INVESTOPEDIA.COM What is a stock? A stock is a partial ownership in a company or an industry, with rights to share in its profits.

When an investor buys a stock of a company, he is called a shareholder or a stockholder of that company. The benefit of buying a share is that when the company profits, the shareholders also profit. The company distributes the profit among its shareholders, which is called the 'dividend'. How do you make profits with stocks? But many traders make real profit in stocks using the market price of the stocks. Stocks are traded in the stock markets. The face value is the nominal value of the stock that is determined by the issuer of the stock. 'Market price' of a stock is the price at which currently a stock is traded in the market. This price may be at premium or lesser than the 'face value' of the stock, depending on the company's performance and prospects, investors' interests in the company and a lot of other factors. Market price of a stock keeps varying as traders trade the stock in the market. Traders often make money using these variations in the market price of the stock. Stocks are bought at lower market prices and sold at higher prices later. This is referred to as 'long' positions in market terms. Similarly stocks can be sold at a higher market price and bought at a lower price later. This is referred to as 'short' positions in market terms. In these cases, the difference in the market prices at the time of buying and selling will be seen as profit by the traders. What is the Stock Market? Basically it is an exchange place or a market that facilitates the trading of stocks. People participating in the stock markets range from some casual traders and investors who trade as a hobby, to large fund traders In India the most famous exchanges or markets are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Globally there are many markets including the famous New York Stock Exchange

(NYSE), NASDAQ, London stock exchange, Hong Kong Stock Exchange etc. Any market can be thought of with two functionality: Primary Market: Here the companies and industries raise long term funds for their operations by issuing shares. Companies come up with an initial price, mostly with premium for the face value of the share, which will be distributed to the investors. This is called the Initial Public Offer or the IPO. Secondary Market: After a Company has finished its IPO, it is listed in the markets. After getting listed and issued shares to investors, the shares can then be sold to other investors in the stock market. Here the people can buy the shares at a current price as determined by other investors in the market.

Fundamentals Part One

Basics of financial instruments There are two fundamental types of investments, 1.Bonds 2.Stocks If anybody wants to start your own business He will need a capital amount as capital. He takes the requisite funds from a family friend and write down a receipt of this loan ' I owe you Rs 50,000 and will repay you the principal loan amount plus 7% interest'. Your family friend has just bought a bond (IOU) by lending money to your company. When you invest in bonds, the bond you buy will show the amount of money being borrowed i.e. face value, the interest rate i.e. coupon rate or yield that the borrower has to pay, the interest payments i.e. coupon payments, and the deadline for paying the money back is maturity dates. There are several Benefits and Non Benefits to investing in bonds Benefit: Bonds give higher interest rates compared to short-term

investments and less risky then stocks. Non Benefit: Selling bonds before they're due may result in a loss, known as a discount. If the issuer of the bond declares bankruptcy; you may lose your money. Hence you must critically evaluate the credibility of the issuer of the bond, ensuring that he has the capability to repay the bond amount.

To get more capital for your new company formed, you sell half your company to your friend or your family member for Rs 25,000. You put this transaction in writing 'my new company will issue 50 shares of stock. My brother will buy 25 shares for Rs 25,000.' Thus, your brother has just bought 50% of the shares of stock of your company.

Now you know what stock is: Stocks, also known as Equities, are shares in a company. It is the certificate of ownership of a corporation. In simple terms, when you invest in a company's stock or buy its shares, you own part of a company. Thus, as a stockholder, you share a portion of the profit the company may make, as well as a portion of the loss a company may take. As the company keeps doing better, your stocks will increase in value and yield higher dividends.

Dividend: A sum of money, determined by a company's directors, paid to shareholders of a corporation out of its earnings. Stock Market trading history of India In the earlier days, stockbrokers kept scouting for 'natural' sites to conduct their trading activities, shifting from one set of Banyan trees to another. As the number of brokers kept increasing and the streets kept overflowing, they simply had no choice but to relocate from one place to another.

Finally in 1854, trading in India found a permanent address, Dalal Street, now synonymous with the oldest stock Exchange in Asia, The Bombay Stock Exchange. With a heritage that goes back to over 130

years, BSE was the first stock exchange in the country to be granted permanent recognition under the Securities Contract Regulation Act, 1956. The exchange has played a pioneering role in the development of the Indian Securities Market - one of the oldest in the world. After India gained independence, the BSE formulated a comprehensive set of guidelines adopted by the Indian Capital markets. Even today, the BSE Sensex remains one of the parameters against which the robustness of the Indian Economy and finance is measured. The trading scenario in India then had undergone a paradigm shift in 1993, when NSE or National Stock Exchange was recognized as a Stock Exchange. Within just a few years, trading on both the exchanges shifted from an open outcry system to an automated trading environment.
Today, the Indian Securities market successfully keeps pace with its global counterparts through the use of modern day technology.

Stock market milestones 1875 BSE established as 'the native Share and Stock Brokers Association' 1956 BSE became the first stock exchange to be recognized under the Securities Contract Act. 1993 NSE recognized as a stock exchange. 2000 Commencement of Internet trading at NSE. 2000 NSE commences derivatives trading (Index futures) 2001 BSE commences derivatives trading Primary and Secondary Markets Primary Market A Company enters the Primary markets to raise capital. They issues new securities in Exchange for cash from an investor or buyer. If the Issuer is selling securities for the first time, these are referred to as Initial Public Offers (IPO's). Summing up, Primary Market is the means by which companies offer shares to the general public in an Initial Public Offering to raise capital. Secondary Markets Once new securities have been sold in the Primary Market, there should be some mechanisms exist for their resale, Secondary Market

transactions are referred to those transactions where one investor buys shares from another investor at the prevailing market price or at whatever prices both the buyer and seller agree upon. The Secondary Market or the Stock Exchanges are regulated by the regulatory authority. In India, the Secondary and Primary Markets are governed by the Security and Exchange Board of India (SEBI). SEBI The Government of India established the Securities and Exchange Board of India, the regulatory body of stock markets in 1988. Within a short period of time, SEBI became an autonomous body through the SEBI Act passed in 1992, with defined responsibilities that cover both development & regulation of the market while also giving the board independent powers. Comprehensive regulatory measures introduced by SEBI ensured that end investors benefited from safe and transparent dealings in securities. Duties & Objectives of SEBI To protect the interests of investors in securities to promote the development of Securities Market to regulate the Securities Market SEBI has contributed to the improvement of the Securities Market by introducing measures like capitalization requirements, margining and establishment of clearing corporations that reduced the risk of credit Today, the board continues on its two-fold mission of integrating the Securities Market at the National level and also diversifying the trading products to increase the number of traders thats including banks, financial institutions, insurance companies, Mutual Funds, primary dealers etc. transacting through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in the year 2000. Stock Exchanges A Stock Exchange is a place that provides facilities to stock broking firm to trade company stocks and other securities. A stock may be bought or sold only if broking firm is listed on an exchange. Thus it is the meeting place of the stock buyers and sellers. India's premier

Stock Exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Fundamental Part Two

Market Related Concepts You will frequently come across terms like Market Capitalization, Small-Cap Stocks, Mid-Cap Stocks and Large-Cap Stocks. Understanding of what these terms mean in the context of stock markets. MARKET CAPITALIZATION "Cap" is short for capitalization, the market value of a stock, indicating the size of the stock available. Calculating a stock's capitalization Market Capitalization = Market Price of the stock x The number of the stock's outstanding* shares Outstanding means the shares held by the public Say, if Stock X has a Current Market Price of Rs 200 per share, and there are 1,00,00 shares in the hands of public investors, then Stock A has a capitalization of 20,00,000. The company's capitalization is an effective parameter to group corporate stocks. In the US, mid-cap shares are those stocks that have a market capitalization ranging from Rs 9,000 crore to Rs 45,000 crore. In India, these shares would be classified as large-cap shares. Thus, classification of shares into large-cap, mid-cap, small-cap is made on the basis of the relative size of the market in that particular country. The total market capitalization of US markets is $15 trillion. In India, the market capitalization of listed companies is around $600bn.

SMALL-CAP STOCKS: The stocks of small companies that have the potential to grow rapidly are classified as small-cap stocks. These stocks are the best option for an investor who wishes to generate significant gains in the long run; as long he does not require current dividends and can withstand price volatility. Generally companies that have a market Capitalization in the range of up to 250 Crore are small cap stocks. As many of these companies are relatively new, it is difficult to predict how they will perform in the market. Being small enterprises, growth spurts dramatically affect their values and revenues, sending prices soaring. On the other hand, the stocks of these companies tend to be volatile and may decline dramatically. Most Initial Public Offerings are for small-cap companies, although these days large companies do tend to source the capital markets for expansion plans. Aggressive mutual funds are also enthusiastic about adding small-cap stocks in their portfolios. Because they have the advantage of being highly growth oriented, small-cap stocks can forego paying dividends to investors, which enables the profits earned to be reinvested for future growth.

MID-CAP STOCKS: Mid-cap stocks are typically stocks of medium-sized companies. These are stocks of well-known companies, recognized as seasoned players in the market. They offer you the twin advantages of acquiring stocks with good growth potential as well as the stability of a larger company. Generally companies that have a market Capitalization in the range of 250-4000 crores are mid cap stocks Mid-cap stocks also include baby blue chips; companies that show steady growth backed by a good track record. They are like blue-chip stocks (which are large-cap stocks) but lack their size. These stocks tend to grow well over the long term.

LARGE-CAP STOCKS: Stocks of the largest companies (many being blue chip firms) in the market such as Tata, Reliance, ICICI are classified as large-cap stocks. Being established enterprises, they have

at their disposal large reserves of cash to exploit new business opportunities. The sheer volume of large-cap stocks does not let them grow as rapidly as smaller capitalized companies and the smaller stocks tend to outperform them over time. Investors, however gain the advantages of reaping relatively higher dividends compared to small- and mid-cap stocks while also ensuring the long-term preservation of their capital.

Bull and Bear markets The uses of "Bull" and "bear" to describe markets have been derived from the manner in which each of these animals attacks its opponents. A bull thrusts its horns up into the air, and a bear swipes its paws down. These actions are metaphors for the movement of a market: if the trend is up, it is considered a Bull market. And if the trend is down, it is considered a Bear market. The supply and demand for securities largely determine whether the market is in the Bull or Bear phase. Forces like investor psychology, government involvement in the economy and changes in economic activity, commodity prices also drive the market up or down. These combine to make investors bid higher or lower prices for stocks. Bull and Bear markets signify relatively long-term movements of significant proportion. Hence, these runs can be gauged only when the market has been moving in its current direction (by about 20% of its value) for a sustained period. One does not consider small, short-term movements, lasting days, as they may only indicate corrections or short-lived movements. Stock symbols A stock symbol is a unique code that is given to all participating companies in securities trading. Once you know the stock code/symbol of the company (sometimes referred to as a ticker symbol) you can easily obtain information about the company. This is important, as a wise investor will always do a financial analysis before purchasing a

stock. For ex- tcs stands for Tata Consultancy Services Infy stands for Infosys

Rolling settlements Let us understand Rolling Settlements After you have bought or sold shares through your broker, the trade has to be settled. Meaning, the buyer has to receive his shares and the seller has to receive his money. Settlement is just the process whereby payment is made by all those who have made purchases and shares are delivered by all those who have made sales. A Rolling Settlement implies that all trades have to settle by the end of the day. Hence the entire transaction, where the buyer has to make payments for securities purchased and seller has to deliver the securities sold, have to complete in a day. In India, we have adopted the T+2 settlements cycle, which means that a transaction entered into on Day 1 has to be settled on the Day 1 + 2 working days, when funds pay in or securities pay out takes place. 'T+2" here, refers to Today + 2 working days. For instance, trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on. Hence, a settlement cycle is the period within which the settlement is made. For arriving at the settlement day, all intervening holidays -- bank holidays, Exchange holidays, Saturdays and Sundays are excluded. From a settlement cycle taking a week, the Exchanges have now moved to a faster and efficient mode of settling trades within T+2 Days. Selling short An investor sells short when he anticipates that the price of the shorted stock will fall from the existing price. He borrows a share and sells it. As the share price dips, he buys the same share at a lower price and returns it back, while pocketing a profit in the bargain. An adage that describes short selling is ("selling high and buying low'.) Selling Short (Shorting) is an effective tool for traders as it allows us to profit from declining stock and index prices. A definition of "Selling Short"

