Day trading or stock trading explained

Those who are the readers of my article are well aware about I am totally against stock trading or day trading. It is because of the following reasons. As I explained in my various articles, we can find two types of people dealing with stock markets. First one is stock investors and later is stock traders. An investor should be aware about the meaning of both investing styles and need to select proper path to build wealth. Please read the below article carefully:

Day trading as know as stock trading is nothing but deal with a small period of time. Stock traders buy stock and immediately sell the stock after an hour or couple of hours. They are mainly using the technique called technical analysis to analyze the up and down as well as the profit possibility of a stock. They are entirely depends on the day to day changes happening in the economy as well as political conditions in there own country to predict whether the stock market move up or down in the same day or the next day by the influences of these factors.

Technical analysis is a method to analyze stocks by collecting its historical uptrend and down trend data as well as the past buy and sell volume details. Till now, I have not understood the idea behind this analysis method and how it help a trader to decide the future trend of a stock. It is entirely depends on the confidence of a trader and the money he has in his hand.

In simple words, stock trading is nothing but another kind of gambling. It is similar to an online lottery buyer, who selects his numbers from the given group. If those numbers are in the winning list, he will get money or he will loose money. There is no neutralization in this activity. Either you will get money or will lose money. An example, if a day trader buying a stock and the price sustaining in the same. After some time he is deciding to sell the stocks. In such situation, he will not get any money because stock price is intact but he will lose money in the name of broker commission.

The psychology behind a stock trader is more interesting. Majority of them commit to stock trading by the influence of other traders. They are thinking in a way that, trading activity is the best way to make enough money in less time with very less work. This is one of the worst thought about money because, from the experience of legend investors, money required enough time to grow. To strengthen the same, I can argue that by saying no legend stock traders in the world available by a famous name as well as the record of continuous profit from short term stock trading. We can see legend stock investors, who are investing on the stock for long term by thoroughly study the possible future profit possibilities of a stock, today as well as in the history. Warren Buffet is the best example for the stock investing genius today.

As a newbie, selecting the stock trading instead of stock investing path is very dangerous because of its gambling nature as well as non availability of trustful resources. It is always advisable for a newbie to select other available investment instruments to get 100% equity exposure. Deal with direct equity investment only after achieving enough knowledge.

This article will be a great help for newbie to identify various investment instruments other than direct equity investments, to get equity exposure other than direct equity investments without proper knowledge.

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What are the reasons behind huge stock market fall

All of we are aware about the fluctuations in the stock markets. Stock markets should have fluctuations to throw up buying and selling opportunities to investors. A continuous growing index never give you better buy or sell opportunities. But, what are the possible reasons behind huge market falls? This article revealing such major factors, that can affect a market at any time and can give huge lose to investors if not acting properly. Keep reading..

1. Inflation : The most dreadful and dangerous reason behind any stock market fall. Raising prices for all the available resources will increase the production costs and thus will affect companies profit and stock holder earnings. This situation can bring a market down immediately. If such situation arises, investors will be panic and immediately try to sell the stock holdings they have, to book maximum profit. Growing interest rate also a fearful truth when inflation reaching high.

2. Instable political conditions - Instability of government in any country can affect stock markets immediately. Expectations on a general election and right or wrong predictions on the negative possible actions by future government can be oil to the panic fire. This will lead investors to make sell decisions to book profit at the earliest. Immense selling activities lead the stock market to down trend.

3. Fuel price hike - International fuel price hike can affect companies badly with large production costs and that will negatively reflect to profit and earnings. This can be an another good reason for huge down trend.

4. US economy slowdown - As the only superpower in the world, economic growth in US have major influence to the growth of other countries. Present down fall of all prominent stock markets worldwide is a clear example of this influence by the slow US growth of US economy.

5. War clouds and rumors- Continuous newses on a war or possible attack on any country can affect the stock markets worldwide. If the country under such treat and is a major producer of anything that world eagerly required, will certainly affect world economies as well as stock markets growth. Best example is Iran. They are major producers of Oil and most of the economies in the world are there customers. Recent newses on America's war preparation against Iran raised the fuel price very rapidly. This action caused huge increase in companies production costs and thus the financial results are not good as expected. Low earnings and reducing profit are the major reason behind the huge market down fall of most third world countries.

