Share Certificate and Scripless Securities Settlement System

Share Certificate

Share Certificate or also known as Stock Certificate is a legal document issued by the stock market regulator or the Central Depository System (CDS) to prove the ownership of shares/stocks of a company with an individual. 

A Share Certificate usually indicated the company name of the shares purchased, the number of shares purchased, at what rate, the total value of the investment and relevant signatures.

However in the modern business world, the place of Share Certificates is diminishing and in some countries, have already ceased to existence. Today large volumes of shares are being traded and in very frequent terms. In such situations issuing Share Certificates is both nonviable and unnecessary. The trades may occur as frequent as many times in a single day, so issuing a Share Certificate is an impossibility. 

Scripless Securities Settlement System (SSSS)

SSSS is a system introduced by many countries to ease the settlement of stock trades without the use of Share Certificates. So despite issuing a paper Share Certificate the SSSS keeps electronic records of the ownership of shares and automatically updated in real time as and when a stock trade occurs. This system has greatly enabled the stock market regulators to cut down on costs relating to issue of Share Certificates and also to improve the efficiency and effectiveness of transactions occurring withing the stock market.

Securities and Exchange Commission

What is Securities and Exchange Commission?

Often referred to as 'SEC', Securities and Exchange Commission of a country is the primary authoritative body for regulating the 'Securities' market. It's an affiliation of the respective country's government, to design and enforce rules and regulations, monitor the Securities market and implement necessary changes. 

The SEC is incorporated under the Section 4 of the Securities Act of 1934.

SEC is responsible for monitoring over the Stock market/Share market, Treasury Bonds, Treasury Bills, Bank-Notes, Forward Contracts, Futures, Debentures, Foreign Exchange Market (FOREX) etc.

Related Websites:

SEC of Sri Lanka

SEC of United States of America

SEC of Canada

Forced Selling

What is Forced Selling?

Forced Selling is simply; where your broker, on his own will, sell stocks that belong to you. Yes, that's the process. But there's a story behind it. 

Forced Selling can only occur if you, the investor, buys stocks on broker credit. That means you decide to invest in stocks worth more than what you have actually invested in the stock market by yourself. The broker will usually provide a credit limit up to 50% of your total investment, but this can hugely vary form stock market to another. The next part is settlement of the credit. It's a very short term loan, so it must be paid back. Usually the brokers provide the investor around 3 days (T+3) to settle the credit, but some stock markets may extend this date up to T+5 (5 days). 

So when the settlement date arrives, the investor should have enough money or liquid cash in his portfolio to pay back the broker. The investor could either willingly sell all or portion of his portfolio sufficient to cover the credit or settle the credit with cash directly. But settling with cash seems unlikely since you're already trading on credit. We could opt. to sell our stocks and settle the credit, if the stocks had made us our intended profits. But if the stocks have crumbled, we wouldn't want to sell them. This is where Forced Selling comes. 

If the available credit isn't settled as of the time limit allowed, your broker will have all the powers to sell any portion of your portfolio up to an amount sufficient to cover the credit. This is called Forced Selling, as you are forced to sell your investments to settle the credit. This is a fully legal process and the investor cannot do anything to stop it or take any legal action against it. 

We can understand that this will mostly affect the traders rather than investors. Investors concentrate on the long term and the broker credit facilitates credit up to maximum 5 days only. So traders are the ones who usually get the worst out of this.

This is just another reason why most investment advisers ask the investors not to trade on credit. Unless you are 200% sure of what you're doing, my advice is, don't go for broker credits.    

Insider Trading

Legal or Illegal?

It's both. There are two forms of Insider Trading. One legal and the other not. In general Insider Trading is the dealings (buying and selling) of stocks/shares of a company by people relating to the company, for an example, directors, officers, employees and large share holders. However if this is done in full disclosure it is considered legal. On the other hand it is illegal to engage in trading of a share for the above mentioned parties based on material and undisclosed/non-public information. This is considered unfair or unethical to those traders who  doesn't have possession of such information.

Who is an 'Insider'?

An Insider is identified as a person/party who has access to important information about the company that could affect the share prices of the company directly or indirectly or that might affect investor decisions at large. These kind of information is known as 'Material Information'.

