Sep 9, 2014

Forward Contracts - Concept And Example

Forwards are the simplest form of a derivative contract. We can define a forward contract as an agreement between two parties to exchange a specific asset on a specified future date at a predetermined price (forward price). Both the delivery and the payment is made on the specified future date.

The concept of forward contracts can be better understood with the following example.

A Ltd is a manufacturer of potato chips. It acquires a 1000 kgs of potatoes from the open market every month. Today is 1st of January and the prevailing market price of potatoes is Rs 10 per kg. It however anticipates, owing to a deficient monsoon, that the price of potatoes would escalate to Rs. 15 per kg in a month's time. 

It therefore enters into a contract with a potato farmer to acquire from him 1000 Kgs of potatoes at a mutually determined price of Rs. 12 per kg; one month hence. 

Therefore on the settlement date of the contract i.e on 1st of February, A ltd makes a payment of Rs. 12000 to the farmer and takes delivery of 1000 Kgs of potatoes from the farmer. 

From the above example, the following features of a forward contract emerge. 

1. A forward is a contract which is entered into today and settled at a future date. 

2. The terms of the contract are mutually agreed upon by the parties to the contract. Forward contracts are therefore non-standardised.

3. The parties to the contract are bound to perform the contract on the contract settlement date. 

4. There is a counter party risk involved.

Great Quotes By Warren Buffett

Warren Buffett is widely considered as the most successful investor of the 20th century. In this post we revisit some of his greatest quotes.

Never invest in a business you can’t understand.

I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy
when others are fearful.

The only value of stock forecasters is to make fortune tellers look good.

Someone's sitting in the shade today because someone planted a tree a long time ago.

Price is what you pay. Value is what you get.

Risk comes from not knowing what you are doing.

Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.

Without passion, you don’t have energy. Without energy, you have nothing.

It takes 20 years to build a reputation and five minuted to ruin it. If you think about that you'll do things differently.

You never know who's swimming naked until the tide goes out.

Honesty is a very expensive gift, Don't expect it from cheap people.

It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.

You can't produce a baby in one month by getting nine women pregnant.

When you combine ignorance and leverage, you get some pretty interesting results.

Never ask a barber if you need a haircut.

Wall Street is the only place that people drive to in a Rolls Royce to take advice from people who ride the subway.

Diversification is protection against ignorance. It makes little sense if you know what you are doing.

The fact that people will be full of greed, fear or folly is predictable.The sequence is not predictable.

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact.

I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will.

If a business does well, the stock eventually follows.

I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out.

In the business world, the rear-view mirror is always clearer than the windshield.

The investor of today does not profit from yesterday's growth.

A public opinion poll is no substitute for thought.

There seems to be some perverse human characteristic that likes to make easy things
If past history was all there was to the game, the richest people would be librarians.

I buy expensive suits. They just look cheap on me.

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.

Stock Market Investing Tips For Beginners

The following is a collection of some basic tips to give a head start into the world of stock trading and/or investing. 

1. Stock market investing may look simple but It definitely is not. So always start with a small amount of money. Once you’ve had a fair idea of things, you can start raising the bar.

2. Again, derivative products like futures and options are complex instruments and should be traded only when you have a strong understanding about concepts underlying them.

3. Make it a habit of picking up new concepts every day. Keep yourself updated with what’s happening on the economic front. Follow corporate news and announcements and study industry data carefully. In the stock markets, it’s only the knowledgeable investor who emerges the winner in the long run.

4. The stock prices are determined by the interaction between the forces of demand and supply. Where the buyers for a particular stock on any given day outnumber (in terms of volume) the sellers, the stock prices are bound to rise.

5. The overall investor sentiment plays a crucial role in determining the direction in which the market moves. If the ‘overall’ investor sentiment is positive, the markets may rise even when the economy is struggling. It is during these phases that the ‘sentiments’ override the ‘fundamentals’ and the markets may seem ‘irrational’. The key during such times is to go with the flow and not fight it. If the investors as a ‘group’ are betting for the markets to rise, you better go long as well.

6. Trading and investing are not synonymous – in fact, they mean two completely different things. Investors buy a stock with the intention of holding on it for a substantial period of time before disposing it off at a premium. Investors therefore buy from a long term prospective and are therefore more interested in acquiring fundamentally strong counters. Traders on the other hand, buy and sell frequently in order to capitalize on the short term fluctuations in stock prices. By recognizing which of the two groups you belong to, you are better equipped at making buy and sell decisions.

7. In the stock markets, no one is immune from losses. A loss therefore, should not cause a loss of confidence. Every loss is an opportunity to reflect upon what went wrong. Remember, a loss is learning opportunity gained. But remember, always trade with a stop loss. It helps to minimize losses in case a trade goes against you.

