What are Corporate Spin-Offs meaning

What are Corporate Spin-Offs? Meaning, Pros & Cons!

Understanding corporate Spin-Offs and how they work: There are many corporate actions that act as a catalyst in the market and results in the prices of a share changing drastically within a short frame of time. A few common examples of such catalysts are mergers, acquisitions, bonus shares, buybacks, etc. The announcement of all these events results in rapidly increasing (and sometimes decreasing) of share prices in a short period. Therefore, share market investors and participants need to know what exactly these catalysts mean.  One other typical example of such events are corporate spin-offs. 

In this post, we are going to understand what are corporate spin-offs, how they work, their advantages, disadvantages and why does a company opt for spin-off. Let’s get started.

What are Corporate Spin-Offs?

A corporate spinoff is an operational strategy where an existing division of the parent company is dissolved and a new company is created in place of the division which is now independent of the parent company. Ownership in the newly formed independent company is given to the shareholders of the parent company on pro-rata based on the holdings in the parent company.

The new company resulting from this corporate action is known as the company spun-off. The company spun-off acquires its assets, employees, and other resources from the parent company.

corporate spin off

A spin-off is a mandatory corporate action. In a mandatory corporate action, the board takes the decision and the shareholders are not permitted to vote.

To make the topic more comprehensible we shall be referring to the division of the company that is spun off and becomes independent as  ‘Spinoff Ltd’. The portion of the company that remains with the existing company earlier will be referred to as ‘Parent Ltd’. The shares of the newly created Spinoff Ltd are distributed to the existing shareholders of Parent Ltd in the form of a stock dividend.

Why does a company opt for Spin-off?

There are a number of reasons why a company may opt for a spin-off. Here are the top grounds why a company may go for a spin-off:

1. Benefits of Focus

Companies that go for a spinoff generally have divisions that are least synergetic and have distinct core competencies from that of the Parent Ltd They find turning these divisions into independent companies i.e. into Spinoff Ltd would be most appropriate.

A spin-off would enable both the Parent Ltd and the Spinoff Ltd to sharpen focus on its resources and manage themselves better off independently. 

Spinoff Ltd benefits from the spin-off the most because they get a new management that is focussed only on the goals of Spinoff Ltd. The newly assigned leaders present here would be experts in the field with focus only on the goals of the Spinoff Ltd. This would also help Spinoff Ltd override corporate bureaucracy that was impeding its growth in Parent Ltd.  

2. Due to Failure to sell a division

At times Parent Ltd might have decided to sell off one of its divisions but does so unsuccessfully. In such cases, the company uses spin-off as a last resort to separate itself from the division.

3. Reduced agency costs 

At times the parent company may enter sectors that are soo diverse from its core competencies that its investors may show no interest in the new division or may even oppose the new division. In these cases, the company incurs agency costs while resolving disagreements between the management and the shareholders.

If the new division is the cause of disagreement a spin-off will prove beneficial to Parent Ltd.

This will also result in satisfied shareholders.

4. Risk, Profitability, and Debt

If a division of a company increases its overall risk due to the sector it operates in the board may take a decision to spin-off that division. 

A division may also have all the characteristics of growth in the future but its current performance or losses may be affecting the parent company. In such a situation the division may be spun off.

 When a Spinoff Ltd is created it may take on the debt of the Parent Ltd. Or at times Parent Ltd. may give Spinoff Ltd a fresh start by not transferring any debt. This will depend on the strategic perspective of the board.

5. Reduced Overheads 

Parent Ltd will benefit from the reduced overheads that pertain to the division which now becomes Spinoff Ltd. On the other hand, Spinoff Ltd will enjoy the freedom of taking care of its own overheads as required without any interference.

parent company and spinoff company

Although there are a number of reasons why a company may opt for a spin-off it is basically due to the fact that it feels that by doing so it would turn out to be beneficial to both Parent Ltd and Spinoff Ltd if they operated independently.

What is the Spin-off Process?

A spin-off may take anywhere from half a year up to over 2 years or even more to be executed. Once the board takes the decision there are multiple steps that follow. They include identifying well-suited leaders for Spinoff Ltd. Creating an operating model and financial plans to suit the business of Spinoff Ltd.

This is because the parent company is still responsible for its division. Proper communication about the terms of the spin-off to the shareholders is also necessary. This is followed by completing the legal requirements. The parent company also focuses and helps Spinoff Ltd to create a new distinct identity before the spin-off.

Types of Corporate Spin-offs

Here we classify spinoff on the basis of the ownership retained by the parent company.

– No ownership retained

In what is called a pure spin-off the parent company does not retain any ownership in Spinoff Ltd. 100% of the ownership in Spinoff Ltd is distributed among the existing shareholders of the company. Here Spinoff Ltd gets greater autonomy in its operations once the spin-off is complete.

– Minority Ownership Retained

Parent Ltd is also allowed to hold up to 20% of Spinoff Ltd. In such a case say if 20% is retained by Parent Ltd, the remaining 80% is distributed among the shareholders on a pro-rata basis. Here the parent company enjoys a greater focus on is operations and still retains some influence and decision making ability in the company spun-off. 

There is also a possibility of a partial spin-off where the company may only spin-off a part of its division and retain minority or not retain ownership accordingly.

Effects of spin-off on price of securities of the company involved

Once a spin-off takes place the share prices of Parent Ltd will fall. This is because a spin-off involves the transfer of assets from Parent Ltd to Spinoff Ltd. This will result in reduced book value of Parent Ltd and hence its reduced price. However, the reduction in price is set-off by the share price of Spinoff Ltd. This is because Spinoff Ltd will receive the same assets transferred from Parent Ltd. Hence the investor will not face any immediate loss of value.

For eg. say the market cap of the company before the spin-off stands at Rs.10 crores and its current share price is Rs.100. Say the assets that will be transferred to Spinoff Ltd are worth Rs.2 crores. After the spin-off, the market cap of Parent Ltd will be worth 8 crores resulting in a post spinoff share price of Rs.80. The share price of Spinoff Ltd would be Rs.20 with a current market cap of Rs.2 crores.

Reduced demand from Funds

These prices will remain temporarily as the shares will be subject to market volatility. Spin-offs are said to cause sell-offs, particularly in the index-based funds. This is because an index shows the topmost companies in a market based on their market cap. The companies undergoing spin-off may no longer suit the requirements of the market index.

Parent Ltd too may lose its position among the top stocks due to the reduced market cap after the spin-off. This will cause funds that follow the indexes to sell the shares of Parent Ltd as well. Other funds may too sell the shares of Spinoff Ltd. This is because Spinoff Ltd may not suit their capital requirements, dividend requirements, etc. This will result in a reduced demand and fall in the price.

Also read: 11 Must-Know Catalysts That Can Move The Share Price

Disadvantages of Corporate Spin-Offs

1. Increased cost

The cost of the spin-off will have to be borne by Parent Ltd. They will include legal duties and other costs of set-up.

2. Employee’s Discomfort

The employees in the division being spun may have joined the Parent Ltd owing to its reputation. They may be put in a situation where they will lose that identity and at the same time be confronted by the uncertainty of Spinoff Ltd.

Spin-offs as part of an Investing Strategy

The share price of Parent Ltd gets reduced after the spin-off. But this is made up for by the shares of Spinoff Ltd that the existing shareholders receive as a stock dividend. As discussed earlier due to market reactions the price may further fall.

After a spin-off takes place investors have the option to either hold onto both the shares of Parent Ltd and the shares of Spinoff Ltd. Or they have the option to sell both or either one. But before deciding which is better let us have a look at what historical studies have shown us about a spin-off.

Spin-offs as part of an Investing Strategy

— Parent company shares   

According to a study by Patrick Cusatis, James Miles, and J. Randall Woolridge published in 1993 issue of The Journal of Financial Economics, it was observed that the parent companies beat the S&P 500 Index by 18% during the first 3 years. A study by JPMorgan showed the parent companies beating the market returns by 5% during the first 18 months.

A more recent study by the Lehman Brothers investigated by Chip Dickson between 2000 and 2005 showed that parent companies beat the market average by 40% during the first two years. Due to their strong market cap, holding onto shares of Parent Ltd will be well suited for those investors that look for stable and low-risk returns. This is because as we will observe ahead, the returns from Spinoff Ltd are higher in comparison. But the shares of Parent Ltd are observed to perform even in times of market downturn.

— Shares of the company spun off

According to the same study published in the 1993 issue of The Journal of Financial Economics, it was observed that the companies spun-off beat the S&P 500 Index by 30% during the first 3 years. The study by JPMorgan showed the companies spun-off beating the market returns by 20% during the first 18 months. The study by Lehman Brothers, investigated by Chip Dickson between 2000 and 2005 showed that parent companies beat the market average by 45% during the first two years. 

All the studies show that the shares of Spinoff Ltd would not only beat the market but also would perform better than the shares of the Parent Ltd. It, however, should be noted that the share price of the spun-off companies is highly subjective to market volatility. They outperform in strong markets and underperform in weak markets. Hence they are much more suited for individuals with risk appetite.

Investors should also note that it is not the case that all spin-offs are successful. There have been situations where spinoffs have performed negatively. The best way to assess future performance is for the investor to find out why the company is attempting to have the division undergo spin-off. This is to assess if the company is using the corporate action to simply get rid of its debt or if the company is getting rid of a division in which they do not see much future prospect. In such situations, a study of debts and losses pertaining to the division in the companies books will help.

May 30, 2020 Economics, Invest Intelligently, Investing Psychology No comments yet
WHAT IS DELISTING OF SHARES_

Delisting of Shares – Here’s what you need to know!