So in general, the CEO, the Managing Director/s, the members of the Board of Directors, employees, other officers, brokers and even family members of related people can be found guilty of Insider Trading. Any 'tipping off' of any information by and to such parties could be found guilty. 

If found guilty;

If found guilty of Insider trading, the Insider will have to return all the profits he/she made from the Insider trade or this may extend up to three times the profit earned form the trade. Beyond this Laws are being strengthened to increase the penalties for Insider Trading. As of now stock defrauding can extend to a penalty up to 10 years of imprisonment. 

For more information :

US Securities and Exchange Commission

Wikipedia

Management

Fundamental Analysis

What is Fundamental Analysis?

In the simplest form 'Fundamental Analysis' is the process of analyzing the financial reports of  an economy, industry or a company. Since this is the Stock Market, it's always about the companies. As always the aim of Fundamental analysis is to forecast the future price movements of the company and also a long term investor may look at features such as stability, growth etc.

Unlike Technical Analysis which determines price fluctuations based on the real-time information like price trends, charts etc., Fundamental analysis is concerned on more solid grounds. Those include, company profitability, company performance (quarters, annually, semi-annually), goodwill, stability, management etc.

Criteria for Fundamental Analysis

As the above picture shows, there are three main parts of Fundamental analysis. 

1. Economy Analysis
2. Industry Analysis
3. Company Analysis

Economy Analysis -  this is the analysis of the annual reports published by the Central Bank of a country and other relevant incidents, events and transactions that might affect the economy.

Industry Analysis - this is the analysis of the industry a specific company is in. For an example a hospital belongs to the healthcare industry and almost all the events that occur within the industry will have an impact on the said company.

Company Analysis - this is the analysis of the company you have or hoping to invest in. This might look as if the most relevant analysis for an investment, but the other two are as equally important. 

Company Analysis

Analysis a specific company can be done in many ways. The more analyse the better chances you have in making a sound decision. Company analysis can be discussed in following topics.

Financial Analysis.

This is the most common for of Fundamental analysis. In-fact most people think this is the only form of Fundamental analysis. But this is just a small part of a bigger chain. Financial analysis includes the analysis of financial statements, reports, past financial data and so on. This is purely of financial nature. This makes more sense since at the end of the day the financial situation of a company is what really decides the price of the share tomorrow. In financial analysis we will mostly look for information like 'debtors, creditors, acid ratios, current ratios, price earning ratio, total revenue, total current and non current expenditure, total debt capital, total equity capital, gearing ratio, liquidity, price, taxes, dividends, cash flows, working capital management etc, and the list goes on. However these information will directly relate to the price of a share of the company.

Management

Another important aspect of the company analysis would be the 'management' or the board of directors of the company who actually makes the decisions on behalf of the company. A 'good' management will give a more positive outlook for the company and vice versa. 

Business Plan

This is the document that provides all stakeholders the information relating to the company as to what it does, what are it's objectives, what are the growth prospects and so forth. A sound business plan with sound goals and objectives and a good management to support that will give the investor confidence to believe the company would perform well in the future.

All these put together, Fundamental Analysis will become a much stronger tool for your decision making process. 

Portfolio

What is 'Portfolio'?

A Portfolio in general means a collection. A group of something and such. In the Stock Market, your collection of the total investment can be referred to as the Portfolio. But more commonly the collection or the group of invested stocks by you is called as your 'Portfolio'. Your portfolio could consist of a single stock up to a maximum decided by you.

How to manage your 'Portfolio'?

Portfolio management simply refers to the process of making decisions as to the appropriate investment mix, the potential performance of the investments, managing risks and meeting your investment objectives. 

Diversification

The main problem with any type of investment is the certain degree of 'risk' associated with it. Risk could be either favorable or unfavorable outcomes that were not foreseen. There's NO term called 'ZERO RISK', because that is practically unavoidable not to face a risk. But there is a term called 'minimizing risk' or 'managing risk', because that is practically possible. So how to minimize the risk of your overall investment? One word answer. 'Diversification'. Diversification in simple means investing in more than one or two stocks. A more advanced explanation would be, a risk management technique that utilizes a mix of investments in your portfolio. 

