Stock Actions

Dividends

A dividend is a portion of a company's earnings that is returned to shareholders. Dividends provide an added incentive (in the form of a return on your investment) to own stock in stable companies even if they are not experiencing much growth. Many companies -- mature and young, large and small -- pay a regular dividend to their stockholders.


Companies use dividends to pass on their profits directly to their shareholders. Most often, the dividend comes in the form of cash: a company will pay a small percentage of its profits to the owner of each share of stock. However, it is not unheard of for companies to pay dividends in the form of stock. Dividends can be determined by a fixed rate known as preferred dividends, or a variable rate based on the company's latest profits known as common dividends. Companies are in no way obligated to pay dividends, although they will almost always pay them to preferred shareholders unless the company is experiencing financial troubles.

There are basically three dates to keep in mind when considering dividends. The first is the declaration date, on which the company sets the dividend payment date, the amount of the dividend, and the ex-dividend date. The second is the record date, on which the company compiles a list of all current shareholders, all of whom will receive a dividend check. For practical purposes, however, this is an obsolete date -- the more important date is the ex-dividend date (literally, without dividend), which generally occurs 2 days before the record date. The ex-dividend date was created to allow all pending transactions to be completed before the record date. If an investor does not own the stock before the ex-dividend date, he or she will be ineligible for the dividend payout. Further, for all pending transactions that have not been completed by the ex-dividend date, the exchanges automatically reduce the price of the stock by the amount of the dividend. This is done because a dividend payout automatically reduces the value of the company (it comes from the company's cash reserves), and the investor would have to absorb that reduction in value (because neither the buyer nor the seller are eligible for the dividend).

Why do some companies offer dividends while others don't? For that matter, why do any companies offer dividends? The answer, naturally, is to keep investors happy. The companies that offer dividends are most often companies that have progressed beyond the growth phase; that is, they can no longer sustain the rate of growth commonly desired by Wall Street. When companies no longer benefit sufficiently by reinvesting their profits, they usually choose to pay them out to their shareholders. Thus regular dividends are paid out to make holding the stock more appealing to investors, a move the company hopes will increase demand for the stock and therefore increase the stock's price.

So what is the appeal of dividends? They offer a consistent return on a low-risk investment. An investor can buy in to a company that has a stable business and stable (albeit low) earnings growth, rest easy in the knowledge that the value of his or her initial investment is unlikely to drop substantially, and profit from the company's dividend payments. Further, as the company continues to grow, the dividends themselves may grow, providing even more value to the investor. This is one way to treat dividends; however, there are other strategies for profiting from dividends. Some investors try to "capture dividends": they will purchase the stock right after the dividend is announced, and try to sell it for the same price after they've collected the dividend. If successful, the investor has received the dividend at no cost. This usually doesn't work, because the stock price usually adjusts immediately to reflect the dividend payout, as interested buyers know the stock no longer includes the current dividend payment and they adjust the amount they're willing to pay accordingly.

Splits

A corporation whose stock is performing well may opt to split its shares, distributing additional shares to existing shareholders. The most common split is two-for-one, in which each share becomes two shares. The price per share immediately adjusts to reflect the change, since buyers and sellers of the stock all know about the split (in this case, it would be cut in half). A company will usually decide to split its stock if the price of the stock gets very high. High stock prices are problematic for companies because they make it seem as though the stock is too expensive. By splitting a stock, companies hope to make their equity more attractive, especially to those investors that could not afford the high price.

Stocks can be split two-for-one, ten-for-one, or in any ratio the company wants. (The less common "reverse split" is when the number of shares decreases, for example one-for-two.) To illustrate what happens when a stock splits, let’s look at a simple example. Say you own 100 shares of stock in XYZ Corp. that are priced at 100 per share. XYZ decides that 100 per share is too high of a price for its stock, so it issues a two-for-one stock split. This means that for every share that you previously owned, you now own two shares, giving you 200 shares. When the stock splits, the price will be cut in proportion to the split ratio that was chosen by the corporation (in this case, to 50 a share). If you compare the amount of your investment before the split and the amount after the split you will notice that they are equal (100 shares x 100/share = 10,000; which is the same as 200 shares x 50/share = 10,000). So, in effect, nothing has changed from your perspective.

