10 Most Severely Affected Industries by Coronavirus cover

[COVID19] 10 Most Severely Affected Industries by Coronavirus

10 Severely Affected Industries by Coronavirus: Late into 2019, we were made aware of the ongoing battle China was forced into by a novel virus called the Cobvid-19. At that time, we were also soon assured by the World Health Organization (WHO) of no clear evidence of human to human transmission of the virus.

Fast-forward to today, there are over three million cases and the virus wreaks further global havoc. There hardly remains any industry around the world that hasn’t been impacted. Over the last 20 years, the healthcare industry was seen as recession-proof. However, the pandemic has physicians and dentists reducing staff to cope with the changing times.

Today we take a look at the ten most severely affected industries by coronavirus and the subsequent lockdown. Let’s get started!

10 Most Severely Affected Industries by Coronavirus

the economic impact of COVID 19 in India from sector to sector

(Source: The above graph shows the severity of the loss different sectors face)

1. Airlines and Hotels

Preventive measures of the airborne virus have led to the devastation of any business even closely associated with the tourism industry. The restrictions were first imposed against East Asian travelers and further extended to Europe. WHO also released a statement where they acknowledged that the transmission of the infection may occur between passengers in the same area of the aircraft. With no vaccine in sight, countries were forced to close their borders and eventually led to the suspension of all forms of travel.

The Economic Times has reported the aviation sector in India may lose as much as Rs 85,000 crores along with 29 Lakh jobs. The total stimulus package-1 stood at 1.7 lakh crore. Here, the workers in the airline industry that were not fired were forced into unpaid leave. According to equity master shares of most hotels, leisure, and airline firms have tumbled 60% to date. Falling fuel prices too didn’t provide any relief caused by the lack of demand.

airlines and hotels Most Severely Affected Industries by Coronavirus

The losses were not limited to commercial airlines but also any company connected with the industry. Leading airline manufacturers Airbus, Boeing, Bombardier, and Embraer have been forced to suspend production and deffer orders. Some even laying off employees.

The IATA ( International Air Transport Association) on 24th March estimated a $252 billion revenue loss globally. By mid-April, ACI observed a 95% fall in traffic in the Asia Pacific and the Middle East. Indian airlines are estimated to incur a loss of 600 million USD. This information does not include Air India, one of the major Indian carriers.

The only demand that exists in the airline industry is those for aircraft storage. Runways and taxiways in normally busy airports were closed to make room for storage.

2. Automobile Industry 

lockdown affect on automobile industry

The last thing an industry experiencing a prolonged slowdown for more than 20 months now needed would be a period of inactivity. According to FTAuto, the Indian Auto sector earns gross revenue of 2000 crores per day. As the lockdown is prolonged the losses in the automobile industry keep getting added up.

What makes the auto industry further susceptible to being impacted by the virus is the dependence on various players for different parts. Even one missing part from Tier-1 or Tier-2  is enough to stop entire carmakers or whole industries. Considering that the Indian auto industry relies on China for 27% of the imports in 2020 has been a further worst year as the regions are dealing with the virus at different time periods. Unfortunately for India, Maharashtra aka the Indian Automobile industry has over 8600 cases. 

— Recovery lessons from China

As China was at the epicenter of the virus, noticing how their industry reacted would help us potentially understand the industry may face. China has faced disruptions in its automobile industry even after localizing 95% of the production. Based on these figures prolonged disruptions can be expected in the Indian automobile industry.

If we take a look at the new car registrations the first half of February saw a drop of 92%. This was followed by a 47% drop in March. Despite this, the market bounced back rapidly. This, however, can be the psychological impact of the virus. People after the lockdown would prefer to avoid public transport, taxi, and other ride-hailing services.

3. Construction and Retail Industry

— Construction Industry  

construction industry hit by coronavirus

This industry suffers from the direct implications of the virus. The majority of the job losses due to the pandemic are in the construction sector. Presently most of the relief measures introduced by the government are directed towards workers in the real estate sector.

This is due to the high number of daily wage workers in the industry. The sector was already affected in the month of February and March. The effects are to last due to its reliance on China for Raw Materials. Even luxury construction segments are to face raw material scarcity. This is because Italy the world’s leading supplier for stone and furniture has been the worst hit. These inputs will be seen in the form of higher costs and delayed project completion throughout the industry.

— Real Estate Industry

The real estate sector in India will suffer immensely but indirectly due to the lockdown. This is because with people losing jobs and sources of income. Investment in the real estate sector is further doubted. As a result, housing sales are expected to fall by 25-35%. Due to the lockdown and fewer buyers will show interest in the retail spaces.

Coming months will also pose a potential threat to cash reserves if tenants are adversely affected by the lockdown. Also, the rising prices of raw materials may add to falling profit margins. The real estate industry currently may seem attractive to buyers whose jobs are unaffected by the pandemic. The price correction will allow buyers to acquire properties at cheaper rates. Also, the reduction in rates by the RBI will result in loans available at cheaper rates.

4. Textile Industry

textile industry - Most Severely Affected Industries by Coronavirus

The textile industry in India employs over 105 million and earns around $40 billion in foreign exchange. This industry similar to the construction industry is labor-intensive. And hence, it adds to the troubles due to the lockdown.

The nature of the industry will require concentrated relief efforts by the government. The city of Tirupur serves as the perfect embodiment of the textile industry. With over 10,000 factories it generates Rs 25,000 crores wealth through exports and the same domestically. A three-month loss due to the pandemic ould amount to Rs.12000 crore. Of the 129 Lakh people who depend on the city’s textile industry, 25% would have to face job losses. 

The textile industry in India depends on China for both imports and exports. India exports 20 – 25 million Kg’s a month to China. These exports have been affected due to a lack of demand from China. Imports from China include $460 million worth synthetic yarn and $360 million worth synthetic fibers.

In addition, India depends on China for buttons, zippers, hangers, and needles which make up  $140 million. The textile industry faces challenges not only from China but also from Europe. This is because of the countries affected by the pandemic like Italy and Spain have asked not to export to them.

The revival of the textile industry would only be possible with directed relief measures from the Indian government. This followed by a hopeful end to the pandemic in the next quarter. This will allow India to procure Apparel industries looking for an alternative to the Chinese textile industry.

5. Freight and Logistics

Freight and Logistics - Severely Affected Industries by Coronavirus

The freight and logistic industry face troubles due to the lockdown in three delivery phases

  1. The fist includes loading. This is due to the lack of manpower.
  2. The second involves the transportation phase. With many states closing their borders and truckers are being forced to abandon the consignment.
  3. The final stage involves unloading issues also due to a lack of power.

Lack of drivers, loaders, and unloaders have plagued the supply chain.

The future after the lockdown is uncertain as the demand will decide if the freight and logistics industry thrives. The fear of economic uncertainty may force consumers to tighten their spending. However, to support all the other industries that will awaken after the lockdown will require an increase in capacity to meet the demands.

The three phases also highlight the problems that may still persist if the government only allows the transport of essential goods without focussing on loading and reloading concerns.

6. Metals and Mining

metals and mining industry slowdown covid 19

The steel production and allied activities such as mining have been covered under the Essential Commodities Act. This does not provide much relief as the producers and miners face the challenge of producing with all the demand wiped out. 

The essential commodities act, however, does not cover nonferrous metals such as Aluminium, copper, zinc, and lead. These add to the troubles as unlike other industries metal production cannot be switched off and started again when required. The cost of starting again would involve losses incurred due to the disruption of the continuous process involving smelters and potlines.

The steel supply-side disruptions were already caused by China, Japan, and Malaysia who were impacted by the coronavirus much earlier due to the pandemic. They account for over half of India’s metal and metal production. The Nifty Metal index as of March 21st has already fallen 43% in comparison to 29% of the Sensex.

7. Oil and Gas Industry

oil and gas Severely Affected Industries by Coronavirus

The oil prices have faced a decline in value since Mid February.

The cheaper crude oil, however, will help in reducing the Current Account Deficit. This will also provide multiple other benefits for the government. The fuel subsidies provided can also be expected to decline. In addition, the government can also raise duties to boost revenue. The revenue mopped up can be used to revive other sectors. 

Read More: Why the Crude Oil prices dived into Negative? – A Detailed Study 

8. Power Industry

The lockdown has reduced power consumption by 46000 MW since March 20th. This is one of the primary challenges faced by only the Power sector i.e. no scope for inventory. Units once generated during the lockdown are represented as lost demand. The lockdown has reduced power consumption due to industries being shut.

In addition, the government has asked power generators to continue the supply of power even if the payments are not received for the next 3 months. The only silver lining is the opportunity for gas-based power generation to take advantage of the low prices. But the reduced demand has kept them from leveraging this opportunity.

The Power sector has been a loss-making enterprise even before the pandemic. The total outstanding dues of the power sector stood at Rs 88,311 crores as of January 2020.

9. Consumer and Retail Industry

In retail Food and Grocery accounts for about $550 billion. The textile and apparel account for $65 billion. Consumer electronic durable is worth $50 billion. Each of these sectors is affected by the purchasing power in the hands of the consumers. The great lockdown has put stress on the purchasing power in the hands of the people. This is due to the job losses and availability of other sources of income.

In addition, people brace themselves by reducing spending on nonessential items in textile and apparel and the consumer electronic durables. The further impact will be based on the duration of the virus. The textile and apparel and consumer electronics may lose out on their seasonal demand. For eg. AC sales during the summer season. 

Once the lockdown is lifted the size of the retail business will also play a role to determine how much stress it will face. Traditional and independent retailers generally have fewer employees. Bigger retail businesses will face the heat due to their large employee requirements to be met and additional burden due to rent. 

10. Chemical Industry 

The Chemical industry is worth 163 billion covering more than 80000 chemical products. The impact on the chemical industry is primarily due to its dependence on China for the procurement of raw materials.

chemical industry hit bad by coronavirus

As the table shows, not only India but globally every country has been severely dependent on China. 

Any impact on the chemical industry will be further felt in the agricultural industry too. This is due to the dependence of fertilizer companies on China for imports of Raw Material.

Closing thoughts

The industries we observed above wouldn’t generally resort to laying off employees. This is because these industries it is more expensive for the new employees to be trained again in comparison to keeping them employed. The lay off’s show that the pandemic and the great lockdown has forced industries into a corner. The revival of these industries will require an individual industry-wise focus to boost the economy. 

As we await another more considerable relief package it is worthwhile to notice how Germany aims at relieving its economy. Germany has announced a 500 billion dollar package. In this, the companies can avail loans at 0% interest and repay them once their companies are in a position to. The relief packages cannot be matched but a package making up a higher percentage of the GDP would provide the required boost.

It does not require a closer look at the above sector-wise impacts to notice overreliance on the Chinese markets. Such reliance would leave any economy crippled when the other is in crisis. This, however, does not mean that economies must close up after the pandemic. Finding other reliable markets to fall back on and not placing all the eggs in a single basket would suffice. 

The current situation will have Indian industries competing with Chinese goods which will be cheaper due to the incentives provided by the Chinese government on exports. Competing with a country is complex especially when it also is the supplier of raw materials.

April 30, 2020 Economics, Market, News 1 comment

11 Key Difference Between Stock and Mutual Fund Investing!

Key Difference Between Stock and Mutual Fund Investing: Hello Investors! When it comes to equity investing, a lot of beginners are confused about whether they should directly invest in stocks or take the mutual funds route. In this post, we are going to discuss the fundamental difference between stock and mutual fund investing.

However, before we start talking about the differences, let’s first exactly define what stock and mutual fund investing is.

What is stock and mutual fund investing?

Stock market investing means investing directly in the stocks of the company. Here, you are purchasing the companies listed on the stock exchange with an expectation to earn profits when the price of that stock goes up.

On the other hand, a mutual fund is a collective investment that pools together the money of a large number of investors to purchase a number of securities like stocks, FDs, bonds, etc. A professional fund manager manages this fund. When you purchase a share in the mutual fund, you have a small stake in all investments included in that fund. Hence, by owning a mutual fund, the investor participates in gains or losses of the fund’s portfolio.

11 key difference between stock and mutual fund investing

Here are the critical differences between stock and mutual fund investing based on eleven crucial factors–

1. Cost of investing  

While investing in mutual funds, you have to pay different charges like an expense ratio, load fee (entry load, exit load), etc. For the top mutual funds, the expense ratio can be as high as 2.5-3%.

On the other hand, if you invest in the stock market, you have to open your brokerage account (which includes opening account charges), and you have to pay some annual maintenance charges too. Further, there also different costs while transacting in stocks like brokerage, STT, stamp duty, etc.

Nevertheless, if you compare the charges involved in stock and mutual fund investing, you can find that the costs while investing in stocks are still lower. This is because managing a mutual fund consists of a lot of expenses like management fee, the salary of the managers/employees, administration charges, operational charges, etc. However, for investing in stocks- the most significant burden is only the brokerage.

Also read: How to Invest in Share Market? A Beginner’s Guide

2. Volatility in investment

Direct investing in stocks has more volatility when compared to mutual fund investing. This is because when you invest in shares- you generally purchase 10-15 stocks.

On the other hand, the mutual fund consists of a diversified portfolio with investment in different securities like stocks, bonds, fixed deposits, etc. Even the equity-based mutual funds invest in at least 50-100 stocks. Due to the broad diversification, the volatility in the mutual funds is a lot less compared to that of shares.

3. Return potential

Stock market investing has a very high return potential. Most of the successful investors in the world and India like Warren Buffett, RK Damani, Rakesh Jhunjhunwala, etc. have built their wealth by investing directly in the stock market.

However, this is only one side of the story.

The complete fact is that the majority of people lose money in the stock market. Although the return potential is high while investing in stocks, however, the risk is also higher.

On the other hand, most of the good ranked mutual funds have given decent consistent returns to their shareholders. Although the returns are not as high as what many successful investors can make from stocks, however, this return is enough to build a massive wealth for an average person for a secured future.

Why You Need to Know The Rule of 15*15*15 cover

4. Tax saving

If you invest in ELSS (Equity linked saving scheme) under mutual funds, you can enjoy a tax deduction up to Rs 1.5 lakhs in a year under the section 80c of the income tax act.

Another benefit of investing in the mutual fund is that you do not have to pay tax if the fund sells any stock from its portfolio as long as you are holding the fund.

On the other hand, when you sell stock while investing directly in the stock market, you have to pay a tax, no matter what’s the scenario. There are no tax benefits while investing in the stock market. You have to pay a tax of 15% on short-term capital gains and a tax of 10% (above a profit of Rs 1 lakh) on the long-term capital gains.

Also read: Mutual Fund Taxation – How Mutual Fund Returns Are Taxed in India?

5. Monitoring

Investing in the stock market requires frequent monitoring. This is because the stock market investing is a personal thing. Here, no one is going to do this for you and hence you have to monitor your stocks yourself. Moreover, due to the high volatility of the share market, the frequency of the monitoring should be higher. At least every quarter or half-yearly.

On the other hand, for the mutual fund -there are fund managers who take care of the investments and make the buy/sell decision on your behalf. That’s why, when you invest in mutual funds, you do not need to monitor your fund much frequently. Anyways, you should watch your funds at least every year so that you can confirm that your fund’s performance is in line with your goals.

Also read: How to Monitor Your Stock Portfolio?

6. SIP Investment   

Mutual funds investment provides you with an option of a systematic investment plan.

A Systematic Investment Plan refers to periodic investment. For example, the investor can invest a fixed amount, say Rs 1,000 or 5,000, every month (or every quarter or six months) to purchase some units of the fund. SIP helps in investing automation and it brings discipline to the investment strategy.

