Wockhardt Hospitals & Emaar MGF cut IPO Prices

The market is setting more and more examples everyday about how everything depends upon the market situation and how helpless an investor as well as the big companies become when the timing is bad.

After so many stop-payments of cheques for Reliance Power IPO and so much speculation going on about the listing price of Reliance Power IPO – expectations generated from Grey market trading prices of Reliance Power IPO shares – it’ the turn of other companies to feel the heat in the IPO business.

In my review of Reliance power IPO, I had clearly mentioned the possible dangers of companies overpricing the stocks following the euphoria they see by the investors in the stock market. However, when things start to go from bad to worse, the same companies as well as the investors wake up to the senses, finally falling victims to the stock market timings.

The latest news to add to this IPO business is that two major IPO’s - Wockhardt Hospitals& Emaar MGF have slashed down their IPO prices significantly.

Wockhardt Hospitals Limited today said that it has lowered the price band of its initial public offering to Rs 225-260 per equity share.

The revision has been done in the light of current market conditions, the company said in a press release issued on Thursday.

The company had earlier fixed the price band for its IPO at between Rs 280-310 per equity share. The issue opens on Friday and closes on February 5.

Initially, the trade analysts were already of the view that the company has overpriced its IPO.

Other news is about EMAAR MGF:

Emaar MGF Land, which had planned to raise up to $1.8 billion in an initial public share offer in India, has cut its offer price a day before opening, becoming the second company to trim its issue because of market volatility.

The company said on Thursday the IPO price range, initially set at 610 rupees to 690 rupees ($15.50 to $17.50) per share, would be reduced to 540 rupees to 630 rupees ($13.7 to $16), cutting the maximum it can raise to $1.64 billion rupees.

What has gone wrong with these 2 companies? Have they lost their business or values or research or market in just past 1 month? No, it’s all dependent upon the market situation. The timing is bad, so is the anxiety of the investors. Everyone falls victim to market timings and the past month has proved to be a typical case of it. Nothing is certain, you apply for an IPO just 10 days back, within these 10 days, things turn from good to bad to worse. You can only observe the so called good company becoming a bad company (in stock market timings) or loosing significant value.

Markets give returns only in the long run. Today is the listing of Future Group Holding IPO. I hope the listing price of Future Group Holdings IPO is good enough to keep the investors faith. Wishing all the subscribers the very best of luck.
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Reliance Power IPO Listing Price expectation-Grey Market Trading Premiums

The markets are going ga-ga up and down, round and round, with no clear picture in sight at the moment. However, it’s also the time when the much awaited listing of Reliance Power is just about to happen in next few days with the allotment status already declared and the allotment expected to be completed this week.

What are the expectations from the Reliance Power IPO, what can be the listing price of Reliance Power IPO stock, what is the trading rate in the grey market for the Reliance Power IPO shares? Let’s see some of the news items related to these questions.

Investors who had invested their money are sitting with big hopes of getting a huge premium and a quick profit making opportunity. However, they are put off by the currently trading grey market premium of the Reliance Power IPO stock or shares.

Unfortunately, the grey market premium for the Reliance Power IPO that has been observed to see a continuous decline since the issue was brought to the markets. As per the news, the last seen grey market price of Reliance Power IPO stock was hovering around the Rs 150-160 level, i.e. against the issue price of 450, the total trading price in the grey market is around 600-610 only. This is in way short of the initially traded prices in the beginning days when the premium was more than Rs 450 or the trading price of 900 Rs. a share.

Here is the news that can be heard on business news channels and different news websites:
According to grey market dealers, there are people who are ready to sell their shares at a premium of Rs 150 but are not able to do so for the lack of buyers. “There are hardly any buyers in the market,” said a source. “While we may blame the global liquidity crisis for all the problem, the bottomline is that retail investors and HNIs have taken a hit,” he added.

Grey market refers to an over the counter market, where shares are traded before they are actually listed on the bourses. Interestingly, while the premium in this unofficial market cannot be taken as a benchmark for determining listing gains, it is always considered to be an important factor.

The premium plays an important role especially for investors, who borrow money to invest in public issues. The quantum of listing gains has to be more than the borrowing costs to make it a profitable proposition. Such costs cover the interest charged for borrowing money, which could be as high as 40-50% in a booming market.

Interestingly, it’s not only the Reliance Power IPO shares the only issue that have taken a hit. There are quite a few ongoing IPOs and some in the pipeline that are facing difficult times. The grey market premium for Shriram EPC is around Rs 30. Similarly, the premium of OnMobile Global is between Rs 30 and Rs 40. OnMobile was given a Crisil IPO grade of 4 indication ‘above average fundamentals.’

Issues like IRB Infrastructure, Bang Overseas, Cords Cable and J Kumar Infraprojects have all witnessed a fall in their respective grey market premium. However, sources say that Future Capital Holdings proved lucky with its premium remaining above the Rs 300 mark. The issue price has been fixed at the upper end of the band at Rs 765.

Interestingly, market participants are still of the opinion that the listing of Reliance Power will be a big event. “A huge premium or not, the whole nation will be glued to the screen when the stock lists on the bourses,” said a dealer with a domestic brokerage.

However, with the overall sentiment in the secondary market turning bearish, the issue took a hit with even reports of many investors issuing stop payment instructions to their banks. This is a good example (better to say a good lesson) for all the investors who believe that the so-called good companies, with great fundamentals are sure to make a faboulous listing on the listing day. It all depends upon the existing market situation, even good companies take a hit and even bad companies hit the jackpot. Anyways, the above mentioned details are only news items and no one can predict what can happen in the future. Let’s hope that the listing of Reliance Power IPO is a good one. All the best!!
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Reliance Power IPO Allotment Status

After the review of the much awaited Reliance power IPO, here is the news about the allotment status of the reliance power ipo applications.

