Understanding Equity Markets Better!

People who have been following this Blog since sometime, would have come to know by now, that we want to encourage peers in the surrounding to be more vocal & at the same time well equipped with sufficient knowledge in the Financial Markets.

Main Objective of our existence only is to help & educate people to make their own Trustworthy & Reliable Financial Health.

We are now going to start a special & specific Literacy Campaign, totally dedicated to Equity Markets, as per the Reader’s Demand.

Opinions & Suggestions Invited. We want a 2-way Discussion to happen, so as to maximize the benefit for the audience. To attain the same, we are plan to conduct Online Workshops pertaining to highlight the Intricacies of Equity Markets on a monthly basis.

 

Regards,

Bharat

Macros Simplified in form of Santa & Banta Conversation

Let me today, try to share with you, a Simpliifed Conversation, between 1 of our Favourite Character’s, whose jokes we are always surrounded by, in a way or Other.

Santa & Banta, once met & started a serious & sensible Conversation, to exchange thier Understanding on Macros & how they impact the Global Economies.

Santa: I have heard recently, that Mr. Rajan has reduced Repo Rate, by 50 basis points and everyone is saying that this is good for the market. Loan EMI may also come down. What this Rate cut means actually? I want to understand this.

Note: For awareness of those, who have not heard, about who Mr Rajan is, he is our Reserve Bank of India (RBI) Governor, who is the mind behind, framing/refining our Monetary Policy.

Banta: To understand this you first need to know, how does a Bank functions?

Santa: Why?

Banta: Because all these are inter-related. Tell me – What does a Bank do?

Santa: Bank takes Money from Depositors and gives Loan to earn Interest. That way, they keep everyone happy, and make a profit also.

Banta: Correct, but there is more to it.

Let me explain this in a very Simplistic way. Bank needs Money. Bank can get Money from depositors like you and me and also from RBI. But bank also needs to pay certain Interest to us and also to RBI.

Santa: Ok.

Banta: Let us try to understand first – What happens when we deposit, say, Rs. 100 with a Bank?

Santa: I know that. Bank gives that Rs. 100, to someone, who needs a Loan.

Banta: No, it is not that simple. Remember, though, Bank can earn Interest by giving away Loans, but it is also very risky. There are many cases of Loan Defaults. This way, Banks can put all our Money, into High Risk areas. It has to be protected.

Santa: How?

Banta: Ok, RBI has made it mandatory, that upon receiving, say, Rs. 100 – Banks first, have to deposit Rs. 4 with RBI. RBI keeps this Rs. 4 in its Current A/c and hence Banks do not receive any Interest on this Money. This is known as Cash Reserve Ratio or CRR, which is currently at 4%.

Santa: Hmmm, then?

Banta: RBI has also made it mandatory, that upon receiving, say, Rs. 100 – Banks need to compulsorily buy Central and State Govt. Securities of Rs. 21.50. Of course, Banks will earn some Interest Income here. This is known as Statutory Liquidity Ratio (SLR), which is currently at 21.50%.

Santa: Ok, so you mean to say that upon receiving Rs. 100, Banks can Lend only Rs. 74.50 at its own will.

Banta: Correct. 100 – (4 + 21.50) = 100 – 25.50 = 74.50

Santa: But you were saying that Banks can also borrow from RBI. What Interest Banks need to pay to RBI?

Banta: Before 30th September, Banks were paying 7.25% Interest to RBI, when they borrow Money from RBI. Now this Rate has been reduced by 50 Basis points. So Banks, now need to pay Interest to RBI, if they borrow from RBI, at the rate of 6.75%. This is known as Repo Rate.

Note:For awareness of those, who do not know, what a Basis Point is: In financial terms, ‘One’  Basis Point  is a unit equivalent to  0.01% i.e. 1/100th of a percent.     Thus 10 bps means 0.10% and   100 bps means 1%.    BPs is mostly used to indicate the changes in Interest Rates and also Bond Yields.