Selling short implies establishing a market position by selling a security one does not own, in anticipation that the price of the security will fall. Margin trading Margin trading is trading with borrowed funds/securities. It is almost like buying securities on credit. Margin trading can lead to greater returns, but can also be very risky. While it lets you actively seize market opportunities it also subjects you to a number of unique risks such as interest payments charged for the borrowed money. Circuit filters & trading bands In order to check the volatility of shares, SEBI has come up with the concept of Circuit Filters. Under this, Sebi has specified the fixed price bands for different securities within which they can move on a given day. Recently, in a bid to check the rampant price manipulation in smallcap stocks (known as penny stocks), stock exchanges reduced the circuit filter maximum permissible rise in prices in a day to 5 per cent. Earlier, stocks were allowed to rise up to 20 per cent in a session. The NSE has also reduced the circuit filter in all the stocks, which are traded on a trade-to-trade basis to 5 per cent. As the closing price on BSE and NSE can be significantly different, this means that the circuit limits for a share on BSE and NSE can be different. Badla financing As the term itself signifies, 'Badla' means 'something in return'. Badla is the charge, which the investor pays for carrying forward his position. This hedge tool lets the investor take a position in scrip without actually taking delivery of the stock, thus carrying forward his position on the payment of small margin. The Badla system of transactions has been in practice for several decades in the Stock Exchange, Mumbai and serves 3 needs of any stock exchange:

A) Quasi-hedging: If an investor feels that the price of a particular share is expected to go up or down, without giving or taking the delivery he can participate in the possible volatility of the share. B) Stock lending: If a stock lender wishes to short sell without owning the underlying security, he employs the Badla system and lends his stock for a charge. C) Financing mechanism: If he wishes to buy the share without paying the full consideration, the financier steps into the CF system and provides the finance to fund the purchase the scheme is known as "Vyaj Badla" or "Badla" financing. How the Badla system works? On every Saturday, a CF system session is held at the BSE. The scrips in which there are outstanding positions are listed along with the quantities outstanding. The CF rates are determined depending on the demand and supply of money. There is more demand for funds when the market is over bought, and consequently the CF rates tend to be high. However, when the market is oversold the CF rates are low or even reverse i.e. there is a demand for stocks and the person who is ready to lend stocks gets a return for the same. The scrip that have been put in the Carry Forward list are all 'A' group scrip, which have a good dividend paying record, high liquidity and are actively traded. The scrip is not specified in advance, as it then gets difficult to get maximum return. The Trade Guarantee Fund of BSE guarantees all transactions; hence, there is virtually no risk to the Badla financier except for broker defaults. Even if the broker through whom you have invested money in Badla financing defaults, the title of the shares would remain with you and the shares would be lying with the "Clearing house". However, the risk of volatility of the scrip will have to be borne by the investor. Insider Trading In your dealings with the stock world, you will often come across the term 'insider trading'. In simple words, the meaning of insider trading

is 'the trading of shares based on knowledge not available to the rest of the world. Insider trading has 2 connotations. Corporate personnel of a company buying and selling stock in their own company when corporate insiders trade in their own securities, they must report their trades to the exchange Illegal insider trading refers to buying or selling a security after receiving 'tips' of confidential securities information. Thus it is considered as a breach of confidence while in possession of non-public information about the company. Examples of insider trading Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments; Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded; Government employees who learned of such information because of their employment by the government; and Other persons who misappropriated, and took advantage of, confidential information from their employers. Various types of the risks once you start trading Market Risk This is the risk of investing in the stock market in general. It refers to a chance that a securities value might decline. Although a particular company may be doing poorly, the value of its stock can go up because the stock market value is collectively going up. Conversely, your company may be doing very well, but the value of the stock might drop because of negative factors inflation, rising interest rates, political instability etc that are effecting the whole market. All stocks are affecting by market risk. Industry Risk

This is risk that affects all companies in a certain industry. For e.g. Utility companies are often viewed as relatively low in risk because the utility industry is stable and operates in a predictable environment with relatively little change. In contrast, internet and other technology industries are usually viewed as high in risk because the industry is changing so quickly and unpredictably. The dotcom bubble burst in the 90s affected the valuation of all stocks in that industry. All stocks within an industry are subject to industry risk. Regulatory Risk Virtually every company is subject to some sort of regulation. It refers to the risk that the government will pass new laws or implement new regulations, which will dramatically affect a business. Business Risk These are the risks unique to an individual company. It refers to the uncertainty regarding the organizations ability to perform business or provide service Products, strategies, management, labor force, market share, etc., which are among the key factors investors consider in evaluating the value of a specific company.

Fundamentals Part Three

Instruments traded in the stock markets there are various types of instruments in the stock market. They include Shares, Mutual Funds, IPO's, Futures and Options. Why choose stocks Stocks are one of the most effective tools for building wealth, as stocks are a share of ownership of a company. You thus have great potential to receive monetary benefits when you own stock shares. Owning stocks of fundamentally strong companies simply lets your money work harder for you since they appreciate in value over a period of time while also offering rich dividends on a periodic basis. Tracking stocks

tracking stocks lets you gain from the best stock opportunities available in the market while also letting you know how the stocks in your portfolio are performing. Many Sites including BSE & NSE provides all data you require to track your stock Where to buy stock Stock trading happens on Stock Exchanges, but one cannot individually buy stocks off the exchange. To do so, you need to find a suitable broker who will understand your needs and buy stocks on your behalf. You can think of them as agents who will conduct transactions for you without actually owning any of the securities themselves. In exchange for facilitating or executing a trade, brokers will charge you a commission. Market Order A market order is an order to buy or sell a stock at the current market price. It signals your broker to execute the order at the best price currently available. However, as market prices keep changing, a market order cannot guarantee a specific price. Limit Order To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. You could use a limit order when you want to set the price of the stock. In other words, you want to sell/buy particular scrip at a price other than the Current Market Price. However, a limit order guarantees a price but cannot guarantee execution of the trade, because the scrip might not reach the desired price on that particular trading day owing to Market related factors. Stop Loss Order A stop loss order is a Normal order placed with a broker to sell a security when it reaches a certain predetermined price Trigger Price. Sometimes the market movements defy your expectations. Such market reversals often result in loss bearing transactions. The stop loss trigger price is your defense mechanism- an amount at which you will be able to sustain yourself against such unanticipated market

movements. Your stop loss instruction is an order to sell when the price of contracts reaches a pre-determined level - the trigger price. Naturally, this price cannot be more than the price of the stock you are trading. Good-till-canceled (GTC) or Day Order Or Normal Orders re o your broker that hold true only during the period of the trading day for the orders have been given. If the order has not been executed on that day, it will not be passed on to the next trading day. Thus they "good The stop loss order given to your broker will not hold true for the next day. For, even if the stock reaches level X on Day 2, he will not execute the trade till you instruct him to do so again. Advances and declines Advances and declines give you an indication of how the overall market has performed. You get a good overview of the general market direction. As the name suggest ' advances' will inform you how the market has progressed. 'Declines' signal if the market has not performed as per expectations. The Advance-Decline ratio is a technical Analysis tool that indicates market movement. Advance Decline ratio is calculated using the formula: Number of stocks that advanced/number of stocks that declined. Generally, it is seen that in Bullish markets the number of stocks that advance is more than the ones that declined and the converse can be said to hold true in a bearish market. The breadth of market indicator is used to gauge the number of stocks advancing and declining for the day. 'Remains unchanged' is a term used if the market scenario shows no advancement or decline compared to the earlier day. Advances and declines are calculated from the previous days closing results. However, a market that is significantly on one side either in terms of advances or declines may have a hard time reversing out of that direction the next day.

Fundamentals Part Four

Annual report An annual report provides a company's shareholders with information about its operations. This is an obligation stipulated by law. This is extremely beneficial to investors because it helps make informed decisions. The report tells you how well the company is doing while also forecasting its future earnings and dividends. The Chairman's letter in the report also profiles the company's future goals. Inside the Annual Report Here is what comprises an annual report: A letter from the chairman on the high points of business in the past year with predictions for the next year. The company philosophy: A section that describes the principles and ethics that govern a company's business. An extensive report on each section of operations within the company, describing the company's services or the products financial information that includes the profit and loss (P&L) statements and a balance sheet Depending on its income and expenses, the company will either make profits or show losses for a year. The balance sheet describes assets and liabilities and compares them to the previous year. The footnotes will also give you reveal important information, as they discuss current or pending lawsuits or government regulations that may impact the company operations. An auditor's letter in the annual report confirms that the information provided in the report is accurate and has been certified by

independent accountants. Obtain an Annual Report Annual reports are mailed automatically to all shareholders on record. If you wish to obtain the annual report about a company in which you do not own shares, you can call its public relations (or shareholder relations) department. You may also look at the company web site, or search the Internet; as there are several sources on the Internet providing information on public companies. All publicly listed companies are required to submit the financial reports available in the public domain as per SEBI regulations.
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Quarterly and other financial reports besides the annual report, companies provide several other financial reports such as quarterly reports (issued every three months) and statistical supplements. These however are not as comprehensive as the annual report of the company. Quarterly reports are very similar to the annual reports except they are issued every three months and are less comprehensive. They may be obtained in the same way as an annual report.
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Company Earnings Earnings are a company's net profit. It is the surplus left with the company after it has cleared all its expenses, i.e. Money paid to employees, utility bills, costs of production and other operating expenses The manner in which a company makes its earnings, is defined by the very nature of its business. Two sources of company earnings are: Income from sales of goods or services Income from investment. Investments generate income for businesses by way of either interest on loans, dividends from other businesses, or gains on the sale of

investment property. Thus, company earnings are the sum of income from sales or investment left after the company has met its obligations. Why are Earnings important As an investor who holds shares of the company, you have part ownership of company. When you invest in a company's shares, you become a 'part owner' of the company and you get to share a part of the company's profit as dividend. Thus, if the company does well and earns more profit, you in turn to well If the company reinvents its earnings towards future growth, you are assured of higher dividends in the future. Meanwhile, if you lend money to the company by investing in its bonds, the company uses part of its earnings to repay interest and principle on the bonds. The more earnings the company has, the more secure you can be that the company will be able to make your interest payments. So, company earnings are important to you because you make money when the business you invest in, makes money. Use earnings information to make an investment decision your investment goals determines how you use information about company earnings. If you are an income investor, interested in earning immediate income from your investments, you probably want to invest in a company that is paying dividends. If you have a long-term investment strategy, dividends may not be as important to you. The "financial s" indicate whether a company is oriented for income, growth, or a bit of both. By comparing the financial s for different companies in the same industry, you can find characteristics best suited to your investment goals. A convenient way to compare companies is through Earnings per share (EPS). EPS represents the net profit divided by the number of outstanding shares of stock. When you compare the EPS of different companies, be sure to consider the following: 1 Companies with higher earnings are stronger than companies with lower earnings.