Let's see how Diversification reduces the risk of the investment. This could be quoted with a popular proverb, "don't put all your eggs in one basket". If you drop the basket by mistake all the eggs are gone. But if you had the eggs in two baskets and if one basket falls and breaks all the eggs, there's still the other basket with a bunch of saved eggs. If you understand this story, you've understood what diversification is really about. It' that simple. But most of us tend to neglect the small facts and go for big calculations, predictions, equations and stuff. But sticking to the basics will not fail you at all.

So it is said that you should diversify your portfolio in order to minimize your risk. Say you have 10 stocks and if five of them go down, there's still hope with the rest five stocks. With diversified portfolio it's very hard to loose the whole game. But if you have just merely a stock or two your chances of failing are pretty high. Investing is a lesser number of stocks is called as 'Under Diversification'.

Over Diversification

This is the other extreme of diversification. Fearing the risk, the investor tends to diversify his portfolio as much as possible. But this is not good at all. Yes, over diversification could bring your risk to a very low level, but the chances of making profits out of these stocks reduce to a great extent. Because of monetary constraints a single stock in an over diversified portfolio will only have a small quantity of shares. Thus it will be very hard to gain a proper profit when all the stock market fees, brokerage fees and other taxes add up to the cost of buying and selling. So it is not advisable to have a HUGE collection of stocks either. The generally accepted number of stocks that should be present in a good portfolio would be 20. But this will vary immensely based on the value of your total investment. But it is advisable that you don't exceed 20 stocks when buying shares. 

(this is not buy/sell/hold recommendation.)

Why the Stock Market?

Savings Account?

Savings account is the normal account any person can open with a bank to safely deposit their hard earned money. This is probably the safest mode to invest money. The banks are regulated by monetary authorities and hence the risk of loosing your money is near zero. They provide you a interest on the balance you have in the account. The interest rate provided is the main tool for attracting customers to deposit their money in banks. This is mostly calculated daily on the account balance and added to the balance monthly. So it's basically earning money with no effort at all. That doesn't sound right, right? Well it doesn't. 

Even the best banks in the world will provide you an interest rate not more than 7%-8% per annum. i you have a balance of $1000 at the beginning of the year, you'd have $1080 at the end. (1000*8%) Of course this is zero-effort money, but is it really enough? The answer is NO. This is because the real value of money is decreasing at a faster rate. Real Value of money is the value of actual goods and services that you can purchase with a given amount of money. The Real Value of money is constantly decreasing, thus creating 'Inflation'. Inflation Rate is the rate at which the prices of commodities increase during a given period of time. In a normal economy the Inflation Rate is almost always above the Bank Interest Rate. This would eventually result in a higher decrease of the 'real value' of the money in your bank, than what the 'interest rate' adds to your bank account. Say we live in an economy with a 10% inflation. So in the above example the bank balance grew by $80 during the year. But due to the inflation, the real value of the balance will decrease by $100 (1000*10%). So eventually resulting in a much less value of money than the amount you had in the beginning. (Real Value of the bank balance at the end of the year = Inflation effect - Interest component = -100+80 = -20). So we can see why it's not financially feasible to lock up your money in a bank account. 

Fixed Deposits?

Sure, FDs give a higher interest rate than a normal savings account. And for a moment let's assume that even the FD interest rate is higher than the Inflation rate which would result in an actual increase in real value of money, but still there's a problem. That is 'Liquidity'. Liquidity is the ability of an asset to be converted to cash with minimum economic and financial loss. In the liquidity department, the FDs do not look nice at all. Because when opening a FD, you sign an agreement with the bank saying that you deposit the money for a specific period of time, it could vary from 3  months to even 10-20 years. Let's assume that a sudden financial requirement pops out and you cancel the FD and withdraw your money before the maturity of the FD, you will only get a normal savings interest rate for your FD. So now it doesn't look that attractive either.

Stock Market?

This is the big YES! The Stock Market is a gold mine to the person who's ready to harvest the gold. Being 'ready' means knowing actually what you are doing in the market. This Blog is a humble attempt to help you get there. So read carefully the articles and try to grasp the psychology behind the market movement. You don't need to remember all these stuff, but let this be a guide to you. All the best!

