Basics of Stock Market - 2

Continuing on my post on the Basics of Stock Market, I would like to make it a series (not a mega serial), so that it will not be too lengthy each time and also allows me to post regularly. I would like to cover the following in this series:

What is a Stock ? What is Share?
Types of Companies
Types of Shares Capital?
What is Stock Market?
What is a Stock Exchange?
How to list the shares?
Different types of Issues?
What is dematerialisation?
What is Face Value?
What is an Index? (Sensex, Nifty, NASDAQ )
What are the fundemental analysis - various analysis with examples
What is online- trading?

If anyone like to have anyother topics to be covered, please do let me know.

Let us start with the very basic of the Stock Market - What is Stock & Share
Ever wonder what is a Stock and how it differs from Share? Nowadays, both are used interchangeably. Initially the companies are called Joint Stock Companies. That means the capital of the company is called the Stock and a part of the Stock is a Share. If a person holds a share in the stock is called a Shareholder.
A shareholder is a person who holds shares in the company. A member is a Shareholder, whose name appears in the Register of Members of the company. Currently with Dematerialisation (discussed later in the post) of shares the distinction between Shareholder and Member is now redundant.

Types of Companies
There are basically two types of Companies - (a) Private Company (b) Public Company
(a) Private Company - A company which has a restriction on the maximum number of members (50 members) and also restriction on transfer of shares. That is the reason, a Private Company cannot be listed
(b) Public Company - A company which has no such restriction as a Private Company. A Public Company can be again classified into 2 categories: (i) Closely held and (ii) Widely held.
A closely held company is a company where the shares are held by very few and a Widely held company is a company where the shares are held by very many. A listed company is a widely held company.

Types of Share Capital
Stocks are of 2 types - Common or Equity Capital and Preference Capital
A Common or Equity Capital is the commonest capital. The total equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs.2,00,000 is divided into 20,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of the company and have voting rights.

A Preference Capital comes with a Preference. A Preference Capital is normally redeemable within a period. Maximum period is 10 years. It carries a preference in terms of payment of Dividend.

Let us concentrate on the Equity Shares, as we would be dealing mostly in Equity Shares in the Stock Market.

To be continued...

Cheers,
Gopal

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Basics of Stock Market - 1

I am happy to share my limited knowledge on the Stock Market with you all. It may be very basic, keeping in mind that some may be totally new to the Stock Market. With the Index falling from 20000 levels to 9000 level, started showing a bullish trend immediately after the election results, shedding about 600 points during the budget session made any common man to look into the Stock Market. There are people who made money and there are many who lost their money in the market. Is it gambling? speculation? calculated risk?. The answer to the question is very simple "Yes" and "No". For those who stay invested in a good stock never lost their money and those who want to make quick bucks loose their money. Nowhere in the history of the stock market people lost their money just by holding on to a fundamentally good stock. How to find those stocks and how long to hold them, how to make the fundamental analysis are the questions that would be running in your mind. It is not a rocket science. It can be easily understood. In this direction, let me take you through a couple of sessions on what is Stock Market, what is IPO, FPO, Rights issue, what is an index (Sensex, NIFTY), why market fluctuates, when to buy, what is long position, what is short, How much is the brokerage, what is STT, what is demat account, what is settlement, etc.,

I hope you will enjoy the same and please keep commenting on the posts by giving your valuable feedback, your doubts, any mistakes in my posting, suggestions for improvements.

I want to make sure that this series is getting to know the stock market and not on giving tips for your buying or selling.

I am travelling and start posting from 28th Aug 09.

Cheers,
Gopal

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Adani Power - Initial Public Offer - An analysis

We all know that the most promising industry in India is Power. There are many players who are jumping into this arena to generate power, as our demand for Power is growing tremendously. Reliance Power came with a bang and now quoting way below the issue price (It never closed a day above the issue price). Though the price of Adani Power is more compared to the fundamentals, it was tipped to get more return on what is called as Listing Gain. The amount you will get in the market vis-a-vis the price you purchased in an IPO. This created more hype for the Adani Power and the NHPC as the market was in a bull phase. Everyone knowing that the price and of Rs.90-Rs.100 is a bit high, but applied for the same.

