‘Margin” means borrowing money from your broker to buy a stock. Now the question is why would you borrow? Investors generally go for trading on margin so to increase their purchasing power so that they can own more stock without fully paying for it. That means you will pay a part of the buy price and the broker will lend you the difference.

For the loan you have taken -

• You will pay interest in addition to the usual fees.
• Broker will hold the stocks as collateral and has the right to sell that as well in case buyer doesn’t meet certain obligations as per margin rules and agreements.

Let us understand this with an example:

Suppose you wish to buy a stock with market price of Rs 50.  Under margin trading, you would be paying Rs 25 in cash while remaining 25 Rs will be lent to you by the broker (Assuming the initial margin requirement with your broker is 50%). How does this help? Let’s see.  Suppose the price of the stock rises to Rs 75.

In case of Margin trading – Your return on the investment is 100% because you paid Rs 25.

In case of normal trading – Your return on investment is 50% because you paid Rs 50.

However there is also an equal probability of higher loss for trading on margin. Suppose the stock price falls to Rs 25. If you fully paid for the stock, you lost 50 percent of your money. But if you have traded on margin, you lost 100 percent. And on the top of that you are supposed to pay interest for the loan you have taken from the broker along with the broker’s commission. Moreover if the investor doesn’t maintain minimum margin in his account the broker will have the right to sell all your stocks without notifying you. By this you would even loose the chance to make up your losses when the price goes up later. Below are certain terms that would make the concept more clear.

Initial margin: The proportion of total purchase price an investor is supposed to deposit for opening a margin account is referred as its initial margin and is generally 50% of the total value.

Maintenance margin: In order to keep the margin account open for doing margin trading, it is necessary to maintain minimum cash or marginable securities which is called the maintenance margin. This is just to prevent an investor from incurring a level of debt that he would not be able to repay.

Margin call: If your account falls below the maintenance margin, your broker will make a margin call to ask you to deposit more cash or securities into your account. If case you fail to meet the margin call, your broker will sell your securities so to make up for the stipulated maintenance requirement.

Lastly, for novice traders it is very important to have a realization that trading on margin can help you magnify your profit and at the same time multiplies the associated risks.

Happy DIWALI and Happy Investing

Renuka Kinger

For buyers; consider a share continuously moving down over a period of time and you find the fall in the price as a buying opportunity. To decide your entry price, support level is there to help you. Since the stock is unlikely to go below this level, you can opt to buy at this level without fearing any risk of further downfall and aiming to take an opportunity to buy.

For sellers; consider a share continuously moving up and your aim is to have maximum profit margin and take a profitable exit. Thus to decide upon an exit price, Resistance level is what you should look for. Since the stock is more likely to “bounce” off this level rather than breaking through it, you can sell your stock for better returns.

In generic terms, for a stock trading between support and resistance levels, the strategy of a trader should to buy a stock at support and sell at resistance. For traders involved in short selling short at resistance and then cover the short at support.

As a part of technical analysis there is no denying the fact that support and resistance can help you benchmark your decisions but it is very important not to assume that these levels will not breach at all.

It is likely that a declining stock breaches a support level and continues dropping until it finds another support level. This is called breakdown and usually occurs when number of Buyers willing to step in to buy exceeds the supply available from sellers willing to sell. On the similar note, a rising stock may also breach the resistance level and continue rising till it finds another resistance level.  This occurs when the supply available from sellers willing to sell is greater then the demand from buyers willing to step in to buy. This is as simple as the concept of “demand and supply”. But next time you make a buy/sell decision, do take few minutes to have a look at these levels to enjoy its crunch.

All the best…

Renuka Kinger

Penny stocks are designated as penny in terms of their market capitalization.