Understanding what is delisting of shares and what it means to shareholders: With the latest news of Vedanta delisting plans buzzing in the market, a lot of investors are confused about what delisting of shares actually means and why companies go for delisting. Moreover, investors are worried about what happens to the shareholders once the company gets delisted from the stock exchange. 

In this article, we take a look at the delisting of shares and will try to demystify most of the frequently asked questions and facts around it. Let’s get started.

What is Delisting of Shares?

Delisting refers to a listed company removing its shares from trading on a stock exchange platform. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange. The company will now be a private company.

A long as the stock is traded in one of the exchanges that are made available to investors throughout the country it is considered as a listed stock. Anyways, if a company is listed in multiple stock exchanges in a country and decides to stop trading from just one of the exchanges, it is not considered as delisting. However, if it removes its shares from all the stock exchanges barring people to trade, then it is considered as delisting of shares. 

Types of Delisting

If we try and figure out why a company is getting delisted the reasons can be grouped into two categories.

1.  Voluntary delisting

Voluntary delisting occurs when a company decides on its own to remove its securities from a stock exchange. The company pays shareholders to return the shares held by them and removes the entire lot from the exchange. 

Why would a company want to delist from the exchange?

Voluntary delisting generally occurs when the company has plans to expand or restructure. At times a company may be acquired by an investor who is looking to hold a majority share. This share may be greater than that permissible by the government. In India, it is mandatory that at least 25% of the shareholding be available to the public. An acquirer who wants over 75% of holdings may expect the company to go private and hence delist. At times the company is also delisted to allow the promoters a greater share. 

The exchange regulations may also be a cause for voluntary delisting.  This is because companies may find it difficult to comply with regulations as they may hinder their functioning. These companies would prefer to delist.

Existing shareholder approval for delisting

A delisting that is of voluntary nature can only occur if shareholders holding up to 90% of the share capital agree to the delisting offer made by the company. The shareholders at times may not agree to delist. if they foresee a rise in the price of the shares or are not happy with the current offer made by the company to buyback the shares as they feel the shares are worth much more. A delisting process may take years to complete hence the shareholders get ample time.

2. Involuntary or Compulsory Delisting

In the case of involuntary delisting, the company is forced by the regulatory authority to stop its shares from trading.  This is also used by the regulatory authority to penalize the company. The investors do not have the opportunity to vote against the delisting in this case.

Here are the Grounds for the company being compulsorily delisted:

  1. Failure to maintain the requirements set by the exchange
  2. The shares of the company being suspended from trading for more than 6 months or being traded infrequently over the last three years
  3. Bankruptcies, where the company has posted losses for the last three years and has a net worth which is negative

Here, the Promoters are required to purchase the shares from the public shareholders as per a fair value determined by an independent valuer.

Voluntary Delisting process

Assuming that promoters, shareholders, and the company’s board of directors agree, the delisting process will take a minimum of 8-10 weeks from the date of announcement of the shareholder meeting to approve the delisting proposal. Here are the steps involved in voluntary delisting of stocks:

1. Appointment of a Merchant Banker

Once the board takes the decision to delist the first major step is appointing an independent merchant banker. A merchant banker overlooks the Reverse book building process. Reverse book building is the process by which a company that wants to delist from the bourses, decides on the price that needs to be paid to public shareholders to buy back shares. Here, it has to follow a detailed regulatory process.

2. Initiate the Reverse Book Building Process through online bidding

The merchant banker oversees the Reverse book building process. It is the process used by the company to set a price that is used to attract the investors into agreeing to the delisting. In this process, the shareholders bid online the prices at which they would be willing to sell the shares. The reverse book building process is used only in India.

To protect the investors the SEBI has also set a floor price which is the minimum the company can offer to the shareholders. The floor price should be the average of weekly closing highs and lows of 26 weeks or of the last two weeks, whichever is higher.

3. Set up Escrow Account before offering terms of delisting to public

To ensure that the company has the ability to purchase the shares from the shareholders it is required to create an account specifically for this purpose. This account is known as an Escrow account. The amount in the escrow account will only be used towards delisting.

4. Gaining Shareholder Approval

 Once the merchant banker receives the prices he makes an appropriate offer to the shareholders in the form of Offer Letters sent by post. The shareholders may or may not accept the offer. The company has to gain the approval of over 90% of the shares of all the shareholders. To acquire this approval what the company does is, make an offer to the existing shareholders to buy the shares from them at a premium. The shares must be bought back by the company at a price that is equal to or higher than the floor price.

Say a situation arises where 25% of the shareholders do not participate in the book-building process. Here as long as it can be proved that the offers were delivered to the shareholders by registered or speed post and the delivery status can be confirmed, the shareholders will be deemed as compliant to the divesting of the company.

If 90% of the shareholders agree to the prices and the companies decision to delist then the company can go ahead and delist from the stock exchange. 

What happens to shareholders who refuse to sell?

If investors do not take part in the reverse book building process they still have the option to sell their shares back to promoters. It is mandated that the promoters accept the shares. The price here would be the same price exit price accepted from the reverse book building process. The shareholders will be allowed to do this for one year from the date of closure of the delisting process. 

If a shareholder still doesn’t sell the shares back within a year he will end up holding non-tradable securities. Shareholders do this in cases where they expect the company to begin trading publicly again after a period. The shares of the shareholder, however, will still be affected by all corporate actions taken by the company.

It must be noted here retail investors (i.e. investment of less than 2 Lakh in the company) do not have much influence over the price and delisting decisions. In the case of a recent delisting announcement of Vedanta Ltd, Retail investors made up only 7.26% of the total holdings.

vedanta delisting

However, if the shareholders are unhappy with the prices or the delisting they can move to the courts. In 2005, shareholders who held 2.4% holdings moved to the courts over Cadbury offering Rs. 500 per share for being delisted. This was done despite Cadbury acquiring over 90% approval for delisting. After a decade the Bombay High Court ordered the company to pay Rs.2014.50 per share.

Also read: 11 Must-Know Catalysts That Can Move The Share Price

Using Delisting as an investment strategy

In 2010 the government made it compulsory for companies that are traded in the stock exchange to make at least 25% available to the public. This encouraged companies that had promoters owning more than 75% of the company to delist their securities. This caused investors to target companies where the promoters have ownership of 80-90%. This was done in anticipation that the company will buy back the shares at a premium. This increased the demand and hence increased the prices. 

Investors also have to consider that a failed delisting may result in a fall in the prices as investors who may have anticipated premiums may engage in mass selloffs. Not to mention that a delisting procedure may take years.

Apart from this investors also should take note of the period during which a delisting takes place. Say a company tries to delist in times of market downturn or elongated bearish markets, it may be a strategy to buy back shares at a cheaper rate when investors are desperate for liquidity. 

May 29, 2020 Investment Basics, Market 5 comments
SGX Nifty meaning what is it

SGX Nifty Explained – How it affects Indian Share Market?

Understanding SXG Nifty meaning & its impact on Indian share market: If you are an active stock market trader in India, I’m sure that you would have definitely have heard of the term ‘SGX Nifty’. If you open any business news channel, then before the opening of the Indian equity market, all you will see is an hour-long discussion on the SGX Nifty and its implications on the opening of the Nifty for that day.

The importance of understanding this terminology can be seen from the fact that it is one of the most popular hashtags followed or searched over different social media platforms like Twitter, if one wants to have a better picture of the Indian Equity market. In this post, we are going to discuss what exactly is SGX nifty and how it affects Indian share market.

What is SGX Nifty?

The word SGX is an acronym for the Singapore Stock Exchange. Further, Nifty is the benchmark index of the National Stock Exchange (NSE) of India and it is comprised of the top 50 companies listed on NSE. Overall, if we were to add these two constituents, we can say that SGX Nifty is the Indian Nifty trading on the Singapore Stock Exchange. It is an actively traded futures contract on Singapore Exchange.

SGX Nifty Chart

Who is allowed to trade SGX Nifty?

Any investor who is interested in trading Nifty, but is not able to access Indian Markets, finds trading SGX Nifty very good alternative to trade. Even the big hedge funds who have big exposure in the Indian market find SGX Nifty as a good alternative to hedge their positions.

Further, an Indian citizen is not allowed to trade SGX Nifty contracts. For that matter, Indian citizens are not allowed to trade derivatives in any other country.

Difference between Nifty and SGX Nifty?

1. SGX nifty is Nifty futures contract trading in Singapore Stock Exchange and in India, Nifty contract trades on NSE.

2. The contract size of SGX Nifty is different compared to Nifty. In India, we have 75 shares in every Nifty contract Lot whereas the SGX nifty does not have a contract with shares in it. SGX Nifty is denominated in terms of US dollars. Say, if Nifty is trading at 9500, then the contract size of SGX Nifty will be 9500*(2 USD) i.e., 19000 USD.

For example, if the Nifty moves up by 100 points for the day, then make a profit of 100 rupees per share.  So, total profit in case of Nifty will be 100*75 = Rs 7,500. But in the case of SGX Nifty, we will be making a profit of 100*2 = 200 USD per contract.

3. Now, In India, in the case of Nifty, we see Open Interest as the ‘number of shares’ outstanding. But in the case of SGX Nifty the Open Interest shows the ‘number of contracts’ outstanding. Both Nifty and SGX Nifty are highly liquid and a very high volume of trading happens in that.

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

Trading Hours of SGX Nifty

SGX Nifty Futures

(Source: SGX Nifty)

The above figure is the value of SGX Nifty from the website on the Singapore Stock Exchange. It shows the value of SGX Nifty futures traded on SGX. In Singapore Nifty trades in two tranches. One part during the day time and it is denoted by ‘T’ (as seen in the picture above). The other half during the evening time and it is denoted by ‘T+1’. The trades happening in the evening will be considered in the next day settlement prices.

