Basics of RBI Monetary Policy

Basics of RBI Monetary Policy
There is the big news on all the financial news papers and TV channels about the CRR hike by the RBI. Let us see what exactly do there terms (Monetary policy, Credit Policy, CRR, SLR, Repo rate, reverse repo rate) mean and how they affect the stock market and the stock investing public.


What is monetary policy?


Basically this is a policy which controls and regulates the supply of money in the Indian economy. This policy is a tool used to influence interest rates, inflation, and credit availability through changes in the supply of money available in the economy. In India it is also called the Reserve Bank of India’s ‘Credit Policy’ as the stress is primarily on directing and controlling credit.


What is Bank rate?


Bank Rate is the rate at which RBI allows finance to commercial banks. Bank Rate is a tool, which RBI uses for short-term purposes. Any revision in Bank Rate by RBI is a signal to banks to revise deposit rates as well as Prime Lending Rate. This could mean more or less interest on your deposits and also an increase or decrease in your EMI.


What is CRR?


All scheduled commercial banks are required to maintain a fortnightly minimum average daily cash reserve equivalent with RBI. This is 3% of its Net Demand and Time Liabilities (NDTL) outstanding as on the Friday of the previous week. But the apex bank is empowered to vary this ratio between 3 and 15 per cent. RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time. Increase in CRR means that banks have less funds available and money is sucked out of circulation.


What is SLR?


Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). Present SLR is 25%. RBI is empowered to increase this ratio up to 40%.


What are Repo rate and Reverse Repo rate?


Repo rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive.


The reverse repo rate is the rate at which banks park their short-term excess liquidity with the RBI


RBI priorities


The RBI also revised the GDP growth projection for 2008-09 from 8.0-8.05 to around 8 per cent, barring domestic or external shocks. Pointing out that price stability and controlling inflation were the priorities of the central bank while it maintained growth momentum, RBI Governor Y.V. Reddy said, “Exaggerated bearishness is as dangerous as exaggerated bullishness. We are emphasising a lot on inflation but underplaying growth.” Dr. Reddy was addressing a press conference to announce the RBI’s first quarter review of the Annual Monetary Policy for 2008-09.


Controlling Inflation


While the policy actions would aim to bring down the “current intolerable level of inflation to a tolerable level of below 5 per cent as soon as possible and around 3 per cent over the medium term,” Dr. Reddy said that at this juncture a realistic policy endeavour would be to bring down inflation from 11-12 per cent to a level close to 7 per cent by March 31, 2009.


On domestic oil prices, the RBI Governor said, “We are not expecting any pass-through of global oil prices to domestic prices in the current financial year.”


How it affects the stock markets, investors and the common man?


These hikes are a clear signal for banks to increase their lending rates; and loans for housing, cars and personal purpose will be dearer.
Bank stocks suffer the most a lending and borrowing becomes dearer. Most rate sensitive sectors in the stock market are banking, real estate, autos. These suffer because loans become more expensive with higher EMI’s.
In other sectors the companies which are in expansion mode and need capital are going to suffer with credit availability becoming difficult

Wall Street Monkey Business

Wall Street Monkey Business


Once upon a time in a village in China, a man announced to the villagers that he would buy monkeys for $10.


The villagers seeing there were many monkeys around, went out to the forest and started catching them.
The man bought thousands at $10, but, as the supply started to diminish, the villagers stopped their efforts.
The man further announced that he would now buy at $20. This renewed the efforts of the villagers and they
started catching monkeys again.


Soon the supply diminished even further and people started going back to their farms. The offer rate increased
to $25 and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!


The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some
business, his assistant would now act as buyer, on his behalf.


In the absence of the man, the assistant told the villagers: 'Look at all these monkeys in the big cage that the man
has collected. I will sell them to you at $35 and when he returns from the city, you can sell them back to him for $50.'


The villagers squeezed together their savings and bought all the monkeys.


Then they never saw the man or his assistant again, only now the monkeys were everywhere!