A total of 43 lakhs or 4.3 million applications were received from the investors by the so-far largest IPO in Indian capital market history subscription. But each investor, who has applied for the issue, will get only 15 shares each in IPO. The retail investors who had applied for the maximum available limit of 225 shares, will receive only 15 shares each. Interestingly, anyone who applied for less than 225 shares, or less than the available maximum limit, will NOT receive a single share.

In total, 4 lakh investors who have applied for less than 225 shares, will not get any allotment. Another 3 lakh applications were disqualified on the basis of incorrect applications or entries.

Share allocation process is underway and will end on Thursday. The good news is that excess share application money refund will begin on Friday. So people who have opted for ECS refund can expect the money to be credited to their bank accounts by this weekend.

As per the news: Reliance Power, Anil Dhirubhai Ambani Group Company, had come out with an IPO of 22.8 crore shares with face value of Rs 10 each at a price band of Rs 405-450. Its issue had received an excellent response and subscribed 73.04 times and received bids worth about Rs 7.5 lakh crore.

Direct link is: http://www.karvy.com/ipostatus/ (Opens in a new Window)

Otherwise, you may also visit Karvy home Page and click on the Reliance Power IPO Allotment Status Button in the Center Top.(Opens in a new Window).

The reserve portion of QIBs subscribed 83 times and non institutional investors 190 times and retail nearly 15 times.

The issue received bids for 16.65 billion equity shares as against 22.8 crore shares on offer.

The company raised nearly Rs 10260 crore from this public issue excluding promoters’ contribution. Wishing all the applicants and the investors who received the shares a very happy and profitable listing of the Reliance IPO shares on the IPO listing day.
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Investing in IT stocks? TCS cuts employee salaries

Some bad news for the employees in the IT sector. TCS has decided to cut the salaries of the employees by about 1.5% for the January to March Quarter. The employees are already apprised of the news item. As per the news source, a typical software engineer with get a deduction of 2000 in the monthly salary for the remaining months in this financial year.

The claim made by the TCS management is that it's due to the dollar rising and quarterly loss. It is said that the dedcutions are justified as Recovery Losses - or "Taking back what was already paid".

TCS is one of the biggies in the IT sector, not only in India, but also worldwide. Trade and Investment Analysts are taking it as a strong signal for the weakening of IT sector. Apart from that, it may soon set a trend for other IT companies to follow. Remember, the major cost for an IT company is Human Capital and that's what takes the maximum cost.

Another big news is that TCS is set to takeover T-Systems, the German based IT major (As per CNBC). No wonder, if this acquisition goes through, then the employees of T-Systems may face the cutoffs to normalize their salaries in track with those of TCS.

Here is the news item from the Economic Times:

MUMBAI: Tata Consultancy Services (TCS), India’s largest software exporter, is effecting a small across-the-board cut in employee salaries based on the company’s performance in the third quarter, a move reflecting caution amid tough times for the outsourcing industry. A top company official confirmed the move while stock market analysts said TCS is sending signals that revenue growth has not met internal targets and employees can’t expect a big wage increase this year.

TCS has clipped a portion of the variable pay linked to its performance, effectively reducing an employee’s salary by about 1.5% for the January-March quarter, TCS executive director and global human resources head S Padmanabhan told ET. “We undertake a review of variable pay every quarter and this time, we decided to make an adjustment,” he said. “We will revisit it in April.”

This is the first time in two years that the IT giant has reduced the variable portion linked to company performance. Mr Padmanabhan said the outsourcing sector faces macroeconomic challenges, which had to be factored in the quarterly review. The variable pay related to individual performance has not been touched, he added.

“This can send a strong signal to the employees that revenues have not measured up to internal targets,” a Mumbai brokerage analyst said. “The cut is small and is unlikely to attract a howl of protests, but employees will get the message that all is not well with the sector. Instead of giving them a shock at the time of annual salary review, the management has sought to lower their expectations of wage inflation through this small cut,” the analyst said.

TCS had reported a 5% quarter-on-quarter revenue growth and 6.7% rise in net profit for October-December, in line with market expectations. It had expressed ‘cautious optimism’ in the face of fears over a US slowdown and reasserted its ability to manage the rise in rupee’s external value.

A recruitment expert said a move by any of the top three software companies to temper variable pay would be quickly followed by smaller companies. “In the last couple of months, we have seen some lead indicators that there is moderation in wage increases. Companies have been following a little bit of a cautious approach,” Ma Foi Consultants COO E Balaji said.

Ma Foi data reveal that yearly wage hikes have fallen to ‘high single percentages’ from 15-16%. Job-hoppers get not more than a 12-15% hike in their new jobs compared to 25-30% earlier. “It is all part of the business cycle. Once stability comes back, wages will return to normalcy,” Mr Balaji said.

After years of heady growth, India’s outsourcing industry is facing the prospect of a slowdown due to US economic worries triggered by the subprime mortgage crisis. Major clients may cut back their spending on technology and postpone upgradation.

Meanwhile, the profitability of companies like TCS has also been hit by the rapid rise in wages and rupee’s rally against the dollar. These companies will also come out of export-related income tax holiday next year. “This wage cut is a reflection of the caution. It reinforces the management view of macroeconomic challenges,” Harit Shah of Angel Broking said. Mr Padmanabhan said the company’s deal pipeline is strong and continues to grow. The review is part of a recurring quarterly process, he said.

Typically, a TCS employee gets 70% of salary as fixed component and the rest as variable. The latter, in turn, is split into one part linked to individual performance and the other to company performance. The company-related variable in paid in advance each quarter.

Outsourcing companies have asked investors to wait till late January to get a clearer picture of how the medium-term business outlook shapes up. TCS is the first company to align its wage payout to the unfolding environment. Other companies will be watched for their response, though a source said Infosys has been paying out 100% of performance-linked wages over the last three quarters.
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Review of Quantum Gold Fund (Gold ETF)

The famous and well known fund house Quantum Mutual Fund has come out with its first ever commodity-related mutual fund offering – titled as the Quantum Gold Fund.