On the other hand, there’s no option of SIP available in stock market investing.

7. Asset class restriction

While investing in the stock market, the only asset where you can spend is stocks of the company.

On the other hand, the mutual fund gives you an opportunity to invest in a diversified portfolio. Here, you can invest in a variety of asset classes. For example- debt mutual funds, equity-based mutual funds, gold funds, hybrid funds, etc.

8. The time required for investing

The total time needed for directly investing in stock is a lot more compared to that of a mutual fund. This is because a fund manager manages a mutual fund.

However, for direct investment in the stock market, you have to do your research. Here, you have to find the best possible stock for investing yourself, and that requires a lot of studies, time, and efforts.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

9  Ease of investment

For investing in the stock market, you have to open your brokerage account with the help of a stockbroker. Here, you need to start your Demat and trading account which can take as long as a week to open.

On the other hand, you can start by investing in a mutual fund within 10 minutes. You do not require any brokerage account to start investing in mutual funds. There are a number of free platforms (like Groww or FundsIndia) available on the Internet where you can register within a few minutes and start investing in mutual funds.

10. Time Horizon of investment

Generally, the investment time horizon in mutual funds for long-term like 5 to 7 years. Here, you are not trading funds, but investing for the long-run to make money by capital appreciation or regular income through dividend funds.

On the contrary, if you invest in stocks- it can be a long-term or short term. You can even keep the stock for a week and get good returns.

11. Control on investment

If you are investing directly in the stock market, you will have a lot of power and control. Here, you can make critical decisions like- when to buy, when to sell, what to buy, what to sell, etc.

On the other hand, while investing in the mutual fund, you do not have much control over your investments. It’s your fund manager who makes the decisions like which securities to buy, when to buy, when to sell etc. The highest control that you have is to find and invest in a good mutual fund. However, once you have spent your money, everything will be taken care of by the fund manager.

Further, mutual fund performance depends on the efficiency of the fund manager. If the fund manager is efficient, you can get high returns. Otherwise, if the fund manager is not that good, you might get fewer returns. In addition, there is always a possibility that the fund manager may quit or join some other fund house.

Overall, here you have to be dependent on the fund manager. However, while investing in the stock market, there is no dependency on anyone, and you can make your own decision to buy/sell whichever stock you want.

Check out the upcoming course on mutual fund investing here.

Conclusion

No investment is risk-free. There will always be some risk when you invest in the market or even if you invest in the safest fund. Nevertheless, investing in a mutual fund is comparatively less risky than the stock market. However, the returns are also slightly low in mutual funds compared to the stock market.

If you are a novice and new to the stock market, it would be salutary if you start investing with mutual funds.

For investing directly in the stock market, you will require a good knowledge or at least a strong passion for learning. However, if you have limited time, limited money, and not enough passion to invest your money on your own- then you should invest in the mutual funds.

That’s all for this post. I hope it was helpful. #HappyInvesting.

April 29, 2020 Investment Basics, Mutual Funds 9 comments
4 Common Types of Stocks That You should Avoid Investing In cover

4 Types of Stocks that you should AVOID investing in!

Types of Stocks That You should Avoid: Successful stock investing requires a lot of discipline. There are thousands of stocks listed in Indian stock exchanges, and all you need to find is 10-15 good stocks to invest. For the remaining, you just need to say ‘NO’.

In this post, we are going to discuss four specific types of stocks that you should avoid investing in. However, before we discuss these four kinds, let’s first learn the most generic rule of stocks that you should avoid investing.

Rule #1 of Stocks that you should avoid

“The difference between successful people and really successful people is that really successful people say no to almost everything.” -Warren Buffett

As an elementary rule, avoid investing in companies that you do not understand. If you can’t figure out how the company is generating its revenue, what is the company’s business model, what are the products/services offered by the company, or what is the use of the products- avoid investing in that company?

For example, if you have zero knowledge of semiconductors or microelectronics, and don’t understand the use of Zener diodes, MOSFETs, Amplifiers, etc.  then avoid investing in semiconductor companies that manufacture these products. There’s no way that you can understand the market demand, product quality, future prospects, or even the competitors.

Instead, invest in companies that you can understand. A few common industries that anyone can understand with little efforts are Consumer goods, FMCG, automobiles, utility, etc.

4 Common Types of Stocks That You should Avoid Investing In

Here are four mainstream kinds of stocks that you should avoid investing to reduce the risks involved and safeguard your returns:

1. Low liquid Companies

There are some stocks whose prices may be continuously falling, but the investors are not able to sell that share just because there are no buyers. Exiting from a low-liquid company can be pretty stressful. Avoid investing in companies with low liquidity.

In general, stay away from companies with the daily average trading volume of fewer than ten lacks. The higher the volume, the better it is. (If you are new to this concept, try checking out the volumes of few of your favorite companies on moneycontrol or other financial websites to get a good idea of the daily trading volumes).

Besides, another way to check the liquidity of a company is by noticing the difference between Ask/Bid price. The smaller the difference, the higher is the liquidity.

2. High debt companies

Debts in the companies are like big holes in a ship. Until and unless, these holes are filled- the ship cannot go far. Avoid investing in companies with a lot of debt.  As a thumb rule, keep away from investing in companies with a lot of debt in their balance sheet and debt/equity ratio greater than 1.

Also read: Is Debt always bad for a company?

3. Falling knife category companies:

Do not try to catch a falling knife! Investing in companies whose share prices are falling continuously and significantly (for example- Geetanjali gems, Yes Bank, PC Jewellers, PNB, Suzlon energy, etc.) is never a good idea. There’s always a reason why the prices of these stocks are continuously falling, and the market is punishing that company. 

Moreover, there are thousands of listed companies in the Indian stock market which you can explore. Trying to catch a falling knife generally results in hurting your own hand if you are not trained on how to do so.

Also read: Catching a falling knife stock - Is it worth it?

falling knife example

4. Low visibility companies 

There are few companies in the Indian market whose information is not easily (and transparently) available on the internet or financial websites. This is mostly in the case of small and micro-cap companies.

Researching such companies with low visibility can be a tedious job for investors. Further, there are also chances of information manipulation if you can’t cross-check the data or when the reference sources are not reliable. Hence, avoid companies that are less visible.

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

Bonus Tip (For beginners)

 — Avoid investing in Penny stocks

Penny stocks are very risky to invest in. Many of the penny stocks become bankrupt and go out of the business. In addition, penny stocks are prone to different scams like pump and dump, etc.

There have been plenty of cases of price manipulations in penny stocks where the insiders try to inflate the share price. One can readily manipulate the penny stock prices by buying large quantities of these stocks. Besides, these stocks also have very low liquidity. Overall, if you are a beginner, it is recommended to avoid investing in penny stocks.

Anyways, if you’re inclined toward any penny stock company- then allocate only a small portion of your net investment (less than 10%) in that stock.

That’s all for this post. I hope it was helpful to you. Happy Investing.

April 28, 2020 Investment Basics 9 comments
Multi Candlesticks Patterns cover

Understanding Candlesticks – Multi Candle Patterns

Multi Candlesticks Patterns: Hi traders! In the previous article, we discussed the various single candlestick patterns and their importance in understanding the pricing patterns. Here, in this article, we will be talking about various multi candlesticks patterns.

These are patterns generated by a series of prior candles. Single candlesticks patterns along with multiple candlestick study goes a long way in understanding and giving better trade signals in the market.

Here is a list of Multi candlesticks patterns we will be having a discussion on in this chapter: The Engulfing Patterns (Bullish Engulfing pattern and Bearish Engulfing patterns), The Piercing pattern, The Dark cloud cover, The Harami Pattern (Bullish Harami & Bearish Harami), The Candles Gaps, The Morning star, The Evening star, Three White soldiers & Three Black crows.

The Engulfing Pattern

The Engulfing pattern is the most basic two candlestick pattern. The first candle is a relatively small one and the second candle is a bigger one as it engulfs the first candle. If this pattern happens at the bottom of a trend, then it’s called bullish engulfing and if this happens at the top of a trend then it’s called bearish engulfing.

— Bullish Engulfing

Here are a few characteristics

  1. The Bullish engulfing pattern shows Long (buy) trade
  2. The prior trend should be bearish.
  3. The prior candle should be Red.
  4. The engulfing candle should be bigger than previous and covering the whole body of a red candle and should be green.

bullish engulfing - Multi Candlesticks Patterns

In the figure above we see bearish trend prior to the engulfing green candle. Once the engulfing pattern took over, we saw a long bullish trend. One important point to observe here is that the engulfing candle attempts to continue bearish pattern but constant buying and rejection at lows brings in more buyers and ultimately the candle closes green.

The trades to be taken here depends on one’s risk appetite. A risk-taker will execute the trade on the day the trend is made but the risk-averse will wait for confirmation and execute his trade the next day. The Stop loss for this trade has to be below the body of the engulfing candle. In the figure above, the trader with both kinds of a risk appetite would have made a substantial profit.

— Bearish Engulfing

bearish engulfings - Multi Candlesticks Patterns

As the name suggests, the bearish engulfing pattern gives an opportunity for short trades. The prior pattern here has to be a bullish one and the engulfing pattern candle should also give an indication of continuing bullish pattern but due to constant selling pressure, the sellers eventually take over and the candle closes red. The engulfing red candle has to bigger than the prior green candle.

The buying pressure gets exhausted by constant selling. It is advisable to exit long trades when this pattern happens and enter fresh short trades. The risk-taking trader enters short trade on the same day while the risk-averse trade waits for the pattern confirmation and enters into trade the next day. The figure shown below is a classic example of Bearish Engulfment with the engulfing body bigger than previous green candle and substantial bearish trend post that.

The Piercing Pattern

The Piercing pattern is very similar to a bullish pattern with a minor difference. In the case of the piercing pattern, the size of the green candle should be between 50-100 % of the red candle. Say if the size of the red candle is of 100 points, then the piercing candle length should be more than 50 points but less than 100 points. This candlestick pattern has a similar characteristics like Bullish engulfing but the confidence level on trades via piercing pattern is little lesser compared to bullish engulfing.

The Dark Cloud Cover

A mini version of the Bearish Engulfing pattern. A bearish pattern indicator and uptrend halter. Here, unlike the bearish engulfing pattern, the red candle size should be between 50-100 % of the previous green candle. Say, if the size of the green candle is 150 points, then the dark cloud candle should be anywhere between 75-150 points.

The Harami Pattern

I know what comes to mind when you hear the word ‘Harami”. But Harami here is a Japanese word meaning Pregnant. This is generally a trend reversal pattern. The first candle is a big one followed by a candle with a small body. And the color of the second candle is generally different from the first candle. If the second candle turns out to be a Doji candle, the chances of reversal increases.

— The Bullish Harami

the bullish harami - Multi Candlesticks Patterns

In the figure above, we see a bullish Harami encircled. It is a two-day pattern. Following are some of its characteristics:

  1. The prior trend of the market is bearish and on the previous day, the market has made a new low.
  2. On the next day, the candle opens in green as against the expected red candle and hence the panic and shorts start to get covered and the day ends with a green or a Doji candle.
  3. The idea here is to go long at the formation of this pattern.
  4. The risk-taking trader can go long near the close of the day and the risk-averse trader can wait for pattern confirmation and go long the next day.
  5.  The Stop Loss for the trade is below the low of blue or Doji candle.
  6. In an ideal scenario, it is always best to keep trailing stop loss and ride the reversal move.

— The Bearish Harami

the bearish harami - Multi Candlesticks Patterns

In the figure above, we can notice that the bearish Harami in a squared box. It is a trend reverser. The strong bullish trend is halted and a new bearish trend starts. Few characteristics of this pattern:

  1. The prior trend is a strong bullish trend.
  2. The prior candle makes a new high and the next candle opens low against an expectation of new high and hence the panic selling.
  3. One should look to exit his existing longs and enter fresh short trades.
  4. The risk-taker will execute the trade close to the end of the day and the risk-averse trader will wait for the confirmation and enter a trade on the next day.
  5. The stop loss for the trade will be the high of the first red candle.
  6. Here also one should keep trailing the stop losses and ride the full move.

The Candle Gaps

The Gaps are formed when the candle for the next day opens significantly opens up or below the previous day closing.

the candle gap - Multi Candlesticks Patterns

If the market gap ups, it shows buyers enthusiasm. They are willing to pay a higher price. The Image above shows Nifty gaps up and buyers are willing to pay a higher price and the momentum continues. This pattern emerges when we see some overnight positive news and the markets react with a gap up. If the share price of some company gap ups, it usually means some positive management news or good quarterly results or firm receiving some substantial orders, etc.

Similarly, in the case of a Bearish Gap down, we see the market opening below the previous day’s close and selling pressure. In the figure above we see a bearish gap down in nifty index and continued negative momentum post that.

One important thing to keep in mind is that candle gaps are more news-driven or event-based but it has a strong bearing on changing the technical set up of the market.

The Morning Star

The Morning star is a bullish candlestick pattern. It’s a three candlestick pattern. This pattern usually indicates a trend reversal. A sustainable bullish trend is on cards.

the morning star - Multi Candlesticks Patterns

Following is the pattern setup:

  1. The market is in a bearish trend and it’s continuously making new lows.
  2. In the image above, we can see the first candle in the circle is a red candle and a new low is formed.
  3. The next candle starts by making new lows and looks set to go down. But with regular buying, the candle closes by making Doji. It starts to set panic amongst the bears.
  4. The next candle starts above the close of the Doji candle (Gap up opening) and shorts start to exit their position and fresh long positions re-initiated in the market.
  5. The best way to trade this pattern is by entering the market near the close of the third day and by then the trend reversal confirmation is also given by the market. The Stop Loss for this trade is the low of the third candle. Trailing Stop losses is the best strategy to ride this move.

The Evening Star

The evening star is the exact opposite of Morning star. It’s a strong bearish reversal pattern. Similar to the morning star, evening star is also a three candlestick pattern.

the evening star - Multi Candlesticks Patterns

  1. The market is in a bullish trend and it’s continuously making new highs.
  2. In the image above, we can see the first candle in the circle is a green candle and a new high is made.
  3. The next candle starts by making new high and looks set to go higher. But with regular selling, the candle closes by making Doji. It starts to set panic amongst the bulls.
  4. The next candle starts below the close of the Doji candle (Gap down opening) and longs start to exit their position and fresh short positions are initiated in the market.
  5. The best way to trade this pattern is by entering the market near the close of the third day and by then the trend reversal confirmation is also given by the market. The Stop Loss for this trade is the high of the third candle. Trailing Stop losses is the best strategy to ride this move.

Three White Soldiers

The three white soldiers is a bullish reversal candle. The trend prior to the formation of this pattern is bearish. This trend has three green candles formed. The opening of every candle is slightly below the previous days close and it closed above the previous day’s high. One can exit their existing short positions and enter fresh longs to initiate a new trade.

A risk-taking trader can execute trade before the close of the third candle and a risk-averse can execute his trade after the confirmation of the trend. The stop loss for this trade is the low of the first candle.

three white solders - Multi Candlesticks Patterns

Three Black Crows

Three black crows is a bearish reversal pattern. The prior trend is a bullish trend with new highs been made every day. The opening of the candle is slightly above the previous day but the closes is lower than the previous day low. Fresh shorts can be initiated with stop loss over the high of the first candle. One should keep trailing his stop losses as the trade starts to move in their favor.

