‘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

Every investment involves two important aspects – returns and risk. And every investor wants to get the maximum returns with minimum risk. In this post is described the significance of Alpha and beta parameters of the stock portfolio that are used to describe the two main risks inherent in investing in stocks. Alpha relates to factors affecting the performance of an individual stock or the fund manager’s skill in selecting the stocks while beta relates to market risks.

Alpha of a stock or portfolio:

Alpha is the risk-adjusted return on an investment. It is excess return of a stock portfolio or fund over a given benchmark and hence is usually used to measure the performance of fund manager in managing the fund portfolio. So usually an investor’s strategy should be to buy securities with positive alpha as these may be undervalued.

If an investment outperformed the benchmark, that means more reward for a given amount of risk. In that case α > 0.

If an investment underperformed the benchmark; that means the investment has earned too little for its risk. In that case α < 0.

For efficient markets, the expected value of the alpha is zero. i.e α = 0 and the investment has earned a return adequate for the risk taken.

Fund managers are rated according to how much alpha their fund generates. It is thus a measure of the fund manager’s ability to generate profits in excess of market returns. Fund managers are usually paid in accordance to how much alpha their fund generates. Higher the alpha, the higher is their fees.

Beta of stock portfolio:

Beta is a measure of a volatility of a stock and expresses the relation of movement of stock with the movement of market as a whole. The S & P 500 Index is assigned a Beta of 1. So a stock can have positive or negative value of beta.

If Beta = 1; that means security’s price will move in sync with the market.

If Beta is positive; that means stock moves more than the market and is more volatile.

If Beta is negative; that means stock moves less than the market and is less volatile.

High-beta stocks are generally riskier being more volatile but provide a potential for higher returns as these are in the early stages of growth. On other side low-beta stocks pose less risk and hence lower returns. Usually utilities stocks have a beta of less than 1 while high-tech stocks have a beta of greater than 1.

Having gone through the fundamentals of alpha and beta; it can be inferred that low beta and high alpha stocks are good. But blindly following this concept is not desirable because these parameters are calculated based on historical data and history is never the indicator of future performance of a stock portfolio.

Happy Trading !

Renuka Kinger

Trading online has become very popular in today’s time when you just need a trading account and after that you can trade comfortably while sitting at your home. Apart from comfort of trade it provides various facilities like:

• Ease of buying and selling of shares.
• Online receipt of contract notes/ trade statement for the transactions.
• Direct deposits of dividends/ bonus amount etc to account.
• Various trading tools for ease of making investment decision.

One click of mouse button is of ample importance while trading online because sometimes it is what that draws a line between your winning or loosing the game. Trading online is very interesting but you have to be a bit careful as well. The process of trading is very easy but making money is a bit tricky. All you need is a trading account and a little bit of caution to operate the same. Below are some do’s and don’ts while trading online:

Prices change at the blink of eye and the transactions are not always in real time. Moreover the speed of your internet might cause delay. So always make sure not to change your decision until the last moment. Take time examining the stock and make decision ahead of time so that you don’t loose while in panic.

An important feature of stock markets is volatility. So if you don’t keep a close eye on how your stocks move while placing an order, you might land up in losses.

Online trading is a matter of trust between you and your broker because there is no in-person contact. But you can’t leave everything on trust. Make sure your broker provides you detailed email statements and contract notes of executed trades.

Online trading provides facility to place limit orders. If you don’t have sufficient time to keep track of the stock prices, fix up a buy/sell price based on your judgement and go for limit orders. Moreover limit orders help you take ample advantage of volatile session during the day.

In addition to the brokerage rate being paid, prudent investor should always be well aware of the various Fees and commissions charged by the broker for various services offered like Mobile services, buy sell alerts, reporting, chart and other tools to facilitate easy trade as they really affect your net earnings.

For novice traders, it’s a suggestion to always trade with stop losses. Set your stop loss to level to avoid the risks associated.

Even though chances of default by a good brokerage firm are nil but a smart investor should always keep track of credit/debit of money in their bank accounts or transfer of shares to/from the demat account accordingly for each trade executed because technical reasons might lead to discrepancy which cannot be avoided.

Prevention is always better than cure. Security is another important factor for online traders. It is advisable always to follow security measures related to passwords and other personal information while login into the websites to eliminate chances of theft of identity and information.

