The Hindu Business Line : Greenmail is a form of blackmail

TRANSACTION is a stimulus plus response is how those groomed in TA-101 would aver, but the Finance Minister sees it as a good avenue for tax. As a prowling tiger he has struck securities transactions with a 0.15 per cent tax, whether or not the parties to the deal ever see profit. A new cost that would be to the buyer, but disappointingly "much investment theory ignores transaction costs," informs Essential Investment from The Economist, written by Philip Ryland, and distributed by Viva Books P Ltd (www.vivagroupindia.net).

These theorists, you would be aghast to know, assume "perfect markets where information glides freely and the costs of buying and selling investments are zero." No, the real world is not like that. "Transaction costs add a significant amount to the cost of dealing, and therefore, affect the net returns available on investments."

In those good old days, there was a whole generation of investors "who had grown up knowing of bear markets only as cuddly cartoon piglets know of big bad wolves — something to excite a frisson of fear in bedtime story, but nothing to be taken seriously." Not so now, when markets react to every word and punctuation in pronouncements.

"Doing no more than partially closing a window of arbitrage opportunity," is what the FM said in his speech, but what is arbitrage? "To make profit without risk and, therefore, with no net exposure of capital," is how the book explains.

"Arbitrage opportunities can be exploited by replicating the features of a portfolio of shares through a combination of equity futures and bonds then simultaneously selling the actual stocks in the market." To understand further, you thumb through to P to see `portfolio theory' — not that models can become successful if they had a good portfolio to flaunt, but the mathematical theory of Harry Markovitz which aimed at fitting in risk and return.

Reverting to the all-important speech on Friday, Mr Chidambaram proposed "to put an end to bonus-stripping and dividend-stripping". Both these phrases are not in this mini dictionary, and that can make one wonder if `stripping' is an Indian thinking. But no, there is `asset stripping' — a term "first coined in the UK in the late 1960s to describe the practice of taking over a company, splitting it into parts and selling them for a profit."

In `B', I spot `bottom fishing' after bonus issue and book value; that's not about deep-sea trawling but "what value-seeking investors do after a stock market has fallen heavily, exposing good value in shares which fair-weather investors are still too shell-shocked to take."

You'd learn that `golden cross' is the opposite of `dead cross'; `greenmail' is a form of blackmail'; `immunisation' is an investment strategy; and `noise trader' describes "a stock market trader who buys and sells securities for all the wrong reasons." We know that `weight party' has a lot of money, but what is `weight of money'?

The book explains the phrase as an explanation of why a stock market is moving upwards; "thus cash flows into and out of savings institutions are monitored by investment analysts as a factor that may influence prices."

Add weight to your knowledge with Ryland.

BookValue@TheHindu.co.in

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