These might be low priced due to some reason such as these are of the companies looking for a way to raise capital. These might have good management, better future prospects but with insufficient funds due to which their share is low-priced. It is a matter of fact that a smaller company tends to grow faster and thus their stock tend to move at faster pace. With this Optimism in mind, don’t forget Penny stocks could be worth millions as well. So before underestimating them; keep it in your mind that it might be great opportunity turning your small capital into big amount

Penny stocks are considered more risky investments due to greater volatility factor. Secondly, these are generally traded in lots of 1000. So even if the price goes down by 1 buck, you will loose 1000 bucks in fraction of seconds. Thirdly, penny stocks might not be so frequently traded on stock exchanges. Suppose some rumor broke out and you just wish to exit the stock. But since the stock’s trading volume is low, you do not find buyers to buy your stock. Keeping aside all these factors, a well planned strategy might take you to diamonds hidden inside a coal mine. But before you really enter into the arena ask yourself few questions:

What is there in that penny stock attracting you to buy it?

What is the price at which you must exit the stock?

Once decided upon the stock to buy, exercise your mind to know is it really worth buying? Below are the three criterion helping you take a final decision.

Company fundamentals: Good cash flow is the most important consideration in choosing a penny stock. Spare sometime in knowing company fundamentals in addition to its goodwill and future projects. If a company has a good chance of success, please go for it.

PE and PEG ratio examine the PE ratio of the stock you and compare it with its peers doing well in the market. A safer way however is to find out the Price/Earnings/Growth (PEG) ratio (PE ratio divided by the projected growth in the next 3-5 years). Remember you will choose a stock with higher PE but lower PEG.

Trading volume: Assume yourself in a situation when you want to sell your stock but no one is ready to buy it. Stocks with low liquidity are difficult to buy or sell for the prices you want. So think twice before you buy such stock.

That was all about the reasons for you to buy a penny stock and considerations while deciding which one to buy? But the story does not end here due to associated risks. The best strategy to minimize the risk is to plan your exit having decided your expected profits. Do not just pump and dump the stock for reason that it costs you less than other stocks and will reach very high levels one day.

All The Best

- Renuka Kinger

Rule 1:  Don’t buy unlisted shares
There are over 20,000 public limited companies in India, of which only around 7,000 are listed on the country’s various stock exchanges. The first rule of profitable share investment is to confine your buying to these 7,000 listed companies only.

Stock exchanges do not permit trading in unlisted shares, nor do they permit their registered members, i.e. brokers to deal in unlisted shares. Therefore, if you want to buy unlisted shares you won’t get the protection of the stock exchange authorities; nor will you be able to use the services of your stockbroker in handling such transactions. Moreover, in the absence of stock exchange quotations you won’t be able to assess what the market price of an unlisted share should be. All these factors create complications and risks, which you are not likely to be in a position to handle. As a basic rule, therefore, you should avoid investing in shares of unlisted companies.

How does one know whether a share is listed or not? It’s simple; all shares whose prices are quoted in daily newspapers or websites are listed shares. Unlisted shares are quoted. Therefore, the fact that a share is quoted means that it must be listed. This is the easiest and surest way of fining out whether a particular share is listed or not.

Rule 2: Don’t buy inactive shares
Active shares are those in which transactions take place every day, or almost every day, on the stock exchange. At the other extreme are shares in which transactions take place rarely, if ever. The latter are called inactive shares. In this book, an inactive share has been defined as one, which is transacted less than two times a month, or not at all.

The main reason why shares are inactive is because there are no buyers for them. They are mostly shares of companies which are not doing well and whose future prospects appear to be dim. Naturally, nobody wants to buy their shares. As a result, existing shareholders of these companies find it difficult to get rid of their shares, even at very low prices. And, if nobody wants to buy these shares, why should you? Why should you allow yourself to get stuck with an investment, which you can’t offload at will, whenever you want to? We would strongly advise you to avoid investing in inactive shares.

How does one find out whether a particular share is inactive or not? The simplest way is to regularly scrutinise the stock market quotations, which appear in the daily newspapers. If you find that a particular share has not been quoted for a long time, you can presume it is inactive. Some newspapers, like The Financial Express not only indicated the last quoted price of each of share, but also the date when it was last transacted. This information can help you to confirm whether a particular share is inactive. Check out BSE or NSE Websites

Inactive shares can generally be bought at very low prices. This is obvious since such shares generally find no buyers. Inexperienced investors looking for bargains are often attracted to such shares by virtue of their low prices. This is how beginners are normally trapped in to making disastrous investments, Beware of such bargains! If you come across a bargain, remember there has to be catch in it somewhere. It is better to hunt for value, and pay a fair for it than to look for such apparent bargains.

