How should be your investment portfolio?

The short term trader is meant to the people you who trades in the Derivatives Market (Futures and Options Market) in Stock Markets or Commodities Market. A trader takes a position in the market in futures or options and holds it for few days. Normally, we can see one month, two month or three months contract in the derivatives market, but we have contracts ranging from months to years.

The trader holds the positions until he makes a profit or until he cuts his losses. Not all trades end up in profits. If the trade goes against his position then he has to close it before he makes a substantial loss. Anyway, he has to close the position with profit or loss or at cost. If he feels, the underlying security move as per his expectation for the next month also, then he can carry forward the contract to next month also. Likewise, he can carry forward the position to unlimited number of months.

So a person trading in this time frame is called a short term trader. In a futures positions, he has to pay a margin to hold a futures position (whether it is short or long). In case, if the position he holding is loss, then he needs to pay the extra margin to make up the loss and also to continue to hold the position. So, there is always a risk of holding these type of positions. Unlike, holding a delivery share, holding a futures position would anytime invite margin call. If we are not prepared for that, then we have to close the position in loss, if it goes our way in the near futures.

Trading for the short term is always risky. But the profits we make in the short term is substantial. You no need to hold it for a long time. Your money will not be blocked for a long time. You can quickly use your funds.

But in the long term investments, your money will be blocked for a long time. There may a time when your money would remain idle without appreciating for years. But it is less riskier than short term positions.

I prefer any investor to invest more than seventy percent of their investments in long term and trade only twenty five percent of your investments in short term trading.

Don’t be married to a stock!!!!!!!!!!!!!!!!!

In investments, don’t marry a stock. Don’t stick to a stock all the time. Not all the stocks perform all the time. Various groups and various sectors perform at different times. Sticking to stock just because you love that stock is a waste of time in Investment.

Let me take the example of Hindustan Unilever from the Indian Stock Market and General Motors from the American Stock Markets. Hindustan Unilever is in Fast Moving Consumer Goods sector. It is a Multinational Company and excellent performing company fundamentally, till now.

The high price of Hindustan Unilever was 325 during 2000. The 2000 bull market was followed by a bear market till 2003 in all world stock markets. From there a bull market started in all world stock Markets. The Indian Bombay Stock Exchange Index , Sensex soared from 2600 to 21000 in another five years where as Hindustan Unilever traded in between 100 and 300 till 2008 and it is still now trading between this range.

If had been a fan of Hindustan unilever for it s performance and its fundamentals, then you would have invested a major portion of your investment in that stock. But for the past 9 years I would not have given a return on your investments.

Had you invested your money in Infrastructure and Reality stocks, it would have appreciated by more than 100 times in these 5 years. So don’t get married to a stock. Always every bull market is supported by a new set of Sectors. Identify it to for successful investing.

Past Financial Bubbles- an Explanation.

One of the oldest recorded financial bubble is Tulip mania in Netherlands. Tulip was brought to Netherlands by the ottoman empire. Initially, it was introduced there in 1590. Slowly cultivation of tulips was started and it soon attracted the attention of the whole Netherlands. Rich people got it in their households these tulips as a status symbol. Soon a craze for Tulips started in the country. Normally, it will take 6 to 7 years to get a tulip bulbs from the plant. So, as the demand picked, new varieties of Tulips were being cultivated, many people joined the bandwagon and almost all in Netherlands was directly or indirectly growing or trading or investing in Tulips.

As the prices of this tulips have gone astronomically, everybody is investing their savings and other money in Tulips. This mania continued for 40 since it started. By the time of its peak, a Tulip is trading more than 10 times the salary of an ordinary worker of that Country.

This Tulip mania has gripped Netherlands and the prices were going up, going up only. Every household in Netherlands is holding Tulip bulbs according to their financial capacity. One fine morning, around the 1737, the prices of Tulips started coming down. The prices were dropping on every passing day. The investors in the tulips are getting wary and they hoped that the situation would soon improve. But it moved otherwise.

So soon everybody started selling it pulling the prices further down, creating further panic among the population. Then only the people realized that they had grown, traded and invested a asset which is worthless to the money that was given. But before they realized the damage was already done. The whole of Netherlands were in financial ruins. The tulips were trading at rock bottom price. There were no buyers and soon tulips of any variety turned worthless within in one or two years.

The rich had become paupers at that time and the poor had become beggars at that time. The whole of Netherlands suffered for more than 2 or 3 decades because the crash in the prices of Tulips.

A worthless Tulip flower was inflated in price simply by the people’s greediness to dizzy height only to come down to few pennies due to the fear of losing the money. This type of process is financial Bubble. Financial Bubble will always burst.

Don’t be a part of a Bubble.

How will IPOs perform in coming months?

IPO is an acronym for Initial Public Offering. IPO is the initial offerings of a company in the form of shares to their share holders at the start of a new company or at the time of expansion of a existing company.

IPOs are being offered by companies that wants the money from the company for their project. People those who are interested in the project of the company or those people who have confidence in the management of the company would subscribe for the shares that is being offered according to their will.

If the IPO is subscribed fully then we can say, people has confidence in that particular company. If it is oversubscribed, then it shows the interest of the investors in that company. If it under subscribed then it shows there lack of faith in that company.

Investors’ interests in investing in IPOs are affected by the various factors. One of the biggest and most influential factor is sentiment in the secondary Markets. If the sentiment is bullish, the IPO will subscribe fully, if not it will flop in the IPO Market.

In any market, the sentiment would be bullish only during Bull Markets. So IPOs will be successful only during the course of the Bull Market or in the end of the bull market. But in Bull markets, the IPOs are priced highly. In bear markets how much ever good project will be bombarded in the IPO market.

But as an investor it is always best to invest during Bear Markets. Simply it is good because it will be priced lowly.

Risk versus reward

Risk is always directly proportionate to reward. The same holds good in investments also. The riskier investments are always give good returns. For example, Investing in Stock is riskier than investing in Real estate. Investing in real estate is riskier than investing in Gold. Investing in Gold is riskier than investing in Bonds. Investing in Bonds is riskier than fixed deposits.

When taking into consideration, investing in Stocks are looking riskiest of all. Dow was trading around 14000 in 2007 and it traded around 7000 in 2009 march. The Indian BSE Index Sensex was trading around 2100 those on January 2008, but by 2008 October, it depreciated by more 60 percent. The Chinese stock market Index was trading around 6100 in October 2007 and by October 2008, it was trading around 1670.

Investments in Stocks would have given negative return to one’s portfolio. Whereas, those who have invested in Gold, would be in good profits till now. Likewise those who have invested in fixed deposits would have got a fixed small return.

But in the longer run, say in another 5 years, Dow may be trading above 25000, Sensex may be trading above 50000 or Shanghai Index may be trading above 15000. If you take in to consideration the return we get from these Indices, it would be phenomenal. Stocks are riskier but in the longer run it will perform above other assets.

So risk is always is directly proportionate to rewards. In one’s portfolio all types of investment of various risks should be maintained for successful investing. One should not choose only a particular asset class. One should choose right mixture of assets including high risk stocks and low risk fixed deposits.

Happy investing.