Review of Quantum Gold Fund: Exchange Traded Fund
The Quantum Gold Fund is an open-ended Exchange Traded Fund (ETF), which will be listed on the National Stock Exchange of India (NSE), closely tracking the domestic prices of gold. Since its an open ended fund, any number of units can be created and redeemed at any time, as per the demand and supply requirements. Usually, there have been not many commodity based ETFs in India. We do have UTI Gold traded exchange fund and one or two more such offerings, but the choices are limited for investors looking for investing in such funds.

Should I invest in Quantum Gold Fund:

Traditionally, India has been the biggest consumer of gold and that holds true till date. However, high prices of gold have now made gold out of reach of the common man. Someone with just 5000 to 6000 amount cannot even think of buying 10 grams of gold, as the gold prices are hovering in the range of 11,00-12000. Hence, Investing in ETF’s which have lower prices for each unit can help the small investors.

How Gold based ETF’s help?

Gold (or any commodity) based ETF’s try to track the gold prices and if the fund management is efficient enough, then the fund unit price almost exactly replicates the price of gold in the market. However, the advantage of (gold based) ETF is that you don’t need to have the big amount of 11,000 to invest in gold. All you can simply do is buy a unit of such gold based ETF at a price which may be anything from 10 to 1000 per ETF share, and let it gain (or loose) in percentage terms while tracking the gold prices. Hence, it gives a very good option to investors who want to invest in gold (or other commodities) without actually buying it.

Another advantage of gold based ETF is that you don’t need to worry about safe storage of the gold. Since the ETF is bought as a share, it sits in your demat account. Hence, the worries of theft or loss of actual gold ornament or bars is gone.
However, one thing you must note is that buying ETF does not guarantee any returns. Since it tracks the gold prices, it can give you losses too. If you buy ETF worth 10 Rs. a unit when the gold price is at 10,000 and after one year the gold prices fall down to 8,000, then your ETF unit cost will also come down to Rs. 8 or so. Hence, there is no guarantee of profits.

Another disadvantage is the cost of brokerage or fund management charges – which one should be aware of while making investments.

The New Fund Offer (NFO) of the Quantum gold ETF scheme would be open from Thursday, 24th January, 2008 to Friday, 8th February 2008. During this NFO period, investors can subscribe to the scheme with a minimum investment of Rs 5,000 and further multiples of Rs 1,000. The Quantum Gold Fund seeks to offer investors an innovative, cost-efficient and secure way to invest in gold. The Fund enables investors to buy gold without the hassles of holding and storing physical gold. The Fund will closely track, before expenses, the movement in the price of the underlying asset-physical gold of 0.995 fineness. The good thing is that the Quantum Gold Fund will be the first Gold ETF in the country without any entry load during the NFO. Investors can try their luck on gold prices!
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Short Term Trading Strategies: Possbile Options

Short term traders live in their own world of fantasies. They make their own models, they make their own calculations, they make their own intra-day trading strategies and they make their own assumptions which lead to their trading.

How many of those assumptions are correct, that is proven only when they feel the jitters in the market – not the usual 1% to 3% intraday rise or fall, but massive fallout of say 10% or more.

It’s easy to say that “My observation has been that markets go up or down -1% to 2% everyday, so I’ll try and bet to capitalize on this range. I’ll attempt to buy at the -1% lowest range and attempt to sell at +2% highest ranges. In the process, I’ll make 3% or so profit.

The assumption looks good and is true also, as long as you can see the historical values of stock prices. However, it is NOT practical and becomes impossible to achieve when you start trading. The reason is that an intraday trader simply has no idea what is the -1% bottom price or what is the +2% upper price. Whether the stock will keep going down today or will it keep going up. More so, they don’t have any idea whether the bottom -1% price will be hit first or the top +2% price will be hit first. So whether they should first short and then go long or they should go long and then short – nothing is certain.

Another thing is that everyone in this world can observe this kind of price range on intraday basis on historical data. Markets are efficient. If it was so easy to follow this well observed price range, then everyone could easily make to 2%-3% profit on intraday basis and become billionaire within no time. Hundreds of books have been written, so many people run websites, so many blogs are now contributed towards short term trading, yet no body is there to guarantee anything.

Now, many other practical-lish assumptions are made. For example, Andy may like to go after the annual bank rate by following the 0.84% net profit per month from his trading activities. Overall, on annual basis, he attempts to make around 10%-11%, slightly higher than the bank rate. The question is, is it possible to achieve that?

Fortunately (or unfortunately), a lot of examples and lessons can be learnt from the recent mayhem that have hit in the Indian stock markets in the last few days. One such important lesson is about withstanding the sudden downfall in the markets.

Let’s take an example. I have a strategy that I want to make 12% per annum from stock trading business. So, if I can make even 1% per month, I can easily beat the bank rate of 10% by 2%. It is easy to make 1% in the stock market in a month, so I don’t see any problems with the strategy. Hence I start with 100,000 capital and at the end of the year I would like to see it translating into 112,000. I made my assumptions and started betting in the market on a monthly basis.

Continue to Part 2: Problems with Short Term Trading Strategies

Problems with Short Term Trading Strategies

This is part 2 of the article: Short Term Trading Strategies: Possbile Options. Please read the first part before continuing with this one.

The market is at 6000 level when I started trading. The first question I need to ask myself is, Out of 100,000 as initial capital, How much should I place on my first trade? I have options:

1) I can put entire 100,000 at 6000 levels of the market. But what will I do if the market falls to 4500 within 3 days? All I’m left with is my 100,000 translating into 75,000 and no further capital left with me to play around. A clear loss of 25% and no money to play around with any further. My strategy of monthly trading and getting 1% per month has failed miserably. I don’t know how many more months it may take for me to even recover my capital.

2) In the above case, I can do one thing as well. Book my losses, get back my 75,000 and start afresh. However, my target will now increase substantially. I need to reach 112,000 from 75,000. This becomes a 49.34% or almost 50% increase in the annual target or 4.2% per month. Compare it to the initial monthly target of 1% - it has quadrupled now. More so, is it really easy to achieve 4%+ monthly profits on your entire capital?

