Stock market Investment speculation

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Stock market speculation in simple words means predicting the price of a market entity (A Stock for example) in future. If the speculation is positive, we buy. If our speculation is negative, we don't buy or sell .Buy low sell high. Speculation is the activity of Speculators. The activity of the speculators leads to taking position in the stock market for a short period of time. The term “speculation” contracts with the term “investment”. Investment refers to the buying of a financial product or any valued item with an anticipation that positive returns will be received in the future.

The distinction between investment and speculation has long been a debate and may well continue so in the future. A speculator is defined by his readiness to pursue short-term opportunities for profit: his investments are fluid where as those of the conventional business man are more or less fixed. “The activity of forecasting the prospective yield of assets over their whole life”, in contrast to speculation, it is called “the activity if forecasting the psychology if the market”. Speculation has come to mean different things to different people, yet still retains something of its original meaning: namely, to reflect or theorize without a factual basis.

The investment is based on valuation of business by speculation rests completely on the price. An investor’s expectation is also an important factor in differentiating between investment and speculation. High expectations are speculative in nature. Investment is an activity of forecasting the yield over the life of the asset; speculation is the activity of forecasting the psychology of the market. A sound investment will involve understanding and analysing the business where as the speculative activity will involve buying based on tips, rumors or the next big thing.

Traditionally, investment is distinguished from speculation with respect to the following factors:

1.       Risk

Investors also invest money in speculative investment. In a sense speculation is also part of investment. But there are distinct differences between investment and speculation. Investment generally means placing money in various financial vehicles or assets with the intention of getting returns when sold at a time these financial vehicles or assets are priced higher than when bought. The investment tends to be speculative investment when the investor doesn't make advocate analysis, or when the financial vehicle in which investment is made poses a high risk and its safety is low or it may even be that the risk involved could extend to even the loss of the amount invested.

2.       Price Change

Expectation that the price of the asset will increase in the future is the speculator invests. Economic, environmental, social and political factors also can influence the price. Even rumours cause the price to fluctuate. The factors that led to the fluctuation may not even be directly connected to the asset. For instance, the prospects of a government falling may cause market fluctuation even before anything has happened to the government. Investment in gold and oil by its very nature are speculative. Sometimes, investors buy an asset with the intention of short selling, the investment is then speculative. Speculative investment is when investor’s hold, buy, sell and short sell stocks, bonds, commodities, currencies, derivatives, real estate, collectibles and other valuable financial assets with the sole idea of making profits from the fluctuations in price rather than its real value.

3.       Holding Period

The way we can distinguish an investment from speculation is by the holding times. The speculator’s holding time is typically short. Of course, there is an element of speculation in all investments but it is not the main intention of investment to qualify as an investment, a purchase must be:

1.      Based on thorough analysis, Promise

2.       Safety of principal and

3.       A satisfactory return.

Any purchase not meeting the requirements is speculation.

Stock Portfolio Management

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Stock Portfolio management in simple word means to conduct SWOT(strength, weakness, opportunity & threat) analysis of one’s portfolio to maximize the return at a given risk. It helps in making selection of Debt Vs Equity, Growth Vs Safety, and various other trade offs. If a person owns more than one security, he has an investment portfolio. The target of the portfolio owner is to increase value of portfolio by selecting investments which gives good returns.

Tasks involved with Portfolio Management are as follows:-

• Taking decisions about investment mix and policy
• Matching investments to objectives
• Asset allocation for individuals and institution
• Balancing risk

Benefits of Stock Portfolio Management Software’s:-

• Stock evaluation.
• Educate the person about the past history.
• Recommendation provided varies from user to user ie based on personal information.
• User friendly.
• Monthly analysis of stocks for a monthly fee.
• Time saving.

The investment in stocks is opened to anyone who would like to invest in stocks. The proper management of investment in stocks can allow the investors to receive dividends on the investment and enjoy the profits of a company.

Stock Trading Chart–An Overview

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Stock Trading Charts

A stock chart represents the price of a stock over time. The stock price is on the Y (vertical) axis and time is on the X (horizontal) axis.




