Sunday, December 27, 2009
ENRON: THE SMARTEST GUYS IN THE ROOM
A must watch documentary on the ENRON scandal. This documentary depicts the rise and fall of ENRON. The documentary can be seen here
Saturday, December 26, 2009
Regulation in the Indian Stock Market
The Bombay Stock Exchange(BSE) was established in 1875 and is the oldest stock exchange in Asia. Even after 132 years of existence, the number of retail investors who participate in the stock markets directly or indirectly is very less when compared to developed countries like USA,UK, France. This skepticism by the retail investors to invest their hard earned savings in the market can be partly attributed to the numerous scams that have occurred periodically in the stock market. And every time a scam happens, the retail investor is the one who is worst affected. To make the stock market a more friendly place for investors, especially small, SEBI(Securities and Exchange Board of India) was established as a non statutory body in 1988 and was later made autonomous in 1992 with more powers after the infamous "Harshad Mehta" scam.
Functions of the SEBI
---------------------------
The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as
“…..to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”
To elaborate, the important functions of SEBI can be listed down as follows
1)Supervision of functioning of stock exchanges.
2)Registering and regulating market participants like Stock brokers, sub brokers, merchant bankers, portfolio managers, Foreign Institutional Investors(FII's) and other entities who participate in stock markets.
3)Prohibiting fraud and unfair trade practices related to securities markets.
4)Prohibiting insider trading and circular trading in securities.
5)Curbing Volatility(Circuit Breakers) and investigating unusual movement in stock prices.
6)Regulating substantial acquisition and take over of companies.
7)Promoting investor's education in securities markets.
8)Suspending trading in any company that violates the regulations to be listed in the exchange.
SEBI has come a long way since its inception as an institution regulating the Indian Capital Markets. It has initiated a lot of reforms to make the market more safer for investors. One of the major reforms taken by SEBI is the introduction of electronic trading. This has helped in making markets more efficient when compared to trading shares in physical form. Also, SEBI has made PAN(Permanent Account Number) mandatory for all the investors to make market more transparent. But still there have been lot of questions raised on the effectiveness of SEBI because of the scams that have taken place quite regularly in the Indian Markets. The prominent ones being the Harshad Mehta Scam, Ketan Parekh Scam and the IPO scam which involved cornering of large number of shares by opening multiple fake demat accounts. In spite of its ups and downs SEBI still plays and will continue to play a major role in regulating and initiating new reforms in the Indian capital markets. SEBI needs to be proactive in restructuring the Indian markets in a way that it becomes a safe place for investors both domestic and foreign and preventing any scams from happening in the markets. SEBI can play a pivotal role in bringing more and more retail investors to the market.
Functions of the SEBI
---------------------------
The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as
“…..to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”
To elaborate, the important functions of SEBI can be listed down as follows
1)Supervision of functioning of stock exchanges.
2)Registering and regulating market participants like Stock brokers, sub brokers, merchant bankers, portfolio managers, Foreign Institutional Investors(FII's) and other entities who participate in stock markets.
3)Prohibiting fraud and unfair trade practices related to securities markets.
4)Prohibiting insider trading and circular trading in securities.
5)Curbing Volatility(Circuit Breakers) and investigating unusual movement in stock prices.
6)Regulating substantial acquisition and take over of companies.
7)Promoting investor's education in securities markets.
8)Suspending trading in any company that violates the regulations to be listed in the exchange.
SEBI has come a long way since its inception as an institution regulating the Indian Capital Markets. It has initiated a lot of reforms to make the market more safer for investors. One of the major reforms taken by SEBI is the introduction of electronic trading. This has helped in making markets more efficient when compared to trading shares in physical form. Also, SEBI has made PAN(Permanent Account Number) mandatory for all the investors to make market more transparent. But still there have been lot of questions raised on the effectiveness of SEBI because of the scams that have taken place quite regularly in the Indian Markets. The prominent ones being the Harshad Mehta Scam, Ketan Parekh Scam and the IPO scam which involved cornering of large number of shares by opening multiple fake demat accounts. In spite of its ups and downs SEBI still plays and will continue to play a major role in regulating and initiating new reforms in the Indian capital markets. SEBI needs to be proactive in restructuring the Indian markets in a way that it becomes a safe place for investors both domestic and foreign and preventing any scams from happening in the markets. SEBI can play a pivotal role in bringing more and more retail investors to the market.