3) Other option is that I can place partial bets – say the first bet can be of only 10,000 and I keep my remaining 90,000 safe. Say instead of just 1%, my buy stock went up 4% in a month and I book my profits. Cool and easy 4% profit. However, this 4% is only on 10,000 not on entire 100,000. On the entire capital, you’ve earned only 0.4%. Annualize it, and it becomes only 4.8%. Even with a 4% monthly profit, that too consistently month after month, did you achieve the target of 12%? No, it’s way short of 12% by 7.2%

4) More options: Increase the bet amount. Come up with an increasing capital investment strategy. But are you sure how much you should bet each time? Whether you should book your monthly profits or should you let you profits run? If booking monthly profits, should you select another stock? If letting your profits run, how much should they go to?

Ultimately, you will see that you are left far behind in this complex market mechanism and stock trading circus. There is no such scheme which can give you consistent returns even of 0.5% each month, year on year in the stock market.

Need proof? Approach a Mutual Fund Manager and tell him that you want him to manage your 1 million dollars which should be invested only in the stock market (not in bank or bonds) and you need a sure shot monthly returns of 1% (12% annually). No fund manager would guarantee that for you.
Relax him a bit further. Tell him that he is free to play around with any stocks (including penny stocks), futures, options other derivatives. Can he still guarantee anything?

Need More proof? Approach your broker offering discretionary services. Ask him the same question giving him full liberty. Is he willing to do it for you?

The fact is that it is not easy to make money consistently in the market – however small your target is. There is a huge level of uncertainty, whether you aim for 1% profit per month or 12% profit per annum. Only long term investment can help, that too with your luck. You never know when you will need money; you never know when you may get completely wiped out. Happy and safe Investing!!!
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Mark to market (MTM) factor & Stock Market Fall Effects

There has been some respite for the traders and investors yesterday. From the lows of 4500, the stock market (Nifty) has again managed to climb back to 5200 levels.

However, in the process of this drastic transition, where the Nifty started declining from the high level of 6200 to the lows of 4500, many investors and traders have lost their capital. Even though the Nifty is again going to climb back, the traders and investors have lost their money because some sell stock orders were executed at the lowest of the low values.

Majority of that has been attributed to the MTM effect or the Mark To Market Factor. In this article, I’ll explain how the MTM effect works. What is Mark to Market and how does that affect a trader’s position. I will also touch upon the associated things – Margin call requirements.

Some brokers like ICICIdirect have a strict requirement that you MUST have the entire money in your trading account, before you can buy any shares through them. So if I want to buy shares worth 10,000 then I must have 10,000 already deposited in my ICICI account and from there I should allocate that 10,000 for trading purpose. Then and only then I will be allowed to buy shares or buy stocks as per my stock picks.

However, majority of the brokers, like IL&FS, etc. do NOT require the entire amount to be deposited with them. Hence, if I have a brokerage account with IL&FS, Motilal Oswal or Angel broking (just for an example), then I can place my buy stocks order even without having a penny in my account. So if I wish to buy shares worth 100,000, I just place a call to my IL&FS broker and he places the order for me in the exchange. If it gets executed, due to T+3 settlement cycle (or T+1 in the US stock markets or T+3 in UK stock markets), I have 3 days time to provide the required money to my broker. Due to T+3 cycle, the shares will come to my demat account only on the 3rd day and the cash should go from my account only on the 3rd day. Hence, that gives me a leveraged position for 3 days.

There can be other brokerage firms which require a percentage of money to be kept with them initially. Say 20%. So if I want to place an order of 100,000, then I should initially have 20,000 with the broker. Ultimately, it depends upon the criteria set by the broker you are dealing with.

So I place the order, I pay the broker in (or within) 3 days time and I get the shares. All fair and good. But there can be a problem.

Remember you will be required to sign at as many as 45 different places on a brokerage account document to open a trading account? There are certain conditions mentioned in that which we obviously ignore and take for granted.

Every brokerage firm has a Risk management division. This division decides the amount of risk they can bear and depending upon that they decide the limit upto which the client’s positions can be leveraged.

However, there is a requirement for the brokers to comply with the MTM or Mark to market factor. The MTM factor means that for all leveraged positions, the broker will be required to have cash, in case the market price of the stock starts falling down.

Let’s take an example. Suppose Microsoft is trading at $20. Due to some problems, the stock price starts to go down. There may be a set limit of providing extra cash to cover for positions if the stock price falls by say 25%. So if the stock price of Microsoft touches $15 (25% below), then the brokers (and ultimately their clients) who are holding positions in Microsoft in this leveraged style (without depositing the entire buy amount), will be required to pay the money to cover their losses in the leveraged positions.

So in the last 2-3 days, the same situation was happening in the Indian markets. Traders and investors had such leveraged positions with their brokers. As the stock prices started to tumble downwards, the brokers were required (as per their risk management divisions) to cover for the losses in the leveraged positions due to stock price meltdown. Remember, a broker is only an intermediary in the trading process. The actual liability lies with the trader or investor or the client who is trading. Hence, the broker, on behalf of the clients, was required to have cash for the leveraged stock positions.

Continue to Part 2: How Margin calls are placed and what is required?

Margin Calls and Requirements for Mark To Market (MTM)

This is part 2 of the article: Mark to market (MTM) factor & Stock Market Fall Effects-1. Please read the first part before continuing with this one.

Usually, when such a thing happens, the brokers call the client on the phone individually and give them a deadline (usually 12 to 24 hours) to furnish the required money for MTM. But unfortunately, due to the regulations, the brokers cannot accept cash. All transactions should happen in paper or electronic form (cheque, demand draft or online transfer). Hence, though the brokers raised to margin calls, though the clients deposited the cheques with the brokers, the clearing time of 24 hrs to 3 days ensured that money did not reach the broker’s account within the given time limit. Hence, with lack of required cash, the brokers were forced to meet up the MTM requirement by selling stocks.

