Limiting losses, via the stop loss

Trading in stock markets can be as tricky as a monkey. One may use all his skill and will but may still avoid making profits if stop loss is ignored. The first step while creating a position should be to determine these two crucial levels. Failing this the investor might lose his capital over a period of time as it becomes difficult to book profit orlosses without a stop loss level.

Various strategies may be used for setting the stop loss. The trader may fix a stop loss which remains same irrespective of the stock price. Instead a strategy of trailing stop loss can also be employed whereby the trader revises his stop loss as and when the stock moves in profit giving range.

Not only setting a stop loss and target price is important but setting them at proper levels is even more crucial. The level at which the stop loss is set depends upon the volatility of the security. For securities which are volatile one may give the position a more space to move as against a stable security. One may also use a strategy whereby stop loss is fixed in such a way that the loss suffered at stop loss price is a certain percentage of the returns expected at the target price. This percentage may vary according to traders of different types i.e. high for a risk taker and less for a risk averse person. But as a thumb rule this percentage can be 25%. Such a strategy will ensure that the trader earns sufficient returns even if he predicts the price movements with just 50% accuracy.

Stop loss is a simple tool but can be highly effective to keep emotions in check while trading. However setting a stop loss is an art and it requires time to master what strategy should be applied when.

Fiscal and Monetary Policy-The Road ahead for India

Amid fears of a global economic meltdown, the country’s fiscal and monetary policy shall play a key role in defining the roadmap for the country’s development. So far, the Reserve Bank of India has followed a tough monetary stance, increasing key policy rates continuously with an objective of controlling the spiraling inflation. This has had a negative impact on the growth which has resulted in many economists considering the possibility of a GDP growth below 7% for the year. Lower tax collections (due to slowdown of economic activity), high levels of expenditure on subsidy and lower proceeds from disinvestment may cause fiscal deficit to exceed the ambitious 4.7% (of GDP) target this year.

As inflation has begun to cool down (albeit due to base effect) and corporate earnings data show revenues hit by higher financing costs due to higher interest rates, it is expected that the RBI will lower key policy rates to stimulate demand in the economy and address supply side inflation oriented constraints. This is expected to end the continuous policy hike seen during the last 19 months, and bring back investor confidence, enhance credit delivery, stimulate economic activity and thus strengthen the consumption story India possesses. As Indian companies face problems in raising external commercial borrowings due to global economic slowdown and euro sovereign debt crisis, it is expected that this move will come as a breather for them and would enhance their earnings.

With regard to fiscal policy, implementation of Direct Tax Code along with higher corporate earnings is expected to enhance government tax revenues. However, it is expected that government expenditure will stay high, partly due to the need of investment in infrastructure following the 12th five year plan and partly due to the assembly elections to be held in 2012. Thus fiscal deficit is expected to be in a 5-7% range over the next few years.

Narottam Garg|Guest editor

Food Bill : Are we losing the larger picture?

This is the world’s largest experiment done to provide food security to 63% of Indian population. Implementation of scheme is expected to cost 3.5 lakh crore rupees and subsidy bill is expected to cost 95000crore rupees. No doubt, both poor urban citizens (50%) and rural citizens (75%) will be benefitted from this scheme if successfully implemented.

People below poverty line (BPL) will get 7 kg food per person (instead of family) where food contains rice, wheat and coarse grains at a rate of 3, 2 and 1rupees per kg respectively. General category get atleast 3kg of grains at rate not exceeding 50% of minimum support price. The supply of food grains shall be linked to targeted PDS reforms, including introduction of schemes such as cash transfer or food coupons and leveraging ‘Aadhar' for biometric identification of the beneficiaries “for proper targeting.”

While this may be a good thing to weed out bogus ration cards or duplication of beneficiaries, it can also deprive deserving beneficiaries in case of any failure of system or technology. Its operation in villages that have no electricity is to be seen. In the present fluid situation, when streamlining of the PDS is not visible, there is a scarcity of storage facility, the number of beneficiaries is not settled, identification of beneficiaries is not done, food grain production levels have not enhanced significantly and irrigation systems are lagging, the government seems to be rushing through the Bill.

Our Indian government should not be reliable to the statistical figures of Food And Agriculture of U.N as it gives the misleading figure of no. of poor people in one’s country. In May 2008, while talking about the ongoing world food crisesPresident Abdoulaye wade of Senegal expressed the opinion that FAO was "a waste of money" and "we must scrap it". Mr Wade said that FAO was itself largely to blame for the price rises. There is no guarantee that poor people used the food for themselves as they will further sell food at escalated price to market people and used that money either to their children’s education or to buy drinks.Consumption level of Indian people is on decline rate. As people have less physical work than before. Quality of food increases drastically which is more nutrient oriented now.

