You are new to stock market. The stock market index has recently gained over 10% in the past one month. Being excited about the movement you have a look at top gainers in the past week. You pick one or two stocks and then justify why these stocks are one of the best available, and also why the price is reasonable. You buy them, wait for a day or two. Unfortunately the stock market retreats and you lose over 10% of your invested value. You then start doubting your stock picks and mange to find a flaw. You decide to rearrange your portfolio and sell a portion of it and buy some of the other stocks which have been relatively stable during the recent market fall. But alas, in the coming week, the stock market rebounds and you realize that had you kept your earlier stocks, you could have done better... frustrated, you start searching the internet for investing strategies..
Penny stocks are bought in exactly the same way as any other stock. However not all penny stocks are listed on standard big stock market exchanges. For example, in United States penny stocks which don't make it to NASDAQ are listed on OTCCB. In India several penny stocks are listed on BSE but not on NSE. Thus to buy penny stocks you have to register with a broker who can help you carry out trades on stock market exchanges. Some brokers specialize in trading in Penny stocks.This should have actually been a part of my previous post How to buy shares using a Demat Account? because it is meant to answer questions like How to buy shares? How to invest in stock market? etc.
There are two ways of investing in shares. One is directly buying shares. For example you decide that you are going to buy 25 shares of BHEl, 50 shares of Tata Steel, 10 of Cipla and so on. For such buying, you MUST have a Demat account.
However, there is also another way of investing in shares. Which can be thought of as indirect way of investing - Invest in a Mutual Fund. After all, a mutual fund takes your money and invests them in shares and gives you the return/profit (after deducting their fees called entry/exit loads). There are thousands of mutual funds around and several of them focus on some specific sectors. For beginners, this is the safest way to invest in a stock market. Well, safest here does not mean risk free. You still have to pick up the right mutual fund which suits your risk appetite and no matter how good the mutual funds past track record the investment is still subject to market risks. However for investing in Mutual Funds you does not require you to have a Demat Account. However you do need a PAN Card.
I have written two posts on a related topic. Best Stocks to buy in 2009 and How to Invest in a Recession. But in some sense both these posts assume that you want to invest in the stock market in 2009, and none of them addresses a more basic question: Should you invest in the Stock market in 2009? Is it a good idea to buy stocks now or should you wait until there are some signs of improvement? Isn't it a smarter idea to completely stay away from the stock market rather than finding investing strategies to invest in a recession?
Well, the answer depends on your assumptions about where the economy is going and what I present here is purely my own opinion based on what I have been reading in the news in the past couple of days. Here is the picture that seems unavoidable to me:Global economy will continue its downfall throughout 2009. 2009 has seen a surge in massive job layoffs and the rising unemployment will deteriorate the economic condition further before things start improving. So at least until the end of 2009, there does not seem any improvement in sight.
If you have been reading the news and / or you agree with the above assumption: then the answer to the above question is simple. Do not invest in stocks until late 2009. Wait for about half a year. This is ofcourse assuming that your interest in the stock market is in long term investment. For traders like swing traders etc. there will be plenty of money making (and money losing !) opportunities provided by markets moving up and down. However for long term investors, it makes sense to stay away for a while.
Ofcourse if you have strong reasons to believe that the economy will magically improve in mid 2009, then NOW is the right time to buy. But as of now I do not see any convincing signs in favor of this overly optimistic assumption. Again the answer depends on your assumption. My earlier post How to Invest in a Recession is about a golden-mid, investing in a recession when you are not sure of any assumptions or do not want to make any.
A lot of online trading accounts allow you the facility to place an AMO order. Here AMO order means After Market order. This facility offered by online brokers can be very useful.How does AMO or After market Order work?
When you login on your online trading account, usually on the bottom left corner you will see a radio button labelled "AMO". Checking this button while placing your order will result in an After Market Order. AMO can be placed only after market hours (i.e. when the markets are closed). When you place an AMO, the order is 'noted down' by the broker and is 'queued' to be sent to the stock exchange as soon as the markets open on the next working day.Can you cancel an AMO?Yes. But some brokers, like SBICAP Securities only allow you to cancel and not modify the order. That is not a problem though. To modify, you can always cancal and replace your order.
When should you use "AMO"?
