How to Invest in Mutual Funds?

Millions of investors have come to rely on mutual funds as their primary investments. The growth of funds has been explosive, with individuals, retirement plans and others putting well over $1 trillion in the funds in the 90's. If you are thinking of investing in a mutual fund, you should remember that they are only one of the many types of investments and that, as with any investment, you should know and understand the nature and risks of mutual funds and options available to you before you invest any of your money.


You can earn money out of a fund in basically three ways. First, a fund may receive income in the form of dividends and interest on the securities it owns which it pays to its shareholders in the form of dividends. Second, the price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors. Third, if a fund does not sell but holds on to securities that have increased in price, the value of its shares (NAV) increases.

The higher NAV reflects the higher value of your investment. If you sell your shares, you make a profit (this also is a capital gain). Today there is a bewildering array of funds on offer. So how does one choose a well performing fund. There is one golden rule of Mutual fund investing- When small stocks do better than big ones, funds will beat the market. When big ones do better, the market will outperform the funds. If you think small stocks are due for a run, then you would expect actively managed funds to beat the indexes.

But before you invest it is better to do some background work: KNOW YOURSELF. Before you invest, decide whether the goals and risks of any fund you are considering are a good fit for you. You take risks when you invest in any mutual fund. You may lose some or all of the money you invest (your principal), because the securities held by a fund go up and down in value. What you earn on your investment also may go up or down.

A portfolio's asset allocation or 'mix of funds' should represent one's tolerance for risk and time horizon. An investor should establish what percentage to invest in stocks, bonds, cash, etc. before choosing a portfolio of worthy funds. In fact, searching for funds without considering asset allocation may lead to a portfolio of funds that are all invested in the same thing. A good portfolio diversifies into different assets to hedge against unforeseen market declines. Which kind of fund is a good investment for you is trickier; the best answer is, a fund whose manager is doing something you understand and are comfortable with as a long-term investment. Read some annual reports; get a feel for the people who run the fund; see if they think the way you do. Or buy an index fund, which is run on autopilot.

ESTABLISH YOUR BENCHMARKS: Be clear in how you will measure the performance of the fund. If it is a dedicated fund like say pharmacy, FMCG etc. then its performance can be measured only against those particular indices. A small cap fund's performance cannot be measured against the BSE Sensex performance. So be clear what is the profile of the fund and what will its performance be compared to. Post that, how much you want the fund to out performs that index is dependant on your risk profile and market conditions.

DO YOUR HOME WORK: There are sources of information that you should consult before you invest in mutual funds. The most important of these is the prospectus of the fund you are considering. The prospectus is the fund's selling document and contains information about costs, risks, past performance, and the fund's investment goals. Request a prospectus from a fund, or from a financial professional if you are using one. Read the prospectus before you invest.

The Annual Report of the fund is another source of information. Look at "fee table," where the fund shows what it's charging you. Any waivers or temporary fee reductions have to be disclosed--but, of course, they're in the fine print, where you'll have to squint to read them. Read all official fund disclosure documents from back to front. All the stuff that can hurt you is buried in the back, where the people who run the fund hope you'll never see it. So read the stuff at the back first, so you get the bad news on the table at the start.

Also once you invest in a fund track it. If you have not recently examined the prospectus for a fund you own, you should monitor your investment by obtaining and reading the most recent prospectus, SAI and financial statements--these may contain important changes. Careful reading of quarterly and annual reports is also necessary to keep up with changes in your investment.

DON'T GET TAKEN IN BY PAST PERFORMANCE: A fund's past performance is not as important as you might think. Advertisements, rankings, and ratings tell you how well a fund has performed in the past. But studies show that the future is often different. This year's "number one" fund can easily become next year's below average fund. Although past performance is not a reliable indicator of future performance, volatility of past returns is a good indicator of a fund's future volatility.

COMPARE THE FUNDS ON TOTAL RETURN: Check the fund's total return. Included in the computation are distributions paid to investors, capital gains distributions and unrealized capital gains and losses. Since all fund activity which has an effect on net asset value is represented, this measure provides a picture of performance which is more complete than yield. You will find it in the Financial Highlights, near the front of the prospectus. Total return measures increases and decreases in the value of your investment over time, after subtracting costs. See how total return has varied over the years. The Financial Highlights in the prospectus show yearly total return for the most recent 10-year period. An impressive 10-year total return may be based on one spectacular year followed by many average years. Looking at year-to-year changes in total return is a good way to see how stable the fund's returns have been.

YIELD: Yield is the income generated over a specified time period divided by the fund's current price per share. This is a measure of mutual fund performance, which is figured by dividing the income generated (dividends, capital gains distribution, etc.) per share for a specific time period by the fund's current price per share. For example if, during a year, a single share of a fund had paid income totaling Re.1 and its share price was Re.10, the annual yield for that year would be figured by dividing 1 by 10, which equals one tenth, or a yield of 10%.

While yield is a measure of current performance-how much income an investment generates--total return measures per share change in total value over a specified time period. All fund activity that has an effect on net asset value (dividends, capital gains, unrealized capital gains and losses, etc.) is represented in this measure. It provides, therefore, a more complete picture of fund performance than the yield or net asset value alone. The investor may approximate total return by using data that appears in the "Per Share Changes and Capital Income" section of the prospectus. Changes in yield do not reflect a corresponding increase or decrease in the fund's net asset value. A fund may increase yield by purchasing investments that are riskier but offer higher interest payments. But, the higher yield may be offset by a deteriorating capital position or a lower total return.

COSTS: Costs are important because they lower your returns. A fund that has a sales load and high expenses will have to perform better than a low-cost fund, just to stay even with the low-cost fund. Find the fee table near the front of the fund's prospectus, where the fund's costs are laid out. You can use the fee table to compare the costs of different funds. The fee table breaks costs into two main categories: 1. Sales loads and transaction fees (paid when you buy, sell, or exchange your shares), and 2.Ongoing expenses (paid while you remain invested in the fund).

ONGOING EXPENSES: These are expenses as a percentage of the fund's assets, generally for the most recent fiscal year and basically include the management fee (which pays for managing the fund's portfolio), along with any other fees and expenses. High expenses do not assure superior performance. Higher expense funds do not, on average, perform better than lower expense funds. However in case the fund provides special services, like toll-free telephone numbers, check-writing and automatic investment programs, then the higher expenses are justified. Note carefully any difference in expenses as even a small variation can make a big difference in the value of your investment over time. Check the fee table to see if any part of a fund's fees or expenses has been waived. If so, the fees and expenses may increase suddenly when the waiver ends (the part of the prospectus after the fee table will tell you by how much). Many funds allow you to exchange your shares for shares of another fund managed by the same adviser. The first part of the fee table will tell you if there is any exchange fee.

RISK: It is quite difficult to compare a fund's risk adjusted return. But there are a couple of ways to do so. A fund's Sharpe ratio, named after its inventor, Nobel Prize winner William F. Sharpe, essentially shows you how much return the fund earned for each unit of risk that it took, and it's easy to compare different funds against each other this way.

Lots of websites will display a fund's Sharpe ratio, usually under a category called "Modern Portfolio Statistics." There's also Morningstar risk, which is a variation of the Sharpe measure based on how often a fund underperformed Treasury bills. And there's beta, which shows how much the fund moves relative to the volatility of the market. But ultimately the real risk is you: If your fund goes down a lot, will you sell? If it goes up, will you buy more then? Most of the risk of investing isn't in your investments, it's in you.

