Become a Crorepati in 30 months

Gaurav's post on the 30 things he wanted to do before he's 30 was a brave one. I wondered at his bravery and wished him all the best only to land up in trouble myself :) He wants a way to build a Networth of 1 Crore before he's 30 and now wants me to find it. :(

Gaurav's target of becoming a crorepati is brave but also bordering on being foolhardy, I think. To top it, he wants to start with a seed capital of only Rs 2 lacs and a monthly infusion of Rs 20000! This way he will need to grow his money at an outstanding rate of 200% annually!!

Impossible. Or could be there some way? Legal, ofcourse.

Very recently I read a book, The Big Idea, which ends with the following Goethe's couplet: Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it.

Here in this blog I have been talking about Mutual Funds, Real estate, Bonds, ULIPs and ETFs. All of them do not pass muster when it comes to giving a return Gaurav wants. What about stocks? Yes, there are stocks that have given that kind of return in the past. But how to identify those stocks who would do the same in the next 30 months? Nobody knows those stocks. So is there still a way?

Now Gaurav says that he has avery high risk appetite. That should essentially mean that when he has invested in shares that he expects will zoom and those share prices drop 30% soon after he buys them, he will average his cost by buying more. Letus assume that he is willing to take the volatility for the desired growth and he is confident of his decisions.

Moving on that assumption, Stocks can give you that growth. But since we cannot identify the 5-6 stocks that will give a growth of 150-200% over a period of 30 months, we need to ride the waves on the stock market.

The first magic happened today morning when I looked at a blog/site that I had been avoiding (Because I understood little of that). It's EagleEyeTrade by Rajeev Mundra.

Talking to Rajeev who runs a Technical Trading seminar too, I did some number crunching. Assuming a challenging but realistic goal of 10% growth every month, a starting amount of Rs 6,25,000 will become Rs 1.09 crore after 30 months. Vow!!!

Atleast, theoretically it's possible. Ofcourse it will take a lot of guts (time & energy too). It depends on Gaurav's risk appetite. And Rajeev's expert guidance. If you ask me, the guys can do it. I wish them Good Luck.

For the first time I'm putting a disclaimer. Here it is: Ideas posted on the blog are educative in nature and must not in any way be construed as advice or recommendations. Investing/Trading in financial instruments is risky. This blog cannot be held liable in anyway for losses incurred.

Ride the market wave to grow your money

I have been following the EagleEyeTrade blog and even though I don't understand technical analysis, I find this blog very credible. I am delighted that Rajiv found time to answer some of my doubts/questions which have been reproduced below:

Technical analysis is the study of the trading history to attempt to predict future prices. What qualifications make you confident of doing that?

• The only qualification which works in Stock Markets is real life experience. A college degree, BTech or on MBA all are helpless unless one can think for himself and be able to risk money. The experience does not comes easy and coupled with the fact that normal human "good" qualities and emotions tend to hamper rather than achieve good results in technical trading.

Do you have a detailed training kit for beginners. Tell us more about that.

• We donot have a detailed kit for beginners. What we sometimes do conduct seminars which are for focused traders.The trader should be familiar with markets for sometime and have some trading experience to benefit from our seminar.Our focus in seminar is to establish new lines of thinking or to give the trader new ways of looking at things. We focus on Elliott Wave, Classical technical analysis, risk management and position sizing. All of which are important pillars of technical trading.We also talk a little about using fundamental scanning for swing trading.

What is Elliott wave analysis? What benefits it brings?

• Elliott Wave is a method to analyze market movements. It shows how market movements are related to each other and how here is pattern in chaos.Its a unique theory which gives the user insights which no other technical theory does. Its is vast and deep and any trader wishing to use this needs 1-2 years of experience to be able to use it effectively.

Critics of technical analysis include well known fundamental analysts. Warren Buffett has exclaimed, "I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer" What do you say?

• I am a fan of Warren.Probably Warren is right about Classical technical analysis, I also find it useless.But Elliott wave is a different class and is very useful.Having said that, i would add that technical analysis of any kind are short term tools, while fundamental analysis is much more long term.

The time and energy required is very high. Dou you agree/disagree? Why

• Time is required to excel in anything.

You provide the knowledge/information/calls. How much time do you expect your clients to put in?

• We expect clients to read carefully what we write. This may take 15 mins to 30 mins.Also before they take a trade, they should commit to memory the entry exit stops and other things we say about a trade.

As an asset class, Equity stocks offer the best returns. But so many of us have burnt our fingers in the process?