Now cheques can treated as a guarantee. But there is a fear that cheque may bounce due to lack of money in the clients account. Hence, the brokers need the cheque to be really encashed. Ultimately, they were left with no solution but to sell the shares at the lowest of the low prices for their clients.

Finally, it was the clients who lost. They may have bought the shares at a price of 100. The price starts to fall down, reaches 75, the broker raises a MTM margin call. Though the clients may have money to furnish for the margin requirements, the problem with the clearing mechanism forces the broker to cover for the losses by selling stocks. This panic and forceful selling for MTM further deteriorated the stock prices and they went for a tailspin.

So even if the client has sufficient money, he may have to suffer the loss. Even if he had the capacity to withstand the bear hug, he may have been forced to book the losses because of the MTM and margin requirements.

Hence, it becomes extremely important to discipline your trading activities and your leveraged positions. It sounds good when the broker tells you that you don’t need to have money ready when you place the order, and you can furnish the money within 3 days time for T+3 settlement cycle. You feel happy that your money can earn interest in the bank and there is no need to keep it idle with the broker if you don’t trade.

However, all that money management and interest earnings tactics and trading strategies go off the fly in a split second, when the markets tumble, like the way they have in the past 3-4 days. It therefore becomes extremely important to understand the risk management requirements of the brokers. It is better to Select a broker after proper research & keep the money with a quality broker having strict requirements for advance deposit, rather than going for a cheap and lousy brokerage house giving all kinds of leverages to the clients. What you may not save in the interest part, much more than that you can loose in the MTM and Margin calls requirement. Remember, the more regulations and restrictions you face, the better you are shielded when you are hit by a big loss.

Yesterday I saw on CNBC webcast, people fought with the employees at brokerage firms due to their trades being cut-off for margin calls and MTM requirements. They were forced to book losses. Another piece of news took to the jewelry stores or pawn brokers. People were found selling their gold ornaments and gold bars or keeping them on mortgage to get some cash to suffice for the margin requirements. Ignorance, lack of knowledge about regulations (set by market as well as the brokers), and taking things for granted will force you to learn the things in a costly way. Learn it before jumping in and play it safe!
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Should you invest in Infosys now?- 1

Yesterday there was a mayhem in the market. Going by Nifty statistics, in last few trading sessions, it has come down from 6200 levels to 5200 (even more on intraday basis) – a clear cut loss of more than 20% within just 6-7 trading sessions. Out of the 50 stocks listed in Nifty, not a single one was positive in terms of returns over previous day’s closing stock price.

Infosys or IT companies used to be the flavour of the trading day just one year back. Long term investments, mid term investments, short terms intraday trading, not a single piece or aspect of trading was assumed to be completed without a mention or recommendation of Infosys. Every single trade analyst or so called market experts and advisors would shout at the top of their voice – “Buy Stocks –Buy Infosys –Keep on buying shares of this company”.

After Infosys declared dividend, one of the stock holders was cited saying as “Only the divine Lord Tirupati Balaji gives, and after the divine God Tirupati Balaji, it is only Infosys that gives”.

I watch the webcast of CNBC. Today, not a single “Market Expert” talks about infosys. Yesterday’s closing price of Infosys was 1391. Few months back it used to smoothly sail at 2200-2300 range. A clear cut loss of 33% within less than a year! Other biggies like Wipro and TCS are not far behind.

Let’s look at what has happened:

In the last one year the dollar-rupee forex exchange rate or forex currency rate has become weaker by around 10%-12%. It used to be at 44-45 levels, today it is at 39-40 levels. A loss of 10 to 12% in forex currency trading terms.

However, the other currencies like Euro and Australian Dollars are still at almost the same levels when it comes to comparison with the rupee, in terms of forex exchange rates. The CFO of IT companies proudly claimed that they are diversifying their client base and are now spread across other locations in Europe, Canada and Australia, so that they are not hit by the dollar weakening, or atleast they don’t have that much exposure to dollar.

Another reason that is quoted is that they are using hedging for forex currency trading, so that way they were able to beat the street expectations. That is very true. But something worth giving a thought is why a mere 10%-12% decline in dollar value is translating to 33% decline in stock price of a dollar dependent company?

Continue to Part 2: Should you invest in the markets now?

Should you invest in stock market now?

This is part 2 of the article: Should you invest in Infosys now?- 1. Please read the first part before continuing with this one.

They say that they are looking at other locations and clients and are dealing in other currencies like Euro, still the sharp decline is not justified. If other currencies are stable, why is it that the stock prices are hammered to such a level. If it is due to dollar forex rate weakening, then why a 10-12% decline in dollar translating into 33% decline in stock price of a company that was supposed to be called the future of India.

Then comes the hedging part: Hedging against forex currency price fluctuations. You expect to receive 1 million dollar in 3 months time. The present price of dollar rupee forex rate is 40. Can you find a bank or a counterparty which can give you a forex rate of 44 in 3 months time? Can a counterparty be stupid enough to get into a futures contract that gives you a 10% hike in the future price as compared to the current price of 39-40?

The fact is that in the last few quarters, there was a lot of ambiguity about the dollar rupee value. It was expected that US economy will not go into recession, it was expected that the subprime mortgage crisis will be overcome, it was expected that dollar will again go back to its 43-45 levels, if not, then it was expected that RBI would make policy changes to keep the dollar-Re forex currency exchange rate to be sufficient enough. Hence, there were some banks and counterparties which were of the view that they will benefit from the dollar increase. Unfortunately, it did not happen. Things went from bad to worse.

However, in the speculation process, the IT companies managed to find the counterparties or banks for their future contracts, so as to hedge their positions at high future prices. Unfortunately, the same counterparties and banks have now arisen to the real situation. They are now observing that the dollar is no way going to go up and the currency trading rate may not increase further.

Now this is forcing the IT companies to get into the futures contract with lower future prices. The simple reason is that there are no counterparties willing to offer higher future prices. Hence, no hedging with high future prices and overall, the IT stocks are being hit.

