Introduction. Are you new to investing? Do you want to know the "How" and "When" to invest? If so, you're in the right place.
Most likely you already know how to invest. Most of us, if not all, have invested all our lives.
When you went to school, you invested your time to get something in return, education.
The point is, if you really think about it, you do a lot of investing, all the time. Maybe not in stocks but in life itself.
When you buy a car, not a traditional investment, but still you get something out of it, it just doesn't have a lot of residual value left after it's paid off.
Don't you wish you could short cars, like you can stocks.
A house is a great investment, if not for the housing bubble. But still, over time, property values rise which makes for an excellent investment.
Clothes! What? Clothes? Now that I regained your attention, to invest, you need RULES and most importantly DISCIPLINE. You also need to understand the basics of investing.
Ok, show of hands. Be honest now!
Wednesday, June 24, 2009
Pakistan's stock market roaring
Pakistan's stock market roaring
April 8, 2008 - 6:45PM
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Asia's only rising stock market claims several reasons for its bullish streak, including recent political stability.
The Karachi Stock Exchange also shines on strong fundamentals and technical reasons, analysts say.
Looking at a turbulent 2007, a quick examination of the first three months of 2008 Pakistan's benchmark KSE-100 Index appears as a car without breaks.
Already the KSE-100 has closed at records highs several times this year, the latest at a record 15,472 on April 4.
"Don't worry the market will easily touch the 16,000 mark by the end of this month, or within 30 days," says Ateeq Ahmad, a senior analyst for technical trends at Capital One Equities.
Analysts are unanimous in seeing political stability and prospects of overall improvement in law and order in the country as two chief driving factors for the index.
To them the recent formation of coalition governments at both federal and provincial levels following the February 18 general elections, hailed as free and fair, signals future political stability in the country. It also triggers hopes for a domestic solution to quell Islamic insurgency in the restive northern province and the spate of suicide bombings all over Pakistan.
But this positive picture emerges out of gloom. Last December 31 the Karachi Stock Exchange witnessed its largest single drop in the KSE-100 index of 696 points. That was its first day open after the December 27 assassination of former prime minister and a charismatic pro-western political leader, Benazir Bhutto, who was chairperson of now ruling Pakistan Peoples Party (PPP).
Throughout January and early February the market behaved skittishly and fell from nearly 15,000 points before the assassination to below 13,600.
"The fear of a massive outflow of foreign investment at the country's equity market (after Bhutto's assassination) sidelined the market participants amid a decline in the international markets of global depository receipts," said Hasnain Asghar at Aziz Fidahusein brokerage house.
But since the February 18 general elections, the market has overcome all its lost traction and seems set to reach new dizzying heights. The market's current capitalisation stands above $US75 billion ($A81.1 billion) or around $US10 billion ($A10.81 billion) higher than July 2007.
The record closings have ridden the news of a coalition alliance between PPP and local Muttehedda Qaumi Movement in southern Sindh province, where Pakistan's largest industrial city Karachi is the provincial capital.
Since forming a federal government, the PPP led by Bhutto's widower Asif Zardari, is streaking a patchwork of countrywide coalition alliances, representing almost all minor and major parties of all ideologies.
Though some political pundits have doubts over seeing the new long list of convenient friends of the PPP, the market analysts are optimistic. "I think the coalitions are durable and long term," said Ateeq Ahmad.
Ahmad also said continued strong buying by institutional investors showed the market is fundamentally strong.
"Institutional investors keep providing huge liquidity in the market," he said.
The market has already absorbed anticipated news of higher inflation and a slight increase in trade deficit due to rising oil prices during the first quarter, said Farhan Rizvi, deputy head of research at JS Global Capital.
He called the recent promise by China to help Pakistan with 500 million ($A540.6 million) to support its balance of payments - due to record high international oil prices - as a big positive indicator.
"In hindsight, a low level of contribution by foreign investors is also a sign of strength for the market as it is immune from the current global slump," Rizvi said, noting the market is purely supported by domestic investors, particularly by local institutional investors.
