Tuesday, 19 June 2018

How to Buy an IPO at Its Offer Price

How many times have you seen a stock go up 10, 20 or even 70 percent on its first day of trading?
Frankly, big first-day gains in IPOs are entirely routine. Sadly, they don’t mean much for the vast majority of investors, because they often can’t buy stock at its IPO price. Instead, they buy at the 10, 20 or 70 percent premium.
That’s a raw deal.
Who actually gets to buy a newly public stock at its touted IPO price? And is it possible for retail investors to get in on the action?
Here’s a look at the process, and the best practices to be able to buy an buy an IPO at its offer price.
Why are IPOs so inaccessible to the little guy? Most high-profile IPOs today raise hundreds of millions or even billions of dollars. That, after all, is the main point of taking a company public – to raise money for the company and allow insiders to cash out. If you want to raise $1 billion by selling 50 million shares at $20 apiece, how exactly do you do that?
You have to have underwriters – investment banks that agree to sell a specific number of shares for you, and get you a certain price for them as well. (And they don’t do it pro bono.)
These banks are typically allocated different amounts of the offering. Let’s say five different underwriters get 10 million shares apiece to sell. Most individual investors don’t have $200 million sitting around, so these banks go around to their biggest, best, most profitable clients and offer them the shares. This is why mutual funds, hedge funds, pensions, endowments and other institutional investors get the first call.
Often, the split between institutional and retail investors is somewhere in the neighborhood of 90/10. That 10 percent will be spread around to different retail-facing brokerages.

While the deck is stacked against them, everyday investors still have a chance of getting in on an IPO – and a few things they can do to increase those chances.
How to buy an IPO at its offer price – without $200 million. First, search your broker’s website for what requirements you need to meet and what hoops you’ll have to jump through if you want to get in on an IPO. Rule No. 1 is know the rules.
Second, your chances of getting in on the next Alibaba Group Holding IPO – shares jumped 38 percent on their first day – marginally increase with the size and prestige of your brokerage firm.
The bare-bones, do-it-yourself oriented online brokerages might not get any allocation of shares, or may get very few to sell. You won’t be getting in on the ground floor using Robinhood, for instance.
That means that if your aim is to buy IPOs at their offer price, full-service brokers with larger amounts of assets under management are your way to go.
Fidelity is one such option, and it has its own requirements for potential IPO investors. For example, you must either have $100,000 or $500,000 in household assets, or made at least 36 trades in the last year, or be a Premium or Private Client Group customer.
The decision on whether to require $100,000 or $500,000 in assets depends on the underwriter Fidelity sources the deal from, according to Robert Beauregard, director of external communications at Fidelity Investments.
“Fidelity strives to give customers the most fair and equitable IPO allocation possible, based on the number of shares we receive from the underwriter,” Beauregard says.
Just as underwriters dole out dibs on shares to their biggest and best customers, eligible investors are evaluated “based on their relationship with Fidelity.”
“This is informed by factors such as assets held at Fidelity, customer tenure, frequency of trading and margin balances,” Beauregard says.
This harkens back to the first rule of upping your chances in buying IPOs before they skyrocket: know the rules. They can vary from brokerage to brokerage.
Most brokerages have so-called share allotment formulas, which help decide which clients get shares in a heavily subscribed IPO.
Typically, they’re based on “assets, how long you’ve been a client and trading history,” says Mike Laubinger, vice president at Victoria Capital Management in Charleston, South Carolina.
“Often overlooked is the risk tolerance assigned to your account,” Laubinger says. “If you selected ‘conservative or moderate’ on your investment profile you will not be able to participate. IPOs are considered ‘speculative or aggressive’ from a risk standpoint.”
You can easily change your preferred risk profile through your online account.
That said, not every brokerage has the same approach.
“We don’t focus as much on a profile. When the indications of interest comes in, we try to work a lot with our clients to make sure there’s a reasonableness around what they’re doing,” says Rich Messina, senior vice president of investment product at E-Trade Financial (ETFC).
“You don’t want to discriminate from anyone being able to participate in it. As long as you don’t have some sort of inside ties to a company,” you can request shares, Messina says.
Exploit loopholes, weigh supply and demand, consider derivative investments. Aside from going with bigger brokers, knowing the particular rules and guidelines, and adjusting your risk profile if necessary, there are still more tricks of the trade to help your chances in IPO-world.
At Fidelity, for instance, you don’t necessarily need $100,000 or $500,000 – or need to be rich enough to enjoy their premium services. You could hypothetically make 36 trades in a year – and do so without paying a penny in fees. Dozens of iShares and Fidelity ETFs, for example, are commission-free to buy.
Another tip that increases your chances regardless of brokerage is to focus on less-sexy issues. Obscure business types like business development companies, master limited partnerships or real estate investment trusts aren’t likely to garner the attention that, say, LinkedIn or Twitter (TWTR) did on their first day.
“There are some initial public offerings that are probably not having as much buzz, but are just as good companies to be participating in in the future,” Messina says.
Finally, there’s an indirect way to buy IPOs before they experience their Day One pop: derivative investments.
Sometimes, a hot new issue will debut with a small percentage of its total shares offered to the public and the rest held by a publicly traded parent company. For instance, when Match Group (MTCH) went public in 2015, it sold 33 million shares to the public – but parent company IAC/InterActive (IAC) still held an 80 percent stake in the online dating behemoth.
IPOs are high risk, high reward. While Wall Street has advanced toward democratization over time, the new issue market remains heavily stacked in favor of big money. While in principle that seems wrong, it makes some sense due to the dynamics of raising lots of money very quickly.
It’s unfortunate average Americans can’t do everything big money managers can, but sometimes that keeps retail investors out of trouble. IPOs are risky, after all, and often perform worse in their first year than the broader market.
On the other hand, buying an IPO at its offer price can be a huge advantage if you pick correctly; you need to do your homework, read the prospectus and know the company well before deciding to try to get in on the IPO.

