Analogy of Investing

Investing is no different from planting a tree and nurturing it . Every rupee that you have is like a seed , full of potential to blossom . Exactly like a seed , it would depend on you , how would you use it . If you spend it , that would be the end of it , as you are no longer in control of its destiny . if you sow it in a fertile soil like a really well managed company , you will see the seed you have sown grow into a magnificient tree.

The Analogy just does not end with where you have sown it . Once you have made sure that you have indeed sown it in the right kind of soil , you would need to have the patience to see it grow .

In case you realised that the soil you have sown it in , is not fertile enough, you would need to have the courage to uproot it and plant it some place else ( sell and invest it again ) where it can grow to its full potential and blossom with lots of flowers ( Bonus ) and fruits ( Dividends)

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Online Trading

Three different accounts are needed to start trading or Investing in Equities Online

A Demat Account

A Bank Account

A Trading Account

Demat Account :

A Demat Account is exactly like a bank account , but is used to store stocks and MFs instead of money.Demat Account is usually provided by a  Depository Participant(DP) .

In India there are two Depositories NSDL and CSDL , these two institutions provide a national infrastructure for storing of Information .

Different banks and private firms act as franchise of these two Depositories , and allow Individuals and Organizations to open Demat Account. These franchise are called Depository Participants(DP).Each DP is assigned a unique number by the Depository this is called DP Id .

When a Individual opens an account, there would be a unique account number assigned to the Indiviual and this number is called Client DP Id

For example : Sharekhan , is a  franchise of NSDL , hence it is a Depository Participant (DP) of NSDL, NSDL has assigned Sharekhan, IN300513 as its unique number.

Trading Account

Trading accounts are usually provided by members of NSE  or BSE  ( Brokers ), the two main stock exchanges in India. These are just web sites , which would allow users to transfer money from their respective Bank Accounts to their trading account and to place buy and sell orders which would be executed by the brokers.

In the absence of a Trading account , an individual can still trade or Invest in equity . He would then have to call up his broker to place order and then give him cheques and his Demat Account details when he is buying and provide Demat Debit Slips ( these are exactly like normal cheques , but instead of money , this would debit your Demat Account of specified quantity of shares of the specified company )

For Example : Sharekhan provides a trading account , which would allow users to transfer money from about 15 different banks and also screens to place buy and sell orders on the NSE and BSE . Which would be executed by the sharekhan brokers.

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NFO , New Fund Offer

Mutual Fund Company ( AMC ) comes out with a NFO whenever they want to lauch a new fund . For the AMC there could lot of different motives for doing so

1) They want to lauch a new type of fund, not already in their porfolio of funds , for example say a Pharma Fund
2) They just want to increase their asset under management , since Asset managers bonus is based on this.
3) the valuation of an AMC is higher , higher the assets under its management.

Investor in a NFO needs to be very cautious

1) When the AMC sells initial units at Rs.10 , there is no underlying assets that is worth Rs.10 , as only after money is collected from the Investor the manager has to buy the underlying assets , which may end up at a value below Rs.10 in a highly volatile market

2) The New Fund , has no past performance records . Though we keep hearing the disclaimer that "Past performance is no gaurantee , as to how the fund will perform in the future" , still it is wise and prudent to see fast record of a fund and its manager through different market cycles . But with an NFO , there is no previous history

So Investing in NFO is like betting your money on a novice , who may have the potential , but yet to prove himself .

So my advice , avoid NFOs , there are sufficient well managed fund of every hue in the market for you to risk your money on a newbie

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BONDS

Bonds are a way for corporates and Governments to borrow money . So we can say Bonds to be a contract between the borrower and the lender .

Types of Bonds that can be issued

Zero Coupon Bonds or Deep Discount Bonds: These Bonds are issues at a discount to their face value , and the investor would not receive any period interest during the duration of the Bond , but would receive the face value at the time of maturity
Eg: You may buy a Deep Discount Bond with face value of  Rs.5000 at a price of say Rs.3000 and will get Rs.5000 at maturity.

Fixed Interest Bonds: These are Bonds with fixed Interest rate throughout the duration of the Bonds and may pay interest periodically or at maturity as per the Bond document

Floating Interest Rate Bonds: These are Bonds , with a floating interest rate . Floating interest would be always be liked to MIBOR + x and this interest may be paid periodically or at maturity as per the Bond document .

Terms used with Bonds are "Coupon" for Interest rate and duration is called "Maturity" .
MIBOR:Mumbai Inter-bank Offer Rate

Corporates and Mutual Funds

Was watching a interview with Mr.Y.V.Reddy former governor of RBI , and one thing he mentioned was so right . He mentiones that currently big and small corporates are big investors in Mutual Funds , now there are two things that are not right about that.

1) Corporates are suppose to have dedicated finance teams ,teams with people who can understand much complicated financial products ,so what are these firms doing investing in Mutuals Funds .What this does is it gives these firms huge lever as they invest huge amounts and hence dictate terms to the Mutual Funds. and also cause serious damage to smaller investors when they redeem their investments

2) When Mutual Funds have access these huge amount of  money from BIG corporates , they have no incentive to go after the smaller retail investor

Net result , we have woefully small percentage of individual investors , invested in Mutual Fund and hence into equities.

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American Depository Receipts (ADRs)

ADRs are commonly used by Indian companies to tap into the US capital market. The process of issuing an ADR is simple. A non-US company (say a Indian company) deposits its shares with a US depository bank (similar to depositories such as NSDL and CDSL in India), which, in turn, issues ADRs to the company. So, ADRs are basically stock certificates listed on US exchanges such as the NYSE and the Nasdaq, offering access to US retail and institutional investors.

ADRs enable U.S. investors to buy shares in foreign companies without the hazards or inconveniences of cross-border and cross-currency transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.

Each ADR is issued by a U.S. depository bank and can represent a fraction of a share, a single share, or multiple shares of the foreign stock .The share that is sold to as part of ADR is called ADS, remember that an ADR is not necessarly issues of new equity shares , but it is possible that exisiting indian share holders can submit their share holdings to be sold as an ADR , when the company intends to list their shares in US as an ADR .

For example Infosys has ADRs listed

Ratio of Infosys's equity shares to ADS : 1 equity share held/traded in India is equivalent to 1 ADS held/traded on NASDAQ

Do the Infosys ADSs have voting rights: Yes. In the event of a matter submitted to the holders of ordinary shares for a vote, the ADS holders on record as at a particular date will be allowed to instruct the depositary bank to exercise the vote in respect of the equity shares representing the ADS held by them.

Are the Infosys ADSs entitled to cash dividends:Yes, whenever dividends are paid to ordinary shareholders, cash dividends to ADS holders are declared in local currency and paid in dollars (based on the prevailing exchange rate) by the depositary bank, net of the depositary’s fees and expenses.

Source: Outlook Money,Infosys.com,Wiki
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How to Limit Credit Card Spends

Some of the ways people use to limit their Credit Card spend

• Carry the card only when you know that you need to make a BIG purchase , so that not only would you use your card much less , but when you pay using cash you feel the money moving out of your hand  compared to , when a card is being swiped
• Have a cover for your Card , which would warn you about over spending
• Never go to a shopping outlet without a Shopping List, Just sticking to the shopping list , prevents you from buying anything on an impulse.
• Have a card with very very low credit limit :
• Last and final one , never have a card , always use cash :)

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