Sunday 25 December 2016

Friday 9 December 2016

Monkeys & Goats – To Convince You To Buy Stocks of Only Good Businesses

So there was this village where one day a man appeared and said that he wanted to buy monkeys. He said that he would pay Rs 100 per monkey. The villagers caught all the monkeys in the neighbourhood and sold them to him for a hundred rupees each. Soon another man appeared and said that he would pay Rs 200 for each monkey. But there weren't any more monkeys around. They were all owned by the first man. So the villagers went to him and said that they were willing to take the monkeys back and return his money. But the monkey owner was unwilling to sell. The villagers raised the offer price to Rs 150 per monkey, then Rs 175 and finally to Rs 199 but the man just didn't want to sell, even though he clearly didn't have any use for the monkeys. Eventually, just to see whether he would sell, they offered him Rs 200 but he still refused.




The villagers were puzzled by this. Finally, one of them figured out that there must be someone else who was going to come to the village and offer even more money for the monkeys. Convinced that this was the real explanation, they went and offered the man Rs 300 for each monkey and sure enough the man accepted. Joyous at having landed such a good deal, they quickly paid him off before he changed his mind and took possession of the monkeys. The man went away with his money and lived happily ever after. The villagers waited for the next buyer. And waited… And waited... But no one ever appeared who wanted to buy a monkey.
But wait.

If you think you've guessed the moral of the story, you are wrong because the story isn't over yet.

There was another village nearby. In this village a man appeared one day and offered Rs 1000 each for a goat. Now goats were valuable, but not as much as a thousand rupees so the villagers sold the goats to this man. A similar thing happened here too. A second man appeared, offered Rs 2000 for each goat, the first man refused and eventually the villagers ended up buying the goats back for Rs 3000 each. Here too, the two men disappeared and no one ever came and offered so much money for a goat again.



But there was a difference.

Goats aren't monkeys. They could be milked every day and the milk was good and healthy. Even the goat droppings could be used as fuel (not sure of it though). When the goats eventually grew too old to be milked, the villagers could kill them for mutton. All in all, it wasn't a complete disaster.

But the monkey-owners were not so lucky. Since these weren't demat monkeys, they actually had to be kept in one's house. The monkeys ate too much, shouted and shrieked all day and sometimes bit people.

Eventually, when it became clear that the monkeys were worthless, their owners abandoned them and tried to forget about their losses.



And that's the Moral of the Story.

In the stock markets today, there are good companies that are overpriced and there are worthless companies that are overpriced. If you are going to be a fool and pay absurd prices because you think that a greater fool will appear in the future, make sure you buy a goat and not a monkey .

Friday 25 November 2016

What is Rights Issue of a Share ?


Rights Issue

Rights issues are the shares issued by a company only to its existing shareholders which are cheaper than its current market price. Sometimes a company come out with a batch of new shares and may choose to not go the public (like IPO). A company may just approach only the existing shareholders (those who own the shares of that company) for the same. These shares are called a rights issue. In other words, only the existing shareholders have a right to buy these shares.
Example : If the market price of the share is Rs 200, the company may offer the rights issue shares for Rs 180. So if you are an existing shareholder, you get more shares at a cheaper rate than the market.

Will the Share Prices Go Up?

Normally, the price will go up because investors now want to buy the shares so that they can benefit from the rights issue.

Rights Issues are not Free


These shares do not come free like bonus shares. A Bonus share is offered free of cost. They are like a gift (bonus). Rights issue will need you to buy the shares.

How many Rights issue shares will I get?



Rights issue are always offered in proportion to your existing share holding. A company may come out with a 2 for 1 rights issue. This means that, it will give the shareholder who has 1 share, the chance to buy 2 additional shares. So, if you have 50 shares, you will get the chance to buy 100 additional shares, at a cheaper price.

What if I don’t want Rights Issue shares?

For a bonus share issue, you are just given the shares free of cost. While in the case of a rights issue, you are given the choice to decline, since you have to pay for it. You have the right to refuse to subscribe to these rights issue.

Is Rights Issue Good for me?

Only subscribe to a rights issue only if you really trust in the company’s performance. Don’t just buy it because you are getting it cheaper than the market price. Try to find out why the company is coming out with a rights issue. If the company needs this to raise money for a sound business plan that will eventually increase the profits and share price, then it is Good.

