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Investment Basics – Investment Club

Why do we always lay stress only on US dollar & not other currencies across the world? How are other currencies performing currently?
Yes, people all around the world track US Dollar the most, than any other currencies. One simple reason is US dollar has been accepted as the global currency medium for all trade related activities across the world. Even a simplest of variation in Dollar, it directly affects the margin figure within which a product is bought/sold in world markets. If any company wishes to be mapped or given status as a multi national, it should be ready to declare its assets, turn over & revenue as per the GAAP … i.e. Globally Accepted Accounting Principles and the medium of currency should be denoted in US Dollars. This is one reason, why people lay much stress to US dollar ($).

Now coming to your second question, about how are other currencies across the world are performing currently… I would say “how strong or week a currency is, largely depends on how strong that countries economic situation is”. The strength of an individual countries currency is measured, by taking US dollar as the base. Just like how you see in India, if rupee is being currently valued at 48.80 rs … it’s against 1 US dollar as the base. For more details, please check out the attachment which gives you a clear picture of world currency standings. It’s from one of the best sources & most relied upon across the world.

How secure are foreign banks in India?
To be frank, I would tell foreign banks operating in India, are considerably secure when compared to their counter parts outside of India. One simple reason would be that foreign banks operative in India, will have to function under guide lines of RBI. Given the stringent CRR, SLR & PLR measures prescribed by RBI, the money left within an individual foreign banks to invest or re-invest would be very less. So that reduces chances of risking too much money in investments.

Okie, now if you have a question as to – why are so many foreign banks coming to India ? 
Answer to this lies with each one of us. How many of us or our families still have a thinking that … Keeping money in Savings Depostis, Fixed Deposts or Current a/c Depostis are the best mode of Investments & does a living out of this in India, instead of being exposed to equities or other modes of investments ? I would say, 8 people out of 10 still have this policy of savings. In contrast, the West world this habit of investment has few takers & most people are exposed to other modes of investment especially equities. Each of these practices has its own pros & cons, that could be thought of.

What is OPEC & how does it help in regulating crude oil prices in the market?
OPEC stands for Organization of the Petroleum Exporting Countries, is a committee formed by 12 countries to bring about standardization in reforms related to crude oil across the world. The 12 countries that come under this purview are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. The Head Quarters of OPEC is located in Vienna.

Okie, now how does OPEC help in regulating crude prices in the market?
Let me tell you guys, there is a myth about this amongst most new analysts in India, which needs fine tuning. Most believe it’s only OPEC which controls oil prices, but the answer is “NO”. The market share of OPEC is only 35.6% all across the world as on March 2008 data. OPEC can exercise control only on 12 countries which are listed above & has no control over oil reserves found in Gulf of Mexico, North Sea & Russia. Mind you, Russia produces the highest capacity till date which stands at close to 9.5 million barrels per day, then later closely followed by Saudi Arabia & others. Most of the countries listed in OPEC have been burning out most of their energy reserves very severely from close to 5-6 decades & thus oil reserves there are either in the process of going extinct or have declined production quantity in this region. Now you can understand why Bush mama, choose for a war against Iraq. :)

Many big companies have fallen massively over the time now, almost down by 75% from their previous highs. How do you analyze, a buying opportunity at this stage?
Absolutely, it makes me buy them to. In fact, current stock prices of few companies looks more seducing than an Item number in Bollywood. This is an industry wide recession & it is a great chance to buy few companies at throw away prices. But, yes there are few evaluations you need to do, before you set your foot forward to buy them.

Always know that, even brilliant companies do stupid things & when they do it, they loose some big time money. Nine out of Ten times [9/10], the stock market upon seeing this will slam that company’s stock.. i.e panic selling factor creeps in & everybody just sells even realizing what the reason is. Now, as a buyer this is the time when you should think using little logic & I am sure each one of you can do this. Your job is to figure out whether, if the reason that bought down the company is just due to a natural stock market calamity or an irreversible damage to the company’s stock.

Natural Stock Market Calamity: Okie, by telling natural stock market calamity I mean… let’s consider this example: There was a rumour surrounding ICICI bank, that the promoters are expected to sell of their stake & this can bring their stock prices down. This rumour impacted the banking sector in such a way that, even most stable banks in the pack took a hard beating with sudden selling pressure, apart from ICICI bank. Now this is something, that is quite natural in the stock markets & thus the other banking stocks were back with a bang to normalcy. This is what I sometimes call “Natural stock market calamity”. This is a clear “Buy” signal.