Santa: Can Fixed Deposit (FD) rates, be affected by reduction of Repo Rate?

Banta: Of course. If banks get Money from RBI @ 6.75%, Why will Banks pay, higher Interest to you and me? One year FD rate is already revised by many banks and it is equal to or very close to 6.75%.

Santa: But as now Banks are getting Money, at a Cheaper Rate, then they should reduce the Loan Interest Rate as well (i.e. pass on the benefits, they are receiving).

Banta: Correct. They should. And on that hope only, Market (Stock Market) is cheering. If Companies, get Loan at a cheaper rate, they will likely to expand their Businesses. That will create more jobs, more Income (Disposable or Discretionary for Individuals & households) and in turn,boost the Economy.

Santa: How is Inflation linked to this?

Banta: See, when Loans becomes cheaper, people tend to borrow more. That means, people will have more Money to spend. This will increase the Demand for Goods, and if Supply does not increase to match this Demand, then prices will increase.

Santa: So there is a chance, that Inflation may rise also?

Banta: Well, yes. But Inflation depends on many other factors as well, like Production (Industrial and Agricultural), Manufacturing, Export – Import, Foreign Currency Movement etc. So Inflation may increase or may not.

Santa: One last Question. Like we deposit our Money with Banks, Can Banks also deposit their Money with someone?

Banta: Yes, they can deposit with RBI and earn Interest too. This Interest is typically 1%, less than the Repo Rate. This rate is known as Reverse Repo Rate.

Key Ingredients of Monetay Policy

Santa: Great! So now I understand CRR, SLR, Repo Rate, Reverse Repo Rate and their impact on Deposit Rate, Loan Interest Rate and on Inflation. Thanks.

Banta: Welcome!

Hope this help as well & each one of us, would now find it so easier, to Understand these basic Concepts of Macroeconomics & its Impact on Economy as a whole (Global Economy).

Knowledge Capsule on Stocks Basics

Off Late, I have been getting, most of the queries from the readers, on clarifying the Basic Differences & Aspects of Face Value (FV), Book Value (BV), Stock Splits & Bonus Shares issued & how do these affect our Investments, as an Individual.

Through this Post, I am trying to throw some light on these basic Concepts.

All About Stocks

What is a Face value of a Share?

Face Value (Par Value) of Share

All Companies issue shares, with a fixed denomination called the Face Value (or Par Value) of the share. This Face Value be indicated on the share certificate. Generally Indian shares has a Face Value of Rs. 10/-

Difference between Face Value and Market value

A Face Value has no relation, with the Market Value of the share. Market value of the share, will always change, depending upon the market conditions. But the Face Value, is a fixed value of the share, as per the books of the company.

Difference between Book Value & Market Value

Book Value is the price paid for a particular asset. This price never changes, so long as you own the asset. On the other hand, Market Value is the current price, at which you can sell an asset.

For example, if you bought a house 10 years ago for Rs 30,00,000, its Book Value, for your entire period of ownership, will remain Rs 3,00,000. If you can sell the house today, for Rs 50,00,000, this would be the Market Value.

Book values are useful, to help track profits and losses. If you have owned an investment, for a long period of time, the difference between Book and Market Values indicates the Profit (or Loss) incurred.

Market Value: The Market Value of a stock, represents the price, investors will pay to buy or sell the stock. Market value does not always represent the actual value of the company.

The terms “Overvalued” and “Undervalued” compare the Market Value of a Company’s Stock, to the Company’s Actual value, or Book value.
When a company’s stock, sells for more, than the company’s book value per share, analysts consider the stock Overvalued. Analysts consider stock that sells for less, than the company’s book value per share Undervalued.

For example, a Company’s Stock might trade at Rs 1000 per share, but the Company has a Book Value per share of Rs 900. Analysts would consider this stock Overvalued, because the Market pays more, per share, than the Company is worth.

