The On-going Oil War (2020)- Causes & Effects: Global demand for energy is an upward moving trend-line majorly due to the growing and developing economies. As per EIA (U.S. Energy Information Administration), there would be an almost 50% increase in the world’s energy usage by 2050, which will be led by growth in Asia. Crude Oil contributes the maximum in energy production worldwide.
Oil isn’t just an energy source but a highly valuable commodity of the global economy. It has always been the most sensitive and influencing element when it comes to global trades, deals, and even wars. But the question is why so, what gives oil such immense governing power? Let’s find out in this piece of article.
The Global Oil Market Explained Briefly
Energy is one of the major underlying factors, which is running the economic activities. Brent Crude Oil contributes the maximum to the world’s energy production and consumption. Additionally ‘Crude Oil’ is the world’s largest traded commodity. This gives the oil an immense power to rule the global economy.
USA, Saudi Arabia, and Russia are the top three oil producers respectively, hence top oil-exporting countries followed by other Organization of the Petroleum Exporting Countries (OPEC). On the other hand, the world’s major oil consumers are the USA, China, Japan, and India. Both, the top producers as well as consumers of crude oil hold the maximum influential power on the global oil markets due to their high market shares.
(Source- Baker Hughes)
Why is the Global Oil Market in Crisis?
A recent outbreak of the pandemic ‘Coronavirus’, which started in China, has not just emerged as a threat to human life but has also turned out to be the root cause of unhealthy and unstable global economy.
China happens to be the major source of the global supply chain. Being the epicenter of the virus outbreak, China’s economic activities slowed down which hampered the global demand and supply scenario. Furthermore, other infected countries like Italy, America, Japan, etc. are on a lockdown in order to contain the virus.
The demand for oil fell in the last few months due to contracting economic activities around the globe and especially in China, which is the largest oil importer, subsequently this led price drop of oil in the global market. But the falling prices of the commodity fell even steeply than estimated as Saudi Arabia and Russia, two largest oil producers locked horns with each other.
The Beginning of ‘Oil-War’ in 2020
‘OPEC+’ (OPEC countries & Russia) recently held a conference in Vienna to come up with a contingency plan on the falling oil demand and subsequently falling oil prices. As per the International Energy Agency, the demand for oil will fall by 90,000 barrels per day accounting for the recent outbreak of ‘Coronavirus’.
As a solution, OPEC suggested a production cut in oil in response to falling oil demand, and stabilize the subsequently falling oil prices. But OPEC’s failed effort to convince Russia on the same led to the ‘Oil-War’.
On Russia’s disagreement to cut the oil production, Saudi Arabia member country of OPEC announced to increase its oil production followed by cutting its export prices of oil by $11, making the price $34 per barrel. This move by Saudi Arabia hurt all the other oil-producing countries.
Why did Russia refuse to cut Oil production?
Russia’s refusal to cut oil production and stabilize the price is explained as its way to hurt the USA’s Shale Oil Industry, which is one of the largest oil producers. Lower price per barrel will impact the USA’s Shale Oil margins. The oil extracting cost for USA is high, hence falling oil prices would further impact the profits for US Shale Oil companies.
How is Oil-War impacting oil-producing countries?
A beaten oil price, which is down by almost 25% due to on-going ‘Oil-War’, has some major implications. Being the most highly traded commodity, tanking oil prices is going to impact the revenues of the oil-run economies heavily. It is too soon to analyze the measure of the impact but, since the world’s economy is highly correlated to oil-prices and its demand, we can only imagine the impact if it gets worse.
What will be the impact on oil-importing countries?
While it only seems logical to say that tanking oil price is an opportunity of biggest oil importers like China, India, etc. but it isn’t that simple.
China, which is the largest oil importer and accounted for more than 80% of global oil demand growth in 2019, has already cut its oil demand 20% in February 2020 due to ‘Coronavirus’ impact. As a chain event similar fall in demand is seen worldwide. (Source- IEA, Business Insider)
Tanking oil price seems attractive to oil-importing countries, as it contributes to huge savings. But the scenario is a little different. Buying cheaper is profitable but with less demand, the benefit will not be passed over to a great extent.
The current scenario of the global oil market is dicey and uncertain. The extent of domination that oil has on the economies worldwide only points towards one direction that longer the war continues higher will be the impact.
Saudi Arabia and Russia both are oil-driven economies and hence affording a tanking oil-price for a longer duration will only hurt their economies in the long run.
On the other hand, USA’s influence on the global output of oil is not nothing. It is the largest oil-producing country, thus it can also influence majorly. However Trump hasn’t announced any move to secure USA from the current oil-war scenario, but that doesn’t make America vulnerable. If the oil-war continues sooner or later we might witness a power play by America.
It is evident from history that geopolitical tensions like the ‘US-China Trade War’, have only resulted in damages. However, where few suffer some others might take advantage. Only time will tell what turn will this ‘Oil-War’ take.
I am an MBA graduate specialised in Finance. I am a passionate stock market investor and a movie buff. I have always been inclined towards learning and development through different styles and new experiences. I believe knowledge is a vital ingredient for success. So here I am trying to contribute my best to add to your financial knowledge via this knowledge centre ‘Trade Brains’.
Understanding why do Stock Markets Exist: A stock market is a public market where people can buy and sell shares on the stock exchange. The stocks, also known as equities, represent ownership in the company.
Stock markets have existed for centuries. The oldest stock exchange was started in Belgium back in 1531. The brokers and moneylenders used to meet there to deal with the businesses. However, they never used actual stocks but traded in promissory notes and bonds. Later, the Amsterdam Stock Exchange was established in 1602 by the Dutch East India Company and regarded as the first real stock exchange.
Since its inception, stock markets have served many purposes, the most important being to provide companies with a source to raise capital for investment and expansion.
Why do stock markets exist?
Stock markets exist to serve the wider economy. It helps individuals earn a profit on their income when they invest in the stock market and allows firms to spread their risks and receive large rewards. It also enables the government to increase spending through the tax revenue they earn from corporations that trade on the stock exchange. The government uses the revenue to increase re-investment and employment capacity.
The stock market plays an important role in the economy of a country in terms of spending and investment. Without stock markets, many countries would not be as developed as they are. Alongside this, it has helped individuals become wealthy and increases the overall standard of living in many economies.
Following are some of the most important functions of a stock market in the economy:
— Stock market helps companies raise capital
If stock markets did not exist, companies would have to resort to borrowing from the bank to raise money for expansion. This would be a burden on the company as they would have to repay the loans with interest.
Fortunately, with stock markets, businesses have the ability to create an initial public offering and raise large amounts of cash without having to worry about repayment. Moreover, publicly traded companies have no obligation to pay dividends when they incur losses.
Capital raised this way can help companies expand operations and create jobs in the economy. From a greater economic perspective, consumer spending increases, governments can benefit from tax revenues and there will be lower levels of unemployment.
— Stock market helps create personal wealth
One of the most important benefits of the stock market is its ability to help generate personal wealth in the economy.
For the individual investor, the stock market provides a way to invest your income to earn a share of the companies’ profits. The revenue they earn can increase spending in the economy that can have a multiplier effect. The increased spending by individuals leads to increased investment and employment.
— It helps increase investment in the economy
One of the key drivers of Gross Domestic Product is the level of investment in the economy. Governments often create fiscal and monetary policies in the economy to promote greater investment. The stock market is considered to be one of the most prominent sources for people to invest money in.
Furthermore, investors are always looking to invest in companies with high growth potential. If the stock market is performing well, this not only increases investment from local investors but also attracts foreign direct investment as people abroad invest in the local stock exchange. For example, people in India can invest in the NYSE which helps increase GDP of the US economy or vice-versa.
— Market serves as an indicator of the state of the economy
(Sensex last +30 years graph)
The performance of the stock market is a rough indicator of how well the economy is performing. This often depends on speculators and perceptions of investors in the market. A rise or fall in the price of shares represents what cycle the economy is in such as a recession or a boom.
There is a symbiotic relationship between the state of the economy and the performance of the stock market. Economists use this as a way to analyze the past performance of investment and spending which helps them in the creation of new economic policies. The stock market serves as a barometer for the economy.
— Stock Market also affects non-investors in the economy
All members of society are affected by the stock market performance regardless of whether or not they invest in stocks.
People with pension funds and retirement accounts are impacted by low stock prices as the value of their accounts is tied to the stock market. Companies can also reduce employee benefits (pensions) as they can no longer afford to spend money on this which can delay the retirement age. Furthermore, when a company’s share price goes down, it affects job security as firms cut back on spending and many people could end up losing their jobs.
The stock market also impacts the rate of taxes and interest rates set by the government. During the Great Depression, the US government lowered taxes to induce borrowing but once the economy was out of depression, the government increased interest rates to encourage investment. Interest rates can affect a non-investor because a person renting out a home does not have to pay interest on a home loan directly but the landlord is likely to increase the rent to cover the high-interest expense.
Closing Thoughts
The stock market gives opportunities to the businesses and the public to transfer capital and ownership in a controlled, secure and managed environment. In addition to providing a convenient way for companies to raise capital and for individuals to increase wealth, the stock market helps keep a check on corporate regulation and increases the economic growth and prosperity of the nation.
A quick overview of what is Stop Loss (Updated Mar 2020): When most of the traders are busy deciding the entry and exit price of a stock, there’s one point that they most easily overlook. And it is stop-loss. In this post, we are going to discuss what exactly is a stop loss and understand all the aspects of stop loss in detail.
Although ‘stop-loss’ might sound a little complicated to the beginners, however, it is really simple to understand. Therefore, without wasting any time, let’s learn what is stop loss and how it actually works.
1. What is Stop Loss?
The Stop loss is a very powerful tool available to the traders/investors to limit their losses. It is an advance order to sell the shares if the share price reaches a particular price point. Therefore, it helps to automate the selling process in different market scenarios.
For example, let’s say that you bought 200 shares of a company ABC at Rs 100. However, you do not want to lose more than 5% of your money, in case the trade didn’t work out as expected because of any reason. Here, you can put a stop loss to automatically sell your shares if its price falls below Rs 95.
Therefore, by putting a stop loss, you are limiting your losses. You are booking a loss at 5% and avoiding the scenario in case the trade might turn out ‘sour’ and the share price falls more than 5% (say 7 or 10%).
