Month: November 2008

Basics of Options trading for beginner investors

Posted on by Jagoinvestor

Looks like people are very much interested in learning about Derivatives. Let me try to put basic things about Derivatives.

Read how you can Hedge your portfolio using PUT options

options trading

Let me first talk Good things about Options

If there is anything in world which can make you instant rich, it’s Options Trading !!! What is instant Rich here !! Instant can indicate anytime from 10 days to 5-10 yrs. It depends on you how much risk you want to take. Options can deliver returns which you can never imagine.

You can get returns in a day equivalent to what you get in 8 years in Fixed Deposit !! 10% return in a week is what I call a realistic average return in long term after risk management.

Just to give an example, if you start with 15,000 and take 10% profit each week, you can generate 1 Crore in 1 year (compounded basis).

How to Trade options?

To just like people trade in Stocks, shares, they can trade in Options .. Buy them at a cost and selling it later at some profit or Loss. The main difference in options trading and Stock trading is that Options trading also has time limit attached to it. That’s makes them more dangerous.

There are some selected shares which have options for them. Almost all the well known stocks have their options. Nifty index also has an option for it.

Almost 85-90% options trading happen in NIFTY options … Each stock option have lot size, like NIFTY lot size are 50. So if the price for NIFTY 2600 CA is 90, 1 lot will cost you 4500. And suppose the price reaches to 200, you can sell it and get 10000, 5500 of profit – brokerage charges.

Some other very good stocks for options trading are RELIANCE, ICICIBANK, CHAMBAL FERTILIZER, JAIPRAKASH ASSOCIATES and many more.

Watch this video to learn more about Options trading:

Some Experiences I can remember

I have often seen an option rise anywhere from 2 times – 50 times.

Just 2 days before NIFTY made the lowest of 2250 in OCT, NIFTY was at 3000, and I bought NIFTY 3000 PA at 60 (NIFTY was at 3000 and 3 days left to expiry). Within 5 min, it went up to 90 and started coming back down .. I sold it at 88 and took good profit of 40% …

Just after I sold it market starting going down and it went up to 200.

Next day market tanked heavily and the price was now 500.

Next to Next day market again tanked heavily and option price was now 750.

Something I bought at 60 was at 750 after 2 days and I sold it at 88. Anyways .. I made good profit and I was happy (It’s a white lie, you know that)

This is a little extreme case, but in general options can give close to 50% – 200% return in short duration. Scenario is very different at the starting of month and at the end of month because of Options expiry. At the time of options expiry, the change in price is significant because of the time value and uncertainty.

How Risky Options Are?

If you don’t fear anything in World, better you fear Options .. It can wipe you out within days … It’s a Money eating machine. You can lose all your money if you are not focused or don’t have knowledge or good money management.

If you are trying hard to lose money and you are not successful, try options ..Warren Buffet calls Derivatives as “Weapons of mass destruction”, I agree with him, but I also differ on the fact that options have the power to make you super rich if you can use it effectively and with intelligence and without GREED.

Advice

If you want to try options trading, first learn about it heavily .. Read books, read stuff .. Watch it for 1-2 months .. See the behavior and once you are confident that you can make some money .. enter with small money (because you are going to lose) …

Don’t feel back after losing money, think of it like “Guru-Dakshina” … everyone has to give it in the start, you are no exception. Now go back .. Again read some more books, Do some virtual trading, and once you are confident again start with small money (which you can afford to lose) .. And start doing the trading slowly step by step … Don’t put all your money in one go .. Else you will cry later.

Disclosure

I have been trading options from last 6 months and still I am in loss and way far than break even .. Please don’t take it as my advice to trade option; it’s just for informational and sharing purpose .. You are yourself responsible for your losses.

“I thought Women are complicated and tough to handle, then I met Options” 🙂

Returns with options trading

Posted on by Jagoinvestor

what kind of markets have these been .. a slight news of hope is causing stocks to rally to so much amount which they used to rally in a year .

As i write this Citigroup Corp shares have risen 68% in just 1.5 hrs of trading . 68% in a day !!

That’s a kind of return which mutual funds are really jealous of . Last month when there was some bad news about UNITECH , it plunged by 50% in a day only to recover back 40% the next day ..

Last quarter DLF lost 33% in 2 days on the news of US FDA banning its drugs in US . and then it again came back to its normal levels .