SGX Nifty Trading Timings

(Source: SGX Nifty)

Now, the above picture gives you details about the trading hours of SGX Nifty. The Trading hours mentioned here are Singapore time and the difference between Indian Standard Time and Singapore time is 2 hr 30 minutes. Therefore, we can see that in the Morning (T) session, it trades from 9 am to 6:10 pm Singapore Standard time.

So, in Indian Standard time, the trading happens at SG Nifty from 6:30 AM to 3:40 PM. And the Evening (T+1) session, it trades from 6:40 pm to 5:15 am Singapore Standard Time, which if converted to Indian Standard time will have timings of 4.10 pm to 2:45 am.

Contract Settlements in SGX Nifty

SGX Nifty has two serial monthly contracts and it has Quarterly contracts. The contract expires on the last Thursday of Every expiring month and if the last Thursday is an Indian holiday, then it expires the preceding business day. The SGX Nifty contracts are cash-settled and the final settlement price is derived from the official closing of S&P CNX Nifty.

How SGX Nifty Impacts Indian Equity Market?

Looking at the current global scenario, with the continuous onslaught of COVID-19 pandemic or the rising tensions between US-China over trade deal, we see a continuous inflow of information and news. And these inflow of information has a direct impact on the Global Financial markets.

SGX Nifty still trading way after the closure of the Indian Nifty market, we see an impact of these global news on the SGX Nifty price movement. This further directly impacts the opening pricing of Nifty, the very next day. And that is one of the reasons we see the Indian Nifty market opening at a premium or discount over the previous day’s close.

Note: Most analysts use SGX Nifty as one of the factors to predict whether the market will open higher or lower on a trading session.

Closing Thoughts

The SGX Nifty is a perfect substitute for investors and traders looking to trade in the Indian equity market but are not able to do so. It is a perfect hedging instrument if you are already exposed to the Indian equity market. One unique advantage that SGX Nifty has the longer trading hours compared to the Indian Equity market. And all these points make it a lucrative investment and trading avenue.

May 27, 2020 Market, Options Trading, Trading 14 comments
Intraday Trading vs Long-term Investing: What are Pros and Cons?

Intraday Trading vs Long-term Investing: What are Pros and Cons?

An overview of Intraday Trading vs Long-term Investing: The stock market is risky but equally rewarding. There are basically two ways by which people make money in the stock market – trading or investing. Here, you may either invest for the long-term or trade to build wealth through day trading (also known as Intraday trading). However, both these are two different approaches to make money in the equity markets.

When you invest in stocks for the long-term, it primarily means that you hold on to the investment for a longer period of time, probably between three to five years or more. In comparison, intraday trading means that you square off all your positions before the end of trading hours on the same day. You do not hold the shares for more than a day i.e. do not take delivery of the shares when you undertake intraday trading.

In this post, we are going to discuss the difference between Intraday trading and long-term investment. Here, we’ll look into different factors like holding period, capital growth potential, risks involved, and more. Let’s get started.

Differences between Intraday Trading vs Long-term Investing

1. Holding period

Long-term stocks are held for several years and any fluctuations in the short-term do not affect your investment decision. Here, holding period may vary from two years to even several decades. In comparison, in Intraday trading you do not keep any position open at the end of the hours on a trading day. A holding period maybe between just a minute to a few hours.

2. Capital growth

When the price moves in the expected direction, the trader will exit his intraday stock position. For example, if you have purchased 100 shares of ABC Limited at INR 50 and the price increases to INR 55, you will sell the shares and book the profits. Similarly, you will cut your loss in case the price decreases, using tools like stop loss.

However, with long-term investments, short-term price fluctuations do not affect your decision. The stocks are held for several years allowing you to build wealth through capital appreciation.

3. Risks Involved

There are inherent risks to intraday trading as well as long-term investing. However, the risks in day trading are higher as price volatility can be significant in just a few hours. Because daily market fluctuations do not affect long-term stocks, risks involved with long-term investments are lower. Here, investors have the potential to create wealth through dividends and price appreciation over the years.

4. Art versus skill

Day traders require technical skills to analyze and study market trends. Moreover, Intraday trading is also related to market psychology. On the other hand, long-term investing requires skills to identify good and reliable stocks. Here, investment decisions are primarily based on the business model, financial strength, and company philosophy.

5. Investor profile

Traders want to potentially earn higher profits from the daily price fluctuations. However, here if you miss the right time, it may result in huge losses. Intraday stocks are identified based on price volatility during the trading hours. On the other hand, long-term investors do not rely on trends and invest based on the fundamentals and value of the company over the years. They patiently hold on to the shares until the desired price levels are reached.

Let us now look at the pros and cons of intraday trading and long-term investing.

Pros and Cons of Intraday Trading vs Long-term Investing

— Pros of intraday trading

  1. While Intraday trading, substantial profits may be earned in a shorter period
  2. You require a lesser principal amount and enjoy benefits of margins.
  3. You do not have to lock-in your investment for the long-term enabling you to trade more frequently for higher profits
  4. Most reliable brokers like mastertrust offer margin trading on intraday stocks providing higher leverage for your capital

— Cons of intraday trading

  1. The price volatility increases the risk of losing money
  2. Knowledge of technical analysis is necessary and you cannot rely on tips received from others

— Pros of long-term investing

  1. Historically, when you invest in the equity market for a longer period, you are able to earn returns that are more than the rate of inflation, which allows you to build wealth over the years
  2. Long-term stocks benefit from economic growth resulting in higher revenue through an increase in consumer demand, which bodes well for an increase in its share price.
  3. Long-term investing not only provides capital growth through price appreciation but also allows you to earn more returns through periodic dividends.
  4. These days, it is very easy to invest in shares for the long-term through a stockbroker or online platforms.

— Cons of long-term investing

  1. There is an inherent risk of losing the principal in case the company does not perform as per expectations resulting in the decline of its share price.
  2. Share prices change from one minute to the next. Many times, the investment may be based on emotions rather than sticking to the fundamentals.
  3. Long-term investing means a long holding period that may last for three to five years or longer. This also means that you won’t be able to leverage your money to earn higher returns, from other alternatives.

Closing Thoughts

Both intraday trading vs long-term investing are proven ways to make money from the stock market. The decision to invest for the long-term or intraday totally depends on your requirements, financial goals, investment horizon, and risk profile. Further, here the diversification to allocate your money to various assets should be based on your financial goals.

Seek expert advice from professionals at mastertrust to know the best investment strategy to meet your goals. This stockbroker offers online broking, in-depth research and analysis, and investment advice at affordable charges. Open demat account and start trading today!

May 25, 2020 Investment Basics, Trading No comments yet
What is Free Cash Flow (FCF)? And How to Calculate it?

What is Free Cash Flow (FCF)? And How to Calculate it?

Understanding Free Cash Flow (FCF) Meaning & Calculations: Hi Investors. One of the most popular topics in company valuation is the Free cash flow. If you are involved in the fundamental analysis of stocks, you definitely have heard about this term. Nevertheless, for beginners, free cash flow can be a mystery.

In this post, we are going to discuss what exactly is a free cash flow and why it is important to evaluate while researching a company. This might be one of the most important articles for the people interested to learn stock valuations. Therefore, read this post completely. Let’s get started.

1. What is a Free Cash Flow (FCF)?

Free cash flow is the excess cash that a company is able to generate after spending the money required for its operation or to expand its asset base. It represents the cash that is available for all the investors of the company.  Now, you might be wondering what is so ‘FREE’ about this cash flow and how it is different from the earnings of the company?

Here you need to understand that not all income is equal to cash. If a company is making earnings, it doesn’t mean that it can spend all the income directly. The company can only spend free cash. There is a crucial difference between ‘cash’ versus ‘cash that can be taken out of a business’, or in accounting terms: cash from operating activities and free cash flow (FCF).

The cash from operating activities is the amount of cash generated by the business operations of a company. However, not all of the cash from operating activities can be taken out of the business because some of it is required to keep the company operational. These expenses are called capital expenditures (CAPEX).

On the other hand, free cash flow is the cash that a company is able to generate after spending the money required to stay in business. This is the cash at the end of the year, after deducting all operating expenses, expenditures, investments etc and is available for distribution to all stakeholders of a company (Stakeholders include both equity and debt investors.)

Also read: 8 Financial Ratio Analysis that Every Stock Investor Should Know

2. Why is free cash flow important?

It’s important for an investor to look into the free cash flow of a company carefully because it is a relatively more accurate method to find the profitability of a company than the company’s earnings.

This is because earnings show the current profitability of the company. On the other hand, the free cash flow signals the future growth prospects of the company as this is the cash that allows the company to pursue opportunities to enhance shareholder’s value. Free cash flow reflects the ease with which businesses can grow or pay dividends to the shareholder.

The excess cash can be utilized by the company in expanding their portfolio, developing new products, making useful acquisitions, paying dividends, reducing debt or to pursue any other growth opportunity.

Further, free cash flow is also used as the input while calculating the intrinsic value of a company using the popular valuation technique- Discounted cash flow (DCF) Model.

(Besides, as free cash flow is the additional money that can be taken out of the company without affecting the running of the business, it is also called the “Owner’s Earnings”.)

3. How to calculate free cash flow of a stock?

Companies in the stock market are not obliged to publish their free cash flow. That’s why you can’t find FCF directly in the financial statements of the companies. However, the good point is that it is easy to calculate them.

To calculate the free cash flow of a stock, you’ll require its financial statements i.e income statement, balance sheet, and cash flow statements. There are two calculation methods to find Free cash flow of a company.

