Showing posts with label what is. Show all posts
Showing posts with label what is. Show all posts

Friday, January 20, 2012

Dot-com Bubble (1995-2000)


What is The Dot Com Bubble?

Let's break the wordings and look at them separately. Dot Com (.com) refers to the domain name of a website. Eg: (www.google.com; www.youtube.com; www.facebook.com) "com" however literally means  'commercial'. That means it's a commercial website. Although there are a large variety of such domain names (Eg: .edu; .info; .gov; .net) the websites/the internet is generally referred to as the 'dot com' world. 

Then what is a 'Bubble'?

A bubble is a false or unexpected or unnatural surge of equity prices mainly due to high levels of speculation. It causes huge uprising in price levels of stocks without proper fundamental backing. So naturally the bubble will burst at some point and the whole market will collapse.


So The Dot Com Bubble was a similar situation that occurred during 1990s (1995-2000 to be specific) surrounding the highly speculated growth of the Internet. 

Investors have invested massively in Internet based companies with high levels of speculations about their growth in the years to come. 

During the mid-to-late 1990s, Cisco Systems, Dell, Intel, and Microsoft were known as "the Four Horsemen of the NASDAQ" because of their dominant market capitalizations. As the bursting of the Internet bubble approached, Cisco Systems, EMC, Sun Microsystems, and Oracle were known as "the Four Horsemen of the Internet."

During this period many companies were setup with the "e-" (i.e. Internet based) in their business names. Such companies witnessed sky rocketing stock prices. Low interest rates during the period has helped acquisition of more and more capital thus more and more investments. 

According to dot-com theory, an Internet company's survival hung on expanding its customer base as quickly as possible, even if it incurred heavy annual losses. For instance, Google and Amazon did not see any profit in their first years. Amazon was spending on expanding customer base and alerting people to its existence and Google was busy spending on creating more powerful machine capacity to serve its expanding search engine. The phrase "Get large or get lost" was the wisdom of the day.


The Bubble Bursts...

During later 1999 and early 2000, the US Federal Reserves had taken steps to increase the interest rates by nearly 6 times. This affected the pace of the economy and started to loose pace. On 10th March 2000, the NASDAQ composite index peaked at peaked at 5,048.62 (intra-day peak 5,132.52), more than double the value it had just a year back. It shows how fast the bubble had grown. The NASDAQ dropped slightly after that, but this was attributed to correction by most market analysts; the actual reversal and subsequent bear market may have been triggered by the adverse findings of fact in the United States v. Microsoft case which was being heard in federal court. The findings, which declared Microsoft a monopoly, were widely expected in the weeks before their release on April 3. The following day, April 4, the NASDAQ fell from 4,283 points to 3,649 and rebounded back to 4,223, forming an intraday chart that looked like a stretched V.


By 20th March 2000, the NASDAQ had lost almost 10% from it's peak in 10th March 2000. 

After the burst of the bubble many Dot Com companies went bankrupt due to financial burdens. Such companies are  'WorldCom', 'NorthPoint Communications', 'Global Crossing', 'JDS Uniphase', 'XO Communications', and 'Covad Communications'. 

But a few finacially sound companies emerged as giants in the Dot Com industry after the bubble. They are 'Amazon.com', 'eBay' and 'Google'. 


References: Wikipedia
                       : Investopedia


Wednesday, January 4, 2012

Online Stock Trading



What is Online Trading?

This is the latest trend in Stock trading, where share transactions are done via your computer connected to the Internet and your stock broker. 

Online trading will give the investor immense freedom, to do whatever he wants with the money he has invested. Most brokers provide this sort of facility and with some knowledge on the Stock market, one can do his own trading and be a self-made millionaire. 


How is it done?

Today almost all the brokering firms are willing to provide online trading facilities to their investors. For them it could reduce their work load and also take off the risk of managing the portfolio. However for a keen investor Online Trading can be of alot useful. 

When requested for the Online trading facility from your stock broker, they will provide you with a software to access the stock market via the broker. The most used software and the best software for this would be DirectFN Pro. It provides real-time access to the market and hence ideal for Day Trading purposes as well. DirectFN provides real time charts, graphs and many technical analysis tools. So it can be identified as an all-in-one tool for stock trading. For more information visit DirectFN.com

Another massively useful software fro Technical Analysis. It specializes on providing the best Technical analysis tools to make a better decision in trading stocks. For more information and screenshots visit here.

The above mentioned sorftware can be freely downloaded from the links given below.
Happy Trading.

To download DirectFN Pro click HERE.
To download AmiBroker 5.3 click HERE.
To download AmiBroker 5.3 Crack click HERE.

Wednesday, October 19, 2011

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.    

Saturday, October 8, 2011

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 :

Thursday, October 6, 2011

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. 

Monday, October 3, 2011

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!

Friday, September 30, 2011

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)

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.



Monday, August 8, 2011

Bull Market and Bear Market


What is Bull Market and Bear Market?

Bull/Bear markets indicate different market situations prevalent in a Stock Market. The names have been derived from the fighting/attacking positions or ways of the two animals in comparison to the market behavior. 

Bull Market
As we can see in the above picture as a Bull attacks, it's horns point upwards. This has been used to signify an upward or positive movement in the Stock market or the share prices. this could be of a single stock, a group of stocks or the market as a whole. A Bull is a fierce and forceful animal, and so is the rising prices of shares in a Stock market. So that's why rising prices, a good performing market is called a Bull market.

Bear Market
In the above picture we can see the Bear laying down and defending itself. Bears can be fierce animals but generally they are slow, sluggish and lazy animals. And so is the stock market with decreasing prices/performance. A Bear stands up when  it attacks, so it attacks down towards the earth with it's claws. So this had been used to indicate dropping prices of the market. So that is how a sluggish or a market decreasing in performance got it's name 'Bear Market'.