When DLF lost for 2 days , I had seen DLF PUT options went up 50 times in 36 hrs …and on the third day when it was up again by 20% , then its CALL options went up by another 5 times . means if you got everything correct and bought call and put options at right time , you could have made 5 Crores ($1 million) with 4 lacs of money ($8000) . that’s 25000% return in 60 hrs . there is an assumption that you bought things at right time which is almost impossible … but with little luck and study at least 1000% was possible for sure …

I thought of buying DLF puts after it fell for 1st day , but because of fear , i didn’t buy it .. and it went up by 800% next day ( i remember it correct , it went up from Rs 4-5 to Rs 40) , that’s 800-900% return in 2 hrs .

I am sure Citigroup option traders would either have made a killing or killed themselves . 🙂

Anyways , options are extremely dangerous products , its not advisable to get into them unless you are sure what you are doing ..

Read the basics of what are options

Some suggestions in mutual funds

Posted on by Jagoinvestor

In this market people are facing dilemma whether to invest in tax saving funds or not ? There are lot of tax mutual funds which will appear on the list if you search for best funds . So the best thing is to hear the experts in the field .

Valueresearchonline.com are the most trusted and pioneer in Mutual funds information collection and advice . As per there website , they have rated funds in different categories with 5 star ratings .

ELSS (Tax mutual funds)

1. Magnum Taxgain
2. Sundaram BNP Paribas Taxsaver

EQUITY DIVERSIFIED

1. DWS Investment Opportunity
2. Kotak Opportunities

DEBT Oriented

1. UTI Mahila Unit Scheme
2. Birla Sun Life Asset Allocation Conservative

Source : Valueresearchonline

Some article related to this

https://finance-and-investing.blogspot.com/2008/08/all-eggs-in-single-basket-people-say.html
https://finance-and-investing.blogspot.com/2008/02/all-tax-saving-mutual-funds-are-not_9196.html

The Real face of FMP’s

Posted on by Jagoinvestor

People who have invested in FMP’s should read this … other should also . What is FMP : Read here FMP’s are considered as equivalent of FD’s , with better return , butits not exactly true … They are also risky and “lehman borthers”equivalent in India .. They are investing in sub-prime home loans inindia in the same way like Lehman did in US . Read a good report here : https://www.shyamscolumn.com/2008/11/know-your-fixed-maturity-plan.html Another article from Outlook money can be read here : https://money.outlookindia.com/article.aspx?sid=10&cid=57&articleid=7873 Note : This is just to show that people should not underestimate therisk involved with something … FMP rarely are considered as riskythings .. that does not mean , they can never collapse .. Read about Equity , Debt and Liquid Funds What is CRR and Repo Rate

Six Investment Rules which will help you to manage your emotions better and become a better investor.

Posted on by Jagoinvestor

This is a nice article by Charles Delvalle based on Investment Rules, i am just reproducing his work on this blog.

Have you ever been on a losing streak and felt like there was no way for you to make money in the markets? I think we all feel that way from time to time. It’s natural. After all, our emotions are never static.

Equity investment rule

The worst part is that when we’re in that mindset, we can actually create a self-fulfilling cycle. Maybe we’re trying too hard. Maybe we get sucked into a variety of different indicators that we never followed before. Or perhaps we get into one trade hoping that it’ll make up for all the losers we just had.

Nine times out of ten, it never works out though. The end result is that you lose more and more money. But it doesn’t have to be that way. So here are six simple rules for you to follow that will help you manage your emotions better and become a better investor.

Rule #1: Hope to make more money, fear to lose more.

In the book Reminiscences of a Stock Operator, this was one of the most important lessons that trader Jesse Livermore learned in his time as a trader.

When he got into a position and it started losing money, he realized that he had to get out of it quickly (cut your losses). So what he’d do was to fear that he’d lose more money and get out of the trade. On the other hand, if the trade was going his way, he would hope to make even more (let your winners ride).

Rule #2: Stick to Your System, NO MATTER WHAT.

This is a tricky rule to stick to, even for experienced traders. But the truth is this: If you have a system that you know for a fact works, then don’t stray from it. You will only end up losing money.

Why do investors stray? Sometimes it’s the feeling of invincibility they get after they’ve won a few trades in a row. Other times it’s simply because they are desperate to hit a winning investment. Whatever the reason, when you stray from your system, you stray from what you know works. Ignoring what you know is never a good way to make money.

Rule #3: Don’t become attached to your money.

Sounds easy, right? You’d be shocked how hard it is to actually implement. Too many people put money in the stock market that shouldn’t be there. If this is your retirement, or tax money, or money you owe to somebody, DON’T USE IT IN THE STOCK MARKET! Only use money that you can afford to lose.

Rule #4: Don’t play catch up.

