Arun's Comments

Good information Naveen, but the RBI base interest hike, will make commerial banks to raise the mortgage and will impact the real estate sector. Over all does this help stock market ? May be yes, as banks may do good, isn't it catch 22?

My Response:

Well I believe RBI was in pressure from all the quarters due to reasons like Inflation, Recovery in economy like IIP data, good auto sales numbers in Jan & Feb (so auto stocks soared) & etc.

But I don't think Banks will immediately rise the lending rates as they are falling short of RBI minimum requirement of credit & from other end they have to take care NPAs(Non Performing Assets) which have increased due to recession.

And coming to stock market obviously you know better than me that market is not only dependent on RBI policy, of course due to RBI action market (Nifty) opened some 80 points down with a gap down. But obviously market is more dependent on world markets now & how the European economy will shape up from CDS problems & what China will do for its interest rate & export policy (currency pegging) & etc.

So as usual rate sensitive stocks(like real estate, banking stocks & auto stocks) have been beaten down on Monday because of sentiments.

But what I feel is if RBI is increasing repo & reverse repo only because of inflation, then it may not be correct decision? Because I feel(most analysts feel) inflation is due to spike in primary food articles which is supply side problem & distribution problem. And if you see the last year February inflation which is acting as base now, there is a sharp dip in Feb. So there is also BASE EFFECT in this inflation numbers. And also I think nobody will stop eating due to increase in interest rate!

If RBI is seeing food price hike is spreading to manufacturing side (IIP data) then their action can be substantiated, because monetary policy action will take some time to slow down the things in the overall economy. And also of course RBI cant allow formation of new bubbles in the economy by cheap credit what US did in Dot com bubble burst in 2000-01 (kept interest rate very low) & ultimately lead to real estate bubble which in turn lead to sub prime lending & following problems.

Tenzin's comment

hi thanks for this post... was very educating.....

keep it going..

regards,
tenzin

Comment from reader

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Lucy

My comment to this comment...

I am glad that my blog is helpful at least fo somebody... From these type comments only I feel like posting regularly & share whatever I feel about certain things...

Keep reading...

Tenzin's Comment

hello,
nice to see you back bloggin....,

hope you continue and enlighten us on economics and technical charts.

Matti's Comment about Adam Smith's Invisible Hand

hey mutnal
i cant resist myself from writing as you touched upon macro eco.

i read ur explanation.thougt has become more generic.
probably u should have discussed it in a more technical way.

say,
effect of price rise on supply,demand . shifting,movements of the curves
slopes of the curves etc.


anyways thanks for helping me exhume eco from my mind.

Gogi's Comment

Naveeen Bhaiiiiiiiiiiiiii.....

Great article....Keep it up

Thumba dhnyavadagalu

Auxi's Comment

Hi SI....


How r u man? It's really a gud article and all our karnataka bros should see this...send it to all of ur frnds & ask them to pass it to their frnds...

gud work...Take care....


Regards,

Auxi

Support From Friends!!!

Hi guys,

Here are the some message I got from some of my friends for quitting the TCS.

From Auxi...

Hi SI,

Just follow guts..no need to worry...all the best

From Praveen S...

Hmmmm....I know you from last 3 years you never took any wrong decesion & gave any body wrong advice.... dont worry abt d past now do well in ur interested field ALL THE BEST.

regards

Praveen


From Gogi,

Congratulations Mutnal ...
Here quitting TCS is not a mistake at all,but the perfect thing you did is you have quit the job which you are not passionate about.
99% among us hate the job which we are working on,but one who dares to quit those jobs is just 1%.Now you are among them...
once again MY HEARTY CONGRATULATIONS...i will definitely try my level best to help you reach your dream job.

From Adi...

Congrats Mutu I really appreciate your brave decision in this present market scenario. You have shown real guts I am proud of you that you have decided to move on to do something that really suits you. Like they say your mind was with Stock market and you never wanted to be tied down. All the best I whole heartedy support your decision.

