Stocks – Lesson 4

Stop the Losses (When to Sell – Part 1)

In lesson 3 we just learnt that the most important thing to do in investing in Stock Market is to take care of the losses. Make sure your losses are minimum and how do we do that. One technique that we learned was not to make big bets. The rule that you are going to learn is the most important and should be adhered with a lot of discipline.

Let us take the same example of the previous lesson. You got 1 lakh to invest in stocks and 5% of that you use to get 14 shares of Wipro at 371 Rs per share. So you have now invested 14 * 371 = 5194 Rs (i.e around 5% of 1 lakh). The next day you look at the price and Oh my God !! Wipro is quoted at 300 Rs, a fall of 71Rs per share taking your paper loss to 994 Rs. Not bad you think , after all it is WIPRO, it has posted great profits so it will come up. The week after that Wipro is at 200 Rs. Now your paper loss stands at (371-200) * 14 = 2394 Rs. What do you do? Many people hold on to their stock with the belief that it will come good one day. It might, but there is a possiblity that ‘THE DAY MIGHT NEVER COME’. So what is the best you can do?

Stop Loss Orders are the answer. When you buy Wipro or any Stock for that matter, make sure you place a stop loss order at some fixed % below the purchase price. The % depends on your choice but make sure that it is not more that 25%. (Ideally 10-15%). What will happen is that when Wipro’s share price falls below the indicated stop loss price, the stop loss order gets executed and your shares are sold ensuring minimum loss to you. Should I place the order for all the shares I bought? No.. Don’t do that too. Sell half or 2/3 of the shares (7 shares or 10 shares of Wipro in our example). Place another stop loss a bit further down from the earlier one where you will sell another % of shares. But the final level at which you sell all the shares should not be greater that 25% of the initial value. Too Confusing !! Right? Let me explain it in simple terms.

    * I go and buy 14 shares of Wipro at 371 Rs. Fine.
    * At the same time I place a stop loss order to sell 7 shares of Wipro if the price falls to/below 316 Rs.  [7 shares is 50% of 14 shares. Rs 316 is 15% less that Rs 371]
    * I place another stop loss order to sell 4 shares of Wipro if the price falls to/below 297 Rs [4 shares of Wipro is close to 25%. 297 Rs is 20% less than that of of Rs 371]
    * I place yet another stop loss order to sell the remaining 3 shares of Wipro if the price falls to/below Rs 278 [3 share of Wipro is close to 25% and 278 Rs is 25% lesser of Rs 371]

What I have done is ensured that my loss at the maximum will be 7*(371-316)+4*(371-297)+3 (371-278) = 960 Rs (i.e 7*55 + 4*74 + 3*93 = 385+296+279). Great. At the worst scenario our total loss in the trade would be 960 Rs + Agent’s comission. That is just fine. But how does the entire process of stop loss order takes place.
We place the stop loss order using our broker (person, by phone or through internet). Once the price of the stock for which we placed the stop loss order reaches or falls below the price that we indicated in the order then the order gets executed and the shares mentioned in the order or sold to the market at the current rate. This is known by the term that we have been stopped out. The same happens for the subsequent orders. It might also happen that Wipro might fall to 316, stopping us out of the first order and continue to fall till 300, but then it might climb back to 450 (who knows what might happen), in that case we would have sold 7 shares at 316 but we still have 7 more shares and with the price at 450 it means that we now have a profit of (450-371)*7 = 553, just with the 7 shares left. But we have incurred a loss of 385 already in selling the other 7 shares by way of stop loss. Net effect is that we have a 553-385 = 168 profit at hand. Not bad. But you might ask, if Wipro is capable of coming back then why sell the 7 shares at 316, why not wait. That is where the danger lies. You might Wait.. Wait and Wait for ever and Wipro might never come back or worse still it might continue to go down and bite the dust.
So stop loss is just that ‘Stop your loss – before it gets too bad’. The example we have taken is very trivial, but consider thousands of rupees at stake and you know its importance. To close this lesson let me tell you the funiest thing that people do when the price of their stock falls. Many people instead of stopping their loss, actually make it worse by buying more shares at the falling price. A few more think that long term investing means they can buy the shares and keep it with them without selling come what may. In the next lesson you will know why both of them are kicked out of the stock market as beggars.

Sivakasi

Yet another Vijay film. But there is one thing surprising about him. He manages to create an interest in his films even though there is nothing much that changes between films except the heroines. Asin replaces Trisha for the ‘Kuthu’ dances and comedy. She has done very well., especially in the latter. There is quite some ‘Mother & Sister’ Sentiments, more so in the second half of the film.