ASI and MPI

What is ASI?

All Share Index (ASI) or also known as All Share Price Index (ASPI) is the main price index of the Sri Lankan Stock Market. This is the weighted price index of all the listed companies on the Sri Lankan stock exchange. Currently there are 259 companies trading in the stock exchange covering 20 sectors of businesses. 'Weighted Price' means that the share prices are weighed based on the market capitalization of each company. 'Market Capitalization' or Market Cap in short is the total issued ordinary share capital of the company valued at current market price. The base year for the ASI is 1985 and the base value is 100. This is the longest and the broadest measure of the Sri Lankan stock market. 

What is MPI?

Milanka Price Index (MPI) includes a set of 25 companies selected based on their performances during the last four quarters. However there are some criteria to be fulfilled for a company to be selected to the MPI.

 

Minimum selection criteria required:

• Average of market capitalization of companies for four quarters immediately preceding as at end of the date of evaluation. 

• Number of trades executed over one full financial year period immediately preceding the date of evaluation. (excluding odd lot trades).

• Trading value over the one full year period immediately preceding the date of evaluation as a percentage of average of market capitalization companies as at end of the immediately preceding 4 quarters of the date of evaluation. 

List of companies included in MPI 1/06/2011 - 31/12/2011 period

BANKS , FINANCE & INSURANCE
Commercial Bank of Ceylon PLC
Hatton National Bank PLC
Janashakthi Insurance PLC
LB Finance PLC
Merchant Bank of Sri Lanka PLC
Nations Trust Bank PLC
Pan Asia Banking Corporation PLC
Sampath Bank PLC
Seylan Bank PLC

HEALTH CARE
Nawaloka Hospitals PLC
The Lanka Hospitals Corporation PLC

BEVERAGES , FOOD & TOBACCO
Distilleries Company of Sri Lanka PLC

INVESTMENT TRUSTS
Environmental Resources Investment PLC

DIVERSIFIED
Aitken Spence PLC
Hemas Holdings PLC
John Keells Holdings PLC
Richard Pieris and Company PLC
The Colombo Fort Land and Building Co.PLC

TRADING
Brown & Company PLC

MANUFACTURING HOTELS & TRAVELS
Ceylon Grain Elevators PLC 

John Keells Hotels PLC
Piramal Glass Ceylon PLC
Royal Ceramics Lanka PLC

TELECOMMUNICATION POWER & ENERGY
Dialog Axiata PLC 

Laugfs Gas PLC

(All the information relates to Sri Lankan Stock Market)

Averaging

What is Averaging?

We used to 'average' in our mathematics lessons when we were small. Remember? Well this is basically the same thing. You take two prices, add them together and divide by two (since we took only two prices). That's what averaging is.

What's the big deal?

Well, averaging may seem easy. And yes, it is. But it's implications are what that counts. As we may understand averaging is used to bring the 'average cost' of a stock down. This is called 'Averaging Down'. (there's nothing called averaging up OK?). Say we buy 100 shares at $10, the total cost would be $1000 right? So the average cost per share would be again $10 (1000/100). Say now the prices of this particular stock is going down. Alas! So we see this as an opportunity to bring our average cost down. This is how it's done. Say the price goes down to $8, we buy another 100 shares at a total cost of $800. So we add up both the investments; that would total up to $1800 ($1000+$800).  So if we calculate the average cost per share it would come to $9 (1800/200). Seems pretty good huh? Well that depends. Read further and find out why.

Good Move or BAD Move?

This is a very controversial part of the investment process. In a quick glance, reducing the average cost of a share seems the wisest thing to do. But most experts absolutely PROHIBIT to do this. Of course there are reasonable reasons. The main argument against averaging down is that you're continuously investing or blocking money on a failing stock. The more the price goes down the longer it will take to recover, so actually you'd be stuck with a bunch of loss shares till it bounces back. Positive side is that when the stock price starts to climb again, averaged down stock would have a lower break-even point. That is a lower point from where anything above that point is profits. That has a magnifying effect on profits. And on the downside, if the prices continue to dip further, that too tends to have a magnifying effect of losses. 

Should you do it?