Regards,
Adi


Thanks guys, for all your encouraging words. I hope I will rise to level which I am hoping from all your best wishes.
Thanks once again...

Responses from my readers...

Guys its good see the responses from you guys for ban on short selling. Good way of knowledge sharing...

Pradeep's Response

I don’t think short selling is playing a major role in fall of market…I don’t know the exact volume but some where I read that short selling is very small fraction of total traded volume

The major factor for current market fall is FII selling , last 4 month they have withdrawn more than $10Bn from the market due to obvious reason i.e. credit crisis and US Recession.

Even though RBI and Govt have taken various positive step like PN notes relaxation, increase ECB limit , increase Debt instrument investment limit by FII etc,

So the main reason for falling market is Global crisis in world market which have proven the theory of decoupling wrong.

Regards,

Pradeep C.


Purnendu's Response...

Hi,

Short selling can never be the cause of market falling to that much amount. An important point that you missed out in your explanation was that every brokerage firm charge the trader a heavy interest rate on its open position for short selling. This makes sure that traders can only short sell particular stock for an average of 4-5 days only. After that they have to cover their open positions by buying back the stock. An excellent tool for trading in short selling is “Short Interest Ratio”. This ratio is nothing but short interest paid for a particular stock in an exchange divided by the volume of stock traded for the stock for a particular day. If this ratio is high then there lies an opportunity for traders to buy shares of that particular stock since higher short interest ratio means that there are huge no of traders who have already short sell that stock and will cover their positions in a few days time. This will cause the demand for that particular stock to increase and subsequently the price of the stock will also increase. Now, the traders who have already bought shares for that particular stock can sell their shares at higher price and book profit for themselves.

Regards,

Purnendu Dey


Udit's Response...

I too don’t think that ban on short selling is the cause of the current meltdown in the Indian markets. It is just that the short selling is taken as a scapegoat for current turmoil. To take an example it may be 28th or 30th of this month that ban on short selling of the 19 stocks in US market would be lifted, however during this period those 19 stocks were the most beaten down stocks, as mentioned by Naveen that short selling provides a floor price to the stock.

Moreover, the problem in Indian market is that the short selling is not liberalized. What is the problem of lending and borrowing? However it effects because in India the period is just of 7 days, which should be of at least of a month or three.

I argue that if one is to disclose its short position before placing an order, what’s the point in short selling then anyone can run above him and make easy money. So a sane person will not short sell if the entire market knows his/her position.

Hence, I just want to drive in the point that short selling should not be banned it should be regulated and liberalized. Also there should be a delivery settlement in the F & O segment to augment it.

Thanks and Regards,

Udit Mehra


My reply:

I dont have to say anything as these are individual perceptions. But I have given enough data(from business standard) how FIIs are lending for short selling.

Thanks guys..

Uma’s Comments…

Mutnal bhai..... New update ... CRR reduced further by 100 BPS to 6.5%... which will flush in 20000crs further into the market

Small correction in Uma’s comments… This move of RBI will infuse Rs. 40000 crores, not Rs. 20000

Prof. Chandra Kant's Comments...

Very Nice web site sir.

Keep it up

Chandu

Adi's Comments...

Hey Naveen thanks for posting the article I know unless the article is good you wont post it and I feel good to share this kind of info with you. Anyway you and your blog always have support from me and I will read, argue and contribute info to your blog no matter what.

Keep it up
Adi

Sean's Comments

Hi Naveen, I thought your post was well written and succinct. If you would like more information on these instruments I run a couple of web sites that may be of interest:

http://www.otcderivatives.co.uk/index.htm

http://derivatives.blogware.com

Regards, Sean

Mr. Nifty Mehra's Comments

Hi, Naveen

For better understanding and examples of Derivatives all of us can visit the website - www.derivativesindia.com

Thanks and Regards,

Udit Mehra

Anna's Comments

The insight given by you on derivatives is really very good and simple. The way you explained options with example made it easy to understand. But if you can explain call and put options with example it will be helpful. Hope to see more on derivatives...