6. Large selling activity by FII's and institutional bodies - Foreign Institutional Investors activity have major influence in any stock market. Most of the retail investors doesn't have enough knowledge but they are always eager to watch the activities going on the stock market. FII's activities will be always under there lens. Large FII selling activity immediately raise panic alarm to these retail investors and they also start to sell there holdings. This continuous selling activity can bring stock markets down.

7. Rumors: rumors in between the retails investors can put the stock market in pressure and possible down trend. Investor should be conscious about the fact inside the rumor. If you are aware investor, you can be alert immediately to utilize the possible forthcoming buying opportunities.

Above are some major reasons that can badly affect a stock market and can pull the index down. In a growing economy like India or China, most of the bear timings are temporary and offering excellent opportunity to retail investors as well as organizational bodies to buy there favorite stocks cheaply.

As a long term investor, invested with carefully selected good growth companies, we are no need to panic on any down falls by any of the above reasons or factors. This is a truth revealed by legend value investors by there actions and is always a clear winner on short term traders.

There are numerous other factors can bring a market to down path. But most of them seems to be temporary. Above mentioned factors can start a bear run for long term or considerable time. Carefully investing is the only way to overcome such situations. As I mentioned in my previous article, patience is the must have quality for a customer to overcome such situations that put you in panic and lead you to take wrong decisions.

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Calculating inflation adjusted future expense amount

All of us are worry about inflation. Inflation can not only raise the cost but also able to drag down your living standard to pit holes. In a best investment plan or financial plan, a financial advisor or an investment consultant should be able to calculate the future possible inflation rates and advise investments that able to beat inflation as well as provide inflation adjusted returns to his or her client after certain years.

As an individual, we should have well idea about how calculate our inflation adjusted expense in the future. If the present expense is 10,000 per month in any currency with present inflation rates but, in the future, say after 15 or 20 years, an expected inflation of 5% or 7%, then how can you calculate the amount required to bear each months expenses at that time?

Here is a simple but very effective calculation method that you can use to identify the total amount you required each month after 20 years and expected inflation rate is 7%.

The formula for the same is =Present Amount*(1+inflation%)^Number of Years

To simplify the same, you have a present monthly expense is 25,000 and after 20 years, say the expected inflation rate is 7%, then what will be the amount you required per month after said 20 years? Calculate like this:

=25000*(1+7%)^20 (You can use and MS Excel sheet to easily calculate this)

This will give you a horrible amount of 96742.11 required each month after 20 years to bear your monthly expenses if the inflation rate is 7%. If the inflation rate is 5%, then you will get a consolidated amount of 66332.44 as well.

Simple to calculate isn't it?

Remember you have to identify the rate of inflation you are expecting after several years. This is an important point to consider when dealing with financial planning . All the investments should park with proper instruments with balanced why to beat inflation. To do this, you should be able to calculate the expected inflation % and required inflation adjusted returns after your intended years by comparing the amount for your present monthly expenses. This formula can help you to identify the later i.e. the amount you required after intended years by comparing your present monthly expense amount.

As a bonus, below are some of the instruments you can consider to park your investment amounts to beat the inflation as well as get the inflation adjusted return in a long run.

1. Gold - Coins, Bars, ETF, Investing on gold companies and funds
2. Real Estate - In the form of residential or commercial property, real estate funds etc..
3. Equity investments: In the form of Direct stock investments, high growth equity mutual funds, ETF i.e. Exchange Traded Funds, Index funds
4. International equity exposure: Have a reasonable international equity exposure by subscribing good mutual funds who investing to international stocks especially to the growing economies.

Below are the instruments never give you inflation adjusted returns. In a simple word, they are flop when inflation is in the subject:

1. Bank FD's
2. Debt funds
3. Post office savings schemes
4. Traditional insurance Plans

As a thumb rule, if you plan to add instruments that you expecting to beat inflation in the future, never give major portion for debt instruments. Instead, go ahead with the instruments I mentioned first, that can beat inflation.

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How to invest in the market

There are lots of doubts on the subject issue. Most of the question I faced from new investors who is very newbie to investing but want to invest in stocks. Daily newses on the down market and fair valuation of best companies attracting lots of new investors to invest in stock market. Most of them have doubt to where they can start and how they buy shares from the stock market. "How to invest in stock market?" is the question from them as the result of this thought. Below is the possible way to invest in stock market for newbies.

1. Open an online trading account and start purchase and sell shares. (Opening an off-line account also will do to those who doesn't have internet facility. But, each time you have to call the broker and give your instructions to purchase and sell shares.)