Welcome to WALL STREET.

Stock investing wisdom from SEBI chief

Stock investing wisdom from SEBI chief




Stock market investors keep hearing the warnings from time to time from financial experts and  investment advisors but not many pay heed to them. Equity Investors refelect on those pearls of wisdom only during times of stock market meltdown, when they lose their hard earned money in the stock markets.


Recently speaking at the HT Leadership Summit the SEBI chief Cautioned the retail investors as well as institutions to desist from greed. The stock market watchdog SEBI has advised them not to play in stock markets with borrowed money.


"Not just our markets, but in markets all over the world, leveraging (investing borrowed money) is a very dangerous thing. A retail investor should not leverage himself and come into the equity market," Sebi Chairman C B Bhave said while giving tips on prudent investment at the HT Leadership Summit.


Bhave said many investors tend to forget that in stock markets one cannot buy at the lowest and similarly cannot sell at the highest.


At times, he said, retail investors and institutions fall victim to greed and apart from losing their money, risk even borrowed funds.


Often, the Sebi Chairman said, stock markets moving consistently in the green are mistaken to be a one-way street.


Citing the example of the fall of Lehman Brothers Inc, he said there is a lesson to be learnt from what happened to markets in the West.


Bhave also advised investors not to invest all their savings in equity markets and must keep sufficient money for medical emergencies and loan repayments.


Following the global financial turmoil triggered by collapse of America's iconic investment banker Lehman Brothers Inc, stock markets world over went into a tailspin, culminating into huge losses for retail and institutional investors.


Stock markets in India have followed the global markets and the most stocks have lost 50 to 80 percent of their market cap.


Time to listen to the experts and follow their sane advise of investing in the stock markets through mutual funds and SIPs (systematic Investment Plan) still holds true.

Top ten questions about stock investing-2012

Top ten questions about stock investing-2012




Top 10 queries of stock investors answered by stockinvest.in


From a booming global economy to the depth of gloomy recession has left stock market investors jittery and with huge portfolio losses. Stockinvest.in has tried to address and answer the top ten questions on the mind of investors.


Q1: When will the stock markets recover from the impact of global recession?


Ans: No one can give the exact answer to this question, only a reasonable estimate can be made. It is clear there is not going to be a V shaped recovery in the stock markets. The stock market will test its bottom couple of times and a gradual U shaped recovery will begin after the dust in financial markets settles down.


The ongoing worldwide financial turmoil is a creation of many years of monetary and financial mismanagement. And it will take some time for the issues to be resolved. At the present no immediate relief is in sight.


In the short run the stock markets are going to be volatile giving a few hundred points jump on both sides. The current gloomy scenario points more towards a downside rather than a positive breakout.

The stocks of good companies with solid business and great managements have also been beaten down to unrealistic levels along with unreliable companies and they make a good investment for long term investors.


Those who invest in the stocks of companies with good management and credentials will be grateful for this downturn in the economy and earn good money on their investments in the long run.




Q2: Are people going to stop investing in stocks in the future?


Ans: Investing is about creating monetary security for your future needs and desires. As long as we have these needs and desires investing in equity will continue as no asset class offers better returns than the equity market. This is a historically proven fact.
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Q3: How badly will the global recession affect India?


Ans: Indian economy is not insulated or decoupled from the global economy. Although India has its own internal market and consumers which will sustain demand to certain extent but overall global scene affects the country to a great extent.


India’s weak internal like poor infrastructure, old technology, lack of investors along with issues like weak governance, rampant corruption, terrorism have the potential to derail the country's growth rate.


On the other hand India also has multiple engines of growth e.g. poor infrastructure also means increased spending on infrastructure, causing growth in related industries and since India is less dependent on developed countries for economic growth it follows that India will tackle the downturn better than most other nations.


Q4: How does this downturn in the economy affect the earnings of companies?

Ans: The earnings growth and profits of Indian companies is going to come down from the earlier expectations. The crisis and its impact on Indian companies have been more severe than what was initially estimated. The sharp depreciation in the value of rupee has  led to companies reporting earnings loss.