Friday, December 25, 2009
Reminiscences of a Stock Operator
This is a must read for every market participant. The book narrates the life of Jesse livermore as a trader initially at bucket shops and then at the Wall Street. The book provides an insightful account of the market behavior, the way the market operates and the how the various market participants affect this behavior. This is an ideal book for anyone who wants to understand how the market behaves in the real world scenario. I like this book because of its practical approach that is hardly found in a lot of books I've read that are more academic in nature. This book really changes the way one looks at markets and leaves a lasting impression on the minds of the reader.
The book can be downloaded at the below location
The book can be downloaded at the below location
Monday, December 21, 2009
Fundamental Analysis v/s Technical Analysis
Stock market analysts can broadly be divided into two kinds. Fundamental analysts and technical analysts. What is fundamental analysis and what is technical analysis ?
Fundamental analysis deals with assessing the worth of a company's stock price based on company's fundamentals i.e, balance sheet, cash flows, quarterly reports and deciding if the stock price is undervalued, overvalued or fairly valued before making an investment decision.
Technical analysis involves studying the movement of stock prices in the past to predict the future stock price. It involves studying the stock patterns, moving averages etc., to determine how the stock will behave in the future. Technical analysts believe the value of a company is reflected by it's present stock price and there is no need to study the company's books to assess the worth of the company.
As a beginner in the market, I was always confused which way to go. Whats better ? Technical analysis or Fundamental analysis ? There is no straight answer to this question and today I believe one should not blindly follow either the technical analysts or fundamental analysts. There is a lot more to investing than just fundamental analysis or technical analysis. There are a lot of factors that come into play in deciding the stock price that cannot be predicted by either fundamental analysis or technical analyis. There are a lot of factors that lead to an imperfect market causing the stock prices to be overpriced or underpriced.
If the market was always perfect, then there was no point in investing. The imperfections in the market are an opportunity that the skillful investors should capitalize on. The most important factor to consider before one invests in a company is the growth opportunities for the company and how the company's stock is priced in comparision to these opportunities. The "scalability of business" is what one should look at before investing. Also, the promoters play a significant role in deciding the company's future. How a company grows has a lot to do with the abilites of the promoters. Their vision for the company and the passion towards the company is undoubtedly one of the most important parameters that decides if the company succeds or fails.
There are also factors that are external that can have an impact on the stock price. The most important being the sentiment. It's the human emotion of greed and fear that invariably leads to cycles of boom and bust causing abberations in stock prices. Then, there is the Government policy, Money supply, perception by the FII's (for emerging markets like India). Even non economic events like war, drought, floods, terrorist attacks, Election Results
affect the market directly or indirectly.
To summarize, market has its own reasons to rise and fall and cannot be accurately predicted. But one needs to have an open mind and take advantage of the abberations in the market that occur from time to time and capitalize on these opportunities to make money.
Fundamental analysis deals with assessing the worth of a company's stock price based on company's fundamentals i.e, balance sheet, cash flows, quarterly reports and deciding if the stock price is undervalued, overvalued or fairly valued before making an investment decision.
Technical analysis involves studying the movement of stock prices in the past to predict the future stock price. It involves studying the stock patterns, moving averages etc., to determine how the stock will behave in the future. Technical analysts believe the value of a company is reflected by it's present stock price and there is no need to study the company's books to assess the worth of the company.
As a beginner in the market, I was always confused which way to go. Whats better ? Technical analysis or Fundamental analysis ? There is no straight answer to this question and today I believe one should not blindly follow either the technical analysts or fundamental analysts. There is a lot more to investing than just fundamental analysis or technical analysis. There are a lot of factors that come into play in deciding the stock price that cannot be predicted by either fundamental analysis or technical analyis. There are a lot of factors that lead to an imperfect market causing the stock prices to be overpriced or underpriced.
If the market was always perfect, then there was no point in investing. The imperfections in the market are an opportunity that the skillful investors should capitalize on. The most important factor to consider before one invests in a company is the growth opportunities for the company and how the company's stock is priced in comparision to these opportunities. The "scalability of business" is what one should look at before investing. Also, the promoters play a significant role in deciding the company's future. How a company grows has a lot to do with the abilites of the promoters. Their vision for the company and the passion towards the company is undoubtedly one of the most important parameters that decides if the company succeds or fails.