2 Companies that reinvest their earnings may pay low or no dividends but may be poised for growth. 3 Companies with lower earnings, and higher research and development costs, may be on the brink of either a breakthrough or a disaster, making them a risky proposition. 4 Companies with higher earnings, lower costs and lower shareholder equity, might go in for a merger. Use Fundamentals to make an investment decision Fundamental Analysis is a method used to evaluate the worth of a security by studying the financial data of the issuer. But this research can never accurately predict how the company will perform in the stock market. It can however be used as a good comparative framework to know which company will be a better investment choice. As an investor, you are interested in a corporation's earnings because earnings assure higher dividends and potential for further growth. You can use profitability ratios to compare earnings for prospective investments. These are measures of performance showing how much the firm is earning compared to its sales, assets or equity. You can quickly see the difference in profitability between two companies by comparing the profitability ratios of each. Let us see how ratio analysis works. Ratio Analysis The ratio analysis technique is also called cross-sectional analysis, providing you with important information about a company's financial strength. Cross-sectional analysis compares financial ratios of several companies from the same industry and enables you to deduce success, failure or progress of any business. Thus, a financial ratio measures a company's performance in a specific area and guides your judgment regarding which company is a better investment option. Some of the important ratios that an investor must know are: i) Price-Earnings Ratio((P-E ratio): It is a ratio obtained by dividing the price of a share of stock by Earnings per share (EPS) for a 12-month period.

ii) EPS (Earnings Per Share): It is that portion of a company's net income, which corresponds to each share of that company's common stock which is issued and outstanding. EPS gives an indication of the profitability of a company. It is calculated using the formula: EPS = Net Income-Dividends on Preferred Stock Average Outstanding Shares iii) Current Ratio: Companies need a surplus supply of current assets in order to meet their current liabilities. They generally pay their interest payments and other short-term debts with current assets. If a company has only illiquid assets, it may not be able to make payments on their debts. It is a type of Liquidity ratio. Current Ratio = Current Assets Current Liabilities Leverage Ratios: Traditionally, leverage is related to the relative proportions of debt and equity, which fund a venture. The higher the proportion of debt, the more leverage. It is a ratio that measures a company's capital structure, indicating how a company finances their assets. Do they rely strictly on equity? Or, do they use a combination of equity and debt? The answers to these questions are of great importance to investors. Leverage= Long Term Debt Total Equity A firm that finances its assets with a high percentage of debt is risking bankruptcy, higher borrowing costs and decreased financial flexibility; if its performance cannot help fulfill its debt payments. If a company is highly leveraged, it is also possible that lender's may shy away from providing further debt financing fearing the viability of their investment. The optimal capital structure for a company you invest in, depends on which type of investor you are. A bondholder would prefer a company

with very little debt financing because of it lowers the risk of him losing his money. When a firm becomes over leveraged, bankruptcy can result. Shareholder's Equity: Shareholders' equity is calculated as the value of a company's assets less the value of its liabilities. It is the value of a business to its owners, after all of its obligations have been met. This net worth belongs to the owners. Shareholders' equity generally reflects the amount of capital the owners invested, plus any profits that the company generates. Bankruptcy Bankruptcy is a legal mechanism that allows creditors to assume control of a firm when it can no longer has the ability to meet its financial obligations. Both stock and bond fear bankruptcy. Generally, the firm's assets are sold in order to pay off creditors to the largest extent possible. When bankruptcy occurs, stockholders of a corporation can only lose the amount they have invested in the bankrupt company. This is called Limited Liability. If a firm's liabilities exceed the liquidation value of their assets, (the value of assets converted into cash), creditors also stand to lose money on their investments. Understanding the Balance Sheet The balance sheet is one of the most important financial statements of a company. The logic behind producing a balance sheet is to ensure that the accounts are always in balance and all the company funds can be accounted for. It is reported to investors at least once a year. You may also receive quarterly, semiannually or monthly balance sheets. The contents of a balance sheet include: What the company owns (its assets) What it owes (its liabilities) The value of the business to its stockholders (the shareholders' equity). Importance of Balance Sheet

As an investor you need to ensure that the company you have invested in, has good potential for future growth and will yield good returns. The balance sheet helps you get answers to questions like: 1 Will the firm meet its financial obligations? 2. What amount of funds has already been invested in this company? 3. Is the company overly indebted? 4. What are the different assets that the company has purchased with its financing? These are just a few of the many relevant questions you can answer by studying the balance sheet. The balance sheet provides a diligent investor with many clues to a firm's future performance. Assets Assets are any items of economic value owned by a corporation that can be converted into cash. Types of Assets: Current assets are assets that are usually converted to cash within one year. Bondholders and other creditors closely monitor a firm's current assets since interest payments are generally made from current assets. Also in case the company goes bankrupt, assets can be easily liquidated into cash and help prevent loss of your investments. Current assets are important to most companies, as they are a source of funds for day-to-day operations. It is thus evident, that the more current assets a company owns, the better it is performing. Cash equivalents are not cash but can be converted into cash so easily that they are considered equal to cash. Cash equivalents are generally highly liquid, short-term and very safe investments. Accounts Receivable Accounts receivable is the money customers (individuals or corporations) owe the firm in exchange for goods or services that have been delivered or used but not yet paid for. As more and more business is being done today with credit instead of cash, this item is a significant component of the balance sheet. Accounts receivable is however recorded as an asset on the balance sheet as it represents a legal obligation for the customer to remit

cash. Inventory a firms inventory is the stock of materials used to manufacture their products and the products themselves for future sale. A manufacturing company will often have three different types of inventory: raw materials, works-in-process, and finished goods. A retail firm's inventory generally will consist only of products purchased that are still to be stored. Inventory is recorded as an asset on a company's balance sheet. Long-term Assets: Long-term assets are grouped into several categories like: A long-term, tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year, such as manufacturing equipment, real estate, and furniture. Fixed assets are long-term, tangible assets held for business use and will not be converted into cash in the current or upcoming year. E.g. Items such as equipment, buildings, production plants and property On the balance sheet, these are valued at their cost. As the value of the asset declines over the years, depreciation is subtracted from all, except land. Fixed assets are very important to a company because they represent long-term investments that will not be liquidated soon and can facilitate the companys earnings. Depreciation gives you an estimate of the decrease in the value of an asset, caused by 'wear and tear' or obsolesces. It appears in the balance sheet as a deduction from the original value of the fixed assets; as the value of the fixed asset decreases due to wear and tear. Intangible assets are non-physical assets such as copyrights, franchises and patents. Being intangible, it becomes difficult to estimate their value. Often there is no ready market for them. Sometimes however, an intangible asset can be the most valuable asset a company possesses. Liabilities Liabilities are a company's debt to outside parties. They represent rights of others to expect money or services of the company. A company that has too many liabilities may be in danger of going

bankrupt. E.g. Bank loans, debts to suppliers and debts to its employees. On the balance sheet, liabilities are generally broken down into Current Liabilities and Long-Term Liabilities. Types of Liabilities: Current liabilities Current liabilities are debts currently owed for taxes, salaries, interest, accounts payable* and notes payable, that are due within one year. A company is considered to have good financial strength when current assets exceed current liabilities. Accounts Payable Accounts payable is one of a series of accounting transactions covering payments to suppliers whom the company owes money for goods and services. Therefore, you will often see accounts payable on most balance sheets. Long-term debt is a long-term loan, for a period greater than one year. These debts are often paid in installments. If this is the case, the portion to be paid off in the current year is considered a current liability.

Fundamentals Part Five

Technical Analysis Technical Analysis is a method where one studies the market statistics to evaluate the worth of a company. Instead of assessing the health of the company by relying on its financial statements, it relies upon market trends to predict how a security will perform. It is a method of evaluating stocks by analyzing stock market related activity, such as past prices and volume. Technical analysts do not

attempt to measure a security's intrinsic value, but instead use charts to identify patterns that can suggest future activity. They believe in the momentum that the scrip/markets gather over a period of time and cashing in on the same. Technical analysts believe that the historical performance of stocks and markets are indications of future performance. This method enables 'short-term' investors to gauge companies who have very good potential to gather increased earnings in the near future. Fundamental Analysis A method of evaluating a stock by attempting to measure its intrinsic value Fundamental analysts study everything from the overall economy and industry conditions, to the financial condition and management of companies A fundamental analyst would most definitely look into the details regarding the balance sheets, profit loss statements, ratios and other data that could be used to predict the future of a company. In other words, fundamental analysis is about using real data to evaluate a stock's value. The method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth. Overvalued Stock or an Undervalued Stock An overvalued stock can be understood as an inflated hope that a company will do well. Thus, a stock is overvalued if its current price exceeds the intrinsic value of the stock. The market may temporarily price stocks too high or too low and that's how investors determine whether stocks are being overvalued or undervalued. If a stock is overvalued, the current price of the stock exceeds its earnings ratio (PE ratio*) and hence investors expect the price of the stock to drop. A high PE in relation to the past PE ratio of the same stock may indicate an overvalued condition, or a high PE in relation to peer stocks may also indicate an overvalued stock thus the PE ratio is one of the many ways to determine whether a stock is overvalued. *A company's P/E ratio is computed by dividing

the current market price of one share of a company's stock by that company's per-share earnings. For example, a P/E ratio of 10 means that the company has Rs1 of annual, per-share earnings for every Rs10 in share price A stock is undervalued when, if is selling at a much lower price than what it is actually worth. This can be determined based on fundamentals like earnings and growth prospects. One of the bestknown measures for finding an undervalued stock is the price earnings ratio (P/E). Consider Colgate and Pepsodent, which are in the same industry and have similar fundamentals. If Colgate has a P/E of 15 and Pepsodent's is 20, Colgate could be an undervalued stock. Value Investing Value investing is an investment style, which favors good stocks at great prices over great stocks at good prices. Hence it is often referred to as "price driven investing". A value investor will buy stocks he believes the market is undervaluing, and avoid stocks that he believes the market is overvaluing. Warren Buffet, one of the world's best-known investment experts believes in Value investing. Value investors see the potential in the stocks of companies with sound financial statements that they believe the market has undervalued; as they believe the market always overreacts to good and bad news, causing stock price movements that do not correspond with their long-term fundamentals. Value investors profit by taking a position on an undervalued stock (at a deflated price) and then profit by selling the stock when the market corrects its price later. Value investors don't try to predict which way interest rates are heading or the direction of the market and the economy in the short term, but only look at a stock's current valuation ratios and compare them to their historical range. In other words they pick up the stocks as fledglings and cash in on them when they are valued right in the markets. For example, say a particular stock's P/E ratio has ranged between a

low of 20 and a high of 60 over the past five years, value investors would consider buying the stock if it's current P/E is around 30 or less. Once purchased, they would hold the stock until its P/E rose to the 50-60 ranges before they consider selling it or even higher if they see further potential for growth in the future. Contrarian Philosophy Investing with a value philosophy can be considered as one form of contrarian investing. Buying stocks that are out of favor in the marketplace, and avoiding stocks that are the latest market fad is a contrarian investing strategy. Thus it is an investment style that goes against prevailing market trends, where investors buy scrip that are performing poorly now and sell them in future when they perform well. Contrarians believe in taking advantages that arise out of temporary set backs or other such reasons that have caused a stocks price to decline at the moment. A simple example of Contrarian Philosophy would be buying umbrellas in winter season at a cheap rate and selling them during rainy days. Futures Derivatives a derivative is a financial instrument whose value depends on the values of other underlying variables. As the name suggests it derives its value from an underlying asset. For Ex-a derivative may be created for a share, or any material object. The most common underlying assets include stocks, bonds, commodities etc. Derivatives contract Anil buys a futures contract in the scrip "Reliance Ind". He will make a profit of Rs.1500 if the price of Satyam Computers rises by Rs 1500. If the price remains unchanged Anil will receive nothing. If the stock price of Satyam Computers falls by Rs 2400 he will lose Rs 2400. As we can see, the above contract depends upon the price of the Reliance Ind scrip, which is the underlying security. Similarly, futures trading can be done on the indices also. Nifty futures are a very

commonly traded derivatives contract in the stock markets. The underlying security in the case of a Nifty Futures contract would be the Index-Nifty.
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Derivatives? Derivatives are basically classified into the following: Futures /Forwards
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Options Swaps
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A futures contract is a type of derivative instrument, or financial contract where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. The example stated below will simplify the concept: Case1: Ravi wants to buy a Laptop, which costs Rs 50,000 but owing to cash shortage at the moment, he decides to buy it at a later period say 2 months from today. However, he feels that after 2 months the prices of Lap tops may increase due to increase in input/Manufacturing costs .To be on the safer side, Ravi enters into a contract with the Laptop Manufacturer stating that 2 months from now he will buy the Laptop for Rs 50,000. In other words he is being cautious and agrees to buy the Laptop at today's price 2 months from now. The forward contract thus entered into will be settled at maturity. The manufacturer will deliver the asset to Ravi at the end of two months and Ravi in turn will pay cash delivery. Thus a forward contract is the simplest mode of a derivative transaction. It is an agreement to buy or sell a specific quantity of an asset at a certain future time for a specified price. No cash is exchanged when the contract is entered into. Index Futures

As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. Index futures are futures a contract where the underlying is a stock index (Nifty or Sensex) and helps a trader to take a view on the market as a whole. Lot size Lot size refers to the quantity in which an investor in the markets can trade in a derivative of particular scrip. For Ex-Nifty Futures have a lot size of 100 or multiples of 100.Hence if a person were to buy 1 lot of Nifty Futures , the value would be 100*Nifty Index Value at that point of time. Similarly lots of other scrip such as Infosys, reliance etc can be bought and each may have a different lot size. NSE has fixed the minimum value as two lakhs for an Futures and Options contract. Lot sizes are fixed accordingly which will be the minimum shares on which a trader can hold positions. Expiry period in Futures each contract entered into has an expiry period. This refers to the period within which the futures contract must be fulfilled. Futures contracts may have durations of 1 month, 2 months or at the most 3 months. Each contract expires on the last Thursday of the expiry month and simultaneously a new contract is introduced for trading after expiry of a contract. Uses of Derivatives what are the various derivative strategies Derivatives have a multitude of uses namely: 1) Hedging 2) Speculation & 3) Arbitrage