If you’ve hit some losses in the stock market, the last thing you should do is ‘double up’ and hope to hit a winning trade. What if you don’t win? You will lose twice as much and be in even more pain.

Listen, losses are a part of the game. Every investor in the world loses money from time to time, but if you’re system works (rule #2) then stick to it and you should end up back in the green in no time.

Rule #5: Don’t over-analyze things.

I can’t tell you how many times I open up the Wall Street Journal and see an article that goes completely opposite to what I believe to be true about a particular sector or investment. Does that mean I listen to them? In all honesty, I look at the argument and see if it has merit. If it doesn’t, that’s it. I stick to what I believe to be true unless something drastically changes.

Equity sentiment roadmap

 

In my trading arsenal, I have a few indicators I look at and then have certain beliefs about the market and sector based on a few people I trust and what I know of the market. Everything else is just static. It’s only there to agitate you.

Rule # 6: Listen to yourself.

One thing I’ve learned is that as you trade, you find out new things about yourself. You find out what your true fears are (fear of success, maybe?), you find out your weaknesses (maybe not following your system to a T), and you find your strengths (maybe you make money best in certain sectors).

As an investor, you need to pay attention to all of these things. That way if a certain emotion is cropping up and threatening to lead you in the wrong direction, you could quickly stop it and move on.

Watch this video to know more about Investment Rules:

If you can stick to these six rules, you’ll be able to have a much better grasp of your emotions while you trade.

What do you like about this article? Do you want to ask any query? leave your reply in the comment section.

Introduction to Equities, Debt funds and Liquid Funds – For beginner investors

Posted on by Jagoinvestor

We will talk about Equity, Debt and Liquid Funds. We will also discuss dividend distribution tax is treated for all these funds.

mutual funds

First understand what is DDT (dividend distribution tax)

Dividend received from a mutual fund is tax free, but only at receivers hand. But mutual funds have to pay a tax on that dividend to Govt before giving it to us. So actually the tax is paid by mutual fund on behalf of us. This tax is called DDT.

Now lets go ahead and see different types on Funds.

Equity Funds

They are the funds that invest more than 65% of their corpus in equity shares of companies. The dividend distributed by such funds is exempt from the dividend distribution tax. So all the dividend which is declared comes to the unit holders, you get 100% of dividends.

But don’t think that this is some extra income .. it is just a part of your own money, after you get the dividend, NAV comes down by that much. This is difference between growth and dividend funds. You actually got some money back, nothing else.

Dividends are are totally tax free and not even DDT is applied to it.

Why to invest : You should invest in Equity mutual funds when you want to invest for long term and when you can take risk. Understand that these funds invest primarily in Equity, so there is more risk, but if you are investing for long term and want capital appreciation to happen, these are the funds for you.

Debt Funds

These funds invest in medium-to-long term debt securities like government bonds and corporate bonds/debentures. The dividend from these Funds are subject to 12.5% Dividend distribution tax. The fund is also liable to pay a surcharge and a cess of 10% and 3%, respectively, on the tax. The effective tax rate comes to 14.16%.

Why to invest : They are debt products and offer good liquidity also. If you want to invest some money for safe returns and for short term goal, then Debt funds are something you can look at.

Liquid Funds

These invest in short-term debt securities (which have a duration of less than a year) like commercial papers, certificates of deposit and call money. The income distributed by such funds is subject to an income distribution tax of 25%. The fund is also liable to pay a surcharge and cess of 10% and 3%, respectively, on the tax.

The effective tax rate for liquid and money market funds is 28.32%.

Why to invest : The main reason for investing in Liquid funds should be Liquidity factor, these funds are most liquid and least volatile .. So if you need to have liquidity in your portfolio, always invest some money in Liquid funds, any extra money lying in your Saving Account above your 1 month requirement should be in Liquid fund.

Conclusion :

There are different type of funds and they all have different purpose, you should see which one suits you and accordingly invest in that. Dividend received from mutual funds are not any extra money like Stock dividend. It is your own money.

Are you willing to buy term plan? – Here are some important tips you should know before buying term insurance

Posted on by Jagoinvestor

We will today discuss some of the best practices and must do things while taking a Term plan.

Click here to read what is Term Insurance and its Importance

Tips before buying term Insurance

1. Take a policy just before your Birthday.

Term Insurance premium depends on your Age. So if possible try to avoid taking the policy just after your Birth date. What i mean by this is that try taking it before you turn +1 year in age. If your Date of birth is 10/11/1983, and you take the policy on or before 10/11/2008, you will be considered of age 24.

