A stock which typically rises in price when the economy expands and falls when it retracts. A stock which rises as the economy contracts and falls when it expands is said to be countercyclical.

“Hedging” or opening up a “hedge position” is the process of establishing an exposure to a particular risk in order to offset an existing but opposite exposure. The term originates from the game of roulette where the lines between betting squares are called hedges. A bet place on the “hedge” wins if the ball lands on one of the numbers either side of it but the payout is lower than for betting on the number itself. The phrase “hedging you bets” became common parlance in English and over time has become established finance terminology. (more…)

The smallest unit of price in which a security may be quoted. The value of a Tickvaries across asset class but a movement of 1 Tick is always the smallest price movement possible

It can sometimes appeear as if the universe of investment strategies is characterised by linear dimension and polar opposites. You’ either go long or you go short, you’re a day trade or a long term investor, you’re a risk taker or a risk avoider.  Some would add to this collection your either a value investor or a growth investor. Even the professionals seem keen to pigeon-hole themselves as one or the other. Scratch the surface however and you’ll find very similar principles at the heart of both. (more…)

A term used to describe a small upswing in the price of a stock which is on a rapid downward trajectory. The term originates from the slightly heartless theory that even a dead cat would bounce if thrown from a great height

A statistical measure of how much a stock price moves in relation to the overall market or benchmark index. A Beta of 1 means the stock historically moves in line with the index (10% rise in index = 10% rise in stock), a Beta less than 1 indicates the stock rises (or falls) less than the index and a Beta greater than 1 indicates the stock rises (or falls) more than the index. A negative Beta indicates the stock moves in the opposite direction to the index.

Companies which sell staple goods like food generally have low Betas while luxury goods companies typcially have high Betas. Negative Betas are rare but can be found in some gold, mining and oil companies. In a bull market high Beta stocks typically outperform the market and in a bear market low Beta stock lose value less quickly than the market while negative Beta stocks generate a positive return.

An investment strategy where the investor or fund manager attempts to match the returns of a specific index by replicating the make up of the index in their portfolio. This is the opposite of an active strategy in which the investor or fund manager attempts to outperform an index by identifying and investing in securities which are under priced

One of the underlying assumptions of technical analysis is that stock and index prices follow trends which are determined by the interplay between numerous forces which affect price. These can be broadly split into four categories; economic, monetary, technical and psychological. Depending on the direction of these forces, traders in a stock fall into one of two groups; bulls plan to buy now sell later and benefit from a price rise; bears plan to sell now buy back later and benefit from a price fall.

During a rising trend bulls dominate the market and during a downward trend the bears dominate. In a reversal period, where the trend is changing from an upward one to a downward one (or vice versa), there is a temporary balance between the two groups. These transitional periods are often characterized by price patterns which can be used to identify when a prevailing trend is reversing. 

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The mistake made by inexperienced investors who believe that buying a variety of stocks will automatically give them a diversified portfolio. A portfolio which contains a large number highly correlated stocks is said to be naively diversified because the overall risk is not significantly reduced by the fact the portfolio has many components

The (MACD) Indicator is a technical analysis method first developed in the 1960s by Gerald Appel, a prominent author in investment and trading strategy. MACD stands for Moving Average Convergence-Divergence and is based on the comparison of fast and slow exponential moving average  prices. Proponents of MACD Indicator methodology argue it can be used to identify trend changes in stocks and indices.

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Picking stocks in a Bear market can be both rewarding (as in the long term you see spectular returns) but also tricky (if you don’t invest near the bottom, then you’re in trouble if the market falls aggressively. Here are some general rules of thumb when it comes to picking stocks in a bear market:

1. Large Blue chips: Go for large, well established blue chips rather than mid-caps or small caps. While these are the first to be beaten in a bear market, they are also the very first to recover. Smaller shares are more likely to be dependent on one industry, and will have less access / negotiating power with banks for access  credit - something that is absolutely critical in today’s environment of a severe credit squeeze.
    