Book Value: If a company went belly-up (i.e. it goes bankrupt) and sold all of its Assets and subtracted any Liabilities, the remaining value, which investors would receive, represents the Company’s Book Value.

In other words, Book Value, represents the total value of all the assets minus any liabilities. This value often gets referred to as Shareholders’ Equity or Owners’ Equity.

Real World

Because the Market value of a Stock, is driven by Supply and Demand, many Companies trade well above, or often below their Book value.

Split the Face Value of the Share

A Face Value or Par Value of the Company’s share, always remains the same, irrespective of the Market Price, of that share. Companies have to right to Split the Face Value of the share to Rs. 5, 2 or 1, to bring more Liquidity to the share.

Liquidity means, that more number of People, can now buy & sell the Share, as Price is in their reach, before the Split, when it was quoting higher, in Quantitave terms (Rs 4000 Seems to be more per share, as compared to Rs 400 or 40).

What are Bonus Shares?

Bonus Shares are additional free shares, issued to the shareholder by the company. Profitable Companies in India issue Bonus Shares. These are additional shares issues, given to the Shareholder, without any cost to existing shareholders.

What does the Ratio of Bonus Shares mean?

Bonus shares in India are issued in a definite proportion to the existing holding. (Eg. Ratios against the number of shares holding by the shareholder)

Example 2 : 1 bonus would mean, that you will get 2 additional shares (free), for every 1 share, you hold in the company. If you hold 50 shares of a company, a Bonus share of 2:1, will get 100 Bonus shares FREE. So your total number of shares in that company will be 150 instead of 50, without any additional cost (Is that exciting!!)

How Bonus Shares are Issued?

Bonus shares are issued by using on the free reserves of a company. Companies accumulate its reserves, by retaining part of its profit, over the years (the part that is not paid out as dividend). Sooner these free reserves increase. When the company issues Bonus shares, the reserves will convert into the Capital.

Finally you are also not paying for this and the Company profits are not affected.

Does it impact Stock Price?

Bonus Shares issue, adds to the total number of shares, in the market. If a company had 10 lakh shares. Now, with a bonus issue of 2:1, there will be 20 lakh shares issues. Now, there will be 30 lakh shares.

The Earnings of the Company, will have to be divided, by that new number of Shares.

Earnings Per Share (EPS) = Net Profit/ Number of Shares

As the profits remain the same, and the number of Shares increases, the value of Earnings Per Share (EPS) will go down.

In fact, the Stock Price, should also go down proportionately, to the number of new shares. But sometimes, in reality, the share prices may not go down, which gives more advantage to the share holder.

How to Grow your Money?

Makes it Easy to Buy and Sell

Whenever Bonus shares are issued, the stock becomes more liquid. And this make it easier to buy and sell.

Are Bonus Shares Good or Bad for me?

A bonus issue indicates that the company is booming and it is in a position to service its larger equity. Bonus share issue is considered as a Positive Sign for the Company.

Whenever a bonus issue is announced, the Company also announces, a Record date for the issue.

Record date is the date, on which the bonus shares takes effect, and shareholders are entitled to the bonus shares on that date.

Hope it helps. Please do share your feedback.

Noise is a catalyst for Deviations

This Post is specifically in response to a query from a blog reader Pankaj.

He raises a very vital concern, that during the end of Financial Year, we all get numerous calls, from so many so called Intellectual People. in their own self acclaimed world, to buy this & that product  (Guaranteed Money Back Plans, Invest this much amount monthly, for these many years & get this much of Pension after your Retirement. & likewise N number of suggestions, pouring from all hook & corner).

It is but obvious, under these influence, bias definitely crops up & we end up in totally committing a mistake, in moving stupendously, in a wrong direction, of where we exactly wanted to land up.

Noise & Ignorance go hand in hand. It is our own Ignorance, being so much educated & doing wonderful & awesome jobs at our workplaces. We are not able to make a correct choice. It is we, who have to filter that noise, with out intellect.