Also read:

Conclusion

From the discussion above, we see various multi candlesticks patterns which can be useful barometers in the trade execution. There are some patterns that are frequent and followed more regularly and other not so frequent but very reliable patterns.

But by no means, these technical indicators to be followed blindly. One should see the technical factors going around and use informed judgment in executing their trade. “Happy Trading and Money Making!”

April 28, 2020 Options Trading, Technical Analysis, Trading 2 comments
10 Best Dividend Stocks in India That Will Make Your Portfolio Rich 2018

10 Best Dividend Stocks in India That Will Make Your Portfolio Rich.

Best Dividend Stocks in India for Income Investors (Updated: April 2020): Whenever a regular retail investor, like you and me, buys a stock, then their main aim is to make money through their investment. There are basically two ways by which anyone can earn money by investing in stocks. They are 1) Capital Appreciation & 2) Dividends.

The first one, capital appreciation, is quite simple and hugely famous among investors. Everyone knows this secret to earn in the stock market. Buy low and sell high. The difference is your buying and selling price is capital appreciation or profit.

For example, suppose you bought 200 stocks of a company at Rs 100 and two years hence, the price of the stock has increased to Rs 240. Here, capital appreciation is Rs 240- Rs 100 = Rs 140 per share or 140%. The overall profit that you made on your investments will be Rs 140*200 i.e. or Rs 28,000.

Almost everyone who enters the market knows this method of earning by stocks. It can also be concluded that most people enter the market hoping that their investment will be doubled or quadrupled and will make them a millionaire one day through capital appreciation.

Now, let us discuss the second method of making money through your investment in stocks- DIVIDENDS.

What are Dividends?

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” – John D Rockefeller

Whenever a company is for profit, it can use this profit amount in different ways. First, it can use the profit amount in its expansion like acquiring a new property, starting a new venture/project, etc. This strategy is generally used by fast-growing companies. Second, it can distribute the majority of the profit among its owners and shareholders. Third and final, it can distribute some portion of the profit to the shareholders and use the remaining in carrying out its expansion work.

Basically, this amount distributed by the company (from its profit) among the shareholders is called DIVIDEND.

What is a dividend? “A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.”

Typically, most big and well-established companies give decent dividends to their shareholders. They may offer dividends two times a year, namely– Interim dividend and final dividend. However, this is not a hard and fast rule. A few companies, like MRF, give dividends three times a year. If you’re holding a stock of these companies and the company announces a dividend, then you’re eligible to receive the dividends as you’re a legal shareholder.

Read more: Dividend Dates Explained – Must Know Dates for Investors

Why are dividends good?

Suppose you are a long-term investor. You have invested in the stocks of a company for the next 15-20 years. Now, if the company does not give any dividends, there is no way for you to make money until you sell the stocks. On the other hand, even though your investments might be growing, however, you won’t receive any cash in the hand unless you sell.

Nonetheless, if the company gives a regular dividend, say 3-4% a year, then you can are receiving some returns from your investments. Here, your capital is growing as you’ve not sold your stocks. Along with it, you’re also receiving some dividends being a loyal shareholder of the company.

In addition, a regular dividend is also a sign of a healthy company. An entity that has given a consistent (moreover growing) dividend to its shareholders for the last 5-10 consecutive years, can be considered a financially strong company. On the contrary, the companies that give irregular dividends (or skips dividends in a bad economy or market crashes) can not be considered as a financially sound company. Therefore, big dividend yields can be an incredibly attractive feature of stock for the long term value investors.

Now that we have understood the basics of dividends, let us learn a few of the important financial terms that are frequently used while analyzing dividends (before we look into the best dividend stocks in India).

Must know financial terms regarding Dividends

Here are a few terms that every dividend investor should know. These key terms are frequently used while discussing dividend stocks.

1. Dividend yield: A stock’s dividend yield is calculated as the company’s annual cash dividend per share divided by the current share price. It is expressed in annual percentage.

Dividend Yield = (Dividend per Share) / (Price per Share)*100

For example, if the share price of a company is Rs 100 and it gave a dividend of Rs 5 this year, then the dividend yield will be 5%. Please note that a high dividend yield doesn’t always mean a g good dividend stock.

2. Dividend %: This is the ratio of the dividend given by the company to the face value of the share.

3. Payout ratio: It is the ratio of earnings paid out as dividends to shareholders divided by the total earnings by the company in that year. Dividend payout ratio typically expressed as a percentage and is calculated as follows:

Payout Ratio = Dividends per Share (DPS) / Earnings per Share (EPS)

As a thumb rule, avoid investing in companies with a very high dividend payout ratio. This is because a high payout ratio means the company is not retaining enough money for its expansion or growth. In other words, be cautionary if the payout ratio is greater than 70%.

Overall, if you are looking for a good dividend stock to invest, search for companies with growing dividends, steady dividend yield, and consistent payout ratio. Now, let us move further and discuss the list of ten Best Dividend Stocks in India.

Quick Tip: The fast growing companies/small businesses/startups give less dividend yield to their shareholders as they use the profit amount in their expansion. On the other hand, the Blue Chip stocks, which are large and established company and has already reached a saturation point, gives good regular dividends. Further, the public sector unit (PSU) companies are generally known for giving good dividends. Some industries like Oil and petroleum, Grid, Utility etc give decent dividends to their shareholders.

Best Dividend Stocks in India (Updated April 2020)

Here are the ten best dividend stocks in India with a history of consistent dividends over the years. They are worth investigating by intelligent dividend investors.

Company NameLast Price (Rs)Market Cap (Rs Cr)Dividend (5 Yr Avg)Div Payout (5 Yr Avg)Div Yield (5 Yr Avg)
Hindustan Petroleum190.129,386.9224.3837.94.58
Indial Oil Corp75.8571,594.6813.9749.164.12
Power Grid166.6587,184.444.3731.162.4
Rural Electrification102.8519,828.1811.2227.65.08
Oil India85.459,266.2410.3533.543.22
Power Finance88.623,655.138.7232.624.8
National Aluminum Co.28.655,344.993.5635.62
Hindustan Zinc187.2577,851.5017.9291.688.4
NTPC9392,019.384.28235.542.8
BPCL316.668,678.5425.239.384.24

Additional Top Dividend Stocks in India

Company NameLast Price (Rs)Market Cap (Rs Cr)Dividend (5 Yr Avg)Div Payout (5 Yr Avg)Div Yield (5 Yr Avg)
ONGC77.6198,377.788.13639.643.88
Coal India130.780,546.8619.52108.286.16
Hero MotoCorp2177.6943,768.8979.849.182.54
GAIL Ltd86.6540,549.696.16232.521.84
Tata Steel Ltd271.4531,181.239.847.582.22
Infosys693.92,95,531.4934.951.43.04
Bajaj Auto2683.777,648.755640.482.12
JSW Steel179.1543,304.505.816.31.24
Castrol India120.2212,062.357.980.322.26
NMDC75.122,994.496.90470.025.9

Quick Note: If you are interested to know more about other high dividend yield stocks, then you can find it here: BSE TOP DIVIDEND STOCKS

Where to find dividend information of a stock?

You can find the details regarding the dividend of stocks on any of the major financial websites in India. Here are a few reliable financial websites to get these pieces of information in India:

  1. Money Control: http://www.moneycontrol.com/
  2. Economic times- Market: http://economictimes.indiatimes.com/markets
  3. Screener: https://www.screener.in/
  4. Investing.com: https://in.investing.com/
  5. Market Mojo: https://www.marketsmojo.com/markets

Further, you can also watch this quick video to understand how exactly to use these websites to find the best dividend stocks in India. Watch here –>

Note: Are you new to stock market investing and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

Closing Thoughts

“It is an extra dividend when you like the girl you’ve fallen in love with.” – Clark Gable

An intelligent dividend investor looks for a company that can provide consistent dividends for many long years without any dividend cuts. He/She is not interested in those companies giving high dividends just for one year and not able to sustain giving similar dividends in the future. That’s why it is really important that the fundamentals of the company should be strong, along with the dividend history. A bad market, slowdown, or recession should not stop good dividend companies from giving dividends to their shareholders.

That’s all for this article. I hope this post on ‘Ten Best Dividend Stocks in India’ is useful to the readers. Further, I will highly recommend not investing in stocks based on the list mentioned above. Do your independent research and invest only when you’ve studied the company enough and confident about its fundamentals. Besides, if you have any queries, feel free to comment below. I will be happy to help. #HappyInvesting.

April 28, 2020 Investment Basics, Market, Stocks 43 comments
Introduction to Candlesticks - Single Candlestick Patterns cover

Introduction to Candlesticks – Single Candlestick Patterns

A Guide to Single Candlestick Patterns: If you want to become a successful stock market trader, it is very important that you learn to read and understand candlesticks or candles. These candlesticks are basically a style of technical chart used to describe price movements of a stock, derivative, or currency. Understanding candlesticks and their patterns can help you to decide the entry and exit points for your trades.

“I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.” – Jim Rogers

In this article, we are going to discuss what are candlesticks and then look into the popular single candlestick patterns that every trader should know. Let’s get started.

What are Candlesticks or Candles?

Candlesticks are the most common form to gauge the market trends, historical analysis, forecasting future. They are the most potent form of technical indicators. Just like a burning candle throws light to present and future, candlesticks with their patterns throw light on the present and goes a long way in understanding the future trends.

A simple candlestick shows the events which transpired within the selected timeframe. It shows us the open, high, low, close of the day (within the timeframe selected). The length of the candle helps us in understanding the volatility of the day. The longer the length of the candle, the more volatile the day and shorter the candle, the less volatile the day.

candlestick high low open close

The candlestick can be said to be a historical indicator as the candlesticks are formed on the already happened market action. But the candlesticks formed goes a long way in understanding the future trends and price patterns.

Before we start understanding the various candlesticks patters, I would recommend keeping the following factors in mind:

  1. “Trend is your friend.” Avoid going against the trend.
  2. One should be very flexible with his views. Stubbornness generally leads to disasters.
  3. Historical data analysis goes a long way in understanding future price patterns.
  4. Avoid taking directional trades on small size candles. Generally, trends are formed after substantially long sized candles.

Single Candlestick Patterns

In simple words, a single candlestick pattern is formed by just one candle. Here, we do not look into multiple or group of candles and the trading signal is generated based on a single day’s trading action. The following are some of the popular Single candlestick patterns we would be discussing in this article: The Spinning top, The Marubuzo, The Doji, The Hammer, The Hanging Man, The Shooting Star.

— The Spinning Top

The Spinning Top unlike any other candlestick formation does not give any clear direction of the trend but has a lot of price action associated with it. A Spinning candle looks like the candle shown below:

the spinning top candlestick

Following are the initial observation looking at the candle:

  1. The body of the candle is very small compared to upper and lower wicks.
  2. The wicks on both sides are generally of similar size.

The spinning although looks like a plain candle but has a lot of price action associated with it. The small main body would imply that the open and close of the candle are very close to each other. Because the open and close are so close to each other, the colour of the candle usually does not signal any trend.

The upper body shows the high for the day. This simply signifies that the bulls did make an attempt to go up but to no avail.

The lower body has similar characteristics like the upper body. This simply signifies that the bears tried to push the market down but were not successful in doing it.

— The Marubuzo

The Marubuzo is again a single candlestick pattern. It is probably the only candlestick pattern in which the prior trend is not given much importance. Only the last candle is given importance.

the marubuzo candlestick

The green line above explains Bullish Marubuzo and the red line represents Bearish Marubuzo.

— Bullish Marubuzo

In Bullish Marubuzo, the open of the candle is low for the day and the close of the candle is high for the day. There are no wicks in this candlestick pattern. This candlestick can also be said to be a trend changing one. The intensity of the buying is so high that the traders are willing to buy the stock at the high of the day. This candlestick patterns simply implies that the buying will continue for the days to come. The recommended buying price is the closing price of the Marubuzo candle.

Theoretically, the open should be low and the close should be high. But in reality, a little bit of variation is allowed.

Let us understand it with the help of a hypothetical example: The XYZ company share price has formed a Marubuzo candle with: Open = 403, High = 450, Low = 400, Close = 449.

Now the trader’s risk profile defines the time of execution of the trade. A Risk-taker would be taking the trade on the day the Marubuzo is formed. So how does this Risk-taking trader gets confirmation about the formation of Marubuzo? The trader basically does that by taking the trade very close to the end of the day.

On the other hand, a Risk-averse trader would be taking the trade the next day once the trend is confirmed. So, a risk-averse trader entry price might be higher than the risk-taking trader but has a better assurance about the pattern formation.

One very important thing to be kept in mind is that one has to be very mindful of the fact that the trade has to be executed with a stop loss in mind. Stop loss helps the trader to minimize the losses because of the inherent risks associated with the trade.

— Bearish Marubuzo

In a Bearish Marubuzo, the open of the candle is high for the day and the low of the candle is close for the day. A bearish Marubuzo indicates that the selling pressure is so high that the trader is willing to sell the share at the lows of the day expecting more negativity in the price of the share. This candle indicates a change in momentum and this changed momentum is set to last over some time.

One should bear in mind that this kind of trades are generally not meant for scalping purposes, they are to held until the trade reaches its desired price. Trailing stop losses is the best strategy.

— The Doji

The Doji is a candle formation that does not have a real body. It just has wicks on either side. So, the opening and closing price of the candles are one and same.

the doji candlestick - Single Candlestick Patterns

The Doji pattern can sometimes be similar to a spinning top except for the fact that Doji does not have any real body. Dojis are generally momentum changer or momentum halter. These candles clearly show the indecisiveness amongst the traders about the momentum and the direction of the market. Let’s examine it with the help of the following situation.

Say the market is in a bullish momentum and has had green candles over a series of days. So, if a Doji candle is formed, it could simply imply the dwindling momentum in the market or could mean an end in current momentum and signal trend reversal. Therefore, it is advisable in this scenario to be cautious and exit the long position or at least one should have stop losses in place. This is generally a time to wait and watch before entering new trades.

Also read: Options Buying vs Selling: Which Strategy to Use?

— The Hammer

The Hammer pattern is one of the most convincing trading patterns simply because of its formation pattern.

the hammer candlestick

The hammer pattern occurs when the candle opens at high but is not able to sustain there and it falls considerably but with continuous buying interest is able to recover and the candle closes in green and near the opening price. The length of the wick here has to be at least twice the size of the body.

In the diagram above, a bullish hammer has formed at the bottom of the bearish trend and the momentum changes significantly after the hammer formation. One Important thing to be kept in mind is that the hammer can be of any colour (green to red) as long as it meets the body to wick ratio. Few characteristics of hammer trade:

  1. The hammer formation generally gives a bullish or a long trade.
  2. The execution time of trade depends on the risk appetite. A risk-taker would execute the trade on the same day and a risk-averse will wait for the confirmation of the trade.
  3. The Stop loss for this trade is generally below the low of the hammer candle.

— The Hanging Man

According to Investopedia, “A hanging man uptrend and warns that prices may start falling. The candle is composed of a small real body, a long lower shadow, and little or no upper shadow. The hanging man shows that selling pressure is starting to increase”.

