10 Things to Watch Out for When Investing in the Stock Market Everyone wants his money to make even

more money. And if you can do that without putting the principal at peril, it's even better. But risk and reward are intrinsically linked, particularly in the case of equity markets. The ET Intelligence Group decodes some of the tricks of the trade to help an investor avoid common pitfalls and make a more informed decision Equity investments are touted as the best form of long-term investments. But the twists and turns on the route to the stock market are sure to put off many a lay investor. Interesting trading patterns tell a story to an experienced hand, but it may all be Latin and Greek for a newcomer. He may learn only by making mistakes, some of them costly. ET Intelligence Group throws light on a few of these myths, interesting trends and market gimmicks. Not only can they save an investor from investment disasters, but one can also use them to make significant gains 1 The Big Public Offer Impact What is common to Reliance Power, Coal India, Reliance Petroleum and DLF other than the fact that they were the four biggest IPOs to hit the Indian stock market' The answer lies in what happened after these offers. All four IPOs were followed by a correction in the overall stock market. Coincidence' A strong one, if at all it was that. Though the Reliance Power IPO mess is well-known, not many would have linked the corrections that followed the other three IPOs. The BSE Sensex corrected 9% post the Coal India IPO, 7% after the DLF offer and 16% after Reliance Petroleum's IPO.

. These facts lead us to believe that there is a link between overall market performance and a large public offer. One thing is certain that these IPOs, when over-subscribed several times, suck out the liquidity from markets. For example, Coal India's IPO was over-subscribed 15.2 times. This locked up nearly 2.34 lakh crore for over two weeks till allotments were made and shares started trading. Such a huge strain on the liquidity front is bound to result in markets going down. Many back the view that big IPOs come typically when the market valuation of the company is at a

Don't be surprised if a company's stock falls sharply after they have offloaded a large chunk of their stake in the company 3 Share Buybacks Announcing a share buyback from the open market is one way a company tries to protect its share price in a weak market. These open market share buybacks are typically open for a long time. and hence a correction is only natural. When such investor groups start selling their shares. give a ceiling price below which the company would buy shares and earmark a specific sum to be expended for the purpose. Also. At the same time.500 crore. The next big public offer expected to hit the market is ONGC's followon public offer or FPO of around 11. Thus. Satyam and Orchid Chemicals' Company insiders sold stock in large quantities in the open market before the share price crashed. an investor may go short in index futures to benefit from a possible correction. the practice has already lost its sheen and fewer companies are taking this route to protect their market value . thereby helping the share price.peak. it should send an alert signal. Once the FPO dates are announced. The trend was visible in all four companies. in practice the buyback offer wouldn't do anything more than boosting shareholder sentiment. However. Promoters and key employees have access to information that an ordinary retail shareholder may not have. one cannot deny empirical evidence that a correction follows a large IPO. This sends a signal to the market that the company would be ready to buy if the price falls below a certain level. there is no dearth of people who deny any linkage between the two and calling these instances as pure coincidence. Reliance Infrastructure has completed three such buyback schemes and is now in the midst of a fourth one. In fact. 2 Insider Selling If you had not figured out the last one. try this. Sasken Communications carried out a buyback in 2010 after a not-tooimpressive performance for a few quarters and couldn't succeed in gaining investors attention. What is common to GTL. this is entirely a voluntary exercise and there is no compulsion on the company to buy shares if the price falls below the acceptable limit. Nevertheless. Similarly. For example. the company can discontinue the scheme at any point in time.

while the one. One classic example of this is HUL. Still. came out on a Tuesday. Even in the case of Nirma. they had to pay dearly to convince retail shareholders to tender their shares. 5 Timing The Bad News "All publicity is good publicity" may be the motto for a few. Its December 2008 result was perceived to be bad with a 35% decline in its earnings. There are notable exceptions. GE Capital Transportation Financial Services and Rayban Sun Optic that have delisted in last couple of years. Not that it helps their valuations when the markets open next. On the contrary. which got delisted in May 2011. the cooling off period of a couple of days certainly helps in muting the impact. there appears to be a trend that immediately before going in for a delisting the quarterly earnings numbers start to deteriorate. This becomes evident if one closely follows the results calendar. Atlas Copco and Micro Inks continued to give substantially strong earnings growth numbers till their delisting. This trend was visible in companies such as Binani Cement. Of course. one can't blame the promoters if they wish that the value of their companies falls before they move to buy it out. Another example of this is ICICI Bank. In 2009. but there are others who would use every possible way to stay out of the public eye when things are bad. the initial results of a season are invariably good. Parry Agro. which was perceived to be good. the company posted three out of four results on weekends. Sulzer India. the FY11 profits were down 69% yo-y. This result . The ones posted on weekends were perceived to be very disappointing. weekends or towards the end of the results season. What typically happens is the exact opposite. A delisting or buyback rumour could drive the share price skywards. The inverse of this fact infers that companies about to report bad earnings tend to announce them late on Friday evenings. Why would they do that' To avoid media attention and a negative impact on their share prices. seen in retrospect.4 Delisting Trick When it comes to the game of buying low and selling high. However. when other FMCG players showed a decent profit growth. A vast majority of corporate results that are published on the weekend or on the last day of the results season are typically bad.