But the film has many positives. For one thing there is a lot of comedy and it is like a happy-go-watch film. But you will have to bear with some sentimental touch. It also is a kind of comdy-revenge film and you will laugh for your money’s worth. Another family entertainer from Vijay and will be a hit equal to ‘Gilli’. In fact it is Perarasu who has directed the film and he has written some songs too like ‘Vadumanga uroothungo’. ‘Thayikku inga Maru vezhama’ is another sad melody that will be popular.

Story: Nothing much. Vijay is a rowdy orphan or that is what he says to everyone. Asin is a daughter of a rich dad   They fall in love. In a misunderstanding between them, Asin says that you got to have family to know about love and then says Vijay ‘I am no orphan. I have a family’ and so on.. It is Vijay who makes the feeble story line stand tall and no doubt that the entire screenplay is tailor made for him. But he does very well.

Rating :: 66/100

Diwali Gift by Indians

While the people were busy celebrating this year’s diwali, the Indian cricket team was busy celebrating another diwali – the death of the complacent and lazy attitude. They too burst crackers at Nagpur, Mohali, Jaipur and Pune. In fact Dhoni sent a lot of rockets (10 of them) in Jaipur and gave the perfect Diwali gift on the eve of the grand day. Soon after Diwali the team came up with a home series win, first time in about 20 months.

One thing is for sure, Ganguly is going to have one hell of a time trying to get into the team where once he was the proud prince. There is no doubt in that he is a world class player and he can get to his best form sooner, but form wasn’t his problem. (A rigorous practise can save him against the fast bowlers) It was his ATTITUDE and they don’t change too soon. I am not very sure if Greg said only truth in his mail, but there were certainly glimses of what every Indian felt about Ganguly at that stage. His running between the wickets was pathetic to say the least and his attitude of keeping the strike (running 2s instead of pushing 3s and even stopping those who did push) was too bad.

He built this team when it was in shambles. Azar was convicted of  match-fixing and the team was at its dead end. Ganguly stepped in and turned things for the team. He was a captain who lead from the front and showed all the way. His aggression kindled a hunger in the youngsters and he nurtured them in their growth. But at one stage about 3 years ago (just after the world cup), Ganguly started suffering from ATTITUDE problems. He was trying to ride on the occasional wins and instead of making him and the team any better, he started to avoid problems. And that is where the trouble started.

But old days are gone by. When they started to chase 298 and Tendulkar was out in the very first over, I said ‘Not again’  and waited for the rest to crumble. But surprise, As I was waiting for Dhoni to play a rash shot and get out, he went on to hit 183 and that rash shot never came. What more, he seemed to have decided to stay till the end. But the closer match was the 4th ODI when chasing 261 almost everyone contributed. Tendulkar and Yuvraj went in quick succession leaving india 34/2. In came Dravid and he is no more the old Dravid who takes time to settle. Straight away he took the match under his control. Sehwag looked a lot mature too and they went on to around 130. When Sehwag was out I did not expect Venugopal Rao to hit 38 of 37 deliveries and help Dravid. But the greates surprise was when India was 180/6 and requiring 80 runs from 81 balls, in came Dhone and Raina and they played absolutely superbly. Raina made 39 from 30 balls while Dhoni played so sensibly that I thought I was dreaming. He finished the match in style with 2 sixes of arnold (He finished the earlier game too by hitting a 6 off Dilshan) and made 45 in 40 deliveries.

I just pray that this young team should always feel this hunger for victory and even when they lose they must ensure that they fight till the end.

Kundakka Mandakka

The last few posts have been only film reviews – and understandably so, for this is Diwali season. Kundakka Mankakka is a film that aims to entertain people the most. We all know that Parthiban and Vadivelu are such a grand combination when it comes to comedy and what they have been doing in bits and pieces in other films, they have managed to do it for the entire movie here. And to maintain the film running for 2.5 hrs they needed some story line. So they added a sister to Parthiban and her marriage to a Crorepathi as Parthiban’s intentions. Please don’t say that a few scenes are ‘Out of Logic’, because they are not meant to be. This is a full time comedy and go ahead and have a good laughter. Vadivelu as usual is outstanding and Parthiban manages to add some fresh touch to shun any signs of repeatition. All in all a good movie for your health.

Rating 65/100