One important criterion for a candle to be called as a hanging man is that the market has to be in a bullish trend. Just like Hammer, a Hanging man can be of any colour as long as it meets the body to wick criteria. The Stop Loss for the short trades executed via hanging man pattern is the high of the candle.

the hanging man candlestick - Single Candlestick Patterns

— The Shooting Star

As the saying goes, save the best for the last. Probably the most influencing of the single candlestick pattern. The shooting star just looks like an inverted hammer or hanging man. It gives very strong trend reversal signals.

shooting star candlestick

The basic characteristics of the Shooting star are:

  1. The shooting star candle has a long upper wick. Generally, the size of the wick is twice the size of the candle body. The longer the wick, the stronger the pattern.
  2. The shooting star is a bearish reversal pattern, so the preceding trend is bullish.
  3. In general, the shooting star happens on the day when the existing bullish trend is expected to continue.
  4. Once a shooting star candle is formed, it is advisable to exit the long trades or at least put a stop loss and if possible reverse the long positions.
  5. One has to be bias-free when trading this type of formation.

Closing Thoughts

In conclusion, the above discussion should give us a clear picture of the various single candlestick patterns. All the patterns have their individual strengths. One has to be very aware of the basic mantra in the market: “Trend is your friend, always trade bias-free and always trade with a proper stop loss to be a long survivor in this marathon of trading”.

In the next article, we will be talking about Multi candlesticks patterns along with examples. “Happy Trading and Money Making”

April 27, 2020 Options Trading, Technical Analysis, Trading No comments yet
What is an IPO Grey Market cover

What is an IPO Grey Market?

Understanding IPO Grey Market: If you’re actively involved in the market, you might have come across the terms White market, Black market, and surprisingly Grey market. A white market is one that is considered a legal, official, and authorized market for goods. A black market is a complete opposite which is illegal.

A grey market, on the other hand, stands for a market that exists with the knowledge of the owner of the goods but takes place outside the official channels of exchange. Today we have a closer look at the IPO grey market.

An IPO is a means for the company to raise capital for its growth and expansion needs. For the investor, it may be an opportunity to make a quick move into owning the shares of a fastly growing company. The purchase of these shares generally takes place through authorized mediums which is the stock market regulated by the SEBI.

What is an IPO Grey Market?

A successful IPO generally has all its shares subscribed or oversubscribed. In cases of oversubscription, the shares are allotted on a pro-rata, or in cases where the subscription is too high a lottery system is adopted. Here the chance of an allotment is too low. In these situations, investors turn to the grey market for prospective sellers who have also applied for allotment.

When the IPO gets sold through unofficial or unregulated markets it is known as a Grey IPO market.

What is an IPO Grey Market meme

The Grey Market generally involves a seller, buyer, and dealer.

  1. The Seller is the person who actually takes part in the application for shares with the motive of selling them in the grey market.
  2. The Dealer acts as a mediator between the buyer and the seller.
  3. The Buyer is the person who purchases the allotted or unallotted shares in the IPO from the grey market

It is necessary to note that there is no regulatory body governing the Grey Market. All the agreement transactions that take place are on the basis of mutual trust placed on each other.

Also read: What is the Process of IPO Share Allotment to Retail Investors?

Timeline of an IPO

When an investor attends the IPO through the white market, he/she applies and bids on the day the IPO opens. The process of allocation of shares generally takes around ten working days. It takes two weeks for the shares to get listed and start trading after the closure of the IPO.

how do ipo works

When an investor involves himself in the grey IPO market, the trading can start before the IPO begins and even after the allocation is done.

How does a grey market function?

In a grey market, the trading is done through a dealer or a mediator.

— Depending on the demand and conditions in the market the Grey Market Premium is set. The Grey Market Premium is the amount in excess of the offering price ( offering price is the price at which the company sells shares to investors in an IPO).

— The buyers who are willing to purchase it at this price make a deal with the mediators. The mediator, in turn, contacts the seller. The bids by the buyers can take place before the application even happens or even after their -allocation.

— The shares then get allocated to the seller. As soon as the shares are listed, on the direction of the buyer, the mediator may instruct the seller to transfer the shares to the buyer’s Demat account. Or he may request that the shares be sold in the stock market on the settlement price and transfer the sales proceeds to the buyer.

In the case where one of the party defaults there is no action that an individual can take as there is no regulatory body to monitor the transactions and all the transfers take place online.

Kostak and Kostak Price

In the grey market, it is possible for a person to have his ‘Application for the IPO’ be sold. The buyer will pay a price called the Kostak price in return for the seller promising his IPO application to the buyer. 

It does not matter if the application gets allocated or not. Irrespective the buyer will have to pay the Kostak price to the seller.

Benefits of taking part in the Grey market

The main benefit the buyers acquire is the increase in their chances of allocation of shares in cases of subscription. It generally takes up to 2 weeks from the closure till the shares get listed. The buyers in the Grey market bet on the fact that the prices will be higher on a listing day in comparison to the unofficial price (inclusive of the grey market premium) from the Grey market.

The Buyer can then sell this at a higher settlement price once the stocks are listed and make a profit. On the other hand, the buyer also faces the risk of a potential fall in the price which may result in a loss. 

Example: ABC company sets the offering price at Rs. 150per-share.

  1. Based on the demand for the shares of ABC the Grey market premium is set at Rs. 30.
  2. In this case, the total official price comes up to Rs 180.
  3. If the settlement price on the listing day is set at Rs.200 then the buyer is set to make a Rs. 20 profit.
  4. On the other hand, if the settlement price on the opening day is set at Rs. 160 then the buyer makes a loss of Rs. 20.

Taking into consideration Kostak.

In the same example as above for ABC company say the Kostak price is set at Rs.100 and a single lot size is of 100 shares. The application by the seller has been for one lot.

  1. In the above case say the price is set at Rs. 200.
  2. Here the seller will sell the lot and transfer the gain to the buyer’s account. The profit here is 20(200-180) x 100 =2000.
  3. From this amount Rs. 100 is deducted for the Kostak amount owed and the net gain is transferred to the buyer in exchange for the risk he took over.
  4. Similarly in the above example if the settlement price is at Rs.160 the buyer will face the loss of the price falling below the unofficial price and Rs 100 added from the Kostak price.

In the case of the seller not receiving an allotment for his application, the buyer will still have to pay him Rs. 100.

The buyer will also face a loss if the seller application does not get allocated. Hence in order to reduce the risk of non-allocation he creates an agreement with many sellers. Say if the IPO is oversubscribed by three times he then creates an agreement with multiple sellers he reduces the chances of loss because of Kostak price due to non-allocation.

Also read: How to Invest in Share Market? A Complete Beginner’s Guide

Closing Thoughts

The Grey market also serves the function of giving other investors an idea of the demand the shares of a company might have and the investor may adjust his application accordingly. The demand may also indicate a price at which the shares may trade once listed.

The Grey market may also be used by the company or the underwriter to push up the demand for the shares. Hence before using the Grey market as a reference, it should be noted that they are subject to manipulation. In addition, the stock market is a risky enough place. The grey market only adds to the risk due to the lack of a regulatory body and because the risk of trust cannot be quantified.

April 27, 2020 Economics, Investment Basics, IPO No comments yet
Why You Need to Know The Rule of 15*15*15 cover

Rule of 15*15*15 – What You Need to Know!

When the newbies enter the world of investing, one of the biggest questions that they may face is ‘how much’ and ‘how long’ should they invest? Enter the rule of 15*15*15.

In this post, we are going to discuss what is the rule of 15*15*15 (and the rule of 15*15*30) and how it can help you to make your investment decisions.

The rule of 15*15*15

The rule of 15*15*15 says that if you invest Rs 15,000 per month in an investment option which gives a return of 15% (CAGR), for a consistent period of 15 years, you will build a final corpus of Rs 1,00,00,000 (One crore).

Here,

  • SIP Amount = Rs 15k per month
  • CAGR =15%
  • Time horizon =15 Yrs
  • Final corpus = Rs 1 Cr

rule of 15*15*15 sip calculator

(Source: SIP Calculator)

Interestingly, your total invested amount is equal to just Rs 27 lakhs. However, over the time period of 15 years, you will build a total wealth of Rs 1 Crore.

Quick Note: In the scenarios discussed above, 15% is considered as the average compounded annual growth rate (CAGR) over the years. However, you must understand that it is just an average as no market can give consistent 15% returns. In the bull market, the returns can be as high as 30–40%. On the other hand, in the bear market, the performance can be as low as -10% to 5%. Here, the 15% is taken as the average of the returns over the 15 or 30 years.

Rule of 15*15*30

The rule of 15*15*15 gets even better when we double the ‘time horizon’ keeping all the other factors the same.

Here, you invest Rs 15,000 per month in an investment option which gives a return of 15% (CAGR), for a consistent period of 30 years.

Can you guess the final corpus build in this case?

The final corpus built after 30 years will be Rs 10,00,00,000 (Rs 10 Crores). And yes, that’s right — not a typo error…

Here,

  • SIP Amount = Rs 15k per month
  • CAGR = 15%
  • Time horizon = 30 years
  • Final Corpus = Rs 10 Crores

the rule of 15*15*30 sip calculator

(Source: SIP Calculator)

Here your total invested amount is just Rs 54 lakhs. However, as the power of compounding is working in your favor, you will accumulate a final corpus of Rs 10 crores. Only by doubling the time horizon, you can get ten times the amount compared to the rule of 15*15*15.

And that’s why the power of compounding is considered the most substantial factor for wealth creation. Here’s a quote regarding the same by one of the greatest scientist of all time, Albert Einstein:

“Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.” -Albert Einstein

Warren Buffett Wealth Creation

The name ‘Warren Buffett’ needs no introduction, especially for the people involved in the world of investing. His wealth creation story is an interesting topic to discuss in this post.

Fascinatingly, unlike the young tech billionaires of this century like Mark Zuckerberg, Evan Spiegel, Bobby Murphy, John Collison, etc. Warren Buffett did not build his wealth by creating a super-tech company like FB, Snapchat, Google, etc.

Warren Buffett built most of his wealth over time through their investments (and acquisitions) by his company Berkshire Hathaway. You may get surprised to know the fact that the World’s third richest person become a billionaire only in his 50’s.

warren buffett net worth growth over time

The biggest factor why Warren Buffett was able to build such a huge wealth was his amazing returns for a consistently longer period. His company, Berkshire Hathaway, gave an average yield of around 21.7% per year for over five decades. This return for such an extended time period is way-way better than what we discussed above. The power of compounding played an important role in Warren Buffett’s wealth creation story.

Resources:

Closing Thoughts

The time period is a significant factor when you are investing.

In this post, you can notice how by doubling the time horizon from 15 to 30 years; you can get ten times bigger final corpus. And that’s why it is recommended to start investing as soon as possible.

To end this post, here’s an amazing quote by Mr. Buffett: “Someone is sitting in the shade today because someone planted a tree a long time ago.” -Warren Buffett

April 26, 2020 Invest Intelligently, Investment Basics, Mutual Funds 1 comment
Options Buying and Selling - Two sides of Option Coin cover

Options Buying vs Selling: Which Strategy to Use?

Options Buying vs Selling: Every transaction, right from the days of the Barter system always has had a counterparty. Every seller got to have a buyer to consume the supply. Similarly, in Options too, every option buyer needs to have a counter option seller willing to give his right on the underlying asset.

An options buyer is one who is willing to pay a premium in advance, for having a right to buy/sell (depending on Call/Put) underlying asset on expiry. And an option seller is one who receives a premium as a fee for surrendering his right on Asset till expiry.

Benefits of Options Buying

  1. Options give you the power of Leveraging, as with limited capital one is able to ride the bigger move.
  2. The Risk involved here is to the tune of Premium paid. Say, if someone is buying a Nifty call option by paying a premium of 40. And a Nifty lot consists of 75 units. Therefore, the total premium paid will be equal to 40*75 = Rs. 3,000. So, by paying a premium of Rs. 3000 one is able to ride the full move.
  3. The option buyer has the opportunity of earning unlimited profit by just paying a premium and the loss is limited to premium invested.

Benefits of Options Selling

To understand this, let us understand the scenarios option contracts move to at expiry:

  1. When the Spot price moves above the strike price at expiry, the option expires In The Money. Options buyers gains and makes money.
  2. When the Spot price is at or near the strike price at expiry, the option expires At The Money. The Option seller earns the premium received as his income as the contract expires worthless for the buyer.
  3. When the Spot price is below the strike at expiry, the option expires Out Of Money. The Options sellers earns the premium received as income as the contract expires worthless for buyer.

So, from the three scenarios mentioned above, the Option Buyer makes money in one of the scenarios and the option seller stands to make money in two scenarios. Let us understand more on options buying vs selling with the help of an example:

call put option buying and selling sides of coin 2

Take for example if the Nifty spot is trading at 9325, and the option buyer buys weekly call option of 9400 by paying a premium of 120, then the

— Calculation for In the Money Call option P/L

  • Spot price at Expiry: 9700 (Say)
  • Premium: 120
  • Strike Price: 9400
  • Profit for Option Buyer: (9700-9400-120)*75 = Rs. 13,500
  • Loss for Option Seller: Rs. 13,500

— Calculation for At the Money Call option P/L

  • Spot price at Expiry: 9405 (Say)
  • Premium: 120
  • Strike price: 9400
  • Loss for option Buyer: (9405-9400-120)*75 =Rs. 8,625 loss
  • Profit of Option Seller: Rs. 8,625

— Calculation for Out of Money Call option P/L

  • Spot price at Expiry: 9275 (say)
  • Premium: 120
  • Strike Price: 9400

Here, loss for option Buyer: (9275-9400-120)*75 = Rs. 18375 loss. But the maximum loss for an option buyer is to the tune of premium paid. So the maximum loss to Option Buyer in Out of Money Call option is Rs. 9000

  • Profit of Option Seller: Rs. 9000

The option buyer starts making money once he reaches a breakeven point on his trade. The Breakeven point is calculated as follows: Breakeven Point = Strike price + premium paid

Also read: Options Trading Definitions – Must Know Terms for Beginners

Margin Calculation

There is no Margin required to buy an option. Just the premium is required to be paid to option seller. Say, to buy a Nifty call option, the premium required to be paid is 40. Then, the total premium to be paid will be = 40*75 = Rs. 3,000.

But in case of selling options, margin along with exposure has to kept with the broker, to account for day to day volatility. The margin is required to be deposited here because seller of an option is exposed to unlimited risk.

Margin for selling option = Initial Margin + Exposure Money

Which strategy to use?

There is no straight answer as to which is better: Buying or Selling. Each have their own benefits and negatives:

1. In case of buying, the buyers risk is limited to premium paid and in return, he gets right on underlying asset till maturity. But selling has its own benefit of receiving income (premium) beforehand and have to pay anything only if the spot price goes above the strike price. Even in that case also the seller has the protection of premium beyond strike price. Therefore, the real loss for seller happens (in case of call option) when: (strike price + premium) < spot price.

2. The option buyer is always in the game to make money, as long as the option does not expire but his probability reduces as the contracts keep moving closer to expiry. And option seller is always exposed to unlimited risk but his risk reduces with time because of less time for the individual assets to make substantial movement in a particular direction.

3. Both option buyers and sellers have the option to exit their trades before expiry. If the option buyer sees that the premium of his position is more than what he paid and he wants to book profit, he can easily do that via options market. And similarly, the option seller can get out of his position if he sees a substantial move of premium in his favour or sees a position going against him.

Also read: What is India VIX? Meaning, Range, Implications & More!

Closing Thoughts

From the above discussion, we can easily conclude by saying that there is no right strategy as to buying or selling options. And there are arguments both in favour and against options buying vs selling.

Choosing the right strategy depends on one’s objective, rational, and risk-taking appetite.

