Ideal Verge - Your Daily Dose of Knowledge and Inspiration.

We have already seen how the pre-open session or call auction trading session for existing securities works. And similarly for the new listings of the IPOs during listing day, the exchanges have introduced a Special Pre-Open Session (SPOS) for IPOs and re-listed scrips.

Salient Features of Special Pre-open Session :

1. This session shall be conducted for IPO scrips only on the first day of trading, i.e. day of listing of the scrip on the Exchange and for Re-listed scrips only on the day of re-commencement of trading of that scrip on the Exchange.
2. SPOS shall be for duration of 60 minutes from 9:00am – 10:00am for scrips participating in that session and shall be followed by continuous trading session.
3. From the next trading day onwards, trading would be normal.
4. Only limit orders will be permitted during the special pre-open session and Market orders will not be accepted.
5. For IPOs of Issue size greater than Rs.250 cr - during pre-open session, there would no Price Bands. But, during the normal trading session it would be 20% of Equilibrium Price (Listing price).
For smaller issues, with size of less than Rs.250 cr., the price bands are 5%.

The above point is interesting, since there wouldn't be no 50/100 % moves after the listing price, which is intended to curtail huge swings in stock prices post-listing.For e.g., if the MCX issue price is fixed at Rs.1000 and during the pre-open session, the price discovered is at 1200, then the price band is fixed at 20% of the listing price, on either side. And because of this new method the volatility on the listing is expected to be substantially reduced.

MCX listing date is to going to be an interesting session, since this is the first time an IPO is being listed using the above methodology. Let us wait and watch, how the new method is being implemented.

MCX or Multi Commodity Exchange of India, the country's largest commodity exchange, is coming out with an IPO of 6 million shares of Rs.10 each in the price band of Rs.860-1032 next week.
After long period of time, an IPO of this size and stature has hit the market, which is unique of its own. This is the first ever IPO by an exchange in the country and the issue has been given highest grade of 5/5 by the rating agency Crisil.


Issue Detail:
Issue Open: Feb 22 - Feb 24, 2012.
Issue Size: 6,427,378 Equity Shares of Rs. 10.
Issue Price: Rs.860-Rs.1032.
Listing At: BSE, NSE.

The promoter of the company is Financial Technologies, which is a leader in offering trading solutions like ODIN and other similar products. Globally, MCX is the fifth largest commodity exchange, which holds top two positions in gold and silver segments and  higher positions in other commodities as well.

The EPS for the reported year 2011 stands at Rs.34.5 and the book value at Rs.210.  The company had recorded Rs 447.5 crore of total income and net profit of Rs 176.2 crore with an equity capital of about Rs 38 crores for the year March 31, 2011. Considering the current growth of about 70-75%, the current year EPS would be around Rs.60 and at the lower price band of Rs.860, the issue is done at 15 times earnings and at the upper end of the band at Rs. 1,032, valuation per share works out at a PE of about 18 times.

Though the pricing seems on the higher side, considering the huge growth potential, the issue price is justified. Hence investors with long term view can invest in MCX IPO  and not for listing gains alone. Once this issue is gone through, one could expect couple of similar IPOs from BSE and NSE also.

Watch out this space for more such IPOs and as well as about the big one from the international front, which is the Facebook IPO.

200 DMA or the 200 Day (Simple) Moving Average, is an important indicator in technical analysis. The 200 DMA is a long term moving average that helps determine overall strength of an index or a stock. The 200 DMA is generally used as a trend following indicator, which do not predicts market direction, but rather gives an idea about the current direction. Moving average is a lagging indicator, since it is based on past prices of an index or a particular stock.

An index that is trading below its 200 DMA is considered to be in a long term downtrend and when it is above, it is in an uptrend. Whenever the index or a stock trades near these averages, they attract support in a bull market and finds resistance in a bear market. Currently, the 200 DMA of Nifty is around 5200 and the index has closed around this level of 5200.

What does this indicate ? Is the market heading higher or is it going to correct after good run in the past few weeks? As said earlier during bearish phases, the 200 DMA find some resistance and attracts selling.We have seen many times in the past, nifty reacting down from the 200 DMA. But any strong close above this level would attract fresh buying and the prices may move higher. Hence, watch out these levels and follow-up action closely, to make your trading decisions better. The following chart may be of helpful, which shows the 200 DMA and the current market prices of the Nifty and Nifty-50 stocks. Also you would find the data for leading indices like Bank Nifty , CNX IT and CNX Midcap as well.


If fact, the 200-day moving average may act as support or resistance simply because it is so widely used. It is almost like a self-fulfilling prophecy. The advantage of using moving averages is they are trend following and these indicators are always lagging, This lag factor not necessarily be construed as a disadvantage, but can be used viewed as a supportive factor to identify that whether a trader is line with the current trend or not.

For a trader, trend is your friend, isn't it?

The question on every investor's mind is - Can you beat the market? Believe it or not, there's a simple method for getting the market-returns, if not beating the market. And that is so simple many investors would rather not use it because it takes the fun and flavor out of the game. It requires not much of a work, no thinking, and no decisions, and it can be summarized in a single sentence.

What's the catch? After all, most Wall Street investment managers, roughly 70 percent, tend to trail the overall market average over the long term, despite spending a lot of time researching companies, reading extensive reports, tracking the moves of the Dow Jones Index and huge churning of the portfolio. So how does a small investor got any chance of outperforming most of the experts?

Here's how you do it: Buy an index mutual fund and set up a checking account deduction plan that automatically buys additional shares(units) of the index mutual fund each month.Then sit back and watch your money grow. It's that simple !

