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