Stop-loss can be used for both short-term and long-term, but mostly effective for day traders. Further, most brokers do not charge extra for this type of order, making it more effective for the traders.
Here are a few of the top reasons to use stop loss
Cutting your losses: Stop loss helps you to cut your losses and ensures you against a big loss. Many a time, your stock trade would have turned out to be quite ‘ugly’ if you didn’t place a stop order and the price falls steeply.
Automation: Stop loss helps to automate your selling and hence you do not need to be present all the time. A stop loss will be automatically triggered in case stock touches a specific price.
To maintain ‘Risk and Reward’: It’s really important to maintain risk and reward while trading. For a specific reward, you should be stubborn that you will take only a fixed amount of risk. For example, you can define that you’ll take only 2%, 5%, or 8% risk for getting that much profit. And, a stop loss helps you to maintain your ‘risk and reward’.
Promotes discipline: It’s really important to detach yourself from market emotions.Stop loss helps you to stick to your strategy and promotes disciplined trading.
There are a number of stop-loss strategies to be followed while trading. Here’s a video by Market Gurukul that can help to learn some of them.
Note: If you want to learn more technical analysis, I would personally recommend you to watch Market Gurukul videos (Freely available on their youtube channel). You can learn excellent technical strategies there.
4. Should long-term investors use a stop loss?
A majority of the long-term investors do not use stop-loss in their long-term holdings. They argue that they do not mind short-term fluctuations in the market.
Moreover, it makes perfect sense not to exit a stock (which you have properly analyzed and researched for weeks), just because the market was volatile on a specific date. If you are investing for five years or more, there will always be a few days when the stock will get beaten by the market. Nevertheless, if you are confident about the stocks’ long-term performance, why to get afraid of a few short-term fluctuations.
Nevertheless, there is a minority of long-term investors who believe that it’s always a good strategy to keep your investments inside your risk appetite. They believe to decide a stop-loss price, even for their long-term holdings.
Personally, I do not use stop loss on my long-term holdings. However, this is my personal choice and not a piece of advice. I leave it totally up to you to decide which strategy works best for you.
5. Word of caution
There are a number of times when you have to remain cautious even if you placed a stop loss on your order.
Let’s say you placed a limit order to buy a share (along with stop loss) on a particular day. However, in case, the stock opened at a ‘gap-down’ in the pre-opening session. In such a scenario, your stop loss will never get triggered and you might have to bear some losses.
For example, let’s say that you placed a stop loss at Rs 95. However, during the pre-opening session, the stock opened on a gap-down at a price of Rs 90. In such a case, your stop loss will not get triggered, and hence, your sell order never gets placed.
Another disadvantage of using stop loss is that it can get activated by short-term fluctuations.
For example, for the same scenario, let’s say that for the same stock, the share price first fell to Rs 94 and then renounced and went up to Rs 105. As you have placed a stop loss at Rs 95, your holdings will be sold automatically, once the stop loss price is triggered. Although even the stock rises after reaching Rs 94, still you have to book a loss as you would have left your position automatically.
Overall, the key point while choosing a stop-loss is that it should allow the stock to fluctuate day-to-day while preventing the downside risk as much as possible. A 5% stop loss for a stock with a history of 8-10% daily fluctuations won’t work out well.
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6. Closing Thoughts
Although there are few limitations of using stop loss, however, it is a very useful tool to limit your losses. A big loss in one trading session might erode the profits of your last ten successful tradings.
Moreover, if you are a new trader and not have the skill yet to decide ‘quickly’ the price action of a share, then you should definitely learn the proper stop loss placement techniques.
That’s all. I hope this post on ‘What is Stop Loss? And How it actually works?’ was useful to you. Please comment below if you have any questions. #HappyInvesting.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
A complete NISM Certification Guide for Beginners: The majority of Commerce students that I come across these days are looking to make their career in the field of Finance. Even, a substantial number of engineering graduates whom I personally know, are currently changing their career to the Financial Services. At present, the Finance industry in India and across the globe is growing at a rapid pace. Therefore, it is of no doubt in saying that professional degrees and courses like MBA (Finance), CFA, FRM, and CFP are attracting a huge number of students every day.
However, apart from these mentioned courses, is there any other course which can give you the license to work as a self-employed individual in the Finance sector? Do you know of any course which is comparatively easier to pursue, affordable and gives you the ticket to pursue a career in the Finance industry?
The answer to both the questions is “NISM certification”.
But hey! Are you hearing the word ‘NISM’ for the first time? Even if yes, then you don’t need to worry at all. In this article, I would share a brief overview of the wide range of NISM courses available and how you can get certified with NISM.
What is NISM?
NISM (National Institute of Securities Markets) is headquartered in Navi Mumbai, India and offers a wide range of courses to the Indian students. It is a public trust which was established by SEBI (Securities and Exchange Board of India). SEBI is the apex body which regulates the securities markets in India.
The SCI (School for Certification of Intermediaries) is one of the six schools of excellence at NISM. The SCI is engaged in the development of Certification examinations and Continuing Professional Education (CPE) programmes in the Financial Markets domain. These are conducted for validating and enhancing the abilities of the associates working in the Indian capital markets.
What does the NISM offer?
The NISM campus in Patalganga (Maharashtra) offers two full-time courses in Finance. The first one is PGPSM (Post Graduate Programme in Securities Markets) and the other is PGD (Post Graduate Diploma) in FinTech.
Apart from these two stated courses, NISM also offers a few other long term courses in collaboration with international bodies. You can have a look at those courses clicking here.
Further, there are 22 short term certification courses offered by NISM. In this article, we would predominantly hold a discussion on these certifications. A majority of these short term courses are mandated by SEBI for those who are either self-employed like an investment advisor or research analyst or working in the Financial Services industry in India.
The rests are voluntary certifications that have not been mandatory for the finance professionals. But, the voluntary certifications are beneficial in the sense that they provide advanced knowledge in some specific area.
For example, Mutual Fund Distributors Certification Examination (Series V C) is a voluntary exam but its contents and way of testing the candidates is more difficult than other Mutual Funds exams.
Note: You can find the list of all the available 22 courses on the website of NISM here.
How to register for a NISM certification exam?
In order to register for any course offered by NISM, you first need to create your account on the NISM website. Click on this link and it will take you to the home page of the website. While creating your account, make sure you have a digital copy of your photograph, aadhar card and PAN card with you.
After you are done with the account creation, you can choose any module of your choice. To register for any module exam, you have to select the exam date, time and center first. After that, it will take you to the payment gateway.
Once you have paid the required exam fees, you would get the soft copy of the workbook (study material) and the hall ticket in your account. Take a physical printout of your hall ticket and carry it with you to the exam center on the day of your exam.
The NISM provides the students with soft copies of the study materials in the ‘pdf’ format. The content covers both theoretical and practical aspects of the Financial Markets. These courses teach you various jargons which you need to know for pursuing a career in the Financial Markets.
Anyways, you can also enroll in these courses if you are simply interested in gaining knowledge. These programmes teach you the key theoretical concepts of the Stock Market, Mutual Fund, Financial Planning, and many others. The exams are based on MCQ (Multiple Choice Questions) and the students are tested on their conceptual understanding. Although you don’t get the opportunity to work on demo projects here, you certainly get the chance to solve case study questions in the exams. Further, you cannot carry a scientific calculator in the exam. But, you are definitely allowed to do rough works in MS Excel, OpenOffice or digital calc on the given desktop in the exam hall.
The NISM certification exams majorly focus on the practical understanding rather than emphasizing on mugging up theories. The best feature of these certifications is that the course modules are updated in every year.
How much time does it take for the completion of a NISM course?
In case of a NISM certification examination, you don’t need any significant amount of time to complete the same unlike CA, CFA, or MBA (Finance). Practically speaking, you can book your exam slot at any time. However, it is recommended that you should prepare for at least two weeks to a month before taking any module exam. This is because when you register for an exam, you get the study material covering a minimum of 100 pages which needs a decent time for complete reading.
If you are only looking to clear the exam, you can do the same by referring to the mock tests of private institutions. But, if you are looking to gain knowledge of the financial markets and clear the exams with distinction marks, you must study the workbooks given to you by NISM.
What is the registration fee to be paid to opt for a NISM certification exam?
The registration fee for any exam is pretty reasonable in nature. Here, you don’t need to pay over 30 or 40 thousand rupees to write a semester of MBA or a level exam in CFA.
Today, you can register in a NISM exam for as low as Rs 1200. The module exam with the highest registration fee is Rs 3000. Whenever you are enrolling for an exam of NISM, you have to pay the required fees. If you are unable to attempt that exam or fail in the same, you have to pay the same fee again for re-appearing in the exam.
How’s the difficulty level of a NISM exam?
The difficulty level of the NISM exams is between average to moderately high. For some exams, the contents and way of testing could be more difficult than the rests. The NISM Investment Advisor Exams (Level 1 and 2) contain relatively more practical contents as compared to the other courses. On the other hand, exams like the NISM (Series VI) Depository Operations Certification Examination contain a very high share of theory portion in their syllabus.
In order to pass a module, you need to secure a minimum of 60% score in most of the module exams. Besides, these exams come with negative marking of 25% per question. A very few exams like NISM (Series V A) Mutual Funds Distributors Certification Examination have a minimum passing marks criteria of 50% and also they don’t have any negative marking feature.
Closing Thoughts
NISM exams are definitely one of the best in the industry if you are a fresher and willing to make a career in Finance. These certification exams are sufficient to give you an initial push in your career. They are strong enough to add a few keywords in your resume and make it look better than your peers. But, you must understand that clearing these exams are not going to make you stand at par with the jobseekers having CA, CFA, FRM or MBA (Finance) in their portfolio.
Nonetheless, in case you are looking for a job after graduation, these courses can help you in getting shortlisted on India’s top job websites. It is easy to start your career as a Mutual Fund Selling Agent or an Equity Dealer clearing the required NISM exams. But, if you are aiming for a career in Portfolio Management, Investment Banking or Fund Manager, you should look for the premier courses in Finance.
Investing vs Trading: What’s the difference? — There are two common approaches to make money from the stock market. The first one is investing and second is trading. However, the difference between them might not be easily understandable for beginners. A lot of people trade in stocks and confuse them by investing. In this article, we are going to discuss the difference between investing vs trading.