INVESTMENT PHILOSOPHY: You can get a clearer picture of a fund's investment goals and policies by reading its annual and semi-annual reports to shareholders. Whether a fund believes in value investing, or is aggressive in its style of investing etc. all these have a bearing on the performance of the fund.

SIZE OF THE FUND FAMILY: The size of a fund's family does matter. In large fund families moving from one type of fund to another is easier. For example, the market is showing bearish signs and you want to get out of your stock fund and into a money market fund. This transaction would most likely be cheaper and easier within the same fund family. Also fund families generally waive load fees when switching funds if you originally paid a comparable load. This policy of switching from one load fund to another has also been used to reduce tax obligations. Large fund families can spread out their normal operating costs. For example, a large fund family can have a bigger research department than smaller ones at a lower cost. Economies of scale usually favor the 'big guys'.

SIZE OF THE FUND: Bigger is usually better. The bigger funds can diversify better, attract better talent and have access to more information. However, if the fund's investment style focuses on small-capitalization stocks, bigger isn't always better. The success of many small-cap stock funds often depends on their ability to move in and out of holdings quickly. Larger small-cap funds, especially those that have ballooned recently, can't always achieve the same gains. In fact, some small-cap funds are so large they drastically affect the stock prices of companies they buy and sell.

SOME POINTS TO CONSIDER: Mutual funds are not guaranteed or insured by any bank or government agency. Even if you buy through a bank and the fund carries the bank's name, there is no guarantee. Mutual funds always carry investment risks. Some types carry more risk than others. The fund's portfolio has investment risk directly related to the securities it contains as well as to general market and business conditions. For example, an aggressive growth fund, because the prices of securities in its portfolio are more volatile, is generally riskier than an income fund, which may invest in conservative stocks and bonds whose prices do not fluctuate greatly but that pay high dividends or interest. Regardless of the investment strategy or portfolio no fund can escape market risk. Understand that a higher rate of return typically involves a higher risk of loss. Past performance is not a reliable indicator of future performance. Beware of dazzling performance claims. Shop around. Compare a mutual fund with others of the same type before you buy.

Golden rule of Mutual fund investing- When small stocks do better than big ones, funds will beat the market. When big ones do better, the market will outperform the funds. If you think small stocks are due for a run, then you would expect actively managed funds to beat the indexes. Determine your financial objectives and how much money you have to invest. Make sure the fund's objectives coincide with your own. Don't change your objectives or exceed the amount set aside for investment unless you have good reason. Always obtain all available information before you invest. Request the prospectus, and the latest shareholder report from each fund you are considering. Be on the alert for incorporation by reference. You will have "no excuse" for not knowing this information, if a problem arises. You may be legally presumed to know materials incorporated by reference in a prospectus or other documents. Always determine all sales charges, fees and expenses before you invest. Shop around among the many funds offered and compare the various fees and costs connected with funds that appeal to you. Learn the costs of redemption.

Sometimes investors are surprised to learn that they have to pay to get out of funds through back-end loads or redemption fees. Find out the redemption costs before you invest so you won't be unpleasantly surprised when you redeem your shares. Never treat the risks of investment in a fund lightly. Weigh the risks of the funds you want to buy against your ability to tolerate the ups and downs of the market and your investment goals. Be extra cautious when considering investing in funds with high yield/high risk portfolios. Don't be misled by the name of a fund. Some funds have been given names denoting safety, stability and low risk, despite the fact that the underlying investments in the portfolio are volatile and highly risky.

Points to Remember


* People invest in mutual funds in order to achieve diversification without the time and cost of tracking hundreds of individual securities.


* There is no ideal number of mutual funds to own.

* Diversify among different asset classes to help reduce risk and potentially increase the rate of return of your portfolio.


* Diversify among different investment styles to potentially reduce risk and increase returns.


* Owning too many funds means you may be paying for active management when you really hold the market.

* Your investment adviser can help you evaluate each fund to determine its role in your portfolio.


* In choosing mutual funds, your first task is to formulate your investment objectives and identify your time frame.


* The next step is to identify which types of mutual funds match your investment goals and risk tolerance.

* Companies such as Crisil and dedicated websites provide statistical information on mutual funds.

Once you have identified the fund categories that seem appropriate to your investment objectives, you will want to take a close look at individual funds in each of the categories.

4 Deadly Reasons Why Beginners Fail In The Share Market

1. Don't know how to choose the right share to buy
2. Don't know when to bail out of a losing share
3. Don't know when to take profit on a winning share
4. Don't Know how to construct a proper portfolio

1. Don't know how to choose the right share to buy…

How does beginners choose what shares to buy amongst thousands of shares? You might choose to listen to your share broker, or listen to your "experienced" relative, or listen to free "share pick" on the internet…etc… and you will end up losing money.

Because individual share behavior is very complex, only the most professional full time traders have the right technology to make proper share pick decisions. Such experience and technology is simply not available especially to the beginner trader.

2. Don't know when to bail out of a losing share…

The deadliest killer of beginner traders is not knowing when to get out of a losing share. Too many traders hold on to their shares until it is worth nothing. Most beginners will hold on hoping that the share will stage a rebound because you simply do not have the technology to tell if a share will ever rebound! The only way for a beginner to prevent losing everything is for an expert to tell them when to get out of a trade.

3. Don't know when to take profit on a winning share…

How many times have you heard stories around you of people who hold on to shares which made them a lot of money until one day, the share turned around on them into a severe loss?

Too many people keep thinking that their winning shares will keep on winning forever and never knew when to take profit… until the shares crashed on them! The problem is again that telling when a share is losing upward momentum is extremely difficult.

4. Don't know how to construct a proper portfolio…

Do you know that many shares actually move up and down together no matter what? Do you know that there are shares that totally move opposite to each other? Do you know that many shares actually move exactly opposite to the way the market is moving? Do you know that there are shares that do not ever move? Do you know that there are shares that are on the verge of getting delisted?

If you do not know the above, how would you ever be able to intelligently put different shares together so that you can make money? What if you put a share together with a share that moves exactly opposite to it? Would you ever make money?

That is why a lot of people are turning to trading a much more reliable and much more stable instrument; Market Index or Market Index ETF.

Way to Deal With Equity & Trading

Preparation for equity trading

A farmer in remote Bihar borrows heavily from his zamindar to pay the dowry for marrying off his 11-year-old daughter (an extreme form of debt that we know will turn the farmer into a bonded labourer forever).

A newly married yuppie buys a car, TV, fridge on his credit card?(another form of debt that the yuppie hopes to repay with his zooming salaries).

In these instances we see that ?debt? has been incurred to spend beyond one?s current means. We learnt last time that typically whatever we earn either goes into buying food, clothes, or assets like a TV, car, etc. Or we save with the intention to use our savings during our retirement or buy a house, etc. In other words, we spend our earnings today or save it to spend it later. ?Debt? brings in a third element?while we postpone consumption when we save, we spend future savings when we borrow! In simpler terms, ?savings? and ?debt? are like day & night?they can never exist together unless it is twilight. Take the case of Nagesh, who we met up with last time. Nagesh is a very practical person who has learnt from the tough times in his life. Nagesh, just like any other human being, has dreams of buying a car, a big house for his family, but realises that he will only be able to get there in stages as his current earning capacity is too limited. He has been keeping his desires in check while continuing to save regularly and investing a part of it in shares of good companies. Nagesh bought a car last month by selling part of his holding in Zee Telefilms (about 100 shares @ Rs3500 that he had bought over a year back @ Rs100).

