Word of the Day

Specialized Investment Fund (SIF)

It is an investment fund for experienced investors who can handle more risk

Trailing Returns

It measures the point-to-point annualised returns of an investment.

Example: if ABC mutual fund has given a 12% trailing return for 3 years till today (22 July), it means that the fund has given an average return of 12% every year till today.

This can be done for multiple time periods — 1/3/5/10-years.

However, trailing returns might not always be the best metric.

Looking at rolling returns alongside this will give a more accurate picture.

“Why there is two exchanges in India”

A. Exchanges are places where you can buy and sell something.

India has two operational stock exchanges: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

There were other stock exchanges in India also.

But they shut down due to operational reasons like not being able to remain technologically updated or not being able to stick to the regulatory requirements, etc.

Example: Calcutta Stock Exchange, Bangalore Stock Exchange, Madras Stock Exchange — are all stock exchanges in India that are no longer operating.

Stock exchange is like a shopping mall — a place to buy and sell.

There can be any number of stock exchanges in a country.

Right now, we have two exchanges.

Nifty Next 50

Nifty Next 50 is an index (collection) of stocks.

It consists of the 51st to 100th biggest stocks of India. The 50 biggest stocks are shown in the index Nifty 50, the 30 biggest are shown in Sensex 30.

The size of the stocks is determined by their market capitalization (m-cap).

How is the IPO price decided?

There are firms that take companies through the IPO process. They are called underwriters.

Underwriters use various methods to estimate the share price. There are a few methods like discounted cash flow method, comparing with other companies, etc.

Once they have a share price that they think is good, they have two options.

Fixed price offering: where one share price is offered to investors.

Book building offering: where they keep the price in a 20% range and let investors bid for shares.

Based on the bidding, the final price is decided.

Why do companies go for an IPO?

To get money.

IPO is a procedure in which a company sells its own shares to investors.

The money can then be used to expand the business operations, spend on R&D, pay back loans, etc.

Once the shares are sold to investors, the company itself does not get any money from the further buying and selling of the shares.

Example. XYZ Company sold 20,000 of its shares in an IPO.

Now, share market investors buy and sell these 20,000 shares among each other.

“How is the capital gains tax is calculated on the shares bought 10 years ago”

A. 10 years ago, there was no long term capital gains tax on shares.

It was introduced in the financial year (FY) 2018-19 — 10% on the gains (profit).

So if you bought a share 10 years ago, there will be no tax calculation till FY 2018-19.

Gains made after 2018-19 will be taxed at 10%.

Do note: shares are only taxed when selling. Simply holding a share does not attract any taxes.

Also, in every financial year, up to Rs 1 lakh gains from equity investment (shares and mutual funds) is tax-free.

Mutual fund performance

When you see a mutual fund’s returns, you are seeing its per annum returns.

So, if a mutual fund’s 3-year returns (3Y) is 12%, it means 12% per annum for 3 years.

In case of mutual funds (especially equity mutual funds), returns can be volatile in the short term.

This is why, usually, 1-year returns change a lot more than 3-year returns (and why 3-year returns change more than 5-year returns).

So when the markets move up, the 1-year returns move up more than the 3-year returns, and so on.

The opposite happens when the markets fall.

This is why investors should focus more on the longer-term returns — not just the last 1-year and 3-year returns.

PE ratio

PE ratio—also known as P/E ratio, P to E ratio, or simply PE.

PE ratio has become one of the most talked about measures of valuation—if a stock is fairly valued, undervalued, or overvalued.

This week, we will learn more about this ratio, what it tells us, and what it cannot tell us.

First, how is it calculated?

Price of one stock divided by the earnings-per-share of that company.

PE ratio = Current share price / earnings-per-share.

Earnings-per-share = net profit of a company / total shares.

Finance certifications

As you would imagine, there are many finance-related certifications in the world.

Many of the global-level financial certifications are also valid in India.

Example: Financial Risk Manager Certification.

People with this certification are employed in roles where they manage risks relating to liquidity, credit, and markets.