But if, after homework and careful rumination, you want to take a shot at it, make sure you give yourself the best chances. Look at the rules and regulations surrounding IPOs at your brokerage. Follow the tips and tricks mentioned above. If you’re lucky and clever enough, you just might be able to operate your brokerage account like a mini hedge fund.

Monday, 18 June 2018

Common mistakes that a beginner trader makes...

As compared to investors, traders hold positions for smaller time periods and buy or sell securities more often. When the frequency of trading is high and positions are held for shorter durations, traders can inadvertently take decisions that can lead to huge losses and wipe out their investment capital. Below, we have listed a few common mistakes that new share traders make:
1. Failure to Contain Mounting Losses
Knowing when to take a small loss and pull out of a bad deal rather than sticking around and letting the losses accumulate is one of the most defining qualities of successful traders. On the other hand, traders who are unable to find much success often, paralyzed by the shock of a bad deal, stick around hoping things would eventually work in their favor. When their trading capital is tied up for a long time in a losing trade, a delay in taking the right action may result in losses piling up and the trading capital getting depleted sooner than expected.
2. Not Implementing Stop-Loss Checks
When it comes to stock broking, a failure to implement stop-loss orders can result in catastrophic losses. Novice traders can use stop-loss measures to contain their losses and prevent trading capital from depleting. There is always the risk of implementing stop orders on long positions at lower-than-specified levels if the security gaps lower. But in most cases, the benefits far outweigh the risks.
3. Not Following a Trading Strategy
An experienced trader will have a well-defined strategy in place before starting to trade. They know their trajectory with exact entrance and exit points, the trade capital to be invested, and the maximum loss that can be sustained. A novice trader may not have such a strategy in place before he or she enters the share market. Or even if they do have one, the chances of them dropping their original plan if things go south are quite high.
4. Redeeming a Losing Position by Averaging Down (or Up)
An investor who has a long term blue-chip investment plan can average down on a long position. On the contrary, it can prove to be very perilous for a trader who dabbles in risky securities. Some of the biggest known trading losses have occurred only because a trader kept adding to a losing position, and eventually the losses got so big that it became impossible to hold on to that position. Some traders tend to go short more frequently as compared to orthodox investors and try leveraging an advancing security to average up; this is an equally risky maneuver that novice traders can fall prey to.
5. Excessive Leverage
That leverage is a double-edged sword is a very well-known cliché in the share market. This is because it can bolster returns from profitable trades and accelerate losses from losing trades. Share brokers who have just started out may be flattered on knowing how much of leverage they possess, but sooner or later, they may discover that it can also wipe out their trading capital in a flash. Take for example Forex trading; if they employ a leverage of 50:1, an adverse move of as low as 2 percent is enough to destroy their trading capital.
In order to make trading a profitable endeavor, beginner traders should avoid these commonly made mistakes.