Manish has been Nagesh?s colleague for the last four years. Manish believes in living life king size. In his very first year he exceeded the credit limit on his credit card. He has been paying through his nose, shelling out interest at 3% per month on his credit card outstandings. Two years back, he availed of a car loan to buy a Maruti 800, at a monthly installment of Rs8000 when his post-tax salary was just Rs14,000! Last year, envious of Nagesh?s newfound wealth in shares, he decided to dabble in shares too. His broker recommended Blue Information Technologies Ltd. as a hot tip that would double in 3 months? time! Full of fervour, without even checking the background of the firm, Nagesh pledged his wife?s gold and borrowed to buy this stock at Rs150. A week later, he discovered that the stock had fallen 35% from his purchase price. When he called up his broker, he was aghast to find out that the stock had been suspended. His interest meter was ticking on the money he had borrowed while his principal was down the tube. Talk of the power of compounding!

Moral: Never stretch borrowings to invest in the stock market. Shares are long-term investments that cannot be matched with short-term borrowings. Ideally, one should repay all borrowings and then invest the surplus in equities. So, when we are debt free, we are ready to invest in equities! By the way, one is never too old or young to invest as long as one understands the investment one makes.

OK, we have understood that in the long run equities offer the highest returns. We have also learnt that one can invest in equities any time provided one has surpluses after repaying debt and meeting one?s expenditure! But how much do we invest?

How much depends on two criteria. One, the risk profile of the investor and two, the liquidity requirements of the investor! Now that we know Nagesh, his father and friend Manish well, let us understand this better through their actions.

Risk profile! Yes, let?s face it. No equity investments are free of risk. There is no such thing as a free lunch, mind you! There are a whole basket of risks to contend with and we will understand all of them very soon. For now, we need to appreciate that there are risks of losing. Looking at our three personalities, we can straight away rule out Manish. He can?t afford to take any risks as he is buried deep in debt and can?t afford to lose a penny! Nagesh on the other hand is just 35 years old and has a long bright career ahead of him, so he can afford to take greater exposure in equities and in slightly risky shares too (for instance, some stocks from our ?Emerging Star?, ?Ugly Duckling? and ?Vulture?s Pick? categories). Nagesh?s father, on the other hand, has retired and has no source of income other than the savings he has amassed. So he will be able to afford very little risk. Hence, he should be looking at stocks in our ?Evergreen? or ?Apple Green? categories to choose his investments (which is why, if you remember, Nagesh had suggested HLL to his father).

Let us now move on to liquidity. Liquidity requirements signify the need of cash to meet one?s payment obligations (and don?t have anything to do with human beings? fluid intake). Manish needs all the money he can get as he has to meet so many of his loan obligations. Nagesh on the other hand has an idea of his monthly expenses so he has a better fix on his monthly cash requirements. He also needs to maintain a certain amount of cash in liquid savings (savings bank deposit, etc.) just in case there are some unforeseen medical expenses to meet or an unplanned visit to his father?s place. Beyond these requirements, he can look at investing in equities. Nagesh?s father, on the other hand, has to meet his entire expenses from his savings and would have large requirements for immediate cash. Hence, he can allocate a smaller portion of his savings to invest in equities.

Judging the actions of the small world of people we know, we have realised that risk profiles vary with age, current financial position, even one?s own personality. Liquidity requirements too depend on similar factors. These two criteria will be different for different people, but one should not lose sight of one?s risk profile and liquidity requirement while investing in equities.

Way of making equity as your own

what we now need to figure out is how to evaluate which company to buy. I?m afraid this is where all those fancy sounding valuation tools come in? PE, RONW, ROCE, EVA, etc. Hey, hang on, it?s not as bad as it sounds. Stick around and we?ll demystify all the above in a jiffy.

But before you get into the complexities of the various valuations tools you can use and how you calculate them, we must table a fundamental principle:

?Investing in equities is akin to owning a business.?

Let?s now explore the full ramifications of this principle.

When you put your money in a bank deposit, you take a risk (albeit small, depending on which bank). In return, you get paid a small interest.

The bank takes on a higher degree of risk and lends that money at a higher interest rate to some businessman, or to a credit card holder who wants to buy a diamond ring for his wife. The bank pays your interest out of the money he earns from the businessman. Or the doting husband.

Whereas, when you buy shares in a company, you are not lending money to the company. By providing capital for the company, which is represented by an equity share, you are participating in the ownership of the company. Clearly, your risk is much greater in this case. Because, in this case, you are entrusting the company with the job of managing risk for you.

Relatively, the risk in lending to a bank is limited. For one, most of our neighbourhood banks are nationalised. So bank deposits are perceived to be backed by the government. There is little soul searching to be done as to which bank to choose. Even in doing so, the highest priority is accorded to a Nationalised Bank purely on the safety parameter. Obviously, when you invest in equities, even this notional sense of security, of a government standing guard over your money, isn?t available to you.

What kind of business would you like to enter?

Let?s look at this another way now. Let?s assume you want to invest your money into a business. How will you decide what kind of business to enter?

For starters, it should display the potential to earn you a return in excess of what the prevailing rate of bank interest is, right? Now you need to ask yourself what would be the essential factors in determining this return. And apart from the return angle, what qualitative factors should you be looking for?

In the long term, we all look for security. Business, being an entity, is also entitled to aspire for the same. The ideal business would thus have to have horizons where profits can be sustained. Like we mentioned above, there are external factors that determine the direction and growth of the activity. All this would need to be factored into a business plan that would have to sustain itself and grow over a period of years. Of course, on an ongoing basis, we would definitely have to get a feedback on the success of the business. Operations would have to be evaluated from market feedback, while the financial statements would give a view of the profitability of the concern.

The same concepts apply to stocks

Now, here?s the punch line. Everything we discussed above doesn?t apply only to running a business. The same concepts apply, even if you just own shares in the company.

We all know of a document called an annual report. This document is the most basic source for information available on the company?s operations. In the annual reports, the directors dwell, at times in length, explaining the nature of operations and the external environment surrounding the business and how it affected the company during the year.

If you take the additional effort of finding out the positioning of the company?s products in the marketplace, it would give a fair idea of the company?s reputation in the field it operates. All this with the objective of figuring out how stable the company?s operation is.

The company?s progress can be tracked periodically over close intervals of 3 months. This is through quarterly financial statements, the publication of which has been made mandatory by the regulatory authorities.

Next comes the question of management issues. The common question that pops up in this context is: ?How do I externally control the business if I do not have a say in the management??.

Ok, let?s assume that you are now running the business you chose. Can you, a single individual, handle all functions of the company? For a while, maybe. But once growth sets in, it would be humanly impossible to manage all the functions of an economic activity, viz. marketing, finance, procurement, etc. That?s when your business will need to morph from outfit to organisation status. Wherein the various functions are distributed across individuals, and finally the same is translated into a unified activity.