As rightly said by Martin Luther : ”Nothing in all the world is more dangerous, than sincere ignorance and conscientious stupidity”

In consensus to it, William Shakespeare also points out wisely: ”Ignorance is the curse of God; knowledge is the wing wherewith we fly to heaven”

What a Fact!!!

We should not listen blindly to anybody & it is our duty to safeguard our own hard earned money, with our little effort to attain that knowledge, so that we should not end up, in not only committing mistakes, but repeatedly… We will totally deviate from our aligned path.

If we are on a Journey & we are lost somewhere in the middle, it is better to ask somebody, but it is we only, who have to use our brain, search for Signboards, as in the herd or crowd of those, whom we ask the path, some will say go straight, others would recommend to go left & remaining may be suggesting to take a right.

Will this not eventually be an invite for trouble for us??? 

Are we going to reach our destination?

Now it is the time to wake up & without any further delay.

Let’s use our collective wisdom & develop a habit, to make ourselves equipped, with at least minimal cognizance, to protect our own Interests & wealth…

Those who ride themselves are the winners….Those give steering to others & take a back seat, definitely end up in paying a price, for not being focused. 

I too have went through this pain & I would not be doing Justice with my readers, if I am reluctant to admit… But what I want my avid readers, is to learn from the mistakes of others & learn from those.

It’s not wise to measure the depth of the well, by diving in to it, when you already know that somebody unknowingly, went through that pain.

Hope this helps…

Investment is nothing but Planting a Sapling

One of my blog reader, wanted me to put the Rational & Significance of Investment for an Individual, in simple words.

My Mind gave me an analogy of the mother Nature, to derive a food for thought, for each one of us.

Most of the times, once we are starting our earning lives, 1st & foremost thought which comes to our mind is:

Let’s enjoy… That Enjoyment comes to us, in form of being extensively spendthrift ,spending in various forms of Liabilities in Balance Sheets terminology, such as Purchasing Latest Gadgets, Going for Loans or Revolving Credit by using Credit Cards & ending up Paying Interest/EMI’s, rather than Creating Financial Assets (Investments)…

Investment is the last thing that comes to the mind of this individual.

Now coming back to mother Nature:

Once, we sow a Sapling, it takes its own due course of time, along with our periodic care (watering, putting fertilizers,pest control & weeding out the waste), to finally become a tree, which would one day give us shade to lie down & relax .

Same is the case with Investments. We need to develop habit of patience, here as well & take periodic review of our Investments & let them flourish over a longer duration of time & let the magic of Compounding play its significant role.

It will provide us a cushion or shade to us in those days, when we will be not able to generate Active Cash Flows for us (Retirement) & we can live our own lifestyle, without making any compromises.

This reminds me an apt Quote in context from Warren Buffet: “Someone’s sitting in the shade today because someone planted a tree long time ago.” So plant your seeds (investments), give it some time and let the power of compounding show its magic.

One of the Famous & Widely used Methodology to achieve this is SIP, which we come across very frequently to gain from the benefits of Rupee Cost Averaging, without timing the Market.

SIP = SMALL IN PLENTY

Watering the Investments Slowly & Gradually

Start Planting your Saplings (Investments), at the earliest, to get the maximum benefits in the longer run.

Hope this helps.

Portfolio Selection-Concentrated Vs Diversified

From the last Post:https://planurmoney.wordpress.com/2015/09/08/personal-finance-simplified-in-terms-of-journey-2/

we would have been by now, well equipped with the means, for reaching our targeted Goals in Future.

Summary of Last Post is: Map your means (Asset Class & Allocations) efficiently with the Goal Based Approach Investment Strategy for Long Term Wealth Creation.

Let’s today talk about a very subjective & debatable topic, which will land us, at such a wonderful experience, of being Financially Independent down the line, provided choices made were right & holding period is sufficient enough.