What Are Deep Discount Bonds?

Deep Discount Bonds are similar to Zero Coupon Bonds. They do not carry any coupon rate i.e investors of Deep Discount Bonds do not receive regular interest payments.

Deep Discount Bonds are generally issued at a discount (i.e at a price lower than the face value) and redeemed at par value. It is this difference between the purchase price of these bonds and the par value that signifies earnings for their investors.

Deep Discount Bonds too do not carry any reinvestment risk.

Regular Fund Switch Helps To Maximise ULIP Returns

Do you know that you can make your investments in Unit Linked Insurance Policies (ULIPs) grow faster by regularly switching between funds? 

All Unit Linked Insurance Products offer several fund options to their customers. Typical fund options would include: 

1. Equity Funds
2. Balanced Funds
3. Debt Funds or Fixed Income Funds 

Of these, 'Equity' funds primarily invest in equities. While a Fixed Income fund would primarily invest in corporate bonds, CP/CDs and/or government bonds. Balanced funds tend to achieve a balance between equity and debt funds.

Customers are required to choose a fund option at the time of their initial investment. Subsequent premium payments are also invested into the same 'fund' as initially selected, unless the customer has raised a 'Premium Redirection' request to invest the premium payment into a different fund. Customers are also given the option of switching their investment corpus between funds

To maximise your ULIP returns, follow the given action plan. 

1. Make 'Premium Redirection' depending upon the state of the markets. 

When making a premium payment on your existing ULIP policy, give due consideration to the state of the markets. 

In a bull market when most stocks are flying high, it is wise to direct a new premium payment towards a 'debt' fund. Similarly in a 'bear' market when most of the stocks are trading below their average price, make your premium payments towards an 'equity' fund. 

This action plan is in line with the investment strategy which tells us to buy stocks when their prices are down so that we can sell them later at a premium. 

One should follow this strategy at the time of making the initial 'fund' selection at the time of taking a new policy.

2. Make regular 'Fund Switches'

When the markets are sliding, make a switch from an 'equity' fund to a 'debt/income' fund. This way, you can protect your investment corpus from falling in value; while at the same time earning a decent 6-10% return on your investments.

Once the markets start recovering after a dip, re-switch your portfolio towards an 'equity' fund to leverage the upswing. Thus by following this strategy, your protect your investment value during a downtrend while leveraging an uptrend to maximise returns. 

All ULIP products offer a certain number of free switches during the year. 

Note: You can make a 'fund switch' or a 'premium redirection' request by either visiting your branch or through your online policy manager. 

When your policy approaches maturity, make may 'switch' towards a debt fund so that your maturity amount becomes guaranteed. 

List Of High Beta Stocks [Updated 2014]

Beta of a stock refers to the sensitivity of a stock's return with reference to the market return. Stocks with a beta score greater than 1 are referred to as high beta stocks. High beta stocks generally move faster than the movement in the Stock Index. The reference index in the Nifty.

Here is a list of high beta stocks for the year 2014. [Stocks represented in alphabetical order]

Adani Enterprises Ltd.
Allahabad Bank
Axis Bank Ltd.
Bank of Baroda
Bank of India
Canara Bank
Century Textile & Industries Ltd.
DLF Ltd.
Delta Corp Ltd.
Dena Bank
Future Retail Ltd.
GMR Infrastructure Ltd.
Hindalco Industries Ltd.
Housing Development and Infrastructure Ltd.
ICICI Bank Ltd.
IDBI Bank Ltd.
IRB Infrastructure Developers Ltd.
Indiabulls Real Estate Ltd.
IndusInd Bank Ltd.
JSW Energy Ltd.
JSW Steel Ltd.
Jaiprakash Associates Ltd.
Jaiprakash Power Ventures Ltd.
Jaypee Infratech Ltd.
Jindal Saw Ltd.
Karnataka Bank Ltd.
LIC Housing Finance Ltd.
Larsen & Toubro Ltd.
NCC Ltd.
Oriental Bank of Commerce
PTC India Ltd.
Power Finance Corporation Ltd.
Punjab National Bank
Raymond Ltd.
Reliance Capital Ltd.
Reliance Communications Ltd.
Reliance Infrastructure Ltd.
Reliance Power Ltd.
Rural Electrification Corporation Ltd.
Sesa Sterlite Ltd.
Syndicate Bank
TV18 Broadcast Ltd.
Tata Motors Ltd.
Tata Steel Ltd.
UCO Bank
Union Bank of India
Unitech Ltd.
Yes Bank Ltd.