Every time you buy a share, you must remember that one day you will want to sell it. If you are likely to face difficulty in selling it – don’t buy it! This is a sound investment principle, which you should never lose sight of, no, matter how cheap or attractive a particular investment may appear to be. Never allow yourself to get caught with illiquid share. They are only pieces of paper without any value. Shares have value only when they are readily encashable.

Of course, it is possible that a share, which is inactive today, could become active tomorrow; just as a share, which is active today, could become active tomorrow. It all depends upon the degree of buying interest in a particular share. If buying interest builds up in a share, it can easily move from the inactive to the active category.

Rule: 3 Don’t buy shares in closely held companies:
Whether a company is widely held or closely held depends upon the number of shareholders it has. In this book, we will draw the line at 5,000 shareholders. Companies with less than 5,000 shareholders will be considered as closely held.

Shares of closely held companies tend to be less active than those of widely held ones since they have a fewer number of shareholders and, thus, a smaller floating stock of shares. Shares of such companies tend to be ignored by the general public. Large institutional investors also tend to avoid closely held companies. As a result their shares do not get sufficient price support, which they would otherwise have got if they had been widely held. Moreover, it is always much easier to manipulate the share prices of a closely held company than those of a widely held one.

Share prices of closely held companies also tend to be more volatile than others. When they rise they rise very fast, and to a very high level. Conversely, when they fall they do so very fast and to a very low level. As a result, it is generally very difficult to buy shares in a closely held company when prices are rising, and very difficult to sell them when prices are falling. Investing in such shares requires a high degree of expertise, knowledge, alertness and quick thinking, which take years of active investing to acquire. We would, therefore, strongly urge you to keep away from such shares.

Source : Various Websites and Books on Share market Basics

Market order: When you put buy or sell price at market rate then the price gets executed at the current rate in the market. The market order gets immediately executed at the current available price.

In market order there is no need to mention the price; the shares will get executed at the best current available price.

If you wish to buy or sell shares at any specific price, i.e. market order is not suitable for you then you have to go for limit order.

Market order is for those who want to buy or sell immediately at the current available price.

Limit order – It’s totally different from market order. In this, the buying or selling price has to be mentioned and when the share price comes to that price your order will get executed at the price mentioned by you.

But here it’s not sure that the price will come to your limit order.

In day trading it’s risky because you have to close all your transactions before 3.30 pm and if in case the price doesn’t reach to your limit order, your order will be open and then you have to go through (bare) heavy penalties. Importantly, limit order and stop loss trigger price are used together.

Stop loss trigger price: Stop loss and trigger price are used to reduce the losses. This is a very important term especially if you are day trading (intraday). Stop loss, as the name indicates, is used to reduce the loss.

You can use a pivot calculator for simple stop loss calculation for delivery based trading and intraday stop loss depends on how much you are ready to lose – the maximum amount you are ready to lose- it also depends on the price movements of the scrip for that particular day

Source : Various

While concerns about online security will always be there, rest assured that the brokerages themselves have a very, very high stake in making you feel comfortable about the level of security being used. All online brokerages have a portion of their website devoted to explaining the measures they employ to protect your transactions.

Here are a few questions that you may have regarding Online Trading in Stocks.

Is trading through the Internet safe?

The safety of transactions on the Internet depends on the encryption system used. The better this transaction system, the more difficult it is for any person to hack the site. Internationally, the best system available today is the 128-bit encryption.

Secondly, you too can ensure the safety of the transactions online. You normally get a secured user id and password, the secrecy of which is to be maintained entirely by you.

Thirdly, if the transaction system requires no manual intervention, you further improve the safety in the transactions. Among Indian sites, very few are fully integrated online trading sites. This enables the elimination of the possibility of any manual intervention, which means orders are directly sent to the exchange ensuring that you get the best and right price.