While such losses are notional and will reverse with the reversal of the currency (i.e., appreciation), the fact is that these will have a bearing on the companies' FY09 earnings and beyond.


Then, companies have also been impacted due to a severe tightening of liquidity and strain on their working capital financing. This has led to delays in manufacturing and lost sales opportunities.


Analysts have revised the target stock prices of companies in view of the earning loss.


Q5: Should investors buy large-caps, mid-caps or small-caps’ stock?


Ans: The allocation of large, mid and small cap companies in an investor's portfolio is  based on several factors like investor's age, risk profile and investment tenure.
While a higher allocation to large and mid cap stocks is best suited to investors belonging to the middle age category and with a lower risk profile, higher allocation to mid and small cap stocks is best suited to investors belonging to the younger age category and with a high risk profile.


However, it is important to make sure that a single stock (whether large, mid or small cap) must not form a large chunk of a portfolio.


Generally, a stock should not form more than 5 to 6 per cent of one's portfolio. The portfolio, as a whole, should be well diversified.


Q6: Is it a good time to invest now or should one wait for the bottom?

Ans: No one and I repeat no one has ever been able to predict the top or the bottom of a stock market cycle. An analysis of the history of the stock markets has revealed that different bear markets have bottomed out at different times and there has emerged no definitive trend on the same.


Hence, an attempt to time the market or in other words, 'waiting for the markets to bottom out and then start investing' is not likely to prove successful.


Efforts should be made instead to look for stocks that are trading well below intrinsic values and then wait patiently for as long as as 3-5 years for the market price to converge with the intrinsic value of the stock.


Q7: Should I sell my stock holdings now?


Ans: If you believe that you hold stock of a company, which has the capability to deliver value in the long term, is down because the markets are down then the answer is don’t sell.


But if you think that you made a wrong choice in the first place and there is no point buying more of a troubled company at lower prices just to average your cost then you should sell.


Ultimately, the decision to 'sell' a stock should not be determined by the market sentiments but by the investor's assessment of the valuation of the stock.


Q8: All stocks are trading near their 52 week bottom, so which stocks should I buy?


Ans: The intrinsic value of any asset, be it stocks, bonds or real estate is nothing but the discounted value of cash flows that can be taken out of the asset from now until eternity. This method of valuation is popularly known as the DCF method.


Hence, the DCF analysis should be performed on stocks that the investor considers cheap and consider investing in those that give the maximum upside with respect to their market prices.


However, we would like to add that future cash flows are a function of factors like the company's balance sheet, its management and most importantly, its competitive advantage.


Hence, these factors need to be carefully evaluated while arriving at the future cash earnings of the company and thereby its intrinsic value


Q9: What about investing in commodities such as gold?


Ans: With the global meltdown the commodity prices are also heading south. In a global slowdown consumption is reduced and demand for commodities falls.


 Gold is a good hedge against rising inflation. However, unlike good quality stocks that pay dividends or bonds that pay out interest every year, returns from investment in gold can only accrue from the sale of the asset.


Thus, there is no income to fall back upon if the market for gold remains non-conducive for years at a stretch. Hence, exposure to gold in one's asset allocation should be limited and not more than 5 per cent of the total assets in our view.




Q10: Should I borrow and buy stocks since the stock market has corrected almost 60 percent?
Ans: A big No is my a

Avoid these stock investing mistakes

Avoid these stock investing mistakes in 2011


Year 2011 has been terrible for stock market investors. We all make mistakes while investing, but there are some obvious ones which can be easily avoided. This can help you safe guard your investment and capital.


While we at Stockinvest.in wish you a happy and prosperous 2009 we also try and list some of the common mistakes stock market investors make which can be easily avoided. 


1. Borrowing money to invest in stocks or leveraging


When you borrow money to buy stocks it is called leveraging. Many investors in over confidence about their convictions about stock market borrow money to invest and they are the ones who suffer the consequences.