Now comes the big question. In this situation, where are IT stocks are at the lowest of the lows, should you buy them?

They hedge, they diversify, they spread their client base to different currencies and different geographical locations – yet they are being hammered, mercilessly. Has Infosys lost its so called FUNDAMENTALS? Is it now operating on a different model? Has it now changed its attitude towards clients and changed its core values? No, nothing has changed fundamentally. Yet the stock price is sinking. Ask an investor who may have bought Infosys at 2200 levels. What is he upto now?

Irrespective of the risk you can take, irrespective of the fact that you are willing to loose your entire capital in the stock market trading, the market has its own language, direction and performance. The direction is RANDOM. If anyone can identify a pattern in the market WITH CERTAINTY, he should keep quiet and keep making money silently for himself.

The world is becoming more and more interdependent. What happens in one remote part of the world affects the entire globe. Let the analysts say what they wish. Let the markets trade the way they want. You must take the decision and you must know how to make the calculations.

At the time of writing this sentence, the market has fallen further 12.5% to the levels of 4500. The trading has been suspended – let’s hope things come to normalcy in a few trading sessions. It is the perfect time to buy ETFs. Traders like Andy willing to beat the bank rate can give a trading shot by buying at these levels. All the best
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25% Price band limit on listing IPO

Some good (or rather bad) news from SEBI for the hungry IPO investors looking to make a quick buck in the IPO application process and making good profit on the very first listing day:

SEBI is proposing to place an UPPER LIMIT on the maximum price a newly floated company can hit on the very first day of listing. The upper limit proposed is 25%

This is just a proposal, what may be implemented and when, is a different issue altogether.
Then, another restriction is that this is proposed only for the relatively smaller companies, not the bigger ones. The proposal from SEBI is for the companies which come out with an IPO which has a total IPO value of less than 250 crores.

The reasoning:
Sebi says that in the past there have been many cases where the listing day price of relatively smaller company IPOs was attempted to be manipulated by a large number of brokers, who made an enormous profit on the listing day, and later eloped.

As an example, in April 2007, SEBI had banned seven brokerage houses from debut trading in newly-listed shares for their alleged role in huge price movements recorded in stocks like Cambridge Technology, Mindtree and Pyramid Saimira Theatre on their first day of trading. Some of these stocks witnessed unprecedented jump in their share prices immediately after the listing.

On one hand, this restriction would mean that for a IPO that is offering shares at 100 Rs. and the entire offer size is less than 250 Crores, then the maximum hike the listing day price can hit is 125 (i.e. 25% higher only). Sebi says that the proposal is justified because it will give enough time for the market to come to its senses regarding the justified price of the newly listed company, and will shield the smaller investors who may end up buying the shares of a newly listed company at a very high price on the listing day, as they may expect further rise in prices in the coming day – all due to euphoria.

However, market participants and analysts differ in view. They say that IPO process runs for a couple of days. People are given chance to bid, that way they themselves take the decision about the price of the share. Secondly, why only the small companies are being hit by this proposal? Why to leave out the biggies, ultimately following the principle of making rich richer and poor poorer.

Sebi’s offer seems justified to me. The euphoria that goes on on the listing day is no good.
Sebi’s proposal is justified on the point that the smaller issue prices are easier to manipulate – especially on the listing day. Hence, at the end of the day, it is the retail investor whose fingers get burnt. Secondly, the proposal is not about IPO price decisions. It is more about controlling the euphoria in the stock market while people buy stocks on the very first day, thinking that it will rise further.

I remember the case of Biocon IPO, which went up on first 1 or 2 days and then went down significantly. It was the retail investors like me who applied for the IPO, did not get any shares, and bought high priced shares on the listing day with an expectation to make a good buck within a few days, but ended up loosing money.

If the stock is good to double or quadruple the price on the listing day itself, then it should not matter if it takes 4 days to reach the double price (4 days * 25% each day) or 8 days to quadruple. I agree with SEBI that instead of letting the price determination done on the very first day, let it be spread over a few days. That will give more stability and control on the prices and things can be easy to regulate.

However, if this proposal is implemented, then it will significantly hit the people who take loans to apply for IPOs. As the listing price will be limited, even if the IPO is good, it will take enough days for them to realize their desired profits - covering the interest of the loan and their expected profits above that interest.

Sebi is currently inviting proposals and suggestions from various market participant. Let’s see what lies ahead in the future.
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Reliance Power IPO: Part Payment Details

Here are the additional details and table on how to apply for the Reliance Power IPO and how much. The article also contains details about the part payment and table for easy understanding. Not my original Post, but got as a email forward.


Issue Opens On : Tuesday, January 15, 2008

Issue Closes On : Friday, January 18, 2008

A Discount of Rs.20/- Per share to Retail Individual Bidders (Retail Discount)

Price Band : Rs.405 to Rs.450/-

Special Discounted price for Retail : Rs.430/- (Rs.450/- -Rs.20/- discount)
Payment Method I (Part Payment) : Rs.115/- for both Retail & NIB

Payment Method II (Full Payment) : Rs.430/- for Retail & Rs.450/- NIB

Bid Lot : 15 shares &in multiples of 15 there after

Maximum Shares for Retail : 225 shares

Illustration of Bid lots and Application Money:

No. of Shares

Application Amount - Retail Category

Application Amount - NIB Category

Part payment @Rs.115/-per share

Full payment @Rs.430/-per share

Part payment @Rs.115/-per share

Full payment @Rs.450/-per share




























































































1. Cheque / Demand Draft Should be drawn on Reliance Power IPO – R, (for both Retail & NIB Categories). Outstation cheques will not be accepted.

2. Application and cheque should be signed and dated properly.

3. PAN number should be mentioned in the application and a copy of PAN Card must be attached to all applications irrespective of value.

4. Age of the first applicant should be mentioned in the form. Minors cannot invest in public issues.

5. Demat account is must, DP ID & Client ID should be mentioned in the application.

6. Only Retail Category of investors can bid at “Cut-off” price, others should specify the Bid price at which they want to apply.

