Market is Myopia!!!

“Stock Market, Oh this is something unrelated to me”. This is the opinion of many people regarding the stock market in India. Such common opinion among many in our country is owing to the fact that they are unaware of the market and they really don’t know what the stock market all about is. To those people definitely market would be myopia. Here is an article to those souls which actually gives you some basic idea about the stock market. After reading this article you definitely see the market clearly which was there always functioning around by your side for a long time.

There are two types of asset classes as far as market is concerned, (1) Traditional Asset Class and (2) Alternative Asset Class. The traditional asset class includes stocks, bonds and real estates. The alternative asset class includes vintage cars, vintage stamps, furniture, paintings, commodities, etc. Derivatives are not asset classes but they are derived from these asset classes. Hedge funds(currently not in India) are a form of investment and not an asset class. Currency is not an asset class for investment purpose but it is a measure of exchange. Generally Indian stock exchanges trade only on stocks and bonds. There are two types of investors (1) Institutional investors and (2) Non-institutional investors. The institutional investors are those having surplus cash and so thereby investing their own money into the market eg. banks, insurance companies, corporate, etc. The non institutional investors are those other than the institutional investors eg. Individuals, small investors, mass affluent, etc.

There are two types of risks involved before buying a company’s stock in the market

(1) Market Risk or Systematic Risk – Risk of investing in the stock market which cannot be nullified and it has to be faced.
(2) Business Risk or Non Systematic Risk – Risk which might arise due to the management and operation of the company and it can be nullified by means of portfolio diversification.

Portfolio: A portfolio is an appropriate mix of or collection of investments held by an institution or a private individual. Holding a portfolio is part of an investment and risk-limiting strategy called diversification. By owning several stocks in a portfolio one can nullify business specific risk. Generally it is assumed that as far as 40 different stocks in a particular portfolio would be able to remove the non systematic risk of that portfolio on the whole.

There is a general difference between a stock and a share which everyone has to understand before going any further. A share (also referred to as equity share) of stock means a share of ownership in a corporation (company). A company would be having two or three stocks at the maximum being traded in the stock exchange. All the items that are actively traded in the market are the shares of these stocks. For eg. Infosys in India has only one stock of face value Rs. 5 being traded in the market. We can buy only the shares of that stock from the market. A portfolio can have different variety of stocks (Eg. Infosys, Wipro, Sathyam, etc) with many number of shares in each variety. There is a general perception that the world markets are linked when they go down but the reverse is not true.
Markets are generally considered to be efficient. Eugene Fama, father of efficient market, formulated the Efficient Market Hypothesis (EMH). According to this hypothesis there are three forms of efficient markets,
(1) Weak Markets – It considers that history won’t make money. Only the present and the informed information would help people make money in the market.
(2) Semi-Strong Markets – According to this, both past and present information won’t help to make money. It is only the informed information that helps to make money in the market.
(3) Strong Markets – According to this, whatever information we have in hand will not help to make money in the market. The ground argument for such an assumption is got from the mosaic theory which presumes that everybody have the same set of information with them.

With this hypothesis as base, we consider our market to be Efficient Market. Basically our assumption dwells on the fact that the market captures all the information and the fundamental values of the companies in their share prices which are being traded in the market. Regulation posed by SEBI and BSC helps to maintain the market efficiency. All these regulations are called as microstructures.

Generally stocks are bought by the professional traders based on the following analysis reports
(1) Technical Analysis: People look at the past history and try to say how the markets would behave in the future. Usually past share price movement graphs are used to make the analysis. It requires three basic criteria: (a) find out the entry price, (b) find out the target price and (c) find out the stop-loss.
(2) Fundamental Analysis: Fundamental analysis is carried out to check whether the fundamentals of the company are strong by means of some ratios, industry analysis, company analysis, etc. It captures the actual worth of the company and from that it derives to the share value. Generally fundamental analysis is not worthwhile for short term investors as the data used for drafting the analysis are quarterly data which are not the immediate past as like the technical analysis data.

Only one of these analysis reports can be used to buy the stocks. No one can use both the reports to decide on for buying a stock. It is not necessary that all the investors in the market would be following any one of these analysis before investing. Most of the retail investments are made based on Noise Trading. Noise Trading means that somebody in the market follows the pattern of others without any basic reason as why to follow.