Margin money is the amount an investor pays to a broker to have a larger position than the money that has been deposited. The interest rate on such lending is higher.


When the stock prices are rising and stock markets are rallying the return on such investment is much more than the interest cost. On the other hand when the market falls, there is a complete wipe out of investor’s money.


For example if a stock 250, you bought stocks worth Rs 40,000 on an initial capital of Rs 10,000. If the stock moves to Rs 270, it has gone up by only 8 per cent, but the return on investment is 32 per cent.


Now if the stock dips to Rs 200 down 25 per cent, you stand to lose 100 per cent, add to this the interest cost to the total capital loss, then the initial capital is completely wiped out.


So, Avoid leveraging or borrowing funds to invest in the stock market it can spell disaster for your financial well being.


2. Averaging the cost


Whenever the price of a stock starts falling, the initial reaction from investors is to buy more to average out the cost to lower levels.


Although it might bring down the total average purchase price of the stock, a lot of money has gone into this process. It is almost like throwing good money after bad money.


Often, this happens when one refuses to believe that things are turning sour and the recovery would take a long, long time.


Do not get emotionally attached to a stock as it can be very damaging. If you have made the mistake of buying shares at higher price, don't multiply it by buying them at every low.


3. Do not investing on tips or rumors


Many investors can be accused of this one. But things can go real bad sometimes. This is especially true with mid- and-small-cap stocks.


There are hundreds of examples where tips are given for penny stocks. Initially, it may give you some money. In the long run, however, such investing tactics can be fatal. You should invest some of your time researching the stock you want to buy. Most of the information is available on the net.




4. Derivatives (Futures and Options) Devil


New investor should stay away from the derivatives market. According to Warrant Buffet “derivatives are 'financial weapons of mass destruction”.


A large number of small investors used the derivatives route to invest rather than the cash segment. It was easy since futures and options allowed them to take positions on either side (long or short) with little over 20 per cent margin or little option premium.


But since they have to pay only 20 per cent, bigger risks are taken. That is, small losses are not booked. Instead, positions are rolled on in the hope that ultimately things would favor them.


No wonder, losses keep mounting and can really hurt sometimes. Derivatives are not an investment tool but a hedging mechanism. So either don’t use it or use only after you have learnt about derivates or know the insand outs of futures and options trading.
 5. Investing in IPO (Initial public issue)


When the stock markets are booming the initial public offerings (IPOs) of companies is oversubscribed by 40-50 times. On listing at the stock exchanges usually the stock lists at a premium and investors make some money by selling it.


If the IPO lists at a lower price you can be stuck with a dud stock. During a bear market phase like the present one even those IPO’s which listed at a premium tend to go below their issue price and investors lose money.


Long-term IPO investors may still make a decent return over a long run, but subscribe and sell on first day is out of sight at the moment.


Invest in IPOs only when you believe in the company. Otherwise, just stay away.


Investors should realize that making money is a long-term process. However, in their attempt to make a quick buck, many suffer. While investing your hard earned money in the stock market in 2011, make sure that you avoid these mistakes. Wishing you very happy and prosperous 2011.

Tax you pay on your investments in 2011

Tax you pay on your investments in 2011


Have you ever wondered hOw taxation affects your investments? How much tax you end up paying on returns on various investing instruments? This is a very important issue which every  smart investor should be aware of. Here we briefly discuss various investment options and related tax issues.




PPFs, FDs, and Government securities


Public Provident Fund or PPF and bank fixed deposits or FDs and the various Government securities are very low risk investments and have similar returns.Perhaps the only difference that you could think of between a PPF and an FD is the number of years of tenure. While PPF has a 15 Year term, FDs has different terms. In fact FD comes with lesser number of lock in periods.