He said foreign investors would soon enter after seeing a continued domestic buying spree. The current share of international foreign investors in the KSE is comparatively small at between six and seven per cent.
The expected news that Pakistan would soon be rejoining the Commonwealth club will also encourage foreign investors, Rizvi said
Pakistan's membership in the Commonwealth, an alliance of former British colonies, was suspended when then-military dictator and now civilian President Pervez Musharraf imposed emergency rule last year.
April 8, 2008 - 6:45PM
Advertisement
Asia's only rising stock market claims several reasons for its bullish streak, including recent political stability.
The Karachi Stock Exchange also shines on strong fundamentals and technical reasons, analysts say.
Looking at a turbulent 2007, a quick examination of the first three months of 2008 Pakistan's benchmark KSE-100 Index appears as a car without breaks.
Already the KSE-100 has closed at records highs several times this year, the latest at a record 15,472 on April 4.
"Don't worry the market will easily touch the 16,000 mark by the end of this month, or within 30 days," says Ateeq Ahmad, a senior analyst for technical trends at Capital One Equities.
Analysts are unanimous in seeing political stability and prospects of overall improvement in law and order in the country as two chief driving factors for the index.
To them the recent formation of coalition governments at both federal and provincial levels following the February 18 general elections, hailed as free and fair, signals future political stability in the country. It also triggers hopes for a domestic solution to quell Islamic insurgency in the restive northern province and the spate of suicide bombings all over Pakistan.
But this positive picture emerges out of gloom. Last December 31 the Karachi Stock Exchange witnessed its largest single drop in the KSE-100 index of 696 points. That was its first day open after the December 27 assassination of former prime minister and a charismatic pro-western political leader, Benazir Bhutto, who was chairperson of now ruling Pakistan Peoples Party (PPP).
Throughout January and early February the market behaved skittishly and fell from nearly 15,000 points before the assassination to below 13,600.
"The fear of a massive outflow of foreign investment at the country's equity market (after Bhutto's assassination) sidelined the market participants amid a decline in the international markets of global depository receipts," said Hasnain Asghar at Aziz Fidahusein brokerage house.
But since the February 18 general elections, the market has overcome all its lost traction and seems set to reach new dizzying heights. The market's current capitalisation stands above $US75 billion ($A81.1 billion) or around $US10 billion ($A10.81 billion) higher than July 2007.
The record closings have ridden the news of a coalition alliance between PPP and local Muttehedda Qaumi Movement in southern Sindh province, where Pakistan's largest industrial city Karachi is the provincial capital.
Since forming a federal government, the PPP led by Bhutto's widower Asif Zardari, is streaking a patchwork of countrywide coalition alliances, representing almost all minor and major parties of all ideologies.
Though some political pundits have doubts over seeing the new long list of convenient friends of the PPP, the market analysts are optimistic. "I think the coalitions are durable and long term," said Ateeq Ahmad.
Ahmad also said continued strong buying by institutional investors showed the market is fundamentally strong.
"Institutional investors keep providing huge liquidity in the market," he said.
The market has already absorbed anticipated news of higher inflation and a slight increase in trade deficit due to rising oil prices during the first quarter, said Farhan Rizvi, deputy head of research at JS Global Capital.
He called the recent promise by China to help Pakistan with 500 million ($A540.6 million) to support its balance of payments - due to record high international oil prices - as a big positive indicator.
"In hindsight, a low level of contribution by foreign investors is also a sign of strength for the market as it is immune from the current global slump," Rizvi said, noting the market is purely supported by domestic investors, particularly by local institutional investors.
He said foreign investors would soon enter after seeing a continued domestic buying spree. The current share of international foreign investors in the KSE is comparatively small at between six and seven per cent.
The expected news that Pakistan would soon be rejoining the Commonwealth club will also encourage foreign investors, Rizvi said
Pakistan's membership in the Commonwealth, an alliance of former British colonies, was suspended when then-military dictator and now civilian President Pervez Musharraf imposed emergency rule last year.