AMO is an excellent facility for investors, when they want to book profits or exit a position as early as possible, but due to some other commitments are unable to login on the next working day (for example if you are going for a vaction on a week, etc.)Caution: Avoid Using AMO for IntradayI strongly recommend not using the AMO facility for Intraday trading. I say this from personal experience. Take the following example: Suppose you expect price of a particular stock to go up when the market opens. In order to 'hurry up' and 'avoid wasting time' you maybe tempted to 'guess the upward movement' and already place an AMO before the market opens, anticipating an upward movement. But this is a bad strategy. because even if your guess about upward movement is right, your guess about the magnitute of the movement is likely to be wrong. I have tried even variations of this, for example "spreading" the order over different values in order to statistically get better results, etc. But they are not worth mentioning here because they have not worked. Yes, sometimes i did make a good profit. But when i did not, i lost big enough to make an 'overall loss'. So avoid using AMO for Intraday.
2009 is going to be a bad year for the world economy. As the results of 2008 were declared, the intensity of the ongoing recession became clearer. Big multinational companies cut hundreds of thousands of jobs. Millions of jobs were cut by small and medium businesses. In all likelihood, the layoffs will continue all through this year, unemployment will keep rising - or at least certainly not fall, and perhaps 2009 will be the worst year most of us have ever seen.
Naturally, there is one question that bothers me and perhaps any other investor. How to invest in a recession? How far can one remain hopeful of a market rebound and keep losing money? Is there a good investing strategy to deal with an economic disaster like the current one? This post discusses 3 simple but effective investment tips to follow while making any investments during a recession.Investment Tip 1: Keeping Lots of Cash 'ready to invest'You have to adjust your investment style in such a way that you maintain substantial cash with you. Two concrete practical suggestions for achieving this are as follows:Invetment Tip 2- Diversify your portfolio.Diversification is a standard investment strategy used for risk reduction. In a recession it is indispensible. Never invest in just one or a few stocks. There is always a chance that any given particular company does worse than expected. It is good to have at least 10 different stocks if you are investing in Large cap companies, or 15-20 different stocks if you are investing in mid cap or small cap companies.Investment Tip 3- Respect stop lossesRespecting stop losses becomes all the more important in a recession. The reason is that in a healthy economy, it is more likely that a stock rebounds. In a recession there have been examples of stock prices going to zero ! (e.g. Indymac Bank, Fannie Mae, Lehman Bros. etc.)
So before you buy a stock, even if it is from a long term viewpoint, first ask yourself the question: If things get bad, how much can this stock fall? Keep that worst price as your stop loss. If price falls below that - simply exit. Never wait for rebounds. If you are a swing trader or Intraday trader, you may keep stop loss in terms of percentage. I dont do intraday, but for swing trading, i keep a strict stop loss of 10%. This also encourages me to choose stocks more carefully.
Investing in HIGH Growth, HIGH P/E companies
Best Stocks to Invest in 2009
Make money in the next bull run!
A 'CRUDE' Investment Strategy
>Economy or business goes in cycles. Recession and booms have always visited us alternately. Now that we have landed in a recession, probably the deepest since the Great depression, probably many out there are asking themselves the qeustion that I have been asking : How to benefit from the bull run (or a bubble?) that will follow this recession?
There are two main puzzling questions.When to invest?It is virtually impossible to predict right now with certainty how long the current crisis and its effects will last. But what we can do is keep watching for change. Once we observe some "DEFINITE" signs of improvement of economy, we can be sure change has started taking place. We are now, (perhaps you should add the word MAYBE), ready to wait for the next bull run. So what are good financial indicators? Here are someWhat to invest in ?This is a tricky question. We can never know what boom will be next. Real Estate again? or Power? or Ethanol maybe? who knows! But remember, as long as it is a healthy economic boom and not just a 100% bubble, it will always lead to flourishing of one or all of the following sectors.
Other less obvious investment options are companies like Praj Industries. In any healthy economic activity, the demand for crude is going to increase. Although the crude is very low priced at this point, the crude oil levels of the world are at low levels. Unless we discoveries of new huge crude oil reserves, the next boom is going to hasten the need to alternative fuel. Ethanol or BioDiesel definitely stand a chance to get serious attention amont other things. Praj industries has the potential to emerge as a global leader in this area. You may also consider other companies benfiting from high oil prices, e.g. ONGC.