This is not really a question I could answer for you. You should be the overlord of your investment portfolio. However for Investors, averaging down doesn't make any sense at all. Investors look at the long term and a sudden dip in the price wouldn't affect their decisions. For a trader, who looks at the short term, this could be vital. At the end of the day it all comes down to risk management. The higher the rick higher the gain. But that doesn't mean you should burn your fingers in hot water either.

Technical Analysis (Part 01)

What is Technical Analysis?

Generally stock market analysis falls into two broad categories. i.e. Fundamental Analysis and Technical Analysis. Now we are going to take a look at the Technical Analysis of the stock market. Very simply put, Technical analysis can be identified as the process of analyzing the price movements and volume movements of a stock and predicting the future movements based on the results. This maybe a kind of too 'modest'. ;)

So let us look in depth.  

Technical analysts use charts, graphs, lines, regressions, trade patters etc. to help their Technical analysis. It is fair to say that all of these are done using the historic and real-time data of prices and volumes of a particular stock, and thus justifying the simplified explanation I provided above. Technical analysis includes the study of many tools like 'Relative Strength Index', 'MACD', 'Average Directional Index', 'Commodity Channel Index' and many more.

Before jumping into the advanced areas of Technical analysis, there are a few concepts a technical analyst must know.

Important Concepts associated with Technical Analysis

• Resistance - a level of price that stops/prevents the price from moving beyond that point. It may act as a 'Price Ceiling'. This is not permanent however. 
• Support - a level of price that stops/prevents the price from moving/dropping below that point. This acts as a 'Price Floor'. This too is not permanent. 

(Both Resistance and Support could be broken and when that happens a significant price increase or decrease can be witnessed.)

• Trend Line - a line drawn connecting two price points. 

• Channel - a pair of parallel trend lines
• Moving average - a line depicting the average price movement of a stock over a period of time. Also known as MACD.

• Relative Strength Index (RSI) - used to chart or map the relative strength and weakness of a stock.
• Bollinger Bands - measures the highness or lowness of the price in relation to previous price trends.

Those are still a few concepts that are used in Technical analysis. Seems extremely difficult? Well, Yes and No. If you study each tool carefully and gain experience by using them first hand, it becomes as easy as everyday trading. The part 01 of the Technical analysis article will stop fro now. The second part will be coming soon with more about the Technical Analysis to win the stock market battle.

Swing Trading

What is 'Swing Trading'?

Swing Trading is yet another type of stock trading where a trader will attempt to make several trades within 'one to four' days following the price fluctuations of a stock within the period. Unlike Day Traders who hold the stock for a maximum of one day, Swing traders may actually hold a stock for a small period of time, generally one to four or five days. This is a breed of traders between Day Traders and Investors. :)

That being said, we'll look what kind of technique Swing Trading involves. 

Generally, Swing Traders watch the market closely to determine the absolute perfect entry and exit prices. This is very vital for a Swing Trader since he does not wish to hold the stock more than a few days, so he has to know the profit maximizing in and out prices. Yes! This is relevant for all types of trading. But investing, which is long term, does not necessarily require an absolute perfect entry price. An investor will anyway be holding the stock for a minimum of say one year, that is an absolutely enough time period for a stock to improve despite market conditions, demand and supply etc. So it is pretty clear that Swing Traders require pin-point knowledge on market behavior. 

Another feature of a Swing Trader is that he is a more of a technical analyzer than a fundamental analyzer. Technical analyzing is about examining and reading the stock market charts, trend lines, price symbols, graphs etc. Fundamental analysis looks at the performance related information of the company. For a stock to reflect the performance of it's company, it might take some time, a resource Swing Traders don't have. Technical analysis is more real-time. We can literally watch the price lines move up and down every minute. These information provide enough knowledge for a Swing Trader to act. This requires some real guts. Fundamental analysis is a promising road, but takes time. Technical analysis is risky and equally rewarding. After-all it's all about high risk-high reward for a Swing Trader.

The right stock

A Swing Trader will have to pick a 'good' stock to do the swing trading. It is the accepted norm that the relevant company should have a large market-capitalization. Also it is very important that the price fluctuates constantly. The range of fluctuation doesn't really matter, but more-the-better. Because that will allow the Swing Trader to enter at the minimum price and exit at the highest price. 

