Stripping !!

Naa… it aint what you thought!

STRIP- separate trading of registered interest and principal. Of a bond and selling them as two different zero coupon bonds.

What is dividend stripping?

It refers to a practice where a person buys a share just before dividends are going to be declared, gets the dividend and sells it off – obviously at a lower price. So he gets tax free dividend income. He also gets to show a capital loss in his tax returns.

But, is it worth it? take into account the brokerage, the risk of keeping a share overnight, price slippages in a illiquid market etc..

well… wats the fun in life without some risk?;)

Taxes – VAT

VAT is aeons better than the old system of sales tax. VAT has in itself an inbuilt system of monitoring that taxes are paid on time and minimizes the load on the regulatory authority to ensure compliance. VAT or Value added tax means that every member in the value chain will pay tax to the government for the value that is added by him in manufacturing that product. Now this means that the next person in the value chain will be able to reduce his tax liability by reducing the amount of tax already paid by the preceeding member in the value chain. This will make him take his supplies from a vendor who pays his tax so that he can claim input tax credit. The 30 states and Union territories that have adopted VAT in India have shown a 26.6% increase in revenues in the first quarter of 2006-07. Hip hip hurray!

How does the consumer benefit from all these? More taxes leads to more revenue for government, more infrastructure- better roads, transportation facilities, lower costs, lower prices. wow!

But it makes me cringe when i see people paving the way for unscruplous traders to evade tax. Take the example of a fuel station. Its swanky to just go stop your car beside the filling station, open the fuel tank using the remote release, give some money to the guy who obediently waits by your door, fill your tank and drive away. The very honest petrol pump dealer will later fill in bills for all these people who have filled fuel, be a honest citizen and pay tax on every drop of fuel dispenses. Balls!!! He is gonna evade as much as he can, and you think he is being nice to you by having a guy wait on you to collect cash from you while you fill up!

Investing in stocks

I know many a person who burnt his fingers badly in the recent stock market crash. Everything is moving northward, even your milkman is making money on stocks and your barber gives you a hot tip over a hair cutting session! Voila! You are gonna be rich. You look like the only dumbhead in the neighbourhood who is not investing in stocks. Your newspaperboy who used to come on a bicycle is now having his own moped bought with the money he got from stocks! Before you know it, you would have lost all your money.
Ever heard this- when everything seems to be coming your way, you are in the wrong lane! Well, in case you still want to invest while the markets are at all-time highs, do yourself a favour and dont follow the tip of your friendly mechanic who services your bike weekly (after all he knows more about the auto sector than you,eh?). Invest in fundamentally sound companies that have all the strucutres in place to make money in the future. Understand that when you are buying a stock, it is not just the scrip that you are buying but you are buying a business. The amount of money a business is going to earn depends on a multitude of factors. You need to analyze each of the variables that could affect cash inflow or increase costs. You need to look at potential competitors, changes in the market trends, market share, alternatives, and you need to look even at the company’s customer’s customer’s cash flow. This is difficult to analyze for Indian IT companies, which is the major reason why I dont invest in that business. I just don’t understand it fully eventhough it looks so rosy like a shiny apple waiting to be eaten. Would you buy a business without understanding it fully? Without trying to understand every last nuance of the business? Why is it that then when it comes to stocks people invest in anything that has a futurustic sounding name and pray to god for it to go up? You must learn to read financial statements properly. If you know how to read finanacial statements properly, you will realise that each statement of accounts tells a story. And the better you are at reading financial statements, the better you will be at reading between the lines of the story.
Just because a stock has risen 200% in the past does not mean that it will give the same returns in the future also. You should check whether the same conditions that facilitated earning that sort of growth are still in place. You should buy a business and give it time to grow. Various studies have shown that in the long run, day traders would have been better off investing in the index. So, do your proper homework before buying a business. Happy investing!

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