But although technically nothing changes for the investor during a stock split, in reality often times there are changes. Not only does the split tend to increase demand for shares by making the shares more accessible to small investors, it also usually garners favorable media attention. This tends to cause the price of a stock that has split to increase after the split. The split is interpreted by some as a sign that the company's management is confident that the stock's price will continue to rise. Of course, there is no guarantee that this will happen.

Buybacks

A buyback is a corporation's repurchase of stocks or bonds that it has previously issued. In the case of stocks, this reduces the number of shares outstanding, giving each remaining shareholder a larger percentage ownership of the company. This is usually considered a sign that the company's management is optimistic about the future and believes that the current share price is undervalued.

Companies may decide to repurchase stock for many reasons. They may be attempting to improve the price to earnings ratio by reducing market capitalization, or they may want to offer the stock as an incentive to employees. It's important to note that when a company's shareholders vote to authorize a buyback, they aren't obliged to actually undertake the buyback. Some companies announce buyback plans as a sign of confidence, but it's meaningless unless they actually go through with the repurchase.

Greed = Loss at the stock market

Here is a very intriguing first hand article from rediff.com on day trading.

You win some. You lose a lot.

This epigram is the perfect explanation for my pitiful experience as a day trader.

January 27, 2001. Monday, 9.55 am.

A day after the horrific earthquake traumatised Gujarat, I enter an air-conditioned room with a computer on which buy/ sell orders [for shares] are fed. They are then sent to a broker's server and from there on to the stock exchange's server where the transaction is completed.

This is referred to as a sub-broker's trading terminal.

My life, since that ill-fated day, has never been the same.

Those were the heady days when day traders either made a killing or got killed in the now much-maligned K-10 stocks.

Let's bust the jargon

Before I start my saga, let me explain some of the terms I will be using.

Day traders are those who buy/ sell stocks during the day and square up their position by the end of the day. Which means they either book a profit or a loss.

This breed traditionally likes a volatile market; it helps them rake in the moolah. And to say the markets were volatile those days would be an understatement.

K-10 refers to infamous broker Ketan Parekh's favourite stocks.

They spanned a spectrum that included software, media, banks and pharmaceuticals. To name a few: Silverline Technologies, Aftek, Infosys, Pentamedia Graphics, HFCL, Global Telesytems, Zee Telefilms, Global Trust Bank and Ranbaxy.

Buying into any of the K-10 stocks in the morning and selling them by evening (with the sole intention of making a huge profit) was how day traders like me evolved and finally perished.

Those who buy first and sell later are said to go long on that particular stock. They expect the share price to rise. So they buy shares at a low rate, hope the price will rise and sell when it does.

Those who sell first (without owning the shares) and buy later are said to go short on that stock. They expect the share price to fall. So they sell at the current rate, expect the price to fall, and buy them again at the lower rate.

The day begins

Now, that we have the jargon clear, let's flashback to my very first day as a day trader.

I went short on (sold) five shares of Infosys when it was worth some Rs 6,000, hoping to cover (buy) them at a lower price by the time the market closed for trading at 3.30 pm. I did this after a pink daily (a business newspaper) recommended going short on Infosys at that particular level.

Back then, the market regulator, the Securities and Exchange Board of India, was rather smug and complacent; most pink journals (business newspapers and magazines) offered their own recommendations on what to buy and what to sell.

After an initial nervousness following the earthquake, the market resumed its upward journey catching short sellers like me on the wrong foot. The stock closed higher than what I had sold it for.

Never one to accept defeat -- and to proclaim my fortitude to my peers -- I decided to wait until Friday to close my position (decide what I finally wanted to do).