Similarly, as a shareholder, you end up delegating authority to others to run the organisation you have a stake in. Imagine Mr Narayana Murthy (Infosys), Mr Dadiseth (HLL) and Mr Anji Reddy (Dr Reddy?s) reporting to you. That?s exactly how the cookie crumbles.

The company whose equity base you have participated in is answerable. To you, as well as other shareholders of the company. Thus, while you as a joint owner have delegated the operations of the company to the professional managers and the employees, the management in turn is responsible to its shareholders. The management communicates through the balance sheet and the AGM, where shareholders voice their opinion on the performance of the company.

Infact, shareholders can actually participate in constructive criticism of the operation of the company.

Equity is enigma for most of people

If one were to conduct a survey to determine how people saved for their retirement, one would typically get the following responses...

?I put my money in NSC, post office schemes; they double in seven years!? (By the way, HLL in the last seven years is up seven times!!)

?I am too lazy, I leave my money in term deposits with the bank!? (Certain to retire as a pauper!)

?I am clever, I keep deposits with finance companies and co-operative banks. I make upwards of 20%.? (He forgot to mention that a few of them are like CRB! Forget the returns you will not even get your principal!!)

A very rare response would be: ?I invest in equities. I bought Infosys @ Rs500, Zee Telefilms @ Rs220?? (Anybody cares to do the sums for him?!)

Equities, or shares as they are popularly known, have been an enigma for most people. A majority of the middle class in India considers it akin to gambling. A majority of the rest is fascinated by the volatility and the short-term money-making opportunities and misunderstand equities to be a ?get rich quick? scheme. There are very few people who understand that equities offer the highest returns in the long run, adjusted for inflation or even otherwise. Take the case of Nagesh...

Nagesh has had a very conservative upbringing. However, he moved out of his home to pursue his higher studies and his eyes opened! He has been working with a leading MNC as a marketing manager. He has been wisely investing in shares for the last five years, relying on his broker?s advice after doing his own homework. On the other hand, his father worked all his life in a PSU and put all his savings in NSC and Life Insurance. He has retired today and has just realised that all his lifetime savings cannot help him lead a comfortable retired life. Nagesh is now trying to help his father out...

Nagesh: Appa, even now it is not too late. You must invest a portion of your savings in equity. You are getting disheartened because you want to live off the meager interest earnings on your savings. If you put a portion of the money in, say HLL, your money will double in 3 years, quadruple in 5 years!! Appa, equities have the ?power of compounding that is unmatched?.

Appa: Equity is very volatile. After you told me last time, I have been tracking the Sensex on Star News. It goes up two days then there is some political uncertainty and it falls. Sometimes it falls without any reason or otherwise goes up 15% in four days. I cannot handle it. At least here, my principal is safe and I get a fixed return.

Nagesh, if you use the same Sensex as a benchmark, then the index was 1220 in September 1990 and currently trades at 4800 in September 1999, up four times in 9 years! Even if you had put in money at the height of the market frenzy in 1992, you would have still made money. The market benchmark is just an indication; the concept is to invest in specific good companies. Think Company, Appa, and don?t let the short-term market volatility scare you! In September 1990, HLL was trading at Rs115, while it trades at Rs2500 levels now! 22 times in 9 years!!

Appa: Even then, why put my savings in risky equities?

Nagesh: An equally important thing to understand is: ?Why does one save?? One saves because the productive span for any human being is a small portion of one?s entire life. I may live for 80 years but I can only work between the ages of 24 and 60. Hence, it becomes important during our productive lives to earn surpluses and save them for the period when we can?t be productive and earn. Having said that, Appa, you would also recognise that it is important to retain the purchasing power of our savings. In other words, we all know that we used to purchase grains at Rs2 per kg 5 years back, while we pay Rs10 per kg for the same now. The price will keep on increasing as the population living off a fixed area of land increases. Hence, it is also important that whatever we save now at least fetches us an equal quantity when we retire...have I lost you?

Appa: No, I was just thinking. You are right. I deposited Rs10,000 seven years back in NSC and I just got Rs20,000 now. Seven years back, I used to get vegetables for Rs25 and it used to last for a whole week and then we were four of us. Today, I buy vegetables for Rs100 and it barely lasts for a week though there are just the two of us!

Nagesh: Exactly. That?s why people used to buy gold and land to protect their savings from inflation. However, those were the days when communities were small and agriculture was the only activity. As population grew, needs grew and there was a compelling need to improve efficiency. Hence, factories came up to exploit economies of scale. To cut a long story short, investment in productive assets is the best way of preserving savings and creating wealth. Equity is the most productive asset.

Appa: What is the connection?

Nagesh: Equities or shares represent ownership of businesses that own productive assets like plant & machinery and intellectual capital to produce more goods. On the other hand, when you put money in deposits or lend directly, the money ultimately finds its way to purchase productive assets as companies borrow to fund their business! Just like we save to take care of our retirement, productive assets are created to meet greater demand for goods in the future, because of increasing population and its ever increasing needs. Who ever borrows to fund the asset hopes to make more money on his equity than what he pays for on his borrowings. So, savings in deposits or any other fixed income instrument is sub-optimal! Hence, intuitively too, equity has to make lots more money in the long run than any deposits, because there will be no borrowings if the equity owner realises lesser money!!

Appa: All that is fine. But some companies don?t do well?

Nagesh: Obviously they are risky as certain businesses find the going tough. But collectively, they are not only very essential but very profitable. Hence, the returns on equity are always higher to compensate for the additional risk. Risk is a part and parcel of life. There are so many bus, rail and two wheeler accidents, but that doesn?t mean that we prefer to walk everywhere. Even if we decide to walk, we run the risk of being hit by another vehicle! One should only take care to invest in the right businesses, which have assets capable of earning good returns. Hence, these will have to be businesses that have a bright future. Nobody thinks of buying a bullock cart now!...

Why Welcome Stock Market Crash

Why should we welcome market crash?

Economics assumes that human beings are rational. But human reactions to stock market movements are utterly irrational. When markets rise, everybody cheers. When markets crash — as has been the case for two weeks — everybody moans.

A hunt for culprits often ensues. No such hunt is ever announced when the markets are rising. In past scams, when manipulators like Harshad Mehta and Ketan Parekh sent share prices through the roof, they were hailed as geniuses and became celebrities. Some market experts cautioned that the markets had shot up to insane levels. But this plea for sanity was widely dismissed as stupid, and ordinary housewives and college kids bought frenziedly in the belief that share prices could only go up.

However, when the markets inevitably fell, the hero-manipulators were suddenly denounced as villains. They were accused of the dreadful sin of rigging markets, and thus misleading small investors. Ironically, no investor complained as long as the manipulators rigged prices upward.

The complaints began only when the manipulators were unable to rig markets any more, and prices crashed. Truth be told, the real public complaint against Harshad Mehta and Ketan Parekh was not that they manipulated prices upward, but that they failed to manipulate it upward forever. For that, this could not be forgiven.

The underlying assumption of small investors is that share prices should rise forever. Now, if the price of rice, sugar or petrol rose forever, the small investor would complain bitterly. Yet he seems to think it perfectly fair that share prices should go up forever, and very unfair if share prices crash. How greedy and hypocritical humans are!

Consider the current moaning over the stock market crash. The fall of the sensex from 12,624 to 10,400 represents a sharp 20% decline within two weeks. But few people seem to remember that sensex was at just 9,390 at the start of 2006. So, even after the crash last Monday, the sensex was still up 10.5% since the start of the year. No bonds or fixed deposits could give such a high return within five months. This point escapes the CPI(M), which sees the market crash as reason enough to stop pension funds from investing in equities.

