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Sunday, August 20, 2006

Testing the Waters

Testing the Waters – Waiting for Demat
My initial experience in buying stocks in the secondary markets had been a disaster. Circa 1996 (I wasn’t even 20 then), I audited a stockbroker for my employer and established a business relationship with them. I scoured through ET stock pages and bought two stocks. My criterion was that they were trading near their 52-week lows. (Behavioral Finance calls it Reference Point behavior). Of course, I didn’t bother to check if there was any valid reason for such a price behavior. Here are the purchase prices:-

GR Magnets Ltd – 100 shares at Rs.8.72 per share
Goodearth Organics Ltd – 100 shares at Rs.1.00 (approximately) per share
I don’t exactly recall the price I paid for Goodearth. I just know that I paid less than a 1000 to the broker in settlement.

When I placed the order, the lady at the broker’s asks me – did I know that GR Magnets’ Managing Director was arrested for FERA violations (foreign exchange laws)? Of course, I had no idea. But, I nodded along.

Electronic trading and demat were unheard of these days. The broker delivered to me a share certificate with attached transfer deed, where the seller had signed his name and with a few other prior parties’ signatures. I had no idea of the timing of the sale. So, when asked I said I wanted it transferred to my name. (It didn’t occur to me to ask for alternatives – I could have held on to the transfer deed and get it revalidated after three months, if I didn’t sell it by then. Three months, I think, was the time limit to hold the deed without sending it to the company). So I filled out the forms and send it on its merry way to the companies to get the shares transferred.

Here’s the rest of the story:-

GR Magnets – bounced up to Rs.20 within 2-3 months. Good call, I thought. However, there was one hitch. I didn’t have the shares with me to sell it. It was with the company to be transferred. By the time I got the shares back, the scrip was moved to the Z list (equivalent of having the bad boys of the class sit in the backbenches) and was trading way below my purchase price. The last quoted price was close to Rs.1. I still have this certificate and am thinking of framing it as a not-so gentle reminder of my follies of indiscretion.

Goodearth Organics – never saw a bounce, never saw the certificate again.

It was a great practical lesson in bad deliveries for me. I stayed away from the markets for the next five years, until demat came into existence.

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