Adi's Comments

Hey Naveen thanks for considering my request to post some simple stuff I really liked the way u gave the examples with which v can easily relate to anyways good job and expecting similar results from u .

Regards,

Adi

Jitendra Prasad's Comments on Short selling...

Naveen it is a good write up on short selling as it gives an overview of what short selling is. Talking about Covered and Naked Short sales (what i have read) the Covered short sales means the seller has the possession of the shares what he intend to sell(or the short sell is backed up the shares held) while in case of naked short sell he don't have the possession of the shares he have to arrange for it (or the short sale is not backed up by the shares held). Its not about the intention of the seller because anyhow the delivery has to be made to the buyer either by incurring loss by the seller or by Auction.

Short Selling/Short Position

Yesterday our C.R. Mr. Pradeep asked me to write about short selling. So today I am sharing & some basics of short selling/short position with you guys.

When I was doing my SIP (Summer Internship Program), most of the time I used to do short selling because at that point of time market was cracking down. In simple terms, short selling is reverse process of normal trading. In normal trading we buy @ lower value and sell @ higher value (long position). In this type you expect market to bullish. But when you think market may be bearish then go for short selling. Means sell @ higher value and buy @ lower value. In shorting we sell the shares without owning them, so we have to buy back the shares within the stipulated time.

In short selling there are two different types, one is for intraday and another one is for long term.

Intraday short position doesn’t affect the market sentiments much. Since most of the time intraday shorting is done by retail investors. And in this intraday case you have to buy back the share whatever you sold earlier otherwise exchange will auction the share and have to pay penalty.

Where as, FIIs, HNIs and some experienced retail investors usually take long term short position. For long term short position, we have to use F & O. Since I have very limited knowledge theoretical knowledge (Not traded in F&O till now), I will not in position to give much of inputs. But I can say that, to take long position you have to buy the put option for that particular month. And the end of the month you have square off your position by buying back the shares or you have to roll over for the next month. Same procedure applies to future with slight variations.

In present condition of the market, most of the players are using the short position as their trading. Market move can be identified by call/put ratio. Most of the time, this pull back rally in bearish market is because of square of short position.

How it works???

Unlike a normal transaction, which involves two parties (the buyer and the seller), short selling involves three parties: the original owner, the short seller, and the new buyer. The short seller borrows shares from the original owner at the time short selling & sells them on the open market to any willing buyer. To finalize the short sale transaction, the short seller must then go out into the stock market and buy the same amount of shares as he sold so that the broker can return them to the original owner.

To sell short you first must set up a margin account with your broker. A margin account allows you borrow from your brokerage company using the value of your portfolio as collateral. The general rule is that the value of your portfolio must equal at least 50% of the size of the short sale transaction. In other words, if you have Rs. 100,000 worth of stock/cash in your margin account, you can borrow Rs. 200,000 of stock to sell short.

To sell a stock short, you must borrow stock. To initiate a short sale, you simply call up your broker and ask to sell short a specific number of shares of your selected stock. Your broker then checks with the Margin Department to see whether the shares are available or can be borrowed. If they are available, the brokerage borrows (from other customers or stock holding corporation of India on behalf of you) the shares, sells them in the open market. To close out your short sale, you tell your broker that you want to buy the same number of shares that you shorted. The broker will purchase the shares for you using the money in your margin account, return the shares and close out the short sale transaction.

Difference between covered and naked short sales

Covered short sales are those in which the seller arranges for the delivery of shares he has sold by borrowing them. Naked short sales are those in which the seller does not intend to provide for the delivery of shares he has sold. Most international securities market regulators have prohibited naked short-selling and require the client to have documentary evidence of borrowing/tie-up with lenders before executing the sale transaction. This is because naked short sales in huge quantities can destabilize the market.

Drawbacks of short-selling

Critics of short-selling feel, selling directly or indirectly, poses potential risks and can easily destabilize the market. They believe that short-selling can exacerbate declining trend in share prices, increase share price volatility, and force the price of individual stocks down to levels that might not otherwise be reached. They also argue that declining trend in the share prices of a company can even impact its fund raising capability and undermine the commercial confidence of the company. In a bear market in particular, short-selling can contribute to disorderly trading, give rise to heightened short-term price volatility and could be used in manipulative trading strategies.