Tuesday 8 November 2016

Rs 500 and Rs 1,000 notes scrapped: Govt releases FAQ to help you make sense of it all

1. Why is this scheme (in place)?
The incidence of fake Indian currency notes in higher denomination has increased. For ordinary persons, the fake notes look similar to genuine notes, even though no security feature has been copied. The fake notes are used for anti-national and illegal activities. High denomination notes have been misused by terrorists and for hoarding black money. India remains a cash based economy hence the circulation of Fake Indian Currency Notes continues to be a menace. In order to contain the rising incidence of fake notes and black money, the scheme to withdraw has been introduced.
2. What is this scheme?
The legal tender character of the notes in denominations of Rs 500 and Rs 1,000 stands withdrawn. In consequence thereof withdrawn old high denomination (OHD) notes cannot be used for transacting business and/or store of value for future usage. The OHD notes can be exchanged for value at any of the 19 offices of the Reserve Bank of India or at any of the bank branches or at any Head Post Office or Sub-Post Office.
Representational image. AFP
Representational image. AFP
3. How much value will I get?
You will get value for the entire volume of notes tendered at the bank branches / RBI offices.
4. Can I get all in cash?
No. You will get upto Rs 4,000 per person in cash irrespective of the size of tender and anything over and above that will be receivable by way of credit to bank account.
5. Why I cannot get the entire amount in cash when I have surrendered everything in cash?
The Scheme of withdrawal of old high denomination (OHD) notes does not provide for it, given its objectives.
6. Rs 4000 cash is insufficient for my need. What to do?
You can use balances in bank accounts to pay for other requirements by cheque or through electronic means of payments such as Internet banking, mobile wallets, IMPS, credit/debit cards etc.
7. What if I don’t have any bank account?
You can always open a bank account by approaching a bank branch with necessary documents required for fulfilling the KYC requirements.
8. What if I have only JDY ( jan dhan yojna ) account?
A JDY account holder can avail the exchange facility subject to the caps and other laid down limits in accord with norms and procedures.
9. Where can I go to exchange the notes?
The exchange facility is available at all Issue Offices of RBI and branches of commercial banks/RRBS/UCBs/State Co-op banks or at any Head Post Office or Sub-Post Office.
10. Need I go to my bank branch only?
For exchange upto Rs 4,000 in cash you may go to any bank branch with valid identity proof.
For exchange over Rs 4,000, which will be accorded through credit to Bank account only, you may go to the branch where you have an account or to any other branch of the same bank.
In case you want to go to a branch of any other bank where you are not maintaining an account, you will have to furnish valid identity proof and bank account details required for electronic fund transfer to your account.


11. Can I go to any branch of my bank?
Yes you can go to any branch of your bank.
12. Can I go to any branch of any other bank?
Yes, you can go to any branch of any other bank. In that case you have to furnish valid identity proof for exchange in cash; both valid identity proof and bank account details will be required for electronic fund transfer in case the amount to be exchanged exceeds Rs 4,000.
13. I have no account but my relative/friend has an account, can I get my notes exchanged into that account?
Yes, you can do that if the account holder relative/friend etc gives you permission in writing. While exchanging, you should provide to the bank, evidence of permission given by the account holder and your valid identity proof.
14. Should I go to bank personally or can I send the notes through my representative?
Personal visit to the branch is preferable. In case it is not possible for you to visit the branch you may send your representative with an express mandate i.e. a written authorisation. The representative should produce authority letter and his/her valid identity proof while tendering the notes.
15. Can I withdraw from ATM?
It may take a while for the banks to recalibrate their ATMs. Once the ATMs are functional, you can withdraw from ATMs upto a maximum of Rs 2,000 per card per day upto 18 November, 2016. The limit will be raised to Rs 4,000 per day per card from 19 November, 2016 onwards.
16. Can I withdraw cash against cheque?
Yes, you can withdraw cash against withdrawal slip or cheque subject to ceiling of Rs 10,000 in a day within an overall limit of Rs 20,000 in a week (including withdrawals from ATMs) for the first fortnight ie upto 24 November, 2016.
17. Can I deposit withdrawn notes through ATMs, Cash Deposit Machine or cash Recycler?
Yes, OHD notes can be deposited in Cash Deposits machines / Cash Recyclers.
18. Can I make use of electronic (NEFT/RTGS /IMPS/ Internet Banking / Mobile banking etc.) mode?
You can use NEFT/RTGS/IMPS/Internet Banking/Mobile Banking or any other electronic/ non-cash mode of payment.
19. How much time do I have to exchange the notes?
The scheme closes on 30 December, 2016. The OHD banknotes can be exchanged at branches of commercial banks, Regional Rural Banks, Urban Cooperative banks, State Cooperative Banks and RBI till 30 December, 2016.
For those who are unable to exchange their Old High Denomination Banknotes on or before 30 December, 2016, an opportunity will be given to them to do so at specified offices of the RBI, along with necessary documentation as may be specified by the Reserve Bank of India.
20. I am right now not in India, what should I do?
If you have OHD banknotes in India, you may authorise in writing enabling another person in India to deposit the notes into your bank account. The person so authorised has to come to the bank branch with the OHD banknotes, the authority letter given by you and a valid identity proof (Valid Identity proof is any of the following: Aadhaar Card, Driving License, Voter ID Card, Pass Port, NREGA Card, PAN Card, Identity Card Issued by Government Department, Public Sector Unit to its Staff)
21. I am an NRI and hold NRO account, can the exchange value be deposited in my account?
Yes, you can deposit the OHD banknotes to your NRO account.
22. I am a foreign tourist, I have these notes. What should I do?
You can purchase foreign exchange equivalent to Rs 5,000 using these OHD notes at airport exchange counters within 72 hours after the notification, provided you present proof of purchasing the OHD notes.
23. I have emergency needs of cash (hospitalisation, travel, life saving medicines) then what I should do?
You can use the OHD notes for paying for your hospitalisation charges at government hospitals, for purchasing bus tickets at government bus stands for travel by state government or state PSU buses, train tickets at railway stations, and air tickets at airports, within 72 hours after the notification.
24. What is proof of identity?
Valid Identity proof is any of the following: Aadhaar Card, Driving License, Voter ID Card, Pass Port, NREGA Card, PAN Card, Identity Card Issued by Government Department, Public Sector Unit to its Staff.
25. Where can I get more information on this scheme?
Further information is available at our website (www.rbi.org.in)