The journey of an investor - right from the point when she/he starts wondering about questions like "How to invest in Stock Market?" "How to Buy Stocks?" to the point where she/he reaches the stage of actually making a regular healthy income from the stock market investments - is quite interesting. The goal of this post is to give a glimpse of this journey to those who are right at the starting point and wondering "How to invest in Stocks?"
As an investor you will have to go through several stages.Opening a trading account to actually be able to buy and sell stocks is the first step. You will have to sign up with an online broker. After you sign up you will have to learn to use the trading platform of that online broker to buy and sell stocks. If you are in India, you will also have to apply for a PAN card and then open a Demat Account.
Stage 1: Learning how to buy stocks? Opening Online trading account.Stage 2: Learning the Stock Market Jargon.For this my friend you will have to do lots of reading. You must know what is a stop-loss order?, what is P/E ratio, how to roughly evaluate a company? and lots of similar stuff. It cannot be written in a single post but is not difficult at all. If you have difficulty in figuring out the answer to any of these leave a comment and I'll try to help you. However, i suggest learning and side by side also making small investments to figure out actually how things work. Otherwise it is just boring to keep reading and reading without actually buying stocks.Stage 3: Choosing your style of investing in Stock Market.Choosing the best style of investing in stock market that suits you is perhaps one of the very important key to big success. There are several styles.
For example, Intraday trading does not suit me at all. I think anyone who has a full time job and cannot take too much adventure and daily stress should avoid Intraday. I am much better and comfortable with swing trading or investing from the long term point of view. However it may suit you and you have to do some trial error to find out your own style.Stage 4: Making a loss - learning some discipline - making regular incomeI dont believe you can be a mature investor until you have made some losses and learnt lessons. Well, not that I am trying to tell you to make a loss :) It is anyway going to happen some day. Making an occasional loss is part of the game. What you have to do is try to develop a method to cut your losses. Surprisingly it takes a lot of time for people to realise that a systematic method or plan is needed for investing in stocks - for example your own predecided plan of when to buy a stock , when to book profits, when to quit and accept a loss etc. In my experience sticking to an investing plan is more difficult than making one. Ofcourse you will have to keep modifying your investing strategy and make it better and better. But it is important to have a strategy before you enter a trade. Only those who make and stick to a investing strategy succeed in making regular monthly income from stock markets. Others make occassional profits and occassional losses but perhaps very few of them actually become rich in this way.Stage 5: Advanced Stage - learning some more advanced language.After you have learned and mastered the art of investing in stocks you will have to, at some point learn about advanced risk management and hedging techniques using Futures and Options. These are very useful from my viewpoint, especially if the size of your investment is very large. In this post I wont discuss anything about hedging strategies but just would like to point out that there is still more to do after Stage 4.
In all your above journey what will be most important to make judgements about a stock - and also judgements about the economy as a whole. It is best in my opinion to select some investing bloggers you like and try to follow them regularly.
I wish you all the best and happy investing !
This post was selected for Carnival of Personal Finance #191.
Companies with high growth are usually the darling of a lot of investors. However, there is a risk as well as a reward in choosing such options. In this post I am simply going to discuss some factors which every investor must keep in mind before simply going after 'high growth' companies.The Risk involvedYou have to remember that in majority of the cases, the fact that the company is growing rapidly is 'built into' the price. For example, if a company is expected to grow at say 10% per anum in the coming years, then people usually pay a price at around 10P/E, i.e. 10 times the EPS (actual price depends on other details, but roughly!). Now your high growth company, say is expected to grow at 50% per anum, then chances are that it is already trading at perhaps 50P/E! So already people are paying several times more for it than for other 'moderate' growth companies. The risk involved here is that the growth may not be sustainable. If suddenly, the next year is bad for either the company or the economy as a whole, then suddenly, the estimate of 50% growth will fall to 20% growth and the price of the share will plummet by a large percentage. This can essentially wipe out a big chunk of your investment in such a company. If you think its unlikely, look at what happened to real estate stocks in this recession, or IT stocks after the IT bubble burst. Ofcourse all stock prices have come down. But those high P/E, high growth companies have plummeted more.The RewardThe reward is easier to describe. If suppose the company does sustain the expected growth, say 50% as in the above example, then in one year your investment will give returns of 50% ! The gamble or the skill involved is in actually deciding whether the expected growth is sustainable.Words of CautionThere are a few things that you must remember are very dangerous.