Method 1: From the Income statement & Balance sheet

FCF = EBIT (1-tax rate) +(depreciation & amortisation) -(change in net working capital) – (capital expenditure)

Method 2: From the cash flow statement

This is the more popular approach to calculate FCF of a company. Here, Free cash flow is calculated as cash from operations minus capital expenditures (from the cash flow from investing activities).

FCF = Cash flow from operating activities – capital expenditures 

Quick Note: To make things simpler, Yahoo Finance has already made the free cash flow of the companies available on their website. Just go to the Stock page –> Financials –> Cashflow statement, and you can find the Free cashflow of the company for last multiple years. 

How to calculate Free cashflow FCF using yahoo finance

(Source: Yahoo Finance)

In addition, you can also find the free cash flow of companies on other financial websites like Screener.in, Tickertape, etc. Nevertheless, we advise our readers to do the calculations themselves to avoid any computer-based miscalculations. 

tickertape free cashflow calculation

Also read: What’s the formula for calculating free cash flow? -Investopedia

4. How to analyze the free cash flow of a company?

While studying the cash flow of a company, it is important to find out where the cash is coming from. The cash can be generated either from the earnings or debts. While an increase in cash flow because of the increase in earnings is a good sign. However, the same is not true with debts.

Moreover, if two companies have the same free cash flow, it doesn’t mean that they have a similar future prospect. Few industries have a higher capital expenditure compared to other industries. Further, if the Capex is high, you need to investigate whether the reason for the high capital expenditure is due to expenses in growth or expenditure. In order to learn these, you have to read the quarterly/annual reports of the companies carefully.

Also check out: Online Discounted Cashflow (DCF) Calculator

Negative FCF of a company.

A consistently declining or negative free cash flow of a can be a warning sign for the investors. Negative free cash flow is dangerous because it may lead to slow down in the business. Further, if the company didn’t improve its free cash flow, it might face insufficient liquidity to stay in the business.

Quick Note: If you want to learn free cash flow and discounted cash flow (DCF) model in depth, feel free to check out this online course: HOW TO PICK WINNING STOCKS? Enroll now and learn stock valuation techniques today.

5. Conclusion

In this post, we discussed the Free cash flow (FCF). It is a measure of a company’s financial performance. Free cash flow represents how much cash a company has left from its operations i.e. the cash that could be used to pursue opportunities that improve shareholder value.

However, the absolute value of the free cash value doesn’t tell you the whole story. You have to find out where this cash is coming from and how the company is using it. Whether they are spending this money effectively on operations like giving healthy dividends, buybacks, acquisitions etc- or not. And finally, a consistent negative free cash flow of a company might be a warning sign for the investors.

That’s all for this post. I hope it was useful to you. If you’ve got any doubts related to finding the free cash flow of a company, comment below. I’ll be happy to help. Happy Investing!!

May 21, 2020 Valuations 8 comments
Coffee Can Investing - Does This Approach Works Anymore?

Coffee Can Investing: Does This Approach Work?

An overview of Coffee Can Investing Approach: A middle class Indian would spend most of his youth being forced into education, his early adulthood building a career, and taking care of his parents. He would be hit by a midlife crisis before 50. His late adulthood would be spent preparing for retirement i.e. if he hasn’t started already and ultimately banks on his kids to take care of him. As young adults, the kids now take up the responsibility with pride as is demanded by the Indian tradition and culture.

A squirrel life, on the other hand, lives chiefly on trees as they forage for food and escape predators. One thing that is interesting about squirrels is that they too try and stock up on nuts for the future. Unfortunately for the squirrels and fortunately for us, millions of trees are accidentally planted by squirrels who bury nuts and then forget where they hid them. Because of a squirrels life spanning only 11-12 months, they do not generally get to reap the benefits of an oak they planted, as oaks take up to 30 years to grow. But they still live in forests that may well have been accidentally planted by squirrel fathers decades ago.

sqrriel coffee can investing

What does it take to retire?

Humans, unlike the squirrel, have an average lifespan of 79 years. Yet we see the middle-class Indian category struggling and not reaping any benefits. According to Saurabh Mukerjea, for a couple to retire and survive for another 25 years with a reasonably good lifestyle post-retirement, they’ll need a crore a year pre-tax which is 60-70 lakhs post-tax.

This does sound reasonable considering the expenses of their adolescent children, the fragility of their health, and most importantly inflation a few years hence. This will mean that for a family to retire in a good shape they’ll need to have financial assets of at least 15 crores. Need a minute? Today we discuss an investment strategy called Coffee Can Investing that shines some light on what seeds to plant for our 15 crore oaks in the long term.

What is coffee can investing?

Coffee Can Investing was first coined by Robert G. Kirby in a paper written by him in 1984. The strategy gets its name because in the old west people who invest in the stock market would receive physical certificates of proof which they would put away in coffee cans. They would hide these cans in their mattresses later forgetting about them.

These stocks would eventually grow enormously making its holder rich when he found it again. The success of Coffee Can Investing depends entirely on the wisdom and foresight used to select stocks in the portfolio.

The Story behind Coffee Can Investing

Robert Kirby first observed the pattern dramatically in the 1950s when working in a large investment counsel organization. One of their woman clients who had just been widowed approached him. She wanted the securities inherited from her husband to be added to her portfolio under the organization. Her husband, who was a lawyer, would look after her financials.

Robert Kirby noticed that the husband had been piggybacking on the advice she would get from the advisors within the company. He would apply the advice as directed by the advisors to his wife’s portfolio. But when it came to his portfolio he would only follow those that were related to buying shares. He paid no attention whatsoever to the sell recommendations. He would simply put $5,000 in all purchases.

When Robert Kirby reviewed the portfolio created, the husband had many stocks that were worth only $1000. However, there were quite a few considerable investments that were now worth $100,000. One jumbo holding worth $800,000 exceeded his wife’s whole portfolio. These were shares of a company called Haloid. This investment later turned out to be a zillion shares of Xerox. 

This surprised Kirby as the wifes’ portfolio was no match to that of her deceased husband. This happened despite the wifes’ portfolio being managed by an Investment organization. And all he did was buy the shares as suggested by the investment counsel organization but ignore the sell orders even if the stocks were moving negatively. 

Coffee Can Investing and Index Funds

When Kirby first wrote the paper in 1984, he noticed that there was an increase in the index funds following. This has continued to this day. An Index in a market creates a portfolio of the top securities held in that market. The Index, however, does not hold the securities. The US has the S&P 500 Index. What Index Funds do is create an actual portfolio by investing in the securities.

In the paper, Kirby criticizes these funds as they are required to trade securities on a regular basis to keep up with the portfolio the index would have. Kirby also explains how the S&P 500 Index made several hundred stock additions and eliminations. An Index fund would actively be required to trade on these stocks. The transaction costs on these alone would have a huge impact on the portfolio and the index funds growth. Hence Kirby introduced Coffee Can Investing. He identified that leaving the stocks alone was one of the reasons why the widows’ husband had grown his portfolio enormously in the 1950s. And he also considered transaction costs from trading as the greatest detriment to superior investment returns.

What is required for a Coffee Can Strategy?

To tap into these superior investment returns of Coffee Can Investing one would have to 

  1. Carefully assess and select stocks based on the company’s performance.
  2. Invest and forget about them for a long period of time. In Coffee Can Investing to reap the maximum benefits, one would have to let the investments be for at least a period of 10 years.

coffee can investing quote

How to pick stocks for this approach?

In their book, ‘Coffee Can Investing: The low-risk road to stupendous wealth’ Saurabh Mukherjea, Rakshit Ranjan, and Pranab Uniyal discuss how to pick stocks to create a Coffee Can portfolio. According to them, the stocks considered must be filtered in the following manner.

1. The company selected must have a market cap of at least 500 crores.

This is because we will need a company that has established itself. Also because we will need the past records of the company for at least 10 years. 

2. Revenue growth of the company must be at least 10% each year for the last 10 years.

3. The ROCE of the companies must be more than 15%

The ROCE will show if the management is capable of allocating that the money put by you into the company correctly. ( ROCE = Net Income/ Shareholders Equity)

The stocks selected in the portfolio still have to be diversified. The investment must be done across industries and also across different capital classes. This would, however, depend on the investor and vary accordingly. The investor would have to keep in mind that the scope for growth is limited when the companies are too big. The potential for smaller companies to grow is much higher. This, however, does not stand true for longer periods. In long term say 20 years this benefit no longer would exist with the companies in the small-cap in comparison to large-caps.

Results of Coffee Can Investing Approach

After studying trends and putting together a portfolio, The book ‘Coffee Can Investing: The low-risk road to stupendous wealth’ brings forward the concept of Patience Premium. As per Patience Premium, a period greater than one year would give you a higher probability of higher returns. Investors are not really rewarded much for periods like 1 year or even up to 7 years. The chances of returns as per the book even reduce during the 3 to 5 year period. After the 7-year and 10-year mark, the patience premium is much higher.

The best-case scenario occurs when patience premium combines with quality premium. Quality premium is the premium associated with the quality companies selected in the portfolio. A dream mix would be of good quality companies selected as per the Coffee Can portfolio filter and an investor letting the investment be for a long period. With both the premiums combined the probability of losing money is -3% yearly. After a period of 10 years, the returns would stand at 20%. They would, however, remain stagnated after this period. Hence 10 years onward the returns expected will be more or less 20%.

Why do the returns stagnate after 10 years? 

Pranab Uniyal explains this citing reference to the book ‘Mathematics of everyday life’. According to the book, large numbers behave differently from small numbers. They use a dice analogy to explain this. Say 3 people were each to roll a dice 5 times. The average obtained from rolling the dice 5 times will vary or have an extremely high probability to vary from each other. On the other hand, if all of them roll the dice say 1000 times, the average will cumulate to 3.5 for all of them.

