Learn how to chose stocks to invest using economy moat.

Here are some important things learn to chose stocks to invest.

1. Your country’s stock index has already chosen some great stocks for you.

For example in India our main stock exchanges are BSE Ltd. – Bombay Stock Exchange, and NSE – National Stock Exchange of India Ltd.

List of 30 stocks in BSE can be found here. This list may change from time to time.

List of 50 stocks in NSE can be found here. This list may change from time to time.

Now you have a handful of companies to research on, forget the rest.

Please note that in order to make it in the list of a country’s top stock exchanges, a company has to be well performing since years. No new comer is allowed in this list. A vigorous process is undertaken every year to chose the best performing companies in the list. Seats are always limited so only the best companies can get in.

2. Select 3 or 4 sectors which do businesses to retail traders.

Try not to select a sector that does business with only business houses, select sectors that does business with common people.

These businesses are known as BtoC – Business to Consumers. Do not select companies that do business in the BtoB Sector – Business to Business.

Here are some examples for you:

a) Banking Sector – In most families at least one member has a bank account in some bank or another.

b) FMCG Sector – Fast Moving Consumer Goods (FMCG). These are companies making products that are sold quickly and at a low cost to consumers either in a shop near their house or online through e-commerce websites. These things include things like food items, clothes, toiletries, over-the-counter drugs, processed foods and consumables. Almost everyone needs them to survive.

c) Pharmacy Sector – These do not come under over-the-counter drugs, but specialized medicines which can be bought only when someone shows a doctor’s prescription. These are usually costly medicines.

d) Automobiles Sector – We cannot sit at home and live our lives. We have to move somewhere to survive. As kids we went to school, when we grew up we went to college, then when we got a job we had to go to our office every day, people go on tours, visit places for business assignments, change city because they were transferred or got a new job.

80% of the times in our lives we keep moving. This is not possible by walking, we need vehicles to move. Lots of people have their own vehicles now and this sector is increasing everyday. For this reason Automobiles Sector makes it to the important sectors to invest list.

e) Information Technology Sector – Now a day’s no company can do business without computers and software automating jobs. This speeds up the data processing process and saves time. Interestingly Information Technology Sector was earlier only a BtoB (Business to Business) Sector, but in this fast changing world it has also become a BtoC (Business to Consumer) Sector. We use a lot of things in our homes where Information Technology Sector comes in, like Computers, Mobile Phones, Televisions, Stock Trading Software and many other electronic devices having some or the other Information Technology object which we ourselves do not know.

Housing sector is also important but history is a proof that it was and will be a risky sector.

Now chose one stock from each of these sectors with a great Economy Moat.

What is Economic Moat

Economic moat refers to the power and advantage a company has over other companies in the same sector. These things include:

• How large and wide is its business
• Trustworthiness of its brand name
• Competitive pricing structure
• Affordability of common man to buy its products
• High demand of its products
• Its ability to contain other businesses to surpass it and small businesses in the same sector to overpower it
• Financials and company growth
• Technology changes as per the new innovations in technology
• Networking with other companies
• Patent of their products to keep at bay rival companies to copy their production process which may have cost billions to research and make. Pharmaceutical companies are well known for doing this.

Other things also includes its financial profit history for the last 5 years at least

The companies with string Economy Moat can keep their services or products prices lower to attract more business. They can lower their prices because they make a lot of profit and are willing to attract more customers by lowering prices.

Once the research is complete you will get a list of three or four companies of different sectors to invest in. You can then start investing in them through the SIP method.

SIP method is Systematic Investment Plan Method

For example you have 10,000 to invest every month and you came out with four companies to invest.

10,000 / 4 = 2500.

Now start investing Rs. 2500 in each company every month. If any company stock goes down you will be able to average it out because with the same money you will be able to buy more stocks. The average value of buying the stock will go down too. If the price of a company goes up you buy less stocks with the same money.