Investing vs Trading
To start with, while investing aims to create wealth over the long term by buying good companies and holding it for a long duration, trading is quite the opposite of it. Trading aims at generating profits by frequently buying and selling stocks.
Example 1: If you buy a stock today and commits to holds the stock for the next three years, then you are investing. Here you believe that the price of that stock will be way higher after three years than what it is today.
Example 2: If you buy a stock today morning and commits to selling the stock by evening (before the market closes on the same day), then you are trading. Here you believe to make a profit by the difference in your purchase and selling price.
The time period for investing is long term and many a time the holding period maybe even decades. You can find many peoples investing for their children or grandchildren. In fact, a lot of people inherit the stocks that were bought by their parents and they might worth millions today.
On the other hand, the time period for trading is short-term. It can be minutes, hours, day or a few weeks. Sometimes the trading period is even less than a minute when traders buy/sell stocks with explosive movements and book profit soon enough.
Further, the attitudes of the people who follow these approaches are different. The investors are inclined towards stress-free sound investment for wealth creation over the long term. However, traders tend to make big profits in a short period of time. They also have a love for the game of trading and find it entertaining.
Investors tend to make sound investments and relax. On the other hand, traders are actively involved in the market and require their time & presence to make profits.
Creating wealth over a long period of time by buying and holding.
Generating profit by frequent buying and selling of stocks.
Daily market fluctuations
Daily market fluctuations do not affect investors as they aim for long-term.
They tend to get benefit of the daily market fluctuations by buying and selling stocks
Add on benefits
Investors enjoys perks like the bonus, dividends, stock split etc
Traders hold the stocks only for short interval and hence doesnÕt enjoy these perks.
Protective element
Investing in the fundamentally strong company that will bounce back to true value over time and losses will be recovered.
Stop loss is used to limit the losses.
Indicators
Fundamental indicators like Earnings per share, Price to earnings, current ratio etc are used.
Technical indicators like moving averages, stochastic oscillators, RSI etc are used.
Period
Long term
Short term- day/week
Strategy
Creating wealth by compound interest and dividend
Timing the market (finding the right time to enter and exit a stock)
Risk
Low risk but low potential return in short term. Good returns in long term.
High risk but higher potential return in short term.
Factors affecting the approach.
Business fundamentals like industry, economy, financials, market, competitors etc.
Technical indicators, the psychology of the market, money management, risk-reward etc
Belief
The company will perform well in the future and will reward its shareholders.
Share price will move in a direction to achieve the target profits.
Expected return
15-20% return per annum (compounded).
8-10% return per month.
Brokerage charges
Very fewer brokerage charges are involved due to buying and holding strategy.
Trading involves high brokerage due to frequent buying and selling.
Involvement required
Investors make the sound investment after deep study of a company and relax afterward.
Require activeÊinvolvement in the market to find the correct time to enter and exit in order to book profits.
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Conclusion
Both these approaches are a successful way to make money from the stock market. However, if you planning to choose one approach, think about the time that you can spend ‘daily’ on market activities. If you can daily spend hours in the market, then trading suits you. Otherwise, investing is a better approach for you.
Moreover, it also depends on your knowledge. If you have an interest in reading financials, accounting, news, economy, etc then investing is good for you. On the other hand, if you are good with trends and charts, trading makes more sense.
Finally, comes your preference. As discussed in the post many people enjoy the game of trading while many want to be relaxed once they invested their money. Your personal preference has a high weight for selecting your style.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Impact of Coronavirus on Stock market and Indian Economy: The Indian stock markets have been in turmoil over the past few months due to slow economic growth. The market was only recovering with government taking some major initiatives like rate cut in corporate tax, infusing money in the economy, disinvestments, lowering repo-rate, etc., until another crisis hit a new wave of major economic slowdown pushing the indices (SENSEX and NIFTY) to their decades low.
In this article, we’ll discuss what exactly is ‘Coronavirus’ crisis and what are the impacts of coronavirus on stock market & Indian economy. Let’s get started.
What is the ‘Coronavirus’ crisis?
COVID-19 a pandemic most commonly known as ‘Coronavirus’, which started in China has now breached the international borders and has spread to nations across the globe. Among the infected nations some of the major economies that are facing severe damages are South Korea, Iran, Japan, Italy and now India has been added to the list.
The nations are not only facing a loss of life or an exponential increase in the number of infected individuals, but the economic growth has also been dented by this pandemic.
The global economy is facing a rough time due to the outbreak of the ‘Coronavirus’, which started in China. ‘China’ is the worlds’ largest manufacturing hub and one of the largest exporters of goods. China accounts for almost 16% of global exports.
Being the epicenter of the virus the economic activities in China contracted as the health emergency called for shut down of offices, factories, schools, etc. This contraction had a dominos effect on the economies across the globe as a majority of ‘supply chains’ globally are sourced from China.
How is the exposure of ‘Coronavirus’ impacting the Indian Economy?
India is China’s second-largest trade partner making the trading roots even deeper and hence the impact on Indian markets is huge. India happens to be a net-importer from China. India’s merchandise import from China accounts for almost 18% of its total imports from around the world, while the exports account for almost 9% of the total exports around the world, as of CY2019.
Due to the economic activity contraction in China, industries and companies directly related to imports and exports from and to China are facing a crisis. Some of the major sectors affected in India are-
Auto-ancillaries imports constitute 18% of total imports from China, whereas tyre imports include approximately 30% of imports from China, resulting in a shortfall of raw materials and auto-parts for OEMs and automobile manufacturers.
Consumer Durables industry imports constitute almost 45% of total imports from China making it highly reliable on Chinese manufacturers.
67% of electronics (mobile phones, laptops, etc.) are imported from China. Due to a high dependency on Chinese imports, the domestic contract manufacturers will only be benefited marginally as the manufacturing capacity in India is quite low in comparison to China. Hence domestic industry players cannot fill the supply gap.
India exports around 34% of its total ‘Petrochemicals’ to China. As a result of the contraction in the economy, the demand will fall and the prices of petrochemicals will take a hit and margins will be under pressure.
Pharmaceutical Industry imports around 69% of its pharma drugs and intermediates from China. However, the companies have maintained enough stock for 2-3 months promising a less affected Q4FY20.
Others- Gems and Jewellery (India exports 36% of diamonds to China); Seafood (India’s exports to China accounts for ~22% of its overall seafood export); Solar Panels (India imports ~70% of solar modules from China); Shipping & Logistics (China is the largest consumer of Iron Ore, Coal, Oil & Gas hence affecting the demand and trade via sea-routes); Textiles (India exports 27% of total cotton yarn to China)
Market discounts information on a real-time basis, thus the aftereffect of the virus outbreak on the Chinese economy and on the above-listed industries and sectors can be seen evidently as the stock prices of related companies and sectoral indices fell in the past one week. Negative investor sentiment can be directly witnessed with the market breaking down to new lows with every passing day.
Further, the sectors and commodities, which are indirectly connected to the above-listed industries, will have a subsequent impact like the Oil prices falling, etc.
The weight of the above-listed Industries in the contribution of India’s GDP growth is high thereby affecting the economy at large.
India – Q4FY20 Outlook
The performance of Q4FY20 is still in question as many sectors like ‘Pharma’, sourcing supply chains from China have already stocked their inventories for almost 2-3 months absorbing the losses that could have occurred due to shortage of raw material supply. While on the other hand, the electronics market might take a major hit due to the shortfall of supply. Some of the top mobile phone companies like ‘Apple’, ‘One Plus’, ‘Xiaomi’ etc. have there manufacturing hubs in China, additionally among the top mobile phone companies majority are Chinese brands.
The uncertainty isn’t much as one can easily do the math of India’s dependency on China. Hence the answer is crystal clear. What needs to be addressed is to what extent can Indian economy be damaged and what will be the governments’ contingent plan to the bailout the Indian economy.
Though it is too soon to say the measure of impact, as Q4FY20 numbers are yet to come out.
Is the falling Chinese Economy a Silver Lining for India?
India has been running its own race to achieve a target of becoming a $5 Trillion economy. The economy has been thriving with the government taking some important measures to make India self-sufficient and attractive for foreign investors.
China is a world manufacturing hub and a net-export country. The dependency of the world economy on China is too high and hence, concluding that the current economic contraction in China is an opportunity for India is too soon and illusionary. Further, the manufacturing capacity in India is far too less than China and cannot be sufficient for an instant shift. A business shift takes immense time due to strategy and cost-effectiveness. Thus India might be a good substitute for China, but in order to replace China, it has a long way to go.
Future Outlook on the Dalal-Street
The root cause of the falling stock prices and indices is the uncontrollably spreading ‘Coronavirus’. The cure for the virus has not been found yet and the number of infected individuals has been increasing with every passing day.
The investors have become so pessimistic about the future outlook of the Indian economy, that pulling out money from investments looks much safer and promising to avoid further after-effects of the virus on the industries and economy.
The fall will continue until the virus is not controlled and continues to spread contagiously affecting the economies. Some positive outlook on the vaccination or control of this pandemic seems to be the only solution that can rest the fear of the investors.
I am an MBA graduate specialised in Finance. I am a passionate stock market investor and a movie buff. I have always been inclined towards learning and development through different styles and new experiences. I believe knowledge is a vital ingredient for success. So here I am trying to contribute my best to add to your financial knowledge via this knowledge centre ‘Trade Brains’.
Baron Rothschild, a British banker and politician from the wealthy international Rothschild family, once said that the best time to buy is “when there is blood in the streets.”
In simple words, when everyone else is selling, it’s a great time to purchase. However, this advise is far easier said than done. Although it seems logical advice, yet very few people follow it. (Btw, by streets we are referring wall street/ Dalal street or just the stock market.)
Why are people afraid to invest when the market is down?
Before diving more in-depth, let’s first understand why people are afraid to invest when the market is down.
For beginners, they are simply scared that the market may go further down and hence, it might not be the right time to invest. Sounds legit, right?
However, here the problem is that even the most experienced investors can’t time the market correctly and repeatedly. If you are planning to invest in the stocks at the bottom-most price, you would most probably fail. The better approach would be to buy when they are cheaper, not the cheapest.
On the other hand, the existing investors are afraid to invest further because they are already bathing in their blood. As many of the stocks in their portfolio may be in red, these investors might be scared to make further investments. However, this approach doesn’t sound correct, does it?