Irreversible Damage: Just as the word suggests, the reason due to which a stock falls is something … that makes you feel that it can never get back to where it was. Okie, I don’t want to take names of companies but if you are good at guessing you could try. These are kind of companies where suddenly one gets to know that, the profit margin within which the company was operating has suddenly reduced & thus the company is expected to face severe losses. Also could be, the natural resources which the company was dependent on all this while.. is now going to be extinct in the next 1 years time. See, such reasons which bring down the company & its stock prices .. is something that cannot be changed in short time or most of the times, a change of work plan is impossible. This is a clear “No Buying” zone.

Why is the auto-segment of the manufacturing industry facing a heavy down turn at the moment? 
As discussed even in earlier sessions it’s primarily the rising prices of steel, aluminium, copper and lead prices that has resulted in bringing down the production units to a screeching halt. No doubt these prices have cooled off at the moment, but it’s too late for those few closed production units to resume operations now. These being key raw materials for the auto industry can significantly reduce the cost pressure that has been eroding the margins of players in the sector for the past few quarters. Steel constitutes as much as three-fourths of input costs and the price of this raw material has corrected by 41% on per ton basis in the past six months.

Another significant reason, for this slow down is contraction of loans from banks. There is not enough money available with the scheduled banks at present, for offering loans to all sectors of trade industry. Please note, Auto industry is one such component which entirely depends on Hire Purchase agreements by partnering with reputed banks. So a contraction in such agreements, will force the management team of Auto companies to postpone all new orders which leads to closing down of production units. The most recent one to bite the dust in India was a production plant owned by Tata Steel in Jamshedpur & another sibling production unit owned by TATA motors.

Mind you, I have spoken about few premium companies who have substantially supported by banks even during down times such as the present one. But the plight of auto-ancillary industry is one segment that is speculated to take the maximum beating. Coz the work orders of ancillary industries are directly proportional to work undertaken by Auto Manufacturing industry. It’s just like, if am manufacturing a car, the battery manufacturing segment becomes its ancillary.

What are the most probable events in a year, which are almost certain that, will certainly happen in the markets?
This question is something which I took it up myself to help our readers create a sense of view about the general market conditions based on our research. Yes, there are few things in our markets which will certainly happen & they are unstoppable, irrespective of how market is currently or how it may perform in future. More funds incomings seen for Mutual Fund Companies: – To know how far this fact could be true, you just need to get up from your desk & look around. How many of you or your friends have already started thinking which mutual fund do we invest in, coz as everybody knows this is the best way to get an Income tax waiver. This is something, which employees of all companies … irrespective of how big or small, the company they would be working for might be… irrespective of higher level or middle level or an entry level role, they occupy in a company… everybody needs to declare their plans for the financial year, and this exercise starts from November & ends in January every year with out fail & they are almost unstoppable.

It’s during these times, most people don’t bother to notice how good or bad their investment decision might prove to be in future, all that they would need & look for is a tax waiver. And also this is the time, when most mutual fund companies starts opening up campaign counters on your companies campus, so that they would get more people to drool in. This is the time of the year, when most MF companies introduces new public offers [NPO] with highly placed Net Asset Values [NAV] for their funds, purely to capitalize on the demand. Does this make the MF companies richer, off course baby it certainly does :). Would you be happy after getting a tax waiver? You should be right. :)

Auto sector slow down during November & December, also time when government usually reduces steel prices during these times: – This slow down phenomenon in auto sector during Nov-Dec, is something that’s been observed all over the world. Most people show sluggishness while buying vehicles during Nov-Dec, as the re-sale value of these vehicles will get lower… since the calendar flips to the next year immediately after two months of purchase. If you are a careful observer, you will notice – most auto sector companies try to hard sell their products by giving massive discounts during this time … but mind you, this offer comes with a catch – you can book now & but the delivery of your vehicle will only be next year.