OPTIONS

Options before you begin options trading it are critical to have a clear idea of what you hope to accomplish. Only then will you be able to narrow down on an options trading strategy. Let us first understand the concept of options. An option is part of a class of securities called derivatives. The concept of options can be explained with this example. For instance, when you are planning to buy some property you might have placed a nonrefundable deposit to hold it for a short time while you evaluate other options. That is an example of a type of option. Similarly, you have probably heard about Bollywood buying an option on a novel. In 'optioning the novel,' the director has bought the right to make the novel into a movie before a specified date. In both cases, with the house and the script, somebody put down some money for the right to buy a product at a specific price before a specific date. Buying a stock option is quite similar. Options are contracts that give the holder the right to buy or sell a fixed amount of a certain stock at a specified price within a specified time. A put option gives the holder the right to sell the security, a call option gives the right to buy the security. However, this type of contract gives the holder the right, but not the obligation to trade stock at a specific price before a specific date. Several individual investors find options useful tools because they can be used either as 1) A type of leverage or 2 ) A type of insurance. Trading in options lets you benefit from a change in the price of the share without having to pay the full price of the share. They provide you with limited control over the shares of a stock with substantially less capital than would be required to buy the shares outright. When used as insurance, options can partially protect you from the specific security's price fluctuations by granting you the right to buy or sell shares at a fixed price for a limited amount of time. Options are inherently risky investment vehicles and are suitable only

for experienced and knowledgeable investors who are prepared to closely monitor market conditions and are financially prepared to assume potentially substantial losses.
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Different types of Options, How can Options be used as a strategic measure to make profits/reduce losses? Options may be classified into the following types: 1) Call Option 2) Put Options as mentioned before, there are two types of options, calls and puts. A call option gives the holder the right to buy the underlying stock at the strike price anytime before the expiration date. Generally call options increase in value as the value of the underlying instrument increases. By contrast, the put option gives the holder the right to sell shares of the underlying stock at the strike price on or before the expiry date. The put option gains in value as the value of the underlying instrument decreases. A put option is one where one can insure a stock against subsequent price fall. If the value of your stocks goes down, you can exercise your put option and sell it at the price level decided upon earlier. If in case the stock price moves higher, all you lose is just the premium amount that was paid. Note that in newspaper and online quotes you will see calls abbreviated as C and puts abbreviated as P. The examples stated below will explain the use of Put options clearly: Study 1: Rajesh purchases 1 lot of Infosys Technologies MAY 3000 Put and pays a premium of 250 This contract allows Rajesh to sell 100 shares of Infosys at Rs 3000 per share at any time between the current date and the end of May.Inorder to avail this privilege, all Rajesh has to do is pay a premium of Rs 25,000 (Rs 250 a share for 100 shares).

The buyer of a put has purchased a right to sell. The owner of a put option has the right to sell. Study 2: If you are of the opinion that particular stocks say "Ray Technologies" is currently overpriced in the month of February and hence expect that there will be price corrections in the future. However you don't want to take a chance, just in case the prices rise. So here your best option would be to take a Put option on the stock. Lets assume the quotes for the stock are as under: Spot Rs 1040 May Put at 1050 Rs 10 May Put at 1070 Rs 30 So you purchase 1000 "Ray Technologies" Put at strike price 1070 and Put price of Rs 30/-. You pay Rs 30,000/- as Put premium. Your position in two different scenarios has been discussed below: 1. May Spot price of Ray Technologies = 1020 2. May Spot price of Ray Technologies = 1080 In the first situation you have the right to sell 1000 "Ray Technologies" shares at Rs 1,070/- the price of which is Rs 1020/-. By exercising the option you earn Rs (1070-1020) = Rs 50 per Put, which amounts to Rs 50,000/-. Your net income in this case is Rs (50000-30000) = Rs 20,000. In the second price situation, the price is more in the spot market, so you will not sell at a lower price by exercising the Put. You will have to allow the Put option to expire unexercised. In the process you only lose the premium paid which is Rs 30,000. Open interest the total number of option contracts and/or futures contracts that are not closed or delivered on a particular day and hence remain to be

exercised, expired or fulfilled through delivery is called open interest. Index Futures As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. Index futures are futures contracts where the underlying is a stock Index (Nifty or Sensex) and helps a trader to take a view on the market as a whole. Option Premium, strike price and spot price the price that a person pays for a call option/Put Option is called the Option Premium. It secures the right to buy/sell that particular stock at a specified price called the strike price. In other words the strike price is the specified price at which the holder of a stock option may purchase the stock. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium. Premium of an option = Option's intrinsic value + Options time value The stated price per share for which underlying stock may be purchased (for a call) or sold (for a put) by the option holder upon exercise of the option contract is called the Strike price. Spot Price is the current price at which a particular commodity can be bought or sold at a specified time and place. Settlement price the last price paid for a contract on any trading day. Settlement prices are used to determine open trade equity, margin calls and invoice prices for deliveries. Determine the price of an option A variety of factors determine the price of an option. The behavior of the underlying stock considerably affects the value of an option. Investors have different opinions about how a particular stock will behave in the future and hence may disagree about the value of any given option. In addition, the value of an option decreases as its expiration date approaches. Thus, its value is also highly dependent on the amount of time left before the option expires. Intrinsic & Time Value

an options price is composed of its intrinsic value and time value. What a particular option contract is worth to a buyer or seller is measured by how likely it is to meet their expectations. In the language of options, that's determined by whether or not the option is, or is likely to be, in the money or out-of-the-money at expiration. Intrinsic value is how far an option is 'in-the-money.' Thus, the phrase is an adjective used to describe an option with an intrinsic value. A call option is in- the-money if the spot price is above the strike price. A put option is in the money if the spot price is below the strike price. It is calculated by subtracting the options strike price from the spot price. An out-of-the-money option has an intrinsic value of zero. For example if XYZ is trading at Rs 58 and the June 55 call is trading at Rs 4, to calculate the intrinsic value subtracts Rs 55 from 58, leaving you with Rs 3 of intrinsic value. The remaining Rs 1 is known as extrinsic or time value. Time value is the amount over intrinsic value that a buyer pays for the option. While buying time value, an options purchaser assumes that the option will increase in value before it expires. As the option nears expiration, its time value starts decreasing toward zero Theoretical Value Theoretical value is the objective value of an option. It shows how much time-value is left in an option. The most commonly used formula to calculate the theoretical value of an option is known as the BlackScholes model. This model considers the price of the stock, the options strike price, the time remaining before expiration, the volatility of the underlying stock, the stock's dividends and the current interest rate while arriving at the theoretical value of the option. Although an option may trade for more or less than its theoretical value, the market views the theoretical value as the objective standard of an option's value. This makes the price of all options tilt

toward their theoretical value over time. The Components of Theoretical Value Volatility the volatility of the underlying stock is one of the key factors in determining the value of an option. Often, the options price increases as the volatility of the stock increases. The difficulty in predicting the behavior of a volatile stock permits the option seller to command a higher price for the additional risk. There are two types of volatility, historical and implied. As the term suggests, historical volatility is a measurement of the stocks movement based on its past behavior. By contrast, implied volatility is calculated using option prices. It is a measurement of the stocks movement as implied by how the market is currently valuing options. Dividends As an owner of a call option you can always exercise your right to the stock and receive any dividend it might pay. Interest Rate if you buy an option rather than a stock, you invest less money upfront. Days until Expiration An option, being a wasted asset; wastes a little as each day lapses. Thus its value is calculated in accordance to the amount of days left in its life. Swaptions A Swaptions is an option on an interest rate swap. Swaptions are options contracts, which give you the right to enter into a swap agreement at the option expiration, in return for a one-off premium payment.

Covered Call, Covered Put, In the Money, Out Of the Money, At the Money? 1 In-the-money a call option is in the money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security. 2 Out of the money A call option is out-of-the-money if the price of the underlying instrument is lower than the exercise/strike price. A put option is outof-the-money if the price of the underlying instrument is above the exercise/strike price. 3 At-the-money At the money is a condition in which the strike price of an option is equal to (or nearly equal to) the market price of the underlying security. 4 Covered Call you can take a covered call if you take a long position in an asset combined with a short position in a call option on the same underlying asset. 5 Covered Put the selling of a put option while being short for an equivalent amount in the underlying security.

Financial Terms
Indian banks are required to hold a certain proportion of their deposits as cash. In reality they dont hold these as cash with themselves, but with Reserve Bank of India (RBI), which is as good as holding cash. This ratio (what part of the total deposits is to be held as cash) is

stipulated by the RBI and is known as the CRR, the cash reserve ratio. When a banks deposits increase by Rs100, and if the cash reserve ratio is 10, banks will hold Rs10 with the RBI and lend Rs 90. The higher this ratio, the lower is the amount that banks can lend out. This makes the CRR an instrument in the hands of a central bank through which it can control the amount by which banks lend. The RBIs medium term policy is to take the CRR rate down to 3 per cent the hike in CRR from 4.5 to 5 per cent will increase the amount that banks have to hold with RBI. It will therefore reduce the amount that they can lend out. The move is expected to shift Rs 8,000 crore of lend able resources to RBI. In the past few months the money that banks has available for giving out as credit is greater than the amount they have been lending out. This has led to an overhang of liquidity in the system. The objective of the CRR hike is to mop up some of the excess liquidity in the system the hike in CRR is not likely to lead to an immediate increase in interest rates. There is excess liquidity in the system even after a higher amount is deposited with RBI as reserves. Unless the demand for credit picks up to the extent that the money is all lent out, banks will not have an incentive to raise interest rates. The inflation rate may continue to be high, the economy may also continue to witness growth which will keep the demand for credit high, and international trends are for rates to move up. This means that sooner or later interest rates will go up. The first rates to get impacted are yields on government bonds. We have already seen this happening. If the inflation rate keeps rising, RBI may raise the Repo rate, the short term rate at which banks park excess funds with the RBI. This makes it less attractive for banks to lend. Further, RBI may raise the bank rate, the rate at which it lends to banks. At this point you may expect interest rates on home loans and fixed deposits to go up as well. Over a year rates could go up by as much as 3 per cent

but I expect SLR is for a liquid ratio. Liquid ratio = Liquid Asset/Current Liabilities Liquid Asset = Current Asset-Stock Current Asset Ratio (CAR) Current asset/ Current Liabilities Current asset is the asset which is easily liquefied with in a span of maximum 1 year. Current liabilities are the liability which has to be played in with in 1 year.

SLR is statutory liquid ratio, this is the % of deposits that need to be maintained as liquid thru' investing in RBI bonds. SLR includes CRR, for example CRR is 7% and SLR is 10%, the 3% should be can non-cash investments. SDR: The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries PLR: Prime lending rate is the rate that the bank will lend to its best customers. Floating rate loans will be quoted as some thing like PLR+_ 1%, when RBI changes SLR, CRR etc banks will announce change in PLR and other loans interest will be changed accordingly CAR: Capital Adequacy ratio is the amount of capital that shareholders should put in for each 100 deposits with bank. For ex if CAR is 12.5% and a bank has a deposit base of 100, then Bank's share capital reserves and surplus should be at least 12.5

Repo (Repurchase) Rate Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demands they are facing for money (loans) and how much they have on hand to lend.

If the RBI wants to make it more expensive for the banks to borrow money, it increases the Repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the Repo rate. Reverse Repo Rate This is the exact opposite of Repo rate. The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse Repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system If the reverse Repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk) Consequently, banks would have lesser funds to lend to their customers. This helps stem the flow of excess money into the economy Reverse Repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while Repo signifies the rate at which liquidity is injected. Bank Rate This is the rate at which RBI lends money to other banks (or financial institutions. The bank rate signals the central banks long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa. Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays for borrowing money (banks borrow money either from each other or from the RBI) increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit.