Different types of chart that are being used in stock market

Line chart:-

This is the simplest of all the chart used in stock market. Each point or date on the chart represents that day`s closing price (price at the end of the trading day) of the stock. Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices.
 

Bar Charts:-

The bar chart shows a vertical bar for each period on the time scale. The chart is made up of a series of vertical lines that represent the high and low for the trading period, along with the closing price. The close and open are represented on the vertical line by a horizontal dash. The opening price on a bar chart is showed by the dash on the left side of the vertical bar & the closing is showed by the dash on the right side. If the left dash (open) is lower than the right dash (close) then the bar will be shaded black, means it has gained value. A bar that is coloured red shows that the stock has gone down in value in such case, the dash on the right (close) is lower than the dash on the left (open).
 

 
Each line shows you the following information:
Opening price (price of the stock at the start of a trading day)
Closing price (Price of the stock at the end of a trading day)
Low (lowest point during the day)
High (high point over the course of the day)
 

Candlestick Charts:-

 

The candlestick techniques we use today originated in the style of technical charting used by the Japanese. Candlestick shows the open, high, low and closing stock prices. When the price of the stock is up and closes above the opening trade, the candlestick will usually be white or clear. If the stock has traded down for the period, then the candlestick will usually be red or black, depending on the site. If the stock's price has closed above the previous day's close but below the day's open, the candlestick will be black or filled with the colour that is used to indicate an up day. A major problem with the candlestick colour configuration, different sites use different standards; therefore, it is important to understand the candlestick configuration used at the chart site you are working with.
The following is a description of what up days look like on a candlestick chart:

Next is a description of what down days look like on a candlestick chart:
 



 

Instruments traded in the stock markets Part IV - Stock Market FAQs

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Instruments traded in the stock markets Part IV

 

• What is an Overvalued Stock or an Undervalued Stock?

An overvalued stock can be understood as an inflated hope that a company will do well. Thus, a stock is overvalued if its current price exceeds the intrinsic value of the stock. The market may temporarily price stocks too high or too low and that's how investors determine whether stocks are being overvalued or undervalued. If a stock is overvalued, the current price of the stock exceeds its earnings ratio (PE ratio*) and hence investors expect the price of the stock to drop. A high PE(profit earning) in relation to the past PE ratio of the same stock may indicate an overvalued condition, or a high PE in relation to peer stocks may also indicate an overvalued stock.

Thus the PE ratio is one of the many ways to determine whether a stock is overvalued. A company's P/E ratio is computed by dividing the current market price of one share of a company's stock by that company's per-share earnings.

Eg: P/E ratio of 10 means that the company has Rs1 of annual, per-share earnings for every Rs10 in share price

A stock is undervalued when, if is selling at a much lower price than what it is actually worth. This can be determined based on fundamentals like earnings and growth prospects. One of the best-known measures for finding an undervalued stock is the price earnings ratio (P/E).

Consider Reliance and Airtel, which are in the same industry and have similar fundamentals. If Reliance has a P/E of 15 and Airtel’s is 20, Reliance could be an undervalued stock.

• What are Derivatives?

A derivative is a financial instrument whose value depends on the values of other underlying variables. As the name suggests it derives its value from an underlying asset. For Ex-a derivative, may be created for a share, or any material object. The most common underlying assets include stocks, bonds, commodities etc.

The different types of Derivatives?
Derivatives are basically classified into the following:

1. Futures /Forwards
2. Options 
3. Swaps 

• What are Futures?

A futures contract is a type of derivative instrument, or financial contract where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price.

• What are Index Futures?

Index futures are futures contracts where the underlying is a stock index (Nifty or Sensex) and helps a trader to take a view on the market as a whole.

• What are the uses of Derivatives? What are the various derivative strategies that I can use?

Derivatives have a multitude of uses namely:

a) Hedging:-

A hedge is used to reduce any substantial losses/gains suffered by an individual or an organization.

b) Speculation:-

Speculation is the practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value .

c) Arbitrage:-Arbitrage is the practice of taking advantage of a price difference between two or more markets.