But if you do a delay of 2 days … and you take a policy on 12/11/2008. You will be considered 25 yrs old and hence your premium will increase by 4-5%.

Note : It does not mean that if your birthday just passed by and now you want to take Insurance, then you should wait for another year. that’s not what i am saying 🙂

For example:

For a male with DOB on 10/11/1983 (24 yrs old), the premium for Rs 50,00,000 cover with tenure of 25 yrs, is 10157, if the policy is taken on 09/11/2008 (just 1 day before the birthday). Where as if he takes the policy on 12/11/2008, the premium will shoot up to 10647 (Rs 490 more) .. though 490 is a small amount, but if we can avoid it by taking the policy little early .. always try to do it.

Even a small amount like 490 saved over 25 yrs in a PPF would give 45,000 and in mutual fund with 12% return will give 77,000.

Note : The gist of the point is that try to see this small point while taking the Term insurance, it does not mean that you wait for 8-9 months just to take the policy before a birthday.

2. Try to diversify your Policy

If possible try to diversify your policy amount over different Insurance companies. If you want to take an Insurance of 50,00,000, it would be better if you take 2 polices, rather than 1 single policy.

How it helps?

– If you hold a single policy and the company does not honour the claim, dependents wont get anything, but if there are 2 parts, then there are less chances that both the companies with not honour the policy.

– If your liabilities come down or you have less dependents after a couple of years and ultimately you need to bring down your Life insurance cover, you can simply stop one of the policies and continue the other one.

– It helps in diversifying the risks involved with the Insurance company.

3. Buy a policy early in life and for longer Tenure.

Its always recommended to buy a Term Insurance early in life and for maximum tenure possible. In your early life you are more healthy and hence your premium will be lowest. Also by taking insurance for a large tenure you are making sure that you are covered for a large period, but the premium will be marginally more.

For example : For a cover of 50,00,000

Example - why it is necessary to buy term insurance early

 

You can see here that you have to pay marginally more for an extra cover of 5 yrs. So for example, a person with age 25 will pay 14,000 more than the 30 yrs old, but he will be insured for 5 additional years. So it always pays in long term.

Also taking a 30 years term insurance once will be very cost efficient than taking a 20 yrs term insurance now and then taking a term insurance of 10 additional years after 20 yrs. Because after 20 yrs, the premium you will pay for that 10 yrs tenure term insurance will depend on your Age that time and health that time.

Note : Premiums are from Aegon Religare Life Insurance.

Personal Finance quiz – For all types of investors

Posted on by Jagoinvestor

Today Let me ask some questions on personal finance to you which you can answer to see how much you understand things in investing. This small quiz will help you and me know where you belong to.

How much have you learned?  I request you to give answers of the questions as a comment back to this article. I will announce the winners after some days. Also please mention your reasoning about the answer.

Personal Finance quest

Information : I have started a chat box on this blog, please see the right hand side to see it, you can post your questions or queries to it and I would try to answer them as soon as I see them.

Q1. Ajay and Priya are married and both of them earn 40,000 each. They earn total of 80,000 and there monthly expenses are around 20000-30000 per month. In case they have to opt for a Insurance plan. which one they should go for?

a) Term Insurance
b) Endowment or Money back plans
c) ULIPS
d) No Need to take Insurance

Choose one option among these and give the reason.

Q2. Ajay lends 1,00,000 to Manish on following conditions.

  1. He will get 7,000 per year for next 30 years.
  2. He will receive whole 1,00,000 back after 30 years.

What is the best way for Manish to utilize this money and make some profits for him too if possible.

No options here, you should give a detailed description of step he should take.

Q3. Your friend wants to enter magic world of Stock markets. He/She is determined and very confident that he/she can make huge profits. What will be 3 things you would say to him/her.

For an example : The first thing I would say to him/her is “Don’t concentrate much on making profits, rather concentrate on avoiding losses”.

What are the 3 things you would say to him/ her.

Q4. There are two strategies of investing in Stocks of blue chip companies in Stock markets. Time Frame : 2-3 months.

Strategy 1 : Can give profits upto 50%, or loss upto 50% with equal profits. (Assume the stock is very volatile)

Strategy 2 : Can give profits upto 10%, or loss upto 10% with equal profits. (Assume the stock is very less volatile)

Which Strategy will you choose? You are free to make your assumption

Note : Please answer these question to help yourself and see if you actually deal with these situation. What kind of thinking you have? What kind of advice can you give to someone? And more than that, to learn.

I will review all the answers and reply them. Also I would choose the best answer in some days.