The Explainer: Stock Market - Part II

The first part of The Explainer on Stock Markets focused on a few basic aspects of the stock market, like meaning of share, types of markets, stock exchange, and demat account.

This article will focus on participants in the stock market, like brokers and investors. 

What is Speculation?
In the world of stock markets, Speculation relates to any activity that involves risk-taking. For example, a speculator may try to buy at a low price to sell later at a higher price, thus making a neat profit in the bargain. Now, you may wonder where is the risk here?

Any activity which is future-based involves risk. Look at it this way: the speculator buys at what he believes is a low price; he does this to sell at a higher price - something that may happen in the future. But there is no guarantee that the price will rise in the future. Thus he is taking a chance; in stock market jargon, this 'taking a chance' is called speculation.

In a simple way, let's say, even before the third test between India and England starts, you place a bet on its outcome - that India will win the match. Now what you are doing here is that you are speculating, with considerable risk involved - India may or may not win the match! 

Who is a Broker?
A broker is a middleman who brings a buyer and a seller together. He helps strike a deal; he charges brokerage or commission for his services. He does not buy or sell for himself; he does this to earn commission. In the stock market, there are both individual brokers as well as corporate brokers (like Motilal Oswal).

Types of Stock Brokers

There are two important types of brokers: Bear and Bull. Though brokers, they are called by these peculiar names after the kind of speculation they indulge in. 

Who is a Bear?
A bear is a broker and a speculator. He is a pessimist; he expects the price of shares to fall.  So what he tries to do is to sell at today's price, which he fears will fall in the future. He believes that by selling the shares at today's higher price, he can avoid making a loss in the future. If there is large-scale selling by a large number of bears, such a market sentiment is called bearish.

Who is a Bull?

A bull is a broker and a speculator. He is an optimist; he expects the price of shares to rise.  So what he tries to do is to buy at today's price, which he hopes will rise in the future. He believes that by buying the shares at today's lower price, he can make a big profit in the future after selling the shares at a higher price. If there is large-scale buying by a large number of bulls, such a market sentiment is called bullish.

After this simple take on stock brokers like bulls and bears, now let us look at two important types of investors: Chicken, Pig, and Stag.

Types of Investors
There are three important types of investors: Stag, Chicken, and Pig. I will not focus on the long term investor. 

Who is a Stag?

A Stag is an investor who buys shares through a famous company's Share Issue, i.e. on application when the company comes out with a share issue. He does this with a simple view: Buy at the face value (i.e. par value) and sell either before the company gets listed on the stock exchange (i.e. before trading starts on the stock exchange), or on the first day of the listing or in the first few days after the company gets listed on the stock exchange. 

The idea behind this is simple: buy at a low price (on application) and sell at a profit when the price goes up in the first few days of the company's listing. There is pretty little risk involved in this kind of trading. 

Who is a Chicken?

Ever heard the term - 'chicken-hearted'? If you called someone 'chicken-hearted', you meant to call that person a coward,  i.e. someone lacking courage. 

In the same way, a Chicken is an investor who does not have the courage to take risk. He is risk-averse, i.e. he avoids taking risk. He does not wish to lose money (and sleep!). So he does not speculate; he also avoid buying / selling anything for the short term. Typically he invests money in fixed deposits (mostly with nationalised banks; the guy would not trust private sector banks) and government bonds, like those issued by the RBI. On a rare occasion, he might invest in some blue chip stocks for the long term.

For your information, blue chip stocks relate to those companies that are financially secure, have a long track record of consistent growth, and sometimes, high dividend payout history.

Who is a Pig?

As an investor, a Pig is the antithesis of a Chicken; a Pig loves to take risk, to make that LARGE profit. Being impulsive and greedy by nature, he buys on the spur of the moment, without doing any background check on how the company is performing or whether the share price will rise. 

A Pig is the darling of a stock broker (bear / bull). Since he is a huge risk-taker, the stock brokers love him. The Pig may or may not make money but the stock broker does (by earning his commission).

I wanted to keep this article short; I hope this helps.

(Read The Explainer: Stock Market - Part I)

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Friday Reads: Horny Indians & Complete Guide to Google+

Starting today, I am resuming the Daily Reads thread. I hope you find this thread interesting and knowledge-enhancing.

• Why are Indians so horny? (ToI)
• The Best and Worst Ad Campaigns of All Time (The Atlantic)
• Capitalism & The Pursuit of Profit Through a Cricketing Analogy. (Telegraph India)
  
  

• It's not the U.S. only that could face a potential debt default, there are 21 more countries in the queue! (Rediff)
  
  

• The Complete Guide to Google+. (Mashable)
  

Do you wish me to post articles / Web reads on specific issues? If yes, please post your comments.

Tech Spawn: Most Successful Start-Ups

Technology companies often compete to hire the best talent to work for them. Some employees, after working for tech giants, go out to start their own enterprises. While ideas that bring in the moolah are important, what's equally important is the fact the start-ups require seed money.

