ________ company with a face value of Rs. 100 in 1980… • In 1981 company declared 1:1 bonus = you have 200 shares • In 1985 company declared 1:1 bonus = you have 400 shares • In 1986 company split the share to Rs. 10 = you have 4,000 shares • In 1987 company declared 1:1 bonus = you have 8,000 shares • In 1989 company declared 1:1 bonus = you have 16,000 shares • In 1992 company declared 1:1 bonus = you have 32,000 shares • In 1995 company declared 1:1 bonus = you have 64,000 shares • In 1997 company declared 1:2 bonus = you have 1,92,000 shares • In 1999 company split the share to Rs. 2 = you have 9,60,000 shares • In 2004 company declared 1:2 bonus = you have 28,80,000 shares • In 2005 company declared 1:1 bonus = you have 57,60,000 shares
At the end of 2005…
• You have 57,60,000 shares of the company
Any guess about the company ?
(Hint : Its an Indian company)
Any guess about the present valuation ?
The result of ‘Power of Compounding’
Your present valuation is about
Rs. 200 Cr.+
The company is ‘ WIPRO ’
Other such examples…
Investment of Rs. 10,000 in 1979 will fetch Rs. 95 cr.+
Investment of Rs. 10,000 in 1992 will fetch Rs. 1.5 cr.+
Investment of Rs. 1000 in 1980 will fetch Rs. 1.9 cr.+