Here I would like to remind you, dear reader, that you did not have settle your trade at the end of the week (pay for what you bought and take money for what you sold). All you had to do was pay a small amount (a margin) and you could settle it the next week. I did this hoping the price would fall the next week. This was called badla financing.

Finally, though, I reluctantly booked my losses (and there were many more that followed) on Friday as the stock did not come under selling pressure (nobody was interested in selling so the price remained high).

My first debit came to around Rs 1,200 (5 shares x the difference of Rs 240 at which I bought those shares to cover my position).

Got the picture?

I sold the shares at around Rs 6,000 and instead of buying them later at a lower rate (I had betted on the rates falling), I ended up buying them at a higher rate.

Thankfully, at the cost of snubbing my own ego, I'd decided not to go for badla financing. The stock climbed further the following week and my losses would also have climbed accordingly.

The sins of a day trader

Smarting from my first loss and determined to make up for it (the most unforgiving sin I ever committed in retrospect), I decided to go long on GTL and HFCL the next week at a very high price.

As luck would have it, the prices of both the stocks did increase and I would have definitely made up for my losses if I had the sanity to sell them. But then I remembered Gordon Gekko and his dictum: Greed is good. In fact, I went a step further and declared: Greed is God (another sin that a day trader should never commit).

No points for guessing right. I lost again. Lost in the sense that the prices fell down from their stratospheric levels and I had to sell them at a small profit (remember a bird in the hand is worth two in the bush; likewise book your profits when you see them. Don't be greedy).

I -- and many like me -- failed to read the coming correction.

I made a neat profit of some Rs 700 after paying brokerage and service tax: my first profit after the initial loss. My happiness knew no bounds that day and my chest grew an inch wider.

Thenceforth, I learned a lot of lessons in day trading from my peers who'd visit the same trading terminal, but never put them into practice. I went on making one mistake after another (always thinking that I knew better), kept losing money week after week until 9/11 happened (I had also lost a fortune following the Ketan Parekh scam, but that's another story).

Not that I made money after that devastating attack on the World Trade Centre.

What I did was to make up was my mind to finally quit day trading, but not before my losses had reached almost Rs 2,00,000 (I have preserved my final debit bill like a souvenir). Then, I knew I had only one option left. It was a wise one; I decided to put an end to my crazy punting ways.

This is what happened...

Reality hit home

A few days before 9/11, I had gone short on (an addiction I picked from my sub-broker, who went short on any stock that took his fancy) Aurobindo Pharma, Infosys (yet again), Moser Baer, Digital Equipment (now Digital Globalsoft), Ranbaxy and what have you...

I had made (notionally) a tremendous profit on Moser Baer itself, on which I had gone Rs 275 short. The price now was Rs 240. In the next few days, MBIL's market price plummeted to Rs 179.80 but, once again, I was possessed by Gordon Gekko and did not cover my position by buying the stock.

As my misfortune would have it -- though I think it was a blessing in disguise -- the stock started rising, as quickly as it had plummeted. I ended up covering my position at a marginal loss.

Even though I made profit on other stocks that I'd gone short on, the entire episode diminished my appetite for day trading.

Also, realisation had sunk in -- a day trader always wins some and loses a lot. I know of many punters who'd agree with me.

PS: Not satisfied with my own losses in Silverline Technologies -- of which I bought 50 shares at Rs 380 -- I convinced my aunt to buy 50 more at Rs 185. I told her what a value buy it was at that level and promised her that she would be soon selling it at double the price. Even as I write this piece the stock's quoting at Rs 4.05. Not to mention the fact that it is still languishing in my portfolio!

Understanding Ratings

The part of an analyst report that tends to get the most attention is the rating — which also serves as a recommendation. The analyst assigns a rating to a stock as a way to sum up his or her opinion.

If an analyst believes a company will increase future earnings at a rate higher than its peers, the analyst gives the stock a high rating, or recommends that investors buy. If the analyst believes the stock isn’t worth buying at its current price, he or she may counsel investors to hold it — saying that it's neither hot nor cold. And if the stock looks set for a fall, the analyst may give it a low rating, or urge investors to sell.