Over time law of averages will come in and you will be able to make good profits in a few years.

When To Sell a Stock?

This question has not been answered anywhere but here are a few pointers.

• Sell all stocks of a company if you see its Economy Moat going down.
• If you need money for your financial goals like kids education or marriage sell the stock that has made the maximum profits
• Sell all the leftover stocks in your account when you retire and keep the money in a few debt or liquid funds. Every month take money out as per your requirements and live a peaceful life.

Make sure that you nominate your spouse or children and write a will so that your children know about your investments and are able to take it out and repeat the process written above if something happens to you. If you do not write a will, your children may not be able to know or take out the money you earned in your lifetime and it will become a waste and will lie with the investment institution. Make sure before you go that this does not happen.

Learn the difference between Ask and Bid Prices And Spreads in this article and what happens when volumes get thin in stock markets.

This month stock markets are witnessing low volumes in trading. Stock Prices are decided on the current demand and supply, and not what has happened in the past.

Let us take an example. Let say XYZ stock is trading at 515 and the first quarter results have come in beating market expectations. It is obvious that traders and investors will be willing to buy the stock and trading on that stock will get very active.

Due to good results, both the buyers and seller will become very active in this stock. If you see your trading platform you will see that it will show Ask and Bid prices.

What is ‘Bid’ in stock trading

Bid the best price a buyer, trader or a dealer is willing to buy that stock or an option at that particular time. Best price is the highest price buyer is bidding or willing to buy the stock.

What is ‘Ask’ in stock trading

Ask is the price a seller of a stock or an option is willing to accept to sell that stock or option. Best Ask is lowest price a seller is willing to sell stock at that particular time of trading.

Whenever they both match a trade is completed and then if trading volumes are high the Bid and the Ask prices both go up. This will take the stock price up. However if the demand of the stock is low due to whatever reasons, both the Ask and the Bid prices may go down taking the price of stock down.

For example if XYZ stock’s first quarter results would have come poor, the Ask and Bid prices both would have gone down as interest in trading that stock would have gone down.

Job of Market Makers

Sometimes when there is very low demand and supply market makers come into action and displays their prices. When the volumes are very thin the software does not understand and you may see huge differences between Ask and Bid prices. Like Ask at 515 and Bid at 500. Due to this huge difference trading may not take place at all.

Here is where the market makers come into action and controls the Ask and Bid prices so that trading does takes place.

Right now trading volumes are low and it is the job of market makers to check that Ask and Bid prices do not have too much of gap. These are mostly done in stock and derivatives where still they find reasonable traders trying to do trading, but due to huge difference between Ask and Bid the trade is not happening.

If they do not control trading prices, retail traders may get confused and those hitting market orders may get stocks at amazing high prices and suffer losses.

If traders keep getting confused they will stop trading and stock markets will remain stabilized not moving for years. This the market movers do not want, hence they control the Ask and Bid prices.

If investors lose interest in stock markets, no new company will come up with an IPO (Initial Public Offer). It is already happening in India since last 2 years. Very few companies have come with an IPO. It is due to IPOs new companies can collect money from the stock market to expand their business. Please note that a company does not have to give back the money to an investor who buys its stock, except when it decides to buy back a few shares. This happens rarely. A company only give dividends to its stock investors.

Dividends also comes from the profits made from the business, not money paid to investors from their pockets.

If investors do not invest in IPOs or in stock markets, a country’s economy may get hit. This the governments do not want. This is the reason when thin volumes are seen in stock exchanges governments gets worried. They either come up with statements or actions to bring back investors beck to the stock markets.

What is A Spread?

The difference of the price between Ask and Bid is the Spread. When the Spread is tight, volumes are good. However when the Spread is wide, it is for certain that Volumes are low.

Right now volumes are thin, so the Spreads in many stocks, options and futures must be wide.

It is advised that during low volumes traders should trade with caution. Even if they want to trade they must not hit market orders but try to hit limit orders only where they can decide at what price they want to buy or sell a stock.

