Engineer's Finance

This is a honest confession from a Long term Investor or better you can call me Loser.

When I invested for the first time without any experience and without investigating and analyzing about that particular stock it was certain that I will be a loser eventually. But I did not realize this till I lost my money. I will tell you what did I do to call myself a Long term investor.

I bought a particular stock say XYZ for 5k. The moment I bought the stock, the stock price of XYZ appreciated by 2%. I was so happy. I did not monitor the share prices of XYZ for couple of days as I was busy with my work. After two days the price had fallen by 10%. I was worried. I thought of selling the shares immediately but I did not want to lose my money so I thought let me wait for a while once it appreciates I shall sell it. I waited for two weeks only to realize the stock prices were going south, the unrealized loss was close to 25%. I thought let me buy few more shares of XYZ so that the effective cost price of the share decreases and once I get a decent margin I shall sell it. This time I bought the shares for another 5k. As expected by me, the price of the stock went up more than my effective cost price. But I did not sell the share, the only reason I can give is my greed and nothing else. I told myself the prices will increase and I will make more money. I kept telling this to myself only to ensure I lose my money. After a couple of days, the stock prices went down drastically. The unrealized profits were close to -45%. It was a disaster. I was in +15% profit and suddenly after a couple of days its -45%. This was partly because of my carelessness and greed. I did not check my stock prices daily and my greed not to sell the stock when it appreciated for 15% is the main reason for my losses.

After all this, I again bought some more shares of XYZ for 5k and waited for 4 months to sell the stock at 15% loss. This way I became a Long term investor rather a loser. I am not against Real Long Term Investor. I don’t want you guys also to become a Long term Investor like me because of stupidity and greed. I could have made money from this super flop deal. But my greed was way too controlling. This clearly shows that a person with emotions is not a suitable candidate for Investing in Stock Market. A guy like computer who does mechanically stuff and understands numbers will make crores.

More to come on similar topics. Keep Visiting.

In my previous post, I had mentioned that there are 30 companies that constitute the Sensex. You must be wondering how these companies are selected and on what criteria they are selected. Here are the criteria with which the companies are selected for BSE-Sensex.

The general guidelines for selection of constituents in SENSEX are as follows:

Listed History:The scrip should have a listing history of at least 3 months at BSE. Exception may be considered if full market capitalization of a newly listed company ranks among top 10 in the list of BSE universe. In case, a company is listed on account of merger/ demerger/ amalgamation, minimum listing history would not be required.

Trading Frequency:The scrip should have been traded on each and every trading day in the last three months at BSE. Exceptions can be made for extreme reasons like scrip suspension etc.

Final Rank:The scrip should figure in the top 100 companies listed by final rank. The final rank is arrived at by assigning 75% weightage to the rank on the basis of three-month average full market capitalization and 25% weightage to the liquidity rank based on three-month average daily turnover & three-month average impact cost.

Market Capitalization Weightage:The weightage of each scrip in SENSEX based on three-month average free-float market capitalization should be at least 0.5% of the Index.

Industry/Sector Representation:Scrip selection would generally take into account a balanced representation of the listed companies in the universe of BSE.

Track Record:In the opinion of the BSE Index Committee, the company should have an acceptable track record.

Sensex is the word which is commonly heard. I wonder how many really know the meaning or ever tried to find it out. I did not know what was Sensex till I started investing.

Sensex is an index which provides an idea as to how the stocks are performing in the market. If most of stocks are bought on a particular day then the Sensex increases and if most of the stocks are sold then Sensex decreases.

How is Sensex formed? Sensex is formed by considering 30 big companies from various sectors such as IT, Power, Oil, Manufacturing, FMG, Retail, Banking and others. Current list of companies present in BSE Sensex can be found from official BSE website. It is basically a collection of various companies stock value.

For eg. Think that Sensex is formed with 5 companies say Infosys, Wipro, BHEL, ICICI and Hindustan Petroleum on 1 Aug 2008. As of today, Infosys is trading @ 100, Wipro @ 50, BHEL @ 20, ICICI @ 30, HP @ 50. On Aug 1 2008 the value of Sensex is determined as 100.

Trade value is 250 (100 + 50 + 20 +30 +50).

Infosys Percentage = (100/250) * 100 = 40%, Wipro = 20%, BHEL = 8%, ICICI = 12%, HP = 20%. This is to show how the Sensex varies with the change in the stock prices of various companies. Assume that after two weeks, the stock prices of the following companies are as follows. Infosys trading @ 120, Wipro @60, BHEL @ 25, ICICI @ 30, HP @ 30.

Trade value is 265 (120 + 60 + 25 + 30 +30).

The value of Sensex is – when trade value is 250 Sensex is 100, when trade value is 265 Sensex is 106. That means if an investor had invested on Aug 1, 2008 Rs. 100 then the value of his investment after two weeks would be equal to Rs. 106. Depending on the trade value the Sensex keeps fluctuating. The big companies that are chosen plays an important role in the Sensex, from the above example it is clear that Infosys plays a major role, if this stock’s value decreases then the Sensex also will decrease considerably and vice versa.

The base value of the Sensex is 100 on April 1, 1979, and the base year of BSE-SENSEX is 1978-79.

At irregular intervals, the Bombay Stock Exchange (BSE) authorities review and modify its composition to make sure it reflects current market conditions.

As of today the value of Sensex is 15167.82 (Market closure – 08/08/08).