Different scales

Some companies use rating scales with finer gradations between high and low to distinguish a stock that may be poised for disaster from one that may be only temporarily downtrodden, and to differentiate the stellar performers from those that are slightly better than average. Unfortunately, although these scales are meant to give the investor more information, they often end up causing more confusion, since the difference between a buy and a strong buy, for example, may seem arbitrary.

Furthermore, the language of ratings may not be as intuitive as buy and sell. For example, one firm refers to overweight, equal-weight, and underweight stocks in its research, while another prefers to rate stocks using the terms outperform, in-line, and underperform. And two analysts may use the same terms to mean different things. You may have to read the firm's explanation carefully to understand what its ratings really mean.

Ratings in context

Ratings sometimes make the news. When an analyst changes a stock's rating for the better, it's called upgrading the stock, and lowering a rating is called downgrading. When a respected analyst downgrades or upgrades a stock's rating, many investors take that advice seriously — both because they respect the analyst's opinion and because they know that the market will react to the rating change.

On the other hand, if you're an investor who's looking for value you might take the opportunity to buy a downgraded stock after prices dip, if you believe that the stock could turn around. This may also be true if you have a contrarian style of investing — buying when others sell, and vice versa. And long-term investors may not worry so much about changes to ratings, unless the situation is particularly dire.

What's the latest?

Because the analyst reports you review may be a few months old, you may need to examine them in light of the latest news and price movements to determine if the analysis still holds firm. For example, if an analyst has downgraded a stock because the price-to-earnings ratio (P/E) is too high — in other words, the stock seems overpriced — selling in the stock may have brought the P/E down to a more reasonable level.

In fact, you might entirely disagree with the analyst's recommendation. You may decide a stock is right for your portfolio now, even if an analyst recommends that you wait for a better price. That's why some investors prefer to look beyond a report's rating and use more of the supporting research to make their decisions.

Target price

If you're considering buying a stock in hopes of selling it later at a profit, one of your top priorities is to evaluate whether you believe the price will go up or down, and by how much. Therefore, the analyst's target price is considered by many investors to be as important or even more important than the rating.

The target price tells you what the analyst believes the stock price will be a year from now. It may be a single price or a range of prices, with an estimated high and low for the period.
Pros and cons

You may find target prices a more useful measure of a stock's potential than ratings, since ratings, by nature, are generic, across-the-board recommendations that don't take your particular portfolio needs into account. A target price can help you calculate whether a stock is worth its current market price given its estimated future performance. However, target prices are based on estimates that may not turn out to be accurate. Furthermore, if your financial needs are more long term, an attractive target price for next year may not be the best indicator of a stock's potential for long-term growth.

Courtesy: Pathtoinvesting.org

IPO Basics

Some of the things you need to consider before investing in a IPO.

# History of the company . What they plan to use the funds from the IPO. Read the Red Herring Prospectus for sure !
# Who are the underwriters ? IPOs which are big and generate interested are handled by bigger brokerages.
# Check the lockup period , i.e , If after the company issues IPO, company officials, employees have to signup a lockup period so that they dont sell their shares immediately.
# Avoid the hype generated by the underwriters. Research well about the company fundamentals and financials and invest sensibly

Deadpresident's Moneymaker

This time its a mutual fund. Try Kotak Global India Fund. Its a fund which was launched in January 2004 went through May(hem) where it hit a low of 8.8. From that time onwards - has given 55% returns. A Very Good Equity Mutual Fund !

Deadpresident's Valuepicks

Pick Sundaram Finance. Good company - very sound financials, trading at a moderate p/e ratio.

Recommendation: Buy
Disclosure: I dont own any Sundaram Stocks

Liquidity

What is liquidity?

LIQUIDITY in the stock market is confused with trading volumes.

We normally understand liquidity to mean stocks that have high trading volumes. But that is not always true. So, what is liquidity?