7. Bids should be in multiples of 15 shares only and bid price should be in multiples of Rs.1/-

8. Bids below the lower end of the price band & above upper end of the price band should not be accepted.

9. For NRI applications, the cheque/dd should be payable in the location where there is NRI collection banker.

10. In case of bids by other than individuals and HUF or bids by GPA holders, the relevant documents such as GPA copy duly attested, Memorandum and articles of association (MOA) and board resolution etc., must be attached.

ON THE CLOSING DATE i.e., on 18/01/2008



Here is the Review of Reliance Power IPO

Review of Reliance Power IPO

The much awaited “Reliance Power IPO” is all set to hit the markets on 15th January.

How good is this IPO? Should I invest in Reliance Power IPO? What are the basics to look for while investing in the Reliance Power IPO?

Before we get into the details, let’s look at some of the latest news items.

More than 1 lakh Demat Accounts will be opened in next 3 days just for the Reliance Power IPO. People stood in the queue for hours in various brokerage firms to get the accounts opened for their family members. Just for getting a demat account so that they can apply for the maximum possible number of shares in the Reliance Power IPO.

Grey Market Trading: is going on for this IPO. Against the offer price band of somewhere around 400 to 450 Rs. per share, the current grey market price is trading at a whooping 900 Rs. or so (as per the news) – almost double that of the offer price.

What do the above news items tell us?
First thing – the IPO is eagerly awaited. And it will be heavily subscribed. No doubt about that. But what it means to we, individual investors? It will mean less allotment and hence hopeless returns than what we expect. The mathematics of IPO share allotment and probability calculations are covered in this article.

If we go by the grey market trading prices, then the Reliance Power Company at the grey market rate of 900 Rs. will be valued at something like 2 lakh crores. Current valuations suggest that even if the company manages to double the proposed power production, then also it will take atleast 3-5 years for the company to justify the price of 900 Rs. a share or a 2 lakh crore valuation. That too everything goes well with double the proposed production. So from the valuations perspective and the grey market trading prices, the issue does not look very attractive even in the long horizon of 3 to 5 years. May be the company discovers something really great and that turns out to be a great profit making business, otherwise the grey market prices are not justified.

However, we need to understand that the grey market prices are the once that are setting the returns expectations. If one can get out of this expectations business, then it may be justified. Still due to the euphoria, the less allotment of shares will mean no significant profits.

As covered in the article, Stock Picking: Good Company v/s Bad Company, I had quoted the example of TCS IPO. That IPO also had grey market trading. Against the offer price of around 775, the grey market price was trading at 1200. However, on the listing day, the closing price of TCS was just 998. What happened?
No one knows. Even though the grey market trading was going on at 1200, the close price was 998, well below 20% of the grey market trading price. Later, in a few months, it went down further.

Some day or the other, the market comes to its senses. For TCS, it came to sense on the very first day – later even more. What can happen with Reliance IPO, only time will tell. Both Reliance and Tata are well trusted houses in India, so definitely the craze that went on for TCS IPO, much more than that will be for Reliance Power IPO.

Now the problem does not stop there. Let us not forget what happened with the IndiaBulls IPO and the follow up. IndiaBulls shares were offered at 16 Rs. However, it started climbing like crazy and went up like a rocket. Seeing that performance, Other brokerage firms like IL&FS, who were initially planning to launch their shares at a mediocre rate, doubled or even quadrupled their IPO price. The list includes IL&FS, Religare and recently concluded Motilal Oswal issue.

If this Reliance IPO is successful, then JP Associates and other power companies are also in the line. They will become very demanding for their IPO, which might ultimately trigger a high price for the entire power sector.

Ultimately, what can be done here? To invest or not? Well, I have always been of the “Randomness Opinion”, and the probability value calculations tell me that my money is better safe in the bank Fixed deposit savings account. One may take a chance, lucky if you are allotted, unlucky if no or less allocations. All the best!
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Tabular Details of Reliance Power IPO Part Payments

Stock Market Trading Strategies-1

Andy has left a nice comment on my previous post – Andy wants to beat the bank rate!

Actually, that is one of the very good targets to achieve. People have different targets – some like Mutual Fund mangers go after the market index they are tracking, and they attempt to beat it. Some traders try to beat the bank Fixed deposit rate (as Andy is attempting to do), some have individual targets fixed for themselves, depending upon what they want to achieve, and the rest just don’t know what to do. Unfortunately, majority of us fall in the last category – we just don’t know how much we want to achieve and in how long horizon.

In stocks trading business of selling and buying stocks, one of the things that’s always good to achieve is to have knowledge about what you want and in what time period. If we have certainty in our ambitions, then 50% of our work is done. If we don’t have any certainty in what we want to achieve, we are already half way defeated. It’s easy to see our stock price going up by 50%, but having no target in mind means we have no clue about how long should I wait for and how much return can I expect from this stock. Even if we have that in our minds, we cannot be sure when this target will be achieved.

Anyways, traders are traders. It is commonly observed that people get fascinated about the rise they see in the stocks they are holding, they keep on holding the stock for long but uncertain time – just to observe that one fine day their rising stocks have taken a U-turn and started going down. They get fascinated with their holdings, build up strong belief that the stock would once again rise and hold it. Ultimately, no one has any clue on what they want to achieve.

As stated earlier, half the problem is solved if we get out of our stock holding fantasies and affections that we develop with our holding shares. If you are a long term investor, define to yourself what long term is. If you are a short term trader, decide what short term for you is. Nobody other than you can help you!

Andy has raised a valid point and I would say it is a very good strategy for any trader to have an aim to beat the bank rate in a year. The reason – banks rates are, generally, always positive, while the return from equities or stock trading, even index based ETF may turn out to be negative. Hence, suppose in the next year the index like Nifty goes down by 20%, then your ETF investment will also go down by 20% or so. However, if you manage to keep up your trading activities and follow you goals religiously to beat the bank rate of 10%, then you will be outperforming the markets by 30%. Even fund managers fail to do so, traders aspire to do so consistently – some fail, some succeed.