Outlets that will accept Rs 1,000 and Rs 500 notes in next 72 hours 

1. Government hospitals will accept these notes from November 9 till November 11, and in government dispensaries with doctor's prescription. 

2. Old notes will be accepted for buying train and airline tickets. 

3. Government bus stops will accept these notes for the first 72 hours starting midnight of November 8, 2016. 

4. Old notes will be accepted at petrol, diesel and CNG stations run by public sector companies

5. Milk booths and crematoriums .. 

6. Cooperative shops, Kendriya Bhandar, ration shops, Safal shops and dairies recognised by the state government will accept Rs 500 and Rs 1,000 bank notes, but all of these entities will have to maintain a stock register. 

7. International airports will have the facility of exchanging the old notes for foreign tourists and those going to foreign nations till a limit of Rs 5000.



Saturday 22 October 2016

how a company grows from almost nothing to being traded in the stock market

In this post, I will explain how a company grows from almost nothing to being traded in the stock market. I will use this to explain basic finance terms.

Stage 0: Bootstrap Startup Tom and Ian start a lemonade business. The business involves buying lemon, sugar, cups and ice cubes. They buy these raw items at the start of the day and then sell the end product (lemonade) throughout the day. 

They need money for three things:
1.    The lemonade stand, juicer, ice box. This is called the fixed assets or Capital.You can use the same stand & juicer for making a long time. Thus, make this investment one time and can enjoy the benefits for a long time. The term "capital" is the central part of entrpreneurship and is the root for "Capitalism".
2.   The raw materials they buy at the start of the day. The raw material gets used up as you make the final product. The raw material and juice you have made it in a pitcher before selling is together called an inventory.
3.   Keep some change in the register for people who are paying with bigger denomination currency. This is called just cash.

Together the fixed assets + inventory + cash is called the company assets.

To get these assets they need to use some money - called an investment. It all costs about $100. Tom and Ian put $50 each. They shared the investment and the profits 50:50. In other words, each owned 50% shares in the company.

They use 10 lemons, 5 sugar packets, 10 ice cubes, 50 cups to produce  50 glasses of lemonade per hour. The raw materials cost $10 and they sell lemonade at $0.25/cup. This provides them 50 * $0.25 = $12.50 in total money got from the customers. This is called revenues. 

They spent $10 on raw material. This is called Cost of Goods Sold. 

The profit is now $12.50 - $10 = $2.50. This is called earnings. 

How significant is this $2.50? We need to see it as a percentage of the revenues. Profit divided by the revenues is called the margin. In this case the margin is:

Stage 1: External InvestmentBusiness is going ok and they want to grow it even bigger. They realized the following:
1.    Instead of buying lemons every day from a local vendor, they could buy it at wholesale from a distant wholesaler every week. If they buy lemons in bulk, they need to buy a big box to hold them. Bigger Inventory.
2.   Instead of squeezing them in their old juicer, they want to buy an industrial grade juicer. This enables them to produce juice faster and serve more customers. Increased Capital investments.
3.   By producing more lemonade & selling them more they could reduce the overall costs per glass. The same stand and labor could be used for the increased production. The idea that you can reduce your average costs by producing more is termed the economies of scale.

All this requires $100 more in investment. The founders - Tom and Ian don't have that much money. The bank won't lend them anything as they are very new in the business. They go to a local wealthy guy - Rich. 
Rich says he can give $100, but asks for a share of the profits in the business. In short, he wants to a co-owner of the company.