It refers to the ability to buy or sell shares quickly at or near the current market price. Take Reliance Industries.

Suppose there are buyers for one lakh shares at prices ranging from Rs 499 to Rs 501 and there are sellers for 1.5 lakh shares at prices ranging from Rs 500.50 to Rs 502. The current price is Rs 500.

What will happen if a mutual fund wants to buy 10 lakh shares? The price should go up because the demand for the shares is more than the supply.

But what if more sellers enter the market, observing the additional demand for 10 lakh shares of Reliance? The increased supply of shares will prevent the stock price from rising sharply.

Suppose the mutual fund buys 10 lakh shares at an average price of Rs 501. Note that there is only a small price change due to sharp change in the demand for the shares. This change in price is called the impact cost. Stocks with low impact cost are said to be liquid.

Now, take a situation where the stock market is trending down. During such times, sellers outnumber buyers.

Suppose 10 lakh shares of Reliance have already been traded. You now want to sell 10,000 shares at the market price of Rs 450.

You may not be able to find buyers at that price. Why? Because the market is trending down, buyers want to pay a lower price.

You cannot execute your order immediately at or near the current price. The impact cost will be high. The stock is, hence, not liquid. The volumes will yet be high.

Courtesy: Business Line

Don't fall in love !

From the investors.com.

Don't Fall In Love With A Stock
BY CHRISTINA WISE

Falling in love can be wonderful. There's an extra bounce in your step, the sky seems a little more blue, the air a little more sweet.

But if the object of your affection is a stock, you're in for heartbreak sooner or later.

It's easy to grow attached to a stock, particularly one that's made you a lot of money. After all, you brilliantly spotted and invested in it. And the company, like a favorite child, can do no wrong.

Missed earnings for one quarter or two? You might dismiss the news by saying they've just hit a small bump in the road. A sharp downturn in price on an avalanche of trade? The short sellers are conspiring against you and your investment sweetheart.

Ignore the warning signs long enough and you could watch your profits, even your initial investment, evaporate.

So no matter how you feel about a company's products or its stock, keep studying the stock's price-and-volume action. Refresh your memory about good sell rules that help you cut losses and lock in gains. Finally, develop as best you can the discipline to execute these important rules. After all, you're in the market to make money.

People made a lot of money riding Commerce One, Qualcomm and other wonder stocks north in 1999 and early 2000. They led the tech revolution and were seen by many as having almost unlimited growth potential. But as past booms show, all good things eventually come to an end.


The 12 stocks in the chart above were the top performers of 1999, rocketing an astounding 1,744% during the year on average. Most gave back all their gains and more.

If you were caught up in this market-induced love trap, you're not the first. Getting overly attached to stocks is a rut that novices and experts alike have fallen into time and again.

Even Nicolas Darvas, the nightclub dancer turned market master, found himself getting overly attached to his winners in his early trading days in the 1950s.

"I thought of them as something belonging to me, like members of my family," Darvas wrote in his book "How I Made $2,000,000 In The Stock Market." "I praised their virtues day and night.

"It did not bother me that no one else could see any special virtue in my pet stocks to distinguish them from other stocks. This state of mind lasted until I realized that my pet stocks were causing me my heaviest losses."


What does this tell you ? Sell Reliance if you have made big profits in it. Same goes with HLL, it might have recovered from its 52 week lows, but short term future doesnt look too bright

Timing the market !

When did you last sell something and it went up the next day ? It happens to almost everyone including you and me. Timing the market is a strategy where you try to predict the market to increase your profit by constantly booking profits and buying new stocks. So you want to buy at every rise and try to skip the fall. Okay, now, do you know anyone who has timed the market and been on the right side more than 75% of the time ? If so, do let me know. The best way for small investors is to invest for long term and avoid timing the market.

Market Term - Cats and Dogs

Cats and Dogs in a stock market refer to those stocks with shady background. These companies would have bad records in the past be it earnings, dividends or would have involved in some illegal activity.