April 26, 2020 Options Trading, Trading No comments yet
Why the Crude Oil prices dived into Negative? - A Detailed Study cover

Why the Crude Oil prices dived into Negative? – A Detailed Study

A detailed study to better understand Why the Crude Oil prices dived into Negative?: A month ago, on March 8th, 2020, ‘30% slash in the crude oil prices’ seemed to be the biggest headlines crude oil could ever get. However, on April 20th, the crude oil prices broke into the news for its extraordinarily inconceivable negative price dump. A negative price, theoretically, would essentially mean that you are to be paid for the purchase of the commodity. Today we try and decode how the crude oil prices ventured into the negative territory and what it would mean to us.

Why the Crude Oil prices dived into Negative? - A Detailed Study

Does the ‘-ve’ represent all oils?

In short, the answer to the above question would be ‘No’. This is because there are multiple varieties of crude oils classified on the geography of their procurement, their quality, and other factors. This ensures their prices remain different just like other commodities.

Popular crude oil types are West Texas Intermediate( WTI), Brent Crude, Dubai Crude, OPEC, etc. An insight into the different types of oils would help us better understand why only a particular oil went negative. 

— The Brent Crude

The Brent Crude

The Brent Crude oil is sourced from the waters of the North Sea between the UK and Norway. It consists of 0.37% sulfur. It is known to be of perfect suitability for the production of petrol. The fact that it is sourced from the sea makes its transportation cheaper from ships. 

Financial Traders take delight in the Brexit crude oil as it is highly volatile. This gives it a larger scope to place their bets.

— The West Texas Intermediate ( WTI )The West Texas Intermediate ( WTI )

As the name suggests this oil is sourced from the US. The oil fields are drilled for their high-quality shale oil. The WTI crude oil consists of 0.24% sulfur. WTI is used in the production of diesel. However, being sourced from oil fields and the high cost of setting up pipelines make the ‘transportation and storage’ expensive.

— Others 

The Dubai crude aka Fateh is a medium sour crude oil extracted from the United Arab Emirates. The OPEC includes oil from OPEC members like (Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and also Murban crude from UAE). The Urals crude is sourced from Russia. Several other crude oils also exist like the Tapis, Bonny Light, etc. 

Just like any other commodities, these crude oils are priced differently based on the quality, cost of procurement, etc. Of the crude oils named above, the WTI had been priced at $-37.63 on April 20th.

What affected Oil Prices?

The factors that played  a role in the massive fall of the oil prices were 

— Demand and Supply Factors

The demand and supply play the most important role while determining the price of a commodity. Political tensions and war have had an impact on demand. This is because countries prefer to stock up due to future uncertainties driving up the prices. This was also noticed during the 9/11 attacks and the invasion of Iraq.

— The Russia v/s OPEC standoff

In today’s scenario, however, controlling the supply chain could have played a big role. Major players like Russia and the OPEC (spearheaded by the Saudi) had a fallout. This was over an agreement to reduce production during the pandemic in order to match the reduced demand. Russia expressed dissent over this as it seemed to favor the US WTI once prices are adjusted.

Result: In retaliation, Saudi Arabia increased its production flooding the markets in order to hurt Russian producers from falling prices. Anton Siluanov Russian finance minister responded by saying that they could handle the situation even when the prices dropped to $30 a barrel. He added that the government would be able to operate without difficulty for four years.

These conditions may have been tolerated by WTI in a normal situation. But considering the pandemic where two-third of the world’s economies are facing lockdown led to a backfire. This led to a build-up of oil reserves with no one available to make purchases.

This was because the airline industry one of the biggest consumers of crude oil has most of their planes grounded. Vehicular consumption at its minimum with people quarantining themselves and working from home. With industries requiring crude oils for production shut, this led to a huge build-up of reserves. 

Also read: The On-going Oil War (2020) – Causes & Effects

— Pricing Methodology of Crude Oil

Crude oil is priced based on the futures contracts set as benchmarks. Futures contracts are agreements to sell a commodity at a set agreed price and set date in the future. This is done due to the volatility of crude oil prices. Dealing in futures helps the producers and buyers possibly protect themselves from uncertainty. Producers and buyers enter into an agreement with a set price beforehand.

If in a situation the price set for crude oil increases at the set date the buyer is benefitted by the cheaper predetermined price. If in a situation the price decreases at the set date the seller makes a profit. This is because he can still benefit from the higher price as per the future contract.

In the crude oil future contract, however, there is another party of traders who serve as middlemen between the producers and buyers. The traders enter into agreements with the producers. They do this with no intention of acquiring the oil. They do this with the aim of earning a profit after entering into another contract with the buyers.

To combat this US President Donald Trump said the US would buy 75 million barrels to replenish the national strategic stockpile. This would also provide temporary relief to the oil businesses.

How did these factors lead to the eventual fall?

on going oil war

A  discussed earlier the WTI already incurs additional expense due to the pipeline. In addition to this, the market was heavily supplied by the OPEC crude with no takers. To combat the price fall Saudi Arabia and Russia reached an agreement. They agreed to cut output by 9.7 million barrels per day for the next two months. This, however, was not enough to stop the prices from falling.

The reserves saved in Cushing, Oklahoma kept building up. The Eventual overflow led to a situation where producers began paying buyers to take the oil. But in such a case why did the producers not destroy the crude oil as it would protect them from further losses. This is because the  U.S. antitrust law prohibits oil companies from coordinating their production. 

In addition to this, the Future contracts of May saw no buyers. Both these issues further alleviated the problem. It eventually led to the oil prices moving into the negative territory.

What does this mean for the economy?

This meant that the buyers were in a position to be paid in return for the purchase of WTI oil. However, as mentioned earlier crude oil is traded based on future contracts. It would not enable a country to take advantage of these in a short period of time. Also, with the demand for crude oil dropped due to the lockdown the respective country reserves will not be able to hoard large quantities.

The Indian government may use any benefits arising to set off the losses due to the lockdown. However, It is not a completely rosy picture for the Indian Economy. This is because 7 million Indians currently reside in economies that depend on crude oil exports. Adverse fall in their crude oil due to the WTI will lead to adverse effects in their economy. Joblessness will further affect Indian states that depend heavily on the remittances that are transferred from these countries.

There also arises the question of the Indian Government benefitting directly from the WTI. In 2018, of the $106.7 billion worth of crude oil only $2.8 billion can be attributed to WTI.

The benefits of the fall in crude oil prices being relayed to commercial customers are doubted. This is because the government has not transferred the benefits of falling prices over to commercial consumers from the last two months. This also may be seen as a silver lining as in a situation of probable rises. The government may again hold their ground and not relay the losses in the form of high prices.

Closing Thoughts

Low oil prices historically have been known to tip the scales of power from the producing countries to the importing countries. Low oil prices were also one of the reasons for the fall of the Soviet Union ( Yess… Chernobyl too!). Talking about the rebalancing of power, low oil prices are also known to encourage gender equality.

Studies with the Middle East as their prime focus have explained that oil production apart from various other reasons also impacts gender equality. Oil production being their biggest industry further discourages the women. With the number of women in the workforce reduced in turn leads to a reduced number of women with political interference. Further enhancing the patriarchal society. Talk about a silver lining.

crude oil meme

The renewable resource industry is also in danger if crude oil products result in providing longer benefits.

When we look at these effects in the short term from the Indian perspective it really helps being tipped upwards especially when we are in the midst of ‘The Great Lockdown’.

April 25, 2020 Economics, Market, News No comments yet
Options Trading Definitions - Must Know Terms for Beginners cover

Options Trading Definitions – Must Know Terms for Beginners

Options Trading Definitions: Options as the name would suggest, gives you the right but not an obligation to own a financial instrument. But, before going deep into the technicalities of this instrument, let’s have an understanding of some of the key terminologies (jargon) used while trading options. Today, we will be covering jargon like Strike price, Underlying price, In The Money, At The Money, Out Of Money, etc.

Options Trading Definitions – Must Know Terms for Beginners

— Strike Price

The strike is the exercisable price of the options contract. The call option holder makes money if upon expiry the spot price is above the agreed strike price. And similarly, put option holder makes money if the spot price is below the agreed strike price.

The strike price is fixed in the options contract. Say, a trader has bought a call option contract (assuming 1,000 shares in a lot) of ABC Company for Rs. 75 strike price. So, over the duration of the contract, the call option holder has the right to buy 1,000 shares at Rs. 75. If the price of the share goes to Rs. 125, the option holder stands to make Rs. 50,000 (=50*1000) on the trade. And Vice versa for the Put option holder.

Also read: Options Trading 101: The Big Cat of Trading World

— Underlying Price

Underlying price is the spot price of the underlying asset of a derivative. For example, if someone owns a call option to buy one lot of ABC Enterprises. If ABC Enterprises is currently trading at Rs 15 per share, the underlying price is Rs 15. The difference between the underlying price and strike price greatly influences the option premium.

— In The Money (ITM)

As the name would suggest, ITM would simply mean something which already is making money. In options terminology, ITM means an option contract whose spot price of the underlying asset is above the strike price for call option and below the strike price in case of the Put option.

For Example, if the spot price of the ABC Company is Rs 50 then the strike price of the ITM Put option will have to be Rs. 51 or more. The premium cost as a factor must also be considered.

— At The Money (ATM)

An At The Money Option contract is one whose spot price and the strike price of the underlying asset are same. The options premiums are at their most crucial stage when the options contract are trading ATM. For example, if XYZ stock’s spot price is Rs.75, then the XYZ 75 call option (CE) is at the money and even the XYZ 75 put option (PE).

An ATM contract has no intrinsic value but has time value before expiry. For Example, on 10 April 2020, ABC share has a spot price of Rs. 100 and the 100 CE (for April Expiry) is trading ATM but still has a premium of 10. The reason for this is simply the fact that the contract still has 20 days to expiry. As and when the contract moves towards expiry, the premium erosion will happen in this contract because of less time available for the stock price to make a substantial move in any direction.

— Out of Money (OTM)

A contract is called OTM when the strike price of a call option is above the spot price of the underlying asset. In case of a Put option, a contract is called Out of Money when the strike of the underlying asset is below the spot price of an option contract. For example, if the spot price of the ABC Company is Rs. 70 then the strike price for the OTM call option will be Rs. 69 or less.

Relationship between various terminologies

For call options, the further away the strike price from the spot price, the economical the option. The following table shows the various strike price and the premiums and other factors for a stock trading at Rs 50.

Strike PriceMoneynessCall option premiumIntrinsic valueTime Value
35ITM15.5150.5
40ITM11.25101.25
45ITM752
50ATM4.504.5
55OTM2.502.5
60OTM1.501.5
65OTM0.7500.75

Conversely, for put options, the following table shows the various strike price and the premiums and other factors for a stock trading at Rs 50.

Strike PriceMoneynessCall option premiumIntrinsic valueTime Value
35OTM0.7500.75
40OTM1.501.5
45OTM2.502.5
50ATM4.504.5
55ITM752
60ITM11.25101.25
65ITM15.5150.5

— Moneyness

Moneyness in simple terms explains the amount of money the option holder was to make if he were to exercise his right immediately. It simply explains the intrinsic value (i.e., the amount received by the buyer) of an option.

— Options Expiry

In financial terms, the expiration date of an option contract is the last date on which the holder of the option may exercise it. A call/put option will be in-the-money if the stock is above/below the strike price and will be executed by the option buyer upon expiration.

If the stock price is above the Put option strike price, the option expires worthless. The weekly options expire every Thursday in Indian Equity Market and the monthly options expire on the last trading Thursday of every month. If Thursday is a holiday, then the options expire the previous day.

options expiry buyer and seller

— Options Premium

The option premium is the fees paid to the option seller by the option buyer for having a right on an underlying asset before expiry. If the option expires In the Money then the option buyer has the right to exercise the option contract. If the option expires Out of money, then the option buyer stands to lose to money i.e., the premium paid. The premium is the income generated by an option writer/seller.

Say, the stock price of XYZ Company on 10th April 2020 is Rs 500. An option buyer buys 530 call at Rs. 15 from option seller. Upon expiry, if the price of XYZ id 575, then the income made by the buyer is Rs 30 (Spot price – strike price – option premium).

Further, let’s assume upon expiry if the spot price of XYZ Company is Rs. 520, then the option will expire worthless for option buyer and the premium will be income earned by the option writer/seller.

Again if the price of XYZ shares upon expiry is Rs. 540, then the contract expires ITM for option buyer but he still stands to lose money. Following is the calculation to explain:

  • Strike Price: Rs 530
  • Option premium: Rs 15
  • Spot Price upon expiry: Rs. 540.

Here, the total Income of Option Buyer: Rs. (540- 530-15) i.e. Rs. -5. So the intrinsic value will be 0.

On the other hand, the total Income of Option Seller: Rs. (530+15-540) i.e. Rs. 5.

— Options Settlement

Let’s understand this with the help of an example: There is a call option to buy XYZ at Rs.50. The expiry is 30th Jan 2020 (last Thursday). The premium is Rs 4 and one market lot has 7,000 shares.

Assume there are two traders – Trader A and Trader B. Trader A wants to buy (option buyer) and trader B wants to sell (write) this agreement. Here is how the money movement will happen

Since the premium is Rs 4 per share, Trader A is required to pay a total of 7,000 * 4 = Rs 28,000 as a premium amount to Trader B.

Now because Trader B has received this Premium form Trader A, he is obligated to sell Trader A, 7000 shares of XYX on 30th Jan 2020, if Trader A decides to exercise his agreement. However, this does not mean that Trader B should have 7000 shares with him on 30th Jan. Options are cash-settled in India. This simply means on the last day if Trader A wants to use his right to exercise his option then Trader B is obligated to pay just the cash differential.

To help you understand this better, consider on the last Thursday (expiry day) of January XYZ is trading at Rs.65/-. This means the option buyer (Trader A) will exercise his right to buy 7000 shares of XYX at 50/-. In other words, he is getting to buy XYZ at 50/- when the same is trading at Rs.65/- in the open market.

Another way to look at it is that the option buyer is making a profit of Rs.15/- per shares (65-50) per share. Because the option is cash-settled, instead of giving the option buyer 7000 shares, the option seller directly gives him the cash equivalent of the profit he would make, which means Trader A would receive

= 15*7,000 = Rs 1,05,000/- from Trader B.

Of course, the option buyer had initially spent Rs.28,000/- towards purchasing this right, hence his real profit would be –

= Rs (1,05,000-28,000) = Rs 77,000 /-

The fact that one can make such a large exponential return is what makes options an attractive instrument to trade. This is one of the reasons why Options are one of the most favorite trading instruments amongst Traders.

Also read: What is Bank Nifty? The Index That Summarizes Economic Health

Key Takeaways

In this article, we discussed a few of the frequently used stock options trading definitions or jargon like Strike price, Underlying price, In The Money, At The Money, Out Of Money. Here are the key takeaways from this post:

  • It is advisable to buy a call option only when one anticipates an increase in the price of an asset.
  • The strike price should be as close as possible to the current price to avoid quick premium decay because of the time factor.
  • The underlying price is simply the spot price of the asset.
  • Weekly options contact expire every Thursday and monthly Option contracts expire on the last Thursday of every month. If Thursday is a holiday then it expires the previous day.
  • Options are cash-settled in India

In conclusion, a clear understanding of the complexity of the instrument goes a long way in making use of the financial instrument for meeting one’s own financial goals and financial independence.

April 24, 2020 Options Trading, Trading 1 comment
Where the Indian Economy is headed in 2020 cover

Where the Indian Economy is headed in 2020?