Quote
Hardly a week goes by without the implosion of a hedge fund. Last week it was Carlyle Capital, with an astonishing $31 of debt for each dollar of equity. But we should not be surprised. These collapses are inherent in the hedge-fund model. It is even conceivable that this model will join securitised subprime mortgages on the scrap heap.
Getting away with producing adulterated milk is hard; getting away with an investment strategy that adds no value is not. That was the point made by John Kay, in a superb column last week (this page, March 11). With the “right” fee structure mediocre investment managers may become rich as they ensure that their investors cease to remain so.
Two distinguished academics, Dean Foster at the Wharton School of the University of Pennsylvania and Peyton Young of Oxford university and the Brookings Institution, explain the point beautifully*. They start by asking us to consider a rare event – that the stock market will fall by 20 per cent over the next 12 months, for example. They assume, too, that the options market prices this risk correctly, say at one in 10. An option costs $0.1 and pays out $1.
Now imagine that we set up a hedge fund with $100m from investors on the normal terms of 2 per cent management fees and 20 per cent of the return above a benchmark. We put our $100m in Treasury bills yielding 4 per cent. We also sell 100m covered options on the event, which nets us $10m. We put this $10m, too, in Treasury bills, which allows us to sell another 10m options. This nets another $1m. Then we go on holiday.
There is a 90 per cent chance that this bet will pay off in the first year. The fund then grosses $11m on the sale of the options, plus 4 per cent interest on the $110m in Treasury bills, for a handsome 15.4 per cent return. Our investors are delighted. Assume our benchmark was 4 per cent. We then earn $2m in management fees, plus 20 per cent of $11.4m, which amounts to over $4m gross. Whatever subsequently happens, we need never give this money back.
The chances are nearly 60 per cent that the bad event will not occur over five years. Since the fund is compounding at a rate of 11.4 per cent a year after fees, we will make well over $20m even if no new money is attracted into this apparently stellar enterprise. In the long run, however, the bad event is highly likely to occur. Since we have made huge profits, our investors have paid us handsomely for the near certainty of losing them money.
The immediate response may be that so naked a scam is inconceivable. Well, imagine a fund that leverages investors’ money by borrowing massively in short-term money markets in order to purchase higher-yielding paper. Assume, again, that the premium gives a correct estimate of the risk. With sufficient leverage, this fund, too, is likely to make profits for years. But it is also very likely to be wiped out, at some point. Does this strategy sound familiar? It certainly should by now.
We can identify two huge problems to be solved. First, many investment strategies have the characteristics of a “Taleb distribution”, after Nicholas Taleb, author of Fooled by Randomness. At its simplest, a Taleb distribution has a high probability of a modest gain and a low probability of huge losses in any period.
Second, the systems of reward fail to align the interests of managers with those of investors. As a result, the former have an incentive to exploit such distributions for their own benefit.
Professors Foster and Young argue that it is extremely hard to resolve these difficulties. It is particularly difficult to know whether a manager is skilful rather than lucky. In their telling example, the chances are more than 10 per cent that the fund will run for 20 years without being exposed. In other words, even after 20 years the outside investor cannot be confident that the results were not being generated by luck or a scam.
It is also tricky to align the interests of managers with those of investors. Obvious possibilities include rewarding managers on the basis of final returns, forcing them to hold a sizeable equity stake or levying penalties for underperformance.
None of these solutions solves the problem of distinguishing luck from skill. The first also encourages managers to take sizeable risks when they are close to the return at which payouts begin. Managers can evade the effects of the second alternative by taking positions in derivatives, which may be hard to police. Finally, even under the apparently attractive final alternative it appears that any clawback contract harsh enough to keep unskilled managers away will also discourage skilled ones.
It is obviously best not to pay the manager, as a manager, at all, but rather to invest alongside him, as at Berkshire Hathaway, Warren Buffett’s investment company. But we still have the challenge of knowing whether the manager is any good. We know this today of Mr Buffett. Fifty years ago, that would have been very hard to know.