It has been observed that it is comparatively easier to get venture capitalists to invest in your business venture if you had previously worked for a tech giant. Top Prospect has an interesting graph on the issue of which tech giants have spawned the most successful startups. 

If you wish to copy this infographic, then please acknowledge this blog; it helps in driving traffic to this blog!

Click on the picture for a larger view.




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Infographic: Renewable Sources of Energy

Over the last decade, environmental issues, like climate change and global warming, have been a favourite of the GDPI panelists at India's top B-Schools; loads of essay and GD topics on these issues have been administered.

Global Warming and climate change have dominated media space for several years now. We are constantly reminded of the impeding doom that is waiting to visit us unless we stop pumping carbon dioxide and other poisonous fumes into the atmosphere.

Some say climate change is natural, i.e. part of the Earth's climate cycle. However, leading climatologists blame the rapidly changing global climate patterns on anthropogenic global warming, i.e. they attribute the rise in the earth's surface temperature to man's ruinous and exploitative activities. The chief culprit, among other reasons, is the use of fossil fuels, like oil and gas.

Let us not get into this never-ending debate; deniers and conformists have entrenched positions on this controversial issue.

However, there is one thing that environmentalists, climatologists, (most) governments, businesses (though reluctantly, of course) and the society at large agree on - use of alternate sources of energy, i.e. renewable sources of energy. 

There are a lot of renewable sources of energy, like solar, hydro, ocean, and geothermal. It is generally agreed that these so-called clean technologies are expensive and have notoriously large gestation plan (i.e. return on investment period) to yield tangible benefits for the users in the short run.

Find below an infographic that details the importance and benefits of the different types of renewable sources of energy. I found this here.

While most of the data here relate to the United States, I suggest that you look at the larger picture and extract valuable understanding of the issue under focus.

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Infographic: The Hugeness of Data Today!

Today there is no dearth of data. You see it everywhere in facts and figures. Ever wondered how much data is available out there? I found the below posted infographic titled, How much data will humans create and store this year?, that answers this important  question.

Also found this note on the infographic on the same Web site: 

Sure, we can put a number on it, like 1.8 zettabytes being created and replicated (as in copied to DVDs and shared in the cloud) this year alone — a number that doubles every two years, according to a recent study by IDCand EMC. But how much is that, really? Not only is data itself ethereal and hard to visualize, but the numbers are so gargantuan that they quickly become too abstract to grasp.

One way to put it all into perspective is to hypothetically plug all that data into physical objects we all recognize. That 1.8 zettabytes of data, for example, would require 57.5 billion 32 GB iPads to store. How much is that? About $34.4 trillion worth. That’s equivalent to the GDP of the United States, Japan, China, Germany, France, the United Kingdom and Italy combined. And that’s how much data we’ll create and store just this year.

Weekend Short Story: Twist in the Tale

As you know, I do not post any serious stuff on the weekends! This weekend, I have a short story, for a change.

About three years ago, Srinivasan Nagarajan, a dear friend and IAS officer (he topped the IAS in the country in 2005!), shared a short story with me. I was intrigued with the way the story ended, with a sudden twist - like those we find in the short stories of Jeffrey Archer.  Both of us do not know the actual source of the story.

Of one thing I am sure: you will enjoy this short story! 

In 1986, Mkele Mbembe was on holiday in Kenya after graduating from Northwestern University. On a hike through the bush, he came across a young bull elephant standing with one leg raised in the air.

The elephant seemed distressed, so Mbembe approached it very carefully. He got down on one knee and inspected the elephant’s foot, and found a large piece of wood deeply embedded in it. As carefully and as gently as he could, Mbembe worked the wood out with his hunting knife, after which the elephant gingerly put down its foot.

The elephant turned to face the man, and with a rather curious look on its face, stared at him for several tense moments. Mbembe stood frozen, thinking of nothing else but being trampled.

Eventually the elephant trumpeted loudly, turned, and walked away. Mbembe never forgot that elephant or the events of that day.

Twenty years later, Mbembe was walking through the Chicago Zoo with his teenaged son. As they approached the elephant enclosure, one of the creatures turned and walked over to near where Mbembe and his son Tapu were standing.

The large bull elephant stared at Mbembe, lifted its front foot off the ground, then put it down. The elephant did that several times then trumpeted loudly, all the while staring at the man.

Remembering the encounter in 1986, Mbembe couldn’t help wondering if this was the same elephant.

Mbembe summoned up his courage, climbed over the railing and made his way into the enclosure. He walked right up to the elephant and stared back in wonder.

The elephant trumpeted again, wrapped its trunk around one of Mbembe’s legs and slammed him against the railing, killing him instantly.

Probably it wasn’t the same elephant.

Stumped? I too was, as much as most of you are! Happy Weekend!

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The Explainer: Inflation

Friends, this Friday's Explainer focuses on 'Inflation'. 

I have kept jargon out of this article; in fact, I have used a conversational mode of writing to explain this important issue. 

What is inflation?
Inflation relates to the sustained rise, over a period of time, in the general price level when there is a rise in demand (for goods) without an equal rise in supply.