2. Invest through mutual funds: This is known as the best methods to those who have very little knowledge on selecting and buying direct equity or stocks from stock exchange. This method not only make you to be a disciplined investor as well as your money will be managed by professionals.

Always choose the SIP (Systematic Investment Plan) method to purchase mutual funds. This is one of the best method to escape from huge lose as well as not bothering about the market volatility. Through SIP, you are authorizing the Mutual fund company to collect a fixed amount from your bank in a quarterly or monthly basis and purchase the mutual fund units.

For a newbie this is the best advisable method to have very good equity exposure to his portfolio.

Only point is to remember is, always select best performing mutual fund by considering its performance compare with peers as well as the capacity to generate long term income.

3. Buy Index Funds - You can buy good index funds to have maximum equity exposure to your portfolio. Can subscribe the index funds by contacting the Mutual fund companies. SIP method also applicable to these too.

4. Buy ETFs - Exchange Traded Funds also a good option to get full equity exposure. You can purchase ETFs just like how you purchase shares directly. Because of its nature, a newbie can purchase this and hold for long term to get very good returns from the economy growth. To purchase ETFs, you required to open a DMAT account as I mentioned earlier.

5. Portfolio Diversification to beat inflation: Diversifying portfolio not only give you exposure with multiple products but it is a good idea to beat against inflation. To diversify, you can have real estate mutual funds, international funds and gold funds and gold ETFs to your portfolio. All these investments are good to beat inflation.

Always remember this points:

1. It is not recommended to a newbie to enter direct equity market without gaining proper knowledge.

2. Always use SIP (Systematic Investment Plan) to purchase mutual funds to reduce your risk.

3. Don't over diversify your portfolio. Investor should identify proper proportion of various investments depends on his goal, risk taking capacity.

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Fail proof investing principles of Warren Buffet

There is only one word in the investment world to show the power of success. Warren Buffett!. His passion, learnings as a student to value investment legend Benjamin Graham and self developed fail proof investing principles enabled him to reach in the maximum height of success. Today he knew as the most successful value investor as well as second richest person in the world. His principles and advices are invaluable treasures for value investors. There are lots to learn from his professional and personal life. Below are the golden points where he trusted wholly as a most successful investment career, certainly help us to be a successful value investor. Take it!!

1. Choose Simplicity over Complexity
When investing, keep it simple. Do what’s easy and obvious.

If you don’t understand a business, don’t buy it.

2. Make Your Own Investment Decisions
Don’t listen to the brokers, the analysts, or the pundits. Figure it out for yourself.

Become a value investor. It’s proven to be a very rewarding technique over the long term.

3. Maintain Proper Temperament
Let other people overreact to the market.

To succeed in the market, you need only ordinary intelligence. But in addition, you need the kind of temperament to help you ride out the storms and stick to your long-term plans. If you can stay cool while those around you are panicking, you can surely prevail.

4. Be Patient
Think 10 years, rather than 10 minutes

Don’t dwell on the price of stocks. Instead, study the underlying business, its earnings capacity and its future. If the question is, “How long will you wait?” – “If we’re in the right place, we’ll wait indefinitely” says Buffet.

5. Buy Business, Not Stocks
Once you get into the right business, you can let everyone else worry about the stock market.

Business performance is the key to picking stocks. Study the long-term track record of any company that is on your buy list. Buffet looks for following five main things before investing in a company.

(i) Business he can understand
(ii) Companies with favorable long-term prospects
(iii) Business operated by honest and competent people
(iv) Businesses priced very attractively
(v) Business with free cash flow
Don’t think about “stock in the short term.” Think about “business in the long term”.

6. Look for a Company that is a Franchise
Some businesses are “franchises”. Franchise generates free cash flows.

7. Buy Low-Tech, Not High-Tech
Successful investing is rarely a gee-whiz activity. It’s less often about rockets and lasers and more often about bricks, carpets, paint, shaving blades and insulation.

Do not be tempted by get-rich-quick deals involving relatively complex companies (e.g., high-tech companies). They are the most unpredictable in the long run. Look for the absence of change. Look for the business whose only change in the future will be doing more business, e.g Gillette Blades.

8. Concentrate Your Stock Investments
A the “Noah’s Ark” style of investing – that is, a little of this, a little of that. Better to have a smaller number of investments with more of your money in each.

Portfolio concentration – the opposite of diversification – also has the power to focus the mind. If you’re putting your eggs in only a few baskets, you’re far less likely to make investments on impulse or emotion.