2. Neccessity rather than luxury: Focus on buying stocks of companies that sell a product or service that is a neccessity rather than a luxury. The reason is simple: when people’s confidence in the economy, the stability of their job / business and therefore their future income is threatened (as it is in a bear market) they’re going to cut back on all their luxuries including designer clothes, watches, luxury cars etc. They cannot cut back (much) on medicines, food, water, electricity, petrol. Business will also cut back on what they may believe are luxuries - advertising, and expensive offices and furniture. Not only will companies cut back spending on real estate, but individuals and households will also avoid ‘large spends’ on new houses, cars etc.Sectors which have shown to have done well in past bear markets include major pharmaceutical, food producers, tobacco, telephone (now more likely cellular phone), basic household products, oil and energy and utilities companies. This is pretty much in line with what we’ve seen thus far - companies like Hindustan Lever, which is actually up since January, or GSK pharma, which has only lost about Rs. 20 since its January highs.Sectors which have shown to do poorly in bear markets are house / real estate builders, motor vehicle related businesses, industrial materials or machinery  / capital goods, advertising or advertising dependent companies, and financials. With real estate, most motor vehicle, and every financial stock suffering (financials are down between 70-90% from their January highs) this general rule of thumb seems to be highly applicable.
    
3. Domestic focus: Choose stocks that have a focus on the domestic economy and are not reliance on exports / foreign operations, especially outside of emerging markets and in the US / UK / Europe.
    
4. Low ‘beta’ - less than 1: Beta is a measure of how much the stock tends to move with a market move, or crudely, its relative volatility. For example, a stock has a beta of 2 then a 10% fall in the Sensex would typically lead to a 20% fall in the stock. Picking stocks with a low beta means that when the market recovers, your stocks may not ’soar’ but this certainly protects you if the market continues to fall. If you pick a stock with a beta, of say 0.5, then a 10% market fall is likely to only lead to a 5% price fall for that stock.
    
5. High dividend yield shares: Dividend yield is how much the annual dividend the company pays out divided by the current market price. So if the stock price is Rs. 100, and the last dividend that the company paid was Rs. 20, the Dividend yield is 20%. Buying stocks that have a high dividend yield is a useful way of protecting yourself against further falls in stock prices. If for example, the stock price falls by 10% and the dividend yield is 20% (provided you hold the stock long enough / at the right time to be eligible for that dividend) then the overall return is +10%.Of course, make sure that the dividend yield is over the prevailing (risk free) fixed bank deposit rate - you need to be compensated for the fact that while the fixed deposit rate will give you guaranteed returns, a company could cut its dividend as and when it feels like it.  Be careful however - high dividend yielding stocks can also spell trouble: very high dividends means that the company may be spending too high a proportion of its profits on dividends. If profits fall, the dividend will get suddenly cut, and the stock price will plummet because nobody likes a stock that cuts its dividends. In order to guard against such instances, trying buying a stock with a dividend cover of 1.8 or more. ‘Dividend Cover’ is Earnings per share divided by dividends per share. If the company’s profits are stable, and it has a dividend cover of 1.8 or more, you can be assured that the company is unlikely to cut dividends suddenly.When looking for dividend yielding stocks, also try to focus on well established, well known blue chip companies, because they’ll avoid cutting dividends in order to protect their name and reputation.
    
6. Stocks to avoid: Stocks with high PE ratios and low dividend yields are likely to see a price correction, and dividend payments aren’t going to be sufficient to protect you. Stocks with few or no tangible assets are also vulnerable. The lower the tangible assets, the lower the company’s ability to get access to cheap credit, especially in an environment such as this, where liquidity has dried up. At the same time, avoid companies that have a lot of debt (a debt to equity ratio of higher than 25%) - in a high interest rate environment such as this (even to interest rates are being cut), those companies saddled with a lot of debt are likely to default, and unlikely to be able to raise further credit.
    
7. Timing - carefully examine support / resistance levels: While a stock might be fundamentally a good buy, it makes sense to try and purchase it near its support (the price level that the stock falls but bounces back from) rather than resistance (the price level that the stock keeps rising to but falls back from). Determining support / resistance levels is not very difficult if you look at a company’s stock chart.