In today’s interconnected world, a lack of stability in the prices of goods and services characterises all types of economies, be it in an emerging economy like India or in an advanced economy like the United States or underdeveloped economy like that of Senegal. But as we all know, any kind of uncertainty is not good for business; so is the case with price instability.

What causes inflation?

Generally, there is never a single cause behind the sustained rise in prices of a basket of goods and services, like wheat, rice, and cooking oil. However, some general reasons include:

(a) increase in money supply;
(b) rise in government spending;
(c) rise in purchasing power (a direct result of rising incomes);
(d) low supply across a range of goods, and
(e) infrastructure issues.

In India, inflation is seen as a result of a combination of all these factors. Let us elaborate on a few of them.

Explanation of causes
Since independence, the Government of India’s (GoI) expenditure has been shooting up steadily. Currently, the GoI’s spends lakhs of crores of rupees every year on welfare functions (like subsidies and insurance for the poor), development works (like building roads) and administrative expenses (like salary payments).

For your information, the current expenditure of the Government of India is more than Rs12,00,000 crore – yes, a staggering Rs12 lakh crore! To put this in perspective, the expenditure in 1980 was just a little over Rs23,000 crore.

When the government spends, it puts money into the hands of the common man, which increases her purchasing power. In short, higher spending would mean higher income, leading to higher purchasing capacity of the individual.

Higher purchasing power often raises the demand for goods and services; however, in the short run, the supply of such goods and services may not rise in equal proportion to meet the demand. This would lead to a rise in prices, a situation dubbed ‘inflation’.

Also, black-marketing, hoarding, speculation, and exploding population have all contributed to a rise in demand for goods and services.

It is also true that inflation might arise because of cost-push factors, like changes in production (as in the case of foodgrains), rise in prices of controlled-supply goods (like LPG and kerosene), and external factors like oil prices and global inflation. Yes, you could add increase in indirect tax too.

Cascading effect

By itself a rise in price of diesel won’t raise the overall inflation rate. It is just one commodity among a wide range of commodities consumed by us. However, when you look at the cascading impact of the rise in price of diesel, you will know that it straight way impacts you too!

It is like this: a rise in price of diesel will force the transporters to increase freight cost. Now vegetable / grain vendors use trucks to transport large quantities of their stocks to the market; this would mean that rising freight cost would add to the price they charge from the retailer / consumer. This means that we will have to pay more to buy the same old stuff!

Take another example, this time on indirect tax (a favourite tool of the government to increase its tax revenues). You must have heard of Service Tax (ST) and Value Added Tax (VAT), which the government imposes on a range of services, including on restaurants.

Let us say, you go down to your favourite restaurant to gorge on the delicious buffet spread. Now the bill arrives, and you notice that the final bill includes items like ST and VAT! (No, no, you didn’t order for these items but the government did!) All these taxes will add up to a substantial part of your food bill and that’s how indirect tax lead to inflationary situation.

How does inflation affect the common man?

Rapidly rising inflation leads to a fall in the purchasing power of money. In other words, the purchasing value of money comes down during an inflationary situation.

For example, let’s say you have Rs100 and a kilogram of mangoes cost Rs100. One month later, you visit the market, again, with Rs100. This time the mangoes are priced at 150 per kg. How much will you be able to buy with Rs100? About 2/3 kg or 670 grams. In short, the purchasing value of your money has fallen by 1/3.

What are WPI & CPI?

Dear Reader, to be honest, any note on these indexes will have to include jargon, which is, for most people, difficult to understand. So, I will reserve that stuff for some other day. Anyway, I will stick to some basic aspects of these indexes.

WPI stands for Wholesale Price Index while CPI stands for Consumer Price Index. The WPI is prepared by the Central Statistical Organisation (CSO). It includes all the important and price-sensitive goods, which are traded in wholesale markets across the country. The articles in the WPI consist of major foodstuffs, raw materials, semi-manufactured goods and manufactures. Hey, that’s too much technical stuff already!

What does it mean if today’s newspaper says that the current inflation rate is 10%?
If a newspaper story title screams that the inflation rate is 10%, then it means that the prices, on an average of a basket of commodities (like those in the WPI – oil, rice, wheat), have gone up by 10% over the prices that prevailed exactly on that date last year. (It’s actually calculated on a fortnight basis; however for simplicity’s sake, we took this approach.)

Confused? Let’s simplify. Let us say, on July 22 last year, you spent Rs100 to buy a basket of commodities. If the inflation rate today is 10%, it means that the price of that basket of commodities would have gone by 10%, to Rs110, today, i.e. on July 22 this year. It also means that the purchasing value of your Rs100 has gone down by 10%. 

Forget the Indian middle class; rising inflation has pushed more than one crore households, which would mean a minimum of 6 crore people, into poverty. It has the debilitating impact of depriving people of nourishment. Such deprivation affects the poor and the marginalised the most. It is no secret that more than 65% of all Indian children and 52% of all Indian women are malnourished; rising prices have only added to their woes. 

Kindly forgive me for any spelling / grammatical error; I write in one go! Thank you!

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