I mean, let’s assume that you bought some seeds to plant in your field which may produce big returns in the long-term. However, after a few months, the price of those seeds dropped significantly. What would you do? Would you buy more of those seeds so that you can enjoy a bigger discount and secure your future even further? Or will you just stay out of the market, even though you have a larger field left to sow?
In my opinion, it would be a better outlook to buy more seeds at a cheaper price which might produce a greater return in the future.
The Law of supply and demand
The laws of supply and demand say that whenever demand is lower, the price must come down.
Now, when there is blood in the streets, there is panic selling and a majority of people tend to sell their stocks. In such scenarios, the demand for the stocks decreases a lot compared to the supply.
And obviously, when demand is less (and the supply is more), you can buy stuff at a better discount. (On the contrary, when the market is high — the demand goes higher and hence the buyers have to purchase the same stock at a premium).
That’s why bad times make for good buys. Invest in the market when there’s blood in the street and you can get great bargains.
The market always gives opportunities, but only a few are brave enough to take it.
If you look at the stock market history, you can find that the market always gives opportunities to purchase shares at a lower price. Whether it was correction during March 2018 (after the announcement of re-introduction of LTCG tax) or the demonetization, the market has always given amazing opportunities to the buyers.
However, most people miss out on these opportunities as they are busy following the crowd. Nevertheless, buying when the market is high and trying to sell during the lows can never be profitable for investors.
Moreover, making emotional decisions to sell stocks when the market is down is always a mistake.
The history says that market rebounds, and over the long term, it always gives decent returns (And this is a fact). Even during the worst economic crisis of 2008 (when the market fell around 60%), the market bounced back to the same points within two years. The biggest losers at that time were ‘not’ the ones who bought the stocks at the highs of 2008, but the ones who ‘bought at high’ and ‘sold at low’ (just because they didn’t have patience).
And if the market can survive such a big crisis, then it will definitely recover short-term corrections (or bears) and give good returns for the long-term investors. The intelligent investors should consider these times as opportunities, rather than threats.
The Time To Act is NOW!
In one of my previous post, I had suggested starting building your watchlist as the market was high then. And if you’ve followed my suggestion then, you might already have a list of a few amazing companies with terrific return potential in the future. (Btw, I believe everyone should keep a watchlist so that they do not miss out opportunities like these).
Next, look into your watchlist and find out the current valuation of those stocks. If any of them are currently undervalued or even trading at a decent valuation, then it is the right time to act.
(Quick Note: You can also use the Trade Brains’ free online calculator to find the intrinsic value of the stocks. Here is the link to the calculator).
Final tip: The best stocks to invest are the ones already existing in your portfolio.
I learned this lesson years back when I read ‘One up on wall street’ by Peter Lynch. And I believe it is a necessary lesson to share in this post.
The best stocks to invest are the ones already existing in your portfolio. Maybe they are trading at a lower valuation, and your portfolio is in red. However, they are still the best options available to you.
You have already researched those stocks, and they are still in your portfolio only because you’re confident that it will perform well in the future. Then, why not to invest more in such stocks when they are selling even at a better discount. Look into your portfolio and find out those stocks which are currently trading at a cheaper price.
Quick Note: This tip doesn’t work for the newbie investors. If you’re new to stocks and haven’t yet researched or invested in stocks, then this article that can help you to pick winning stocks.
At last, here’s an amazing quote by Warren Buffett to end this post:
“I’ll tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful”— Warren Buffett“
That’s all. I hope this post was useful to you. Happy Investing.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Best Indian Stock Market Blogs to Follow to Learn Investing: If you are looking for a few best Indian stock market blogs to follow, then you have reached the right place.
Although there are hundreds of stock investing blogs in India, however, in this post we have hand-picked 7 best Indian stock market blogs that every Indian equity investor should follow. (Quick note: Please read this post till the end as there’s a bonus in the last section of this article).
Trade Brains was founded by Kritesh Abhishek, an NIT Warangal graduate, in Jan 2017. It is a fastest growing Financial Educational Blog in India with over 42,500+ newsletter subscribers within a year and half of inception. Trade brains blog is focused to teach stock market investing and personal finance to the DIY (do-it-yourself) Investors.
Get money rich (GMR) blog is run by Mani (founded in 2008). You can read a number of interesting articles regarding stock investing, mutual funds, real estate, income tax, personal finance etc on this blog.
This blog keeps analyzing new stocks and if you’re a beginner (or even a seasoned investor), you can read these articles to understand how to analyze stocks, which factors to consider and how to find whether a stock is undervalued or overvalued. Here’s a list of few recent stock analysis by Get money rich blog.
Because of it’s simple and easy to understand contents, it’s one of the best Indian stock market blogs to learn to invest in stocks alongside boosting your additional financial insights.
This blog is managed by Prof. Sanjay Bakshi. He teaches MBA students (at MDI Gurgaon) two popular courses: “Behavioral Finance & Business Valuation” and “Financial Shenanigans & Governance”. On fundoo professor blog, Mr. Bakshi shares his thoughts as a teacher & practitioner of value investing and behavioral economics.
This blog consists of hundreds of free amazing lessons on investing and human behavior. It’s a great read for the Indian investors to build a strong investing foundation.
‘Safal Niveshak’ means a ‘successful investor’. This blog is managed by Vishal Khandelwal and Anshul Khare. Vishal has 15+ years of experience as an investor. The Safal Niveshak blog is focused to help the small investor, become intelligent, independent, and successful in your stock market investing decisions. They have a newsletter of over 47,000+ subscribers.
You can find many valuable investing lessons on this blog which definitely makes it one of the best Indian stock market blogs.
This blog is managed by Nitin Bhatia, who covers areas like Investment, Insurance, Stocks, Mutual Funds, Credit Score, Taxation, and Business Start-ups. They also run a youtube channel with over 290,000+ Subscribers.
Stable Investor is run by Dev Ashish, a SEBI Registered Investment Advisor.
This blog is focused to help people invest sensibly to achieve financial goals, get their personal finances in order, invest profitably in stocks. Stable Investor has over 11,000+ Newsletter subscribers.
Stable Investor also provides various financial services like financial planning, retirement planning, children future planning etc.
This blog is run by Dr. Vijay Malik, a SEBI registered analyst. He has been actively involved in the Indian equity markets since 2006. The articles on his blog attempt to simplify the process of investment decision making. Dr. Vijay Malik blog provides premium services like ‘Peaceful investing’ workshop, stock analysis excel sheet, ebooks etc.
You can also read the analysis reports of various stocks published on this blog for free making it worth mentioning in our list of best Indian stock market blogs.
Besides reading blogs, watching videos is also a good alternative to learn to invest. As a bonus, here are two amazing Indian stock market youtube channels that you can subscribe for free to learn to invest in stocks.
– Trade Brains YT Channel
This channel is hosted by Kritesh Abhishek and is focused to teach stock market investing and personal finance to the do-it-yourself (DIY) Investors. On Trade brains youtube channel, you can find simplified investing videos on stock market basics, valuations, mutual funds, investing strategies and much more. You can subscribe to the channel using this link.
FinnovationZ creates easy to understand video contents for beginners. Most of the videos on this channel are in Hindi and hence comfortable to grasp for the native speakers. FinnovationZ has over 270,000+ subscribers on their youtube channel.
That’s all for this post. If you think we missed any astronishing blog on our list of best Indian stock market blogs, feel free to comment below. We’ll be happy to include it on our list if it’s worth adding. Cheers!
11 Catalysts that can move the share price: While investing in the stock market, a number of times you may find that a new announcement regarding any company drastically spikes its share price within a few months. These are called catalysts.
The catalysts are certain special events (actual or potential) that are capable to push the share price of a company upwards or downwards in a short (accelerated) time period.
These catalysts may ‘not’ always push the share price upwards. However, most of the time, these catalysts allow the investors to get a fast profit by holding the share for a shorter period of time.
Moreover, the outcomes of these catalysts are comparatively easier to predict. Depending on the catalyst type, you can analyze whether the share price will go up or down. In this post, we are going to discuss the top eleven must-know catalysts that can move the share price of a company.
DISCLAIMER: Although most of the times these catalysts can move the share price of the company, however, there is no guarantee that the things will always work out as expected. Sometimes these catalysts may not be able to move the share price as much as logically predicted.
11 Must-Know Catalysts That Can Move The Share Price
1. Earnings release
A strong earnings report (which is more than what expected by the market experts) can be really good for the stock. The public takes this report enthusiastically and hence, the company’s share price is pushed higher. Further, this also raises the ‘bar’ for the future earning potentials of the company.
2. Mergers & Acquisitions
A merger occurs when two separate entities combine together to form a new joint organization. You can consider a merger as a corporate ‘marriage’. Whereas, when a company takes over another company and establishes itself as a new owner, then this action is called acquisition.
Mergers and acquisitions can push the share prices of the ‘acquiring’ and the ‘target’ company. However, here do take care of which company will get more benefits after the merger.
A share buyback is a situation when a company buys its own share back. This means that the company will purchase the outstanding shares and hence will reduce the total number of shares available in the market.
As stock buyback increases the value of the remaining shares. Hence, it increases the demand for the stocks of that company and pushes its share price in an upward direction.
4. Significant dividend announcement
A significant dividend announcement by the board of directors means that every shareholder will get a greater dividend per share. This will increase the demand for the stock and hence a rise in the share price can be expected.
However, in such scenarios, many times the share prices increase till the ex-dividend date of the company and might move a little downwards after the record date.
If a company announces the launch of a new product or the opening of a new plant that can help to generate more revenue in the future, then it will be taken positively by the public.
6. Stock splits
In a stock split, the company splits the share price into different parts. For example, in a stock split of 1:1, stock price splits into two parts. In a stock split of 1:5, stock splits into 5 parts. The fundamentals of a company remain the same in a stock split. There is neither an increase or decrease in the share capital or reserve in a stock split.
Stock splits make the company more affordable for an average investor. Further, it also increases the liquidity of the stock and its trading volume.
7. Bonus
The bonus shares are the additional shares given to the shareholders by the company. This is a method of rewarding shareholders.
Although, there will be no noticeable difference in the wealth of shareholders as the share price of the company will fall in the same proportion after the bonus date. However, the announcement of the bonus shares is considered a piece of positive news as it will increase the dividends that you’ll receive in the future (as you will hold more stocks which will be added as the bonus in future).
That’s why the bonus announced by the company is taken eagerly by the crowd resulting in an increase in the share price.