Remember that the sensex was around 5,000 during the last general election in 2004. It then slumped to 4,282 on panic selling. From that low point, the sensex tripled in two years to 12,624 on May 10, 2006. That has been a bonanza, fuelling speculative frenzy. So, the 20% correction is to be welcomed. Stock market valuations remained stretched by historical standards, though not by developed market standards. If the sensex falls all the way to the 9.390 level at the start of the year, the market would still have yielded enormous gains to investors since 2004.

The long run prospects of the economy are excellent. So, some investor exuberance is understandable. Yet such exuberance needs to be tempered by sharp corrections from time to time. This sends the valuable message that exuberance is no substitute for judgement.

Human beings quote many aphorisms that they seem to forget when they enter the stock market. All that glitters is not gold. Don’t be penny-wise and pound-foolish. Look before you leap. There is no such thing as a free lunch. Better safe than sorry. A fool and his money are soon parted.

All who invest in markets must remember these aphorisms. Risk and reward go together. If there were no risk, there would be no market reward. Share prices represent subjective judgements of the day, so bouts of euphoria and depression will necessarily drive share prices up and down.

Marxists find this terrible. They deplore “casino capitalism”, and lambaste foreign institutional investors (FIIs). Marxists cannot bear to acknowledge that FII pressure has sparked capital market reforms that have made Indian markets among the best in the developing world, far ahead of China or South Korea. FIIs were earlier reluctant to invest in a market where one-tenth of all paper share certificates were forged, settlements were delayed for months on end, and thin turnover facilitated rigging by big brokers (and by companies before every public issue).

But after capital market reforms, FIIs have flooded in. They have invested in all emerging markets, but disproportionately more in India. They have favoured companies with good governance and transparent accounting, rewarding these traits for the first time (earlier, the ability to rig markets was rewarded most). Stock market reforms and FII inflows have hugely improved the ability of Indian companies to raise equity finance for expansion. This has reduced their dependence on debt, thus reducing interest rates as well as over-leveraged balance sheets.

The CPI(M) can see none of this. It believes only that foreign devils are making millions and paying no tax. So it demands a capital gains tax and an end to the Mauritius treaty that has been used as a tax loophole by FIIs. The CPI(M) seems unaware that Mr P Chidambaram is in fact taxing dividends and capital gains in ways that have made the Mauritius loophole irrelevant, and so ensured that FIIs are indeed taxed.
Dividend tax is now paid by companies rather than recipients; so FIIs cannot avoid it. A transactions turnover tax is being collected in lieu of capital gains tax. This brings all investors including FIIs into the tax net, and the Mauritius route has been rendered irrelevant. Domestic crooks used to avoid capital gains tax through benami small accounts, but now cannot escape the transactions tax. Thus Mr Chidambaram has ended tax avoidance and evasion, brought FIIs and Indian crooks into the tax net indirectly, and created a level tax playing field between domestic and foreign investors. That is a considerable achievement.

So, our problem today is not untaxed FIIs. It is the notion that markets should rise forever. They will not, and should not. We need sharp dips, not Marxist controls, to remind investors from time to time that stock markets have risks as well as rewards.

Nifty, Sensex Based Index Based Circuit,

The India Growth Story
India has come out with robust growth of around 9%, is it because of reforms? Or global payer? Or is it our loose fiscal and monetary policy? What are the fundamental changes which are responsible for India’s rapid growth?
Economists, as usual, seek practical and verifiable answers; and we shun cultural and sociological reasoning whenever possible. But I think it is a more powerful force which has been guiding all the recent changes in India, the risk taking ability of youth.
Risk is indeed an economic concept – and an often measured one. It is usually applied to an individual’s risk aversion; a company or a country’s risk-premium; and generally for all significant financial transactions. What I’m trying to refer to, however, is a far broader change in the way Indians perceive risk, and how we respond to it.
Firstly – in what is now a common refrain – the private sector has completely transformed. Not only the private sector, the public sector enterprises have also drastically changed the way they work. Managers are beginning to accept the idea of relinquishing control, and are looking for creative sources of capital. Companies are getting aggressive with their expansion plans – sometimes too aggressive. Some corporates have even picked up a taste for overseas acquisitions(TATA`s). There is an unmeasured commonality to all of this. Marketing gurus would call it “renewed self confidence”; cynics would call it dumb luck; I call it ‘taking risks’.
Now the risk tolerance is not confined to the merchants of wealth alone – it is gradually beginning to infect the government too. Begrudgingly, it is either internally corporatizing; listening to outside voices and sharing responsibility; or in some cases, completely moving out of the way in areas where it knows it is underperforming: infrastructure, finance, education, health. Its manner of doing so is bumbling and idiotic (for instance the recent SEZ debacle), but the change in its intention is mostly clear. Of course, our politicians have fickle wills so that could quickly change – were it not for the third, and most important observation.
Indian families and individuals, are also becoming bigger risk takers, now they prefer investing in stock markets rather than putting their money in banks & post office deposits. I am a tail-ender in the great reverse migration – expats returning to India to take advantage of the new opportunities that are coming available. Two or three years ago, that was impossible. Today, for young people, the potential long-term rewards of returning to fast-growing India could be far greater than those from working on an overstretched Wall Street.
More fascinating than even the NRIs’ new risky behavior are the choices being made by the people I know in India. With more careers for their kids to choose from, parents from all income strata are seeing the value of a good and practical education and bypassing the government when necessary. Other examples abound: people are travelling a lot more for work, women are gradually entering the labor force.
The introduction of the culture of risk at this grassroot level ensures that all the other pieces move – that the government and companies are given the message to change. This new inflexion point in our behavior is at least partially the result of the burgeoning young population. And no one can really doubt that it is the old guard who are reluctant to admit that the doctrine of governing a society through babudom has lost.
Also with increase in the income levels due to the outsourcing industry the living standard & consumption is incresing rapidly which indeed is increasing the growth rate. So we can conclude that the Indian youth is the fountainhead of this growth and we need the participation of the youth to sustain this growth.

Unraveling The Stock Market Puzzle

I have been hunting around for the best places to invest my money for some years now. You see, I'm not an impulsive person. If anything, I am a little bit obsessive compulsive. I'm moreover a PhD. level student of mathematics. As such, I am interested in the mathematical reasons that underlie investment decisions. I'm also as interested in the mathematical basis behind stock market trends as I am with actually making money from them. Don't get me wrong, once I figure out what the best investments actually are, even if that means high risk stocks and shares, I will go out and make a killing. So it's not that I'm not that interested in making money, it is just that I have this innate desire to discover the underpinnings of the financial products that I am looking at, before I choose to invest in them. It's just the way my mind functions.

For sure, there is no one best spot to invest forever, however there are several reasonable ones. The finest place to invest your money depends on what you're aiming to do. You may perhaps invest in stocks for a variety of assorted reasons. And, if you do happen to get a hot tip, it might even be very sensible to invest in stocks. Though, I ought to point out that if you received some of those email hot tips that appear in a spam-like way in your inbox, just ignore them. The people who've sent them have only bought that stock themselves and are trying to get others to buy it too, after them, so that the share price rises and they can make a quick buck.