The issue was over-subscribed. The portion reserved for qualified institutional buyers got subscribed over 39 times the shares on offer, while the non-institutional and retail investors portion were subscribed over 8 and 2.5 times respectively at the close of the IPO. So, the company decided to fix the price of the share at Rs.100 (top of the band)

Today (20th August 2009) the share got listed. On the National Stock Exchange (NSE), the share listed at Rs 108 (a premium of 8% to its issue price of Rs 100 a share). On the BSE, the share had opened at Rs 105, (a premium of 5%).

At the end of the day it closed at Rs 100.10 on the NSE. During the day ita high of Rs 110 and low of Rs 98.30.

On the BSE, it closed at Rs 100.05 . During the day It touched an high of Rs 107.90 and low of Rs 98.50.

What do we learn from this? Look for the fundamentals like Price to Book Value, Price to Earnings, etc., and not listing gains. Look at the peers (Tata Power, Reliance Power, NTPC) in the industry with proven record and compare the fundamental.

The news is that the share of Adani Power may go up a bit and then come down below Rs.90 soon. For a long term investment, get this share at Rs.80 - Rs.90 level.

More people may wonder why I wrote suddenly on a Stock! Some of my friends asked me this question on how the IPO is priced what is a listing gain and how to analyse the fundamentals of a particular stock. This is a start and frequently I will write on the basics of the Stock Market (in India)

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Impact of the Direct Tax Code, 2009 on the housing sector

With the Direct Tax Code draft released by the Finance Minister, Pranab Mukerjee, there were lot of questions surrounding the impact it has on various sector. Let us look at the famous housing sector.

There were several sops given to boost the housing sector in the earlier budgets. Let us see how these were treated in this Tax Code, 2009.

(a) Interest on the housing loan borrowed for acquiring, construction etc.,

Currently the interest paid by an assessee on the self-occupied property is allowed as a deduction from the taxable income to the extent of Rs.1,50,000. But in the new Tax Code, this is not available.

(b) Repayment of principal of loan amount taken for acquiring, constructing etc., a housing property.

Now the re-payment of the principal amount is allowed as a deduction u/s 80C (within the overall limit of Rs.1,00,000). But this benefit has been removed under the new Tax Code.

(c) Deduction for Repairs & Maintenance
Now the assessee can claim a deduction of 30% of the Annual Value, if the house is let out for tent. In the new Tax Code, 20% on the Gross Rent is allowed as deduction.

Also, we had some benefits in investing the capital gains in a Property to escape Capital Gains. But it is also gone now. Following are the deductions from Capital Gains, if you invest the CG in Property or deposit in a CG Savings Scheme.

Deduction # 1
Capital Gain from....: Any investment Asset
Investment in..........: Residential house
Conditions to be met:
(i) The assessee does not own any residential house, other than the new investment asset, on the date of transfer of the original investment asset; and
(ii) The original investment asset was acquired prior to one year before the beginning of the financial year in which the transfer of the asset took place.

So, if you have 2 residential house and sell one and invest in a new residential house, you will not be eligible for the benefit.

Deduction # 2
Capital Gain on....: Any investment Asset
Investment in......: Deposit in an account maintained under the Capital Gains Savings Scheme
Conditions to be met :
(i) The original investment asset was acquired prior to one year before the beginning of the financial year in which the transfer of asset took place; and
(ii) The deposit is made within a period of sixty days from the date of transfer of the original investment asset.

The housing sector reeling under the pressure of the economic downturn and most of the builders trying to sell their properties with great difficulty. Earlier, people started investing in the second property, as the return on the real estate and the tax sops was good. Also, the banks were lowering their interest rates to woo the common man to purchase / construct a property.With the tax benefits gone, the prices of properties started to going up, the demand for the housing property will go down, unless you are trying to own a property for the first time.

The new tax code, if put to use will be applicable only from 1-Apr-2011. So, if you have any loan for your existing property and having some surplus money, better pay off the loan before the Act is in place.

Please note : The views are my own on a plain reading of the Direct Tax Code 2009. Better check with your Financial Advisor before taking any decision.

Cheers,
Gopal

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Fools Work Hard..... for Others.

Last weekend, I spent my time in reading a book "Fools work Hard....for Others. Smart People Work Hard For : Freedom From The Race" by Ravindra Potharaju. It was a nice reading and written very well in a narrative manner. The author created 3 fictitious characters (Bob, Tom & Lou) to explain the concept through dialogues between them.