Short sell it !

Short selling is a very interesting concept in the stock market. It basically lets you make money even when you are in bear market. Before we move further, this is only for traders and not for long term investors. So, if you have a great risk appetite, read on !

Short selling works like this, for example - Reliance stock now has been suffering because Dhirubhai's kids are quarelling for 90000 crores. Now, you know that the stock has very limited upmove and whenever one of the kids starts uttering something, the group stocks go down. However you know that the stocks will recover soon enough. So, what you short sell it , you actually aren't buying a stock, but borrowing it from a investor who thinks long term or a broker who has it in his inventory. If the stock price falls, you can buy back the stock at the lower price and make profit on it. If the stock price rises, you have to buy and give the shares back to your broker and hence you lose money.

Short selling is for people who speculate and for people who hedge. We all know what is speculation, hedging is where you sit on the fence and short as well as go long so that if the market moves the other way, you still are safe because you are shorted.

10 Crippling Mistakes

Here is an interesting article from thestreet.com. I must admit I have committed quite a few of these mistakes :( like the author.

* Fighting Mr. Market. There's nothing worse than trading a trend in a choppy market or sideways choppiness in a trending market. Make sure you know which one you're jumping into before hitting the enter button.

* Loving the bad. It's hard to admit it when we're wrong. Rather than cutting losses, we try desperately to transform our worst trades from lemons into lemonade. Sooner or later we find out how easy it is to turn a small loss into an absolute disaster.

* Hating the good. Sometimes we know it's a great trade, but only at the subconscious level. For some reason, we can't handle our good fortune and jump out with a small profit. Minutes later it takes off like a rocket ship without us on board.

* Arriving before the show. Seeing a trade is not the same thing as actually trading it. Bad timing forces us into many positions that aren't ready to move. Then we get bored and give up just before they do exactly what we expected them to in the first place.

* Arriving after the show. Read this one closely before it shows you how to become a bagholder. Sit on your hands and watch a great trade roll by because you want to see what everyone else does before you act. Then jump in just as all of those folks are ready to get out.

* Bull fever. You're sure the market will go up after a rally day, so you jump in with guns blazing the next morning. You've forgotten that markets need to shake out weak hands after a big rally before starting the next move. Guess what? You're one of those weak hands.

* Number cramp. You see numbers that don't exist on your trading screen. Worse yet, your fevered brain thinks they're great trades and you start pounding the keyboard to get in. It can take a lot of time to climb out of this mental mineshaft.

* Ignoring gravity. We worried too much about gravity in the 1990s. Now we need to pay much closer attention to it. Stocks will go down when they can't find many buyers, regardless of how few sellers are hanging around at the time.

* Blind to the big picture.You can get into big trouble by forgetting to step back and check out the landscape. Many stocks have to grind through debris left behind by old selloffs. Every one of those red bars hides losers who want to get out at any cost.

* Hooked on polarity. The diabolical market will manipulate your heartstrings at every turn if you let it. Invariably you'll be afraid when it's selling off and downright giddy when it's going up. This means the trade that follows your emotions is likely to be a big mistake

Weak monsoon ?

Concerns about monsoon are being voiced already. Business Standard reports

The news of a 60 per cent chance of a weak El Nino developing in early 2005, is surely not welcome, given the possibility that this presages a below-normal monsoon next year as well. However, concern at this stage may be premature.

More information at Monsoon Warning

Deadpresident's Valuepicks

Jammu and Kashmir Bank - Hasn't run up like its private bank peers. Trading at very low p/e of 4.19. CMP - 351. Accumulate before it zooms.

Disclosure : I own Jammu and Kashmir Bank Stocks

Avaya Globalconnect

Has had its fall ! Now is the time to rise. Very impressive list of clientele. Telecom sector booming. This stock will perform now. Trading at a very low p/e for a telecom company. More at Avaya GlobalConnect

Disclosure : I dont own any stocks of Avaya GlobalConnect. Will buy it in the coming week.