Anyway, what few people understand regarding the stock market is that the win-it-all or lose-it-all phenomenon is much rarer than the media makes it seem. Most people who invest in the stock market actually are fairly careful. They've usually placed a lot of cash into a stock, and are in it for the long term. They don't want to be reckless with their futures, so they make conservative investments.

My investigation of where are best places to invest demands me to come up with a definition of what "best" actually means. Since I'm a mathematician, I undertake to define it mathematically. The top spots to invest must possess a mishmash of characteristics. They must provide an investment opportunity that is money-making but, at the same time, as safe as possible. Usually, these attributes work in opposition.

For example, day trading on the stock market is extremely profitable if done right, but also really dangerous. Investing in land, on the other hand, may perhaps take a great deal longer to turn a profit however it tends to be much less risky. Hence, the overall best places to invest are a bit difficult to find. It is hard to find something that combines all of the favorable ingredients equally.

The most important thing to figure out is that the best spots to invest actually change from day to day. One week, the securities market may be in top condition. The next week, it might be the real-estate market. The finest places to invest money in the short-term change weekly, sometimes daily. And even the value of long term investments is subject to frequent change. It has to be said that if you want to invest your money wisely, you really need to do your homework.

Which Stock to Buy?

Before we need to know which stock to buy, we need to know the fundamental of an individual companies and how they perform in terms of revenue, profits, assets, and borrowing.

It is important to know about all these as the company's share price is ultimately the market's reflection of how valuable that company is. If a company is making profits and these profits are growing year on year, with borrowings contained to low levels and revenues also growing, then is an ideal company to invest in, provided we expect the company to continue growing at such levels.

Well, by looking at the fundamental of an individual company, a lot people fails to adopt either investing in a fundamentally strong company but doing so in a bad overall market or investing in a great company in a bad market sector.

By researching of all the information, you can use the method that I find which can give you a good stock selection on any stock and industry you like, but if you want a top-performing stock and the best chance of the stock going up you can screen for it.

Personally, I like to use MSN Money's screener. Only change the boxes that I refer and leave the rest the way they are.

1. First of all, we need to pick an industry that is currently hot. If you do not know any or do not want to do the research, just select "all industries".

To pick a 'hot' industry. Log in to www.prophet.net. At the top bar, click on 'EXPLORE' and select the sub category 'industry ranking'. Pick only the top 1-20 industries I recommend a 1 year time frame.,

2. The market capitalization can be 'small', 'medium', or 'large' which depends on what the market is favoring at the moment. I prefer to use 'small' to 'medium' but this also increases volatility.

3. 'Net Profit Margin' selected 'as high as possible'

4. '12 month relative strength' should be 'as high as possible'

5. 'Debt to Equity Ratio' should be 'as low as possible'

6. 'Revenue Growth Year vs. Year' should be 'as high as possible'

7. Optional: 'Average Daily Volume' over last 2 weeks should be 'as high as possible'

Any of the other features that I did not mention should NOT be used. You will now have a list of potential candidates to watch more closely and possibly trade.

Pick a stock that have 25% or more in the growth column and over 80 in the relative strength column.

This is the best step-by-step way so far I discover of choosing which stock to buy by using the available FREE tool in the Internet easily.

Successful Stock Trading Tips

Trading stocks online isn’t for the faint at heart, especially when one good market day can result in an unexpected crash the next. The vast number of stock trading platforms from some of the biggest names in finance offer stock solutions to experts right on down to a day trader or novice. Before you begin investing your life savings into an unpredictable market economy, keep these stock trading tips in mind.

• Pay attention to industry trends-If an up and coming website or company gets extensive media attention or business, consider purchasing stock from them.

• Don’t be afraid to invest for fear of loss…the quicker you buy stocks, the faster you can make a profit.

• Know your trade options: some services allow you to use your mobile phone for trades, as well as faxing or over-the-phone.

• If you cancel a trade, make sure it’s complete before making another trade. Simply because you receive a cancellation receipt, it may have already gone through. Know who to contact for trading.

• Don’t trade with a company you don’t know anything about. If possible, look into their investment history, so you know you’re trading reputable stock.

• Join an online stock trading service that provides up-to-date market forecasts and comprehensive market overview features. When trading, you need access to instant stats.

6Star Reviews cites online stock trading services TD Ameritrade and Zecco as great choices in personal investment that incorporate the latter. Zecco offers great rates and 10 free trades a month if stock brokers meet the minimum balance requirement.

Options trades are $4.50 a trade, which is a low rate that new traders will surely appreciate. Similarly, TD Ameritrade runs specials such as 30-day commission-free trades and a $100 bonus on current new account openings. Before signing up with a particular company, consider your level of trading expertise, as well as your financial resources, as some sites offer lower rates than others.

Tips For Choosing The Best Stockbroker

Choosing a stock broker can be an annoying task. While they all seem the same, there are differences in commission rates that you should be aware of. Depending on the type of investor you are, you may end up paying too many fees depending on the broker you choose. Here are some tips for choosing the best stock broker, depending on the type of investor you are.

1. Casual investor. If you are casual investor with a moderate amount of capital ($200k or less), then chances are most of your money is in ETFs or index funds. In this case, a discount broker is fine. You will rarely make many trades and you do not need much advice since you are just investing in standard, safe investments. A brokerage like TD Ameritrade is good for you since they have $9.99 trades.

2. Frequent trader. If you are a chartist, then finding a broker with low fees is a very high priority. Most discount brokers will give discounts to people who trade frequently. One example is E-trade. Another site like Interactive Brokers might be good for you too. Be careful with this sort of investment style, as fees may gobble up all of your profits!

3. High net worth investor. If you have $1 million+ in the stock market, then chances are you can get a discount on how much you pay per trade. This is especially the case with the established, big firms such as Fidelity. Fidelity offers $8 trades to those with $1 million+ in their Fidelity accounts.

4. Short seller. If you plan on selling many stocks short, you need a broker that has access to these shares so that you can short them. Most of these brokerages will be able to short mid and large caps for you, but many do not have access to a large percentage of the small cap stocks. Interactive Brokers might be the best broker for short sellers.

How to Use Stock Screeners for Stock Market Success

Stock screeners allow traders to screen the entire market for stocks that conform to certain criteria to meet the needs of the trader. They are indispensable for modern stock traders, and can be either web-based or stand-alone tools. One of the benefits of web-based screeners is that upgrades tend to be automatically available.

If you consider how stock screening was carried out some years ago before the advent of the modern online stock screener, you will begin to understand the benefits that these systems have provided in enabling trading opportunities to be identified in seconds. Think of pouring over the stock exchange sections of newspapers, of trying to make sense of radio, real-time stock quote machines and of charting graphs by hand.

These manual procedures allowed very few stocks to be examined in a given timeframe, and you would be lucky to spot any stock to meet your criteria, let alone compile a useful Watch List. By allowing today’s traders to set criteria and automatically screen out all companies that do meet these criteria, today’s stock screeners can examine tens of thousands of stocks in a very short time. Results are virtually instant.

The filtering criteria used can detect stocks suitable for growth, for short or long-term earnings, or whose values will increase in a relatively short period of time. Using technical criteria to spot key reversals and breakouts can boost your stock earnings several-fold. If a trader feels a specific criterion to be important, then the stock screener will find a list of stocks that fit, and if several criteria are used in the same search, stocks with very specific properties can be identified.

