Part II : Asset Building through Equity

Part  II :   Asset  Building  Through  Equity

CHAPTER 8: BUSINESS CYCLE

“THE UNSEEN FORCE THAT MOVES THE MARKET”

Embark upon an action after careful thought. It is folly to say,

"Let us begin the task now and think about it later."    

                                                                              THIRUKKURAL   Verse 467

WHAT IS BUSINESS CYCLE?

A business cycle refers to periods of expansion and contraction. A peak is the high point following a period of economic expansion. A trough is the low point following a period of economic decline.

It is a long-term pattern of alternating periods of economic growth (recovery) and decline (recession), characterized by changing employment, industrial productivity, and interest rates. Also called as economic cycle.

A business cycle is not a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock. Its timing is random and, to a large degree, unpredictable. A business cycle is identified as a sequence of four phases:

 “Schumpeter” labeled the "four-phases" of a cycle as: 

                                   Boom – Recession – Depression - Recovery.

Depression:

 When the economy is characterized by large unemployment rates, a decline in annual income, and overproduction, it is said to be in a state of depression. The point at which the real GDP stops declining and starts expanding is the lowest point. Sooner or later, the recession will reach the bottom of the business cycle. How long the cycle will remain at this low point varies from a matter of weeks to many months. During some depressions, such as the one in the 1930s, the low point has lasted for years.

 Peak:

The point at which the real GDP stops increasing and begins its decline signifies the highest point. At the top or peak of the business cycle, business expansion ends its upward climb. Employment, consumer spending, and production hit their highest levels. A peak, like a depression, can last for a short or long period of time. When the peak lasts for a long time, we are in a period of prosperity.

One of the dangers of peak periods is that of inflation. During periods of inflation, prices rise and the value of money declines. Inflation is more of a threat during peak periods because employment and earnings are at high levels With more money in their pockets, people  are willing to spend more than before In this way, demand is increased and   prices rise.

How we measure business cycle?

The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in Real GDP and other macroeconomic variables.

What are Real GDP and Nominal GDP?

Real Gross Domestic Product measures the value of all the goods and services produced expressed in the prices of some base year. In other words, it also considers the effect of inflation on the value of goods and services.

The Nominal Gross Domestic Product measures the value of all the goods and services produced expressed in current prices. It does not consider the effect of inflation on the value of goods and services.

 Stages of Business Cycle :

Expansion: A speedup in the pace of economic activity, resulting in expansion of production and employment.

Peak: The upper turning of a business cycle is characterized by peak production, highest employment and highest inflationary pressure. Low levels of both unemployment and labour shortage push up wage rates. High levels of consumer borrowing and spending occurs. During peak, Firms work at full capacity, profit levels will be high, and inflation and interest rate will be increasing. There will be a “boom” in housing market.

Contraction: A slowdown in the pace of economic activity. During contraction, Industrial production and employment go down.

Trough: (Recession) Recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes, business profits and inflation fall during recessions. Bankruptcies and the unemployment rate rises. Production and employment hit the lowest levels.

 Revival: The lower turning point of a business cycle, where a contraction turns into an expansion. Consumer confidence grows leading to increased borrowing and spending. Firms increase output, build up stock levels, Spare capacity used, then Investment increases and Unemployment falls. It may take more than a year of recovery for large changes in unemployment.

How the real economy and financial markets interact? We will discuss in the following chapter.

Dr.Felisleo

19.12.2010

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PART II: CHART PATTERNS

PART II: CHART PATTERNS

 8 A :  CLASSIFICATION OF CHARTS 

Introduction:

In stock and commodity markets charts represents the pattern of price movement over a period of time. In these charts y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale.

CHARTS USED BY ANALYST

 1.  Point and Figure Chart

In this chart time is not taken for plotting the chart. Plotting is done based on day to day price movement. Point and figure charts are composed of a number of columns that either consists of a series of stacked ‘X’s or ‘O’s. A vertical line of ‘X’s is used to illustrate a rising price, while ‘O’s represent a falling price.

2.  Three Line Break Chart

This is a popular financial charting method used in Japan. This chart also ignores the time element.  These charts display a series of vertical boxes

 ‘lines’ that reflects changes in price values.