Examine the above picture. This is an intra-day price chart of a stock. For an experienced Swing Trader this stock would've earned him a fortune. The BLUE arrows show the price increases. The ORANGE arrows show the price drops. The BLUE lines show the minimum price level and BLACK lines show the maximum price levels. This is a price chart, that's why swing traders use technical analysis rather than fundamental analysis. Within one day this stock has gone up and down 5 times. These are the kind of stocks a Day Trader would be eyeing too.

The right market

To be boldly honest either kind of market is not perfectly ideal for Swing Trading. Whether it's a sleeping bear market or raging bull market, it really doesn't matter for a Swing Trader. All that matters for him is the price fluctuations of a said stock. Any market that goes up and down would be ideal for a Swing Trader.   

So;

We have come to the end of the article. It is often said that Swing Trading is the best approach for a novice or a new trader. That might be actually true if you learn to identify the price movements, only limitation with Swing Trading is that a trader has to actually keep staring at the screen for subtle price movements. That is pretty insignificant compared to the gain you are about to receive through Swing Trading. 

Sources : Wiki

                   Investopedia

Penny Stock Trading

   

What are Penny Stocks?

Penny stocks may have different definitions in different countries. This is because a Penny stock is kind of a relatively low value stock among the lot. Let's look at it in much clearer sense.  A Penny stock can be a stock priced lower than $1.00; this is the accepted definition is US (according to Wiki). But as I have mentioned above $1.00 could be a considerably larger amount in another country. So they may also define penny stocks as low valued stock compared to the prices of stocks in the respective country. (For example; In Sri Lanka a Penny stock is usually around Rs. 1.00 - Rs. 10.00). In UK it's below £1. 

Features..

However the definition varies from country to country the ground rule is that Penny stock is a stock that is of very low price/value compared to other stocks in the market. So it's generally understandable that these stocks are heavily traded. That is penny stocks can be seen traded in large quantities simply because of the fact that penny stocks give the investor a much more higher purchasing power. 

Also another feature is that these stocks are prone to constant 'manipulation'. We may often here this in the market. This is where large investors buy extremely large number of shares of penny stocks and use media to publicize it. This will lead to a sudden increase in demand for the stock leading to an unnatural rise in the price. Sometimes this rise may count up to 50% gain in one day or even less. The downturn is that this not a permanent increase. The price will fall drastically to it's original level when the big investors sell their portion with a huge gain (due to the rise in price). This is called 'Pump and Dump'. (This will be discussed further in coming articles). The plus side for the small investor is that if you're careful and observe when the big fish hunt for the stock, you can jump in too. That way you can ride the price wave and get out of it when the big fish gets out. This will need constant monitoring of the market, but it's worth a lot.      

However for a day trader Penny stocks could be a gold mine. Simply because Penny stocks tend to fluctuate more than any other stock. Also the negative side is that Penny stocks usually represent small, newly established or companies that are not financially sound. So the risk is there that a Penny stock company could go bankrupt overnight and make you suffer. 

So I think you have a basic idea of what penny stocks are and how they could help you in winning your Stock market game. 

References : Wikipedia

Not getting what you expected from the market?

Read this if your stock-market results are disappointing.

I'm reading a great book that is making me think about how I've been managing my share portfolio, even after several years of stock-market investing.

It's called "Selecting Shares That Perform" and was written by Richard Koch and Leo Gough, one a successful investor and the other a prolific author of financial and investment books.

Some of their rules for portfolio management challenge my previously held views, but I think they make sense. The following list starts with the rules that are rocking me the most:

1. Never 'average down' when the price is falling

They must be joking, right. Never average down; surely that flies in the face of conventional wisdom. Heck, I've averaged down on my investments loads of times, when they've moved against me.

But here's the thing -- although times of general market weakness may be a good time for bargain hunting, maybe there's a rational argument for not averaging down when an individual investment tanks. What we are talking about here are shares that fall despite being part of a rising index or portfolio. After all, we buy shares in companies because our analysis leads us to think that they will go up. If they go down, we were wrong, plain and simple.