SEBI framework for short selling

1. Naked short selling shall not be permitted in the Indian securities market and accordingly, all investors would be required to mandatory honor their obligation of delivering the securities at the time of settlement.

2. No institutional investor shall be allowed to do day trading i.e., square-off their transactions intra-day. In other words, all transactions would be grossed for institutional investors at the custodians’ level and the institutions would be required to fulfill their obligations on a gross basis. The custodians, however, would continue to settle their deliveries on a net basis with the stock exchanges.

3. The stock exchanges shall frame necessary uniform deterrent provisions and take appropriate action against the brokers for failure to deliver securities at the time of settlement which shall act as a sufficient deterrent against failure to deliver.

4. The securities traded in F&O segment shall be eligible for short selling. SEBI may review the list of stocks that are eligible for short selling transactions from time to time.

5. The institutional investors shall disclose upfront at the time of placement of order whether the transaction is a short sale. However, retail investors would be permitted to make a similar disclosure by the end of the trading hours on the transaction day.

6. The brokers shall be mandated to collect the details on scrip-wise short sell positions, collate the data and upload it to the stock exchanges before the commencement of trading on the following trading day. The stock exchanges shall then consolidate such information and disseminate the same on their websites for the information of the public on a weekly basis. The frequency of such disclosure may be reviewed from time to time with the approval of SEBI.

Exchange traded Funds (ETF)

One Mr. Nifty Mehra asked me to post about ETFs. Since I am not much exposed to ETF, I searched through net and got some material from Asit Mehta Investment Intermediaries Ltd. I am posting important points from that material; hope it gives sufficient information Mr. Nifty Mehra!!!

Buying gold on the stock exchange?? Impossible, it is a commodity; we have to go to the commodity market. Well, buying gold on the stock exchange is now possible with the eminent introduction of Exchange Traded Fund that will invest in Gold only. Launching of gold-based EFT has obvious advantages. Gold can be bought like a share on stock exchanges; storage will be done by the Fund manager, no security risk, no impurity risk, and no cost of making charges. Costs will be low and same channel of trading and delivery like shares will be used.

Let us first understand the concept of Exchange Traded Fund (ETF) then understand about the advantages of buying gold ETF.

EFT is defined as a security that tracks an index, a commodity or a basket of assets like an index fund but trades like a stock on an exchange and experiences price changes throughout the day as it is bought and sold. ETF were first launched in 1993 in United States.

The issuance of EFT is just like a primary market IPO or a mutual Fund NFO. Shares are issued by the Fund manager and listed on the exchanges. Investors can buy and sell these shares from the secondary market through their brokers. ETF are often called as index shares, are a hybrid of index mutual funds and stocks.

The advantages of a traded fund shares are:

• Tradable and diversifiable: ETF offer a unique advantage as they are diversifiable like mutual funds and also can be traded like stocks.

• Low cost: ETF like an Index fund does not require active fund managed and is therefore cheaper as passively managed.

• Transparency: ETF is a very transparent instrument, as everyone knows the underlying asset.

• Makes multiple trading strategies possible: Arbitrage opportunities between cash and futures market can be availed at low cost. Trading strategies can be applied with stop loss orders.

The disadvantages are:

• Broker and commission costs: ETF are traded through brokers and hence every time brokerage has to be paid which becomes costly affair if regular trades are done.

• Premiums and discounts: An ETF might trade at a discount to the underlying shares. This means that although the shares might be doing very well on the bourses, yet the ETF might be traded at less than the market value of these stocks.

There are different types of ETF unlike close-ended funds can create or cancel units as investors enter or leave the fund. The size of the ETF, rather than the price, will fluctuate based on the demand and supply for the ETF. There are several ETF launched till date they can be broadly categorized as follows:

• Global ETF: There are ETFs tracking indices beyond the domestic markets. For example, specific regional funds that track fast growing markets in China and Korea.