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Instruments traded in the stock markets Part III - Stock Market FAQs

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Instruments traded in the stock markets Part III 

• Shareholder's Equity:

Shareholders' equity is calculated as the value of a company's assets less the value of its liabilities. It is the value of a business to its owners, after all of its obligations have been met. This net worth belongs to the owners. Shareholders' equity generally reflects the amount of capital the owners invested, plus any profits that the company generates.

• Bankruptcy

Bankruptcy is a legal mechanism that allows creditors to assume control of a firm when it can no longer has the ability to meet its financial obligations. Both stock and bond fear bankruptcy. Generally, the firm's assets are sold in order to pay off creditors to the largest extent possible.

When bankruptcy occurs, stockholders of a corporation can only lose the amount they have invested in the bankrupt company. This is called Limited Liability. If a firm's liabilities exceed the liquidation value of their assets, (the value of assets converted into cash), creditors also stand to lose money on their investments.

• Understanding the Balance Sheet

The balance sheet is one of the most important financial statements of a company. The logic behind producing a balance sheet is to ensure that the accounts are always in balance and all the company funds can be accounted for. It is reported to investors at least once a year. You may also receive quarterly, semi-annually or monthly balance sheets. The contents of a balance sheet include:
What the company owns (its assets)
What it owes (its liabilities)
The value of the business to its stockholders (the shareholders' equity).

• Why should the Balance Sheet be important to you? 

As an investor you need to ensure that the company you have invested in , has good potential for future growth and will yield good returns. The balance sheet helps you get answers to questions like:

• Will the firm meet its financial obligations? 
• What amount of funds have already been invested in this company? 
• Is the company overly indebted?
• What are the different assets that the company has purchased with its financing?

These are just a few of the many relevant questions you can answer by studying the balance sheet. The balance sheet provides a diligent investor with many clues to a firm's future performance.

• What are Assets?

Assets are any items of economic value owned by a corporation that can be converted into cash.

Types of Assets:

Current assets are assets that are usually converted to cash within one year. Bondholders and other creditors closely monitor a firm's current assets since interest payments are generally made from current assets. Also incase the company goes bankrupt, assets can be easily liquidated into cash and help prevent loss of your investments. Current assets are important to most companies, as they are a source of funds for day-to-day operations. It is thus evident, that the more current assets a company owns, the better it is performing.

Cash equivalents are not cash but can be converted into cash so easily that they are considered equal to cash. Cash equivalents are generally highly liquid, short-term and very safe investments.

Accounts Receivable

Accounts receivable is the money customers (individuals or corporations) owe the firm in exchange for goods or services that have been delivered or used but not yet paid for.
As more and more business is being done today with credit instead of cash, this item is a significant component of the balance sheet. Accounts receivable is however recorded as an asset on the balance sheet as it represents a legal obligation for the customer to remit cash.

Inventory

A firms inventory is the stock of materials used to manufacture their products and the products themselves for future sale. A manufacturing company will often have three different types of inventory: raw materials, works-in-process, and finished goods. A retail firm's inventory generally will consist only of products purchased that are still to be stored. Inventory is recorded as an asset on a company's balance sheet. 

• Long-term Assets:

Long-term assets are grouped into several categories like:

A long-term, tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year, such as manufacturing equipment, real estate, and furniture.

Fixed assets are long-term, tangible assets held for business use and will not be converted into cash in the current or upcoming year.

Eg. Items such as equipment , buildings , production plants and property. On the balance sheet, these are valued at their cost. As the value of the asset declines over the years, depreciation is subtracted from all, except land. Fixed assets are very important to a company because they represent long-term investments that will not be liquidated soon and can facilitate the company’s earnings.

Depreciation gives you an estimate of the decrease in the value of an asset, caused by 'wear and tear' or obsolesces. It appears in the balance sheet as a deduction from the original value of the fixed assets; as the value of the fixed asset decreases due to wear and tear.
Intangible assets are non-physical assets such as copyrights, franchises and patents. Being intangible, it becomes difficult to estimate their value. Often there is no ready market for them. Sometimes however, an intangible asset can be the most valuable asset a company possesses.

What are Liabilities?

Liabilities are a company's debt to outside parties. They represent rights of others to expect money or services of the company. A company that has too many liabilities may be in danger of going bankrupt.