What we have then is a huge “lemons” problem: in this business it is really hard to distinguish talented managers from untalented ones. For this reason, the business is bound to attract the unscrupulous and unskilled, just as such people are attracted to dealing in used cars (which was the original example of a market in lemons). The lemons theorem states that such markets are likely to disappear. The same may happen to today’s hedge-fund industry.
Now consider the financial sector as a whole: it is, again, hard either to distinguish skill from luck or to align the interests of management, staff, shareholders and the public. It is in the interests of insiders to game the system by exploiting the returns from higher probability events. This means that businesses will suddenly blow up when the low probability disaster occurs, as happened spectacularly at Northern Rock and Bear Stearns.
Moreover, if these unfavourable events – stock market crashes, mortgage failures, liquidity freezes – come in stampeding herds (because so many managers copy one another), they will say: “Nobody could have expected this, but, now that it has happened to all of us the government must come to the rescue.”
The more one believes this is how an unregulated financial system operates, the more worried one has to become. Rescue from this crisis may be on the way, but what about next time and the time after next?
*Hedge Fund Wizards, and The Hedge Fund Game, January 2008
Getting away with producing adulterated milk is hard; getting away with an investment strategy that adds no value is not. That was the point made by John Kay, in a superb column last week (this page, March 11). With the “right” fee structure mediocre investment managers may become rich as they ensure that their investors cease to remain so.
Two distinguished academics, Dean Foster at the Wharton School of the University of Pennsylvania and Peyton Young of Oxford university and the Brookings Institution, explain the point beautifully*. They start by asking us to consider a rare event – that the stock market will fall by 20 per cent over the next 12 months, for example. They assume, too, that the options market prices this risk correctly, say at one in 10. An option costs $0.1 and pays out $1.
Now imagine that we set up a hedge fund with $100m from investors on the normal terms of 2 per cent management fees and 20 per cent of the return above a benchmark. We put our $100m in Treasury bills yielding 4 per cent. We also sell 100m covered options on the event, which nets us $10m. We put this $10m, too, in Treasury bills, which allows us to sell another 10m options. This nets another $1m. Then we go on holiday.
There is a 90 per cent chance that this bet will pay off in the first year. The fund then grosses $11m on the sale of the options, plus 4 per cent interest on the $110m in Treasury bills, for a handsome 15.4 per cent return. Our investors are delighted. Assume our benchmark was 4 per cent. We then earn $2m in management fees, plus 20 per cent of $11.4m, which amounts to over $4m gross. Whatever subsequently happens, we need never give this money back.
The chances are nearly 60 per cent that the bad event will not occur over five years. Since the fund is compounding at a rate of 11.4 per cent a year after fees, we will make well over $20m even if no new money is attracted into this apparently stellar enterprise. In the long run, however, the bad event is highly likely to occur. Since we have made huge profits, our investors have paid us handsomely for the near certainty of losing them money.
The immediate response may be that so naked a scam is inconceivable. Well, imagine a fund that leverages investors’ money by borrowing massively in short-term money markets in order to purchase higher-yielding paper. Assume, again, that the premium gives a correct estimate of the risk. With sufficient leverage, this fund, too, is likely to make profits for years. But it is also very likely to be wiped out, at some point. Does this strategy sound familiar? It certainly should by now.
We can identify two huge problems to be solved. First, many investment strategies have the characteristics of a “Taleb distribution”, after Nicholas Taleb, author of Fooled by Randomness. At its simplest, a Taleb distribution has a high probability of a modest gain and a low probability of huge losses in any period.
Second, the systems of reward fail to align the interests of managers with those of investors. As a result, the former have an incentive to exploit such distributions for their own benefit.
Professors Foster and Young argue that it is extremely hard to resolve these difficulties. It is particularly difficult to know whether a manager is skilful rather than lucky. In their telling example, the chances are more than 10 per cent that the fund will run for 20 years without being exposed. In other words, even after 20 years the outside investor cannot be confident that the results were not being generated by luck or a scam.