Call Rate Call rate is the interest rate paid by the banks for lending and borrowing for daily fund requirement. Since banks need funds on a daily basis, they lend to and borrow from other banks according to their daily or short-term requirements on a regular basis. CRR Also called the cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money SLR Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. What SLR does is again restrict the banks leverage in pumping more money into the economy. Regarding Repo and Bank Rate: Repo is short term whereas Bank rate is long term. Thus Repo rates are also called short term lending rate and Bank rates are called long term lending rates. Now if the Repo rate > Bank rate, it signifies that short term borrowing of funds is more expensive for commercial banks. Incidentally, this short term borrowing through Repo is required by the banks to maintain its CRR. Thus if Repo rate is increased, bank will reduce its lending to public because to maintain the CRR bank will have to now borrow from RBI at a higher Repo rate. Thus increase of Repo is done to suck liquidity from the economy. CRR-Is the percentage of amount deducted from the total liability of the bank and which should be kept in the liquid form with the bank(say total liability of bank is 100 and amount for CRR is fixed 5%,than Rs. 5 will be kept in the liquid form ),remaining amount will be Rs.95-/ SLR- it is the percentage (fixed by the RBI) of money (left after deduction of CRR) which is invested in the government securities. (Say

the Percentage fixed for the SLR is 25% than 25%of95 will be invested as the SLR PLR .Is the percentage of amount left after deduction of CRR and SLR from the total liability of any bank, and lend to the Sectors at lower rate of interest as compare to another lending. RR-Lending rate offered by the RBI to other banks for short term lending against the private securities. RRR- It is the opposite of RR (means rate at which RBI offers the securities to the banks) BR- It is the rate at which the RBI lends the loan to other banks for long term against government securities. RR-Lending rate offered by the RBI to other banks for short term lending against the private securities.

Financial market
In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis. Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity. Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy. In finance, financial markets facilitate

The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); International trade (in the currency markets)

And are used to match those who want capital to those who have it Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends.

Fundamental Analysis
Overview Fundamental analysis is the practice of evaluating a company's stock price by comparing base elements in the company's balance sheets as well as general market factors. It does not include chart analysis, which is the domain of technical analysis. The main principle of fundamental analysis is to find profitable companies to invest in by comparing revenues, sales, management, etc. There are two types of drivers to look at in fundamental analysis: internal drivers and external drivers. Internal drivers are company specific (e.g. revenue, net income, assets, debts, etc.). External drivers are things that can affect the company's profitability but is not company specific (e.g. the economy, industry averages, etc.). The analysis of internal drivers can be broken down into two components: balance sheet numbers/valuations (you can calculate); and, news/management/analyst ratings/economic outlook (you cannot calculate). The items you cannot apply numbers to like news, management style, etc., are subjective so discussion of these factors with others will help. With balance sheet numbers and valuation techniques you can get a general appraisal of whether the company is overvalued or undervalued. This can be done in many different ways. The most common is in the form of a P/E ratio.

The analysis of external drivers is more subjective, as it requires a broad knowledge and, discussion of future industry growth, politics, economy, etc. These influences are important but cannot be easily calculated. External drivers

External drivers are factors which are outside the company's influence that can affect profitability. For example, the economy, inflation, interest rates, politics, bond market, etc. External drivers can be interpreted differently by different individuals (there is no magic formula). To explain some of the external factors we will begin with Inflation. Inflation is the rate at which the general level of prices for goods and services are rising. Inflation Inflation has a direct influence on the stock market. While looking at inflation can be still subjective to the trader, a little history can explain what the effect inflation has had in the stock market's past. Between1970-1980 there was high inflationary trend. During this period, as inflation was rising and "not in control," the trend was for businesses and individuals to increase debt load. The rationale was to borrow today with more valuable dollars and pay off the debt in the future with less valuable dollars. While this concept is sound in a situation with up-trending inflation, the problem comes in when the inflation trend is stemmed and reversed. As businesses and individuals continue to borrow and inflation continues to rise, the Federal Reserve (which will be discussed in further detail later) tends to step in to correct the problem. As these controls are activated, the inflationary trend changes direction. As history shows, there will always be a group of individuals and businesses that do not realize the trend has ended. As interest rates climb, they are caught with an excessive debt load which they can no longer service. By 1986 the excessive debt load was being noticed and by the early 1990s a record number of business and individual

bankruptcies were declared and resulted in a high unemployment rate (1990-91). There has been a slow economic recovery since this recession and the inflation rate (consumer price index) has been trending downwards since then. Part of the formula of a strong bull market is when inflation is perceived as being in control. During some of the best bull markets all you needed was a dart board. While the dart board is NOT recommended, these bull markets all had something in common inflation was in control. This effect can be observed in the following super bull markets: 1920-29; 1949-66; and, in the current bull market. Inflation also has a direct effect on interest rates. As the inflation rate climbed from the 1970s until the late 1980s, the demand for debt financing was high. Like anything, if the demand is high, so is the price, so interest rates were equally high. In 1990, the recession and the huge number of bankruptcies dramatically reduced the general debt demand. By 1993, interest rates fell about 4%. This drop in interest rates also made CDs and money markets less attractive to investors and led to a significant shift in assets to stocks and bonds (which was the beginning of the new bull market). Interest rates The first two types of rates are short term and long term. In general terms, if there is strong economic growth, short term rates will rise. Long term rates are related to the inflationary trend as well as rate differences between foreign countries. There is also the discount rate and federal rate. These are the rates that are controlled by the Federal Reserve. These rates are also used to control the inflationary trend as well as the interest rate trend, and have a significant impact on investors. The discount rate is the interest rate that member banks use to borrow money from the Federal Reserve. The federal rate is one that banks use to borrow from each other. If the economy is growing too fast, the Federal Reserve will raise the federal rate to hold back the inflationary trend. Finally, there is also the "real" interest rate. The real interest rate is the average Federal Funds rate minus the inflation rate. Most

economists use the real interest rate for analysis to determine the general future direction of interest rates and the overall market. The Federal Reserve The Federal Reserve's primary function is to keep the economic system in balance. The Federal Reserve has three economic controls to influence imbalances like high inflation rates. The Federal Reserve can: alter the amount of reserve that member banks are required to maintain; control the discount rate; and, the Federal Funds rate. During a recession or slow economic growth period, the Federal Reserve will lower interest rates to encourage investors to move assets into stocks and bonds (which will obviously help the stock market). When economic growth is too fast and inflationary pressures begin to build, the Federal Reserve will raise interest rates to encourage investors to move assets into money markets and CDs. This is the Federal Reserve's preferred method of economic control. During the 1990 recession, the Federal Reserve dropped the rates to the lowest rate in two decades. In 1994, the economy began to rebound and the Federal Reserve raised the rate for the first time since 1990. This signaled the first potential of a change in the trend of the interest rate. Since then, the Federal Reserve has raised the rate 10 consecutive times (as of August 2005) which has quite conclusively made an upward trending interest rate. Even though the rate changes were quite small, it is the perception of the public that the trend has changed that put a bit of a damper on the stock market. Note: A reasonable method for forecasting interest rates is to look at the Dow Jones Utility index. If the index in trending upwards it indicates that interest rates are trending down, if the index is trending down, it indicates that interest rates are on the rise. Utility stocks are considered sensitive to interest rates and therefore make a good leading indicator towards the interest rate trend as well as the overall market trend. (Some might argue that other indexes work just as well, however this depends on the investor's strategy... Generally speaking the utility index works well for interest rates and for overall market trend). Internal drivers

Internal drivers are company factors that are directly related to the actual business in question. For example, liabilities, assets, revenue, income, products, management, etc. It is these characteristics in a company that you will be comparing to other companies in the same industry. This allows the trader to get a general understanding of where this company "sits" in relation to other companies with similar businesses. A trader can also use these internal numbers to calculate many different ratios that will help determine if the company is currently undervalued or overvalued. Management Management who are they? What have they done in the past? What is the quality and diversity of the management team? All these questions can lead to a lengthy discussion about the particulars of each individual in management. Traders should use analysts reports, news, internet, and other sources to help make informed decisions about the management team. Products, product cycles and competition what is the company's product and/or service? How does it compare to other competitive products? What's unique? Why is it better? If you would not be willing to buy the company's product why would you invest in that company? Companies with inferior products, weak development/product cycles, poor quality companies tend not to last very long (I'm sure there are some exceptions to that rule, but it can be considered bad policy to invest in companies with bad products). Production Production is very important when it comes to companies that produce oil/gas, wood, power, metals etc. Their value depends highly on their production output as well as the current value of the product. The more a company produces, the more it can earn. As well, these specific commodities vary in cost, the higher the value of the product, the higher the potential for profit. Oil is a perfect example of this relationship. As global oil prices raise so does the value of oil companies. Profit

Profit margins are important, or for that matte, profit in general is important. Profit can be considered the keystone to fundamental analysis - the more profitable the company, the higher the potential for dividends as well as price growth. Most valuation techniques compare profit in some form or another to that of similar companies. Companies that have not yet attained net profit are still in the early stages of development. While these companies generally have a larger growth potential, they also have more risk. Companies that are producing net income can generally be considered established in the market place. There is less risk, and typically, the price of the stock will reflect that. The axiom here is that the more the company makes, the more the company is worth. Institutional presence Is there an institutional presence? The level of institutional presence is determined by the amount of shares outstanding that are owned by institutional investors (mutual funds, pension funds, investment houses, etc). As small companies mature, there is a point where they will be recognized by institutional investors. When these institutions begin investing in a company, the stock price will reflect that recognition (also when they sell out, it will be noticed in the stock price as well). Larger and more established companies typically have larger percentile institutional presence than smaller companies (micro-caps tend to have little to none). Share volume While the study of volume patterns is in the realm of technical analysis, volume can also be used as a fundamental indicator. Does the company you are looking at have enough share volume to sell your shares at a later date? A simple check will keep you from getting trapped.

You Must Do Your Own Investing With tens of thousands of mutual funds, Unit trusts, insurance groups, money mangers vying to invest your money you would think the easy

route to riches in the stock and futures market would be to invest in a top-performing fund, sit back and wait for the cash to roll in. Not so. The funds have some problems you should be aware of before you invest your hard earned money with them. Here they are:
1. Actually, not many funds perform any better than the averages.

If the DJI rises by 25% over 90% of funds will have similar returns. And after they take their 5% management cut you are left with a poor return. If this is the case then why not simply buy a basket of diversified shares of the overall index, as this will perform in line with the overall index, and save your self the management fees? But what about when the overall index declines by say 15% year on year? Ask your money manger and theyll tell you the old clichs: You must take a long-term view. The market corrected this year but next year will be better. This neednt be the case, as I will explain later. Keep this in mind. During the 1974/1975 Bear Market stock indexes declined by over 50%. During the 1987 market crash the index fell by over 30% in the space of a couple of months. From March 2000 to December 2000 the NASDAQ has declined by over 50%. How would you feel if your money manger reported at the end of the year that your hard earned saved money account is down by half? What about the top ten performing funds? What you will find here is that in order to be a top-performing fund their size is relatively small, this gives them much needed flexibility. So it is actually quite hard to get money into these funds. Many of the top performing Hedge Funds are open only to a small select few and then close their doors to new money.
2. Size. I read recently the Mutual fund Industry is pumping over 1

Trillion dollars per MONTH into the stock market. Some of these monster funds now manage portfolios worth tens of billions of

dollars. This alone restricts the funds to large cap stocks (the poorest performing) But most of all when things turn bad they simply can not get out due to their enormous size. For this reason they HAVE to adopt the buy and hold strategy. This is the individual investors BIGGEST advantage. We are the speedboat darting in and out of small rivers; where-as the mutual fund is the slow, cumbersome, super tanker. Restricted in its movement.
3. Management Philosophy:

Whilst I have up most respect for all professionals sometimes I wonder if some Mutual Fund mangers actually know anything about investing in stocks. In fact I know some do not. When I read the report on the Mutual Fund Manager and he talks about diversifying into over 100 different stocks, being invested fully at all times, not cutting losses for not wanting to time the market, not investing in small cap stocks because of lack of quality" I know most of these rules are set not because they bring superior stock market returns but because of the size of the funds under management and the attitude of the board. How would you feel being told your fund was still invested in Yahoo despite it being some 70% off its high? Why not get out when it fell by 10%, 15%, and 20%? To buy and hold despite all is a sure way to disaster in the markets. Yet even the funds seem powerless when it comes to this golden rule. Many Funds are stuck in a time warp. The markets have changed since the 1960s and will continue to change. What worked for Warren Buffet in the 1960s - 1990s has failed for him in the year 2000. You must be willing to go with the flow and accept change. Man Funds will not.

So if many funds perform in line or below the general averages, are too big for their own good and have detrimental attitudes how can the individual investor go it alone and perform much better? In order to

beat the Mutual funds by a wide margin you have to "piggy back" on their hard work but exit long before they can.

What Advantages do we the Small Investor Have?

1. Flexibility.

Without doubt our number one asset. We can a favorable share where a massive Mutual Fund buying spree has created an upward trend. We jump in make a big profit. When it starts to look ugly we quickly op off Take the money to the bank Or if we buy into a share and it goes sour straight away we quickly jump off with a small loss. Preserve your capital is the name of the game.
2. Focus.