What are spinoffs? – A company may have several products or services. When a larger company ‘Spins off” a division and split the company up in two, then it is called spin-offs. Shareholders receive stocks from both companies.
Here, the independent companies perform better as the management can focus more on the individual company. In addition, after spinoffs, there’s a better stock valuation for each company sedately as opposed to one big entity. The announcement of spinoffs will easily move the share price of the company.
9. Liquidation
Liquidation is bad news as it means that the business went bankrupt and will be terminated. While liquidation, the company sells everything it owns.
The shareholders who are owning this company might want to get rid of it or start selling their shares to some other people. Hence, the liquidation announcement acts as catalysts that can move the share price in a negative direction.
10. Lawsuits and investigations
Many public companies are sometimes investigated. There can be various outcomes while dealing with lawsuits and investigations. The company share price can move in different directions once the public finds out about it.
In general, during the investigation time, the share price of that company moves in a downward direction. It declines further if the company is found guilty. However, if the company is found ‘not guilty’, then its share price may jump in the upward direction.
11. Addition to the index
When a company is added to the index (such as nifty or Sensex), then the index funds have to purchase that company. This increases demand and pushes the share price.
Bonus: A few other catalysts that can move the share price are ‘change in management’, takeovers, a spike in interest rates, political reasons, global issues, etc.
What can you do with this information?
Usually, most of these catalysts are ‘unpredictablein nature‘. It’s really difficult to predict when the company will announce the next bonus or a significant dividend (although few of these catalysts can be predicted by the experts, however, the exact news is known only after the announcement).
That’s why don’t make an entire investing strategy just based on this info. Take these catalysts into account and be ready for it.
In addition, you also need to follow the news regarding these catalysts in a ‘smart’ way. There are a lot of fake news or rumors in the market. Filter out the correct news before processing. You can use google alerts to get the relevant news.
There are a number of catalysts in the market that can accelerate the share price. These are the bonus information if known to the investors, can help to get profit within a short time period. Here are the top 11 Catalysts that can move the share price which we studied today.
Earning release
Mergers & Acquisitions
Stock buybacks (Repurchases)
Significant dividend announcement
Product launches
Stock splits
Bonus
Spinoffs
Liquidation
Lawsuits and investigations
Addition to index
Quick Note: New to stocks? Want to learn how to select good stocks for long-term investment? Check out my amazing online course: HOW TO PICK WINNING PICKS? The course is currently available at a discount.
That’s all. I hope this post is useful to you. Feel free to leave a comment below if you have any doubt or want to ask any questions. I’ll be happy to help you out. #HappyInvesting.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
The best offense is a good defense. Just like in military combat or football, investors also need a good offense and defense strategy. In other words, you need to use more than one strategy in order to succeed. As a serious investor, there are many different ways you can do this. You can invest in a variety of stocks, cash, and other securities, you can also diversify your portfolio by investing in securities across various sectors and markets or you can invest in stocks that are at different growth and value levels.
Implementing the right strategy requires a good knowledge of the global economy and how the markets work- if you don’t have a good understanding of this, making decisions become incredibly difficult. As we all know, the economy goes through different business cycles and while we can’t predict the outcome of the cycles we can alter our decisions to keep up with the ever-changing landscape. This changing environment also provides a great way for investors to mix up their portfolio, namely with investing in cyclical and non-cyclical industries.
What are cyclical stocks?
As the name suggests, cyclical stocks are those that move in the direction of the market. That is when the economy is doing well, the stocks go up and when there is a downturn in the economy, the value of the stock goes down too. These stocks are more closely aligned with the broader economy and are more prone to economic activity.
Investors can use various indicators to tools to judge whether a stock is cyclical or not. One such popular indicator is Beta. In simple words, beta is a measure of a stock’s volatility in relation to the overall market. If a stock moves less than the market, the stock’s beta is less than 1.0. On the other hand, a beta of 1.5 means if the market falls 10 percent, the stock is likely to fall 15 percent. Cyclicals tend to have high beta values, which are usually higher than 1.
For many investors, the movement of stock in cyclical industries provides a great opportunity to earn revenue on the stock by buying when there is a downturn and selling when there is an upward trend. For a novice investor, this may seem like a fool-proof strategy but be cautious, as it is almost impossible to tell when there will be a downturn in the market.
Cyclical industries usually may include durable goods (that last for a long time into the future), non-durable goods (that have a short shelf life) and services like an automobile, construction, and travel.
When the economy is doing good and the people are earning well, they may spend a lot of money on buying a new car, constructing their new house or even plan fancy off-shore travels. However, when there is a downturn in the economy, people may prefer to hold these expenses for another year or two.
Around 75 percent of the stocks listed in the stock exchange are cyclical and follow the market trends. A few examples include Tata Motors, Honeywell Automation India Ltd, Shree Cement Ltd, SAIL, Hindalco etc.
What are non-cyclical stocks?
While cyclical industries may seem like a good investment, every good offense needs a defense, hence, it is important to balance out your portfolio with non-cyclical or defensive stocks. During a boom, people splurge on goods and services such as travel and cars. But during a slump, people stop spending on purchases that they don’t consider a basic necessity, instead they focus their spending money on food, water, and shelter.
During an economic recession or depression, the revenue and cash-flows and share price of non-cyclical companies continue to do well because they are industries that produce the basic needs of life that people will continue to consume.
In addition to basic needs, non-cyclical stocks also include those goods that are addictive such as tobacco or alcohol which can put ethical investors in a tricky situation as these industries do well even during a slump and reduces the number of industries that they can invest in.
Defensive stocks include goods and services in industries that are not affected by market fluctuations such as utilities, food, and medicines. It is basically any good or service that people will buy whether or not the economy is doing well. A few examples of defensive stock companies include Hindustan Unilever (HUL), Marico, HDFC Bank etc.
Bonus: The top-down strategy
There are two main investing strategies in the market, the top-down approach, and the bottom-up approach. The top-down approach involves looking at the economy as a whole and picking stocks that do well during certain economic conditions. This strategy requires the investor to have a good understanding of the macroeconomy along with its various sectors and industries to know what industry will perform well during the different business cycles. They also need to assess the inflexion points in the economy, that is when a certain stock price is expected to go up or down. For cyclical and non-cyclical stocks, top-down is the most commonly used strategy.
The bottom-up approach, on the other hand, involves looking at the stock individually and making investment decisions based on independent parameters.
When using the top-down approach, there are many indicators that investors can use to study the market. The first and most obvious metric is the GDP (Gross Domestic Product). This is the total value of all the goods and services produced in the economy and gives us a good understanding of the overall economic health.
Another great indicator is the ‘Purchasing Manager’s Index (PMI). This is a survey conducted among the purchasing managers in different sectors and industries in the economy. The PMI provides the investor with information on how the businesses are currently performing and which direction the economy is headed.
A third metric is the Consumer Price Index (CPI). This will give an investor insight into the changing price levels of goods and services in the economy and is a reflection of the state of the economy.
The top-down strategy is considered successful when the cyclical and defensive stocks are in perfect correlation with each other. A 100% correlation would mean that the stocks move in synch with each other while a -100% correlation means that the stocks are still in sync but move in the opposite direction.
During the 2008 recession, luxury goods such as Ford cars faced a huge decline in the value of their stock as people stopped spending on expensive items when the economy was down but at the same time, the stock for beverages such as Coco-Cola continued to do well as people spent money on this regardless of the business cycle.
It is important for every investor to have a balanced and diversified portfolio with both cyclical and non-cyclical stocks.
Cyclical stocks include more luxury goods and hence a provide a higher return than non-cyclical stocks. However, the investor needs to study the market carefully and have a good tolerance for risk. Defensive stocks are safer investments but provide lower returns but are better for investors looking for safe investments Remember low risk, low return.
Have you ever bought a cheap stock, which later got cheaper and cheaper? If yes, then you might already have met with- Value traps.
Value traps are those stocks that may seem like a value stock because of their cheap valuation. However, in actuality, they are garbage stocks. Unlike value stocks, these value traps do not have true potential to give good returns to their investors and that’s why their price keeps on declining for a continuous period of time.
Why do investors fall in value trap?
There are some stocks which may appear cheap because they are trading at a low valuation metrics such as PE, price to book value ratio, cash flow ratio, etc.
The bargain hunters keep an eagle eye on these stocks as they appear cheaper compared to their historical valuation or relative to the market.
These investors buy these stocks at a low price considering them as a value stock. However, the problem arises when the price keeps on dropping for an extended duration of time.
Here, instead of purchasing a value stock, the investor has fallen for a value trap.
The value traps are those stocks that are ‘not’ cheap because the market has not realized their true potential or because of some temporary setbacks. These stocks are trading at a cheap valuation because the company has either lost its fire or else its fire is fading away.
A value trap is that stock which is not able to generate any significant profit growth or revenue. A few of the general reasons for the underperformance may be rising production/operational cost, declining market share, lack of new product/services, change in competitive dynamics or inefficient management.
The investors who buy such stocks just by evaluating its low valuation (without giving any regard to the reason why the valuation is low) falls in the value trap.
The real value stocks are those stocks that are trading below their intrinsic value. The reason for their cheap valuation may be either temporary factors or because the market has not yet realized their true potential.
A few common characteristics of value stocks are consistency, strategic advantage, strong business plan, growing cash flow and high-quality financials. Further, these stocks can be considered value stocks only if they are bought at a significant margin of safety by the value investors.
On the other hand, value traps are those stocks that are trading at a low valuation because of long-term or permanent setbacks (factors). These stocks are not actually trading below their intrinsic factor. They are just trading at a low valuation compared to their historical valuation or relative to the market (which might be even above its true intrinsic value).
Value trap stocks lack catalysts or momentum to retrace their original growth track.
Although these value trap stocks might be trading at a low valuation compared to its past valuation or market, however, the chances of these stocks bouncing back to their historical valuation are quite low.
Most of the value trap stocks suffer from lack of innovation, degrading competitive advantages, high debt, low-interest coverage potential, poor management, declining profitability, and no future growth prospects. Proper research is required while investing in these cheap stocks to understand the reason behind their low valuation.
For example- if the average PE of an industry is 18x and stock is trading at 5x, then considering the PE valuation, it might look like a value stock. However, whether it’s actually a value stock or a value trap can only be found after proper investigation.