Eg: Bank loans, debts to suppliers and debts to its employees. On the balance sheet, liabilities are generally broken down into Current Liabilities and Long-Term Liabilities.

Types of Liabilities:

• Current liabilities

Current liabilities are debts currently owed for taxes, salaries, interest, accounts payable* and notes payable, that are due within one year.

A company is considered to have good financial strength when current assets exceed current liabilities.

• Accounts Payable 

Accounts payable is one of a series of accounting transactions covering payments to suppliers whom the company owes money for goods and services. Therefore, you will often see accounts payable on most balance sheets.

Long-term debt is a long-term loan, for a period greater than one year. These debts are often paid in instalments. If this is the case, the portion to be paid off in the current year is considered a current liability.

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Instruments traded in the stock markets Part II - Stock Market FAQs

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Instruments traded in the stock markets Part II 

• What are Company Earnings?

Earnings are a company's net profit. It is the surplus left with the company after it has cleared all its expenses, i.e. Money paid to employees, utility bills, costs of production and other operating expenses. The manner in which a company makes its earnings, is defined by the very nature of its business.

For eg.

A Steel manufacturer produces steel for sale to its customers.
Two sources of company earnings are:

• Income from sales of goods or services
• Income from investment.

Investments generate income for businesses by way of either interest on loans, dividends from other businesses, or gains on the sale of investment property.
Thus, company earnings are the sum of income from sales or investment left after the company has met its obligations. 

• Why are Earnings important to an investor?

As an investor who holds shares of the company, you have part ownership of company.When you invest in a company's shares, you become a 'part owner' of the company and you get to share a part of the company's profit as dividend. Thus , if the company does well and earns more profit, you in turn to well. If the company reinvents its earnings towards future growth, you are assured of higher dividends in the future.

Meanwhile, if you lend money to the company by investing in its bonds, the company uses part of its earnings to repay interest and principle on the bonds. The more earnings the company has, the more secure you can be that the company will be able to make your interest payments. So, company earnings are important to you because you make money when the business you invest in, makes money. 

• How to use earnings information to make an investment decision?

Your investment goals determine how you use information about company earnings. If you are an income investor, interested in earning immediate income from your investments, you probably want to invest in a company that is paying dividends. If you have a long-term investment strategy, dividends may not be as important to you. The "financials" indicate whether a company is oriented for income, growth, or a bit of both. By comparing the financials for different companies in the same industry, you can find characteristics best suited to your investment goals.

A convenient way to compare companies is through Earnings per share (EPS). EPS represents the net profit divided by the number of outstanding shares of stock.

When you compare the EPS of different companies, be sure to consider the following:

• Companies with higher earnings are stronger than companies with lower earnings.
• Companies that reinvest their earnings , may pay low or no dividends but may be poised for growth.
• Companies with lower earnings, and higher research and development costs, may be on the brink of either a breakthrough or a disaster, making them a risky proposition.
• Companies with higher earnings, lower costs and lower shareholder equity, might go in for a merger. 

• How do I use Fundamentals to make an investment decision?

Fundamental Analysis is a method used to evaluate the worth of a security by studying the financial data of the issuer. But this research can never accurately predict how the company will perform in the stock market. It can however be used as a good comparative framework to know which company will be a better investment choice.

As an investor, you are interested in a corporation's earnings because earnings assure higher dividends and potential for further growth. You can use profitability ratios to compare earnings for prospective investments. These are measures of performance showing how much the firm is earning compared to its sales, assets or equity.

You can quickly see the difference in profitability between two companies by comparing the profitability ratios of each.

Continue to Instruments traded in the stock markets Part III

Go Back to Instruments traded in the stock markets Part I

Instruments traded in the stock markets Part I - Stock Market FAQs

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Instruments traded in the stock markets

There are various types of instruments in the stock market. They include Shares, Mutual Funds, IPO's, Futures and Options.

• Why would I choose stocks?

Stocks are a share of ownership of a company. Thus one has great potential to receive monetary benefits when one own stock shares. Owning stocks of fundamentally strong companies simply lets your money work harder for you since they appreciate in value over a period of time while also offering rich dividends on a periodic basis.

• How can I track stocks?