Thursday, 14 June 2018

Didn’t make it to Russia this year? Watch the next FIFA World Cup in Qatar by investing in SIP

The FIFA World Cup is one of the most-watched sporting events across the globe. This year, this football extravaganza takes place in Russia where 32 teams battle it out to become the world champion. Sadly, India is not participating in this event. But that has not stopped football fans from the country making the trip to Russia for the World Cup. If you were not able to make it, don’t worry. Here is a plan to help you watch the World Cup live in Qatar in 2022.
What are the expenses?
The first step in this plan is to identify how much the trip is going to cost you. There are a lot of variables that come into play when you visit a foreign country. The primary expense is of course the tickets. How many matches do you want to see? Two, perhaps three? In the current World Cup, the cheapest tickets cost around Rs. 7,000 and the most expensive tickets are around Rs. 70,000, as per the FIFA website. If you wish to see three matches from mid-priced seats, it may cost you Rs. 90,000 overall. You also need to think about plane tickets, hotels and food.
Currently, economy flights to Doha cost around Rs. 20,000, according to Qatar Airways website. A round trip means your travel would cost you Rs. 40,000. If you know somebody in Doha, great! You can stay at their place. Otherwise, you need to find a good hotel. Assuming you stay for at least a week, your lodging expenses can be anywhere between Rs. 45,000 – Rs. 50,000. And with food expenses at Rs. 20,000, your total expenditure for the trip comes up to Rs. 2 lakh. These are rough estimates and prices could change in four years’ time. So, let’s incorporate inflation and other miscellaneous and let’s peg the entire trip at Rs. 3 lakh.
You need to start saving
Alright, now that you know the costs, you need to start saving. Creating a fund of Rs. 3 lakh for a football World Cup might seem like a lot of money. But if you plan carefully and invest, it is quite possible. Remember, you have a time span of four years before the next World Cup. So, it is best to start investing right away to realise this dream. But where should you invest?
For this goal, it might be best to invest in mutual funds.

Investing in SIP

The best thing about mutual fund investment is that you can transfer a fixed amount of money each month into your desired fund through a Systematic Investment Plan (SIP). This way, you don’t need to worry about chasing returns or timing the market. All you need to do is transfer the fixed amount into the fund at a regular interval.
In this situation, let’s imagine you invest just Rs. 5,000 into a liquid fund that offers a return of 10% per annum. In four years’ time, you can accumulate a corpus of Rs. 3 lakh! This is the power of Systematic Investment Planning. Of course, you can invest a greater amount per month based on your convenience and requirement.
To sum up, football is a fun sport that offers a lot of enjoyment and delight. But for the players, it is all about discipline and focus. You can apply the same principles with respect to your investments. Through proper financial planning and careful execution, it is possible to make your dream of enjoying the World Cup live in the stadium a reality. Now all you need to do is to start investing.

SIP comes up with another meaning....

The Government on Tuesday added 10 Swachchh Iconic Places (SIP) under phase III of its flagship programme, Swachchh Bharat Mission, which aims to make the country open-defecation and litter free by October 2019.
Raghavendra Swamy Temple (Kurnool, Andhra Pradesh), Hazardwari Palac (Murshidabad, West Bengal), Brahma Sarovar Temple (Kurukshetra, Haryana), Vidur Kuti (Bijnor, Uttar Pradesh), Mana village (Chamoli, Uttarakhand) are among those which have been taken up under Phase III of the flagship project of Swachchh Iconic Places (SIP) of the Swachchh Bharat Mission, an official statement said here.
The others are Pangong Lake (Leh-Ladakh, Jammu & Kashmir), Nagvasuki Temple (Allahabad, Uttar Pradesh), Ima Keithal/market (Imphal, Manipur), Sabarimala Temple (Kerala) and Kanvashram (Uttarakhand) .
These sites have joined the 20 iconic places selected under Phase I and II where special sanitation work is underway.
The iconic places included in Phase I of the project in 2016 include Ajmer Sharif Dargah, CST Mumbai, Golden Temple, Kamakhya Temple, Maikarnika Ghat, Meenakshi Temple, Shri Mata Vaishno Devi, Shree Jagannath Temple, The Taj Mahal and Tirupati Temple. The Phase II launched in November, 2017 included Gangotri, Yamunotri, Mahakaleshwar Temple, Charminar, Convent and Church of St Francis of Assissi, Kalady, Gommateswara, Baidyanath Dham, Gaya Tirth and Somnath temple.
SIP is a collaborative project with three other central Ministries — Housing and Urban Affairs, Culture and Tourism. It also involves local administrations in the concerned States and Public Sector and Private Companies as sponsoring partners.
Envisioned by Prime Minister Narendra Modi, the project  is being coordinated by the Ministry of Drinking Water and Sanitation. A consultation is in process for finalising the PSUs/corporates for extending support to the new sites as CSR partners, the statement said.
Speaking at the launch of the third phase of the project in Mana village in Uttarakhand, Parameswaran Iyer, secretary, Ministry of Drinking Water and Sanitation, said under the scheme, the Government would take up initiatives like improved sewage infrastructure, drainage facilities, installation of sewage treatment plant (STP), improved sanitation facilities and water vending machines (Water ATMs).