Similarly in investing. Short periods will subject us to market volatility, which would be the easiest way to lose our investment and the results would vary too much to different investors. However, when we look at longer periods say 10 years if different investors create a Coffee Can portfolio the returns would converge at 20% yearly.

Greater the Risk, Greater the reward?

The book also challenges the quote on every investor’s tongue which says more the risk, higher the reward. Coffee Can Investing provides a way for investors to earn huge returns on their investments instead of gambling in the short term. These returns can only be achieved however only if the portfolio is held for a long period of time. One of the major reasons the investor earns here is by saving up on all the transaction costs.

Why not select assets outside the stock market? 

warren buffett quote on gold

Only 2% of the Indian population indulges in the Indian stock markets. Over 95% prefer to invest their savings in Land and Gold. This could be because we as people tend to put our trust in assets that we can see and touch. Also, a great deal of cultural influence is at play when it comes to gold.

The land came to be considered as one of the best investments due to the boom in the period between 2003 to 2013. Due to this India has currently become one of the priciest markets in the world. But the prices are not followed by an apt demand. This has left a lot of unsold properties in the market. This has made land and gold one of the worst investments in recent times especially if one wants to stay ahead of inflation. And an even worse investment if they want to compete with the stock market. 

warren buffett quote investing

Benefits of Coffee Can Investing

1. Minimum Expenses

Coffee Can Investing can be said to have been built on this factor. Apart from the cost that occurs during the one-time investment, there will be no more transaction cost for the remaining 10 year period. Tracking an index involves multiple additions and eliminations to a fund portfolio. Due to this, the investments are affected regularly from brokerage and other expenses transaction costs.

coffee can investing quote

In addition to this investment management firms have their own set of charges charged to the investors. Expenses to the investment manager are spread to all the funds and not just Index funds. Also, the quest for alpha in the market has investment managers charging investors for their apparent skills. However, for the period the investors remain the market we rarely see them beat the markets.

A Coffee Can Portfolio created by the individual would not have an Expense Ratio. Also, investors rarely consider how taxes affect their investments. Regular purchases and sales would result in added taxes on any profit earned. 

2. No need for tracking the portfolio.

This is also one of the necessities of Coffee Can Investing. Once we have filtered and achieved a portfolio of quality stock the only thing that is required is for them to be put aside and left alone for a decade.

When we invest we unfortunately always try and keep track of what is going on with the company. CEO changes, political and other economic changes would all stimulate us to act on our holdings. In fact, a Coffee Can Portfolio would even require us to not even look at our stocks during the pandemic.

3. Not Affected by volatility

The filters to create a suitable coffee can portfolio ensures that only the best stocks as per the present scenario make it to your portfolio. However, in the short term, these stocks will face very high volatility in reaction to the market, political, and other changes. In the long term, the stocks will only be judged by their intrinsic quality. However, even if a few stocks turn out to be bad investments it is best to cite what Kirby saw in the deceased husbands’ portfolio. There were stocks that did not perform as well as the others but they were more than made up for by the stocks that performed better. In the long term, the portfolio will face reduced impact from market volatility.

4. Outperformance by 8-10%

According to ‘Coffee Can Investing’ a portfolio that has followed all the steps will be performing better than the market and beating it by 8-10%

Why don’t funds just follow Coffee Can Investing?

If this investment strategy enables you to outperform the market by such a large margin then the question arises as to why shouldn’t mutual funds just follow this investing strategy.

— One of the major reasons is the wait for 10 years. In Coffee Can to judge how you have performed, you will have to wait for over a decade. Very few investors would be willing to commit to such a fund.

– Imagine a scenario where a fund does start coffee can investing. It would have to set up a team that would prepare a portfolio for the fund. What next? Coffee can would require you to simply ignore the investment for the next decade. Setting up a fund only as Coffee Can will have a huge setup cost at the beginning with returns only after a decade. In regular investment firms, the employees are rewarded for the right decisions, investments, and performance. These benefits would only be available to the employees of such firms only after a decade. This would be highly unfair to them.

Despite Coffee Can Investing not being popular in the Indian markets there still are a few Asset management companies still offering the coffee can route.

Closing Thoughts

Coffee Can Investing makes us question if we really are investors. Or due to our reaction to every market change has resulted in us inadvertently become traders. Traders holding the facade of an investor. 

At the end of his paper where Robert Kirby introduced Coffee Can Investing, he makes it clear that his argument wasn’t against index funds. They were directed towards the transaction costs, brokerage fees, taxes that are associated with every trade. Instead, if the stocks are just left alone they would perform much better

What should an Investor with limited liquidity do?

If we take a regular Indian Investor, for him to be expected to contribute a huge amount for the one-time investment would be unrealistic. Instead if one would want to follow coffee can investing but is not able to set aside a huge amount at once it would be better if he does the following.

Create a coffee can portfolio where the investor invests what he can and set it aside for a decade. When he has saved enough again say in a year, create a coffee can portfolio which is completely independent of the one he created earlier with no references to it. It should be solely based on the market conditions prevalent filtering companies based on the present scenario and set it aside for a decade.

Coffee Can Investing: The Book

For a thorough study, I would recommend giving ‘Coffee Can Investing: The low-risk road to stupendous wealth’ by Saurabh Mukherjea, Rakshit Ranjan, and Pranab Uniyal a read. Although there might be quite a few books out there on investing there are very few books written keeping the Indian Markets particularly in mind.

It would be highly rewarding to break the loop mentioned in the introduction. Happy Investing. 

May 18, 2020 Investing Psychology, Investment Basics 2 comments
The Rs 20 Lakh Crore Relief Package - Overview of First Tranche Aatma Nirbhar Bharat Abhiyan

The 20 Lakh Crore Relief Package – Overview of “First Tranche”

A detailed study on the 20 Lakh Crore Relief Package in India (First Tranche): Prime Minister Narendra Modi’s address to the nation on Tuesday will be remembered by many for a right smart spell due to two reasons. Firstly because the number we couldn’t fathom  – 20 Lac Crore (20000000000000- 10% of our GDP) is now our relief package. Secondly for the word ‘Aatma Nirbhar’ (Self Reliance).

However, if observed the address holds much more gravity, especially in our preparation for the post lockdown economy. The direction chosen to move in is towards an Aatma Nirbhar Bharat.  To achieve this the Abhiyan has focused on the five important pillars- the economy, infrastructure, system, vibrant demography, and demand. It seems like a throwback to the 20th century Swadeshi movement with national leaders calling for local purchases. It is however evident that the economy can be saved from being plundered by COVID-19 by robust demand for Indian products.

narendra modi ‘ Aatma Nirbhar’( Self Reliance) announcement

Finance Minister (FinMin) Nirmala Sitharaman announced on Wednesday the First Tranche of measures that would be taken to attempt at reviving the economy. The focus would be on the factors of production. However, the traditional factors have been recast to suit the purpose of this Abhiyan. They are:

  1. Ease of doing business
  2. Compliance and Regulation
  3. Due Diligence Observed

The FinMin also clarified that becoming ‘Aatma Nirbhar’ would not mean turning into an isolationist state that only looks inward. But instead, it talks about a country that can rest on its strengths and at the same time contribute to the globe. Today we have a closer look at the measures of the first tranche, the reasons for their implementation, and the path intended.

Measures to revive the economy -Tranche1 

Nirmala Sitharaman announced the fifteen measures to revive the economy. They are directed towards the following sectors/measures:

MSME (Micro Small Medium Enterprises)

The FinMin has focussed a considerable portion of the relief towards Micro Small and Medium Enterprises( MSME). Of the 15 key decisions, 6 are directed towards the MSME. MSMEs are our nation’s dominant job creator by employing 11 crore people.

MSMEs contribute to 45% of the country’s manufacturing output, 40% of exports, and to 30% of the GDP. Considering the figures a relief package not directed towards the MSMEs survival would result in their closure and eventually mass unemployment accelerating the GDP decline. From the numbers above it becomes evident that ensuring their survival would mean saving the economy.

MSME (Micro Small Medium Enterprises)

It can be noticed from above that there is a huge gap between credit requirements and credit available to MSMEs. Such a huge lending ability to bridge the gap is only possessed by financial corporations in the country. The government would not be able to fulfill the requirements simply because it does not have that much money to be directed towards MSMEs during an ongoing pandemic.

What are the means adopted to achieve this?

The government has two options here. Either directly give loans to the MSMEs or to take over the credit risk of the loans received by MSMEs from other sources. It becomes evident that the government has chosen the latter as the measures in Tranch 1 focus on this.

If in a normal situation if an MSME would approach banks he would be required to place a collateral of a value higher than the loan in exchange. The property available with MSMEs will be affected too as the outbreak has caused a fall in their prices as well.  The Government of India(GOI) has rolled out measures where instead of collateral it acts as the guarantor for the loan. This means that in a case where the MSMEs fail to repay, the banks would still be able to recover the loan from the government. With the government acting as a guarantor the banks are encouraged to give out more loans to the MSME’s

The reforms that enabled this are:

1. Three Lakh Crore collateral-free automatic loans for MSMEs

Here MSMEs that have no more than 25 crores outstanding in loans and a turnover of at least Rs. 100 crores are eligible. An emergency credit line to businesses and MSMEs has been set up from NBFCs and banks for up to 20% of the outstanding credit as of 29/02/20.

The loans will be provided with a 4-year tenure with no requirement for the principal to be paid for the next 12 months. They will be required to pay interest however but at a capped limit set by the GOI. Here the GOI will act as 100% guarantor for both loans and interest. This scheme can be availed till 31st October 2020. 