Most funds are so diversified they will never perform any better than the averages. If you own more than 5 different stocks you are not focusing enough. The BIG money is made by putting large amounts of capital into that one HOT Stock we are lucky enough to find from time to time, not by buying a big bunch if average shares. If one sector is the HOT sector we can concentrate all our efforts in this sector.
3. Variety.

We can invest in Micro cap shares, small, medium, large, options, shorting, margin, etc. We dont have to answer to any one but our selves. We can use the full range of instruments available.
4. Time.

With the advent of the Internet there is no need to spend hour after hour pouring over company financial statements, reports, analysis, etc. If you follow Momentum Share Trading System then trading will not take you more than 10 minutes per day.

The Internet has leveled the platform so much I wonder how many people realize the advantage they now have. Years ago many wannabe investors would subscribe to newsletters in order to manage their own accounts but let some one else tell them what to buy and sell (very contradictory) this would cost from $200 up to $1,000 p.a. A lot of money but now with the filtering mechanisms of the Internet there is absolutely no need to subscribe to a newsletter. Everything you need to know to make sound investment decisions is now available. For example, with Yahoo financial services you can set up a filter that will present a list of all the shares on the market, which have the strongest 20% earning record, are being accumulated and have been trending upwards. Then, if you so wish, you can go into a company profile and read about their products, sales, debts, management etc. What more do you need? And its free. Years ago this kind of data could only be afforded by the big companies. This is the data they employ hundreds of analysts to sift through every day. Now its available to them man on the street at the click of a mouse. Of course even when you have compiled a HOT list of the best shares you must know how to trade them correctly for maximum return. A trader must know where to enter a share, where to get out if it doesnt act right, where to add positions in a share which is acting right, where to exit the trade, how to interpret the trend and much more. With the right system this is easily obtainable. Momentum Share Trading System will show you how to trade like a professional.

Choosing Broker
Depending on the type of investing that you plan to do, you may need to hire a broker to handle your investments for you. Brokers work for brokerage houses and have the ability to buy and sell stock on the stock exchange. You may wonder if you really need a broker. The answer is yes. If you intend to buy or sell stocks on the stock exchange, you must have a broker. Stockbrokers are required to pass two different tests in order to obtain their license. These tests are very difficult, and most brokers have a background in business or finance, with a Bachelors or Masters Degree. It is very important to understand the difference between a broker and a stock market analyst. An analyst literally analyzes the stock market, and predicts what it will or will not do, or how specific stocks will perform. A stock broker is only there to follow your instructions to either buy or sell stock not to analyze stocks. Brokers earn their money from commissions on sales in most cases. When you instruct your broker to buy or sell a stock, they earn a set percentage of the transaction. Many brokers charge a flat per transaction fee. There are two types of brokers: Full service brokers and discount brokers. Full service brokers can usually offer more types of investments, may provide you with investment advice, and is usually paid in commissions. Discount brokers typically do not offer any advice and do no research they just do as you ask them to do, without all of the bells and whistles. So, the biggest decision you must make when it come to brokers is whether you want a full service broker or a discount broker. If you are new to investing, you may need to go with a full service broker to ensure that you are making wise investments. They can offer you the skill that you lack at this point. However, if you are

already knowledgeable about the stock market, all you really need is a discount broker to make your trades for you.

Successful Investors What they have in Common.

Obviously, the first thing that successful investors have in common is a good net profit. The question is, what common traits do they have that make them so successful? First and foremost is method. Their methods may differ widely, but the presence of a methodical approach is true for all of them. All successful investors have their respective ways of organizing relevant investment information and take the right pragmatic decision at the right time, are it on investing or disinvesting that is, withdrawing or selling off one's stock. Everyone makes a profit on a few deals if they have been in the game for some time. The question is, how do some people make a profit so often? Simplistic advice like keep left or follow a witch or a pendulum does not really make sense. Nor is there any single fool-proof method regarding investment strategies. If you want to win you have to play, and make the right moves under the rules of the game. The first move is to get and keep track of stock and corporate information properly. Focus and not emotionality is what successful people have when going into this business. Startups are normally small or moderate, and that is indeed a good thing because successful investors do not make large investments on anything they have not understood adequately. If you invest time to read and observe the market, your time will turn into money. They analyze their own portfolios and also those of others results, at least in the beginning. They keep written track of the analysis results. Analyzing means figuring out causes and effects of the events intelligently they are open to mistakes in purchasing and selling of stocks, in speculations on options, on the timings of buying and selling. If an investors finds him continuously on the wrong side he should be mature enough to reconsider his approach. He can't stick to any particular stock because of emotional investments. A successful investor knows that the market ruthlessly ignores any emotional attachment. It is common to find successful investors who pay attention to the immediate trail of prices of the stocks purchased, but still do not get swayed by 10% ups or downs. They have set pragmatic tolerance ranges for themselves. They are confident but not overly so. They will never play a sitting duck in risky affairs; though they will surely absorb a certain amount of risk. They are quick to distinguish between the 'no-risk-no-gain' and 'too-risky' lots, and it is often this acumen that makes them successful investors.

They often will move upstream along their documented analysis to reach proper understanding of the stocks they are considering. It is wise to understand one particular stock in every detail, and to use that knowledge to learn the other stocks better. Work using your head. Remember, Lady Luck does not smile for a lazy bum. And if there's anything that all successful investors have in common, it's that not one of them is a lazy bum.

Invest In Stock
How to Invest in Stocks for Maximum Profits: Investing is stocks are something everyone should be doing. Not only is that, investing in stocks something everyone SHOULD be profiting from but for some strange reason many investors in stocks lose money. Why? Why do so many who invest in stocks lose money when there are hundreds of thousands of web sites, gurus, newsletters, system vendors telling you investing in stocks for massive profits is oh so easy? Investing in stocks, in my opinion, is not a mystery. There are no Holy Grail investing systems out there where profits will automatically fall into pockets. There is no one stock investing method that is the BEST way to invest in stocks. Just like there is no one best way to run a business, get fit, be happy, be successful, and acquire wealth. There are simply methods that work and methods that do not. Many people who attempt to invest in stocks and fail at it seem to commit the same cardinal sins. I have listed the ten most common reasons many investors in stocks fail to make a profit when there really is no reason not to: 1) You do not plan. When you get into a stock you must have reasons why. Where will you get out? What happens if the stock flies up 200% in the next 3 months? Will you add to your position? "Trade you plan and plan your trade."

2) Over diversify. You own too many stocks. Like a child in a sweet shop you can't resist buying this and that stock. Focus is the key to large profits. 3) You do not have a system/method. You trade from opinion, tips, outside advice. I don't know anyone who has made money consistently from third party advice. 4) Money management is more important than where to enter. Money management is a vital subject when investing in stocks. How much to buy? How much to risk this is where you success lies. 5) You actually trade/invest too often. You want to trade all the time. You want action. You are not patient waiting for those ALMOST certain trading/investing opportunities where big profits will be GIVEN to you. You are drawn into short-term gambling methods or even highly stressful day trading techniques. Not realizing the big money is in the big moves. Be patient and the money flows in. 6) You will not pay for specialized advice. For a fraction of the money you can make investing in stocks you can accumulate fantastic information and tools that will help you in your lifetime career of making money from stocks. But being too cheap you prefer to go it on your own. Losing your precious $10,000 account tin the process 7) You fail to take your time and build your stock empire slowly but surely. Get rich quick schemes sell so well simply because 90% of the population are stuck in this "get rich quick" attitude. It takes time, effort and determination to build the knowledge and experience necessary to make big money in the stock market. It's the same as any other business. 8) Instead of becoming the very best at one style of trading/investing you jump from one hot trading/investing method to the other. To make more money than you could ever dream about in the stock market vow to become the VERY best at one style of trading. Sure the market goes through cycles. The big money is made from a specialized investing method. Not a "jack of all" investing approach. Take a look at millionaires from all industries. They specialize. You don't see Bill Gates learning about the stock market. you don't see Warren Buffet

going into software design. they are the leaders of their own specialized niche markets. 9) You will not cut those losses. As strange as it seems many investor/traders of stocks will NOT cut those losses early. This is a lack of planning, fear of losses and arrogance. Cut your losses early and watch your portfolio grow. 10) You really didn't want to invest in stocks. I see many people who are desperate in their current situation. They dislike their day job and read there is money to be made in the stock market. Having never read a stock book, or shown the slightest interest in the past, they buy a trading course and expect to make big money from it. There is no interest in investing in stocks. They have no passion about learning about the stock market. If you do not enjoy investing in stocks and learning about the stock market then make your money from something you really enjoy.

Trading basics for the beginners

A share makes the holder a partial owner of the company and different types of shares have different rights associated with them. If you are able to sell off your share at a price higher than your buying price, you make a profit but you also run the risk of incurring a loss if the share price falls. The business you invested in makes profit and they provide you part of it as dividend. In the share market you are an anonymous player and many have made a reasonable profit. There is no unique formula to ensure consistent gain but before you venture into this market you should know the basics of stock trading. Trading stocks Buying and selling of stocks is referred to as trading in the financial market. You have to approach a broker in order to trade. You can trade either

electronically or on the exchange floor. Exchange floor scene must be familiar to you; the NYSE has been on television as part of news coverage innumerable times. It is here that your broker arranges for your shares to be ordered. . The floor clerk locates the floor trader from whom the shares can be bought. Once the price is agreed upon, the deal is finalized. Electronic transaction is very common today. It is an efficient and fast method of stock trading. Here too you require a broker but you receive confirmations almost immediately .In online investing your broker will connect to the exchange network and search for a buyer or seller according to your order. How are the stock prices determined? The stock prices cannot be predicted, they depend on various factors like political unrest, if there is a huge demand for a particular share at a given time, prices can fluctuate, and any event that could adversely affect the company will also cause the share prices to drop. Remember This before Investing in stock markets

Do you know the company well enough?

What is the companys reputation in the market?

Have you gone through their annual report?

Do you have the confidence to invest in this company?

Is some negative news about the company circulating?

How are analysts predicting the future?

How is the management of the company?

What are their growth prospects?

Am I aware of the insider activity?

Is it an internationally renowned company?

How is their marketing strategy?

Have there been any changes in the management recently?

How consistent has been their performance?

Has there been a sudden shift in their production?

Whenever you invest you should be aware of your limits and remember not to exceed them. Share market involves a lot of risk; risk taking could either lead to fortunate gains or to bankruptcy. You should avoid investing money more than you can actually afford. Know about your investment well and do not blindly depend upon your broker. Follow regular stock market quotes to keep yourself abreast of the market swings. The share provides you with an earning power, gives you partial ownership of a company and the freedom to buy or sell at any moment. But if you are a novice in stock trading you need to play safe and equip yourself with a lot of information. Unless you are a seasoned player you should invest only after surveying all the alternatives and never go beyond your risk tolerance. Know where to draw the line and begin trading in stocks!

Technical Analysis v. Fundamental Analysis

Fundamental Analysis is based on the study of factors external to the trading markets which affect the supply and demand of a particular market. It is in stark contrast to technical analysis since it focuses, not on price but on factors like weather, government policies, domestic and foreign political and economic events and changing trade

prospects. Fundamental analysis theorizes that by monitoring relevant supply and demand factors for a particular market, a state of current or potential disequilibrium of market conditions may be identified before the state has been reflected in the price level of that market. Fundamental analysis assumes that markets are imperfect, that information is not instantaneously assimilated or disseminated and that econometric models can be constructed to generate equilibrium prices, which may indicate that current prices are inconsistent with underlying economic conditions, and will, accordingly, change in the future. Another definition of Fundamental Analysis: Fundamental Analysis is an approach to analyzing market behavior that stresses the study of underlying factors of supply and demand. It is done in the belief that such analysis will enable one to profit by being able to anticipate price trends. A Fundamentalist is a market observer-and/or participant who relies principally on Supply/demand considerations in price forecasting. Components of Fundamental Analysis:

How to start investing in Stock Markets?