RENUKA KINGER

SEBI has recently allowed allowed registered stockbrokers to transact mutual fund units on behalf of their clients through the stock exchange mechanism. When the systems are in place there are a few points the investor has to consider while investing in mutual funds through Stock Exchanges (NSE and BSE)

- Existing mutual fund investors who intend to buy more units will also benefit as this system will allow them to keep track of all investments under a single statement.

- The SEBI circular on Friday also said that investors can hold units of mutual fund schemes in dematerialised form, and that the demat statement given by the depository participants would be deemed adequate compliance with SEBI norms. Buying and selling will become more efficient and transparent , particularly if investors choose to transact through a demat account.

- Though cost seems to be a factor for those who do not have a demat account, the impact will be minimal for those who already are demat account holders.

- End-users can use the convenience of their neighbouring broker’s office for their mutual fund transactions. However, once the broker starts acting as a distributor, there is an issue about what commission he might ask for and whether the client would be ready to pay that or not.

- In terms of convenience, the advantages are similar to investing online through the AMC’s website — reducing the clutter of paperwork and speedy execution.

- Investing in SIPs (systematic investment plans) – A reading of the SEBI circular on entry loads suggests that the entry load will continue to apply on instalments of SIPs registered before August 2009. As long as this loophole remains unplugged, existing SIPs will be at a disadvantage to the ones registered after August 1. The only way out is to stop the existing SIPs and start afresh in the same scheme.For those with SIPs, the only way to benefit from the entry load waiver is to stop them and start new ones in the same scheme.

- Switching from one scheme to another within the same fund house – As per the new guidelines, no entry load will be charged for purchases, additional purchases and switch-in accepted by any fund house with effect from August 1, 2009.Similarly, no entry load will be charged with respect to applications for registration under systematic transfer plans.

Source : ET and Hindu Businessline

It is very interesting to invest in shares, though most of the people would like to start with small money.

First of all, you need to know a little bit in detail about the stock market, then about the shares and the mode of their trading. What are the risks involved and how to be smart in dealing with shares?

• Stock Market – It is the place where the shares of listed companies are bought and sold. In India, you have BSE and NSE as two big stock exchanges.

• Shares are bought and sold by you and me only through approved brokers.

• Approved brokers are mostly banks like the ICICI, HDFC, IDBI, UTI Bank, SHCI, are to name a few.

• First you need to open an account with a bank, that has the Demat account facility.

• Go to the respective bank  and open a Savings account with deposit of around Rs. 10,000.

• Tell the bank that you want to deal in shares and ask them to open a Demat account. It will be done automatically after signing a few forms.

• A Demat account is nothing, but the account where the shares bought by you will be kept separately.

• Only you could operate that account online, through Internet.

• You could open the online facility offered by the ICICI, HDFC or ShareKhan or others  and buy shares you wish and decide the quantity and the price.

• Here the bank will act as a broker. You online order for purchase would be carried out by the bank. They charge broker commission, much less compared to private brokers.

• It is very important for you to have enough balance to your credit in your savings account.

• As and when you buy on line, your Demat account will be credited with those shares. The money for the purchase will be automatically deducted from your account by the bank.

• You also have to keep looking for opportunities to sell the shares that you have already bought and kept in your Demat account.

• For buying and selling, it is necessary to familiarize which shares to be bought at what prices and sell them at what price.

• As and when you decide to sell (depending on the price quoted in the market) you could sell them through online trading system.

• The moment you sell your Demat account will be debited with the number of shares sold by you.

• Your account will be credited with the amount for which you have sold.

• Depending on the amount of profit earned, tax will also be deducted by the bank (TDS). The bank will give you a TDS certificate by the year end, i.e., March 31, of that year which you could attach with the return to justify the tax payment.

• When the shares could be bought or sold?
  Always sell the shares when the price is up and buy when the price is down. Every body had to adapt to this formula.

• What profit should it give you?
  You buy a share for a particular price. Take the amount as investment. Any bank will lend you at ten per cent interest. It will give you 24 per cent return if the share price rises in such a way. Do not wait for the market to crash and start searching for buyers for the price you quote.

  After selling, never look back and repent for what profit you have earned, had you delayed the sale. Be happy that it did not happen otherwise. This is the best way, to sell.

• If you want to buy, look for 52 week low, look for the peer companies, their price and compare it with the company you want to buy.

  Look for the prospectus, future plans and the profit the company ought to make in the next year. Take the perception or a change and buy.

• You cannot take profit in the buys. Losses do occur as long as you are at decent surplus for which you have no reason to be unhappy.

Happy Investing