On the tax treatment for PPF and FD the deductions under 80C are the same however there is difference on the tax returns front. The returns that you get on FDs are taxable while on PPF it is tax free. So assuming that both PPF and FD gives you 8 percent returns, the post tax returns on PPF would still remain the same at 8 percent while it will be 5.6 percent post tax returns on FDs if you fall into the 30 percent tax bracket.




Other investment options




The returns from the various Government securities like the National Savings Certificate (NSC) and Kisan Vikas Patra (KVP) are taxable and considering the same example as above your post tax returns would stand at 5.6 percent. After having considered which tax bracket you fall in your investment should be where the returns are either tax free or the returns which do not get taxed much.


Stock market investment in stocks and equity mutual fund


Stock market investing is relatively a higher risk and quick return investment. A systematic investment plan is usually a safe bet and long term investments give better returns. Equatiy investment has short term capital gain tax of 15 percent and cess if you sell your equity mutual fund before one year of holding. If your hold your investment longer than one year it is not taxed.


Insurance, pension plans


When you get back your money which you invested in an insurance or retirement plan it is taxed at normal rates. However the returns from other types of insurance plans such as guaranteed, bonus linked or ULIPs, and a whole life insurance plan that comes with an option of YoY withdrawals are tax free.


Debt funds and bank FDs


The returns from Liquid Plus funds which are tailor made tax saving instruments for very short term deposits are slightly higher than the traditional bank FDs.


Also unlike the taxable FD returns the returns from these funds are tax free. Despite some percentage of tax on the dividend distribution tax from Liquid Plus funds the post tax returns per annum from this fund is considerably higher compared to FDs.


Similarly, the investments in long term deposits of more than one year such as Fixed Maturity plans or FMPs give 'double indexation' benefit. However the timing of investing and withdrawal in FMPs is important.


While investing in FMP is ideal just prior to the end of a financial year you can withdraw it after the end of the next financial year. The tax rates are minimal compared to FDs and higher post tax annualised returns by over 50 percent.


Gold, real estate


The sale of gold jewelry within a period of 36 months from the date of buying is taxable at normal rates. Even if the sale is made after 36 months after employing the indexation benefit you could still end up coughing about 10 to 20 percent of taxes.


So the best way to save tax would be to invest in tax saving gold mining funds or mutual funds and in exchange traded funds.


The impact of taxes on real estate which is an illiquid asset depends on the holding period. While selling of a real estate within 36 months of buying would attract taxes at normal rates, exemption can be claimed if a residential property is sold after 36 months but only if it is re-invested.

10 Must Read Stock Market Investing Tips

10 Must Read Stock Market Investing Tips
In the stock market there is no rule without an exception, there are some principles that are tough to dispute. Here are 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.


1.Ride the Winners not the losers


Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:


    Riding a Winner - The theory is that much of your overall success will be due to a small number of stocks in your portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.


    Selling a Loser - There is no guarantee that a stock will bounce back after a protracted decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.


In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses. 


2. Avoid chasing HOT TIPS 


Whether the tip comes from your brother, your cousin, your neighbor or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; do your own research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run. Find out what you should pay attention to - and what you should ignore 


3. Don't sweat the small stuff.


As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few cents difference you might save from using a limit versus market order.


Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself. 


4. Don't overemphasize the P/E ratio.


Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued. 


5. Resist the lure of penny stocks.

A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you've lost 100% of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it. 

6. Pick a strategy and stick with it.

Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed. 

7. Focus on the future.

The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.

A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with Subaru demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought Subaru after it already went up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that." The point is to base a decision on future potential rather than on what has already happened in the past. 

8. Adopt a long-term perspective.

Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.

Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire. 

9. Be open-minded.

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades from 1926-2001, small-cap stocks in the U.S. returned an average of 12.27% while the Standard & Poor's 500 Index (S&P 500) returned 10.53%.

This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Dow Jones Industrial Average (DJIA), and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains. 

10. Be concerned about taxes, but don't worry.

Putting taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you'll want to put tax considerations above all else when making an investment decision (see Basic Investment Objectives).

Conclusion
There are exceptions to every rule, but we hope