Wednesday, September 29, 2010
Investment success or failure depends on your ability to formulate a successful investment strategy and to have the discipline to follow the chosen investment strategy. Understanding one’s own personality traits is essential, both for formulating a successful investment
strategy and in implementing the strategy with discipline. For example: if you are prone to take impulsive decisions, you could end up buying stocks on tips without doing detailed research in stocks where you are investing, whereas if you have an aggressive personality, you might be trading/investing in stocks with high risk-reward ratio.
New investors should make prudent stock investments in the beginning by investing small amount of capital until they gain confidence on their investment strategy. While investing, they should also gain clarity about how their personality traits could affect the successful outcome. Although the investors might not gain during the initial learning period, they can successfully deploy their experience while managing a bigger pool of funds.
If you are an existing investor, the best way to learn and improve the success in investing would be to study whether you are taking buying/selling decisions based on the emotions or based on a sound investment strategy and review the performance of your past investment decisions.
Before you evaluate your performance you need to gather data about your past transactions. Thereafter, you should be reviewing your reasons for purchase and/or sale of your investments.
Check whether the reason to buy a stock was based on some rumour/hot tip from your friends or based on information about the expected stock price movements? Have you bought any stock because it seems to be moving a lot off late and you expect it to continue to rally after you have purchased it?
Did you buy some stock because all your friends and most of the investing crowd seem to be buying it and you do not want to feel left out?
Have you bought a stock because you had a gut feeling that it would go up and you did not want to miss the upside opportunity?
In most of the cases above, 'greed' was the predominant emotion that has dictated the purchases by the investors.
Check whether you have sold the stock, after it witnessed a steep fall and you were afraid that it would continue to fall?
Have you sold your investments because other investors were also exiting and there is panic in the market place?
Have you sold because you had notional losses and were afraid that there could be some negative developments in the company and the stock would fall further?
In most of the cases above, 'fear' was the predominant emotion that has dictated the sales by the investors.
Investors also need to review their current holdings periodically to check whether they are holding stocks as a part of their investment strategy or due to decisions based on the emotions such as hope, love, disbelief.
If the stock you have bought witnessed a steep fall, are you still hoping that the stock would recover to reach your cost price where you bought, so that you can recover your amount?
Are you in love with some of the stocks that you hold, and as a result you do not want to sell those stocks even though the performance of the stock is poor?
Are you still holding the stocks that you have bought at higher prices in an up trend because there is disbelief that the market has turned around and entered a downtrend?
If your answer to the above questions is yes, then you might not be holding
stocks that give you the best upside opportunities in a recovery.
Pls. note that investors whose decisions were dictated by the emotions such as Greed, Fear, disbelief and love are the ones who are not able to establish a proportionate balance between risk and reward. Once they understand their personality traits they can remove the distortion caused by their emotions and they would be able to take a more disciplined approach towards investing.
By reviewing the past experiences in the market and learning from them, investors can improve their success rate in stock market investing. Based on their learning, investors can redefine their investment strategy and apply it successfully to invest in Stocks, Commodities and Real Estate markets!
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Wednesday, September 8, 2010
What is Open Offer?An open offer is an offer made by an acquirer to buy a fixed quantity of shares, when his stake in the target company crosses certain pre-defined limits. In case of takeovers, an open offer can be an exit opportunity for existing shareholders
as the offer price is usually at a premium to the prevailing market prices.
When would an open offer be triggered?~ If an entity’s stake in a company crosses 15% of the total shares outstanding, then he needs to make an open offer for a further 20% of total shares outstanding.
~ If an acquirer has 15% or more but less than 75% of shares, to get more than 5% of the voting rights of the company in a year, the acquirer needs to make an open offer for further 20% of shares of target company.
~ An acquirer, who already has a stake of 75% or more in a company, can acquire further shares only through an open offer from the shareholders.
Regulatory View● SEBI's (Substantial Acquisition of Shares and Takeovers) Regulations, 1997: Provides regulations and suggests measures to protect interest of the investors.
● If the shares received by the acquirer under the offer were more than the shares agreed to be acquired by him, the acceptance would be on a proportionate basis.
● After the public announcement of open offer, it should be opened on or before 55 days. The open offer is kept open to the public for a period of 21 days.
How does one determine the offer price?SEBI does not decide or approve the offer price. The acquirer is required to ensure that all the relevant parameters are justified in the offer, which are
● The highest price at which the acquirer has acquired the shares of the target company as per the agreement.
● If the target company is frequently traded, then the average of weekly high and low prices of shares is taken for 26 weeks or during two weeks prior to the date of the Public Announcement, else the fundamentals of the company are
● In case of abnormal cases, amendments of regulations are expected from SEBI to deal with pricing issues. (Ex. Satyam Computers)
How can an investor benefit?● Short-term players might enter for arbitrage when the market price of the stock is lower than offer price, and exit the stock before the close of open offer, as there is a possibility of share price moving towards the offer price.
● If the acquirer is accepting more number of shares, then there is a greater possibility that the shares tendered by the investor would be accepted under the open offer.
More Importantly - The Conclusion:An investor can benefit under an open offer, as it is an opportunity for him to exit his position in a stock, at a price that is usually higher than the prevailing market price. Short-term traders can also benefit from the arbitrage opportunity in the
open offers as the stock price usually moves closer to the offer price, once the company announces an open offer.
However, if the number of shares tendered by the investors were more than those available under the open offer, the company would acquire the shares on a pro-rata basis. Also there is a risk of a steep fall in the share price once the open
offer concludes. As a result, the investor could end up having to sell the unaccepted stock at lower prices.
On the tax angle, both short-term investors and long-term investors are taxed with the applicable tax rates as open offers are treated as off-market transactions (hence the lower capital gain taxes that are applicable for normal investors in the market would not be applicable to the gains made by submitting the shares in an open offer).
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