There are two types of investing fashion followed in the market
(1) Active Investing: Investing in stocks actively
(2) Passive Investing: Investing in index funds which are not considered as active investments as there is a lack of active trading in these stocks.
Investments can be done directly as done by the insurance companies or indirect investments can also be done as like that of mutual funds.

There are two major indexes in India, (1) Nifty – An index of fifty companies decided by National Stock Exchange (NSE) and (2) Sensex – An index of thirty companies decided by Bombay Stock Exchange (BSE). The companies in these indexes may be changing based on their performances. Indexes acts as the reference for the market as a whole. There may be a total of around 7000 stocks that are listed in the market out of which around 1000 would be traded in which around 100 would be actively traded by the traders in the market. The number of shares for a particular company that are freely available in the market can be found out using a parameter called free float.
Free Float = (Total Shares available for a company – Shares which are not available for trading).
There are three types of investment styles that are adapted by the investors in the market like investing in (1) Large cap companies (2) Mid cap companies and (3) Small cap companies. When the market goes up the large cap companies stock prices immediately reflect the market condition. But after that the stock prices of mid cap companies outperform than that of large cap companies. Nifty and Sensex, both are large cap indexes. So a large cap active manager would produce returns more than Nifty index. Companies offer stocks and bonds as the investors need to invest in the market.

Basically there are three different types of services are given to a high net worth individuals by the financial service institutions.
(1) Portfolio Advisory Services: Advises are given to the client regarding the kind of portfolio he can maintain in order to suit his requirements. The client may now buy the advised stocks from his broker.
(2) Portfolio Management: The portfolio manager of the financial institute gets the client’s money and invests himself in the stock market assuring a pre-confirmed return.
(3) Wealth Management: Cares about the inter-generational wealth transfer as it constitutes a lot of money when approached through proper legal channel.

People can either go on a short in stock trading or take a long position for a stock. Shorting is generally to sell the stocks immediately without the actual stock in hand with the view that the price of the shares of the stock would fall down in the future. On the contrary, taking a long position for a stock means to buy and keep the share of the stock for a longer duration.

The financial service institutions generally obtain the requirements of its clients before getting their money to play in the market. The requirement of the investors contain the following key things in it
(1) Amount to be invested
(2) Investment Objective
(3) Returns expected
(4) Time Period
(5) Investment Style
(6) Risk level (Portfolio Composition)
(7) Liquidity
(8) Fees for the service

Portfolio managers make money by means of playing wisely in these two fields
(1) Asset Allocation – Allocation of money in various asset classes
(2) Security Selection Process – Selecting the specific stocks in the portfolio
Thus the process of Security selection assures the 80% returns for the portfolio and the remaining 20% is acquired through proper asset allocation policy.

Stock Market is full of risks. By investing in stocks, one is exposed to the market risk whereas investing in bonds leads to credit risk in addition to the market risk. Both these markets have an operational risk which arises due to the malfunctioning of the computers in the stock exchanges.

These information would have given you a taste of the stock markets. Hope you got the idea right in your minds. This is just a lead into the no-extent deep blue ocean. Wait for some more distant swimming in this blue ocean which would be mentored through my next posts.

Account for Yourself

“You are responsible for the good and the bad that is happening in your life”. The one who realises this would excel in his life. Don’t think that I am being philosophical. What I meant was ‘Accounting is the key activity of success in one’s life which is essential to maintain the integrity of his life and his bank balance’. So it essential that everyone has to become accountants for their own accounts, either it may be a bank account or their emotional account. In order to have a glimpse about the basics of accounting I would suggest you to refer the book called “Financial Accounting” written by Reddy Murthy. It would give you the accounting principles in the simplest form. Some of the key terminologies in accounting that you have to know are jotted below. The train to accounting stars here ..

Accounting is a language used for identifying, measuring and communicating economic information for the users. The user may be internal (within the company) or external (outside the company) users.

Asset: Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property. There are two types of assets: Current Assets and Fixed Assets. Current Assets have shorter time span (a year or less) for liquidation whereas Fixed Assets have longer time span (more than a year) in general.

Liability: A liability is a financial obligation, debt, claim, or potential loss. There are two types of liabilities: Current Liabilities and Fixed Liabilities. Current Liabilities have shorter time span (a year or less) for liquidation whereas Fixed Liabilities have longer time span (more than a year) in general.

Debt: An accounting entry which results in either an increase in assets or a decrease in liabilities or net worth.

