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The Current Share Stock Market Buzz And The Success Mantra

Think about the Indian share stock market and consequently think how your money multiplies fast. The live stock market now is carrying news and statistics about uptrend in myriad segments. Many a BSE stock, almost 25 out of the 30 are performing beyond expectations for a week now – a sudden rise witnessed after two months of incessant volatility. Almost all the sectoral indices in the live stock market have been rising higher with big gains coming from realty, auto, banking, healthcare, capital goods, and more segments. At this juncture, your NSE or BSE stock may yield you the returns you have been expecting for long. It is all because of global cues and foreign inflows that boosted the sentiments.

Companies like M&M, Cipla, HDFC Bank, SBI, Jaiprakash Associates, DLF in the BSE stock market are exhibiting good growth. The aforesaid companies may not show consistent growth provided the uptrend witnessed at a stretch. It also depends from sector to sector. If in the live stock market of yesterday you find companies like Bharti, Hindalco, ITC, etc. trading low, after a couple of days or the very next day, you will find them trading high. But yes, blue chip companies that have maintained satisfactory annual growth record for years together are hardly affected by the temporary downtrends. And if you happen to invest in a share in India or several shares of such companies, you do experience a win-win situation. Investing for the long term is the success mantra here. Once you conduct enough research on the financial and growth records of the chosen company and once you are satisfied of the results, you can put in your money and stay unbothered for years together until you feel it is time to sell them off.

The share stock market of India is buzzing in the world map attracting more investors from overseas. With the BSE sensex now about to cross the 20,000 mark and the nifty soon to reach 6000, investors are all finding reasons to rejoice and buy more rather than sell. It is brisk buying that leads to the uptrend and vice versa. Buying and selling in bulk for short term trading is but a humdrum affair. If you are investing in a share in India for the short term, you need to be very cautious because the risk factor here is more. Enough research and knowledge and staying updated with the up-to-the-minute trends of the share stock market only will yield you returns. Otherwise your blind investment in any share in India won’t meet your expectations. It is no doubt true that the market of share in India has given birth to countless millionaires but it is also a fact that many investors have turned bankrupt. Thus, it all depends on how knowledgeable you are about the NSE and BSE stock market, how determined you are to stay updated with the latest share stock news, conducting research, and related paraphernalia.

Lehman – AIG – Stock Market Reaction Explained

With the stock market down almost 10% since the beginning of the month, Lehman going bankrupt and the AIG “bail-out” people want answers, but nobody is explaining what’s happening in a way that makes sense. To understand what’s happening you have to understand what financial institutions (banks) like Lehman and AIG were doing during the real estate boom and bust cycle.

The real estate boom was driven by the creation of complicated financial instruments that were supposed to reduce the risk of lending money for banks. These financial instruments we’re going to call “stuff” because the how and why of their creation is too complicated for this article. Because this “stuff” was supposed to reduce the risk of lending money, banks started lending money like crazy. Without much surprise this led to an increased demand for housing and the creation of a lot of this “stuff”.

Basically, underlying all this “stuff” is mortgages. Mortgages are pretty simple financial instruments, a bank lends someone money to buy a house and in return gets a stream of payments to repay the loan plus interest. Usually banks are happy to lend mortgages because underlying mortgages are houses, so if you stop paying your mortgage the bank can sell your house and get their money back. Unfortunately, when the housing market slowed down the banks suddenly couldn’t sell the houses to get their money back.

Eventually, banks realized this “stuff” was no longer worth the original amount of the mortgage and started the write-down process at the end of 2007. A write-down means they had to change the value of the loans on their books to reflect the current value. If they had a $300,000 loan on a house worth only $280,000 they wrote the loan value on their books down from $300,000 to $280,000. This could have been the end of the financial crisis except for two things; mark-to-market accounting and greed.

Mark-to-market accounting means you have to find a price you can sell something at in order to value it. If you thought your house was worth $300,000 but when you put it up for sale the best offer you got was $250,000, then your house, marked-to-market, is worth $250,000 no matter what you think its worth. Now consider what happens if you don’t get any offers…yep, your house, marked-to-market, is worth zero. All this “stuff” banks held suddenly was worth nothing when marked-to-market. Now they couldn’t raise cash by selling it or taking loans against it to meet their operating needs (payroll, rent, etc). This leaves banks without cash for operations and balance sheets worth much less after being marked-to-market.

If banks just accepted facts and took whatever was offered for their “stuff” they would have lost money, but probably would have survived. Instead they refused to accept the prices offered to them because underlying this “stuff” is mortgages and most are still receiving payments. Let’s go back to the house example, maybe by now you’ve realized your house isn’t worth $300,000 but think it’s worth $260,000 and wish you had taken the $250,000 a year ago. Plus, now you’re renting the house for $2,000 a month but the best offer you get is only $60,000. What would you do with an offer four times less then you think the house is worth when the house is generating $24,000 a year in rent? This is the decision faced by financial institutions. They collectively owned so much of this “stuff” that no one was willing to pay anywhere near what they wanted (not to mention there aren’t that many buyers with $2 or $3 trillion to pay their prices).

They could have made the tough decision and sold as much of this “stuff” as they could at .20 cents on the dollar ($60,000/$300,000=.20), but who would do that. Instead they thought they could hold out until they got better prices, but there was no one left to offer them better prices because everyone was in the same situation. Now they can’t pay the bills with just the mortgage payments coming in and they can’t sell this “stuff”, even at 20 cents on the dollar, because everyone who can buy it knows they have to sell it or go bankrupt. Banks are left without any choices accept to go bankrupt or take whatever price someone is willing to offer.

The good news about this situation is all this “stuff” still has value. Remember, underlying all this “stuff” is mortgages and underlying all the mortgages are houses. Whatever these houses are worth is what all this “stuff” is worth. Unless the houses are worth 20 cents on the dollar from a year ago or a $300,000 house is now worth $60,000 whoever buys this “stuff” is going to make money. However, the only way to make the money is to hold the “stuff” until all the mortgage payments are made or the market returns to normal and you can sell it. You have to have enough cash that you can just hold the “stuff” without having to sell it. That’s where Lehman and AIG and all the others got into trouble…they had to sell it to meet cash flow needs but didn’t so now they are forced to sell in bankruptcy.
Much like if you didn’t pay your mortgage for a few months, but the house was worth more then the mortgage…the bank would still come in and sell your house out from under you for whatever they could get for it. And this selling would lower the prices of all the other houses in the neighborhood. Just like the selling by these financial institutions is lowering the prices of all the other stocks. The only thing left is deciding what you’re going to do with your money now.