The Finance Ministry has estimated that this will help 45 Lakh business units to resume business utility and safeguard jobs.

2. Rs 20,000 crores subordinated debt for stressed MSMEs

Here the GOI will facilitate a provision for Rs. 20,000 crore as subordinate debt. This is aimed at MSMEs that are stressed and would be considered NPA (Non-Performing Assets) but still have managed to keep functioning. These MSMEs classified as NPAs would not be provided credit by NBFCs or banks. Here the promoter of the MSME will be given debt by the banks which will then be infused by promoters as equity in the firm. This will increase his respective ownership but will be liable for the debt received.

3. Rs. 50,000 crore, equity infusion for MSMEs through FOF.

The GOI here will set up a Fund of Fund which in turn will invest in its daughter funds. These daughter funds will provide equity funding to MSMEs that show growth potential. The GOI will invest 10,000 crores into the FOF. The remaining amount will be funded from institutions like LIC and SBI.

Rs. 50,000 crore, equity infusion for MSMEs through FOF

The MSME, however, will be encouraged to get listed on the main board of the stock exchange.

4. New Definition of MSMEs.

The FinMin pointed out before the announcement that this change of definition will be in favor of MSMEs. The new definition will revise investment slabs for those companies to be considered as Micro Small and Medium. In addition to the investment, it will also consider the turnover before classifying an MSME.

The new definition will also have no distinction between the MSME involved in manufacturing and service.

New Definition of MSMEs

  • Micro will be those with investment up to 1 crore whose turnover is LESS than 5 crores.
  • Small will be with investment up to 10 crores whose turnover is LESS than 50 crores.
  • Medium will be those with investment up to 20 crores and a turnover of  LESS than 100 crores

5. For government procurement tenders up to 200 crores will no longer be on the global tender route.

According to this global tenders that are worth up to 200 crores will no longer be available to global players.

This reform would encourage and provide MSMEs with the opportunity to procure these tenders without facing global competition. 

6. Other incentives for MSMEs 

MSMEs in the post lockdown environment will face problems of marketing and liquidity due to social distancing requirements. For these reasons, the GOI will launch an e-market linkage for MSMEs which will be promoted as a replacement for trade fairs and exhibitions. Fintech also will be applied to enhance transaction-based lending using data generated by e-market linkage.

In addition to this, all dues from the GOI and Central Public Sector Enterprises (CPSE) will be released in 45 days. 

This reform focusses on ensuring that the MSMEs are able to restart their business with ease after the lockdown as well. At the same time, their liquidity position would be improved to meet their immediate needs from the dues received.

Provident Fund Contribution

Provident Fund Contribution announcement by sitharaman

7. Reduction in rates for those covered in the first relief package.

Under the Pradhan Mantri Garib Kalyan package of Rs 1.7 lakh crores announced in the first phase of the lockdown, the GOI announced that it would contribute the employer’s portion to the PF. The companies eligible for this relief were those who had 100 employees earning less than 15000 per month. This relief was announced for a period of 3 months.

Moreover, this relief currently helps a total of 6 Lakh establishments during the months of March, April, and May. The FinMin announced that these establishments that are currently eligible would have these benefits extended to both the employees and the employer’s contributions respectively. The GOI will now pay 24% to the PF for a period of 3 months.

8. Reduction in rates for those not covered in the first relief package.

The FinMin also announced that those who were not covered earlier would now only be required to contribute 10% instead of the earlier 12% rate. This 10% contribution will be for both the employers and the employees for the next 3 months.

However, for state PSU and CPSE, the employer’s contribution will remain at 12% but the employees will be required to contribute only 10%.

The main aim of the PF contribution from the govt or rate reduction is to transfer more money into the hands of the employers and employees. The employers would have greater liquidity and hence would be able to use this to better survive. The employees, on the other hand, would have more cash in their hand which would cause a spurt in the demand in the economy. This will create liquidity of 6750 crores available to the employers and employees for the next 3 months.

NBFC( Non- Banking Finance Corporations) / HFC(Housing Finance  Corporation)/ MFI(Micro Finance Institutions

9. 30,000 crore special liquidity scheme for NBFC/ HFC/ MFI

The scheme is available to those NBFC’s that are finding it difficult to raise debt in the COVID-19 environment. The special liquidity scheme of 30,000 crores was launched for this. Under the scheme, investment was made by buying investment-grade debt papers of NBFC HFC and MFIs. It is not necessary for the companies to be graded highly and be of high quality.

Purchasers of these debt papers will receive a guarantee from the GOI.

10. Rs. 45,000 crore Partial-Credit Guarantee Scheme(PCGS) 2.0 for NBFC’s.

With the PCGS already in place, the PCGS scheme is said to supplement it. This scheme will enable finance corporations that have low credit ratings to raise finances. In PCGS 2.0 the existing PCGS scheme will now be extended to cover borrowings such as primary issuance of bonds and commercial papers of these entities. Here ‘AA’ papers and below including unrated papers will also be eligible for investment. This will particularly benefit MFI that do not have ratings high enough to attract investments.

In this scheme, the first 20% of the loss will be borne by the guarantor i.e. GOI.

The main aim of both schemes is to provide liquidity to NBFC’s, MFI, and HFC. If they are provided with the liquidity it will lead to increased lending to MSMEs. So it can be said that even these 2 schemes are aimed at the MSMEs.

Discoms

Discoms

11. 90,000 crore liquidity injections of Discoms.

The working of the electricity sector requires Power Generation Companies(Gencos) to transfer electricity to Distribution Companie(Discoms) in respective states which is then transferred to the consumers and respectively paid for. The payments then trickle down to the Gencos. The Discoms currently owe Rs 94,000 crores to the Gencos. The lockdown unfortunately only alleviated the problems and troubles of the electricity sector as many industries were shut causing a fall in the demand. In the electricity sector, the units produced cannot be stored. Hence a fall in the demand causes a loss.

The FinMin unveiled that both PFC and REC will together infuse a total of 90,000 crores into all the Discoms against all the receivables they have. These 90,000 crores in loans will be extended against the state government guarantees with the exclusive purpose of discharging liabilities of Discoms and Gencos.

The loans, however, will be given to the Discoms for specific activities and reforms which include 

  • Introducing digital payment facility by Discoms where necessary. 
  • Liquidation of outstanding dues to state govt.
  • Plan to reduce financial and operational losses.

The benefits of this have also been aimed at being passed onto the consumers in the form of rebates for the power tariffs paid.

Infrastructure

12. Relief to contractors 

Central Agencies ( like Railways, Ministry of Road Transport and Highway, Central Public Works Department) have been directed to extend all contracts for up to 6 months. This covers both construction works and goods and service contracts. It covers obligations like completion of work, intermediate milestones, and extension of the concession period in PPP(Public-Private Partnerships) contracts. 

To ease cash flows the GOI will partially release bank guarantees, to the extent contracts are partially completed. This move will also improve the cash flows for the contractors as they will be provided with liquidity which will help them meet immediate business needs when the lockdown is lifted. 

TCS Chief Strategist Himanshu Chaturvedi said ‘ The Governments Aatma Nirbhar Bharat Initiative has recognized infrastructure as one of the 5 pillars. This is an acknowledgment of the sector’s role in India’s development and large scale employment generation.

13. Relief to Real Estate 

According to this measure, the real estate is to treat COVID-19 as a ‘force majeure'(unforeseeable circumstances that prevent someone from fulfilling a contract) and extend registration and completion date by 6 months. The regulatory authorities may extend this for another period of 3 months if necessary. This was done so that the home buyers may get new timelines for delivery.

The GOI has also decided to provide projects that have been stalled due to a lack of funds with financial support. Projects that are NPA’s or undergoing NCLT will also be eligible for the proceedings. The maximum finance for a single project has been capped at 400 crores.

This scheme is said to benefit 1509 housing projects comprising of 4.58 Lac housing units.

TDS and TCS

14. Reduction of rates

In order to provide more funds at the disposal of the taxpayer the rates of TDS for non-salaried specified payments made to residents and rates of the tax collected at source for the specified receipts shall be reduced by 25% of the existing rates. 

This will be applicable for the rest of the year starting from 14/05/2020 to 31/03/21. These measures are estimated to release liquidity of Rs. 50,000 crore.

It has to be noted that this doesn’t bring down the tax liability of taxpayers, it leaves more money with them during the course of the FY. Individuals will still have to pay their tax liability every quarter or annually.

15. Other Measures

All pending refunds to charitable trusts, non-corporate business, from the GOI shall be issued immediately.

Income tax returns extended from 31st July 2020 and 31st October to 30th November 2020. The tax audit has been postponed from 30th September 2020 to 31st October 2020. 

Closing Thoughts

The 20 Lakh Crore Relief Package

Ernst and Young Chief policy advisor D.K. Srivastava estimated that the measures announced on Wednesday amounted to Rs 5.94 lac crore, which includes both the liquidity financing measures and credit guarantees, although the direct fiscal cost to the govt. In the current financial year may only be Rs 16500 crore. As mentioned earlier the government has taken over the credit risk that the MSMEs and various financial institutions.

Hence the amount that the government would invest will depend on how much of the loans taken by the MSMEs and various financial institutions will default on. Furthermore, the real trajectory of the relief package can only be understood after it is viewed together with the measures in the Second and Third Tranch. Even more so on how many of these are successfully implemented. It still goes without saying that tranch 1 is nothing short of impressive.

May 16, 2020 Economics, News 2 comments
Zerodha vs Angel Broking - Stockbroker Comparison cover

Zerodha vs Angel Broking: Stockbroker Comparison

Zerodha vs Angel Broking Comparison: Zerodha and Angel Broking are two of the best and biggest discount brokers in India. In this article, we are going to compare Zerodha vs Angel Broking by looking into their brokerage charges, account opening charges, maintenance charges, exposure margin, trading platforms, pros, cons, and more.