Similarly, if a banking company is trading at a price to book value of 4x compared to the industry average of 9x, then again the bargain hunters first need to investigate the reason behind the low valuation of that stock before concluding it as a value stock.
A few common signs that the cheap stock is actually a ‘Value Trap’
1. Declining earnings
If the earnings and cash flow of a company are consistently declining for the past few couples of years, then the stock might be a value trap. The low valuations of these stocks are because of their dull future prospects. The market works on future expectations and if investors cannot see any future growth potential in the company, then the stock might even degrade further, no matter how low is the valuation.
2. Business plan
A company with outdated technology or a non-profitable business cannot be a value stock. Take the examples of the 2G/3G technology-based telecommunication companies. Most of such companies ran out of business just because of outdated technology.
3. Poor Management
Poor and inefficient management of a company is a sure sign of a value trap. If the management lacks the driving force and their strategic vision is cloudy, then the investors of that company might suffer from value traps.
4. High Debt
Huge debt and leverages are never favorable for a business. Big debt is an actual trigger for the most deadly value traps.
5. No change in management compensation structures
If the earnings have declined and still the management keeps on giving huge bonuses to their top management structures, then definitely they have not adapted to address the problem. During declined earnings or troubled times, a company needs to change its fundamental behavior in order to get back in the race.
6. Poor financials and accounting principles
The financial accounts should be clear and transparent enough to give the true snap regarding the company. If the accounting of a company is not credible, they might be hiding some financial difficulty or even solvency.
7. No change in capital allocation method
With the shift in the scenarios, the company needs to change its capital allocation method like how much capital they want to allocate in their growth, dividends, capital expenditure or to get rid of big debt.
8. Strategic disadvantages
Declining market share, declining competitive advantage, and company not being able to contain its costs are again a few big signs of a value trap.
9. No growth catalysts
When the company starts moving in the wrong direction, it might need some kind of catalysts to move back to the growth track. These catalysts can be new innovations, products/services or even earning growth. If the company is lacking any sign of growth catalyst, then again that cheap stock might be a value trap.
Although, there can be a number of other signs that a company is a value trap, however, these nine are the top signs.
Quick Note: New to stocks? Want to learn how to select good stocks for long-term investment? Check out this amazing online course: HOW TO PICK WINNING PICKS? Enroll now and start your investing journey today.
Closing Thoughts
The actual goal of a value investor is to avoid value traps. Therefore, my first suggestion to every value investor would be to research the stock properly before investing.
However, even seasoned investors sometimes fall into the value trap and buy garbage stocks considering them undervalued.
In such a situation, the best you can do is to understand the problem and cut off the stock as soon as possible. Do not purchase more stocks in order to average down or hold the stock long enough with an expectation to break even. The faster you can get rid of that stock, the better it is for you. In the end, let me tell you the law of holes: “If you find yourself in a hole, stop digging”.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
A beginner’s guide on how to select a stock to invest: So, you are interested in the stock market and want your money to grow. You have read a number of investment blogs, financial magazines and subscribed to the Stock TIPS and recommendations from different brokers.
However, you are afraid to take the next step. You know that over 90% of people lose money in stock market. Most of them lose because they do not do their homework first and rely mostly on their brokers to select a stock to invest in Indian stock market. Therefore, you decide to take the matters in your hand and intelligently select a stock to invest in Indian stock market. You know that by doing so, either you will win or you will learn. No, a third way.
If you are one such investor and want to smartly select a stock to invest in Indian stock market for consistent returns, then you are at the right place. In this post, I will explain to you 8 steps with questions to be answered to select a stock to invest in Indian stock market to avoid loss and get consistent returns. So, be with me for the next 10-15 minutes to learn the secret to intelligently select a stock to invest in Indian stock market.
8 steps to select a stock to invest in Indian stock market
“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” -Warren Buffett
Here are the eight essential steps (or checklist) that you need to follow for picking winning stocks to invest in Indian stock market:
1. Does the company have good fundamentals?
To find the answer to this question, there is a 2-minute drill to find a fundamentally strong company. Using this drill, you can filter the healthy companies so that you can proceed to investigate further. If the company is not fundamentally strong, there is no need to learn more about its products/services, competitors, future prospects etc.
You can move to the next steps only once you confirm that the company has given good past performance and is worth investing in. For this 2-minute drill, you need to look into the financials of the company. Here are 8 financial ratios and their trend that should be carefully noted in this step:
Earnings Per Share (EPS) – Increasing for last 5 years
Price to Earnings Ratio (P/E) – Low compared to companies in the same industry
Price to Book Ratio (P/B) – Low compared companies in the same industry
Debt to Equity Ratio – Should be less than 1 (Preferably debt<0.5 or Zero-Debt)
Return on Equity (ROE) – Should be greater than 20%
Price to Sales Ratio (P/S) – Smaller value is preferred
Once you are confident that the company fulfills most of the criteria mentioned above, then study the financial reports of the company. Reading financial reports (Profit & loss statement, balance sheet, and cash flow statement) can take a little time. That’s why first make sure that the company passes the 2 min drill before you start investigating further. I have written a detailed post on how to read financial statements of a company, which you may find useful.
These financial results, however, gives the past growth. You cannot decide whether the company will perform the same or better in the future based on just past trends. Therefore, you need to consider other important factors while evaluating to select a stock to invest in Indian stock market. These factors are discussed in the next steps.
2. Do you understand the products or services offered by the company?
After filtering the companies based on their financial fundamentals, you need to investigate the company. Understand the company first. Learn about its products and services. It’s important that the company is easy-to-understand and has a fairly straightforward business model.
You might ask why is it so important to understand the company. Let’s comprehend this with the help of an example. Assume that you have to choose a classmate for whom you’ll be paying for 36 months of expenses. In return for which he/she will give you a quarter of his/her earnings thereafter for the rest of their lives. Whom will you choose?
While choosing, you must be thinking to select the one who is most likely to have a great income in the future. Further, will you choose a guy/girl whom you know nothing about? As you don’t know that person, there is no way that you can predict how much he/she will earn in the future. The same goes for stocks. If you can understand the stock, you can easily take a good decision whether to buy, hold or sell the stock at any time. Hence, always invest in the companies that you understand.
There are a number of companies that everyone knows and understands. From toothpaste, soaps, towels, t-shirts, jeans, shoes to bikes, cars, airlines, banks; there is a company behind every product. Invest in such companies. Do not buy the stock of ‘ABC Pharmaceuticals’ without knowing what medicines/products it produces.
3. Will people still be using this product or service in 15-20 years from now?
The next step is to ask about the life of the company. Always look for a company with a long life. Such companies have huge growth potential and the power of compounding applies to such companies. Avoid investing in companies having a life of just a few years.
For example, do you think people will be using soaps in 20 years from now? The answer is ‘Yes’. It’s been there for over 100 years and will surely continue in the future. Maybe the fragrance will change, but the soap will be there. Now, take another example. What do you think about a pen-drive or USB manufacturing company? Do you think that people, 20 years from now, will still use pen drives? The answer is no. Overall, select only a stock to invest in Indian stock market that will last for the next 15-20 years.
If you want to learn stocks from scratch, I will highly recommend you to read this book: ONE UP ON THE WALL STREET by Peter Lynch- best selling book for stock market beginners.
4. Does the company have a low-cost durable competitive advantage?
“I like businesses I can understand. We’ll start with that. That narrows it down about 90% …There’s all kinds of things I don’t understand, but fortunately there’s enough I do understand. You got this big, wide world out there. Almost every company is publicly owned…You got all American business, practically, available to you. Now, to start with, it doesn’t make sense to go with things you think you can[‘t] understand. But you can understand some things. I can understand this. I mean you can understand this. Anybody can understand this. I mean this is a product that basically hasn’t been changed much…since 1886…and it’s a simple business. It’s not an easy business. I don’t want a business that’s easy for competitors. And I want a business with a moat around it. I want a very valuable castle in the middle. And then I want…the Duke who’s in charge of that castle to be honest and hard working and able. And then I want a big moat around the castle, and that moat can be various things.”
This ‘MOAT’ concept was popularized by Mr. Warren Buffet. A moat is a deep, wide ditch surrounding a castle, fort, or town, typically filled with water and intended as a defense against attack. Some stocks have a similar moat around them. That’s why it’s really tough for its competitors to defeat them in its sector.
For example, Colgate! It has become such a common name in Indian homes that Colgate is considered as a synonym to toothpaste. Another example is Cadbury– the chocolate producing company. This company is dominating its industry and the people are even ready to pay a lot more to buy its products. Similarly, Tata Motors has got a moat in ‘truck’ sector. Tata Trucks has been in dominating in the Indian automobile sector for the last 5 decades.
In addition, while selecting an ‘unbreathable moat’ look for such companies in which the switching cost is high. For example, Banks. How rarely people change their bank accounts just because the competitor is giving 0.5% more interest rate. Coal India, ITC, Asian Paints are few of the other Indian companies with big moats.
5. What is the company doing that its competitors are not?
Find the unique selling point of the company. Learn what this company is doing which it’s competitors are not.
To understand better, let us analyze the Indian automobile sector. There are a number of automobile companies in India. However, when we consider the passenger vehicles (Cars and SUVs), Maruti Suzuki is the leading company in India. There are a number of competitors against Maruti in this sector like Tata Motors, Hyundai, Honda, Ford etc.
Nevertheless, Maruti Suzuki is dominating because of the easily available service centers that it provides. Maruti’s service center can be found on every corner of the streets. It’s really simple and easy to get a Maruti car serviced even in small cities. On the other hand, try to get your ‘FORD’ car serviced. You will rarely find any authentic ford service center around you. That’s why people prefer buying Maruti cars in India. And hence, Maruti Suzuki is able to increase its sales consistently and give good returns to its shareholders.
Overall, investigate first what the company is doing that its competitors are not before you select a stock to invest in Indian stock market.
6. Does the company have a big debt?
Big debts in a company are the same as the big hole in the boat. If the hole in the boat is not filled soon, then it won’t be able to cross the long sea and will definitely sink. When you select a stock to invest in Indian stock market, read its financial documents carefully. Avoid companies with big debts. Many times, the accountants use the financial loopholes to hide the debt in their annual results. However, if you read the financials minutely, you will be able to find these debts, as the financial sheet always needs to be balanced.
While investing the companies in the banking sector, look for its Non-performing assets (NPA). Avoid companies in the banking sector with huge NPA’s.