Averaging down means we think a share is about to turn around and go up again, right? Well that's a tough call to make and one that's easy to get wrong. If you don't believe me, look at shares such as Royal Bank of Scotland (LSE: RBS), Lloyds Banking (LSE: LLOY) and Taylor Wimpey (LSE: TW), all popular 'value' favourites around 2007. Look at the share prices of these companies now and think of those investors that averaged down into the share-price destruction.

To me, it seems wise either to maintain our original weightings in such bad performing investments, or even to consider using the next rule:

2. Never be afraid to sell at a loss

Instead of averaging down, why not axe a falling share? I mean, it's doing the exact opposite to what it was 'supposed' to do, so why not just cut and run after a predetermined decline? The book I'm reading suggests 7-10%.

I wish I'd done that much more often. Shares such as Trinity Mirror (LSE: TNI), Dixons (LSE: DXNS) and HMV (LSE: HMV) could have been prevented from causing so much private-investor carnage if those punters had simply sold on share-price weakness.

3. Balance patience and prudence

Whether we fall into the 'long-term buy and hold' camp or the 'it's never wrong to take a profit' camp, it's a good idea to seek a balance between the two philosophies.

How patient should we be? If we are holding a share for years, and nothing happens, maybe it would be more prudent to sell and move on to other opportunities. Similarly, if a share rockets very quickly, maybe it's prudent to pocket some of those gains. My own rule-of-thumb is 'the faster the gain, the faster the sale.'

Generally, I think it's wise to be flexible and not become too entrenched in either philosophy.

4. Do not over-diversify your portfolio

Traditionally, a diversified portfolio of shares is seen as a defence against individual company risk, but too many shares in a portfolio can actually increase risk.

With too many shares, it's hard to know the underlying companies that well. There is a risk that the quality of your choices might decline and, with so many holdings, you could end up chucking in a few speculative punts with hardly any thought.

With greater focus on just a few shares, it's more likely that we will be on the ball when it comes to buying and selling. The book suggests that between five and ten shares is adequate for most investors.

5. Do not invest heavily when everyone else is

You've probably heard the adage: "When they are crying, it's time for buying; when they are yelling, it's time for selling."

In other words, when everyone has gone share crazy, there's a good chance that markets may be close to a cyclical high -- often a disastrous time to buy most shares.

Conversely, when markets have plummeted and shares are very unpopular due to recent investor losses, it is usually a good time to pick up cheap shares on depressed valuations.

6. Only invest if you are confident in the company's prospects

The book cautions: "Investing in the stock market is not like picking a winner at Aintree", and we can only be confident in a company's prospects if we have researched and analysed it thoroughly.

If we invest in speculative companies with no profits, but with great 'potential,' it is usually very similar to betting on the horses with an unpredictable outcome. On the other hand, finding attractively valued, profit-making businesses with good growth prospects can help us to achieve results that are more predictable.

Bottom Line

To me, these are sensible rules and I'm looking forward particularly to applying the first two more with my own share portfolio.

Published in Investing on 19 August 2011 by Kevin Godbold

Dealing with today's distinctly dicey market - 15 Rules For Investing Success In Any Market

Keep the following 15 rules in mind that could help you hold your head high in times of sudden losses or for general investing purposes:

1) Think twice protecting against the downside (price downs), before daring to look up (price ups) when picking shares.

2) The norm is "Volatility does not represent risk, but creates opportunity". This is true. But go through the numbers (financial statements) and decide on your free will.

3) Investing when a share is neglected or out of focus is the best. The prices will be low and will produce you with enough gains in the long run.

4) Buy companies with excess cash flow.

5) Watch out for value, then make sure the basic figures tell you a clear story about the future of the company.

6) When digging further, use a Warren Buffet-like discounted cash-flow method to help determine underlying value.

7) Ask yourself if you're prepares to buy the whole company for yourself if you could. If the answer is 'NO', probably you should move on.

8) Don't fall for the reputation of the company or the centuries of years it has been in existence. The market has numerous examples for incidents where such companies have fell overnight. Always look at the current performance.

9) Don't listen to the directors if the reports show a complete over turn. If the numbers do stack up, take what the directors say with a healthy dose of salt. The same goes for brokers' forecasts.

10) If directors are buying shares, keep your eyes open.