If you have any questions please ask in the comments section.

Now experts are saying what I have been saying for long, that, demonetization of old Rs. 500 and 1000 notes, is the only reason Indian markets are finding it hard to recover and go up.

How long will this take, no one can say but one thing is for sure – as soon as the cash withdrawal limits goes away and Indian banks and ATMs will have enough cash in the system to keep giving money as per the requirement of their clients, this cash crunch in the system will go away and some percentage will flow in the stock markets taking it up.

It was expected that this will get over by January 2017, but now it seems it will take longer. So for traders and investors patience is required.

As far as I know RBI is printing new Rs. 100 notes to get rid of cash crunch and other notes as well. Once this will get in the system and the limits to withdraw money from the banks is taken away Indian Stock Markets will get a boost.

What To Trade Now during Demonetisation?

Read to know how to invest in stocks and invest the way Warren Buffett invested in stocks.

Indian stock markets are down more than 10% from recent high, this is a great time to invest in stocks. In future also remember that:

Whenever there is more than 10% fall in major stock index in your country, just get in and buy great stocks in SIP (Systematic Investment Plan) method.

Since Indian stock markets have fallen a lot it is a great time to buy stocks. For long term investors and non-directional traders this is the best time to make profits. India’s top stocks are at a great level to collect for the long term.

It is always a great idea to research stocks which have the capability to enter the stock market index. In India the most popular stock index is Nifty. Here is the list of top 50 companies that make Nifty. It is highly recommended that you invest in the best 4 stocks from different sectors that are in the top 50 list. When your country’s stock exchange has already hand-picked the stocks for you why do further research? They have a very strong selection criteria to pick stocks that can make to this list, then why bother about other stocks?

Some of the big giants that you can buy in the SIP (Systematic Investment Plan) mode are Infosys, HDFC, SBI, L&T, ONGC, Axis Bank, Maruti Suzuki, Tata Steel, Hindalco Industries. These are strong companies and have fallen a lot. Please note that this is not a recommendation to buy these stocks. I am only giving you ideas to research on these stocks. Please do your own research and invest as per your capability. Also remember that stock markets investments are subject to market risk, so please thoroughly research before investing in any of the above stocks.

What is SIP Method of Investing?

SIP is known as Systematic Investment Plan. SIP is highly popular with Mutual Fund Investors, because Mutual Fund industry has advertised Systematic Investment Plan in a great way – in news papers, TV, magazines, websites, emails etc. Therefore Mutual Fund Investors know about SIP very well and automate the whole process and make a lot of money. I am mutual fund investor too.

It is really strange that stock investors, not just in India, but in the world are not much familiar or interested in investing in stocks in the SIP method.

One reason is that our brokers do not advertise investing stocks in SIP method. They just tell us to buy as much as we can. Because the more you buy, the more money they make. Then what happens is known to the investor only, brokers are least bothered because they have made money, why should they bother about their investors?

Another reason is Greed – a traders biggest enemy. Most stock investors think it will take months or years to make 10% on a small amount so why invest in phases? They invest millions of rupees in one go as soon as they get a green signal from their brokers, and then scratch their heads when they see the stock falling down.

Once they see a loss of 20% or more they exit. It is strange that after they exit, the stock starts to move up. This makes them more frustrated.

This is not the correct process to make money from investing in stocks.

Do not forget that unlike derivatives stocks do not have an expiry date. Big companies are here to stay forever.

The best investor of all times Warren Buffett made a lot of money investing in good company stocks. In 20 years he went on to become the richest man in the world investing in stocks.

But all over the world you will see many stock investors losing millions investing in stocks.

Why they cannot copy what Warren Buffett did? The reasons are pretty simple:

Date: Dec 21, 2016

8000 Is a big support For Nifty because when it breaches a psychological level, greedy traders come in and start buying stocks to take Nifty high.