This comparison between Zerodha vs Angel Broking will highlight the major differences between these two stockbrokers and help you choose the best between them based on your preferences.

Zerodha Introduction

zerodha demat account

Zerodha, founded in 2010 by Nitin Kamath, is the biggest stock broker in India and perfect for traders & investors looking for low brokerage, easy interface, and reliable trading platform. It has over +2.2 million clients that contribute to over 15% of daily retail trading volumes across  BSE, NSE, and MCX.

In terms of brokerage charges, Zerodha offers a zero brokerage for delivery equity investment & direct mutual fund investments. For all intraday, F&O, currency, and commodity trades across NSE, BSE, MCX, it offers a flat brokerage of ₹20 irrespective of the trading volume. Therefore, you can save a lot of brokerage charges on your trades using Zerodha as your broker.

Also read: Zerodha Review 2020 – Is Free Investing Legit? [Pros and Cons]

Angel Broking Introduction

angel broking discount broker

Incorporated in 1987, Angel broking is a big brand having +30 Years of experience in the broking world and +1 million happy customers. They have a presence in over 1800+ cities in India and a strong network of 8500+ sub-brokers. Angel Broking offers the trading facility in Equity, F&O, Commodities, and currency across BSE, NSE, NCDEX & MCX.

In the past, Angel Broking worked as a full-service broker and offered a percentage based brokerage charge to its clients for over two decades. However, they recently changed their business model (Nov 2019) from percentage brokerage to flat rates to compete with rapidly growing discount brokers like Zerodha, 5Paisa, Upstox, etc.

Angel Broking now offers a flat rate brokerage plan, named ‘Angel iTrade PRIME’. Here, the delivery trading is FREE of cost. And for all other segments i.e. Intraday, F&O, Currencies & Commodities, they charge a fixed rate of ₹20 per trade. The same simple rate is applicable across all exchanges and segments.

One of the key advantages of trading with Angel Broking is that they provide investment advisory, guidance, and recommendations to their clients for investing in the stock market. Further, they also offer research reports on companies along with many other value-adding tools and services to their clients for free.

Quick link to open your FREE account with Angel Broking.

Zerodha vs Angel Broking Comparision

NameZerodhaAngel Broking
AboutZerodha is the largest stockbroker in India with +1.5 million clients and +10% of daily retail trading volumes across NSE, BSE, MCX. Located at Bangalore, Zerodha offers zerod brokerage on delivery trading and a flat rate of 0.03% or Rs 20 per executed on all other segments.Incorporated in 1987, Angel broking is a big brand having +30 Years of experience in the broking world and +1 million happy customers. They have a presence in over 1800+ cities in India and a strong network of 8500+ sub-brokers. Angel Broking offers free delivery trades and flat charge of Rs 20 for all other trades
Founded20101987
CompanyPrivatePrivate
Main OfficeBangaloreMumbai
# of Active Clients on NSE (Nov 2019)9,09,0084,12,809
Broker ServiceDiscount BrokerFull-Service Flat rate Broker
Supported ExchangeNSE, BSE, MCX, NCDEXNSE, BSE, MCX, NCDEX
Brokerage SummaryFree for Delivery Trading and Rs 20 for all other tradesFree delivery trades and flat charge of Rs 20 for all other trades
Servies offeredEquity, Derivatives, Currency, Mutual Funds & CommoditiesEquity, Derivatives, Commodity, Currency, PMS, Life Insurance, ETFs, IPOs & Mutual Funds.
Account Opening ChargeRs 200Rs 699 (Currently Waived)
Commodity Trading Opening chargeRs 100Rs 0
Annual Maintenance ChargeRs 300Rs 450 (Second years onwards)
Trading PlatformKite 3 Web baased trading platform, Kite Mobile, Kite Connect API, Console, Pi, Sentinel, CoinAngel iTrade, Angel Broking Mobile App, Angel SpeedPro, Angel BEE
Brokerage Charges
Equity DeliveryFreeFree
Equity IntradayRs 20/ trade or 0.03% whichever is lowerRs 20 per trade
Equity Future ChargesRs 20/ trade or 0.03% whichever is lowerRs 20 per trade
Equity Options ChargesFlat Rs. 20 per executed orderRs 20 per trade
Currency future chargesRs 20/ trade or 0.03% whichever is lowerRs 20 per trade
Currency options chargesRs 20/ trade or 0.03% whichever is lowerRs 20 per trade
Commodity ChargesRs 20/ trade or 0.03% whichever is lowerRs 20 per trade
Minimum brokerage fees0.03% MinimumFlat Charges Rs 20
Call & Trade ChargesRs 20 per executed orderAdditional Rs 20 per executed order
Margin Offered
Equity Margin DeliveryNo margin for delivery - Cash and carryUpto 3x for equity cash
Equity Margin IntradayUpto 20x (Based on stock)Upto 6x
Equity margin futuresIntraday - 40%(2.5x), Carry forward - 100%(1x) of Total marginUpto 10x (Buying/Selling)
Equity margin optionsIntraday - 40%(2.5x), Carry forward - 100%(1x) of Total marginUpto 10x (Selling) and 3x (Buying)
Commodity MarginIntraday - 40%(2.5x), Carry forward - 100%(1x) of Total marginUpto 5x
Currency futuresIntraday - 40%(2.5x), Carry forward - 100%(1x) of Total marginUpto 8x
Currency OptionsIntraday - 40%(2.5x), Carry forward - 100%(1x) of Total marginUpto 8x (Selling) and 3x (Buying)
Addons
3-in-1 AccountYes, with IDFC BankNo
Research & TipsNoYes
Brokeage CalculatorYesYes
Span Margin CalculatorYesYes
Training & EducationYesYes
Interactive ChartsYesYes
Margin Against Shares (Equity Cash)YesYes
Margin Against Shares (Equity F&O)YesYes
IPO ServicesYesYes
Robo advisoryNoYes
Other FeaturesDirect Mutual fund investments, Kite APIs, Sentinel, Streak, SensibullResearch reports, Portfolio management system (PMS), Insurances
ProsZero brokerage charges for delivery trading, Simple and flat brokerage model in all other segments, Excellent trading platforms, Easy & fast online account opening, Direct mutual fund investments, Maximum brokearge of Rs 20Free delivery trades; Full-Service Broker with Flat charges; Services offered in Equity, Mutual funds, Commodities, IPOs, PMS, Life insurances; Customised trading help; Robo Order, High Margin
ConsNo stock advisory or research reportsAngel Broking doesn't offer 3-in-1 account, Higher Maintenece charges
Promotion/OfferFree delivery equity trading and Rs 20 or 0.03% wihchever is lower brokerage charge on all other tradesRight now - FREE Account Opening (Opening Charges 100% Waived)
WebsiteQuick Link to Open AccountQuick Link to Open Account

*Disclaimer: All pricing data was obtained from the published stockbroker’s web site as of 02/04/2020 and is believed to be accurate, but is not guaranteed. Account opening charges, margins, etc can vary from time to time depending on the active campaigns by the brokers and hence recommended to refer to the broker’s website for the latest updates.

Also read:

Closing Thoughts

Both Zerodha and Angel Broking offers low (flat) brokerage and fast trading platforms for their clients.

Zerodha, being the biggest discount broker in India with over 22 lakh clients obviously adds trust and brand value. Moreover, Zerodha’s innovative initiatives like educational facility (Varsity), free direct mutual fund investments through COIN, investment in IPO’s from the same dashboard, partner portals like Streak, Sensibull, etc create more value for their clients.

zerodha partners senseibull smallcase etc

On the other hand, Angel broking has built its reputation with over +30 years of experience in the broking industry. Since Angel Broking is a full-service broker, it offers a lot more segments than Zerodha like Portfolio management Services & Life Insurance. Moreover, a few notable advantages of Angel Broking over Zerodha is that they offer Research reports and robo-advisory to their clients, which Zerodha don’t.

Overall, if you’re looking for full-service facilities like investment advisory, Research reports, Robo-advisory, PMS, etc, then Angel Broking is a good alternative.

Nonetheless, if you wish to trade/invest on your own, but looking for essential add-on products like learning platform, Sensibull, Streak, etc and a user-friendly innovative trading platform, Zerodha is the go-to broker. Zerodha offers a little more benefits compared to Angel Broking for independent traders and investors.

May 13, 2020 Online Brokers 6 comments
What is Blue Ocean Strategy Examples Pros Cons

What is Blue Ocean Strategy? Examples, Pros & Cons!

Understanding Blue Ocean Strategy with Examples, Pros, Cons & More:  Hello readers! It is a new day and we are back with a new topic of discussion exclusively for you all!

Almost all of us have been to beaches for a weekend getaway or long vacations! If not holidays, we have definitely come across visuals of oceans and seas on social media and televisions. Haven’t we? Well, oceans are vast, deep, massive, wide and are the most baffling natural wonders of the world. Proper explorations and researches can give way to incredible discoveries and provide us information about its scopes and untapped prospects.

In a similar fashion, a path-breaking strategy, known as Blue Ocean Strategy, was introduced by  W. Chan Kim and Renée Mauborgne. It is a pacifist marketing scheme and is considered a strategic planning tool for assessing a business.

A Blue Ocean Analogy is utilized to unlock the wider, unfathomable, powerful and vast potential in the unexplored market space in terms of profitable growth. This strategic planning theory is an escape from the general notion of benchmarking the competition and focusing on lump sum figures.

What exactly is a Blue Ocean Strategy?

Blue Ocean Strategy is all about devising and acquiring the uncontested market forum by spawning a new demand.