Indian Economy Overview 2020: The rough ride of India during coronavirus times in 2020 is now being termed as ‘The Great Indian Lockdown’ after Gita Gopinath’s (Cheif Economist at the IMF) address. The IMF has forecasted the Global GDP to contract by 3%, a downgrade of 6.3% from earlier estimates. This shrink is estimated after considering the pandemic to peak in the second quarter and recede by the second half of the year. This is an optimistic assumption considering that we do not have a vaccine in sight. 

Discussing the economic downturn may be considered trivial in the minds of a few in comparison to the testing pandemic. But considering the fact that we are from a country where 22% of the population is below the poverty line, the toll of an economy in depression could further lead to deaths from starvation. This dilemma poses a significant threat to the country especially if the pandemic is not bought into control in time.

where the economy is headed 2020

In order to find where the Indian Economy is headed in 2020, we’ll look into the GDP today. The GDP is the market value of all the finished goods and services produced within a country for a particular period. In the midst of the GDP of the whole world shrinking, we take a look at the effects on the Indian GDP to assess where eventually we are headed in the near future. 

What does each day of the lockdown mean for the GDP?

Tejal Kanitkar (National Institute of Advanced Studies) and T. Jayaraman (M. S. Swaminathan Research Foundation) have attempted to quantify the impact of the lockdown in their study. Their model assumes the estimated annual output to be distributed uniformly across the year.

They then assess the impact based on the number of working days lost. It estimates the direct and indirect impacts of lockdown on sectors using Input-Output multipliers which are assumed to be constant. The research takes into account four different scenarios based on the number of days lost as depicted by the table shown below.lockdown impact on gdp and economy

( Source: A Time for Extraordinary Action)

According to the table, the Indian economy is to suffer a loss of around 13% of the GDP if we are to consider the 1st phase of the complete lockdown and the portion of the complete lockdown in the second phase ( 21 days + 6 days). Here, we did not consider the complete extension period as relaxation were expected state-wise after April 20th. 

If, however, we are to consider a situation where the lockdown isn’t lifted till May 3rd (40 days) the losses loom at around 20% of the GDP.

In a worst-case scenario where the COVID-19 cases explode. The government will be forced to extend the lockdown till the end of May. The economy will then be estimated to lose 73 lakh crore i.e a  33% impact on the GDP. 

Also read: 21 Day Lockdown (COVID-19) – Are We Headed in Right Direction?

Positive Forecasts of the Indian economy in 2020/21

The only bittersweet news is when the forecasts of the Indian economy are compared with that of other countries. India and China are one of the few major economies that may still expand during the pandemic. The IMF has predicted the Indian economy to grow at 1.9%.IMF projection for economies - Positive Forecasts of the Indian economy

Fitch solutions and Goldmann Sachs have also cut their forecasts of the Indian GDP growth rate for the financial year 2020 -2021 to 1.8% and 1.6% respectively. The IMF has however predicted that the following year the Indian economy will be able to expand at 7.4%. This growth rate will be achievable only if the Indian economy is successfully able to control the outbreak. Additionally, a successful stimulation of the economy along with falling oil prices would enable the Economy to meet the targets.

IMF Projections for World economies

(Source: imf.org)

Challenges that still lie ahead

— Unemployment

One of the most important factors that stimulate the economy is wages. In the current scenario of the lockdown, the daily wage workers are already left without a source of income. As businesses keep sinking into losses each day the situation is further alleviated. The Centre for Monitoring the Indian Economy (CMIE) has reported that the unemployment rate has shot up to 24%. As people lose income earning capacity they begin to consume less. And if the consumption is reduced the immediate middlemen also suffer losses and eventually even the production is reduced.

— Agricultural Crisis

The Rabi crop harvest has already taken a hit due to the lockdown as it is labor-intensive. The disruptions of the supply chains have further inflicted misery on the plight of the farmers. Despite this, the RBI has claimed that the agricultural output was at an all-time high. But we have to further discuss the importance of just harvesting and quantity produced.

According to Christophe Jaffrelot ( French Political Scientist), productivity is not the sole determining factor but the price at which it is sold is also important. Farmers in these cases no longer have a minimum support price due to urban bias. Cheaper imports are bought into the market to keep the prices low for the urban population. This, in turn, affects the local farmers and is called an urban bias

— Loans to ailing Businesses

The Indian government has put forward various monetary measures to put more money in the hands of the people to stimulate the economy. These include the rate cuts by the RBI. These rate cuts give people access to loans at cheaper rates. However, the reduction in rates is to work only if the banks pass on the benefits of the reduced rates to businesses. Considering the ailing banking sector is already plagued by high NPA’s (Non-Performing Assets) in the form of bad loans. The banks may be concerned over worsening this issue by giving out loans to businesses affected by the lockdown.

Also read: FDI Restrictions: India tightening the leash on Dragon

Closing Thoughts

‘The Great Lockdown’ crisis that we face today is significantly worse than the 2008 recession. This is particularly because in the recession majority of the workforce still had the ability to work or at least look for jobs. The IMF has considered multiple scenarios including ones where the pandemic remains strong even after the second quarter and carries into 2021. In this case, we would be looking at an estimated global contraction of 6% followed by no growth in 2021. 

On being asked as to “why only India and China are expected to maintain positive growth?”. Gita Gopinath replied that this is due to the fact that India and China are already starting from a low place. She also advised that the priority at the moment should be in dealing with the health crisis. Prof Phillipe Martin put the only way out of the current situation as “ To kill the virus we have to kill the economy, at least in the short term”.

April 23, 2020 Economics, Market No comments yet
FDI RESTRICTIONS india 2020

FDI Restrictions: India tightening the leash on Dragon

“You need to revise discriminatory FDI restrictions, it is against the WTO principles of Non-discrimination and against free and fair trade” – Statement by China Embassy

The above statement came after the Indian government sanctioned new restrictions on FDI investment in India. According to these new sanctions, all the investments made by the neighboring countries in India will be under tighter scrutiny. These new rules have been specifically made keeping FDI flows from China in mind. India is trying to safeguard its interest by imposing these entry rules, as it is worried about the opportunistic takeover of Indian firms by Chinese firms in these financially vulnerable times.

As per these new sanctions, any companies (from countries that share its borders with India) will have to approach the Indian Government for permission, if they want to invest in India. Before these new sanctions, they could invest via the direct route in India. One needs to understand the fact that these new sanctions do not cap any limit on investment, it just reroutes the way to do it.

The existing FDI policies were earlier limited only to Pakistan and Bangladesh. Now, these new rules bring China, Nepal, Bhutan, and Myanmar within its gamut.

But why this sudden imposition of sanctions by India? This can be simply attributed to the fact that because of the COVID -19 pandemic, all the major stock indexes have taken a big hit and it’s made the valuation of all the companies very economical, vulnerable and attractive. So, to prevent the interest of these companies been taken over by opportunistic firms from neighboring border sharing countries, these new sanctions have been imposed.

Also read: Why did Indian Stock Market Crash in 2020? Causes & Effects!

fdi restrictions pic According to a press note released by the Department for promotion of Industry and Internal trade on 17th April 2020,

“A Non-resident entity can invest in India except for sectors or activities which are prohibited. However, an entity of country which shares its borders with India or where the beneficial owner is a citizen of country which shares its borders with India, can invest only via Government route.”

In addition to this, a company incorporated in Pakistan can invest only via Government permission, only in sectors other in defense, atomic energy and other sectors prohibited in foreign investment policy.

An article published in the Times of India states that “this move is very similar to barrier imposed by other countries like Germany, Spain, Italy, and Australia to block predatory capital for hostile takeover by China”

Now, what is the difference between the Automatic route and the Government route?

In simple terms, through the automatic route, the investor has to just inform RBI about the investment made while in case of government route, the investor has to take permission from a particular ministry or department.

According to an estimate by India-China economic council, an estimated Greenfield investment of 4 billion USD (Rs. 30,000 crores) has been made in Indian startups. Such has been the growth of investment in the Indian market by Chinese investors. So, is it the right time for India to tighten its FDI policy stance? Only time will tell. But for the moment, India has safeguarded its long term considerations by blocking hostile buyouts and takeovers.

Moreover, as per the data published by the Department for Promotion of Industry and Internal Trade,

“Between 2000 and 2019, FDI received from China was estimated around $2.3 billion dollars (nearly 14500 crore rupees) and all the other border sharing nations invested a combined FDI of 71 crore rupees”

This clearly explains the fear factor of the Indian Government.

pic fdi restrictions

The last nail in the coffin to introduce this policy by India would have been the purchase of 1.75 crore shares of HDFC Bank by China’s peoples Bank which increase its share in HDFC Bank to 1% from 0.2% earlier. This move is to safeguard the interest of Indian firms because of their current financial vulnerability.

Also read: China’s central bank buys 1% stake in HDFC

Other major investments in India come via third part routes like Singapore. For example, $ 500 million (Rs. 3500 crores) investment from Singapore subsidiary firm Xiaomi (China Origin) should also have to be added to official statistics as this investment indirectly comes from country sharing a border with India.

The reports published by the ministry of finance do show a huge investment to the tune of $4 billion. This investment comes via online wallet like Paytm (backed by Alibaba), BigBasket, and cab service provider like Ola (sizable investment from China). Mobile phone manufacturers like Vivo, Oppo, and other Chinese phone manufacturers. In the Pharma sector, the acquisition of Gland pharma by Fosun Pharma for $1.1 billion, etc. are some of the direct and indirect investment by China in India.

These new policies won’t be applicable to the existing investment but any future investment will have to follow the new policy rules. Therefore, the latest rules imposed by India might look like a decision taken in haste, but these sanctions were always on cards. The breakout of the COVID-19 epidemic made this decision quicker and faster. So, to answer China’s claim that India is breaking the WTO rules of free trade, one can simply say that there is no restriction on investment that can be made but it has to be just done via Government route.

Anyways, a few questions still remain unanswered:

  1. “It remains to be seen as to what would be the implications of these FDI sanctions over long time?”
  2. “Looking at the gravitas of these sanctions, how does the future of trade and investment shape up for these two Asian giants?”
  3. “Considering the importance of China and its expertise in technology and infrastructure, will the restrictions be relaxed in the future?”

Also read: What does Weakening Rupee Against Dollar Signify?

References:

  1. New FDI Rules Not Violation, Say Government Sources On China Criticism – NDTV India
  2. Govt approval must for all FDIs from neighbouring countries including China
  3. Press release by Ministry of Commerce & Industry, Government of India dated 18/04/2020
  4. The Economic Times newspaper dated 18/04/2020, 20/04/2020 The Times of India dated 18/04/2020, 20/04/2020
April 22, 2020 Economics, Market, News 2 comments
Stock Trade Settlement Process in India cover

Stock Trade Settlement Process in India: Trading & Clearing Cycle

Stock Trade Settlement Process in India: As Investors, we play the role of both buyers and sellers in the stock market. We indulge in trading activities to either purchase or sell shares. Although the mechanism may look simple with only a few parties involved, there are a number of activities performed by various other groups behind the scenes.  This is to ensure trading activities take place smoothly with minimal risk.

In today’s article, we’ll look into the stock trade settlement process in India. Here, we aim at understanding the Trade cycle, Clearing, and Settlement process while trading in shares.

Trade Cycle in India

NSE India

The Stock Exchange in India follows a ‘T+2’ rolling settlement cycle. The day the trade is executed is known as the ‘Trade Date’ and is signified as ‘T’. Every working day after the trade date is signified as T+1, T+2 and so on (weekends and stock exchange holidays not included). The trades in India settle on T+2 day.

Example: Mr. Ajay buys shares of company ABC on Monday. He buys 10 shares at Rs 1,000 per share. This activity is performed on Monday. Here Monday and the date associated is known as the Trade Date. It is signified by ‘T’.

  • On the trade date ‘T’, Rs. 10,000 is deducted from Ajay’s account and the broker provides him with a Contract Note as proof of the transaction. 
  • On T+1 day, all the internal processing of the trade gets worked out. 
  • On T+2 day, Mr. Ajay will receive shares of company ABC in the DEMAT account by the end of the day.

If in the above example Mr. Ajay had sold his shares instead of buying, then the shares would get blocked in his DEMAT account before T+2 day. They would be moved out of his DEMAT Account before T+2 day. On T+2 day proceeds from the sale will be credited to his trading account after deduction.

The example we went through above is what we, from the investor perspective, would experience while trading. We will now go through the process that makes this possible.

Process involved in the Transfer of Shares

The transfer of shares includes three processes.

1. Execution

Execution is when the order to buy/sell is completed by the buyer and the seller. An execution is said to be completed only when it is filled. This is after the trader places an order and based on the instructions of the order the broker fulfills the requirements of the order in the stock market. Only then the order is said to be filled.

2. Clearance

After the trade is executed the clearing process begins. In clearing process, it is identified how much money is owed to the seller and how many shares are owed to the buyer. Apart from identification trade recording, confirmation, determination of the obligation of different parties and risk assessment also take place. This process is managed by a third party known as a Clearing House. Clearing Activities take place on T+1 day.

Also read: Different Charges on Share Trading Explained- Brokerage, STT & More

3. Settlement

The stage involves the actual exchange of shares and money. Here the shares are moved to the buyer’s DEMAT Account and the money is transferred to the sellers trading account. These activities take place on T+2 days.

Participants involved in the Process

In the trading, clearing, and settlement stages “the Stock exchanges ensure a platform for trading while Clearing Corporation ensures the funds and security-related issues of the trading members and make sure that the trade is settled through the exchange of obligations. The depositories and clearing banks provide the necessary interface between the custodians or clearing members for settlement of securities and funds obligations”.

From the above short explanation of activities that take place, we will first look at what are the roles of different parties involved and link them to understand the procedure that takes place to ensure a clearer understanding.

1. Clearing Corporation

The National Securities Clearing Corporation Limited (NSCCL) is responsible for clearing and settlement of trades executed and risk management at the stock exchange. It ensures short and consistent containment cycles. The NSCCL is also obligated to meet all the settlements regardless of member defaults.

2. Clearing Members / Custodians

The trading members of the stock exchange place deals in the Stock Exchange which is moved to the NSCCL. The NSCCL transfers these deals to the clearing members. A clearing member is responsible for determining the position of shares and funds to suit the trade. And once it is confirmed the actual settlement process takes place.

3. Clearing Banks

The settlement of funds takes place through Clearing Banks. Every clearing member is required to open a clearing account with one of the following 13 clearing banks

  • HDFC Bank
  • ICICI Bank Ltd
  • Axis Bank Ltd
  • Kotak Mahindra Bank
  • JP Morgan Chase Bank
  • State Bank of India
  • HSBC Bank
  • Stock Holding Corporation of India Ltd
  • Infrastructure Leasing and Financial Services Ltd,
  • Deutsche Bank, Standard Chartered Bank
  • Orbis Financial Corporation Ltd
  • DBS Bank
  • Citibank.

The Clearing members receive funds in case of a pay-out in the clearing account or are to make funds available in the clearing account in case of a pay-in.

4. Depositories

We may not be thoroughly familiar with the term depository but are familiar with a related term called DEMAT Account. There are 2 depositories in India NSDL and CDSL. These depositories hold the investor DEMAT (Dematerialised) Accounts. Clearing members are also required to maintain a clearing pool Account with the depositories. The required securities must be transferred to the clearing pool account by the clearing members on the settlement day.

5. Professional Clearing Members

NSCCL admits a special category of members namely professional clearing members. PCM are not allowed to trade. They can only clear and settle trades similarly like the custodians for their clients.