Is trading through Internet Difficult ?

The experience of trading through Internet depends a great deal on the type of product offered by the site. Say, for example, one of the issues bothering you may be getting tired of the paperwork involved after every trade, in writing cheques.

In online trading sites, the greater the back-end integration of the system, the greater the amount of work the sites do for you, therefore greater the convenience available to you.

In big financial institutions your broking account, bank account and Demat account are linked electronically. So when you punch in a buy or sell order, the system checks the funds/shares availability and automatically credits/debits the accounts once the order is executed by the exchange.

Is trading through Internet a costly affair?

The convenience provided by online trading is even then worth the costs involved.

And online trading sites are not that costly. For example, a trader can trade shares on margin at rates as low as 0.10% and if one wishes to trade in cash, then the rates applicable are as low as 0.4%.

However, it is important to compare various online trading sites on brokerage rates, inclusive of all sub-charges.

I am pretty satisfied with my present broker who serves me off-line. Why should I choose to go online to trade shares?

Many of those customers who have chosen to trade shares online today, had at one point of time been trading through offline brokers, just like you are today. They took a chance to go online and trade shares. After realizing the advantages of trading shares online, they have shifted to online trading now. Just try trading shares after opening an account with any online trading site. However, before choosing an online trading site, please compare all such websites and then make a decision.

How frequently are the prices updated at all these online trading sites?

The tickers available at online trading sites provide instantaneous updates. Also, some websites can offer to transact in those shares instantaneously and with convenience.

How can I be sure that I shall be trading at a price I want to or at a price appearing in the website?

The solution to your problem could be provided in different ways by different online share trading sites. For any trade order, the customer is asked to click ‘Proceed’ after he has the opportunity to completely check the order verification form.

Moreover, you have the option of modifying or canceling the order till the moment the order is executed at the exchange.

Finally, online trade confirmations reach our customers within 4 minutes, while contract notes are dispatched at the end of the day and reach within 24-36 hours.

What other services can I get by trading shares online?

Internet has brought to the retail investors what was till sometime ago the sole prerogative of large brokerage houses and high net worth individuals.

In the era of capitalism, with arguments of whether socialism would take over, emerged the concept of stocks and hence stock markets. We were always familiar with the bonds that the government issued against a certain security it provided us, which we often term as deficit financing. It is now applicable for the private industrialists as well, when they want to accrue capital and they are running short of funds. They fly shares, some of which are collectively called stocks and they collect money against the shares that you hold. This way you actually own up the company even though just by bits and pieces. Your money, of course is a risk of undergoing a loss if the company loses profit. However, the chances of gaining profits are not very less either. Often shares are termed as risky assets, which can yield very high returns. You could say it acts almost like an insurance market when it comes to risk spreading.

As many seem obvious to you, unless you know your way through the stock market, you might end up losing money. Stock market, as the common notion goes, is not gambling for money. It is rather pure mathematics and what we call in statistical terms, econometrics. So, when you are new to stock market investing, trying to find your way out, you indeed could do with the help of a stockbroker, who know the principles of how the market will work for a set of political and financial developments. And once you know your way about the market, you could do with discount brokerages, which charge you a lot lesser than the traditional stockbrokers in lieu of providing you with lesser advices. Discount brokerage allows you to take your own decision with little or no help from the stockbrokers as per your preferences.

If you want to trade stocks or buy and sell financial assets within the same day, what you do is day trading. With Internet making the world a smaller place, the concept of online stock market trading has come up to be very popular. You can undertake online stock trading when you want to trade stocks without being fooled into buying a certain stock or selling one, doing directly to the market. This is where discount stock trading could help you from losing money for nothing. It provides you with an opportunity for the cheapest stock trading. Many casual traders are now into the scenario of day trading due to improved Internet options, changes in legislation and advanced technology. Traditionally though, day trading was the nook for financial firms, investors and speculators.