Monday, 11 June 2018

Exchange-Traded Fund (ETF)

Exchange-traded funds (ETFs) are securities that closely resemble index funds, but can be bought and sold during the day just like common stocks. These investment vehicles allow investors a convenient way to purchase a broad basket of securities in a single transaction. Essentially, ETF so offer the convenience of a stock along with the diversification of a mutual fund.

Exchange-traded funds are some of the most popular and innovative new securities to hit the market since the introduction of the mutual fund. The first ETF was the Standard and Poor's Deposit Receipt (SPDR, or "Spider"), which was first launched in 1993. Purchasing Spiders gave investors a way to mimic the performance of the S&P 500 without having to purchase an index fund. Furthermore, because they traded like a stock, SPDRs could be bought and sold throughout the day, purchased on margin, or even sold short.
Whenever an investor purchases an ETF, he or she is basically investing in the performance of an underlying bundle of securities -- usually those representing a particular index or sector. Unit Investment Trusts (UITs) are often organized in the same manner. However, the unusual legal structure of an ETF makes the product somewhat unique.
Exchange-traded funds don't sell shares directly to investors. Instead, each ETF's sponsor issues large blocks (often of 50,000 shares or more) that are known as creation units. These units are then bought by an "authorized participant" -- typically a market maker, specialist or institutional investor -- which obtains shares of the underlying securities and places them in a trust. The authorized participant then splits up these creation units into ETF shares -- each of which represents a legal claim to a tiny fraction of the assets in the creation unit -- and then sells them on a secondary market.
Just as closed-end funds don't always trade at a price that precisely reflects the value of the underlying assets in each share of the portfolio, it is also possible for an ETF to trade at a premium or a discount to its actual worth. To liquidate their holdings, most investors simply sell their ETFshares to other investors on the open market. However, it is possible to amass enough ETF shares to redeem them for one creation unit and then redeem the creation unit for the underlying securities. Because of the large number of shares involved, individual investors seldom use this option.
Exchange-traded funds have grown increasingly popular in recent years, and the number of offerings has swelled. Today, these securities compete with mutual funds and offer a number of advantages over their predecessors, including:
Low Cost -- Unlike traditional mutual and index funds, ETFs have no front- or back-end loads. In addition, because they are not actively managed, most ETFs have minimal expense ratios, making them much more affordable than most other diversified investment vehicles. Most mutual funds also have minimum investment requirements, making them impractical for some smaller investors. By contrast, investors can purchase as little as one share of the ETF of their choice.
Liquidity -- Whereas traditional mutual funds are only priced at the end of the day, ETFs can be bought and sold at any time throughout the trading day. Many have average daily trading volumes in the hundreds of thousands (and in some cases millions) of shares per day, making them extremely liquid.

Tax-Advantages -- In a traditional mutual fund, managers are typically forced to sell off portfolio assets in order to meet redemptions. Often, this act triggers capital gains taxes, to which all shareholders are exposed. By contrast, the buying and selling of shares on the open market has no impact on an ETF's tax liability, and those that choose to redeem their ETFs are paid in shares of stock rather than in cash. This minimizes an ETF's tax burden because it does not have to sell shares (and therefore potentially realize taxable capital gains) to obtain cash to return to investors. Furthermore, those who redeem their ETFs are paid with the lowest-cost-basis shares in the fund, which increases the cost basis for the remaining holdings, thereby minimizing the ETF's capital gains exposure.
Although exchange-traded funds offer several advantages over traditional mutual funds, they also have two distinct disadvantages. To begin, the securities that an ETF tracks are largely fixed, so investors that prefer active management will probably find ETFs wholly unsuitable. Furthermore, because they trade as stocks, each ETF purchase will be charged a brokerage commission. For those that make regular periodic investments -- such as a monthly dollar-cost averaging investment plan -- these recurring commissions might quickly become cost-prohibitive.
As with any security, the pros and cons should be weighed carefully, and investors should first do their homework to determine whether exchange-traded funds are the appropriate vehicle to meet their individual goals and objectives.