It is also tricky to align the interests of managers with those of investors. Obvious possibilities include rewarding managers on the basis of final returns, forcing them to hold a sizeable equity stake or levying penalties for underperformance.
None of these solutions solves the problem of distinguishing luck from skill. The first also encourages managers to take sizeable risks when they are close to the return at which payouts begin. Managers can evade the effects of the second alternative by taking positions in derivatives, which may be hard to police. Finally, even under the apparently attractive final alternative it appears that any clawback contract harsh enough to keep unskilled managers away will also discourage skilled ones.
It is obviously best not to pay the manager, as a manager, at all, but rather to invest alongside him, as at Berkshire Hathaway, Warren Buffett’s investment company. But we still have the challenge of knowing whether the manager is any good. We know this today of Mr Buffett. Fifty years ago, that would have been very hard to know.
What we have then is a huge “lemons” problem: in this business it is really hard to distinguish talented managers from untalented ones. For this reason, the business is bound to attract the unscrupulous and unskilled, just as such people are attracted to dealing in used cars (which was the original example of a market in lemons). The lemons theorem states that such markets are likely to disappear. The same may happen to today’s hedge-fund industry.
Now consider the financial sector as a whole: it is, again, hard either to distinguish skill from luck or to align the interests of management, staff, shareholders and the public. It is in the interests of insiders to game the system by exploiting the returns from higher probability events. This means that businesses will suddenly blow up when the low probability disaster occurs, as happened spectacularly at Northern Rock and Bear Stearns.
Moreover, if these unfavourable events – stock market crashes, mortgage failures, liquidity freezes – come in stampeding herds (because so many managers copy one another), they will say: “Nobody could have expected this, but, now that it has happened to all of us the government must come to the rescue.”
The more one believes this is how an unregulated financial system operates, the more worried one has to become. Rescue from this crisis may be on the way, but what about next time and the time after next?
*Hedge Fund Wizards, and The Hedge Fund Game, January 2008
Saturday, June 13, 2009
Stock Market
A stock market is a public market for the trading of company stock and derivatives at an agreed price; these aresecurities listed on a stock exchange as well as those only traded privately.
The size of the world stock market was estimated at about $36.6 trillion US at the beginning of October 2008. [1]The total world derivatives market has been estimated at about $791 trillion face or nominal value, [2] 11 times the size of the entire world economy. [3] The value of the derivatives market, because it is stated in terms ofnotional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring.). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.
The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The stock market in the United States includes the trading of all securities listed on theNYSE Euronext, the NASDAQ, the Amex, as well as on the many regional exchanges, e.g. OTCBB and Pink Sheets. European examples of stock exchanges include the London Stock Exchange, the Deutsche Börse.
Trading
Participants in the stock market range from small individual stock investorsto large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order.
Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders.
Actual trades are based on an auction market model where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.
The New York Stock Exchange is a physical exchange, also referred to as a listed exchange — only stocks listed with the exchange may be traded. Orders enter by way of exchange members and flow down to a floor broker, who goes to the floor trading post specialist for that stock to trade the order. The specialist's job is to match buy and sell orders using open outcry. If a spread exists, no trade immediately takes place--in this case the specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are reported on the "tape" and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant amount of human contact in this process, computers play an important role, especially for so-called "program trading".
The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange. However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always purchase or sell 'their' stock. [1].
The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching process was fully automated.
From time to time, active trading (especially in large blocks of securities) have moved away from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant[citation needed].
Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets is shifting. By bringing more orders in-house, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in trading commissions[citation needed].
[edit]Market participants
A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, hedge funds, investor groups, banks and various other financial institutions). The rise of the institutional investor has brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees. (They then went to 'negotiated' fees, but only for large institutions.[citation needed])
However, corporate governance (at least in the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners'.[citation needed]
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