Related Posts on Financial concepts and Investment Basics |
Being a successful investor is a game of patience and discipline. As an investor, you have two options- either learn discipline or keep taking occassional big hits.
In this post I am going to explain the importance of placing a stop loss order by two different methods.
The first method: (Plain suggestion): It is very important to keep a stop loss for any transaction you make. What that stop loss is going to be is for you to decide (before you enter that trade- not in between). Say for example you buy a stock for Rs. 100 thinking that it will reach 110. Ask yourself: if things turn out unfavourable, how much will this stock go down? The more your answer is based on some facts and research, the better. Say you think there is no way (or it is unlikely) that the price of this stock is going below 90/-. Then keep a stop loss of 90 or maybe 85 and stick to it ! If the price falls below 85 - Get the hell out ! It is natural for every investor to have a feeling of the type " ok , now the price has fallen to 85/-, its really low, no point selling it now. This stock can only go up from this point". Well. this is not investing. This is emotion. To summarize: Avoid emotions. Place a stop loss before entering a trade and follow it.
Here is the second method. I know that not all of you will follow this. But if you really want to take investing seriously i suggest you try this experiment.
Experiment : Set aside a couple of thousand rupees, an amount which you dont mind being paid for learning valuable investing lesssons. I had set aside Rs. 2500/-. Then try to do intraday trading without paying too much attention to stop loss. Keep a target that you must earn at least a couple of percent, say 5% of money and try to double this amount in about two weeks !
I will not disclose in this post what will be the result, or rather what experience I had, but believe me it is actually worth trying this. Not just reading. It will teach you the importance of discipline in investing much more than any blog post or a book can teach you.
To summarize the post, let me mention that there are three types of orders you can place.
When i said keep a stop loss, i do not mean that you should always actually place a 'stop loss order' on your online trading account. It could just be a 'manually triggered stop loss order', i.e. you keep watching the price and get out if it is worse than your pre-decided tolerable limit - or stop loss.
Has the stock market crash eaten up more than 40% of your portfolio? Would you like to minimize the effects of such disasters in the coming year? Are you confused about what investment strategy to follow, where to invest in 2009, how to build your portfolio etc. In this post I will outline one simple effective investment strategy which will help you make the most of your stock market investments.
Best Stocks to Invest in 2009
How to invest in a recession?
Make money in the next bull run!
In this post I am going to explain the concept of a Futures contract. Just like any other investment ideas, there are three things about Futures or Options that you must understand.
Options Greeks Stock Market Derivatives: Futures, Options Options Trading Basics In the Money Stock Options At the Money Stock Options Out of the Money Stock Options |
I have recently been getting a lot of visitors searching for How to buy shares using your Demat account? or How to place order using your Dmat account? and so on.
First you must understand that Demat Account is merely an account which 'keeps' your shares. Just as a savings account in a Bank keeps your money. Now if you want to buy shares "using" your Demat account you need to either have an Online Trading Account or find some Broker. You can either directly place an order with the Online Trading account with a few clicks, or you can call/tell your Broker to buy the shares for you.
There are two things you can do with the shares or stocks or equities that you buy. You can either sell them on the same day itself. Such buying and selling of shares on the same days is called intraday trading. Or you can choose to 'keep' those shares in your demat account (to be sold at a later date at your discretion), an action usually referred to as "take delivery" of those shares. Such a trade would be called "Delivery". The brokerage charged for delivery trades is typically more than that charged for Intraday trades. Read my post on comparison of brokerage charges in India to get an idea about how much brokerage is charged for Intraday and Delivery by leading brokerage houses in India.
T+3 rule
Remember that once you place a delivery order for shares (or stocks or equities) with a broker or on your online trading account, they are not immediately deposited in your demat account. They will only be deposited on the 3rd business day. T in T+3 refers to trade or the day on which trade has taken place.
Can shares bought for Delivery be sold on the next day itself, before having to wait for 3rd day on which they are deposited in your Demat account? Yes! this type of trade is called "Obligation". I'll write more about it later.
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