Prepare yourself I have seen most of the first time investors losing big money in the stock markets and you would come across a number of such investors with terrible experience in stock markets that they hate to even discuss about any shares and feeling very secure with their money being invested in Bank Fixed deposits, traditional insurance plans and Government bonds with a return of about 8 percent a year. They had a sour experience because they had not prepared themselves for investing in stock markets, they simply saw some other fellow making huge money on some news driven stock and next time put a huge sum on his advice or saw an expert on a news channel strongly recommending a stock and the markets turned otherwise. Such people do not dare to take another chance and believe that perhaps they are not made for it and resolve not to even look at it during rest of their lives. The experience might have been different if they would have spent some time researching and had some patience before making a

first time entry. Some basic steps for the first time investors are listed hereunder which will be useful to make a successful entry into the stock markets and for those as well who had a terrible first time experience. Buy stocks while they are moving up; dont try to catch a falling knife. An old saying, but true. The most important thing in trading is to trade with the trend. A stock should be bought while it is in an uptrend and is moving up. A number of investors think that is has already moved so much how far it can go and ignore the stock thinking that they should have bought it a month ago. But actually there are more chances of a momentum stocks climbing higher than those which have yet not started moving up. Last year sugar stocks fell more than 50 percent and a number of investors thought that they have already halved, how far can they fall so it becomes a good buy, but the fundamentals did not suggest buying sugar stocks and now they have went down to as low as a third of what they were a year ago. There are oversold situations in the markets and there is a bottom to every fall, but it is impossible to predict a bottom. We have to wait till the downtrend reverses and the stock starts rebounding, there you have to catch it and ride the momentum. Let the knife fall, vibrate for some time and then you may pick it up; there are less chances of injuring yourself. 2. Do not lose patience and let the stock come to your target. It happens to most of investors that when they want to sell, the stock does not go up and when they have to buy, the stock does not come down. The fault lies not in the stock but in ourselves that we become impatient and try to initiate a trade without waiting, it is very difficult to sit on cash. When you have chosen a stock for buying, decide a price where you are comfortable and wait for some time, let the stock come to your price and you should not be chasing the stock, and bear it in your mind that if the stock does not come to your target, you do not lose anything. But the same is not true while selling, if you get decent profits, sell the stock, dont expect a fortune from your pick and expect only reasonable returns. Once you have converted into cash some other opportunity will come your way. 3. Invest in blue chips, market leaders and aggressive companies

Dont buy a stock just because it is going cheap. Look at the prospects of the company, you would see that in the long run blue chips and market leaders would not disappoint you though they cannot be expected to be multi baggers but a decent return is always expected. You would see Infosys, Reliance Industries, ICICI Bank, Bharti, Bajaj Auto, Maruti and Unitech in the portfolios of most of the Mutual funds. These stocks are the firsts to recover from any corrections or recessions. These are the first preferences of foreign investors, Mutual Funds and traders therefore they attract a lot of buying interest whenever they fall down to a bargain price. 4. Play both sides of markets. Most of the retail investors are bulls by nature they only buy stocks and do not short the markets or individual stocks. There is an inherent fear in short selling than in going long but truly speaking there are equal chances of markets going up or down so why not pick the trend and go with the trend. When there is panic in the markets or there is any negative news on which the markets are bound to fall, then you must be on the short side, of course with stop losses as in case of going long. Play both sides of the markets if you want to completely enjoy the game. Dont be a batsman or a bowler, be an all rounder. 5. Opportunities always exist in equity markets. Believe in the fact that opportunities always exist in equity markets and lament not for a missed one, there are ample waiting to be discovered. Have an eye for watch and you will find another gem at a handsome price, you dont need to make all right calls to make money in stock markets, rather you need to keep your senses with you and play intelligently. No one knows the future; he who plays smartly will win the game. 6. Check fundamentals before buying. You must check fundaments and do your own analysis before buying any stock. A street call or an experts call should not be followed blindly. In these markets everyone can be wrong or right, you must satisfy yourself before putting your money. Have tips from everywhere, weigh them well in your own way and decide yourself which stocks to pick and when to pick.

7. Strictly follow stop losses. Everyone knows this, it is taught everywhere but we still get carried away with our emotions, yes, we tend to fall in love with our stocks, it feels painful to part with them and that is why when it breaches our stop loss we tend to give it one more chance to make a comeback, but it doesnt and keeps going with the trend, deepening our losses. It takes courage to accept losses but it should be part of the game, when you had decided to invest in stock markets you had agreed to accept both profits and losses, didnt you? Now by adhering to your stop losses you are trying to restrict your losses and that is a wise thing to do, so we strictly need to put stop losses to our trades and stand by them to maximize profits. When it comes to make a long term call, I think 9 out of 10 analysts will be right or may be 10 out of 10, and even an experienced investor who reads well, will be able to make a right call but when it comes to making a short term call it becomes an arduous job for the most learnt researchers. There are so many factors which contribute to the movement of prices that it becomes very difficult to predict their trend. However an insight of all major events, news flows, financial information and basics of the company gives us a view whether the price of the stock is justified or not, is it worth owning the stock at the given price or the stock is already overvalued. It works well if you make a prediction for the long term, but the short term movements are always governed by macroeconomic factors, general trends and Government announcements which are not predictable, therefore it is easy to make a long term call by using fundamental analysis. And that is why most of the mutual funds take long term calls considering them to be safe. For example you find a stock which is going very cheap and fundamentals suggest buying the stock but suddenly some negative factor triggers in US and there is a sell off in Global markets and our markets are also not spared and that stock also could not swim against the stream and is hammered down and a good stock gives you a negative return in the short term in spite of being a value buying. But if you have bought if with a long term view and the company is fundamentally sound the stock will rebound when the crisis is over and will give you a good return in the long term. The whole discussion was to bring home the fact that if you are novice to this market make your first call a long term call, there are more chances of making money.

After some experience you can become a swing trader or a day trader but first be an investor. Economy analysis The first step towards picking stocks is to analyze macro economic factors. After having a look at the macro economic factors you will have a feel about the overall future outlook of the markets. The GDP numbers, inflation, exchange rates, interest rates, Foreign Direct Investments, industrial growth and a forecast given by the Government on expected GDP and industrial growth numbers are to be tracked. A strong GDP growth and industrial numbers indicate a strong economic growth and a growing Foreign Direct Investments shows the potential of companies operating in India. An increase in inflation might trigger the urgency to raise interest rates and increasing interest rates will slow down credit growth and demand in the country and thereby resulting in lower profits by the companies and falling interest rates have an opposite effect and will have a direct impact on the Automobile and real estate companies, lower interest rates will increase profits of these companies. An appreciating currency will attract more foreign investments and carry trades giving boost to the markets. A combined effect of all the above factors gives us an indication of a strong or weak future outlook. When every thing is going well and the economy is growing there are more chances of stock markets going up and fundamentally strong stocks will rally with the markets. Industry analysis It is necessary to have a look at the industry as whole to which your pick belongs. If the industry or the sector as a whole is in a downtrend then there will be a downward pressure on your pick being in that reeling industry. For example Sugar Industry has been in a downtrend for last one year and the valuations are looking very cheap still the stocks have underperformed if compared with the broad indices, most of the sugar stocks have given negative returns whereas the markets have grown sharply in the last one year, the economy has also been booming. Similarly metal stocks, Tea stocks, Oil stocks, Textile stocks and other sector stocks follow sectoral movements which depends on various factors like international commodity prices, currency prices, crude prices and overall demand and supply situation in that sector.

Therefore the whole industry should be analyzed before picking your favorite stock. Company analysis The last step is to analyze the company you are going to invest in. For this purpose you will need financial statements of the company for past few years and the recent news flows about the company. This information can be taken from any brokerage house website and such information is also available at the websites of stock exchanges. The first thing to watch is the consistency in growth of profits and turnover, the turnover and profits should be growing consistently from quarter to quarter and from year to year, this would ensure that the company you are going to invest in will have growth prospects which should be reflected in its stock price. EPS and PE ratio After having a look at the profitability and its consistency, you have to check whether the current market price of the stock is justified or not. Two basic ratios are used to find a correlation between the market price of the stock and the profitability of the company. EPS or earnings per share are the profit per share of the company. It can be calculated by dividing the total profits of the company by total number of outstanding shares. For example a company makes a Net profit of Rs. 10, 00, 00,000/- and the total number of shares are 53, 00,000 then the EPS of the company is Rs. 18.86. The PE ratio or the price to earnings ratio is found out by dividing the Market price of the share by the EPS arrived at above. In the above example if the stock price is Rs. 260 then the PE ratio is 13.78. Every industry has different PE ratios and it also varies from stock to stock, the more reputed and large sized companies enjoy larger PE ratios as compared to small companies. These ratios should be compared to the peer group companies, for example two companies are in the same sector and the size is also not very different then the stock with the lower PE ratio is cheaper than the other and has less chances of correcting in a falling market. In my previous article in this series we had learnt to prepare ourselves mentally to get into the markets and learnt some basic exercise before actually jumping into the markets. In this article we shall try to

cover practical aspects of investing like opening of various accounts and understanding basic concepts of trading. Charges for opening a Demate account There are two types of charges on your Demate account. One, annual maintenance charges and two, transaction based charges. Annual charges range from Rs. 100 per annum to Rs. 500 per annum for most of the Depository Participants and transaction charges vary from 0.01 percent to 0.05 percent of the transaction value, some Depository Participants, mostly brokers, charge flat transaction charges like Rs. 10 or Rs. 30 per transaction slip irrespective of the value of trade. Some brokers have come out with a lifetime free Demate account where you do not need to pay for annual account maintenance charges. How to choose the right Depository Participant? As far as cost aspect is concerned a Demate account with a broker is much more economical than a Demate account with a bank. For example, you sell 1000 shares at the rate of Rs. 500 per share then, in case of your account with a broker, the broking house would charge you Rs. 25 for executing your instruction slip and in case of a Bank they may charge you Rs. 200 (i.e.0.04 percent of transaction value of Rs. 5,00,000/-). One more benefit of having a Demate account with your broker is that you may authorize your broker through a Power of Attorney to automatically debit your Demate account with him whenever you sell stocks from your holdings in that account, this saves you from the hassles of filling up and depositing delivery instruction slips with the DP in a very short time. I would recommend having a Demate account with the same broker where you have a trading account. Still, if you feel more secure with a bank to have your Demate account then it should be with a bank which is most convenient when it comes to deposit delivery instruction slips. Choosing a stock broker and opening a trading account The regular traders and experienced investors look at the lowest brokerage and highest margin while choosing a stock broker. But for the first time investors, brokerage rates should be secondary and they should look at the research and analysis provided by the broker. A

good brokerage has a system whereby you get an access to their research team and research reports released by them and a relationship manager is always accessible for your general queries and help. The brokerage should not be a deciding factor as initially your volume will not be very high and once you get expertise in trading, you can shift to a low brokerage broking house. Opening of trading account is almost similar to opening of a Demate account. You will need to fill up an account opening form along with agreement with the Broker together with the following documents. Internet trading Internet trading is getting popular for the convenience of trading stock markets without going anywhere. ICICI Direct, Sharekhan and many other brokerages are providing services of internet trading through their websites. In an internet trading account your Bank account, your demat account and your trading account are linked with one another and you can transfer funds from your bank account and buy shares through your online trading account and you can check the status of your holdings online in your demat account and when you sell the shares through your trading account your demat account is debited by the same quantity and the amount realized is shown as a credit balance in your trading account which can be transferred into your bank account or can be used for further buying. However, there are certain disadvantages of having an internet trading account. The online trading companies would not give you any margin and you will have to transfer entire amount before buying any stock whereas in offline trading brokers generally keep only 20 percent margin and rest can be paid when you buy the shares. The brokerage charged by the internet trading websites is generally higher than that charged by the brokers offering offline trading. The biggest disadvantage is the time lag of prices, you would not get live quotes in an online trading account and in stock markets even seconds would matter, you would want to have the live prices to initiate a trade. It depends on the speed of the ISP you are using and the type of connection and if your connection is slow the time lag could range from 2 to 5 minutes. Now after opening demat and trading accounts you are ready to do your first trade. Do your own research, have a word of advice from

your broker and tread forward into the world of financial markets. Happy investing Prepare yourself I have seen most of the first time investors losing big money in the stock markets and you would come across a number of such investors with terrible experience in stock markets that they hate to even discuss about any shares and feeling very secure with their money being invested in Bank Fixed deposits, traditional insurance plans and Government bonds with a return of about 8 percent a year. They had a sour experience because they had not prepared themselves for investing in stock markets, they simply saw some other fellow making huge money on some news driven stock and next time put a huge sum on his advice or saw an expert on a news channel strongly recommending a stock and the markets turned otherwise. Such people do not dare to take another chance and believe that perhaps they are not made for it and resolve not to even look at it during rest of their lives. The experience might have been different if they would have spent some time researching and had some patience before making a first time entry. Some basic steps for the first time investors are listed hereunder which will be useful to make a successful entry into the stock markets and for those as well who had a terrible first time experience. Get a feel of the stock markets. Before entering the markets its always recommended to spend some time understanding them. When you go for shopping you spend some time visiting shops in the market to have a look at various designs and prices and then decide which merchandise you want to buy, similarly before buying stocks you must visit the stock markets, understand them, have a look at various stocks available and then pick one of your choices. Well its not as easy as writing it or recommending to someone; actually its a tough job even for those who have spent a long time in markets. But I would still maintain that the research done by you is the best. Spend some time with business newspapers and business news channels. Start reading the daily business papers, particularly the stock market pages and try to correlate the news on companies to the movement in their stock prices. For example, recent news that Suzlon buys control

