The budget proposals were a dampener for the stock markets. The Finance Minister hiked the short-term capital gains tax from 10% to 15% in order to encourage investors to stay invested for a longer-term but market players termed it as a sentiment-spoiler.
"What it does is that it makes the perceived sentiment of investing in equity markets less attractive," Anoop Bhaskar, chief investment officer, UTI Mutual Fund, said.
It was the other proposal of the Finance Minister-- securities transaction tax (STT) to be set off as a business expense rather than against other taxes paid which was the case earlier-- that hogged the limelight.
According to the proposal, the amount of STT paid by the broker will be allowed as deduction under Section 36 of the Income Tax Act only if the income from these transactions is included under the head "profits and gains of business or profession". The amendment will take effect from April 1, 2008, and will apply in relation to assessment year 2009-10 and subsequent assessment years. The rebate will not be allowed in or after assessment year beginning April 1, 2009.
Brokerage houses, who trade in proprietary accounts, jobbing and arbitage, would be hit since the tax set-off is now likely to be only a third of that (since the tax rate is about 34%). "We did not expect this at all," said Nirmal Agarwal, president, Association of National Stock Exchange Markets of India (ANMI). ANMI is planning to make a representation to the Finance Minister over this issue on March 6 at a convention of brokers.
The Finance Minister has also proposed to bring stock markets, commodity exchanges and clearing houses under the service tax net. As per the proposal, the service tax would be charged by stock exchanges on the exchange transaction fees, listing fees, data discrimination charges (data provided to brokers by exchanges for fees) and on property rent if any being received by the stock exchanges. The service tax would be passed on to the stock brokers, which they would set off with the service tax on brokerage.
A long-standing demand of brokers has been met with the proposal to charge STT only on the premium of the options trades and this will be collected from the seller. In case of exercised options, it will be charged from the buyer. The amendment comes into effect from June 1, 2008.
Understanding Short Term Trading
Before I begin, this blog is not for intraday traders. My definition of short term implies duration of around 2 to 3 months.
Short Term stock picking is no rocket science, but rather a visual interpretation of technical charts. A basic moving average on a time frame chart will show the direction of the securities movement.
Moving averages is a mathematical results calculated by averaging a number of past data points. Moving averages (MA) in it's basic form is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. Once the value of MA has been calculated, they are plotted onto a chart and then connected to create a moving average line. Typical moving averages used for short term trading are 50 MA and 100 MA.
Types of Moving Averages
1) Simple Moving Average (SMA)
SMA is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. The usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics argue that the most recent data is more significant than the older data and should have a greater influence on the final result.
2) Exponential Moving Average (EMA)
EMA overcomes the limits of SMA, where more weight is given to the recent prices in an attempt to make it more responsive to new information. When calculating the first point of the EMA, we may notice that there is no value available to use as the previous EMA. This small problem can be solved by starting the calculation with a simple moving average and continuing on with calculating the EMA.
The primary functions of a moving average is to identify trends and reversals, measure the strength of an asset's momentum and determine potential areas where an asset will find support or resistance. Moving averages are lagging indicator, which means they do not predict new trend, but confirm trends once they have been established.
A stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend. Many traders will only consider holding a long position in an asset when the price is trading above a moving average.
In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 50 days or less. Looking at moving averages that are created with a period of 50 to 100 days is generally regarded as a good measure of medium-term momentum. Finally, any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum.
Support, resistence and stoploss can be infered by referring the closet MA below or above the market price. The other factor that is used in short term momentum is the trading volume. The moving averages along with the trading volume can provide a better insight to short term movement.
Markets are moved by their largest participants - I believe this is the single most important principle in short-term trading. Accordingly, I track the presence of large traders by determining how much volume is in the market and how that compares to average. Because volume correlates very highly with volatility, the market's relative volume helps you determine the amount of movement likely at any given time frame--and it helps you handicap the odds of trending vs. remaining slow and range bound.
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