This usually happens, since Auto sector reduces production of units during this time of the year expecting a rate cut in steel prices from the government. So that they can begin a new fleet of production units, by taking maximum advantage of reduction in prices of steel. That is one reason, most Auto sector units shuts its plants during this time of the year, for a holiday season. So this is one such time, you should probably keep in mind while trading with Auto sectorial stocks…

What could be the impact of any Terror Strikes/Untoward Calamities on the stock markets, both in short & long term period?
- Yes, the terror strikes / Untoward natural calamities are tragic episodes & are worrisome for more reasons for the Indian stock market insiders. You might call my notion a little more than “mean minded” if I told you guys that … I would pity more for upcoming Indian Business Ventures more than pitying for lost lives in the recent tragic event. Going by the current scene of people’s outrage against the Indian government policy makers & government reacting to those remarks made by asking few leaders to step down, is just like inviting more unwanted bad days ahead. This is certainly a plight, which needs to be quickly addressed. Getting the Indian government to work on a stimulus package to save the economy from further slow down should be a priority at the moment. Coz if this element of economic factor is ignored now, there never would be any chance for damage control any time in future. The manufacturing industry has been waiting with bated breath for over months now to begin production after getting the necessary sanctions from the government in the form of stimulus package & a slow down in this will be a result of breaking of BCP cycle… i.e “Business Continuity Plan”. A slowdown in manufacturing sector will force the Foreign Institutional Investors to move away from Indian markets & this can only increase the momentum of the downward spiral of our countries economics’. To be more precise yet in simple terms … “If you need a company who pays you the salary, so that you could feed your self & your family, it’s your time to act on this issue first”.

This is one reason which is pushing our strong feeling, that the media needs to strongly focus on getting the act right by stressing more on getting the money packet out from government as a priority rather than seeking government’s attention on resignation drama. Yes, going by the rage I have against the government even I willfully condemn & support causes that has like wise thinking, but need for the hour is not emotional thinking instead rationale thinking. Again if I were to think like a true strategic advisor for India – yes, we desperately wanted this kind of rage in people some time soon against the government so that we can make a beginning for an evolution phase & have the lazy government heads roll.

But going by the people’s emotion that we have seen even earlier during previous crisis moments like Mumbai serial bomb blasts & others, people’s rage or the anger is absolutely impotent. We strain our voices with full anger over every possible communicative means, but loose it over a period of time even before its heard. I hope we are not marking a beginning of a similar rage amongst people, which is all set to die down soon with the burst of a bubble. Aap hi bolo bhai saab, kya hum kuch alag bol rahe hain, jo aap isse pehle nahi suna hai, ya nahi dekha hai… If we really believe in what we think & stand by it consistently during changing times, only then we can change this world.

Why is that you always suggest in your discussions, that atleast 10,000 rupees should be your initial investment while newbies enter stock markets?
Yes I have suggested in many places to set your capital budget to minimum of 10k rupees while you shop for shares in our Indian Stock Market setup. As you all know, one should have atleast “Demat A/C” with a banker & a “Trading A/C” with a brokering unit or a banker in order to trade shares in the market. Okie, let’s start by asking these questions to ourselves… How much does your banker charge you for your Demat A/C – in & around 750 rs … How much does your brokering unit charge you for your Trading A/C… in & around 250 rs [100 rs for NSE & 100 rs for BSE]. So its guaranteed that every year you end up paying 1,000 rupees irrespective of you make profit or loss on your capital.

If I would calculate the same in terms of percentage, I would end up loosing 10% of my 10k capital just for keeping my accounts alive & active. Okie, now think what if your capital is 5,000 rs… you end up coughing up 20% of your capital just like a minimum amount due on a Credit Card. :) And mind you these are figures just to keep your account active, I still haven’t included Brokerage charges, Transaction charges, Stamp duty on buying & selling, Security transaction tax & Sebi tax. ? … ab aap hi decide karlo madamji, aapki muft distribution cere-money ka bulava aur kis kisko bhejna hai …

Could you please let us know how do they calculate GDP for a country? 
GDP i.e Gross Domestic Product, is commonly used as an indicator of the economic health of a country, as well as to gauge a country’s standard of living. GDP is usually calculated on an Annual Basis in every country. GDP is a measure of all the goods and services produced domestically.

GDP = C + G + I + NX Where: “C” is equal to all private consumption, or consumer spending, in a nation’s economy “G” is the sum of government spending. // This is what we call Mystery. Very few have understood this until now :) “I” is the sum of all the country’s businesses spending on capital // Investments made by Industries for our country’s growth, not their’s :). “NX” is the nation’s total net exports, calculated as total exports minus total imports. (NX = Exports – Imports). NX is sometimes even denoted by just “E’. // Mind you, if Exports exceeds imports, it adds to the GDP. If not, it subtracts from the GDP.