On the other side, instead of going down, if the markets go up by 20% and you are still with a little more than 10% of your returns beating the bank rate, then you will fall much behind the market.

Continue to Part II of this article

Stock Market Trading Strategies-2

This is part II of the article: Stock Market Trading Strategies-I, please read the first part before proceeding with this part:

Ultimately, it depends upon your psychological biases and targets that you set with the level of certainty. As I’ve explained in my previous post Forex currency trading and Hedging strategies, that hedging is used for eliminating the risk and to achieve a certainty in the future prices. So if you loose on a significant bull run while you are in a hedged position, you should not repent because your purpose for hedging was to eliminate the risk and achieve the desired level of certainity in your profits.

Same thing goes here as well. If you are happy by beating the bank rate, don’t repent on loosing on a 50% bull run in the market.
One more thing to notice is that you should know how to calculate the profits. That includes deducting the brokerage charges, demat charges, internet charges (if you pay for it), phone calls (if trading by call-n-trade) and basically anything that accrues a cost for your trading activities.

Another aspect of looking at this strategy is effort v/s reward. Is beating the bank rate justified for the amount of time, effort and energy you put in?

We should not forget that the bank rate that we get is effortless and with 100% certainity. You just walk into a bank branch, put in your money with a particular saving scheme in a bank account and walk away without any worries. You come back on the maturity date and happily take away your money plus the interest or return that you’ve earned. Simple and Straightforward.

But is it same for trading stocks with having an aim of beating the bank rate? One cannot quantify the effort you put in stock picking skills, the time you invest in researching the stocks, or refreshing the stock prices webpage for trading on a daily basis. It is difficult to keep track of internet usage or telephone bills. We tend to forget the demat charges and brokerage fee – even if we do so, we do not usually take the time value of discounted cash flows.

Ultimately, this is the randomness that one trader has to fight against. No one can have any control on which way the market goes, which way the stock prices move and how much you can make from your stock picks. Remember that it is not possible to quantify the efforts that you put in while trading, leave apart the brokerage and other charges. No point in beating the bank rate by a mere 1% or 2%; one just has to be lucky to make a significantly high profit than that offered by the bank.

How to select a stock broker

In almost all of my articles, I’ve primarily focused on the risk part of any stock market investment, trading or transaction. Along with that, I’ve also touched the transaction costs associated with a stock buy or stock sell that you do, a mutual fund investment that you make or exit, a forex currency trading transaction or insurance policy – everything comes at a cost. You cannot ignore the effect of transaction costs in any transaction related to investments, trading or insurance purchase.

Now all these things related to transaction costs depend upon the stock broker that you deal with or the insurance agent whom you involve in or the mutual fund advisor or mutual fund investment agent that you consult. Hence, it becomes very very important for you to know about the charges they take and what you should keep in mind while selecting a stock broker

In this article, I will list some of the tips and points that one should keep in mind while selecting a stock broker or an insurance agent or a mutual fund advisor. Questions covered are: How to select a stock broker, tips for selecting a stock broker, transaction charges of a stock broker, questions to ask to a stock broker, etc.

Begin with a simple example. Let’s say my broker charges me 1% for each transaction. Fine with me, I don’t care, I heard from a friend that this broker is good, so I’ll go with him, I’ll pay high for good services, etc. etc.

If I buy stock worth 10,000, then the actual buy stock price to me will be 10,000 + 1% of 10,000 = 10,100. Now suppose I’m lucky that the stock I bought went up by 5% and hence stock purchase is now worth 10,500 and I sell stocks to realize my profit. I will have to again pay 1% of brokerage, which on 10,500 will come to 105 Rs. Hence, I will get a net 10,500 – 105 = 10,395!

So on total investment of 10,100, I made 10,395, a net percentage return of (10,395-10,100)/10,100 = 2.92%. Now remember that the stock went up by 5%, then you were able to make only 2.92%. What you’ve paid to the broker is 2.02%. Hence, even without investing a penny, the broker has made 2.02% profit, that too without any risk.

However, we will not be worried about the broker. Let us only concentrate on our profits. Suppose instead of charging 1%, my broker charges only 0.5% brokerage. Hence, the 10,000 stock investment will cost me 10,050 and when it rises by same 5%, it will give me net 10,500 – (0.5% of 10,500) = 10,447.5. Calculating the return on investment of 10,050, it comes to 3.96%.

As you can observe, my returns have effectively increased by more than 1%. Not only that, my total investment amount is also less, 10,050 compared to 10,100.

Hence, when you keep on trading frequently, the % brokerage you pay significantly affects your profits. The markets are efficient; hence one needs to know how to trade within short spreads. It was easy for me to assume 5% increase in stock price, but do we see it always? No.

Selecting a broker therefore is an important aspect of trading and investment – be it for short term trading, long term investment, mutual fund unit purchase or any financial instruments.

It must have online trading facility:
In the present mobile world, it is now almost impossible to be with a broker who does not have online presence and online trading account facility. I may be in New York, Tokyo or Sydney, but I may be trading in the Singapore stock markets. Hence, having online trading facility is very important

Off market order placement facility
If I am in New York in a different time zone and want to trade in Indian Markets, I do not need to keep awake all night to place my orders. My broker should allow me to place trade orders for selling & buying stocks anytime during the day

Depot and nostro facility

One of the most important things that you need to know is whether the broker offers both Depot and Nostro services. Depot means your demat account where you keep your shares. Nostro means your bank account where you keep your money for buy and sell of shares. Both are important as you need money as well as shares to keep trading or buying for long or short term. Hence, a stock broker that offers you both depot as well as nostro is the best bet. The reason is that the money movement does not take much time.
However, it all comes at a big cost.

Transaction charges:
As illustrated above with the numbers, you should know how much your broker will charge. If you are not clear of the charges, you will be on a loosing side, as majority of the profits will be given to the broker as brokerage

Continue to part II of this article

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