Tracking stocks lets you gain from the best stock opportunities available in the market while also letting you know how the stocks in your portfolio are performing. The Portfolio Tracker Section lets you regularly monitor your portfolio.

• Where do I buy stock?

Stock trading happens on Stock Exchanges, but one cannot individually buy stocks off the exchange. To do so, you need to find a suitable broker who will understand your needs and buy stocks on your behalf. You can think of them as agents who will conduct transactions for you without actually owning any of the securities themselves. In exchange for facilitating or executing a trade, brokers will charge you a commission.

Some of the orders that can place

Different orders such as Market orders, Limit Orders, Stop Loss Orders, Cover Orders, After Market Orders (AMO'S), Normal Orders etc.

• What is a Market Order?

A market order is an order to buy or sell a stock at the current market price. It signals your broker to execute the order at the best price currently available. However, as market prices keep changing, a market order cannot guarantee a specific price.

• What is a Limit Order?

To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. You could use a limit order when you want to set the price of the stock. If  you want to sell/buy particular share at a price other than the Current Market Price. However, a limit order guarantees a price but cannot guarantee execution of the trade, because the share might not reach the desired price on that particular trading day owing to Market related factors.

• What is a Stop Loss Order?

A stop loss order is a Normal order placed with a broker to sell a security when it reaches a certain predetermined price Trigger Price. Sometimes the market movements defy your expectations. Such market reversals often result in loss bearing transactions. The stop loss trigger price is your defence mechanism- an amount at which you will be able to sustain yourself against such unanticipated market movements. Your stop loss instruction is an order to sell when the price of contracts reaches a pre-determined level - the trigger price. Naturally, this price cannot be more than the price of the stock you are trading.For eg. 

If you bought a stock at Rs 100, you place a stop loss order with your broker to sell it, if it reaches Rs 97. This helps you prevent further loss, in the eventuality that the price of the stock might dip even further. Thus, it helps limit your loss or protect unrealized profits, whichever the case.Good-till-canceled (GTC) or Day Order Or Normal Orders 

Day orders are orders given to your broker that hold true only during the period of the trading day for which the orders have been given. If the order has not been executed on that day, it will not be passed on to the next trading day. Thus they are orders that are only "good until it is cancelled" or "good for the day" or "inter-day".For eg.

You place a stop loss order with your broker to sell a stock, if its price reaches to level X. Now, if it does not reach limit X, your broker will not sell the stock. 
However, the stop loss order given to your broker will not hold true for the next day. For, even if the stock reaches level X on Day 2, he will not execute the trade till you instruct him to do so again. 

• What is an annual report and why is it useful to investors?

An annual report provides a company's shareholders with information about its operations. This is an obligation by law. This is extremely beneficial to investors because it helps make informed decisions.

The report tells you how well the company is doing while also forecasting its future earnings and dividends.

Continue to Instruments traded in the stock markets Part II

What to Look for in an Online Stock Broker???

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The top online stock Trading services should provide the resources need to make well-informed financial choices and the ability to buy and sell stocks from anywhere, including from your cell phone. Some support resources include educational materials such as articles, real–time charts, streaming news, investment calculators and a user-friendly trading platform.

In online stock broker, we looked for services that provide good tools for choosing stocks or investments, and also offer a competitive trade and margin rate. Though many experienced traders may not need all of the tools offered by the services, we looked for services that can provide tools and investment options for everyone, no matter how much you know or how much you can afford to invest. We also looked for trading services that can offer excellent, responsive customer support.

Below are few criteria used to evaluate online stock Trading.

Fees/Commissions

Fees and commissions can quickly escalate, most services charge fees for trades, broker assisted trades, option trades and so on. In online stock trading we should compared fees and margin rates as well as requirements like minimum account balances and account maintenance fees.

Investments Offered

Online stock trading services offer the ability to buy and sell stocks, options, mutual funds and exchange-traded funds. However, comprehensive services also provide access to a selection of international markets as well as investment services or options for retirement and education saving.

Trading/Investment Tools
Buy and selling stocks without the assistance of a broker can be intimidating. We looked for online stock trading services that provide educational resources as well as monitoring tools. The best online brokers offer tools such as investment calculators, analyst reports, cell phone alerts and useful charts, chains or graphs.