Credit: An accounting entry which results in either a decrease in assets or an increase in liabilities or net worth.

Debtors: A debtor is simply an entity that owes a debt to someone else, the entity could be an individual, a firm, a government, or an organization. The counterparty of this arrangement is called a creditor.

Creditors: A creditor is a party (e.g. person, organization, company, or government) that has a claim to the services of a second party. The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract) that the second party will return an equivalent property or service. The second party is frequently called a debtor or borrower.

Accounting Period: The period for which a business prepares its accounts. Internally, management accounts may be produced monthly or quarterly. Externally, financial accounts are produced for a period of 12 months, although this may vary when a business is set up or ceases or if it changes its accounting year end.

Share: The actual definition of a share is that a share is a share in the share capital of the company.

Profit and Loss Statement: A summary of a corporation's revenues, costs, and expenses within an accounting period--also called an "Income Statement". The balance statement and the profit and loss statement usually reflect a company’s financial condition. Because profits and losses relate to revenue inflows from business operations, a profit and loss statement is an income statement. It is written for a particular accounting period.

Trading Account: That part of an income statement which shows how the gross (operating) profit was generated through the firm's trading activities. Even this is written for a particular accounting period.

Balance Sheet: A balance sheet is a snapshot of a business’ financial condition at a specific moment in time, usually at the close of an accounting period. A balance sheet comprises assets, liabilities, and owners’ or stockholders’ equity. Assets and liabilities are divided into short- and long-term obligations including cash accounts such as checking, money market, or government securities. At any given time, assets must equal liabilities plus owners’ equity. Thus the balance sheet captures the firms total assets and liabilities as on that date.

A Skeleton of a Balance Sheet

GOLDEN RULES OF ACCOUNTING
DEBIT the receiver
CREDIT the giver
DEBIT what comes in
CREDIT what goes out
DEBIT all expenses and losses
CREDIT all incomes and gains

With these basics throw over, let’s go in for the actual structure of Trading and Profit and Loss Account and Balance Sheet of a manufacturing firm as an example.

TRADING and PROFIT & LOSS A/C DEBIT side consists of EXPENSES.
TRADING and PROFIT & LOSS A/C CREDIT side consists of INCOMES.

The above information would have given you a glimpse of what is accounting all about. This base is enough to provide confidence in your mind about accounting. This would ensure you to take any further developments in your accounting knowledge without any hesitation.

Touch of Finance is Essential for Our Daily Life!!!

Finance, Yuck....... This is the idea of finance in most our minds. One main reason for us to frame such an image about finance is the number crunching operation the field demands. It is also because of the fact that we lack good mentors to provide us with clear insights in this area. But after joining my MBA it happened for me to change my views about this field. If the person who teaches you finance is clear about the stream then definitely you would have a better insight about the stream as such. So don’t just hear to every ones views as far as finance is concerned as it is field where you may get lost anywhere in the middle. Choose your mentor clearly at the beginning itself in order to develop interest in the field.
Interest is the key tool for you to master in finance. This is not only for finance but it is true for all the learnings that we are about to. But finance particularly demands ‘interest’ as the basic requirement to carry on. If you are not clear about a concept in finance don’t ever give up. Read more and more on that concept and try to clarify it with the people who know about that concept very well. The stream of finance is very much important even to lead our day to day life. For example, in a middleclass family the head lady trying to tally that month’s expenses with the income is literally what is known as ‘profit and loss statement’ in finance terms. So we are carrying out some of the core financial activities in our everyday life without knowing that it come under the stream of finance. Whatever you do, do it with the knowledge of know-how-to-do.
If you master yourself in finance then you can earn with ease in your life. I would suggest you to read a book called “Rich Dad Poor Dad” written by Robert T.Kiyosaki. He had given a good insight about the things that you must know in finance to lead a happy life. If you are out of financial troubles then definitely your life would be happy. So finance is only stream, which could give you both “Happiness and Sorrow”, which everyone has to face in their lives.

Dear Note

Hi all. I wish to share the learnings of my life, with you, through this blog. Since I had generalised as “learnings of my life”, this blog will not be oriented towards one specific stream. It would contain all the information, which I perceived so long and which I would perceive in the future, in all aspects technical, management and general life. Be free to comment on my writings so that it would be helpful for me to improvise in whatever I produce. So here I go with the first post...........