Termed dollar cost averaging or systematic investment plan, the system relies on the volatility of the market to ensure that the investor automatically buys more units when markets are down and fewer units when markets are up.

And the real kicker is, you can do it automatically through a checking deduction plan, so the process continues to work without any physical, mental, or emotional involvement from you.

The question you may have is, if it's that simple and that reliable, why doesn't everyone do it? Why waste your time reading earnings reports, tracking price/earnings ratios, following the market, and agonizing over when to buy and when to sell, if you can use index fund dollar cost averaging with no effort?

Why? Boring!

Investors play the market because they enjoy it. Trying to beat the market can be fun and exciting. You pit your wits against the market experts, playing your hunches, making some buys and sells, in the process leads you to lots of excitement. But on the other hand, the above mentioned passive investing  provides you no such fun, but you are left with peace of mind and good amount of market-returns. The choice is with the investor !

PSU stocks like MMTC, Hindcopper, STC India, NMDC, Dredging Corporation  etc.,  have gone up anywhere between 30-60% last week. MMTC has rallied from Rs.540 to Rs.900 up 66%, followed by STC India up 53% and Hindustan Copper up 56%.

So, what's the buzz? The government has been thinking of raising funds through the buyback route and under the buyback mode, the government can raise money by selling its equity in the company. After the government's due approval, institutions, banks and companies interested in buying government stake in PSUs will be able to send their proposals and buy these shares.

Recently, SEBI has allowed promoters to offload their stakes through auctions and this move will facilitate the government's efforts to sell these stocks at better prices. With the new window, the government will be in a position to negotiate better prices for the stake sale and hence the huge spurt in stock prices of these companies.

Does buyback move warrant such huge jump in these stocks? No, since most of the companies on the fundamental part do not justify such high price -  for e.g., MMTC is just a trading company and its current EPS stands at Rs.2 and at the current price of Rs.900 the P/E ratio works out to 450, which is abnormal. And similar is the case with other mines and mineral stocks.

This huge rise is entirely driven by the buy-back news and also due to low liquidity of the floating stock (since Government of India holds about 90% each in all of the stocks mentioned above).  We have seen many such hi-fliers before and know what happened to them later. Hence, investors are better off,  if they would stay away from such stocks, even if they fall 30-40% from current prices.

Buyer beware !

We have already seen the historical returns of the BSE Sensex, which indicated an average return of about 20%  per year, despite many yearly returns varying from -20% to +60%. The following table shows BSE Sensex historical data - yearly high,low,close and also the yearly returns of the sensex from 1991 to 2011.


There are some interesting points to note from the above data. Post 2008 crash of about 50%, one can see how the markets have performed differently in each year. In 2009, the markets gave positive returns of about 81%, in 2010 the returns were just 17% and in 2011 the returns were down 24%. The interesting point to here is the average returns are about 20%, even after the 2008 crash and 2009 boom. The lesson is pretty much clear - long term investing pays and one need not bother too much about the ups and downs of the markets.

During the past few years,  the returns from investing in individual stocks are varied,  only few were multi-baggers, while most of them have come down anywhere between 80-90%. The message for retail investors is clear that - index investing is better than individual stocks. Individual or Retail investors are  better of investing in index Exchange Traded Funds (ETFs) like Nifty Bees or Top mutual funds, which have given consistent returns over longer term.

Be a wise investor !

We all know about P/E Ratio, but what is this PEG Ratio and what does it mean?

The PEG ratio or Price/Earnings to Growth ratio is one of the most popular valuation ratio calculated for determining the relative trade-off between the price of a stock, the earnings per share (EPS), and the company's expected growth rate. This was popularized by Peter Lynch, who wrote "The P/E ratio of any company that's fairly priced will equal its growth rate", i.e., a fairly valued company will have its PEG equal to 1.

Basic formula:

PEG = (P/E) / (projected growth in earnings).
For example, a stock with a P/E of 30 and projected earnings growth next year of 15% would have a PEG of 30 / 15 = 2. A lower ratio is 'better' (cheaper) and a higher ratio is 'worse' (expensive).

What does PEG tell us?

PEG, which is derived from P/E ratio, is generally higher for a company with a higher growth rate. Using just the P/E ratio would make high-growth companies overvalued relative to others. PEG is a popular indicator of a stock's correct value. Similar to PE ratios, a lower PEG means that the stock is undervalued more.

It is preferred than P/E ratio because it also accounts for growth. If a company is growing at 30% a year, then the stock's P/E could be 30 to have a PEG of 1. The PEG ratio of 1 is sometimes said to represent a fair trade-off between the values of cost and the values of growth, indicating that a stock is reasonably valued given the expected growth.

Investors may prefer the PEG ratio because it explicitly puts a value on the expected growth in earnings of a company. The PEG ratio can offer a suggestion of whether a company's high P/E ratio reflects an excessively high stock price or is a reflection of promising growth prospects for the company.

On the flip-side, the PEG ratio is less reliable for measuring companies with low growth rates. Large, well-established companies for instance may offer dependable dividend income but little opportunity for growth.A company's growth rate is an estimate. It is subject to the limitations of projecting future events. Future growth of a company can change due to number of factors like market conditions, expansion setbacks and hype of investors.

To conclude, we can say that though there are certain advantages of using the PEG ratio like, it accounts for growth and easy to calculate. But,it has certain disadvantages, like it can be an misleading indicator at times. Thus it should be used with utmost care and only in those situations, along with other parameters, where it shows the right picture. Well, Investing is not that easy ! Right ?