Posts Tagged ‘Investing’

INVEST IN DIVIDEND PAYING COMPANY Final Part :)

Lots of market participants, who wish for regular income by way of dividends, look for stocks which maintain a steady or an upward trend of dividend declaration.

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Here is a list of few companies.

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Ideally, a low market price when combined with high dividend payout gives high dividend yields. Dividend yield is an uncomplicated tool for investor to evaluate his investments in stocks and to choose the right portfolio depending on his priority.

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Here are two things which will be very helpful for investor:

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Dividend-capture strategy – Investors using a dividend-capture strategy will simply buy the stock prior to the ex-dividend date, and would ensure that they would receive the payment by holding the security until the ex dividend date, and then sell the security. In theory, they should be able to quickly buy and sell a number of securities near their ex dividend dates and capture numerous dividends. However, in practice the truth is that this is not always the case.

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Dividend Arbitrage – It is an options trading strategy that involves purchasing put options and an equivalent amount of underlying stock before the ex-dividend date and then exercising the put after collecting the dividend. When used on a security with low volatility (causing lower options premiums) and a high dividend, dividend arbitrage can create profits, assuming very low to no risk.

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Concluding I would like to say that all investors have mainly two objectives. First is earning from capital appreciation and the second is profits from dividends. And, it is the skill of any stock to offer both these incomes that determine its market price. Investors can increase their returns by investing in dividend-yielding stocks, especially following a continuous stream of dividends. Considering the fact that dividends are tax free, it makes all the more sense to target these stocks.

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WANT GOOD RETURN, LOW RISK – INVEST IN DIVIDEND PAYING COMPANY Part 1 :)

Dividend= Extra Income. Investing in high dividend paying companies is wise decision as dividend paid is tax free at the hand of the investors; but what should be given greater importance is “preservation of capital”. In that case investors have a fine amount of dividend-paying stocks in portfolio. The tax on dividends is rewarded by the company at the time of announcement of the dividend.

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Well, the price of dividends may differ from company to company depending on profits earned, cash flows, investment and the policies of the company. Company announces a small size of earnings as dividends. The rest is used in business to spend and generate high returns. Final dividends are also a purpose of the future cash requirements of the company.

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A dividend is always paid on face value of the company. Dividend yield is considered as the ratio of the annual dividends amount announced to the existing market price of the company’s stock. The dividend yield ratio shows what investors earn on their stock. For example, a 10 percent dividend on Rs 100 equity share means a dividend of Re 10 per share.

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Dividend yield: Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price.In the absence of any capital gains, the dividend yield is the return on investment for a stock. It is often expressed as a percentage. Its reciprocal is the Price/Dividend ratio.

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To calculate dividend yield is main work to analyze the proper income from an investment. Dividend yield is a major determining factor for stock prices. Dividend yield is calculated as follows:

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It should be clear that dividend yield is not the same to the amount of dividend paid by a tax company. It is the dividend payout with reference to the market price of the company’s stock. While the dividend is received, it is computed as a percentage of the current market value of the share and is termed as the dividend yield.

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Dividend yield also specifies how an investor is prepared to pay for the predicted dividend stream generate by a single stock. Investor uses the projected dividend values over a period or past dividend values for the analysis.

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Dividend Payout Ratio The percentage of earnings paid to shareholders in dividends.

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The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. A dividend payout has a direct effect on the cash balance of a company. Some companies follow the policy of sustaining dividend payouts or gradually increasing them. These companies demand higher values in the stock markets as compared to the companies following erratic dividend payout policies.

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Preferred Dividend coverage ratio: Preferred Dividend coverage ratio is a coverage ratio that measures a company’s ability to pay off its required preferred dividend payments. A healthy company will have a high coverage ratio, indicating that it has little difficulty in paying off its preferred dividend requirements.

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This ratio gives investors an idea of a company’s ability to pay off its preferred dividend requirements, and also an idea how likely they are to be paid dividends. If the company has a hard time covering its preferred dividend requirements, common shareholders are less likely to receive a dividend payment on their holdings.

Points to Remember while Selling Stocks – Part 2

Hello Friends here we come up with an extension of our previous blog, “Points to Remember while Selling Stocks Part 1”.

