News Flyer : Benazir Assassinated, Gold Prices Rise

From our earlier article 'All that glitters is Gold', we know that gold is a favorite safety net. Political instability in Pakistan, meant investors rushed to gold. Indian stock markets and currency markets, however did not react violently to her assassination.

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The Sentimental market

After all that you have learned about Supply demand, EPS and PE Ratio most of us simplify stock markets into a block of science models.However there are a lot of events that question and dispute these mathematical models. One of them is popularly called the January effect. The January effect (also known as the turn-of-the-year effect or the January anomaly) is the most important calendar anomaly. The returns on common stocks in January are much higher than in other months. There is no cause and effect to this anomaly. Share prices simply go up during this month and there is no plausible explanation for this behaviour. According to a study by Marc Reinganum "Small firms experience large returns in January and exceptionally large returns during the first few trading days of January." I believe this is more accurate for emerging markets like India where speculation is the order of the day. Take advantage of this anomaly because stock market is simply about "Buy low sell high and play golf ! "

One vital thing we need to take cognizance of when we invest in the market is that, market and people who determine the market movements are often not analytical and scientific. The experts, whom I am always sceptical about, try to simplify the market in reverse format of effect and cause. That is once an event happens they retro fit the explanation. This leads to a dissonance and inefficiency and thats where all the money could be made. I think the under lying moral to these anomalies is that there is often no right or wrong way to invest in a market. If there was one, Warren Bufett would have been cloned all over the world.

However it is important to understand the fundamentals of the market and then use your own gut feel to decipher the future value of each stock. Warren Bufett likened the market to a psychotic drunk. Warren Bufett said "Companies don't change every day but market prices do. This volatility makes the market the greatest game there is. We should bask in the current turbulence as it creates countless opportunities. " Ultimately only two things make a difference : how to value a business and how to think about the market."

All that glitters is GOLD!

Image borrowed from Wiki

In India, Gold has been a symbol of richness and prosperity since ancient times; recent times have given Gold an additional Investment sheen. Investors view gold as an ideal way to insulate wealth from inflations. Here are some of reasons.

Over the years, gold has also shown a strong negative correlation with other investment options like stocks, bonds and US Dollar price. As in the case of stocks, the balance between supply and demand has a key influence on the price of gold, but the key players in Gold are different.

The existing stock with the world’s central banks and International Monetary Funds are the main supply sources. Banks across the world procure and stock gold to minimize(hedge) the risks they face with their other investments. Gold sales by the banks can lead to a sudden increase in supply and pull down the price. Uncertainty in the value of the dollar, volatility in the stock market or political crisis in the country can prompt banks to lean towards gold as an investment option.

Gold mining companies, the primary of gold supplier also base their production decisions on price trends.

The London Gold Fix is the most commonly followed benchmark for gold prices. Recent years have seen increased investment in gold commodity and gold exchange traded funds, which invest in physical gold. India being the world’s largest gold jewellery market, affects Gold demand significantly and thus the price. But investment demand more than jewelery demand govern gold prices.

Investors need to keep watch on other key macro factors that have an impact on gold prices- trends in the US dollar, crude oil prices and global economic or political events.

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Attention Indian investors : In dollar terms, gold has given a return of 19.5 per cent this year, but with the rupee appreciating by 10.9 per cent, domestic gold prices have gained only 6.6 per cent.

For Indian investors to capitalize on the global increase in Gold prices, it will be advisable to invest in Exchange Traded Funds like Gold BeES that follow global trends.

By allocating 5-10% to Gold, you would have a 'safety net' for your equity investments.

Why there is a PRICE RISE or PRICE FALL?

Lets understand basic Demand – Supply situations

- If there are more buyers of the stock Zang than sellers, then the price will go UP (i.e. Demand > Supply )

- If there are more sellers of Zang equity than buyers, the price will go DOWN (i.e. Supply > Demand )

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To understand it intuitively

As a seller of oranges, I have a daily customer base of 10 people, all buying 11 oranges daily at Re 1 per orange. On any given day, there will be an additional sales of 50 oranges with a chance of 10%, 30 oranges with 20%, 10 oranges with chance of 40%, and zero additional oranges sold with 30% chance.
The optimum number of oranges that I must carry every day, so as to maximize my profit (110*1 + 2*(50*0.1+30*0.2 + 10*0.4)) assuming that to the floating population I sell one orange @ Rs 2/- is 125.

So I expect to make Rs. 140/- per day .

SITUATION 1:
Today I could get only 110 oranges from the wholesaler, now at what price will I sell each orange – I can still sell to my sure customers @ Re 1 due to the daily relationship, but then I lose out on Rs 30/-, NOW WHAT??

Well I should increase the price of one orange, so that I will still make Rs 140/- , but should sell to my regular customers only, or sell a lesser quantity to my regular customers, and overcharge the floating population

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Either ways what has happened is that - there are more buyers than sellers, so I’m able to sell one orange at a higher price.

SITUATION 2:
Now, talking the other way – another orange seller comes and sets shop adjacent to me, but with just 50 oranges (and I still have 110).
If I still insist on selling my oranges at Rs. 1, I will not be able to sell them all, so what price should both of us charge?

The total amount the buyer are ready to spend is Rs 140. The price should be such that
(110 + 50)* Price = Rs 140; i.e Rs 0.875 per orange.

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There are more sellers than buyers, so I’m have to sell one orange at a lower price.

Equity Talk - How a company becomes a Stock?

4-STEPS to jump into the market

STEP 1 : PAN Card
It is mandatory to have a PAN card (since Jan 2007) before you start investing. You can apply for a PAN Card online and get it within a week. Even a new born baby is eligible for a PAN Card!

STEP 2: Bank account with a cheque book
Deposits/Withdrawals will be directly made from here. Also your passbook can serve as your address proof for STEP 3.

STEP 3: De-mat (dematerialised) Account
You can open this with any broking house. Your account will be with NSDL/CDSL which are stock depositories. Demat account is to avoid holding paper-based physical stocks.

STEP 4: Trading Account
You can open this with any broking house. It is a list of stocks you hold. You can have more than one trading account.

These four steps are necessary to trade in the equity(stocks) market. To start investing in Mutual Funds, you can stop at Step 2.

A broking house is a phone call away. FYI: I have accounts with the following broking houses
Shreyas - SSK Enterprises, +91-44-43585640/41/42
Kotak - DivyaSwaroopa, +91-98840 48960

What are YOUR investment options?

महूरत session : DIWALI special

On that Subh Mahurat, we start our blog sessions.

Mahurat trade is the auspicious stock market trading session lasting just an hour on Diwali. Brokers will make token buys and push the market up during this pilot session. So the volumes (or amount of money traded in the market) is quite low. Ideally retail investors (like you), should not trade heavily in this session.

And with Foreign Investors (FII's) pouring in funds and the phenomenal rise of the NIFTY and SENSEX (~45%) this year, the Mahurat session may lose its significance.

Mahurat session : 6 - 7pm (after the Lakshmi Puja)