Plain Dictionary meaning of Concentrated is Focused & Diversified is spread out.

Coming to Portfolio Creation:

Concentrated Portfolio, signifies,where we are focused, only to Limited Asset within an Asset Class or Asst Class & keep on increasing our allocations, in those limited scope of Investment Avenues.

Hence it too can be concluded that we are putting all the eggs in the same basket & if something goes wrong we are written off, but it can create wonders too & that too beyond imagination, in  LT wealth creation, if our initial choice to pick the means, to reach our destination is right & our strategy is buy right & sit tight.

Alternative to the above methodology of Portfolio Creation is:

Diversified Portfolio: It, in turn demonstrates, that more we spread out, in our Investment Strategy, better are the chances to mitigate the risk from losers in our PF, with those out-performers in the PF. Here, we are saying that, keeping 10 eggs in 4-5 baskets…If 1-2 baskets are gone, at least 3 still are there, to safeguard our vested interests, in our money making Journey.

Both the Approaches have their own Repercussions & as I have always insisted, that it is Personal Finance, final call lies with the Individual in discussion, based on various other allied parameters such as Risk Appetite, Capital Allocation, Age,Investment Horizon, to name a few.

Hope this helps…

Personal Finance Simplified in Terms of Journey

Normally, most of the times, we are working in a different City & our Parents/Family stay at different Place. Hence we have to travel to meet them.

Same thing, I felt over years & years travelling from Hyderabad to Delhi. I can travel from Source to Destination, by different modes of Transport, ranging from Train, Flight or by Road. The time, thus required to reach the final destination, would then depend on which mode of travel, we choose.

In a similar but simple fashion, I would try to throw some light on managing our own Money. Source & Destination would vary from person to person & hence it is Personal Journey or Finance.

Hence , we can derive an analogy between the two.

Personal Journey                                                                     Personal Finance

Source:                 Hyderabad                                         Initial Capital for Investment  (P=Principal)

Destination:            Delhi                                               Linked Goal to our Investment (Kid’s Education, Kid’s                                                                                                                       Marriage, Home Loan/Car Loan Down-payment)                                                                                                                                                   (A=Amount)

Mode of Transport:     Train, Flight, Road                 Stocks, MF, PPF, RD, FD, Gold, Real Estate

Time Taken:               Depends on Mode of Transport                    Depends on Investment Vehicle chosen from above                                                                                                                                           (T=Time)

ROI (Speed (KM/H))       Flight>Train>Bus                   Stocks/MF>RE>PPF,RD,FD>Gold (R=Rate of Return)

Finally, we land up to a very Basic Mathematical Eqn, read in our Primary Classes

A=P*(1+R)^T

Hope this post, gives us fodder for thought & we can correlate our day to day money matters & understand them in a simplified manner.

Feel free to share your feedback & do let me know the Topics on which you want more clarity.

Carnage in Markets should not deter our Confidence

In the last post, we talked about as to, why are we afraid of Equity Markets?

Why are we Afraid of Equities?

Let’s today discuss, why are we shaken in our own conviction bets, once markets start correcting significantly.

Markets Globally have been correcting these days, due to Chinese Yen Devaluation (which means China is depreciating its own currency, so as to make Exports, across world too much competitive in turn catalysing & igniting the Currency War, specifically for Emerging Market Economies, such as India) & hence India too is not insulated from the economic happenings across the Globe.

This currency war started by China, has resulted in a Crackdown of around 1100 Points & 300 Points in our Broader Benchmark Indices (Sensex & Nifty) today. Shall we also become a part of this panic selling & sell our conviction bets at losses or at a meager profit?

All these meaningless thoughts, are flooded within our brains, from all nook & corners & as per our Human Investing Psychology, we tend to do normally, as per per our belief of our own fear.

Also as very aptly said by King of Wall Street-Mr Warren Buffet-“Buy when others are Fearful & Sell when others are Greedy”.