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Points to Remember while Selling Stocks

Points to Remember while Selling Stocks

In previous Blog we had touched upon few points related to selling stock tips.

In this blog lets get to know more of valuable points in this regard.:)

Major points when to sell your stocks ( starting from 4th..three already being discussed in Blog 1)

4. Stock is Over Valued:

During bull market, high quality stocks appreciate value.

But more importantly, with so much hype around the stock, they are often set up for a fall.

Therefore, investor may use the strategy of selling them first and buy at lower price.

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5. Need Some Cash-

Certain unexpected circumstances may affect the time when to sell stock.

It is not wrong to sell stock to solve your financial emergency, especially the underperforming one.

However, it is advisable to have some emergency cash funds.

After all, basic investing rules is to start investing if you have enough money.

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6. A Change in Monetary Policy-

The Central Bank, RBI changes monetary policy if it perceives that inflation is heating up.

By raising interest rates, it contracts the money supply and slows down the financial system.

It is generally seen that stocks normally react negatively against the action, and some time markets become more volatile.

If you are not happy with this type of risk then you should move a portion of your portfolio into stocks that will not be as affected with such changes.

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7. A Company Suddenly Cuts Dividends or Lower Income Estimates-

This event should be investigated carefully before making any judgment to sell.

For good reason, the board of directors might want to retain more of their earnings for internal growth, rather than paying them out in dividends.

Sell a company’s stock if the performance is down.

Investors must never sell the stock of a fine company if its price goes either ways significantly – up or down.

Falling earnings margins and slowing earnings must be treated as a warning signal.

Lastly, I would like to say that always do your homework (Research) well while selling a company’s stock; you can use either the top-down approach or the bottom-up approach.

Markets are often full of rumors. You cannot make money in the market by acting on market rumors.

Always listen to the stories, but remember you should do your own research–and do it thoroughly.

Make your buy or sell decision based on your analysis of the company, not on what others tell you to do.

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PORTFOLIO REBALANCING TO STAY ON TRACK

Portfolio re balancing is the process of bringing the different asset classes back into appropriate proportion following a significant change in one or more.
PORTFOLIO REBALANCING TO STAY ON TRACK
Over the time, as different asset classes produce different returns, the portfolio’s asset allocation changes. To recapture the portfolio’s original risk and return characteristics, the portfolio must be rebalanced to its original asset allocation.

The primary purpose of rebalancing is to maintain a consistent risk profile. Periodic rebalancing will help to avoid counterproductive temptations in the market.

For example, in this seemingly falling market, rather than an investor

Tempted to follow the crowd, who are busy dumping popular stocks; the imbalance created by erosion of the equity component can be used to book profits on debt portion and buy into equities to bring back the allocation to the original ratio.

The balancing act

To get the entire asset classes back to their original allocation percentages would entail the following:

·Selling part of the equities and investing the proceeds into debt and cash and vis-a-versa.

·Putting in fresh one-time investments into debt and cash to raise the allocation in the portfolio.

·Start a systematic investment plan skewed towards debt and cash.

Rebalancing controls risk

The investments in a portfolio will perform according to the market. As time goes on, a portfolio’s current asset allocation can move away from an investor’s original target asset allocation.

If left un-adjusted, the portfolio could either become too risky, or too conservative.

The goal of rebalancing is to move the current asset allocation back in line to the originally planned asset allocation.

How often should one rebalance?

Though the frequency is entirely dependent on the investor, the portfolio size as well as market conditions will impact the overall returns’ expectation of the portfolio.

The main idea is that the periodic interval between successive rebalancing acts should be constant.

Some of the other factors affecting the rebalancing are:

Cost of transactions

If one decides to rebalance the portfolio once in six months, he needs to factor in short term capital gains, brokerages and entry exit loads. Hence, it is advisable to rebalance annually the long term portfolios and rebalance semi annually for the short term portfolios.

Volatility

High return volatility increases the fluctuation of the asset class weights around the target allocation and increases the risk of significant deviation from the target.

Greater volatility implies a greater need to rebalance. In the presence of time-varying volatility, rebalancing occurs more often when volatility rises.