Clearing and Stock Trade Settlement Process

Clearing and Stock Trade Settlement Process

(Source: AdityaTrading)

  1. Trade Details are transferred from Stock Exchange to National Securities Clearing Corporation Limited (NSCCL).
  2. NSCCL notifies the details of trade to clearing members or custodians who affirm back. Based on the affirmation, it determines obligations.
  3. Download of obligation and pay-in advice of funds or securities are sent by NSCCL to clearing members or custodians.
  4. Instructions sent to clearing banks to make funds available by pay-in time.
  5. Instructions to depositories to make securities available by pay-in-time.
  6. Pay-in of securities (NSCCL directs to debit pool account of custodians or Clearing members and credit its account to depository and depository do it)
  7. Pay-in of funds (NSCCL directs to the debit account of custodians or Clearing members and credit its account to Clearing Banks and clearing bank do it)
  8. Pay-out of securities (NSCCL directs to credit pool account of custodians or Clearing members and debit its account to depository and depository do it)
  9. Pay-out of funds (NSCCL directs to credit account of custodians or Clearing members and debit its account to Clearing Banks and clearing bank do it)
  10. Depository informs custodians 
  11. Clearing Banks inform custodians or Clearing members.

Also read: 8 Best Discount Brokers in India – Stockbrokers List 2020

Closing Thoughts

The above explained stock trade settlement process in India might look complicated but they work in perfect synchronization to ensure smooth functioning of the stock market. If we are to compare how far the markets have come since the 1960s and 1970s to today, the difference will be huge. At those times, the payments were still made with paper checks. The exchanges closed on Wednesday and took 5 business days to settle trades so that the paperwork could get done.

In comparison to the stock market not even functioning throughout the week and five days for the trade cycle, we can thank technological and procedural advances for the ease of functioning we enjoy.

April 21, 2020 Investment Basics, Market, Trading 2 comments
what is bank nifty meaning

What is Bank Nifty? Index That Summarizes Economic Health

What Is Bank Nifty? Bank Nifty is the Index that comprises of the most liquid banks listed on the National Stock Exchange (NSE). Bank Nifty comprises the twelve leading banks (inclusive of both the Public sector and Private sector) that are publically listed on NSE. Following is the list of 12 banks included:

  1. Axis Bank Ltd
  2. Bank of India
  3. HDFC Bank Limited
  4. ICICI Bank Limited
  5. Bank of Baroda
  6. Canara Bank
  7. Kotak bank limited
  8. IDBI Bank Limited
  9. Oriental Bank of Commerce
  10. State Bank of India
  11. Punjab National Bank
  12. Union Bank of India

The Bank Nifty index is the highest traded Index in Futures and Options Market. In fact, Bank Nifty and Nifty Index have a very high positive correlation because of a very high weightage of Bank Nifty in Nifty 50 Index.

A Brief History on Bank Nifty

The Bank nifty was introduced in September 2003 but its base year is considered to be January 01, 2000. The base value in the year 2000 was taken to be 1000. So, if Bank Nifty right now is trading at 20,000, that means it’s given returns of 20 times over the last 20 years.

The Bank Nifty values are available on the real-time market and its volume of trading is more than that of Nifty index. It’s the first Index with weekly expiring options with the highest volume of trading and hence very liquid.

Nifty Bank Top constituents by weightage

Here is the weightage of the top ten banks constituting Bank Nifty As on March 31, 2020:

Nifty Bank Top constituents by weightage

Source: (NSE India)

Looking at the above representation above we notice that the top 5 banks constitute almost 85% of the Bank Nifty. So naturally, any movement in one of these 5 banks have a lot of bearing on Bank nifty and even the Nifty 50 Index.

Private sector banks have a major portion in Bank Nifty and very few public sectors make the cut. This could also be because Private sector banks (unlike the public sector banks) are more modernized and technologically better equipped to tackle the needs of modern banking system. And hence the trading activity in Private sector banks are also higher.

Even if we were to see the breakup of the Nifty 50 index, we can see that Bank Nifty occupies about 28.5% share (highest for a sector), followed by Technology (18%) and Oil & Gas (14.5%). Therefore, if we see a substantial move in Index, we can safely assume that banking sector must have played a part in it and index move must have also impacted the Bank Nifty Index.

Also read: What is Nifty and Sensex? Stock Market Basics (For Beginners)

How Weightage is decided in Bank Nifty?

To simply put, the weightage of banks in Bank Nifty is purely dependent on the free-float market capitalization of banks. The Free float market capitalization does not mean the full capitalization method. It basically means the market value of the total number of shares (excluding promoter holding, government and insiders) actively trading at exchange.

The free float method is the best way to judge a banks weightage in the Bank Nifty Index. The current share price decides the weightage and the banks day to day performance has a lot of bearing on their share price and which in turns also impacts the Bank Nifty movement. The corporate policies, the innovation, the products, bank-specific news, corporate policies etc., impact the share price which in turn impacts their weightage.

Therefore, from the above discussion, we can easily conclude that HDFC bank is not guaranteed top position in the Bank Nifty index. It can be taken over by any bank if that bank share price starts to outperform that of HDFC banks share price over a period of time.

Trading Bank Nifty Futures

A futures contract is a forward with fixed expiry date and the contracts expired can be rolled over to next contract. The Bank Nifty futures contracts are derivative instruments deriving value from the Bank Nifty Index.

The Bank Nifty futures contract have three contracts running simultaneously. The 1st month (near one), the next month (the two month contract) and the far month (three month).

When the near month contract expires, a new far month contract is introduced. So at any point of time, there are three active contracts in Bank Nifty futures. Bank nifty futures contract expire on last working Thursday (or previous day if the last working Thursday is a holiday) every month

Trading Bank Nifty Options

As discussed in my previous article, options are contractual rights (not obligation) of the option buyer and obligatory duty of option seller. The Bank nifty option contracts are cash settled. Bank Nifty options contract derive their value front he Bank Nifty Index (Underlying asset).

Just like the futures contract, even the bank nifty options contract have three monthly contracts (Near one, two month one and a far one). And once with the expiry of the near month contract, a new far month contract is added. Bank Nifty has 7 weekly expiring contracts. At the expiry of near week, a new serial weekly contract is introduced.

The weekly expiry contract expire every Thursday of the week and if that Thursday is a holiday, then the contract expires the previous day. Similarly, the monthly Bank Nifty options contract expire on the last Thursday every month and again if the last Thursday is a holiday then the contract expires on the previous day.

Also read: Options Trading 101: The Big Cat of Trading World

Closing Thoughts

To Summarize this article, we can conclude by saying that the overall health of the economy can be gauged by looking at the health of its banking system. Bank Nifty goes a long way in explaining it. Bank Nifty constitutes 12 of the major public and private banks in the Indian Banking system. Bank Nifty options contract form a majority in the Indian Options market and they have a series of weekly and monthly expiring contracts.

April 20, 2020 Options Trading, Trading 1 comment
Offer for Sale (OFS) vs IPO - What's the difference?

Offer for Sale (OFS) vs IPO – What’s the difference?

Offer for Sale (OFS) vs IPO: An IPO has always been popular and preceded with loads of razzmatazz to impress the investors considering the stock. An investor in India may purchase a stock from the Primary market during such public offerings. Moreover, in other cases, they can take advantage of a situation while stock already trading in the secondary market. The SEBI in 2012 brought forward Offer for Sale (OFS). This allowed promoters to sell their shares directly in an exchange instead of waiting for a public offering.

Today we look at OFS and public offerings and their attributes. In this article, you’ll learn what exactly is OFS and how to differentiate Offer for Sale (OFS) vs IPO. Let’s get started.

What is an OFS and a Public Offering?

The OFS (Offer for Sale) was introduced to allow promoters to dilute their investment in a company through simpler means. Soon other shareholders who hold more than 10% in a company were also allowed to benefit from OFS. However, OFS is currently limited to only the top 200 companies (in terms of market capitalization).

stock market bse

Public Offering are of two types. The Initial Public Offering (IPO) and Follow on Public Offer (FPO). In a Public Offering, the company offers shares to investors in exchange for capital. A Public Offering is one of the means for a company to raise further capital.

Any company that fulfills the requirements of the SEBI can go public. IPO is the first time a company raises equity capital through means of public offering. After an IPO if the need arises for capital the company can still raise equity capital by means of FPO (Follow on Public Offer).

Also read: Is it worth investing in IPOs?

how do ipo works

Differences between Offer for Sale (OFS) vs IPO

Here are the most distinguishing features between Offer for Sale (OFS) vs IPO based on prominent factors:

1. Purpose

OFS (Offer for Sale): The purpose of an OFS is to provide shareholders holding more than 10% with an easy alternative to sell their stake in the company. This is especially used by government companies to reduce their holdings in a transparent channel through an exchange. None of the amount raised from investors is transferred to the company. It is instead transferred to the promoter to suit his needs in exchange for the ownership he had.

Public Offering: A company goes for IPO or an FPO to raise capital for its growth and expansion needs. The amount, in this case, moves from the investors to the company in exchange for ownership through shares.

2. Regulations

OFS (Offer for Sale): In an OFS, it is necessary for the company to inform the exchange 2 working days (bank) before the OFS takes place. The ability to indulge in an OFS is available only to the shareholders who hold more than 10% stake in the company. The OFS takes place on the trading day.

25% of the shares undergoing an OFS are reserved for mutual fund and insurance company purchases. However, no single bidder (Mutual Fund or Insurance Company) can get more than 25% of the shares in OFS. The OFS takes place in one trading day. 10% of the shares in OFS are saved for retail investors. The maximum cumulative bid a retail investor can make is 2 Lacs.

Public Offering: An IPO is generally lengthier and takes 3-10 days to take place. An IPO requires an Investment Bank to be appointed for underwriting the IPO. This is then followed by registration with the SEBI and drafting a prospectus. 35% of the shares issued are reserved for retail investors. The maximum amount that can be invested by a retail investor in a public offering is 2 Lacs.

3. Cost

OFS (Offer for Sale): The cost incurred by the promoter and shareholder in the company during an OFS is minimal. The only requirement is for the company to have the exchanges informed two days in advance. The investor, in this case, incurs only the regular transaction charges.

Public Offering: An IPO is preceded with a lot of advertisement activities to get the word out. The more obscure the company is the greater difficulty it will face and hence will be required to spend higher at this stage. Appointment of an underwriter and other SEBI formalities adds to the expenses.  

4. Allotment

OFS (Offer for Sale): The company is to provide the floor price before the OFS takes place. That is T-2 or T-1 with ‘T’ being the day of the OFS. The floor price is the price at and above which the investors are allowed to bid. The investors generally receive a discount of 5% on their bids. If the investors bid an amount below the floor price the bid gets rejected. The investor is allowed to change the specifics of the bid throughout the day. But no cancellation can be made.

In case of oversubscription two types of allotment may be made

  1. Single Clearing Price: Here al the investors are allocated shares at the same price but on pro-rata basis
  2. Multiple Clearing Price: In this case, the investors with higher bid are given preference. This goes on till the subscriptions are full.

Public Offer: The price band here is set by the investment bank prior to the IPO. In the case of oversubscription, the shares are allotted based on a pro-rata basis or automated lottery system.

5. Effect on the Balance Sheet

OFS (Offer for Sale): In the case of an OFS, there is no change in the Balance Sheet. Here the company does not raise any additional capital. The same number of shares that may have been with a respective promoter will be present now in the hands of the new shareholders via. OFS.

Public Offering: When shares are issued in a public offering the Balance Sheet of the company will now have increased share capital under Equity and Liabilities and the asset side Cash and Cash Equivalents will account for the cash coming in.

Quick Note: New to stocks? Want to learn how to make consistent returns your stock market investments? Check out this amazing stock investing course for beginners – How to pick winning stocks? Enroll now to begin your journey in the exciting world of stock market today!

Closing Thoughts

An OFS and Public offering both are attractive from an investor perspective. This is considering the discounts received in an OFS and investors making first movers advantage in the case of Public Offering. However, investors must still beware and consider investing only after a thorough study of the company. Both these methods might be used by promoters and venture capitalists as an escape strategy when they do not see future prospects in the company.

April 17, 2020 Investment Basics, IPO 1 comment
Sqrrl App Review Direct Mutual Fund Investment App

Sqrrl App Review – Direct Mutual Fund Investment App

Sqrrl App Review: Sqrrl, a fintech startup founded in 2016, offers the facility to make investments in direct mutual funds, start a SIP, save tax or simply reach your goals through your investments. If you are looking for a simple, beginner-friendly and modern technology-based app to start investing, then you should definitely check out this app.

In this article, we will review the Sqrrl app to look into some of its unique features and find out how this app stands out among all other direct mutual fund investment apps.

What is Sqrrl?

Sqrrl is a modern technology platform that helps its users to start investing in direct mutual fund schemes by opening an instant online account. As the users invest in direct mutual funds there is no distributor commission involved with this app.

With the simplified investing approach, this app aims to help young Indians save and invest their earnings without making things complicated. The basic ideology behind Sqrrl is to empower users to save small chunks of their salary, even if you are not able to put away a large portion.

Along with saving & investing, Sqrrl also provides the facility to save money on income tax by choosing the right tax-saving funds. Overall, this app aims to help the millennials to prosper financially.

Sqrrl app is available on both Android and iOS.

Key Features of Sqrrl App

One of the prominent features that differentiate the Sqrrl app from all of its competitors is an easy and hassle-free setup. As a matter of fact, the users can open an account and start investing within minutes using this app.

Now, here are a few top features and benefits that you can enjoy by using Sqrrl App:

  1. Fast Paperless A/c Setup: Users can open their instant accounts electronically by entering their bank and PAN details at no cost.
  2. Multilingual App: Unlike most other direct mutual fund investment apps, this app offers services in nine languages including Hindi, Gujarati, Telugu and more.
  3. Zero-commission: As users will be investing in direct funds, there’s no need to pay distribution commissions.
  4. High returns and minimum lock-in: Users can invest in high performing funds with easy and no minimum commitment period.
  5. Hand-picked mutual funds by experts: Sqrrl offers the best hand-picked funds curated by a team of avid financial experts and managers with a combined experience of over 90 years.

Moreover, in addition to direct investment opportunities, Sqrrl also helps its users in tracking and managing their investment portfolios within the same app.

Sqrrl App – A few other things that you should know

Sqrrl App Review Android

 — Is Sqrrl Safe to invest?

Sqrrl fintech is registered as a financial advisor with SEBI (Securities and exchange board in India) and as a distributor with AMFI (Association of Mutual Funds in India). They are a registered, compliant and eligible fintech startup to provide their services.

Moreover, the money invested by the users using Sqrrl app is entirely safe as it never touches the Sqrrl Bank account and is directly invested with the largest AMCs regulated by SEBI. Besides, the details of each transaction are always made known to users at every step of the process, by confirming and corresponding recorded statements by the underlying mutual fund.

— What is the minimum investment amount?

Sqrrl App offers different services and the minimum required investment amounts vary from products to products. However, their most popular product, Sqrrl Away, allows the users to start investing with an amount as low as Rs. 100.

Further, if you are planning to start a SIP with Sqrrl app, you can begin investing with an amount of Rs. 500. For the tax-saving and goal-based investing products, the minimum amount to get started in Rs. 1,000.

— How is the customer Care/Support offered by Sqrrl?

Sqrrl offers one of the best support to their customers. In fact, this might be the reason why their app is rated 4.4 out of 5 stars on google play store and have got over +100,000  happy users as of March 2020.