Other examples: Association of Chartered Certified Accountants (ACCA), Certified Management Accountant (CMA), Chartered Financial Planner (CFP), etc.

Some of these certifications are fairly easy and can be cleared with a short period of preparation.

Many people actually take these exams simply to gain the knowledge that is required to clear these exams — with the only intention of handling their own finances better.

Hedge Funds

 

A hedge fund is a type of institutional investor (similar to mutual funds).

Hedge funds are of many different types. Each uses different strategies to invest and generate returns for their investors. 

Regular retail investors are not allowed to invest in them due to their high-risk nature. 

Hedge funds investments are most commonly made by rich individuals and other institutions like pension funds, banks, etc. 

OPEC+

A group of the world's major oil producing countries. 

Includes Iran, Iraq, Kuwait, Saudi Arabia, Russia, etc. 

Together, these countries decide how much oil they are going to produce. This, in turn, determines the price of crude oil.

If there's a lot of oil, prices are likely to be lower, and any person is likely to pay lesser for their petrol and diesel bills. 

Opposite is also true.

“What is relation between p and sector p”

PE ratio stands for price-to-earnings ratio.

To get the PE ratio, you

-take the price of the share 
-divide it by the earnings (per share)

What this tells you is how high the price of a stock is when compared to the money it is earning.

PE ratio is used by many investors to determine if a stock is overvalued or undervalued.

But there is no 'right' level. It varies from investor to investor.

The PE ratio of companies in same industries are usually similar.

For example, companies from the infra sector will likely have similar PE ratios. Banking sector companies' PE will be similar. And so on.

This is where the concept of sector PE ratio comes in.

They calculate the PE ratio of an entire industry or sector (infra, pharma, banking, etc).

Based on that, they can look at individual stocks and decide if the PE ratio is too high or too low.

Example:

The sector PE ratio of IT stocks is 25.

So, when an investor sees an IT company stock’s PE ratio being 20, he/she might say that the stock is undervalued in comparison to the sector.

The sector PE ratio of energy stocks is 15.

So, when an investor sees an energy stock’s PE being 20, he/she might say that the stock is overvalued.

NISM

National Institute of Securities Markets.

This is an educational arm of the SEBI that conducts the NISM exams.

NISM certification is not one certification. There are many levels of NISM certifications.

NISM certification is useful in many fields.

It is most popular for becoming a registered investment advisor (RIA) — to give finance advice to people.

To become an RIA, a person would have to clear some levels of NISM certification.

It must be added here, NISM certifications can be taken by anybody, not necessarily those who want to become an advisor.

Bull Market

When stock prices are rising due to investor confidence and expectations of growth, it is called a bull market.

Opposite of this is a bear market.

In a bear market, investor confidence is down and Nifty 50 and Sensex generally fall.

Featured Question : Stock loss

 “Where does the money go when you make a loss in the stock market?”

Think of it from the perspective of buying a house.

You bought a house for Rs 50 lakh. If you sell it for Rs 40 lakh, where did the Rs 10 lakh go?

The value of the house reduced. That’s all.

Similarly, let’s say you bought share worth Rs 5,000. Today, its price is Rs 3,000.

That’s the price available in the market. The value of the shares has reduced.

The buyers who are in the market are not wiling to pay a higher price.

Mutual fund companies

The main business model of mutual fund companies revolves around fees.

They earn money by charging a small fee from investors. This fee is called expense ratio.

Investors need not pay it separately. It is a part of every mutual fund and is automatically deducted.

The mutual fund returns you see and get is after the deduction happens.

So whatever returns you are seeing are final — you are getting the returns you are seeing.

This is how mutual fund company’s interests are aligned with investors' interests — the higher the returns the investor gets, the higher their earnings.

SEBI

Word of the Day

SEBI, the Securities and Exchange Board of India, sets rules, catches rule-breakers, and takes actions like fines or bans to protect investors.

It was created in 1988 to keep an eye on the stock market and ensure fairness.

Its core functions include -

-maintaining transparency and fairness within the market,
-ensuring companies provide accurate and complete information to investors, -preventing fraudulent activities.