• Equity will offer the best returns always in long term. The simple reason being that it is companies which move the world and it is companies which earn the money which flows into everything else. Thus other asset classes which depends upon money generated by companies cannot outperform the companies itself. Like say you want to buy a gold ring, thus you send gold prices up. But how did you get the money to buy the gold ring?Some company you work for, or your own company made the profit from which you paid for the ring. Thus stocks would always lead by a far margin in long term
• Greed and fear is the axis around which stock market rotates and its a dangerous axis to rotate around unless well prepared.Action motivated by greed and fear will result in losses always and the way the market works though greed and fear it makes sure most people remain on the loosing side.

Unless you're working full-time in the financial world, you don't have the skills, tools, information, time or interest in playing the market. Comment.

• This is not always true. Long term investment is relatively easy. An index fund and term insurance would help most people.The more short term oriented you become, to try to extract the most profits, the more tools you need to make sense of the madness and more is the time consumed.

What is the average monthly return an investor can expect from your trade calls?

• I try to generate 10% returns a month for myself. In this 75% of trades are in cash and 25% in futures and options.While this is a high target to achieve every month, we have done that in most months.

I found the answers insightful and reassuring. What do you say? Check out EagleEyeTrade

Derivatives Trading for Dummies

Yes, it's for me, a dummy on Derivatives. So here's what lil' bit of Derivatives I understand(or pretend to..). Read on....

Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset. Derivative products initially emerged as hedging devices against fluctuations in commodity prices.

In India, BSE created history on June 9, 2000 by launching the first Exchange traded Index Derivative Contract i.e. futures on the capital market benchmark index - the BSE Sensex. The exchange commenced trading in Index Options on Sensex on June 1, 2001. Stock options were introduced on 31 stocks on July 9, 2001 and single stock futures were launched on November 9, 2002. September 13, 2004 marked another milestone in the history of Indian Capital Markets, the day on which the Bombay Stock Exchange launched Weekly Options.

Types of Derivatives:
Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts, such as futures of the Nifty index.

Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price.

Facts: The daily trade of commodities futures market is expected to rise by another Rs 5000 crores from the Rs 15000 crores being traded currently.

With increasing interest from investors, the basket of 120 commodities currently being traded is likely to touch 250 by 2007-08.

Options offer three significant benefits: Versatility; High Leverage and Risk Management. (I bet I didn't understand this, but I'll pretend I did)

Last Word: Warren Buffet sees derivatives as "time bombs" and a weapon of mass destruction!! Read on for his insights

Wanna read more. Read them here, here, here and here.

Warren Buffet on Derivatives

I wrote about the derivatives basics a month back and learnt that it has a speculative element. Here's another dissection of derivatives by none other than Warren Buffet. See the entire article on Warren Buffet on derivatives.

Buffet sees derivatives as "time bombs" and a weapon of mass destruction!! Download and read on for his insights. Thanks are due to Sourav Saha who has posted this on an Orkut community called Finance Club.

Anybody needing an Orkut invite can write to me. Now I hear that your google account can log you into orkut, a google community. Send a mail if having any download problems.

While talking about downloads, Mr. Ram has put a number of books on his blog. It is a collection that will impress you for sure.

Futures & Options

In futures trading, you take buy/sell positions in index or stock(s) contracts expiring in different months. If, during the course of the contract life, the price moves in your favor (rises in case you have a buy position or falls in case you have a sell position), you make a profit. In case the price movement is adverse, you incur a loss.

To take the buy/sell position on index/stock futures, you have to place certain % of order value as margin. With futures trading, you can leverage on your trading limit by taking buy/sell positions much more than what you could have taken in cash segment. However, the risk profile of your transactions goes up.

While buy/sell transactions in margin segment have to be squared off on the same day, buy/sell position in the futures segment can be continued till the expiry of the respective contract and squared off any time during the contract life.

Margin positions can even be converted to delivery if you have the requisite trading limits in case of buy positions and required number of shares in your DP in case of sell position. There is no such facility available in case of futures position, since all futures transactions are cash settled as per the current regulations. If you wish to convert your future positions into delivery position, you will have to first square off your transaction in future market and then take cash position in cash market.

Another important difference is the availability of even index contracts in futures trading. You can even buy/sell NIFTY in case of futures in NSE, whereas in case of margin, you can take positions only in stocks

In options trading, you take buy/sell positions in index or stock(s) contracts expiring in different months with various Strike Price. Strike price is the Price at which the underlying Asset is Agreed to be Bought or sold. Premium is the downpayment the Buyer of Call or Put is required to make for entering the options agreement.