Besides, if the users need any kind of support, they can reach the Sqrrl team over phone at +91-7840877775 or via dropping an email at support@sqrrl.in

Conclusion

Sqrrl is an easy and simple to use app focused on the millennials to make their investment journey hassle-free. This app allows its users to make investments with as little savings they got by investing in direct mutual funds, tax savings funds or with goal-based investments. In addition to simple investment options, Sqrrl also helps its users in tracking and managing their portfolio within the app.

Further, as users will be investing in direct mutual funds using this app, they can save a significant amount compared to regular mutual fund investments and enjoy higher returns.

Overall, we’ll definitely recommend you check out this app. Here’s a direct link to download the app on the play store. In addition, if you’ve got any questions regarding the Sqrrl app, feel free to ask in the comment box below. We’ll be eager to help. Take care and happy Investing.

April 17, 2020 Mutual Funds No comments yet
How to use SCREENER.IN like an Expert

How to use SCREENER.IN like an Expert

A beginner’s guide on how to use SCREENER.IN for screening stocks efficiently (Updated):  Screener.in is an amazing website to perform the fundamental analysis of a company. There are thousands of Indian investors who use the Screener website regularly to read and analyze the financials of Indian companies. As a matter of fact, the customized financial reports presented by the screener website is quite interactive, friendly, and easy to use.

Introduction to Screener.in Website

Moreover, they provide various tools and data to analyze any publically listed company in India efficiently. For instance, if you search any stock on the stock screener, you will get a number of essential information about the company like an overview, chart, analysis, peers, quarters, profit & loss, balance sheet, cash flow, and other reports. The best part is that you can read the financial statements of the company for the last years, all in one place, without scrolling much or changing the tabs.

Here is an example of the pieces of information that you can get about ‘TITAN COMPANY’ on the Screener.in website.

1 titan company screener

2 titan company annual results screener

3 titan company balance sheet screener

(Image source: Screener)

However, there’s one powerful tool that screener offers which most people are not using on their website. And it is the query builder. The majority of people know how to use screener.in to read financials. However, they do not know how to write a query in the query builder.

What is Screener’s Query Builder?

First of all, if you do not know what exactly is a query, it can be defined as follows:

What is a query? A query is a request for data or information from a database table or combination of tables. For example, if you want a specific type of stocks from a table of all the stocks listed, you can write a query to request that information.

Query Builder can be used in a number of ways. You can use it for screening stocks i.e. to find stocks with specific criteria. Personally, I use this tool quite often to screen Indian stocks. In this post, we are going to cover how to use screener.in website efficiently using the query builder. Here, we will discuss the basics of the query builder. However, once you know how to use the query builder basics, you can write complex queries to this builder as well.

 

Now, before we cover all the topics mentioned above, you need to learn where and how to use query builder. You can find the query builder on the Screener website. Here are the steps to find the query builder.

1. Open Screener website (www.screener.in)

4 screener login

2. Login using your username and password. If you do not have an account on the screener, make a new one using your email id. It hardly takes a minute.

5 screener register

3. Once, you are registered/ logged in, scroll down to find the query builder.

6 screener query builder

How to use the Query builder?

In the query builder, you can write the queries to find the data/ information. The queries can either be of one line or multiple lines. For example, if you want to find the companies with Price to earnings ratio less than 15, you can write the following query in the query builder.

Price to earnings < 15

7 how to use screener

Here’s the result that you will get.

8 PE less than 15 screener

This is the example of a one-line query.

Now, if you want to find the list of companies whose Price to earnings ratio is less than 15 and Price to book value is less than 3 (should fulfill both criteria), then you can write the following query:

Price to earnings < 15 AND
Price to book value < 3

9 PE and PBV screener

Note: This is an example of a multiple line query as we are using two filters. Whenever you use a multiple line query, use an ‘AND’ after the end of every line. Further, you do not need to add ‘AND’ on the last line of the query.

Here’s the result that you will get.

10 PE AND PBV output screener

Now that you have understood how to use the query builder, let’s write few simple queries to shortlist the companies based on different criteria and filters.

How to use SCREENER.IN like an Expert using Query Builder?

— How to find small-cap, mid-cap, and large-cap companies?

Now we are going to use market capitalization to find small-cap, mid-cap and large-cap companies here.

Market capitalization: It refers the total market value of a company’s outstanding shares. It is calculated by multiplying a company’s outstanding shares with the current market price of one share. Read more here: Basics of Market Capitalization in Indian Stock Market.

Although there’s no fixed market capitalization range to classify companies into small-cap, mid-cap or large-cap companies, however, as the thumb rule, we can use the following range:

Small cap companies: Market capitalization < 8,500 Cr
Mid cap companies: Market cap- between 8,500 Cr and 28,000 Cr
Large cap companies: Market cap > 28,000 Cr

Now, how can you use the above information to find small-cap, mid-cap, and large-cap companies? You just have to write a query using the market capitalization range to get the result.

For example, if you want the list of small-cap companies with a market capitalization less than 500 crores, write the following query in the query builder:

Market capitalization < 500

11 small caps query

You will get the following result.

11 small caps

Similarly, if you want to find companies within a certain market cap, you can write the following query:

Market capitalization > 500 AND
Market capitalization < 10,000

12 mid cap query

This query will limit the market capitalization between Rs 500 Cr to Rs 10,000 Cr. Here is the result that you will get.

12 mid caps

Now, can you guess the query to find the list of companies greater than a specific market cap, say Rs 10,000 Cr?

Yes, here’s the answer:

Market capitalization > 10000

13 large cap companies

You will get the following output for this query.

13 large caps

As already mentioned above, the values of market capitalization taken here is not a hard and fast rule. You can write different queries depending on your criteria. If you want the list of those large-cap companies whose market cap is larger than 50,000 crores, you can write the following query.

Market capitalization > 50000

Similarly, you can write a number of queries depending on your requirements.

— How to find penny stocks?

Penny stocks are the companies with a very small market share price. Typically, the share price of these companies is less than Rs 10. Further, they also have a small market capitalization (below 100 crores). You can run a simple query on the Screener query builder to find penny stocks. Here’s the query:

Current price < 10

15 penny stock

penny stocks screener

Moreover, if you want to add the market cap filter in this search, you can write the following query:

Current price < 10 AND
Market capitalization < 100

This query will give you the list of all the companies with the current price of less than Rs 10 and market capitalization of less than Rs 100 Crores.

Also read: What are Penny stocks? And should you buy it?

— How to find debt-free companies?

If you are investing in a company for the long-term, make sure that it’s debt-free. Or at least that it doesn’t have more debts than its asset. The profitability and growth of a company are highly affected if it has a huge debt. To find the debt-free companies you can use the ‘debt to equity’ ratio.

Debt to equity ratio: It measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity). Read more here.

If the debt to equity ratio is equal to zero, it means that the companies are basically debt-free. If the debt to equity is equal to 1, it means that the debt is equal to equity. Now, most of the companies will have some debt as many times the company requires additional money to carry out different works like expansion, R&D, etc. However, as long as the debt is less than equity, the company can be considered decent.

Here, we are going to use debt to equity = 0 to find the debt-free companies. (However, feel free to use debt to equity < 0.5 to find the list of companies with low debts.) Here’s the query:

14 zero debt company

You will get the following output:

14 zero debt company list

Note: You can also use ‘debt=0’ query to find debt-free companies in India.

— How to find debt-free large-cap companies?

To find large-cap debt-free companies (blue chips), you just have to write a simple 2-line query given below:

Market capitalization > 50000 AND
Debt to equity ratio = 0

16 large cap debt free

16 large cap debt free companies

Note that you can take the market capitalization of the company accordingly. I took the company with a market cap greater than 50,000 Cr here just as an example.

— How to find low PE stocks?

If you want to find the companies within a specific Price to earnings (PE) ratio, you can write a simple one-line query. For example, if you want the list of the companies whose PE is less than 12, you can write the following query:

Price to earnings < 12

17 low pe ratio companies

Please note that the list is a generic one and will give the list of the companies across all industries.

— How to find high dividend stocks?

To find the list of high dividend stocks, you can use dividend yield in the query.

Dividend yield: A stock’s dividend yield is calculated as the company’s annual cash dividend per share divided by the current price of the stock and is expressed in annual percentage.

For example, if you want to find the list of all the companies whose dividend yield is greater than 4%, you can write the following query:

Dividend yield > 4

18 high dividend companies

This query will give the following output:

18 high dividend companies list

Also read: Dividend stocks: Should you invest in it?

— How to find companies between a specific price range?

You can also use the Screener’s query builder to find the list of all the stocks within a specific price range. For example, if you want to find the list of all the companies between Rs 80 to 100, you can write the following query:

Current price > 80 AND
Current price < 100

19 specific price range companies

19 specific price range companies list

This will give you the following list of companies. You can use this query to find the specific price range stocks accordingly.

How to run multiple queries on the query builder?

All the cases explained above are simple to find the specific type of stocks like debt-free, penny stocks, or high dividend stocks. However, is that all? How to use SCREENER.IN query builder more efficiently?

You can perform better screening by using multiple queries in the query builder. Here, you can write multiple lines of queries on the query builder to filter companies with different criteria. For example, if you want to find the list of a company fulfilling the following criteria:

  • Market capitalization greater than Rs 30,000 crores
  • Debt to equity ratio of less than 0.5
  • Current market price range is between Rs 100 and 300
  • The dividend yield is greater than 1.5%

Then you can write the following query:

Market Capitalization > 30000 AND
Debt to equity < 0.5 AND
Current price > 100 AND
Current price < 300 AND
Dividend yield > 1.5

20 multiple queries

20 multiple queries result

This is the result that you will get for the above query.

How to create your own Stock Screen?

You can use different financial ratios to create your own stock screen. These different ratios can be ROE, ROCE, PEG, Sales growth, Profit growth, Current ratio, PE ratio, P/BV ratio, etc. Here, you can create your own screen using these different ratios to shortlist a few good companies and use it for your future references.

Here is an example of a query to screen the stocks:

Market Capitalization >500 AND
Sales growth 5Years >15 AND
Profit growth 5Years >15 AND
Debt to equity <1 AND
Net cash flow last year >0 AND
PEG Ratio <1 AND
Promoter holding >30 AND
Pledged percentage <15 AND
Average return on equity 5Years > 12 AND
Average return on capital employed 5Years > 12

21 your own screener

21 your own screener result

NOTE: THIS IS JUST AN EXAMPLE TO TEACH YOU THE BASICS, NOT A RECOMMENDED QUERY. Generally, I do not use a general query to filter the companies for the whole list, but use specific queries for specific industries. Different industries have different characteristic ratios.

In a similar way, you can create your own screen with the help of different ratios. This can help you save a lot of time and energy.

Quick Note: If you want to learn more stock research tricks, feel free to check out my online course- HOW TO PICK WINNING STOCKS? The course is currently available at a discount.

Conclusion

Query Builder is a simple yet powerful tool that can make your stock research 10 times simpler. Writing queries in the query builder is easy as discussed above.

Although there are a lot many uses of the Screener website, however, the most useful ones are covered in this post. Feel free to play around and create your own queries.

That’s all for today. I hope this post ‘How to use SCREENER.IN efficiently?’ is useful to the readers. If you have any questions, please comment below. Happy Investing.

April 17, 2020 Investment Basics 31 comments
Dupont Analysis A Powerful Tool to Analyze Companies

Dupont Analysis: A Powerful Tool to Analyze Companies

Introduction to Dupont Analysis: As investors in the stock markets, it is important to find high-quality along with fairly valued companies to invest our capital. The rationale behind this is simple. Our aim in the markets is to always preserve our capital first and then produce profits.

There are several robust tools that investors use during their stock analysis. In this post, we will make an attempt to share one such powerful framework to assess the quality of stocks that we target for our portfolio -The Dupont Analysis. Here, you’ll learn how to incorporate the Dupont analysis in your study while researching stocks.

The post should be an easy read and we hope our readers find this to be of great value to their time. Feel free to reach out to us or post comments in case of any doubts or clarifications.

1. What is DuPont Analysis? Who made it?

DuPont analysis was created around the 1920s by Donaldson Brown of Dupont Corporation. Initially, when Brown invented the framework it was used for assessing the managerial efficiency of the company before it got adopted by public market investors. His genius was breaking down the formula for Return on Equity (ROE) into its constituent parts to analyze the root cause of ROE.

2. The technical background of the DuPont Analysis

Breaking ROE into its constituents helps us investors analyze the company’s business model and how it manages to achieve excess returns for its shareholders.

Since most investors (including Warren Buffett) use ROE to judge the quality of a stock it would be of great use to us to understand how deep “Quality” actually runs within the business.

To understand how the analysis technique is used let’s start with the very basics. As most of us already know, Return on Equity (ROE) is calculated from the following formula –

ROE formula

Now, our friend Brown brown multiplied and divided the expression to get the following–

DuPont Analysis 1

This expression is now also summarised as below-

DuPont Analysis 2

But Brown did not stop there, he took this expression and went one step further. This time he multiplied and divided the expression with Total Assets to give us the DuPont formula-

DuPont Analysis 3

Which is again summarised as,

DuPont Analysis 4

From the last expression, it becomes clear that ROE is not merely a ratio (as per the formula we started with) but a framework to understand the business and capital position of the company as a whole.

Valuable insights can be derived from knowing which of the attributes drives the rise or deterioration of ROE over a period of time. It can also be used to compare companies with their peer sets to get a deeper understanding of the differences in the business models between the companies.

Also read: How to read financial statements of a company?

3. Real world DuPont Analysis on Eicher Motors:

Let us perform the DuPont analysis on Eicher motors for the period 2014-2018. The summary table and the evolution of the three attributes from the analysis is as given below.

Financial Ratio20142015201620172018Net Effect
ROE19.224.531.331.227.9Increased
Net Profit Margin5.8721.923.721.9Increased
Asset Turnover203.3222.4105.5100.394.1Decreased
Leverage Ratio162.9156.2135.2131.1135.5Decreased

From the table, we can see that the company has improved its ROE from 19.2% to 27.9% in 5 reporting periods.

We can also see that the company decreased its leverage and asset turnover but this drop was offset by close to 3.7 times rise in the net profit margins.

Further, notice that the leverage ratio has been stable since 2016 while asset turnover has seen a drop in 2015-2016 and then moderate decreases from 2016-2018.

This analysis can now set the foundation for further analysis, the questions raised from the above figures could be as below ( this may not be very exhaustive but may give an idea as to how the framework is used)-

  1. What is causing the decrease in asset turnovers? Is it because of rising inventory? A fall in efficiency? Or perhaps a decrease in capacity utilisations at manufacturing facilities?
  2. Is the Net Profit Margins led by rise in prices or decrease in costs of goods sold?
  3. What caused the spike in net profits and the corresponding drop in asset turnover?

Answering the above questions in additions to questions generated by assessing the financial statements could help the investors analyze Eicher Motors in greater depth.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

4. Conclusion

Since ROE is used as a measure of the quality of management by many investors, the incorporation of DuPont Analysis could help quell any illusions developed by using ROE at face value.

According to DuPont formula, ROE is a function of net profit margins, asset turnover, and the leverage ratios. A rise or dip in ROE could be because of a corresponding rise/fall in any of these metrics and hence a high ROE doesn’t always indicate better performance.

Our readers are advised to use DuPont Analysis along with the other stock evaluation frameworks and not to solely depend on data provided by the financial websites. In addition, you can read further about DuPont analysis here.

That’s all for this post. I hope it was helpful to you. Happy Investing!!

April 16, 2020 Investment Basics, Valuations 2 comments
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