3.  Kagi Chart

Once again a chart developed by the Japanese in the 1870s that uses a series of vertical lines to illustrate general levels of supply and demand for certain assets. Thick lines are drawn when the price breaks above the previous high price and is interpreted as an increase in demand.  Thin lines are used to represent increased supply when the price falls below the previous low. This chart also does not give importance to time.

4. Renko charts

The filled and hollow squares that make up a Renko chart are often referred to as "bricks." Renko charts have a pre-determined "Brick Size" that is used to determine as to when new bricks need to be added to the chart.

 If prices move more than the Brick Size above the top (or below the bottom) of the last brick on the chart, a new brick is added in the next chart column. Hollow bricks are added if prices are rising. Black bricks are added if prices are falling. Only one type of brick can be added per time period. Bricks are always with their corners touching and no more than one brick may occupy each chart column.

Renko charts may not change for several time periods. Prices have to rise or fall "significantly" in order for bricks to be added. Hollow bricks are bullish, black bricks are bearish.

TO BE CONTINUED

Dr.Felisleo

16.12.2010

Part II : CHART PATTERNS

PART II: CHART PATTERNS

 7:  ABOUT CHARTS 

Introduction:

Charts are Graphical representation of price movement of anything over a period of time. The trend depicted by these charts is governed by the forces of demand and supply. Chart analysis can be used for all markets – Forex, Commodity, Bullion, Crude etc. Stock chart analysis can be applied equally to individual stocks   and major indices.

Analysts use their technical research on index charts to decide whether the current market is a BULL MARKET or a BEAR MARKET. On individual charts, investors and traders can learn about the direction of the price movement of their favorite companies.

WHY CHART ANALYSIS?

The understanding of the effect of supply and demand on any product or commodity or stocks is necessary for successful investing. When demand is greater than supply, prices move upward. Should supply be greater than demand, then the prices are forced downward.  When demand has absorbed all the supply at any given price, it will begin to absorb the supply available at the next higher price at which offerings are available. Prices recede as a result of absence of demand or an oversupply.

The fluctuations of price changes, when plotted by means of the principles of any charting techniques like Bar Charts, Candlesticks, Kagi or Point and Figure, will more accurately indicate the technical condition, the relationship of supply and demand, than any other known method, which can be used for the purpose.

CHARTS - DRAWING SCALE

Stock charts can be drawn in two different ways. An ARITHMETIC chart has equal vertical distances between each unit of price. A LOGARITHMIC chart is a percentage growth chart. It has equal vertical distances between the same percentages of price growth. For example, a price movement from 10 to 20 is a 100% move. A move from 20 to 40 is also a 100% move. For this reason, the vertical distance from 10 to 20 and the vertical distance from 20 to 40 will be identical on a logarithmic chart.

* To enlarge the chart Double click by keeping the cursor above the chart.

CHARTS – TIME FRAME

Stock charts can be created in many different time frames. Mutual fund holders use monthly charts in which each individual data plot consists of a single month of activity. Day traders use 1 minute and 5 minute stock charts to make quick buy and sell decisions. The most common type of stock chart is the daily plot, showing a single complete market session for each unit.

CHARTS USED BY ANALYST

       1.  Point and Figure Chart

       2.  Three Line Break Chart

       3.  Kagi Chart

       4.  Bar Chart

       5.  Candlestick Chart

 

        6. Renko charts

Further discussions about charts in forth coming chapters.

Dr.Felisleo

9.12.2010

Part II : Asset Building through Equity

Part  II :   Asset  Building  Through  Equity

CHAPTER 7: Who are the fellow players?

The prudent act after weighing the strength a deed demands,

One's own strength and the strengths of allies and opposition.

                                                            Thirukkural    Verse 471

                          

Introduction: 

When you play a game it is important to know the fellow players and their strategies. In stock market the price of a stock will never move on its own. Stock prices are manipulated often by those having vested interests. This manipulation results in wild gyrations in the market. It is essential to know about people who are interested in pushing the stock price up and down.

The stock market is comprised of people. People who run the stock exchanges, people who serve as market makers, people who run stock brokerages and, of course, people who buy and sell stocks.  Let us discuss about them one by one.

1. Brokers

A broker is a person who mediates between a buyer and a seller. Stockbrokers also sometimes or exclusively trade on their own behalf, speculating that a share or other financial instrument will increase or decline in price. In such cases the term broker makes little sense and the individuals or firms trading in principal capacity sometimes call themselves dealers, stock traders or simply traders.