9. Practice Inactivity, Not Hyperactivity
There are times when doing nothing is a sign of investing brilliance.

Be a decade’s trader, not a day trader.

10. Don’t Look at the Ticker
Tickers are all about prices. Investing is about a lot more than prices. It is about value. It is about wealth.

Abstain from looking at share prices every day. Study the playing field and not the scoreboard. Know the value of something rather than the price of everything.

11. View Market Downturns as Buying Opportunities
Market downturns aren’t body blows; they are buying opportunities.

Change your investing mind-set. Reprogram your thinking. Learn to like a sinking market because it presents great buying opportunity. Pounce when the three variables come together. When a strong business with an enduring competitive advantage, strong management, and a low stock price come onto your investment screen.

12. Don’t Swing at Every Pitch
What if you had to predict how every stock in the Standard & Poor’s (S&P) 500 would do over the next few years? In this scenario you have very poor chance of being correct. But if your job was to find only one stock among those 500 that would do well? In this revised scenario you have a good chance.

A few good investments are all that is needed.

13. Ignore the Macro; Focus on the Micro
The big things – the large trends that are external to the business – don’t matter. It’s the little things, the things that are business-specific, that count.

It’s possible to imagine a cataclysm so terrible that the markets would collapse and not bounce back. Externalities don’t matter – and you can’t predict them, anyway. And what can you do about them? Focus on what you can know: the workings of a good business.

14. Take a Close Look at Management
The analysis begins – and sometimes ends – with one key question: Who’s in charge here?

Assess the management team before you invest. A investing in any company that has a record of financial or accounting shenanigans, (creative accounting, accounting jugglery). Weak accounting usually means weak business performance. Strong companies do not have to resort to tricks.

15. Remember, The Emperor Wears No Clothes on Wall Street
Wall Street is the only place where people go to in Rolls Royce to get advice from people who take the subway.

Ignore the charts. A value investor is not concerned with charts. Invest like Benjamin Graham. Graham told investors to “search for discrepancies between the value of a business and the price of small pieces of that business in the market.” This is the key to value investing, and it’s far more productive than getting dizzy studying hundreds of stock charts.

Offer documents of most mutual funds say – in small print – that past performance is no guarantee of future success. Buffet says the same thing about the market: If history revealed the path to riches, librarians would be rich.

16. Practice Independent Thinking
When investing, you need to think independently

Make independent thinking one of your portfolio's greatest assets. Being smart isn’t good enough, says Buffet. Lots of high-IQ people fall victim to the herd mentality. Independent thinking is one of Buffet’s greatest strengths. Make it one of your own.

17. Stay within Your Circle of Competence
Develop a zone of expertise, operative within that zone.

Write down the industries and businesses with which you feel most comfortable. Confine your investments to them.

18. Ignore Stock Market Forecasts
Short-term forecasts of stock or bond prices are useless. They tell you more about the forecaster than they tell you about the future. Take the time you would spend listening to forecasts and instead use it to analyze a business’s track record. Develop an investing strategy that does not depend on the overall movement of the market.

19. Understand “Mr. Market” and the “Margin of Safety”
What makes for a good investor? A good investor is one who combines good business judgment with an ability to ignore the wild swings of the marketplace. When the emotions start to swirl, remember Ben Graham’s “Mr. Market” concept, and look for a “Margin of Safety”.

Make sure that you also understand Buffet’s concepts of Mr. Market and the margin of safety. Like the Lord, the market helps those who help themselves. But, unlike God, the market doesn’t forgive those who “know not what they do”.

Bide your time, and wait for Mr. Market to get depressed and lower stock prices enough to provide a margin-of-safety buying opportunity.

20. Be Fearful when Others Are Greedy and Greedy When Others Are Fearful
You can safely predict that people will be greedy, fearful, or foolish. Trouble is you just can’t predict when or in what order.

Buy when people are selling and sell when people are buying.

21. Read, Read Some More, and Then Think
Mr. Warren Buffet spends something like six hours a day reading and an hour or two on the phone. The rest of the time, he thinks.

He therefore advises get in the habit of reading. The best thing to start is to read Buffett’s annual reports and letters. Finally, restrict your time only to things worth reading.

22. Use All Your Horsepower
How big is your engine, and how efficiently do you put it to work? Warren Buffett suggests that lots of people have “400 – horsepower engines” but only 100 horsepower of output. Smart people, in other words, often allow themselves to get distracted from the task at hand and act in irrational ways. The person who gets full output from a 200-horse-power engine, says Buffett, is a lot better off.