These are companies from different business houses and hold stakes in various group companies. the first day of a long weekend. Kalyani Investments etc. JSW Holding. However. The rationale is that the value of these assets is much higher than the market capitalisation of these companies. Therefore. whether it was a coincidence or not. A recent example is Reliance Communications. a company like Tata Capital. which is in the investment business. If one were to value their investments at current market prices. A number of holding companies are traded in the stock market ' UB Holding. due to this lack of marketability these holding companies will always trade at a substantial discount to their net asset value. Bajaj Holding. At the same time. property etc.was released on Saturday evening. Its financial performance was perceived to be below expectation for the previous three quarters and each time. results were declared on a Saturday evening. this is natural as the companies being part of the respective promoter groups are highly unlikely to sell any part of their investments. a company scheduling its results board meeting on a weekend or delaying it for no apparent reason could be a hint of insipid earnings performance 6 Holding Companies Theory Traders and analysts often recommend stocks of holding companies or of companies with assets such as land. But to what extent does that impact how the market values such companies. Not much if the value remains locked up. tends to attract a lesser discount. 7 Seasonal Flavours . but holds investments in varied listed companies outside the Tata Group. While one shouldn't take it for granted. their market capitalisation appears to be extremely cheap. as it sells its investments from time to time.

Companies working for the railways sector ' Kalindee Rail. The post-monsoon harvest season. Jain Irrigation and the fertiliser sector. This investment strategy is also known as 'Tactical Asset Allocation'. It is interesting to note that such large IPOs almost always help improve the valuation of the entire sector. finds cement. construction. retail etc sectors gaining currency. which is full of festivities and increased consumer spending. Titagarh Wagon etc . Of course. As summer ends and monsoon is about to start. DLF is a classic example. the hullabaloo is much more when the IPO is from a large company. has some method to it. January and February typically see Budget-sensitive companies garnering market attention. which might appear chaotic. Just like the weather. Educomp. The summer season with all its load shedding finds the power industry attractive. The volatility in equity markets. Its IPO was preceded by a rally in all real estate stocks. consumer durables. Gitanjali Gems' IPO in February 2006 also had improved the valuations of gems & jewellery firms. Cox & Kings IPO in December 2009 had pushed up Thomas Cook's market value. This includes names like Navneet Publication. An investor can benefit from these trends if he can invest in companies sufficiently before they become the market flavour and exit when they are at top of their valuations. agrochemicals and seeds gain market favour. 8 Big IPOs: The Feel-good Factor Initial public offers (IPOs) are much-publicised affairs for any company seeking funds from the market for the first time.Somesectors gain more market attention in certain seasons like agrochem before monsoon or fertliser and education etc before the Budget. Texmaco. . equity markets and various stocks have seasons of their own. which can charge higher rates for merchant sales. the agroinput sectors such as fertiliser. paints.are also in the limelight ahead of the Railway Budget. Knowing that a January or September is typically good for the markets and March and May are bad is a helpful piece of information.

this growth trajectory fails post the IPO. An investor would be attracted by schemes that give out maximum dividends. A large company would always like to charge a premium for its IPO from investors looking to participate in its growth story. This could be a possible explanation of this trend. On the other hand. However. This has a rub-on effect on the already listed companies in the sector. one can limit the applicability of this observation to bull rallies. There is thus a corresponding decline in the value of the investment (net asset value) in the mutual fund scheme equivalent to the value of the dividend declared by the scheme. the additional capacities for which the IPO funds are raised take time to materialise. Similarly. 10 Small Wonders When a company is about to raise funds from capital markets for the first time. Unfortunately. which see their valuations improve. the recent IPO of Orient Green Power helped valuation of its peer Indowind Energy. the only information potential investors have is through its prospectus. its peers NHPC and JP Power Ventures witnessed renewed investor interest.When hydropower major SJVN's IPO came in May 2010. In such scenarios. . Many a time one finds that financial numbers of such companies have suddenly improved in the financial year prior to the IPO. Of course. A check of the cash flows and working capital can reveal the reality. However. there are companies that try to push up sales by extending excessive credit to pump up the pre-IPO profit numbers. where dividend implies a share in the profits of the company. staying invested in companies from industries that are likely to see major IPOs coming in near future could be a good idea. 9 Dividend March Once the March quarter kicks in. it is common to see a flurry of advertisements relating to equity-linked savings schemes or ELSS. unlike companies. a dividend payout in the case of mutual funds is simply a portion of capital appreciation returned back to the investor. This is a typical gimmick adopted by the mutual fund industry to attract new customers looking for avenues to save tax. Surely any company would like to list when the going is not just good but great so as to get the best valuation possible.

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