If you refer my previous emails you will see that I had written that 8000 is a big support for Nifty. It is very hard for Nifty to break 8000 on the downside because there is no big negative news except demonetization that the market has already factored in. Moreover greedy traders come in and start buying stocks to take Nifty high.

The reason why it is not going up fast in spite of US stock markets hitting all time high is the liquidity is low. The retail traders are busy taking money out from the banks and put food on the table. Right now getting and buying the essentials of living a life is more important than investing money in stock markets.

Once this demonetization effect gets over people will once again start investing in stock markets. I do not feel that day is very far as now days you do not see long queue in the banks.

Until the cloud does not get over there is going to be no trend in the markets. The best trade to do now is the non-directional strategies in my course.

It is really a tough time for directional traders and I am sure they must be losing money now as there is no trend at all in markets. In fact if you look back you will see that 80% of the times there is no trend in the markets.

So non-directional traders make money 80% of the times and directional traders make and lose money 20% of the times.

Why Most Traders Then Do Directional Trades Only?

Because most traders think only way to make money in stock markets is to trade the direction. I am sure more than 80% just do not know that there is something called non-directional trades that makes money when Nifty just does not move much.

Another reason is greed. Some of them know there are non-directional trades but it makes less money though safer than directional, but unfortunately greed takes over and to make more money in less time try the directional trades and lose money.

It is only after losing lakhs and sometimes crores they stop trading.

Those who have done my course non-directional trade Strategy 1 is the best to do right now. Keep looking at profits according to the course and exit when you reach the desired target.

Learn why interest rates affects the stock markets and how to be aware of them as a trader.

Lots of people do not know that interest rates do affect the stock markets. In this article you will learn why interest rates affects the stock markets and also the premium of options.

What Is Interest Rate?

Whenever you take a loan from a bank you have to pay them extra money for the money they lend to you. Or if you pay via credit card and do not pay back the money on time then you have to pay a fine plus some interest on the borrowed money.

The extra money you pay is decided on the interest rate to lend money.

In simple terms let say A borrows money from B a sum of Rs. 100 on the condition that after one year A has to give back Rs. 110 (100 + 10) to B. In this case the interest rate is 10% on the borrowed sum for one year.

Why should A pay an interest rate to B?

This is nothing but the cost of borrowing someone else money because, why should someone give his money to someone else for free? For that the borrower needs to pay a price depending on the interest rate decided.

In stock markets no one borrows money but still interest rates does affect the stock markets.

Recently there was a big news on FED interest rate hike. Interestingly traders all over the world were waiting for the news but others were not so interested. We will shortly know why Interest rates affects the stock markets.

In the US banks borrow money from the Federal Reserve Bank to do business and pay an interest rate to Federal Reserve Bank. If FED increases interest rate, the cost of borrowing money from FED will increase and it is obvious that these interest rate increase will be passed on to the consumers. In effect all loans like mortgages, personal and business loan rates will increase. Since the interest rates will increase on loans, their demand will go down.

When their demands goes down, the system will have less money to buy things. When the system will have less money to buy things, demand will be less than supply. This will obviously lower the cost of products and services in the markets or keep them stable.

This is how central banks all over the world control Inflation. In US central bank is Federal Reserve Bank, in India it is the Reserve Bank of India (RBI).

What Happens When Interest Rates Are Raised By Central Banks

In the very short term not much is affected. But over the long run the affects can be seen.

Borrowing money from the Central Banks becomes costlier by the banks, therefore liquidity of money in the system goes down. Why? Because when borrowing money becomes costlier banks cannot pay the interest from their pockets, they will pass it on to the consumers. This affects an increase in the interest rates in mortgage loans, credit cards, personal loans, car loans, business loans and other kinds of loans. Therefore both individuals and businesses are affected.

When loans gets costlier both individuals and businesses borrow less money from banks.

When businesses are affected they will again raise the price to their products or services to consumers to remain profitable.