There are two specific types of screening that can be carried out: by use of either fundamental or of technical criteria, and each can be made available either as end of day or real time intraday screening. Most normal stock screeners utilize fundamental criteria, although elements of technical analysis can also be included to fine tune the screening.

So how should these screeners be used? Let’s have a look at the technical criteria that can be used in filtering the stocks that you want on your Watch List. You could start by trying to find trending stocks, or those that will break out above or through resistance levels. The criteria to use in your filtration in order to screen for these could include:


* Stock trending up

* Rising on unusual volume

* Price crossed above resistance line

* Price has touched support line (It is likely to climb again)

* Price has reached new highs


Many of the fundamental screeners can be obtained free although if you want a real-time technical screener then you will likely have to pay a nominal fee. However, although it is normal for stock screeners to be predominantly one or the other, there are screeners available that can be used with both fundamental and technical criteria. This expands the type of screening available to you, and you should never buy a stock unless both the fundamental and technical criteria are both positive for the stock. You will achieve better results if you screen the stocks for both types of criteria, and for that you will need either a combined stock screener, or one of each type.

Stock screeners are essential for screening in today’s markets because most professionals actually underperform the market due to human influences. A machine-based model can filter out human weakness, such as believing press forecasts, and produce better results assuming that the criteria, or variables uses, are those that affect the direction of stock prices in the future.

Given that is so, stock screeners are a must for the modern investment professional and novice alike.

Now it is time to try stock screeners in action! Start from Market In&Out screening service which provides most powerful stock screening tools. No matter if you are novice in stock market or a professional trader the provided stock screeners will be extremely helpful in optimizing your stock trades!

4 Deadly Reasons Why Beginners Fail In The Share Market

1. Don't know how to choose the right share to buy
2. Don't know when to bail out of a losing share
3. Don't know when to take profit on a winning share
4. Don't Know how to construct a proper portfolio

1. Don't know how to choose the right share to buy…

How does beginners choose what shares to buy amongst thousands of shares? You might choose to listen to your share broker, or listen to your "experienced" relative, or listen to free "share pick" on the internet…etc… and you will end up losing money.

Because individual share behavior is very complex, only the most professional full time traders have the right technology to make proper share pick decisions. Such experience and technology is simply not available especially to the beginner trader.

2. Don't know when to bail out of a losing share…

The deadliest killer of beginner traders is not knowing when to get out of a losing share. Too many traders hold on to their shares until it is worth nothing. Most beginners will hold on hoping that the share will stage a rebound because you simply do not have the technology to tell if a share will ever rebound! The only way for a beginner to prevent losing everything is for an expert to tell them when to get out of a trade.

3. Don't know when to take profit on a winning share…

How many times have you heard stories around you of people who hold on to shares which made them a lot of money until one day, the share turned around on them into a severe loss?

Too many people keep thinking that their winning shares will keep on winning forever and never knew when to take profit… until the shares crashed on them! The problem is again that telling when a share is losing upward momentum is extremely difficult.

4. Don't know how to construct a proper portfolio…

Do you know that many shares actually move up and down together no matter what? Do you know that there are shares that totally move opposite to each other? Do you know that many shares actually move exactly opposite to the way the market is moving? Do you know that there are shares that do not ever move? Do you know that there are shares that are on the verge of getting delisted?

If you do not know the above, how would you ever be able to intelligently put different shares together so that you can make money? What if you put a share together with a share that moves exactly opposite to it? Would you ever make money?

That is why a lot of people are turning to trading a much more reliable and much more stable instrument; Market Index or Market Index ETF.

Stock Trading - How To Pick Stocks For Stock Trading

I have found that the best stocks for stock trading and day trading are the stocks that make up the S&P 500. The reason for this is that the large Mutual Funds and large Institutional Buyers concentrate on these stocks in their never ending quest to beat the S&P 500. These stocks generally have strong relative strength and absolute performance to the S&P 500 Index. Of these stocks, I like to concentrate on those that are in the Nasdaq 100 Composite Index. It is the Nasdaq stocks that I like to trade the most because of their volatility of the stocks in the Nasdaq 100, I concentrate on those stocks that I that I like to refer to as "trading where the action is" stocks. These are stocks that show tremendous volume in the number of shares being traded during the day, at least 15 million shares and preferably 20 million shares and more. My real preference is share volume of 30 million plus per day.

In addition, the stocks must have a large daily stock trading range, which is the difference between the high price and low price of that stock for the previous trading day, and a lot of volatility. I look for a trading range of at least $2.00 per share, but I really prefer those that are more volatile and have a daily travelling range of $3.00 to $6.00 and more.

The reason for this is that I trade both sides of the market, both the long side and the short side on an intra-day basis. I have no interest in whether the stock closed in positive, or negative territory the previous day, just as long as the volume and price action are there.

All I want is the price action, high volume and the volatility. If I have these three ingredients, I know that the major players are very active in that stock and they are either increasing, or decreasing their weighting in that stock. Adding to and contributing to the price and volume action are what I call the "accelerators", which are the momentum players, the program traders and the hedge funds who are trying to jump in ahead of the mutual funds and front run the stock, either up, or down. This is when the action really heats up and you will see "climatic volume" where each stock trade is occurring in less than a second. I have seen this many times every day. It happens all of the time.

One thing that may not be apparent to you on the surface is that what I have done when I pick stocks for stock trading is that I have used the major players as my research department. The money flow is very visible because most institutions are on the same page in terms of what they are buying and selling. This shows up in the price action, the volatility, and volume for the stocks in play. It is awfully hard for a herd of elephants to hide their foot prints in the sand.

Now with a potential list of stocks to trade. I then load those stocks into my "stock trading" watch list . In addition to that watch list I have another watch list that contains every stock in the Nasdaq 100. When the market opens I spend the first 5 minutes or so, observing the volume, price action, and direction of the stocks in both watch lists.

I am looking for certain patterns to develop and if I see a pattern that I like to day trade, I will pull the trigger and take the trade, either on the long side or the short side based on what the stock (price action and volume) tell me, what I see the market makers doing on the Level II screen, and provided the stock is trading in line with the chart of the Nasdaq 100.

I always have a fairly tight protective stop in place to protect me in case I am wrong and took the trade too soon. I may attempt that trade 2 or 3 times before I get the right entry, each time taking a small lose. But when I get the right entry, there is a lot of money to be made, especially when you are in the right stock.

One of the things I like to do is to stay with the same stock, as long as it satisfies my stock trading requirements. I may trade the same stock all week as along as it is performing for me and I am making good profitable trades with it. One of the benefits in doing this is that you really get to know the stock well, and how it trades.

To recap, in my opinion the best stocks for stock trading are those stocks with very high velocity and high volume, high volatility and a good intra-day travelling range. When you have these characteristics, you know the large institutions and the "accelerators" are involved in the stock.

For stock trading, you will need a direct access day trading account from a stock trading broker that offers direct access stock trading software. This is an absolute must have for day trading. The software will have Level II, charts, technical indicators, etc. Direct access means that your buy and sell orders are sent directly to the market by you without using a middle man to place the orders for you..

The first thing you need to do before you even attempt stock trading, and this is even if you do have some experience, is to take a good day trading course so that you really understand how the business of stock trading works, what patterns to look for, how the markets work and how everything fits together. It will be the best investment you ever make. If you don't eductae yourself - you have better than a 90% chance of failing.