in RE power pulls the price of Suzlon up by more than 7 percent in a day and sound quarterly results and announcement of bonus shares moved the stock price of NIIT Technologies more than 12 percent in a day similarly a poor show of quarterly results by Punjab National Bank saw its stock price fall by more than 4 percent in a day. In a few days your eyes will automatically be able to catch the price sensitive news in the papers. The next stage is to remain updated by watching Business channels as the news you get in newspapers in the morning might have been broken by the channels on the previous day, and in this world of fast moving information you need to get the news as it is broken. It may not be possible for you to watch TV during office hours, and then you may browse through some good websites to keep yourself updated. Have patience, do not panic to invest. Once you allocate some money for investing in stock markets, it becomes very difficult to control your nerves and sit on cash till you discover a dream stock at a dream price. Your first entry should be after a lot of research and it may take a few months waiting for the right opportunity but your first stock should not let you repent on your decision. Consider all factors, the macro economic factors, the trend of the markets and the overall global scenario, the cycles, the technical of the markets, fundamentals and technical of your target stock to make your first move. Do your own research, dont follow street calls blindly. Try to do your own research before buying a stock. You may take a tip from a friend or an expert, but research yourself before making an investment and if your own research justifies the decision then go for it and if you think otherwise or you feel uncomfortable with the bargain then dont go for it. There is no dearth of opportunities in the markets wait for the next one because in these markets sometimes not making a loss is also a profit. Create a paper portfolio. Now when you feel ready to kick off, its time to test your skills I know we all hate this, still it is worth being honest with yourself. Make an excel sheet on your PC and create a portfolio based on the knowledge you have gained including well analyzed tips from your friends and experts and see the performance of your portfolio over a period of time. You will be able to realize when you can make a real portfolio.

Always invest in stock markets with the surplus money. Last and most important advice is to make investments in stock markets with the surplus money. If you are able to set aside an amount after incurring all routine expenses, paying your installments, premiums for life and health insurance and the EMI of your house, then it can be dedicated to the stock markets. If you have yet not bought a house, I would recommend you to do that first before entering the stock markets. And never take a loan for investing in stock markets, whatever justification your calculations may give.

Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. The term "inflation" once referred to increases in the money supply (monetary inflation); however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflation. Inflation can also be described as a decline in the real value of moneya loss of purchasing power in the medium of exchange which is also the monetary unit of account. When the general price level rises, each unit of currency buys fewer goods and services. A chief measure of price inflation is the inflation rate, which is the percentage change in a price index over time. Inflation can cause adverse effects on the economy. For example, uncertainty about future inflation may discourage investment and saving. High inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused when money supply increases faster than the rate of economic growth. Today, most economists favor a low steady rate of inflation. The task of keeping the rate of inflation low is

usually given to monetary authorities who establish monetary policy. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.

Fiscal policy
refers to government attempts to influence the direction of the economy through changes in government taxes, or through some spending (fiscal allowances). Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy are government spending and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:

Aggregate demand and the level of economic activity; The pattern of resource allocation; The distribution of income.

Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible stances of fiscal policy are neutral, expansionary and concretionary:

A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue). Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity. An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through rises in government spending or a fall in taxation revenue or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had, or a deficit if the government previously had a balanced budget. Expansionary fiscal policy is usually associated with a budget deficit.

A contractionary fiscal policy (G < T) occurs when net government spending is reduced either through higher taxation revenue or reduced government spending or a combination of the two. This would lead to a lower budget deficit or a larger surplus than the government previously had, or a surplus if the government previously had a balanced budget. Contractionary fiscal policy is usually associated with a surplus.

Monetary policy
is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy is referred to as either being an expansionary policy, or a concretionary policy, where an expansionary policy increases the total supply of money in the economy, and a concretionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while concretionary policy involves raising interest rates in order to combat inflation. Monetary policy should be contrasted with fiscal policy, which refers to government borrowing, spending and taxation.

Stock Fundamental Analysis - A Key Component for Success

When it comes to investing in the stock market, one measurement stands out above the rest; how much did the investor earn at the bottom line. Traders use many tools to help determine their stock trading plan, but the best tool for assisting an investor is basic stock fundamental analysis. Stock fundamental analysis is the process of examining businesses at the most essential levels. This method of review evaluates key risk reward ratios of a business to attempt to

determine the stability and financial health of a company and to determine the value of its stock. Many investors use stock fundamental analysis alone for their determination of future stock purchases. While stock fundamental analysis is a powerful practice, it should be an important part of an investors overall stock trading plan. This plan should include stop loss strategies, as well as a stock trading system such as Japanese Candlesticks. Such a trading system, coupled with basic fundamental analysis can provide the trader with a valuable insight into the murky waters of the stock market. Basic fundamental analysis helps an investor to know how much money a company earns. This is the ultimate measurement of its success, both currently and in the future. Earnings can be difficult to calculate, but that is to be expected when dealing with the stock market. When a company is growing and profitable, its stock generally increases; earnings create higher stock prices and in some cases, regular dividends and successful trading. Lower stock value can have the opposite effect, making the market bearish on the stock. By evaluating a stock with stock fundamental analysis, it is possible to look for basic candlestick chart formations and determine the direction of a stock. When the direction is known, an investor can implement stock market strategies which reflect either a bullish or bearish approach. In addition to understanding a companys earnings, there are a number of ratios involved in basic fundamental analysis that help the investors to evaluate the worth of a companys stock. These ratios focus on earnings, growth and value in the market. Evaluating these dynamics together can provide unique reflections on the value of the company. When a company can be identified by basic fundamental analysis, its stock can be tracked using candlestick chart analysis. With this information, an investor can move confidently to make a trade. Stock fundamental analysis is a key component in any trading plan. Investors can find patterns and trends in the stock price history and use this information to help make decisions about a companys value and the value of its stock. Incorporating a stock trading system such as Japanese Candlesticks teams up with stock fundamental analysis to form a powerful team in evaluating stock.

The bottom line is the ultimate measure of the success of an investor. Using basic fundamental and technical analysis, a stock trading plan and a stock investing system, an investor increases the possibility of moving from the hope of being a good trader to the reality of becoming a highly successful trader. Risk Reward Ratios Risk reward ratios are a critical component to successful trading. Trading can quickly become gambling if you continue to press your bets by taking positions with poor risk reward ratios. While identifying good risk reward ratios does not guarantee success, ignoring them usually guarantees failure. Candlestick traders look for patterns with proven higher probabilities for placing trades. Once the pattern is identified, the next step is determining entry and exit points. For both, profit targets and stop loss targets. These points can be determined based upon moving averages, Bollinger bands, or other technical indicators to evaluate possible support and resistance levels. The onslaught of computerized trading programs provides traders with quick calculations to base ones risk/reward targets. Calculating Risk Reward Ratios lets assume our computerized scanning program provides us with a dozen high probability patterns from which to choose. Most traders will only be able to add one or two new positions to their portfolio. This is where utilizing risk reward ratios come into play. The simplest calculation will take into account: 1) Entry Price 2) Profit Target 3) Stop Loss Target For example: Stock XYZ has the Entry Price of Rs20.35 with our Profit Target of Rs21.50 and Stop Loss target of Rs19.85. Our Risk = the difference between our Entry Price of Rs20.35 and our Stop loss of Rs19.85 or

Risk = .50. Our Reward is the Entry Price of Rs20.35 plus the Profit Target of Rs21.50 or Reward = Rs1.15. We are risking .50 to make Rs1.15. In this example a little better than a 2:1 ratio the rule of thumb for a reasonable risk reward ratio is a minimum of 2:1. It is important to analyze your potential loss in the event your analysis is wrong and the trade does not follow in the expected direction. And no fair setting your targets using fuzzy math the risk reward ratio is meant to provide an unemotional evaluation before risking your hard earned money. Dont jiggle the figures to justify the trade. Use this approach to narrow down your trades until you find the highest probability patterns with the greatest risk reward ratio. The more systematic you become in evaluating your trades the more likely your portfolio will prosper. Additionally, this approach helps to remove emotional trading which is a continued struggle for many investors. Where to Begin Evaluate youre previously closed positions, using both your winning and loosing trades. Since you should constantly be evaluating your previous trades to evaluate the success of your most important technical analysis tools, you will kill two birds with one stone. Yes, I realize this is a boring exercise but it is essential to your success. The old adage Insanity is doing the same thing over and over again but expecting a different outcome was never more true. At least take the time to consider whether you want to add the risk reward ratio to your trading criteria. There is another other element to consider after the risk reward ratio has been determined. What is the length of time you expect to be in the trade? The shorter the time period the more trades you can place and the more money you can make. A 5:1 ratio is less attractive if your opportunity money will be tied up for too long a period. You must use your capital on the highest probability trades. Using the simple risk reward ratio should produce more profits to your portfolio. To summarize; you should be willing to risk Rs1 to make Rs2. You should not be willing to risk a Rs1 to make a Rs1. Keep it simple and keep your targets honest, (the data is only as good as the person plugging in the figures).

By doing the risk reward calculations for every potential trade you will have your exit criteria before placing your trade. This keeps you from getting greedy when your profit target has been reached. You can take your profit and re-enter if the new trade meets your criteria. This also helps you from dropping your stop-loss, in the hopes that your trade will soon go your way. What if I determine one of my open positions has a poor ratio? Over the years, I have found one of the best ways to evaluate if it is time to take a loss is to look at my existing trade as if I were considering placing it today. If I could not justify taking it at the current price, using the same criteria I use for entering a trade, then it is time to take a loss. If you would not buy it today then more than likely, you already know the answer. Allowing your losses to grow is not a good habit to get into. Hoping and praying are not profitable stock market trading tools. The key is to win more than you lose. Loses are simply the cost of doing business. Every business has an income and expense allowance and candlestick stock trading is no different. Stop Loss Strategies Check out our Stop Loss Strategies & Techniques Training Video! A 'stop loss' is a pre-defined point at which you will get out of a position in a stock based on the idea that it is not moving in the direction that you had anticipated. Every successful and experienced trader utilizing the basics of stock market investing will tell you that establishing and adhering to a reasonable stop loss is extremely important if you are going to make profits in the long run. There are many reasons why traders will not sell shares when a loss is imminent. This is problematic because there will be many occasions when a trade they enter does not head in the right direction. At times, it is difficult to adhere to the rule of 'cutting your losses' when it obviously the right thing to do. This is often done by traders who feel a strong sense of greed and fear, or an unearned feeling of selfconfidence, and may find it difficult to close the trade because, in doing so, it acknowledges the fact that they got the trade wrong in their minds. This may be a bitter pill to swallow so the easier option is

to keep the trade open in the hopes that their ego will not be adversely affected. Yet, they will be violating one of the most important trading rules there are. To most traders, the idea of not closing a trade at a loss means that they haven't had a loss despite the fact that they may have a larger loss down the road. A detailed plan that guides successful traders when to close positions is one of the things that separates them from the majority of the stock market community for them, this is a necessity. It is fair to say that a lot of traders don't have a clue about what conditions would warrant closing a trade. It is also fair to say that the majority of market participants routinely adopt a 'buy and hold' approach. While a stock market investing strategy will always require decision making, there are no more important decisions you have to make than when to sell shares. This part of trading is often overlooked its importance is frequently underestimated. The act of buying simply puts one in a position where money can be made. It's the act of selling a position that is directly related to whether or not any money is made from the trade. When it comes to considering your stock market investing strategy for exiting, what is important is not the manner in which you decide to exit, but the fact that you have a plan in place to advise you when to exit. What is also important is that you remain consistent in whatever approach to exiting you adopt. Selling shares is probably the most complex money management decision you will face but, as a rule, it is the most important. The decision is especially difficult when you are faced with a loss and all you want to do is wait for the shares to return to your buying price. When the shares move away from you, making your loss even greater than you would have ever imagined, it makes the situation even more difficult. Regrettably for many traders, they cannot bring themselves to set stop losses. If they do, they abandon them when the pressure is turned on. To make money investing in stock, cutting your losses is one of the most important trading rules there is. If you fail to do that, you are most likely going to be worse off for it.