Do not forget that demand of products does not goes down drastically as people have to buy these products to continue living. Although due to less cash in the system and costlier products, the demand of the products does goes down to some extent. Lower demands does affect businesses revenues and profits.

When Central banks increase interest rates, it becomes difficult for businesses to borrow more money to expand their business. They start borrowing less, therefore the speed of growth of businesses also goes down.

Over the long term, businesses borrowing less money brings down the stock prices down of these companies. We will read shortly how.

Therefore, businesses are indirectly and directly affected by an increase in the central bank rates.

If rates are low – more business loans, more business and more profits, if rates are high – less loans and less business and less profits.

How Increase or Decrease in Central Bank Rates Affects Stock Prices

When businesses revenues and profits is affected it is obvious that the stock prices of these businesses also goes down as the profits do not meet expectations of the markets.

Retail investors trade in speculations but this is not the case with HNI (High Net-worth Individuals), and DIIs (Domestic Institutional Investors) like mutual funds. These people have a lot of money to risk, they cannot speculate and trade.
Their first priority is the fundamentals of the company.

One of the best methods of valuing a company is to see expected future cash flows from that company compared to present cash flows. Future cash flow comes from the expected growth of a company. When they see that a company may not be able to expand fast and may slow their growth they become skeptical to invest in that company.

When they see that the future situation does not show a great picture for a company, they invest less in that company or do not invest at all to reduce risk. This obviously decreases the stock price.

How Does The Stock Price Effects Investment

Retail traders look at the current situation of the stock price and invest. When the Institutional investors reduce their investments in these stocks, these stocks starts to fall and is seen by retail investors. It is obvious that they get tempted and sell their stocks. This is a simple reason why retail investors sell when the markets fall and buy when the markets go up and lose money in the long run. In reality they should buy more when the stocks are falling and sell to book profits when the stocks are rising. Unfortunately since the birth of stock markets retail investors are doing this mistake time and again and will continue to do so.

Conclusion of the Affects of Interest Rates In Stock Markets

• When Interest rates are hiked it becomes costlier for banks to borrow money from Central Banks
• They pass these higher interest rates to consumers so rates on all loans like home, car, personal and business loans goes up
• Due to the above, cash in the system decreases and demand of products slows down
• When business loan rates goes up, businesses borrow less money and their speed of growth slows down
• When business growth speed slows down, it affects their prices and stocks begins to fall
• Vice-versa when the Central Banks lower their interest rates.
  

FED May Raise Interest Rate and it may impact stock markets all over the world.

The Federal Reserve Bank’s FED decision on whether to raise interest rates is due Wednesday at 2 p.m. Eastern.

India time it will be early morning Thursday, till then all stock markets in the world may not decide the direction.

Which means some sudden move may happen from Wednesday close to Thursday open.

If rates remains unchanged not much move may happen but VIX may drop – bad for option buyers.

Most experts feel there will be an increase but we all will know the real news only Thursday morning.

It is better to take a decision only after the news is out not before it as it could lead to losses.

Update 14-Dec-2016:

Its 10.48 pm India time on 14-Dec-2016 and the FED meeting may have started. What they will do, we do not know but The FED is widely expected to raise rates today and this may impact world markets.

Please be very careful with your traders tomorrow as your biggest enemy greed may come in and destroy your wealth.

Do not trade without a hedge, since you have not done my course there is nothing more I can say but those who know what a hedge is please do not trade naked.

Those who have done my course I am sending this email in advance so that almost all of them read before markets opens tomorrow.

Results: In an unexpected move FED kept rates unchanged. However what may happen in future we do not know.

Update 17-Dec-2016:

The Federal Reserve hiked short-term interest rates by 0.25 percentage point today. It’s the first time the central bank has raised rates in almost a year. It is also strange that it did not raise interest rates in its general meeting on 14-Dec-2016, howsoever today it did that in an unexpected move but universal expectations.