The concepts were not new but was put very aptly. The author tries to explain how to achieve freedom from the ‘Race of life’. "Fools depend on others for Security" and "Smart guys depend on themselves for Security". He says that he is not against working, but make a plan for future while in job, which will expedite the process to Freedom.

The process to Freedom, he says, can be achieved by following the 7 steps.

1. Choose "Freedom-based Goals"
2. Cultivate "Natural Motivation"
3. Fall in "Love with Wealth"
4. Align "Natural Talents" to your profession
5. Develop the "Right Skills"
6. Prepare and Execute a "Simple Plan"
7. Review "Progress" and "Motivation Fuel"
   

In essence, the author says, Fall in love with wealth, as you do for your children. Deploy your natural talents with the right skills. Develop a simple plan and monitor the same.

The plan is nothing but an Income and Expenditure statement with a slight difference. The bifurcates the Income into Assured Income (dividend, Interest, Rent etc.,) and non-dependent (like salary). He tries to increase the non-dependent income. While on expenditure, he tries to control the expenditure (not cutting them). Then he is re-investing the surplus to generate more independent regular inflow of money. Though he does not talk about how to generate the wealth or to get more returns, he discusses on how to get into the habit of getting regular income. He explains how to compute the number of year to achieve freedom:

N = Freedom Flow/ (AIOP * Ploughback)

Where:
N = Number of years required to achieve threshold of “Freedom”
Freedom Flow = Total Expenses – Assured Income
AIOP = Assured Income that can be generated as a percentage of ploughback
Ploughback = Total Income – Total Expenses ( the amount available for conservation to assured income)

Assured Income = Rentals, Dividends, Royalties, Interest and others
Non Assured Income = Salary, Bonus, etc.,
Total Income = Assured Income + Non Assured Income

To make this equation work, the Freedom flow should be as low as possible. That means, increase the Assured Income and reduce the total expenses. The more you reduce your expense, freedom will be achieved faster. The AIOP to be maximised. This can be achieved by taking proper financial advise.

To conclude, if you feel that you are not living the lifestyle of your choice, dependent of your monthly salary, being in a job you don't like or you are not able to put your natural skills to your job, I suggest you to read this book. It will not give you answers, but can guide you.

Author : Ravindra Potharaju
Publisher : Vikas Publishing
Price : Rs.150 (~$3.50)

Cheers,
Gopal

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Annual Day Celebrations of Bangalore Chapter of ICSI

Yesterday ( I attended the Annual day function of the Bangalore Chapter of the Institute of Company Secretaries of India - at Hotel Woodlands, Bangalore. It was the function for the members & their families. I reached little early at the venue (5.50pm), while the function was supposed to start by 6.15pm. The members (true Indians) started coming around from 6.15 and by 6.30 there were few members. The Chief Guest Dr.Master Hirennaiah reached the venue by about 7.00pm. Finally the function started at 7.25pm. CS Nagendra Rao welcomed the gathering and introduced the Chief Guest. Mr.Kannan, Secretary of the Bangalore Chapter read out the agenda of the day. Luckily I got the company of the past Chairman of the SIRC of ICSI & the Bangalore Chapter of the ICSI and sat on the second row.

The function started with speeches (everyone greeting the members on the dias individually...we are still to come out of the Indian political way of mentioning the names, designation before starting their speech. Prizes were given to the meritorious students. I was surprised to hear that the Chapter has organised sports & games events for the members and students. The winners were presented with Certificates and gifts by the Chief Guest. They have organised for Chess, Table Tennis, Carrom, Cricket, Football and Shuttle. One person won many prizes for Carrom and Table Tennis.

Finally with a foreword from CS.Gopalakrishna Hegde, the Chief Guest started to deliver the speech. It was a hillarious speech and though provoking. While speaking, the Chief Guest reminded that he will adhere to his time as it was nearing the Dinner. The dinner was supposed to be at 8.30pm. When he finished, everyone gave a thunderous applaud for the excellent speech. When everyone got up to form a line for dinner, it was announced that there is a cultural program by the students and the dinner will be served afterward. By that time, it was 8.30pm and I had to leave, as I had some commitments.

I hope the students' program went well and all the members & family members had a fantabulous supper - No doubt on the Woodlands taste! I missed it.

I thought I can meet some of the Company Secretaries in Bangalore, but could not. I realised how I miss this profession by not attending any program in Bangalore. I made it a point to attend few Professional Development programs of the Chapter.

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