There are also factors that are external that can have an impact on the stock price. The most important being the sentiment. It's the human emotion of greed and fear that invariably leads to cycles of boom and bust causing abberations in stock prices. Then, there is the Government policy, Money supply, perception by the FII's (for emerging markets like India). Even non economic events like war, drought, floods, terrorist attacks, Election Results
affect the market directly or indirectly.
To summarize, market has its own reasons to rise and fall and cannot be accurately predicted. But one needs to have an open mind and take advantage of the abberations in the market that occur from time to time and capitalize on these opportunities to make money.
Friday, December 11, 2009
To Invest or Not to Invest
This is the question that must have crossed everyone's mind at some point or the other and everyone has there own perceptions and notions about the stock market. Many a people look at stock markets as engines of economic growth while others see stock markets as gambling dens which should be completely avoided. Now, why do we have such a drastic divergence in viewpoints.
Lot of it has to do with with the kind of environment in which one is brought up. Even today, in most of the middle class families in India, stock markets are perceived as gambling dens and should be avoided. Statistics show that Indian middle class is still skeptical about investing in stock markets and prefer more safer instruments which have no risk. This can be partly attributed to the middle class mentality which always tends to be risk averse. But the major reason is the lack of financial literacy. Even, when one ends up investing, most of the times, it is by blindly following others(the TIP culture that prevalent widely in the Indian Stock Market). You invest because someone else tells you to do it and many a times end up losing money. You think investing is risky.This is because you are not in control of your investments. How many of us have heard of people losing their shirts during the stock market crashes and scams(India has had its fair share of scams) ? Most of us, I guess. These events play a role in how the stock markets are perceived by oridinary people.
Having said that, can a person be in complete control of his investments? Not really...
There is a certain degree of uncertainity and risk involved in investing. There are a lot of factors that are beyond the control of investors and are not known before hand. But this risk can be minimized with with financial literacy and if a person takes control of his/her investments.
Knowing all these dangers associated with investments, Is it really worth it ? Inspite of the failures and scams the market has seen, one should not overlook the positive aspects of the stock market. It's the same market that has helped raise capital for so many growth stories India has seen. Be it a Reliance or Infosys.
In summary, I would say that investments have their own positives as well as negatives but one should not have any preconceived notions about the market. One should have an open mind when thinking about stock market as an investment option and should be knowledgeable about the financial decisions being taken. The author of "Rich Dad Poor Dad" has rightly said that it is the investor who is risky and not the investment.
Lot of it has to do with with the kind of environment in which one is brought up. Even today, in most of the middle class families in India, stock markets are perceived as gambling dens and should be avoided. Statistics show that Indian middle class is still skeptical about investing in stock markets and prefer more safer instruments which have no risk. This can be partly attributed to the middle class mentality which always tends to be risk averse. But the major reason is the lack of financial literacy. Even, when one ends up investing, most of the times, it is by blindly following others(the TIP culture that prevalent widely in the Indian Stock Market). You invest because someone else tells you to do it and many a times end up losing money. You think investing is risky.This is because you are not in control of your investments. How many of us have heard of people losing their shirts during the stock market crashes and scams(India has had its fair share of scams) ? Most of us, I guess. These events play a role in how the stock markets are perceived by oridinary people.
Having said that, can a person be in complete control of his investments? Not really...
There is a certain degree of uncertainity and risk involved in investing. There are a lot of factors that are beyond the control of investors and are not known before hand. But this risk can be minimized with with financial literacy and if a person takes control of his/her investments.
Knowing all these dangers associated with investments, Is it really worth it ? Inspite of the failures and scams the market has seen, one should not overlook the positive aspects of the stock market. It's the same market that has helped raise capital for so many growth stories India has seen. Be it a Reliance or Infosys.
In summary, I would say that investments have their own positives as well as negatives but one should not have any preconceived notions about the market. One should have an open mind when thinking about stock market as an investment option and should be knowledgeable about the financial decisions being taken. The author of "Rich Dad Poor Dad" has rightly said that it is the investor who is risky and not the investment.
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