Hence our strategy, during these times of extreme volatility, should be to move a surplus from our Monthly Earnings, in a systematic way, to our Understandable Businesses & Managements, which definitely would become our conviction bets. This approach, would help us in enjoying the Rupee Cost Averaging. In other words, we should avoid investing Lump sum amounts, when every1 is busy in chasing the climbing stocks.

Food for Thought:            Use SIP Mode for a Long time horizon, even investing a meager amount of money, over years & years & enjoy Multiple benefits of as: Skewed Risk reward ratio in your favor, Rupee Cost Averaging, as said earlier, along with Compounding Growth Machines (High Conviction Stocks or Businesses), which you own stake in, i.e. your conviction stock. This in turn would eliminate the Beta element of risk & volatility as well.

Back with a Bang!!!

Actions speak louder than words.

Silence & Exile are over for this wonderful group of people now.

We are back with a bang, with totally professional, renovated & re-structured version of PlanUrMoney which is a platform to help others in attaining Financial Independence in their respective personal lives by reducing their Liabilities & Increasing their Assets & in turn Net Worth.

This is a Journey which we started around 2011, when we started a blog, to address various generic Personal Finance related stuff.

Now over the course of time, we have attained a real time practical experience & strategic approach for sharing our knowledge with others by addressing their each & every small query which holds even slightest of the space in their memory.

We are here to help you out. Please feel free to post any query of ur’s related to Personal Finance & we will try to answer it for you, with best of our capabilities.

Why are we Afraid of Equities?

Stock Market is a Gambling den— is a very frequently heard quote, which we have become habituated to hear, from our Parents or Traditional Investors. The main goal of these Traditional Investors is Capital Protection with little aim or aspiration for Growth.

I too started on the same notion,being no different from the herd, which has got deep inculcated within me, as my Father has always been fancied by the Conservative Asset Classes such as Fixed Income Instruments-comprising of Recurring Deposit’s (RD’s).Fixed Deposits (FD’s), Kisan Vikas Patra (KVP-Instruments for doubling your money in a span of time, where span stands a variable), Employee Provident Fund (EPF) & Public Providend Fund (PPF) to name a few & to some extent in Gold & Real Estate & those were considered as a Capital Protection Strategy.

Lately over the course of time, Economy & specifically Emerging Markets such as India have overwhelmingly matured & at the same time a monster or devil called Inflation, is always after us to eat a major chunk of our Capital.

Inflation is nothing but Power of Purchasing.

But as an Investor, who are en-cashing their Earning Opportunities, as early as at age of 22,we still have not become matured & flexible enough & are still unaware of the miracles, that could go beyond our imagination, with a simple Equation of Compounding, which we have been reading since our childhood.

Compounding Eqn: A=P* (1+r)^t

We can give ample amount of time for Gold to be with us, as most of the times, we are emotionally attached with this asset class. We never look back to other illiquid asst class: Real Estate. We can stay back relaxed, that my Property is going to give me hefty gains in the future, without anticipating any timeline for the same.

We can give EPF’s, PPF’s & FD’s of all the world, ample amount of time, for our brain-fed conservative or traditional returns, but when it comes to Equity Markets, we cannot refrain ourselves in deciding the Parameter t in the Compounding Eqn.

We want quick bucks in short span of times & finally we chase those stocks which are daily climbing high. Stocks are nothing, but give you an opportunity, to be a co-owner of the business being run by a Management.

What we end up chasing these daily climbing stocks is we buy high & get stuck up at top & once the stock starts its downwards journey, we are under tremendous self acclaimed pressure to sell that at lows, so to minimize our losses.

Why can’t we give an appropriate time to these Excellent or Good Businesses being run by extraordinary or superb & proven Managements & keep our ownership in these companies, close to our chest, as time to sell these stocks is never, as long as companies are growing.

Food for Thought: Are we really matured (Financially Literate) enough, even being so much Educated & excelling at an excellent pace in our professional lives?