This has not impacted the markets much as it was expected and factored anyway into the stock markets.

Please see my yesterdays email. I had written that all over the world the stock markets are going up. In fact Dow Jones one of the main stock market Index of USA has hit a record high yesterday.

Yesterday it closed even higher. Dow and S&P 500 hit fresh records. It looks like traders there are seeing Donald Trump win as a positive sign for business in USA.

I had also written that Indian traders follow the US markets. The results is in for all to see. Today Nifty is up by 1.44% currently at 8218.75 (08-Dec-2016 at 1.11 pm).

Since last few days I was giving some advice to my course subscribers which was different form my course and they must have made good profits there too.

RBI rate policy: It is strange that the Reserve Bank of India (RBI) on Wednesday kept benchmark rates unchanged, still stock markets in India are going up. So why still Indian stock markets are rising? This is the US effect, not the India effect.

Sometimes, in fact most of the times, I see that logic works more than what Technical Analysis says in stock markets. Due to the 500 and 1000 notes demonetization effect most Technical Analysis were saying Nifty may see levels of 7600 or below. Fact is it did not even break 7900. In my view most Technical Analysis do not make money.

This is the reason I believe in thinking about most traders mindset on what they may trade, rather than what the experts are saying on TV or what a brainless software tells you to trade.

Neither experts talking on TV nor any TA software has the power to control millions of traders.

If you go deep into it. Only 1% of traders see them and listen to them carefully, and out of that 60% ignore what they are saying. So how can they be correct if traders are not doing as they are saying?

If you do not believe me follow any TA expert on TV and do a paper trading on their advice. Within months you will see that what they tell does not make money. So why they are shown on TV? To get eye balls, to increase the Television Rating Point (TRP), and to make more money via advertising slots.

So if you really need to make money trading only way out is to educate yourself as much as possible on stock markets.

RBI may cut rates on 07-12-2016 Wednesday (tomorrow), by 25 Basis Point (BPS). This could be one reason stock markets in India, Nifty and BSE are going up.

One basis point is equal to 0.01%. So 25 basis points is 0.25% reduction in interest rate.

Definition of BPS from Investopedia:

Basis point (BPS) refer to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument.

What does this mean?

This means the repo rate that RBI pays to banks to keep money with it will get reduced by 0.25%.

So What This Has To Do With Stock Markets?

When Repo Rates are reduced banks make less money with the parked money with RBI.

When banks make less money it is obvious that they cannot give more money to people who keep money with them, so it is likely that the Fixed Deposit rates may get reduced.

It is to be seen that home loans and personal loan rates get reduced or not.

Please note that to reduce the FD rates depends on the management of the bank so the Fixed Deposit rates differs from one bank to another.

It should also be noted that CRR limit is likely to be maintained at the 4 percent level. Which means banks will still keep 4% of the money they receive from deposits.

Update on 07-12-2016, 11.20 am:

Today is the RBI Policy on rate day and as written yesterday we may see a 25 BPS cut in Repo rate. In fact all 6 members of the MPC voted in favor of a rate cut, so 25 basis points rate cut is almost sure.

In fact many banks have begun to reduce interest rates ahead of Reserve Bank of India’s monetary policy announcement as cost of funds continues to decline. Bank of Baroda in the first bank to do so. Yesterday it reduced its one-year benchmark lending rate by 20 basis points or 0.20%.

Due to this expectation Nifty is trying to go up. If it happens Nifty may be up by a few percentage in days to come else we may see levels of 8000 again. But there is a big chance of rate cut, so positive news for Investors which means Nifty will go up.

All over the world the stock markets are going up. In fact Dow Jones one of the main stock market Index of USA has hit a record high yesterday.

This is good news for Indian markets. Why? Because most of the times Indian traders copy the movement of the US markets. If RBI does cut repo rate by 25 basis points we will see Nifty moving up swiftly.