There is a saying in Tamil "Muzhu Pushani kayai.Sothil Maraikathey" meaning do not try to hide a pumpkin amidst the food in the plate, may be the current food security Bill is attempting this trick.The bill should provide a secured food to the poor irrespective of the failure or success of the public distribution system.Creation of employment opportunities and vocational education is what we need, not nobleman’s food security bill.

Shobhit Singhal | Guest Editor

Shobhit Singhal

2011: Highs and Lows

With the year coming to an end everybody around hopes to make a resolution to brighten their new year. As we do it, the economy too hopes to make a few resolutions to see the coming year in a much better state than what it has shown us in 2011.Lets see where the economy went wrong in the last year. The RBI continued to increase its key policy rate during the year from 6.25% to 8.50% in order to fix inflation but it eventually led to bad numbers for industrial and economic growth.

 The year saw BSE sensex making new lows, gold at historic highs and INR falling to record lows. IIP (index for industrial production) numbers decreased throughout the year, it showed us a negative 5.1% in October 2011 for the first time after 2009 .This is because of the expensive capital available due to high interest rates leading to declining corporate investment and also falling consumer demand Downgrading of debt ratings and the poor outlook of some European countries in May deepened investors concern. Later, an unprecedented downgrade of the US credit rating by S&P on 5th August led to turmoil in global markets, triggering fears of another recession in the world's biggest economy. INR also fell to a very low 54.17 per USD reaching the 54 level for the first time in history on sustained foreign capital outflows and dollar gains against the euro and other rivals overseas. It has shown the worst performance among the Asian currency. This has its consequential effects on international commodity prices adding more to the ever inflationary pressure.

Sensex witnessed 23% fall till 29th Dec 2011 as risk aversion deepened globally and also due to the lack of appropriate policy initiatives to work for the betterment of the slowing domestic growth. Continuing with the trend, gold and silver touched the heights in 2011 (from USD 1400 levels in 2010 to USD 1900 levels in September 2011) because of strong demand even in times of inflation. Nervous investors considered in gold as a safe investment instead of other risky options like equities.

Internationally gold prices have seen correction from its all time highs. However, falling INR has promoted the gold prices in India. Though the economy had a tough time in 2011 we believe to see it growing with the action of appropriate policies and steps taken by the economists of our nation and wish to have this year show us a better state for everybody!

Yamini Agarwal | Guest Editor

Lokpal and its implications for India’s growth

How a company is monitored

In the era where a new scam is unveiled every other month, the need for an ombudsman is critical. The reasons why it is necessary for India are: one, it will adopt the role of the auditors to the government and two; it will help imbibe the concept of Corporate Governance in the Indian Polity. For long, investors have stayed away from Indian markets due to the bureaucracy and corruption embedded at each level of the system. Good governance will bring stability and transparency; attracting foreign investors to our market. Lokpal will act as the auditor, providing relief from the pervasive corruption and make the government more accountable to the public. Little is divided between the Satyam Scam and the Common Wealth Games Scam as both have led to an enormous loss of the public’s hard earned money. Thus, the demand for public accountability of the bureaucrats and the government that manage public resources has become more evident. Taking the case of a Business scenario; we have the company, its shareholders, directors, internal auditors, external auditors and above all the Securities Exchange Board of India.

When compared with the political scenario; we have India as the company, Indian citizens as its shareholders and the Government as the directors. Here, the role played by SEBI and the auditors is not in play. This is where the Lokpal comes into picture. The Lokpal is required to fill in this gap. It has to fulfil the duties performed by SEBI and the auditors, but in the political scenario. It has to play the role of an auditor to the Government.

Likewise, how a country can be monitored

According to this analogy, Lokpal assumes the responsibilities of the government’s auditor. It is Lokpal’s duty to ensure that the country is run properly. The government assumes the role of the Directors. Their duty is to carry out the demand of the shareholders, i.e. the citizens of India, without thinking of personal gains. Today, the role played by SEBI and the auditors is vacant. Lokpal is required to realize this role. In conclusion, it can be said that India’s growth has been hampered from many a years to the malice called corruption. Lokpal may not be the cure of all ill, but it is indeed the best start that the movement against corruption can get and is highly recommended.

Arfa Shaikh | Guest Editor