Investors can also employ another trigger for asset rebalancing. They can decide to rebalance their portfolio, not according to time, but rather only when any asset class changes in allocation due to market movements, over a certain percentage.

Conclusion

Portfolio rebalancing is an important part of sticking to your game plan. You should look at your portfolio at least quarterly in terms of rebalancing and more frequently if you have had a significant gain or loss in any asset class.

At last asset rebalancing is a very important exercise for any disciplined investor who wishes to approach their investing in a systematic manner, while realizing their financial goals that they have set out to achieve.

Portfolio rebalancing is the process of bringing the different asset classes back into appropriate proportion following a significant change in one or more. Over the time, as different asset classes produce different returns, the portfolio’s asset allocation changes.

To recapture the portfolio’s original risk and return characteristics, the portfolio must be rebalanced to its original asset allocation.

The primary purpose of rebalancing is to maintain a consistent risk profile. Periodic rebalancing will help to avoid counterproductive temptations in the market. For example, in this seemingly falling market, rather than an investor tempted to follow the crowd, who are busy dumping popular stocks, the imbalance created by erosion of the equity component can be used to book profits on debt portion and buy into equities to bring back the allocation to the original ratio.

Greed and Fear : Factors that Drive the Stock Market !

fear and greed are the two key factors that drive the stock market :)

Everyone knows that fear and greed are the two key factors that drive the stock market.

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If you talk to any seasoned investors in the market, they would tell you of the stories of how people got carried away by greed and lost all their money in the process.

Stories about people spooked by ‘fear factor’ also do the rounds of Dalal Street at regular intervals.

According to a study by SMC Capitals, “the elements of fear and greed are clearly apparent in the trends of allocation of assets by the investors in terms of cash and stocks.’’

The trend, says the study, can be seen at the levels of market cap and bank deposits in the economy.

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When there is fear among the investing community, the bank deposits go up.

And, when there is widespread optimism, the market cap levels go up.

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“If you look at investor behavior in the last three years,
the pattern is very clear:

the first year was of over-optimism,

the second was of over-pessimism and

now it’s the recovery period.

This trend is clearly visible if you look at the market cap and bank deposits (or the real wealth),’’ says Jagannadham Thunuguntla, equity head of New Delhi-based SMC Capitals.

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In the study, SMC has compared the BSE market cap from the period starting January 2007, with the aggregate bank deposits in the bank deposits.

The relative measure of the entire market capitalisation of BSE as a percentage of aggregate bank deposits in the entire banking system demonstrates the mindset of the investor community.

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Read the Full Story on The Economic Times

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Let’s Talk About Mutual Funds ;)

mutual-funds-basics

Friends we will discuss now as to what are mutual funds before going on to seeing why to invest in mutual funds instead of stock 🙂

What is a Mutual Fund?

A mutual fund is an investment that pools money from many investors, and that money is used to invest in stocks, bonds and other securities.

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One mutual fund share includes a portion of a share of each stock held in the fund’s portfolio.

The stocks these mutual funds have are very fluid and are used for buying or redeeming and/or selling shares at a net asset value.

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Mutual funds posses shares of several companies and receive dividends in lieu of them and the earnings are distributed among the share holders.

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Who Decides What a Mutual Fund Invests In?

Mutual fund managers decide what securities to buy or sell guided by the mutual fund’s objectives.

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If a mutual fund’s objective is to invest in the energy sector, the manager cannot buy shares in technology stocks.

Fund objectives let you know what to expect now and in the future.

Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern.

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An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund.

Closed end funds have limited number of shares.

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Why Invest in Mutual Funds Instead of Stock?

You can invest in both mutual funds and individual stocks, but mutual funds are particularly useful in some cases.

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*Diversification: If you do not have a lot of money to invest, creating your own diversified portfolio to spread risk will be difficult.

Diversification is automatic in mutual funds.

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*Time : Successful investors take hours every week to analyze their holdings, stock market conditions and to educate themselves further on investing.

Mutual funds are a wise choice for those who lack the time to follow stocks so closely.

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* Experience: Consistently investing well takes a few years of experience and learning from mistakes and successes.
If you are not experienced with trading stocks but want returns over and above what a savings account offers, investing in mutual funds is a good way to grow your personal assets.

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