• Fixed Income ETF: ETF tracking fixed income products. ETF in this case may declare and pay dividends.

• Commodity ETF: ETF that track commodity or commodity indices take advantage from the gains in the commodity market.

• Currency ETF: ETF tracking currency or currencies. Ex ETF- Euro Currency Trust

(FXE) was introduced in Dec 2005 which trades on the NYSE. Hence investors can take exposure in Euro through this fund.

Difference between ETFs & Mutual Funds:

It is also important to understand the difference between a Mutual Fund and ETF.

Trading in ETF takes place on the stock exchanges during trading hours. The Mutual fund units are however purchased from the Mutual Fund at NAV at the end of the day.

The expenses are low in an ETF since there is no active fund management involved as in case of mutual funds. The costs in mutual funds are higher in short term since they are subject to load fees, annual management fees, exit fees etc. These are intended to discourage frequent trading.

Dividends are rarely made in EFT whereas there are frequent dividends made depending upon the stocks the mutual fund is holding.

As per Indian tax laws redemption amount received from mutual fund units are not subject to tax, however in case of EFT if representing gold, which is a commodity and

not stock there would be tax payment in event of appreciation.

ETF are regulated by the same authority, which regulates mutual funds. In the Indian context SEBI is the regulator.

ETF is not a new concept in India. There have been two ETFs launched in India one is based on Sensex which was called Spice and another was launched with Nifty as an underlying asset, it was gold Nifty Bees. However both these instruments failed to attract the attention of investors. These instruments allowed the investors to buy index in the form of shares. The investors apparently preferred to buy shares included in the index directly by buying index baskets or purchased index in derivatives markets.

Response to Mr. Adi’s Comments…

Mr. Adi’s Comment

Hey Naveen you know I am new to these stocks and shares its ok studying the financial definitions I get a bleak idea but the share market is acting very strangely its going up and down for the past few days and I have been observing the pendulum like swing is there any conclusion in sight so that new and aspiring investors like me would invest????

My response

Well adi, share market is always like that only. Previously it was like that, now it is like this and in future also it is going to be same. Since, you can’t predict human nature. And share market is nothing but, full of human calculation, sentiments and expectations. Each person may be having different perspective about each share in the market. For one person market may look like good time to sell but at the same time another person look at this as a good buying opportunity. So if market is overburdened with sellers then market will go down and vice versa.

See in any kind (Bull or Bear) there will be both buyers and sellers. Because, in bear market if only sellers are there and no buyers then there is no question of bear market. And this holds good for bull market also, there will be buyers as well as sellers.

Now coming to present condition, according to me, its good time for investors and EXPERIENCED traders only. Its not good time for new entrant traders! Investor is one who is planning to hold his investments more than 1-3 years. And trader is one who buys and sells at any time of the day, week, month or so. Like me!!!

Investors most of the time go for fundamentally strong companies, with the help of self gained knowledge (from experience) or brokers or portfolio managers. But for trading you need to have your own calculations.

According to me, even investors should not expose their full liquidity to the present condition. Since present market is pull back rally in a bear market. So invest only 25% or 30% of your total investment amount now and gradually go on investment in successive steps so that you can go on averaging. Since in this bear markets biggies like FIIs and Institutional investors are not taking long position. So no question of retail investor like me and you!!!

So first you decide what you want to become Investor/Trader. If you want to become an investor then go ahead with 30% of your investment on investing fundamentally strong (As Mr. Nifty Mehra always says) companies. Since most of companies are beaten down heavily like 40-70% from their peak in January 2008. And at higher or lower (both are possible) invest your another portion and so on, so that you can hedge the possible risk.

Or if you want to become a trader, then just follow me! Just kidding, u need to know some basic things about the market. And according to me that comes when you actually enters the market, not by reading any books or any other thing (like my blog!!! Hey don’t stop reading…)

Keep reading…

Keep investing (or trading)…