Complexity in Investing in stock market

Team members: Jaspreet singh-51 Jenkin J S-52 Jose Thomas-54 Souvik Mitra-123

Stock Market
A stock market or equity market is a public entity for the trading of

company stock(shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.
A stock exchange is an entity that provides services for stock

brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, unit trusts ,derivatives, pooled investment products and bonds .

Bombay Stock Exchange (BSE)

Oldest Stock Exchange in Asia Location: Dalal Street, Mumbai, India First Stock Exchange in the country to obtain permanent recognition in

1956 from The Government of India under The Securities Contracts (Regulation) Act 1956 No of listing: 4996 Market Capitalization: US$1.78 trillion (Oct 2010 Index: BSE Sensex Website: www.bseindia.com World's number 1 exchange in the world in terms of the number of listed companies . World's 5th most active in terms of number of transactions handled through its electronic trading system.

National Stock Exchange (NSE)

The National Stock Exchange of India was incorporated in November

1992 as a tax paying company. In April 1993,it was recognized as a stock exchange under the securities contract(Regulation) Act, 1956.NSE commenced operation in the WDM in June 1994 The capital market segment of the NSE commenced operation in November 1994 ,while operation in the derivatives segment in June 2000 Market capitalization of around 7,262,507 crores(October 2010) NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. It is the second fastest growing stock exchange in the world.

Market Capitalization
Market Capitalization of the company which is the product of a

companys total number of shares outstanding and the market price of the share . Market capitalization of a stock plays an important role in deciding which stock one invests. the best stock based on its market capitalization and ones risk profile can help to earn great returns on their investment. The market capitalization changes with time as a result of factors like company performance, economic factors like inflation, interest rates, etc. In India, one can find companies with market capitalization ranging from a few lakh to as much as few lakh crores. As a result, companies are usually classified as large-cap, mid-cap and small-cap companies. BSEs classifies companies according to their Market Capitalization by using the 80-15-5 method.

Significance to the Investor

Determinants of Portfolio Performance

Security Selection 4.6% Market Timing 1.8% Other 2.1%

Asset Allocation 91.5%

Source: Determinants of Portfolio Performance II, An Update by Gary Brinston, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal May-June 1991 For illustrative purposes only. Not indicative of any specific investment.

The Importance of Asset Allocation

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Asset allocation is the MOST important decision an

investor makes (i.e., buying some stock, NOT Coke versus Pepsi) Asset allocation determines about 90% of the return variation between portfolios This study has been repeated numerous times, by different researchers, with similar results.

Downside of Asset Allocation

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A diversified portfolio MAY generate a lower rate of

return when compared to a single hot asset class (e.g., growth stocks from 1995-99) BUT
Callan table)

You never know the hot asset class in advance (i.e., Asset allocation reduces volatility to provide a

competitive rate of return

Factors To Consider
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Investment objective (e.g., retirement)

Time horizon for a goal (e.g., life expectancy for

retirement)

Amount of money you have to invest

Your risk tolerance and experience

Caution about risk tests

Your age and net worth

Mindset of the investor

Trading and investment motives. There exist high correlation between investment

psychology and the market behaviors

Hedging in down market.

Common myths
The January Effect Spotting trends-Wrong Way to Think!

Bubble burst
News and Overreaction

Macro economic events:

Libyan crisis.

Continued unrest in Middle Eastern countries.

Natural disasters in Japan. Activity of European banks.

Sovereign debt problems

Indian scenario
Budget announcement. Terrorist attacks.

Link between $/Rs. Exchange rate.

If its raining in Brazil, Buy Starbucks

Market can be predicted. Holding on to a stock. complexity of macro economic issues. Sector rotation

Recommendations while investing in Stock Market

Ride the Winners not the losers - Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks he or she can, in the worst-case scenario, see the stock sink to the point where it is almos worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice.

Avoid Chasing HOT TIPS - Whether the tip comes from your brother, your cousin, your neighbour or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; do your own research and analysis of any company before you even consider investing your hard-earned money.

Dont sweat the Small Stuff - As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Dont overemphasize the P/E ratio Investors often place too much importance on the price-earnings ratio (P/E ratio). The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued. Common misconception loss in buying a low-priced stock is less - A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you've lost 100% of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company.

Pick a strategy and stick with it - There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Focus on the future - The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most. Adopt a long term perspective - Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.

 Be Open Minded - Many great companies are household names,

but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades from 1926-2001, smallcap stocks in the U.S. returned an average of 12.27% while the Standard & Poor's 500 Index (S&P 500) returned 10.53%. above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you'll want to put tax considerations above all else when making an investment

Be concerned about taxes, but dont worry - Putting taxes

Thank you!!!!