7. Is the company’s management efficient and qualified?
This is one of the most crucial questions to ask before you select a stock to invest in Indian stock market. The management is the soul of the company. A good management can prosper the company to new heights. On the other hand, a bad management can lead to the downfall of the company. Hence, it’s really important to research carefully about the management of the company that you plan to invest in the Indian stock market. First, do some research, and find out who is running the company. Among other things, you should know who its CEO, CFO, MD, and CIO are along with their qualifications and past experience. Next, here are a few points to check the efficiency of the company:
— Strategy and goals
Go through the Vision, Mission and Value statement of the company. Together, mission and vision guide strategy development, help communicate the company’s purpose to shareholders and inform the goals and objectives set to determine whether the strategy is on track. Hence, these defined future statements for the company can help an investor to decide whether to select a stock to invest in the Indian stock market or not.
— Length of tenure
This can help to judge the stability in the management of the company. A long length of tenure of the top management with the steady growth of the company is a good sign. However, sometimes, a change in management is considered an adept signal when the last management was not performing well. Nevertheless, the long tenure of good management is the sign of a healthy company.
— Promoter’s buying and share buybacks
The promoters of the company have the best knowledge about the company’s performance. The management and the top officials can understand the future aspects of the company and if they believe that the company will outperform in the future, they are mostly correct. Therefore, promoter’s buying and share buybacks are signals that the owners trust in the future of the company and it’s a good company to select a stock to invest in Indian stock market.
In addition, the other scenario, where the promoters or CEO is selling the stocks, is an independent activity and cannot be treated as a bad signal. We cannot judge the company’s future is declining just because the promoters are selling a small portion of their stocks once in a while. Maybe, the promoters need money to start another venture, buy a new house or enjoy a vacation. Everyone has the right to sell stocks when they need it the most, and so does the founders.
In short, the promoter’s buying and share buybacks are signals of good company. However, we cannot judge the company’s future based on the promoter’s selling the stock. Please note, if the promoters are selling a lot of stocks continuously without explaining the reason, then it’s a matter to investigate further.
— Perks and compensations to staff and workers
If the company is giving good perks to its staff and employees, then again it’s a sign of good management. The results of a company depend a lot on the performance of its staff and employees. Happy employees will give their best performance. However, if there is continuous workers strikes or increasing worker union demands, then it means that the management is not able to fulfill the needs of its workers and employees. Such cases are a bad sign for investors in the company.
— Financial ratios ROE and ROCE
The management’s efficiency can also be judged using a few financial ratios. Return on Equity (ROE) and Return on Capital Employed (ROCE) are the best tools to judge the management’s performance and the resulting potential for future growth in value.
ROE is the percentage expression of a company’s net income as it is returned as a value to shareholders. This formula allows investors and analysts an alternative measure of the company’s profitability and calculates the efficiency with which a company generates a profit using the funds that shareholders have invested.
ROCE is the primary measure of how efficiently a company utilizes all available capital to generate additional profits. Source: Investopedia
A high and steady ROE and ROCE for the last few couples of years is considered a sign of good management. As a thumb rule, invest only in companies with the ROE and ROCE of above 20% continuously for the last 5 years.
— Transparency
This is the last, but one of the most important factors while judging the management. The integrity of the management is the key to the growth of the company. It’s the management’s duty to give a ‘fair’quarterly and annual results to its shareholders. Just as the management announces the good results of the company; in the same way, the management should come forward in the times of bad results to explain its reasons to its shareholders. A good management always maintains the transparency of its organization.
8. Is the company constantly in the news and overly popular?
The stock market is based on the sentiments of the people. Consistent news affects the expectations and decisions of the public. Stocks, which are popular in news, can be inflated by the hype of the media. As people expect great results from such companies, even after giving good returns the stock prices of such companies fall. That’s why try to avoid buying stocks of such companies for easy returns. The hot stocks are subjected to market volatility and the boring stocks are the one, which gives the best returns.
A Few Other Quick Tips
Here are a few additional tips to select a stock to invest in Indian stock market:
— Cheap isn’t always good, and expensive isn’t always bad
While investing in growth stocks, sometimes it’s okay to invest the stocks with a high P/E ratio. Some growth stocks have huge future potentials and can give multiple times returns. Moreover, while selecting an undervalued stock, you should investigate further why the stock is undervalued. Many companies sell cheaply because they do not have much growth opportunity in the future. For example, Coal and mining sector.
— Invest in mid-cap companies
The mid-cap companies can give the best returns. These companies have the potential to become a large-cap company in the long term frame. They have a high growth rate compared to the large caps which have already reached saturation and the chances of giving multiple-time returns are highly unlikely. In addition, Mid-cap companies have good capital to stay out of debt and live a long life. Overall, a good growth mid-cap stock can easily become a multi-bagger, i.e. a stock which gives multiple times returns.
— Past results do not guarantee future performance
Do not rely totally on the financial reports to select a stock to invest in the Indian stock market. These reports show the past performance of the companies. However, future growth depends on various aspects of management, competitors, industry, etc. Always look at both the quantitative and qualitative aspects of the company before investing.
Summary
These are the key points to consider while choosing a stock to invest in. Now, let us summarize the 8 steps with questions to be answered to select a stock to invest in Indian stock market:
Does the company have good fundamentals? 2-minute drill to filter companies using financials.
Do you understand the products or services offered by the company?
Will people still be using this product or service in 15-20 years from now?
Does the company have a low-cost durable competitive advantage?
What the company is doing that its competitors are not?
Does the company has a low debt?
Is the company’s management efficient and qualified?
Is the company constantly in news and overly popular?
That’s all! I hope you have understood all the steps and questions to be answered before you select a stock to invest in the Indian stock market.
New to stock market? Confused where to start? Here’s my online course to learn fundamental analysis for selecting stocks: HOW TO PICK WINNING STOCKS? The course is currently available at a discount. Enroll Today!
Let me know what do you think about the steps discussed in this article in the comment box below. In addition, if you have any doubts regarding any step mentioned in this article, feel free to comment. I will be happy to help you out. Keep learning and Happy Investing.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
While evaluating a company to invest, one of the biggest element to check is its debt level. Ideally, it is said to look for a company with Zero-debt as it means that the company is able to manage its finances predominantly through internally generated cash without any external obligations.
However, is debt always bad for a company? Should you ignore a stock just because it has some debt. Moreover, what if the debt level increases after you invest in a stock? Should you exit that company because the company is adding debts?
In this post, we are going to answer these questions and discuss whether debt is always bad for a company or NOT. Let’s get started.
How a company finances its debt?
A company can raise debt either by issuing debt securities like bonds, notes, corporate papers etc or by simply borrowing money as loans from banks or any lending institutions. However, once the company has taken a debt, it is legally obliged to pay it back based on the terms agreed by the lenders and lendee.
In general, if a company is currently debt free and later starts taking some debt, it might be good for the business as the company can invest that money in expanding its business. However, the problem arises when the company which already has a big debt in its balance sheet, decides to add more. This increasing debt level can negatively affect the shareholders as by norms, debts are to be paid first by the company and shareholders will always be the last in line to receive profits.
When debt is not bad for business?
Although a few matrices like declining profit margins or negative cash flow from operating activities for a consistently long period is considered as a bad sign for a business. However, the same is not true in the case of debts. The debt is not always bad for business.
If a company has a low debt level and decides to take a new debt to start a project which may double or quadruple their revenue, this debt may be good for the business and add more value to the investors in the long run. However, an important question to ask here is whether the company can afford the debt at that point in time. If yes, then it may not be a point of concern for the company or you as a shareholder.
To check whether the company can repay the debt or not, you can look at the free cash flow (FCF) of the company. As a rule of thumb, if the company’s long-term debt is less than three times the average FCF, it means that the company will able to repay its debt within three years using its free cash flow. Of the other hand, consistently negative free cash flow with increasing debt level can be a warning sign for the investors.
Quick note: Also check out this post by Harvard business review on When Is Debt Good?
Debt is cheaper than equity
For growing a business, the management may decide to raise money from investors (equity funding) or they may borrow money from banks as debts. However, an important concept to understand here is that debt is cheaper than equity.
In other words, equity is a comparatively expensive method of financing for a company. Why? Because, first of all, raising money by equity dilutes the ownership and control of the promoters. Second, the cost of equity is not finite. Here, the investors may be expecting bigger returns as they are taking higher risks.
On the other hand, the cost of debt is finite and they are sourced at lower rates. This is because the debt is less risky financing as the firm is obligated to pay it back (unlike equity funding where the company is not obliged to pay any dividends to the shareholders). Moreover, the company has no obligation to the lenders once the debt is paid off.
Further, debt financing doesn’t result in any dilution and change in control. Here, the lenders take no part in the equity of the company and hence the promoters and shareholders can enjoy the benefits.
How to evaluate the debt of a company?
Although checking the liability side of a balance sheet is always the first step to evaluate the debt of a company. However, there are a few financial ratios that you can use to evaluate the debt level. Here are the three most frequently used financial ratios to evaluate the debt of a company:
1. Current Ratio
This ratio tells you the ability of a company to pay its short-term liabilities with short-term assets. Current ratio can be calculated as: Current ratio = (Current assets / current liabilities)
While investing, companies with a current ratio greater than 1 should be preferred. This means that the current assets should be greater than the current liabilities of a company.
2. Quick ratio
This is also called the acid test ratio. Current ratio takes accounts of the assets that can pay the debt for the short term. It doesn’t consider inventory as current assets as it assumes that selling inventory will take some time and hence cannot meet the current liabilities.
Quick ratio = (Current assets — Inventory) / current liabilities
A company with a quick ratio greater that one means that it can easily meet its short-term obligations and hence quick ratio greater than 1 should be preferred while investing.
3. Debt/equity ratio
This ratio is used to check how much capital amount is borrowed (debt) vs that of contributed by the shareholders (equity) in a company. As a thumb rule, prefer companies with debt to equity ratio less than 0.5 while investing.
Contrary to the general belief, debts are not always bad for a company but can help it to speed up the growth. Moreover, debts are a more affordable and effective method of financing a business when it needs cash to scale up. The problem arises only when the management does not control its debt level efficiently.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Zerodha vs 5Paisa – Stockbroker Comparision: Zerodha and 5paisa are two of the biggest discount brokers in India. In this article, we are going to compare Zerodha vs 5Paisa by looking into their brokerage charges, account opening charges, maintenance charges, exposure margin, trading platforms, and more.