Make sure that you have the right role models. Strive for rational behavior, good habits, and proper temperament. Write down the habits, practices and philosophies that you want to make your own. Then be sure to keep track of them and eventually own them. Financial success is a “matter of having the right habits”.

23. A the Costly Mistakes of Others
This is self explanatory and need no comments!

24. Become a Sound Investor
Buffet says that Ben Graham was about “sound investing”. He wasn’t about brilliant investing or fads and fashions, and the good thing about sound investing is that it can make you wealthy if you are in not too much of a hurry, and it never makes you poor.

To become a sound investor, you need to develop sound investing habits. Always fight the noise to get the real story. Always practice continuous improvement.

It’s less about solving difficult business problems, says Warren Buffet, and more about avoiding them. It’s about finding and stepping over “one-foot hurdles” rather than developing the extraordinary skills needed to clear seven-foot hurdles

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Simplifying Benjamin Graham's famous "Margin of Safety" formula

Margin of safety is a formula to identify the difference between company value and price. If value and price are equal, the stock price considered as fairly valued. If price is more than the value, then you can assume that the stock is overprices. If price is less than value, this is a good buy because there is lots of room available for better profit in the future. All are correct. But, hoe do you find out the value and price? That is the question. This is a magic formula from legend investor Benjamin Graham with success stories from another legend Warren Buffett. find the magic below:

In the “Intelligent Investor”, Benjamin Graham describes a formula he used to value stocks. He disregarded complicated calculations and kept his formula simple. In his words: “Our study of the various methods has led us to suggest a foreshortened and quite simple formula for the evaluation of growth stocks, which is intended to produce figures fairly close to those resulting from the more refined mathematical calculations.”

The formula as described by Graham in 1962 edition of “Security Analysis”, is as follows:




V = Intrinsic Value
EPS = Trailing Twelve Months Earnings Per Share
8.5 = P/E base for a no-growth company
g = reasonably expected 7 to 10 year growth rate

Where the expected annual growth rate “should be that expected over the next seven to ten years.” Graham’s formula took no account of prevailing interest rates.

This highly simplistic formula has little practical value to most value investors. A company with an expected growth rate of 10% in EPS could have a P/E (Price/Earnings) of 28.5 to be considered a buy. Most value investors would reject it. At least half of the stocks in the S&P 500 meet this criteria and most value investors wouldn't buy them at a P/E of 28.5 or anything close.

On the other hand, if it could grow earnings at that rate for 30 years, it would be a bargain.

However, Graham also preached Margin of Safety. Therefore, taking this formula and allowing a 50% Margin of Safety you arrive at a P/E of 14.25 in the above example. Many value investors would take a hard look at a company with a 14.5 P/E growing earnings at 10% a year.

Then, he revised his formula in 1974 (Benjamin Graham, “The Decade 1965-1974: Its significance for Financial Analysts,” The Renaissance of Value) as follows:

Graham suggested a straight forward practical tool for evaluating a stock’s intrinsic value. His model represents a down-to-earth valuation approach that focuses on the key market-related and company-specific variables.

The Graham formula proposes to calculate a company’s intrinsic value V* as:




Where:

EPS : the company’s last 12-month earnings per share. g : the company’s long-term (five years) earnings growth estimate. 8.5 : the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham. 4.4 : the average yield of high-grade corporate bonds in 1962, when this model was introduced. Y : the current yield on AAA corporate bonds To apply this approach to a buy-sell decision, each company’s relative Graham value (RGV) can be determined by dividing the stock’s intrinsic value V* by its current price P:




An RGV of less than one indicates an overvalued stock and should not be bought, while an RGV of greater than one indicates an undervalued stock and should be bought.

Because of the measures it uses, difficulties may be encountered in evaluating both new and small company stocks using this model as well as any stock with inconsistent EPS growth. It is efficient because of its simplicity but it also limits it: the model doesn’t work well for every stock.
Thus, the calculation is subjective when considered on its own. It should never be used in isolation; the investor must take into account other factors such as:

• Net Current Asset Value in order to determine the financial viability of the firm in question

• Current Asset Value in order to determine short-term financial viability of the firm

• Debt to equity ratio

• Quality of the Current Assets.

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It's note worthy that 1974 was the crash of the Nifty Fifty and it would be interesting to see how Graham's original and revised formula would have performed with this group of Wall Street darlings.

Source: wikipedia

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