* the words stock trading and day trading are interchangeable.

Good luck and good trading,

Secrets of Online Trading and Stock Market Hours

Most people would liken stock trading with gambling. However, in truth, the two couldn't be more different. In fact, stock trading isn't simply buying and shares as well. Developing a good trading strategy is the key to making it in the stock market. A stock market simulator, is an online game application that duplicates aspects of real-life stock markets, from trading strategies and information, down to the varying stock market hours of the different stock exchanges. Read on and know more about how you can learn and practice stock trading with an online stock game simulator.

Two types of online stock game applications are available online for you to practice stock trading skills and strategies. Naturally, no real money is involved; play money is used, so you can practice stock trading without the financial risk. The two types of stock market simulators are: Financial and fantasy stock game simulators.

If you want to practice stock trading through a fictional portfolio based on real stock entries, scenarios and stock market hours, then the financial stock market simulator is the best one for you. Because this type of stock market simulator downloads and processes real and actual stock trading numbers and information, most online trading websites that offer these free stock games use a delayed data feed, that sends the information well after the end of the stock market hours. This prevents any abuse of the stock market simulator and the system by unscrupulous traders who want an edge before the start of the stock market hours of the next day.

Most online simulator systems ensure that the stock market information and data may not be used to do actual stock trading before, during and after stock market hours using their information. Safe, reliable and enjoyable, a financial stock market online simulator is a great way for you to practice actual stock trading scenarios and gain experience and a working strategy before you move up to the real thing.

Another type of simulator is the fantasy simulator. This type lets you practice stock trading through thoroughly hypothetical yet amusing settings. While it retains many essential features of the stock market like premium stock picks and options, trading tickers, regular stock market hours, other traders, among others. But unlike the financial simulator application, fantasy stock market simulators feature imaginary stocks that, while representing real items, would never be actually traded in a real stock market trading setting.

Traded items in fantasy stock market simulators would include questions on how long books will last on selected bestseller lists, the box-office success of specific movies, antics of infamous celebrities, rankings and statistics of sports teams and events, and more. The value of a fantasy stock market simulator is in its application of stock market principles and how these may work given a stock trading setting.

The simulator uses the analogy to teach anyone with no background in trading understand how the stock market works. Fantasy stock market simulators use these items because they are familiar to a lot of people, thus opening opportunities for learning online stock trading to more and more people. This is one way where you get to practice stock trading techniques and strategies while having fun.

Getting the hang of how shares are bought and sold, and how other variables like stock market hours affect your investments are all part of your learning experience. Learning the ropes with a stock market simulator is one of the best ways to get you started with trading stocks.

What Really Controls the Stock Market?

What Really Controls the Stock Market?

Apart from the big financiers and institutions you will find that in reality it is “Fear and Greed” that drives the market along. Of course traders’ reactions also play a part. Here. Is an example:

You have selected your next profitable stock and have decided to buy. It looks great. It is currently priced nicely at a nice affordable $1.00 per share. Unfortunately quite a few other traders think it is great as well and the share price is starting to rise upwards.

So suddenly instead of one choice (buying) you now have several.

1. Stay with the original price and wait for the market to hopefully slow and reverse back to your price.

2. Chase the price and collect the number of shares you have already decided on previously.

3. Or chase the price but keep to your dollar limit thus buying a smaller parcel of shares.

A few traders and investors will wait for the market to recede, but they are in the minority as the majority of traders will chase the price.
The faster the share price moves away from them the more emotional the trader becomes. (Sounds familiar?)
Frightened that they might miss out they proceed to outbid the other buyers which means you have to pay more for the stock than you intended.

Although each trade made is an individual one. Counted altogether they make crowd sentiment and a crowd reaction. This is what is controlling the share market.

Remember sellers are pessimistic .This is because they believe that the share price is going to head downwards. So as to either lock in profits or stop further losses they sell.

Now the buyer is an optimist who believes that the share price is headed only one way and that is upwards.

Every single share transaction that occurs is made up one of these. Both of the traders are of the opposite opinion. Only one will be right, and only time will tell which one.

What. Affects Share Prices?

Share prices go upwards or downwards during a typical trading day.

This depends on the current emotion which is affecting that particular stock at that time. It will most likely be either Fear or Greed.

Fear is usually prevalent in one or two forms.

You have the type of fear the share price is going up and they are frightened that they will miss out on the profits. So traders will chase the price which of course only pushes the share price up further still.

Or alternatively there is the Fear that the share price will be heading downwards and they will be losing what profit they have achieved or that the value of the stock will recede to a level where they will realize a substantial loss. Therefore they panic and sell in droves which only succeed in escalating the downward trend in the share price because of the selling volume which is unleashed suddenly on the market.

Greed comes into play when the price is heading upwards. Not being content with a moderate profit of 10 - 20 % a trader will hang on and hang on hoping for larger gains. Invariably the share price will fall dramatically and as always goes down at twice as fast as it originally went up, if not faster.

Because of laziness or more likely inexperience the average trader has not employed a stop loss to protect or to lock in their profits. Because of this lack of foresight or planning this ensures disastrous consequences and so the cycle of Fear and greed continues.

As always the law of "Supply and Demand" plays an important part in the share price. If stock is scarce and hard to come by then the share price will go upwards. On the other side of the coin if more stock is available for sale than there are buyers then the share price will descend so as to attract a buyer.

Usually if a share price is tracking sideways it is because the buyers and sellers are at status quo and content with the level at which the share price is currently at. Invariably it is either good or bad news which is the catalyst which will determine which way the share price will head in the future.

How Much Research Do You Do?

I was glancing through the local newspaper this morning and came across a thought provoking article. I stated that more share traders/investors need to do more research before they buy a stock.

At least a half of all Australians now invest directly in the share market. But as to what motivates them to buy and sell is an elusive mystery. Apparently less than one half do their own research when ever they make a buying or selling decision. And only one third actually do it consistently most of the time.

Of those that do their own research the most popular method used is searching amongst the various chat rooms and forums that are available on the net.

They predominately look for comments made about the various companies in the media's eye at the moment; plus any analyst's reports and other annual reports that are also available at that time.

Three quarters admitted that "Gut Feelings" played a major part in their decision to buy and sell shares. And nearly half of those based their decisions on a "Hot Tip." Most traders/investors do realize however that they have made a decision on insufficient information.

When asked if they sought professional advice before buying shares 56% responded "Sometimes," while only 18% responded all the time. Amazingly 26% never seek professional advice at all.

The survey also showed a massive 78% never even valued a company before buying their stocks. Only 5% of the traders/investors follow the disciplined strategy of value investing.
It makes you wonder what methods the other 95 % of traders are using?

While we are on the subject of research I wondering how much research was done by the traders who sold off all their shares in the last week or so'?

With this sub prime debacle now affecting Australia, I wonder how many stocks are directly linked to the mortgage industry.

Ideally if your stop losses were activated by this correction as it started to go downhill. You would have been in the envious position of being able to buy them all back again at bargain basement prices.

You would not have to worry about any capital gains losses as they will be more that compensated for when the market resumes its way upwards again. Rest assured it will as this correction is only one of many that will occur from time to time in the years ahead.

The main thing is to be prepared for them, and of course "Do Your Research."