This comparison between Zerodha and 5Paisa will highlight the major differences between these two brokers to help you find the best between 5paisa and Zerodha, based on your preferences.
Zerodha Introduction
Zerodha, founded in 2010 by Nitin Kamath, is the biggest discount broker in India and perfect for traders & investors looking for low brokerage, easy interface, and reliable trading platform. It has over +2.2 million clients that contribute to over 15% of daily retail trading volumes across BSE, NSE, and MCX.
In terms of brokerage charges, Zerodha offers a zero brokerage for delivery equity investment & direct mutual fund investments. For all intraday, F&O, currency, and commodity trades across NSE, BSE, MCX, it offers a flat brokerage of Flat ₹20 irrespective of the trading volume. Therefore, you can save a lot of brokerage charges on your trades using Zerodha as your broker.
5Paisa is a discount broker that provides you the platform to trade in stocks, futures, and options at the lowest cost of Rs 20 flat per trade, even if you trade for Rs 10 Crore.
It is headquartered in Mumbai and is a part of India Infoline (IIFL), a leading non-banking financial institution in India with experience of over two decades (initially incorporated in 1995). 5paisa was re-launched with a new brokerage model for online retail broking services in late 2016. Later, it got de-merged from IIFL so that it can be listed on the stock exchanges. 5Paisa Capital started trading on NSE/BSE in November 2017, making it the first such listed financial digital marketplace.
5 Paise Capital provides a platform for all financial products including equities, derivatives, mutual funds, commodities, AIFs, bonds & debentures, insurance, and personal loans. The account opening process for 5Paisa is totally paperless based on Aadhaar. 5Paisa provides the trading facility in mobile, browser, and desktop platforms.
Zerodha vs 5Paisa Comparision:
Name
Zerodha
5 Paisa
About
Zerodha is the largest stockbroker in India with +1.5 million clients and +10% of daily retail trading volumes across NSE, BSE, MCX. Located at Bangalore, Zerodha offers zerod brokerage on delivery trading and a flat rate of 0.03% or Rs 20 per executed on all other segments.
5paisa.com, second largest discount broker in India, is part of IIFL group (India Infoline), India's leading financial services company. It offers a flat brokerage of Rs 20 per trade for its clients.
Founded
2010
2016
Company
Private
Public
Main Office
Bangalore
Mumbai
# of Active Clients on NSE (Nov 2019)
9,09,008
1,06,280
Broker Service
Discount Broker
Discount Broker
Supported Exchange
NSE, BSE, MCX, NCDEX
NSE, BSE, MCX
Brokerage Summary
Free for Delivery Trading and flat charge of Rs 20 for all other trades
Investor terminal, trader terminal, 5 Paisa Trade Station
Brokerage Charges
Equity Delivery
Free
Rs 20 per trade
Equity Intraday
Rs 20/ trade or 0.03% whichever is lower
Rs 20 per trade
Equity Future Charges
Rs 20/ trade or 0.03% whichever is lower
Rs 20 per trade
Equity Options Charges
Flat Rs. 20 per executed order
Rs 20 per trade
Currency future charges
Rs 20/ trade or 0.03% whichever is lower
Rs 20 per trade
Currency options charges
Rs 20/ trade or 0.03% whichever is lower
Rs 20 per trade
Commodity Charges
Rs 20/ trade or 0.03% whichever is lower
Rs 20 per trade
Minimum brokerage fees
0.03% Minimum
Flat charge of Rs 10 per trade (for higher plans)
Call & Trade Charges
Rs 20 + 18% GST Order
Rs 100/ call
Margin Offered
Equity Margin Delivery
No margin for delivery - Cash and carry
Upto 4x for equity cash
Equity Margin Intraday
Upto 20x (Based on stock)
Upto 20x
Equity margin futures
Intraday - 40%(2.5x), Carry forward - 100%(1x) of Total margin
Intra-day: 3.5x - Carry forward: 1x (no margin)
Equity margin options
Intraday - 40%(2.5x), Carry forward - 100%(1x) of Total margin
Intra-day: 1x - Carry forward: 1x
Commodity Margin
Intraday - 40%(2.5x), Carry forward - 100%(1x) of Total margin
NA
Currency futures
Intraday - 40%(2.5x), Carry forward - 100%(1x) of Total margin
Intra-day: 1 time - Carry forward: 1x
Currency Options
Intraday - 40%(2.5x), Carry forward - 100%(1x) of Total margin
Intra-day: 1 time - Carry forward: 1x
Addons
3-in-1 Account
Yes, with IDFC Bank
No
Research & Tips
No
Yes (for higher plans)
Brokeage Calculator
Yes
Yes
Span Margin Calculator
Yes
Yes
Training & Education
Yes
Yes
Interactive Charts
Yes
Yes
Margin Against Shares (Equity Cash)
Yes
Yes
Margin Against Shares (Equity F&O)
Yes
Yes
IPO Services
Yes
Yes
Robo advisory
No
Yes
Other Features
Direct Mutual fund investments, Kite APIs
Mutual Fund Investments, Research reports
Pros
Zero brokerage charges for delivery trading, Simple and flat brokerage model in all other segments, Excellent trading platforms, Easy & fast online account opening, Direct mutual fund investments, Maximum brokearge of Rs 20
Cheapest broker, flexible brokerage plans, Research reports available (but at extra cost)
Cons
No stock advisory or research reports
Call and trade Rs 100 per call, Higher charges of Rs per transaction on demat
Promotion/Offer
Free delivery equity trading and Rs 20 or 0.03% wihchever is lower brokerage charge on all other trades
Right now - No Opening Charges, Annual maintenance charges waived
*Disclaimer: All pricing data was obtained from the published stockbroker’s web site as of 02/01/2020 and is believed to be accurate, but is not guaranteed. It can vary from time to time depending on the active campaigns by the brokers and hence recommended to refer to the broker’s website for the latest updates.
Both Zerodha and 5Paisa offers low brokerage and fast trading platforms for their clients.
Zerodha, being the biggest discount broker in India with over 22 lakh clients obviously adds trust and brand value. Moreover, initiatives like educational facility (Varsity), investment in IPO’s from the same dashboard, free direct mutual fund investments, etc create more value for its clients. Moreover, Zerodha has got a bigger range of partner products to help traders and Investors like Streak, Sensibull, Learn app etc.
On the other hand, a few notable advantages of 5Paisa over Zerodha is that they offer Research reports and robo-advisory to their clients, which Zerodha don’t. However, this facility by 5Paisa is offered only to its clients with higher plans. In addition, the multiple flexible brokerage plans offered by 5Paisa can also be a little advantageous for volume traders.
In conclusion, both these brokers have some advantages and disadvantages over others. Zerodha with its evolved trading app and partner platforms vs 5Paisa with its flexible brokerage plans and advisory services. Nonetheless, if you see from the broad perspective, Zerodha offers a little more benefits compared to 5Paisa for independent investors and traders who are not looking for advisory and are happy with a single discount brokerage plan.
In this article, you’ll find out the exact process to apply for an IPO with Zerodha account. However, before we begin, let me tell you my experience of applying to an IPO’s through Zerodha Account.
I’ve been using Zerodha for over four years now and been a happy customer. This discount broker has helped me save a lot of un-necessary brokerage charges if I had used any other full-service broker instead.
Anyways, there was one ‘cons’ of using Zerodha as a broker which bugged me in the past. And it was not having the facility for the customers to directly invest in Initial public offerings (IPOs) through the Zerodha dashboard.
Prior to this recently launched facility, the Zerodha customers have to use ASBA (Application Supported by blocked account) on their net banking portal to apply for IPOs. However, this was not a simple one-click process unlike what most of the other traditional big brokers like ICICI direct, HDFC sec, etc offered.
Although I am not a regular investor in IPO’s and only invest if I find the new offer a lot appealing. Nonetheless, having a simple process to invest gives flexibility whenever the opportunity arrives. Nonetheless, investors can apply for IPO’s directly within Zerodha console. And the best part is that the process is really simple.
Next, you need is a UPI account. And this is nothing new. These days everyone uses UPI to make fast and secure payments. For example, you can use apps like Phonepe, Bhip app, iMobile by ICICI, etc. Here is the link to the UPI apps and banks that allow IPO payment.
4. Select the IPO that you wish to apply from the list of active IPOs and click on ‘Place bid’.
5. A pop-up screen will launch with IPO information. Here you can find details like issue date, issue price, market lot, discount (if any), minimum order quantity, etc.
6. Next, enter your UPI id. Make sure to select the correct bank account.
7. Place your bid by entering the ‘Quantity’ and ‘Bid price’.
For the quantity, it should be minimum order quantity or the multiple of the lot size. For the ‘bid price’ you can enter any price between the offered issue price range. Anyways, for the maximum chances to get an allotment, it is recommended to use the ‘Cut-off’ price.
8. After filling the details, click on the ‘checkbox’ stating that you’ve read the prospectus and you’re are an eligible UPI bidder as per the applicable provisions of the SEBI.
9. Finally, recheck the details and click on ‘Submit’.
10. Besides, if you want to make any changes if the bidding later, simply click on ‘Bid details’ on the IPO page and make the changes.
Once submitted, you’ll receive the request to complete the “UPI Mandate” on your UPI app.
Please note that sometimes it may take a few hours to receive the UPI mandate request. Anyways, in my case, it was instantaneous and I received payment request on my iMobile ICICI app as soon as I submitted the application on the Zerodha Console. Accept the request once you receive it to complete the process.
On accepting the payment request, your UPI app will block the IPO funds in your bank account till the date of allotment. You’ll receive an SMS from exchange once your application is placed successfully.
If you’re allotted the IPO shares, the amount will get debited from your account and shares will be credited in your demat account. On the contrary, if shares are not allotted, then blocked funds are released on the date of the payment. You can read more about the process of IPO share allotment to retail investors here.
That’s all. This is the exact step-by-step process to apply for an IPO with Zerodha Account.
Closing Thoughts
Zerodha is continuously innovating to provide a better investing and trading facility to its customer. The procedure to apply for IPO is a lot simpler now. You should definitely check it out. Further, comment below if you face any difficulty in applying for IPO using Zerodha account. Happy Investing!
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
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