Now, how many shares should Rich get?

Tom and Ian get together to start valuing their company.

Assets:Fixed assets (juicer, stand): $50
Inventory: $50
Past profits (that they have it in the bank): $50

Total assets: $150

There is one thing that is missing here. What about the reputation and brandthey have built? 
1.    TomIan Lemonade Stand is popular among the local public, who frequent it. A lot of people made the drink their part of their daily routine.Brand.
2.   Local shopkeepers give discounts to these guys as they have proven to be trustworthy. Relationships.
3.   They have already set up paperwork with the local corporation and all this required manual work. Relationships.
4.   Through their daily routine, they found faster ways to squeeze the lemons.Intellectual Property & Processes.

What is the value of all this?

It is hard to put a value to all this. However, these items have a big impact on the future revenues.

Together these things are called the Intangible Assets. They are hard to touch and see. But, have a lot of hidden value.

Ian and Tom guess that the value these at $200. Rich scoffs at this and says he sees these are worth only $50. With no other option, they grudgingly take the offer.

Total value of TomIan Stand: $200 ($150 in tangible assets and $50 in intangible assets).

Rich is bringing $100 in new cash. Together the total assets after investment is $300.

Since Rich put $100 in that, he gets 33% in the company:



Tom and Ian share the remaining 66.66% equally among them. These 3 are now called the shareholders - as they all own the share in the company. Rich is not working the lemonade stand and is non-executive owner of the company. Rich is sometimes called the Angel Investor. He is the rich guy who acted like an "angel" to these small entrepreneurs.

Stage 2: GrowthThe business is now going quite well. Using the money from Rich and later a few more wealth people, TomIanRich Lemonade Corporation has increased production and have setup multiple stands in different parts of the city.

Now, they dream really, really big. They want to bottle the lemonade and sell it worldwide. They reason that their unique flavor has already proven to be a hit in their city.
This expansion requires a substantial amount of new money - 100 million dollars. Tom & Ian project that this 100 million investment could provide them a profit of over $500 million in the next 10 years. Sounds attractive.

It would be impossible for them to find that many rich people from their contacts directly. However, they guess that if each person in their state invests $10 in their company, they can easily get that investment. Each of the investor could be given a small percentage of the company & its profits. Since a $100 million in investment could produce $500 million in profits (according to "Estimates) it is likely that an ordinary investor who put $10 could get $50 in the next 10 years if everything goes well.

However, how do they get $10 from 10 million people? Where do they go to?

Stock Markets. 

Stock markets are like an eBay for investors. There are a bunch of people who are selling you shares in their company in return for your money. Just like you buy tomatoes in your regular market, you can buy shares. To make it even more simple, you can both buy and sell at any time. This is called a trade or an exchange. 

What are the functions of the stock markets (also called exchanges):
1.    They bring a large number of investors and good companies in a single place. Thus, investors have a lot of companies to choose from and companies have a lot of investors to provide money. This works the same for any marketplace. A Stock market is a company just like eBay or Amazon that brings different parties together. Just like Craigslist competes with eBay, New York Stock Exchangecompany competes withNasdaq.
2.   They verify the credentials of the company to make sure only really quality companies are listed in the board. The best exchanges allow only the best companies. Thus, it is a mark of honor to be listed on the New York Stock Exchange. 
3.   They provide each ways for transfer of payments & share certificates between the buyers and sellers.

The first time a company enters the stock market is called the IPO or Initial Public Offer. The "public" here refers to the fact that you are raising money from common public (instead of just rich people who are Angel investors). This requires a lot of transparency in your accounting and companies prepare this process for months. Twitter is now rumored to be in this process of preparing for its IPO.

Google executives at its IPO in Nasdaq.

Share price.TomIanRich Corporation has now successfully entered the New York Stock Exchange. They divided the company into 10 million pieces (called the shares) and sold 5 million of them at $20 a piece. This called the share price.

Do you see the value of an item in eBay change? Yes it does. It depends on how hot an item is. If more people are interested in holding the share of a company X, the share prices would go up.

On Dec1, Tom finds a new way to use the lemonade formula for making a lemonade candy. New investors see that and believe that the profits will be moving up. As new investors flock in, the share prices move up.

On Dec 5, Ian finds a major damage in one of their warehouses and announces that this will cause a drop in their profits. Many existing investors sell shares and share prices move down.

On Dec 10, a major healthcare institute announces that lemonade is good for the body. Smart investors understand that this will cause more lemonade consumption, meaning more future profits. This again causes the stock to move up.

In short, the share price moves up and down as investors adjust their profit projections based on the arrival of new news.