I am watching the following stocks traded on the Indian markets closely. I will consider taking medium term(1-2 years horizon) positions in these stocks after 10-20% falls in prices.
The List
More later.
There seems to be fairly widespread concern that a poor monsoon may hold back a quick economic recovery in India. Monsoon winds bring rainfall to much of India between June and September every year. The agricultural sector depends heavily on the monsoon for rainfall to irrigate fields since the irrigation system in India is at best underdeveloped. The monsoon season accounts for 80% of the total annual rainfall. A poor monsoon would mean that the agricultural output would be affected badly.
This would in turn hit the agro-based industries which, along with the agricultural sector, employ 60% of the workforce in India. Thus, a poor monsoon would hurt other branches of the economy such as finance, retail and manufacturing as it would lead to lower disposable incomes for the majority of the workforce, thus decreasing overall domestic consumption.
A poor monsoon would also lead to shortages in food grains, thus pushing their prices higher and leading to higher inflation. This would further dampen market sentiment and dullen economic growth.
Meteorologists say that this year’s monsoon is likely to be “below normal”. Let us hope that this is not the case
Click here to see NDTV Profit’s article on the likely effect of a poor monsoon on the Indian economic recovery.
According to Rupya.com, DBS Bank, a Singapore based bank pays 8.5% p.a, the highest interest rate on fixed deposits (2 year maturities) in India followed closely by YES Bank, which pays 8.25% p.a. Public sector banks such as State Bank of India and Andhra Bank pay 7.25% p.a . It is also interesting to note that most banks pay higher interest rates to senior citizens ( 65+ years of age).
Banks pay interest to depositors as incentive for them to deposit their money with the bank. This interest rate depends on several factors such as expected inflation, credit risk, liquidity risk etc. Generally speaking, the interest rates paid by banks on fixed deposits with similar terms are supposed to reflect of the credit risk that the depositors take on by depositing money with the banks. Credit risk is the risk that arises from the possibility that the bank may default on the interest payment/principal payment. The higher the probability of default, the higher the credit risk. The higher the credit risk, the more the interest the bank has to pay in order to get depositors to deposit money with the bank.
Technically speaking, only bonds issued by the Reserve Bank of India(equivalent to the US Federal Reserve) are credit risk-free. However, deposits with public sector banks are considered credit risk free for all practical purposes(very low credit risk) . Public sector banks include banks like State Bank of India, State Bank of Hyderabad, Andhra Bank etc.
Click here to see the original article and the table of interest rates.
In this context, leverage is simply the practice of using borrowed money to make investments. Let us suppose that you have a strong feeling that a particular stock(say the stock of Goldman Sachs) is going to increase in value. You also want to earn insane amounts of money by investing in that stock but only have 1,000 dollars in your bank account.
No Leverage
Suppose that the stock (GS) is trading at 70$ per share today and you expect the value of the stock to go up to $80 in 2 months. If you invest $1000, you will be able to buy $ 1000/ $ 70 = 14.29 shares (For the sake of simplicity, assume that you can buy fractions of a share) . If the stock does move to $80 in 2 months and you sell your shares, you will end up having 14.29 * $80 = $1143. This is a profit of $143.
With Leverage
Suppose you borrow $2,000 from a bank and use this amount in addition to the $1,000 that you already had to buy Goldman stock, you would have $3000/$70 = 42.86 shares. At the end of 2 months, if the stock does indeed rise to $80 per share and you sell you shares, you will have 42.86 * 80 = $3429 . You will have to pay back the $2000 that you borrowed from the bank. Thus you are left with $3429 – $2000 = $1429. This is a profit of $429 , which exactly 3 times $ 143 (the profit earned in the previous case).Thus, you have effectively tripled your profit using leverage aka borrowed money.
There is no such this as a free lunch
If leverage is so great, why doesnt everybody use it? What is the downside? The answer lies in the fact that leveraged is a double edged sword. It magnifies your profits as well as your losses. Let us use the previous example to explore this assertion. If Goldman stock, instead of rising to $80 per share, fell to $60 a share and you sold your holdings, you would have had $60 * 14.28 = $856.8 which would have resulted in a loss of about $143. If you had used leverage, you would have had had $60 * 42.84 = $ 2570 which would have resulted in a loss of about $429 which is exactly 3 times the loss without leverage.
In essence, we are magnifying the exposure that we gain, to changes in asset(shares etc) prices, through the use of borrowed money.
Common forms of Leverage
The most common way people lever their trades is by using something known as margin trading. When you trade on margin, you are essentially borrowing money from your broker and investing it in the stock market/whichever market you are trading on. You typically pay interest on the borrowed money. We will talk more about margin trading later.
Though not involving the use of borrowed money, CFDs (Contracts for Difference), futures and options are other ways to magnify your exposure to movement in the prices of assets. These instruments are essentially contracts and we will deal with these instruments in later posts.
The moral of the story is – Leverage is a great tool . Use it wisely and carefully lest you lose everything including your shirt.
Courtesy Yahoo!
The Indian markets have had a roller-coaster ride over the last 5 months or so. From the early 8,000 levels in March to the mid- 15,000s in mid-June to the early 14,000 s as of today. What a ride! In less than 6 months, we witnessed the euphoria after the election results, the disappointment of the ‘09 budget and the semi-blind mirroring of global cues.
Highlights- UPA’s election victory
The United Progressive Alliance won a near majority in the powerful lower house of the Indian Parliament on 16th May 2009, much to the surprise of pollsters and the business community who had expected a semi-hung parliament. This resulted in a single day jump of 17% in the benchmark index – the Sensex on the very next trading day after the announcement of the results. The Sensex rose to 14,284 from 12,173 in a span of 1 day !
Highlights – India Inc disappointed with ‘09 budget
The union budget was presented by Finance Minister Pranab Mukherjee on July 6th, 2009. Critics were disappointed by the budget as is apparently did not talk of further disinvestment of Public Sector Undertakings, did not outline the roadmap for further economic reforms and ignored the idea of further fiscal stimulus. The Sensex tanked by about 743 points , closing at 14,043 on July 6th, 2009.
I personally liked the budget as it increased the outlay for the flagship NREGA scheme by 144%, abolished the 10% cess on personal income above 10 lakh Rupees p.a , abolished commodity transaction tax as well as the Fringe Benefit tax and marginally raised the standard deductions for personal income tax. I would have been happier had the Finance Minister abolished the Securities Transaction Tax of 0.2% that is paid on every transaction on the stock markets.