Discount stockbrokers allow you the flexibility of creating your own portfolio, sharing your money between mutual funds, bonds, stocks, options and exchange traded funds. Most of the companies that are into discount brokering, allow the options of banking like checking and savings accounts, credit cards, certificate of deposits and mortgages and money market accounts. Such companies offer you options of the best online trading.

Short Selling

Looking at the flow of shares in above flowchart, one would ponder why to borrow shares for selling in market and then transfer them back to the lender? The logic behind shorting is very simple; earning profit margin. Let’s see how??

If you think a stock is overvalued and expect that the price would come down in future for sure; you would wish to sell the shares at current levels at higher price. So you borrow the shares and sell them at higher price. And when the stock actually falls as you had speculated; you buy it from market at lower price and return it to the lender and the difference between the selling price (higher) and buy price (lower) is what you earned in the deal. So at the end you must close the short by paying back the shares and this is called as “covering the short”. Concluding this, investors who anticipate fall in the stock price go short to take advantage of market fall. An investor can hold the short for as long as he wants but he is charged an interest as it is similar to a loan taken in the form of shares. Also if during the course of loan, the company declares dividend or rights issue, it must be paid to the lender who is the actual owner of shares because you are just a borrower.

Short selling is considered to destabilize markets directly or indirectly. In 2001, the stock prices crashed heavily owing to short selling by big operators after which SEBI banned it. After a gap of 6 years in December 2007 SEBI came up with updated norms of short selling to cover the loopholes and ultimately institutional investor were also permitted to short sell.

Concluding this, short selling no doubt gives you an opportunity to earn profit by taking advantage of downturn of markets, it might bring in huge loss to your investment if stock price moves up. Because in real sense, shorting is a bet against the current market trend. When stock is at current higher levels, you are expecting it to fall down and entering the arena. Speculation is what makes shorting a riskier job. So beware of the dark side of shorting before you actually go for it!

All the Best

Renuka Kinger

Market is said to be bearish when it keeps falling for a prolonged period of time. The common thought that creeps into our mind is about triggering event causing such a prolonged downfall. There can be many reasons like economic recession, political events like war and invasions, decrease in corporate profits, stocks being overvalued etc. ( Also see What is a Bull market and Bear market ? )

The question arises now what keeps it to remain bearish for such a long duration? Consider yourself stuck in a stampede struggling to save your life. You will make every effort to get out of it. Similar is the situation of an investor who speculates huge losses in bear market and wishes to avoid them. When market shows downtrend continuously, selling pressure continues and there are no potential buyers in the market. This creates panic amongst the investors who wish to make an exit by booking nominal profits if they find themselves lucky enough. This situation which leaves selling as the only option keeps the bearish market alive.

What does bear market has in store for you?

The only rule of finding hidden treasure in bear market is to be optimistic and observant of market movements while everyone is rushing out to seek shelter. The reason is simple as indicated in diagram below. There is always a cyclic trend wherein after a period of recession, market recovers and finally booms.

Think of a pendulum which has to come back to its original position and rest assured that bears will turn bullish. The only catch is how to decide what to sell from your current holding and what to buy for further gains.

While selling keep two points in view. First, don’t bother if you don’t book profit; make sure you are not into losses. Second, don’t sell because everyone is selling. To choose the ones to be sold, revisit your portfolio and study the fundamentals of stock. If the stock is overvalued with high P/E, don’t wait much and sell as you get the opportunity. On contrary, if a stock has stable balance sheet and good performance, it falls following the market trend and will surely rebound.

While buying, a wise investor would surely gain; just be prospective. First, if you are long-term investor, identify the recession-hit stocks with good fundamentals. These are a good pick because they are trading low following the market trends. Once market recovers, they will follow the suite. Secondly, blue chips have been a buyer’s choice in such markets because they are the market movers. So keeping in view that recession will be over, they can be most relied upon. On similar note, better stay away from penny stocks. Thirdly, invest in stocks based on items of necessity like FMCG, telecom etc. rather than luxury items because even if the whole economy is in recession, human’s basic needs have to be fulfilled and these stocks will never die out.

The crux is be optimistic and keep investing because sometimes your good investments are the ones which you don’t make.

Renuka Kinger