Ease of Use
In online stock trading not all investors are pros; many are just starting out or only have a small amount to invest, so we looked for services that are easy-to-use for everyone, regardless of experience. The best online brokers offer free assistance such as tutorials, articles, FAQs, blogs and so on. Additionally, some also offer one-on-one training.

Support/Customer Service
Online stock trading buying and selling stocks online can be a bit complicated, the best services provide excellent support by telephone, email, instant messaging and chat.

Why Use Online Brokers?
With the use of internet, world is becoming small, thus many broking firms are now offering online services of one form or another. Some brokers work solely online, preferring to keep all of their transactions completely digital. Finding the best online broker can obviously be something of a chore, simply because there are so many options available. However, knowing what to look for can make the final decision much easier.

Buy and Sell Stocks Online

This may seem more than a little obvious, but it’s important to know how useful this service can really be when it comes to buying and selling of stocks. And online brokers have some advantages over traditional brokers. With the advent of the internet, investors can now make purchases and invest directly online, with online brokers serving as agents to approve and monitor the trade. Besides stocks, many of the best online brokers also allow for the purchase of stock options, mutual funds, exchange-traded funds, bonds and CDs.

Investment

The best online brokers offer investment services. Online brokers offer advice on proper investment procedures and sound investment opportunities, many online services take a somewhat more impersonal approach. Called "discount brokers" these online brokers typically refrain from counselling clients on where they put their money, and so offer their services at a substantially lowered fee.

Monitoring Stocks

Online brokers now monitor your stocks and other investments for you. If customer just want alerts to be sent for certain stocks, then that’s the way it will work. However, many online brokers also allow you access to materials like virtual trading, option chains, investment calculators, watch lists and third-party analyst reports.

Educational Opportunities

Many online brokers will also offer a number of materials for familiarizing yourself with the world of finances. Trading can be very difficult and very expensive to learn, and so even the slightest amount of information concerning process, what to look out for, and what to anticipate can go a long way towards ensuring that you’re first step into finance is a successful one.

Online brokers offer many of the same services as traditional stock brokers, and even some information and customization options that you may not otherwise have access to. Knowing the reasons to consider digital trading will give you confidence as you research and choose the best online broker for your needs.

Limit Price & Trigger Price in stock Trading

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Limit price in stock trading is the actual price that you demand during the execution of the order.

For a Stock Buy order, the limit price of stock must be greater than or equal to the trigger price. 

For a Stock Sell order, the limit price of stock must be less than or equal to the trigger price.

Trigger price of a stock is the price, which if touched, activates an order.

Scrip code : DLF

NSE	232.70	Prev. Close	Open	High	Low
06/05/2013 15:59:53	1.20  (0.52%)	231.50	230.70	233.90	229.10

LTQ 2 TBQ 2583 TSQ 0 Wt. Avg 231.75 TTQ 5925778 TTV (Lacs) 13732.99

Buy Market Depth Order Qty Price 16 2583 232.70 0 0 0.00 0 0 0.00 0 0 0.00 0 0 0.00

Sell Market Depth Order Qty Price 0 0 0.00 0 0 0.00 0 0 0.00 0 0 0.00 0 0 0.00

BSE	232.8	Prev. Close	Open	High	Low
06/05/2013 15:55:04	1.30  (0.56%)	231.5	232	234	229.7

Suppose you brought a DLF stock at 232.8.

You don't want a loss of more than Rs. 1.

So you put a stock stop loss sell order of Rs 231.8 with a stock trigger price of Rs 231.9.

What the system (exchange) does is - it checks if the LTP (Last Traded Price) is less than or equal to Rs 231.8.

As soon as the condition is met, the exchange will put your Rs 231.8 sell order in the normal order book.

Unless the LTP goes below or is equal to the trigger price, a stock stop loss trigger sell order is not activated.

Similarly Unless the LTP goes above or is equal to the trigger price, a stop loss trigger buy order is not activated.

Thus a trigger order has two components - trigger price and the price at which the order is placed.

A trigger order may also be a market order. This means if triggered, the trade will take place at market price.

Once your order is triggered, it is cancelled only at the end of the trading session.