11) No matter how hard you try and no matter the market condition, you will make losses. Accepting that will ease your pain. The general norm is that in stock trading you should always be prepared to take 20% loss anytime.

12) Make sure you understand how the company makes its profits and the essence of what it does.

13) Stick to your investment strategy. Pay less attention to market gossip and hush hush..

14) John Maynard Keynes said: "The market can stay irrational longer than you can stay solvent". But this is only true if you've overdone it. Don't invest more than you can truly afford to lose. (Margin trading is really not necessary)

15) Last but not the least... BE PATIENT.. You bought a stock, it's prices are not moving? Hold on. A price can never stay the same forever. If there's nothing interesting to buy. Just wait. Don't just go tie yourself in some good-for-nothing shares. Always be patient. 

Published in Investing Strategy

Who is a Stock Broker?

Broker?

A broker is an individual or an enterprise who contacts two parties, usually a buyer and a seller, and make a transaction happen between the two. What's in it for the broker? The brokerage. A considerably small fee charged from either both parties or based on the whole transaction value (usually a small percentage of the whole transaction).  

Stock Broker?

A Stock broker is the one who connects the stock investor/trader with the stock market. An individual cannot directly deal with the share market, hence he must go through a stock broker. A stock broker is usually a firm consisting of agents. Once we register ourselves at an agent, he will be our guide and middleman to the stock market.

Services

• Buy and sell shares on-behalf of  his clients and only on the approval of the client. (a stock broker does not have the freedom of buying and selling shares for his clients without the approval of them).
• Investment/Trading advising. Since the brokers deal with the market 24*7 it's wise to consult them before making our buying/selling decisions.
• Discretionary Dealing- this is where the client has given the freedom to the stock broker to make his own decisions based on the investment/trading objectives of the particular client.

Best Stock Brokers/Brokering Firms

America

1. Merrill Lynch & Co. Inc.
2. E. F. Hutton & Co.
3. Bache & Co.
4. Paine Webber & Company
5. Francis I. DuPont & Co.
6. Dean Witter Co.
7. Goldman Sachs
8. Bear Stearns

Sri Lanka

1. Bartleet Mallory Stockbrokers (Pvt) Ltd. 
2. Asia Securities (Pvt) Ltd.  
3. J B Securities (Pvt) Ltd.
4. Asha Phillip Securities Ltd.

When to Buy and Sell your Shares?

This has the been the most famous and age old question regarding Stock Trading. Simply due to the fact that 'When to Buy and When to Sell' is the core function behind stock trading and if you're an expert at deciding this, you can easily be a Pro at trading and end up unbelievably rich!!

Sorry to disappoint you though, but there's really no hard and core rule regarding when to buy and sell. That's the harsh and cold truth. Some may call it intuition, luck or sometimes pretty decent hard work and thought and decision making skills. However it is said and done, there are really a few basic things that you should know that could actually save your life in the stock market and hopefully not end up making losses for you. 

When to buy?

Actually most people think or it may seem very appealing to buy a stock which has it's price moving up. It may logically seem valid. The price is moving up so it will continue further more and when I have enough profit I'll sell it. Just like that. But that's not the correct way to approach the market. You should always focus on stocks that have decreasing price movements. or more like stocks that have lost it's market price and fallen down to a low value. Why? Simply because, if a share was performing well and had dropped to a lower level, it has a HUGE potential to reach back to it's previous price or even further more. A price that is already increasing only has a huge potential to drop. So always we should eye for stocks that have recently lost it's value. Buy them quickly and wait till the prices recover. You cannot loose this way, because the price was already down it wouldn't go any further down but only up. So guaranteed you will end up with a profit.

When to sell?

Buy and sell may seem like two opposites, and it is, but the same core rules as of buying shares apply for selling shares. This doesn't mean that you have to sell when the prices have dropped. The ideal time to sell a stock would be when it shows signs of dropping price. Now, if you picked a stock at a lower value as I've mentioned above any increase in price would earn you a profit, so when the stock shows even the slightest signs of dropping prices, sell them. Don't wait thinking it'll recover, just sell it. You won't loose anything since you bought at a lower price.

So that's about it.

This is NOT buying/selling recommendation. 

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