Sunday, 10 June 2018

Can I buy your one hour


Once day, father was doing some work and his son came and asked, “Daddy, may I ask you a question?” Father said, “Yeah sure, what it is?” So his son asked, “Dad, how much do you make an hour?” Father got bit upset and said, “That’s none of your business. Why do you ask such a thing?” Son said, “I just want to know. Please tell me, how much do you make an hour?” So, father told him that “I make Rs. 500 per hour.”
“Oh”, the little boy replied, with his head down. Looking up, he said, “Dad, may I please borrow Rs. 300?” The father furiously said, “if the only reason you asked about my pay is so that you can borrow some money to buy a silly toy or other nonsense, then march yourself to your room and go to bed. Think why you are being so selfish. I work hard every day and do not like this childish behavior.”

The little boy quietly went to his room and shut the door. The man sat down and started to get even angrier about the little boy’s questions. How dare he ask such questions only to get some money? After about an hour or so, the man had calmed down and started to think, “Maybe there was something he really needed to buy with that Rs. 300 and he really didn’t ask for money very often!” The man went to the door of little boy’s room and opened the door.“ Are you sleeping son?” He asked. “No daddy, I’m awake,” replied the boy. “I’ve been thinking, maybe I was too hard on you earlier”, said the man. “It’s been a long day and I took out my aggravation on you, Here’s the Rs.300 you asked for”.
The little boy sat straight up, smiling “oh thank you, dad!” He yelled. Then, reaching under his pillow he pulled some crippled up notes. The man, seeing that the boy already had money, started to get angry again. The little boy slowly counted out his money, then looked up at his father.
“Why do you want money if you already had some?” the father grumbled. “Because I didn’t have enough, but now I do,” the little boy replied. “Daddy I have Rs. 500 now. Can I buy an hour of your time? Please come home early tomorrow. I would like to have dinner with you”. Father was dumbstruck.
Moral: It’s just a short reminder to all of you working so hard in life! We should not let time slip through our fingers without having spent some time with those who really matter to us, those close to our hearts. If we die tomorrow, the company that we are working for could easily replace us in a matter of days. But the family & friends we leave behind will feel the loss for the rest of their lives. And come to think of it, we pour ourselves more into work than to our family.

Hence, instead of doing all the work ourselves, outsource as much as possible. The advantages of doing so are multi-fold
1) First and foremost you get quality time with people whom your love and who really love you

2) By outsourcing to experts, you get the best results - Mutual Fund for stock investing and Financial Advisory for money management

3) You help the economy by creating employment for others and set up a virtuous cycle of wealth creation for the society and nation


Why One should invest in mutual funds?

Reason 1:
They are investments instruments which are capable of giving high returns . An average mutual fund scheme returns easily beats inflation in longer run and a good scheme can give far superior returns.

Reason 2:
Our Mutual Fund industry is one of the best regulated industry in the world. They are governed by the strict guidelines layed down by SEBI(Securities & Exchange Board of India).

Reason 3:
Investments decision of a Mutual Fund is taken by their AMCs and Fund Managers. They are experts who make investments decisions after doing intensive research and analysis of a company & industry. (Individuals generally don't have time and resources to do research hence best option is to let MF manage your investments)

Reason 4:
This industry is highly liquid. Even more liquid than stock markets. Payments are generally made through cheques or in some cases they are directly credited to your bank accounts , If your bank is allowing RTGS & electronic clearing and mutual fund AMC is providing such facility.

Reason 5:
Investments are diversified into many companies & sectors. Which make our investments safer and consistent growth prospects. Diversifying is usually not done by small investors , for such a actions one requires lots of funds.

Reason 6 :
Tax treatments- Governments encourage investments in capital markets and has given many tax sops. Under i) 80(c) investments done up to one lakh in specific mutual funds schemes which is called ELSS(Equity Linked Saving Schemes.) are exempt from tax. ii) Any units held for more than one year if redeemed is treated under long term capital gain tax which is taxable at 10% . If one plans to redeem before one year then he has to pay tax of only 15% on the profits.

Reason 7:
Mutual Funds are much cheaper compared to direct exposure to capital market since one does not need demat account ,annual charge to maintain account, charges imposed on demat holdings, stamp duty on transaction are not levied .

Now, let's assume that this group of individuals is a novice in investing and so the group turns over the pooled funds to an expert to make their money work for them. This is what a professional Asset Management Company does for mutual funds. The AMC invests the investors' money on their behalf into various assets towards a common investment objective.

Hence, technically speaking, a mutual fund is an investment vehicle which pools investors' money and invests the same for and on behalf of investors, into stocks, bonds, money market instruments and other assets. The money is received by the AMC with a promise that it will be invested in a particular manner by a professional manager (commonly known as fund managers). The fund managers are expected to honor this promise. The SEBI and the Board of Trustees ensure that this actually happens.