In case of Futures the Buyer has an unlimited loss or profit potential whereas the buyer of an option has an unlimited profit and Limited downside. The Seller of a Futures has an Unlimited loss or profit potential but the seller of an option has a Limited profit but Unlimited Downside.

Using options

If you expect the price of the stock to rise, buy a call option at a predetermined price, which is lower than the rise you expect in the stock's market price at the time of exercise of option.

However, if you expect the price of the stock to fall, buy a put option at a predetermined price, which is higher than the fall you expect in the stock's market price at the time of exercise of the option. If your judgment goes wrong, simply let the option lapse and you just lose the premium you have paid to buy the option.

Suppose an investor is bullish and buys a call option on Infosys shares at the strike (exercise) price of Rs.5,250 at a premium of Rs.150 where the time to exercise the option is 1 month. The investor will earn profits if the price of Infosys crosses Rs.5,400 (Strike Price + Premium i.e. Rs.5250+ Rs.150). Suppose stock price touches Rs.5,700, the investor should exercise the option to buy the share at the exercise price of Rs.5,250 and then sell it in the market at Rs.5,700 making a profit of Rs.300 (selling price of Rs.5,700 minus purchase cost of Rs.5,250 minus premium cost of Rs.150). If at the time of expiry of the 1 month, the stock price falls below Rs.5,250, the buyer of the call option should not exercise his option. In this case he loses only the premium paid i.e. Rs.150.
Similarly, if the investor anticipates a fall in the price of Infosys, he should buy a put option to gain if his expectation turns out to be true.

Options offer three significant benefits:
Versatility: Besides offering flexibility to the buyer in form of right to buy or sell, the major advantage of options is their versatility. An investor can use options in as conservative or as speculative a manner as his investment personality dictates.

High Leverage: Option contracts allow the investor to control the full value of the underlying shares for a fraction of the actual cost. For instance, though Infosys trades at Rs.5,600, an investor can get full exposure to it by investing only the premium of Rs.150.

Risk Management: T he buyer can only lose what was paid for the option contract (i.e. the premium), which is a fraction of what the actual cost of the asset would be.

World over the derivative markets are bigger than the equity markets and options are the most favored instruments because of the unique combination of unlimited return-limited risk offered by them.

courtesy: Finance Insights which is a rich source of information on Finance

Commodities

The daily trade of commodities futures market is expected to rise by another Rs 5000 crores from the Rs 15000 crores being traded currently.

With increasing interest from investors, the basket of 120 commodities currently being traded is likely to touch 250 by 2007-08.

The Assocham-NMCE paper says that commodities as an asset class is increasingly being used to diversify asset portfolios by investors. Commodities offer a classic hedge against inflation.

Derivatives

Definition Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset. Derivative products initially emerged as hedging devices against fluctuations in commodity prices

In India, BSE created history on June 9, 2000 by launching the first Exchange traded Index Derivative Contract i.e. futures on the capital market benchmark index - the BSE Sensex. the exchange commenced trading in Index Options on Sensex on June 1, 2001. Stock options were introduced on 31 stocks on July 9, 2001 and single stock futures were launched on November 9, 2002. September 13, 2004 marked another milestone in the history of Indian Capital Markets, the day on which the Bombay Stock Exchange launched Weekly Options, a unique product unparallel in derivatives markets, both domestic and international. BSE permitted trading in weekly contracts in options in the shares of four leading companies namely Reliance, Satyam, State Bank of India, and Tisco in addition to the flagship index-Sensex.

Types of Derivatives:

Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts, such as futures of the Nifty index.

Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him. Options are of two types - Calls and Puts options:'Calls' give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. 'Puts' give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date.

One use of derivatives is as a tool to transfer riskFor example, farmers can sell future contracts on a crop to a speculator before the harvest. The farmer offloads (or hedges) the risk that the price will rise or fall, and the speculator accepts the risk with the possibility of a large reward. The farmer knows for certain the revenue he will get for the crop that he will grow; the speculator will make a profit if the price rises, but also risks making a loss if the price falls.

Of course, speculators may trade with other speculators as well as with hedgers. In most financial derivatives markets, the value of speculative trading is far higher than the value of true hedge trading. As well as outright speculation, derivatives traders may also look for arbitrage opportunities between different derivatives on identical or closely related underlying securities.

Because derivatives offer the possibility of large rewards, many individuals have a strong desire to invest in derivatives. Most financial planners caution against this, pointing out that an investor in derivatives often assumes a great deal of risk, and therefore investments in derivatives must be made with caution, especially for the small investor.

But anyway it's a matter of your own risk taking abilities.