2. Retail Investors

A retail investor is an individual investor possessing shares of a given security. A Registered Shareholder is a retail investor who holds shares that are acquired either directly through the issuer or its transfer agent. Many registered shareholders have physical copies of their stock certificates.

3. Jobbers

These are the brokers who buy shares on their own account and not for the customers. So they have vested interest in maintaining or pushing up or down the stock prices.

4. Promoters

Promoters of a company are much interested in their share price in the market. They try to maintain higher share price whenever they come out for public issues.

5. Insiders

Usually the senior officers in a company, who have access to vital information about the company, have vested interest in their company’s stock price. The inside information affords them to cash in before others come to know of it.( Such trading is not ethical and is considered illegal).

6. Syndicated Investor Groups

Big investors and syndicated groups of medium sized investors are immensely interested in stock prices. Their operation can influence the market considerably.

7. Investment Advisors

Large-scale investment advisers who operate with a wide circle of clientele can influence the stock price considerably.

8. Indian Financial Institutions

An institutional investor is an investor, such as a bank, insurance company, retirement fund, hedge fund, or mutual fund that is financially sophisticated and makes large investments, often held in very large portfolios of investments. Because of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable. Today’s influential market participants are mainly institutional investors. These include asset management and equity market-making firms. Most institutional players manage, control and/or trade large amounts of investment capital on a daily basis. Their impact on share prices can be significant.

9. Government

The Government at times have vested interest in the stock market.

10. Foreign Institutional Investors (FII’s)

Fairly a recent entrant in our Indian Stock Market. A large percentage of foreign institutional investors are asset managers involved in managing “long-only” portfolios of equity securities held in pension funds, retirement plans, mutual funds, charitable foundations, endowments, etc. Other asset managers, like hedge fund managers, deploy alternative investment strategies utilizing the equity and other markets to accomplish their goals. Hedge funds control vast amounts of investment capital, and assets under their management have a serious impact on the direction of the equity markets.

Most of their operations are based on international developments. Small investors should take enough care in investing in stocks which have great exposure to these funds.

11. Day Traders

Fairly a new breed in Indian Stock Market, trying to make quick money every day by indulging in day trading in stocks. A day trader is a trader who buys and sells financial instruments (e.g. stocks, options, futures, derivatives, currencies) within the same trading day such that all positions will usually be closed before the market close for that trading day. This trading style is called day trading. Majority of this group end up in losing money.

Besides the actions of the above group of people, natural calamities such as earthquake, fire, flood, famine, war etc., will also have sudden impact in the price movement.

Successful stock market trading requires experience, discipline and technical knowledge. Traders must learn how stock prices behave and how they are influenced by key market participants. Knowledge and insight into the behavior of the key market players will greatly enhance the trader's ability to anticipate and recognize their operations, forecast the future direction of prices and position themselves accordingly. While no trader is successful 100% of the time, the successful trader should strive to be right most of the time. Being right often means making money.

Stock Market Jargon:

Primary Market

Companies, governments and other groups obtain financing through debt or equity based securities. All new IPOs(Initial Public Offers) issued will be considered a primary market trade when the shares are first purchased by investors directly from the underwriting investment bank.

 A Primary market usually refers to new securities that are issued on an exchange. Primary markets are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors.  Also known as "new issue market" (NIM). Primary markets can see increased volatility over secondary markets because it is difficult to accurately gauge investor demand for a new security until several days of trading have occurred.

Secondary Market

A market where investors purchase securities or assets from other investors, rather than from issuing companies. The secondary market is represented by the stock exchanges in any capital market. The stock exchanges provide an organised market place for the investors to trade in the securities. The national exchanges NSE and Bombay Stock Exchange BSE are secondary markets.

Secondary markets exist for other securities as well. In any secondary market trade, the cash proceeds go to an investor rather than to the underlying company/entity directly. In the primary market prices are often set beforehand, whereas in the secondary market only basic forces like supply and demand determine the price of the security.

Arbitrageurs

Traders who take advantage of any price difference that exists for a particular share at a particular time between two stock exchanges (Between BSE and NSE) .They buy at the stock exchange where the price is low and sell at the stock exchange where the price is high.

Dr.Felisleo

5.12.2010

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Dear viewers

You can send all your Queries, Suggestions and Opinions to the following ID.

Email:   panleoinc@in.com

Whenever the author finds time, your queries

 will get reply either in personal mail or in the Blog.

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