Example: On 1st October 2009, Mr. X got a hot tip that the share market was going to go upwards. Based on this he decided to buy shares of ABC Ltd as it had the highest market capitalization then. Mr. X therefore bought 200 shares @ Rs.2,400/- per share, and to finance this he took a loan @ 18% p.a. pledging some of his lifelong savings. Mr. X was a happy man for his smart investment.
Three months later, on 1st January 2010 Mr. X’s prediction proved to be right. The BSE index did move upwards from 4270 to 5215. However Mr. X was neither happy, nor was he rich. He had suffered a loss of Rs.21,200/- (4.42% of his investment).
| Interest paid @ 18% | 21,600/- |
| Capital appreciation | 400/- |
| ————- | |
| Loss | 21,200/- |
| ————- |
How can this happen? Mr. X was as surprised as all of us are. What actually happened was that though the Sensex rose by 22%, ABC Ltd’s share price did not rise in the same proportion. Mr. X suffered a loss even though his prediction was accurate.
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By
CMA Ankur Pandey
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