Since the industries are in a state of non-existence, there is absolutely no relevance of peer comparison. The strategy bags the new demand by familiarizing unique products with advanced features that stand apart from the crowd.

In other words, the strategy spurs companies to offer extremely valuable products to the consumers. Thus, it supports the company to incur large profits and surpass the competition. The price tags of the products are generally kept on the steeper side because of their monopoly. Blue Ocean approach shuns the ideology of outperforming the competition and asserts to recreate the market boundaries and operate within the nascent space.

blue ocean strategy meaning

The kind of leadership and management required to initiate a Blue Ocean Strategy differs from the management of corporations that have short-term ambitions and mainly concentrates on increasing shareholder value by pushing up the stock prices via buybacks, mergers, and acquisitions. The Blue Ocean Strategy can be applied to all the sectors or, businesses and is not limited to just one kind.

On the contrary to the concept of Blue Ocean Industries, there exists Red Ocean Industries. Let us understand the concept in brief before moving to further analysis.

Red Ocean Industries

Red Oceans are those industries that are currently in existence or, what we call the contested market forum.

In Red Oceans, there are well-defined industry perimeters that are known and out in open to all. Due to the acquaintance with the competitive rules and acceptance of the drawn boundaries, the market space gets crowded and there is a consequent reduction in growth and profitability. When the product comes under the burden of pricing pressure there is always a chance that a firm’s operations could come under notable menace.

competition red ocean strategy

Companies under Red oceans strive to outperform their rivals by grasping a higher proportion of existing market share at another company’s loss. In order to keep themselves afloat in the marketplace, proponents of Red Ocean Strategy concentrate on creating competitive advantages by examining the blueprints of their peers/competitors. Such a saturated market space makes way for a toxic competition which ends up as nothing but an ocean full of rivals fighting over a dwindling profit pool. Such firms mainly seek to capture and redistribute wealth instead of creating wealth.

These kinds of market forums can be correlated with the shark-infested ocean waters which remain spilled with blood. Hence, the coinage of the term Red Oceans. Thus, the business world has pulled up their socks and is striving to skip the “Red Oceans” to create their very own “Blue Oceans”.

BLUE OCEAN STRATEGY VS RED OCEAN STRATEGY

(Image Credits: Blueoceanstrategy.com)

Examples of Blue Ocean Industry

Let us learn how organizations that have followed the path of Blue Ocean Strategy has undergone outstanding growth and profitability!

1) UBER

Uber Cab is a brainchild of the Blue Ocean Strategy and has dramatically transformed the picture of the transportation industry by discarding the nuisance of booking cabs, denial of services, meter issues and unwanted arguments.

It is a ridesharing service that enables customers to book their rides with the ease of swipes and taps. It also permits users to trace a  driver’s progression towards the pickup point in real-time through the medium of a smartphone application called Uber App.

Uber devised a new market by the amalgamation advanced technology and modern devices. It tried to differentiate itself from the regular cab companies and in turn developed a low-cost business model that offers flexible payments, pricing strategies and generates good revenues for both the drivers and the company. In the initial stages, Uber was successful in capturing the uncontested market space but was eventually flooded by the competitors. In spite of that, it continues to command the market and is speedily expanding across the world. As of 2019, Uber approximately has 110 million riders worldwide and holds 69% of the market share in the United States.

2) iTunes

Apple headed into the space of digital music with its unique and eminent product ie. iTunes in 2003. In previous days, conventional mediums like compact discs (CD) were put to use to disseminate and listen to music.

When iTunes ventured into the market, it solved the basic problems which were faced by the recording industry. As a result, iTunes cut down the practice of illegally downloading music while simultaneously catering to the demand for single songs versus entire albums in a digitalized version. High-quality music at a reasonable price offered by Apple became a talk of the town. All the available Apple products have iTunes to download music and have largely ruled the market space for decades. It is also recognized for driving the growth of digital music.

These examples of the Blue Ocean Strategy can enlighten future startups regarding the execution of a  strategic planning scheme and successfully unlocking new demand.

How to find and develop/Launch them?

Blue Ocean Strategy becomes the need of the hour when supply surpasses demand in a market. When there is limited scope for further growth, businesses try and search for verticals for discovering new business lines where they can enjoy the advantage of uncontested market share or ‘Blue Ocean’.

In order to find and identify an attractive  Blue Ocean, one needs to take into consideration the “Four Actions Framework” to devise the aspects of buyer value in creating a new value curve. The Four Actions Framework emulates strategic triumphs and guides towards the path of launching a Blue Ocean initiative.

The framework poses four key questions, namely:

A) Raise

It includes points that must be blossomed by industry in reference to the line of products, price tags and caliber of services. A startup must analyze the pros and cons of the existing organizations and their strategies for key aspects of differentiation.

2) Reduce

It points out the arenas of an organization’s product or, service which foreplays a crucial character in the industry but is not absolutely essential in nature. Therefore,  the proportion of the products can be curtailed without entirely eradicating them.

3) Eliminate

It points out the arenas of an organization or industry which could be eliminated absolutely for the purpose of cutting down the costs and also to fabricate a completely new market. At times, newly invented products can lead to self-assassination of the existing products and thus,  leads to an unwillingness to interfere with the current revenue source.

4) Create

It nudges the companies to shape up trailblazing products. The introduction of an entirely new product line or, service leads to the establishment of a new market and points of differentiation. Identification of the needs of the target market provides sound knowledge regarding the addition of unique measures and consequently tracking the progress for illustrating a Blue Ocean.

Now that we have discussed the Blue ocean strategy and how to find them, let us also discuss the pros and cons of this strategy.

Pros of Blue Ocean Strategy

Here are a few of the advantages of using the blue ocean strategy:

  1. Blue Ocean Strategy cooperates with organizations to find uncontested markets and avoid matured and saturated markets.
  2. It assists to move from the impediments of competing within the existing industry and cost structure and to gradually migrate towards constructive value improvement. In short, it demonstrates how to break free from the traditional strategic models and to expand profitability and demand for the industry by using the analysis.
  3. Value innovation is the backbone of a Blue Ocean Strategy. Value innovation is the alliance of innovation with price, utility, and cost positions. It eventually creates new value/demand for consumers and thereby, expands the chances of growth potential.
  4. Blue Ocean Strategy enables a fundamental transformation in mindset. It develops mental horizons and helps in recognizing the opportunities.
  5. Blue Ocean Strategy is based on “time and again” proven data rather than unproven theories. It is based on practical approaches that have proven results during live market executions.
  6. Products under the concept of the Blue Ocean Strategy doesn’t make a consumer choose between value and affordability. It is the simultaneous pursual of differentiation and low-cost theorem.
  7. Creating blue oceans is non-zero-sum with high payoff possibilities.

Cons of Blue Ocean Strategy

Let’s us also look at a few of the common cons of using this strategy:

  1. It’s quite difficult to come up with futuristic ideas and identify colossal and untapped markets.
  2. Nominating an articulate Blue Ocean Strategy is a result of a calculated and detailed research process backed by extensive analysis. It is to be kept in mind that there is no magic formula or, silver bullet.
  3. Venturing into a market in the early phase comes with baggage of risk. There is a high possibility that the customers might not understand the grass root of the products and services because of the absence of a fully developed technology.
  4. Production of a new market is never easy because an organization has to be smart and clear regarding its customer base and ways to impart education about new ideas, new products, and new solutions. It also requires clarity about the trade-offs, obstacles and the workforce.
  5. Opting for a different ocean i.e the Blue Ocean, requires a lot of patience, persistence trust, preparation, and faith. It is also extremely paramount to look at initial indicators for confirming the fact that “fishing”  is not being done in a dead sea.
  6. On finding a new ocean, other sharks from the saturated markets aka the Red Oceans and other adjacent oceans will be lured to the new market. Thus, building strategically defensive alternatives would be a wise step. Defensive alternatives majorly consist of brand power, technological advancement, and speed of execution.

Also read: What is a BCG Matrix? Explanation with Example!

Summary

Let us quickly summarise what we discussed in this article.

A path-breaking strategy known as Blue Ocean Strategy is a pacifist marketing scheme and is considered a strategic planning tool for assessing a business. It is all about devising and acquiring the uncontested market forum by spawning a new demand. Since, the industries are in a state of non- existence, there is absolutely no relevance of peer comparison. The strategy bags the new demand by familiarizing unique products with advanced features that stand apart from the crowd. Blue Ocean approach shuns the ideology of outperforming the competition and asserts to recreate the market boundaries and operate within the nascent.

These days, the Blue Ocean Strategy becomes the need of the hour when supply surpasses demand in a market. In order to find and identify an attractive  Blue Ocean, one needs to take into consideration the “Four Actions Framework” to devise the aspects of buyer value in creating a new value curve. The framework poses four key questions, namely, Raise, Reduce, Eliminate & Create.

That’s all for this article. Let me know what you think about the blue ocean strategy in the comment section below. Cheers!

May 12, 2020 Economics No comments yet
Why Alcohol Prohibition Lifted in India

Alcohol Prohibition Lifted in India – A Dream Too Good?

Understanding Why Alcohol Prohibition Lifted in India: On May 4th the Central Government lifted the prohibition on liquor sales. What followed was a parade through all news outlets exhibiting Indians risking their lives in thousands just to feel half-seas over. Media focus on movie box office records has been replaced by alcohol day to day sales records being reported during the pandemic. Today we try to unravel why the center decided to do so and what possible implication it could lead to.

What does alcohol mean to the government?

— Alcohol and the Soviet Union

Mikhael Gorbachev, although some might know him as the Soviet Union President during its collapse, our generation will famously remember his character played in the TV show Chernobyl ( Another disaster he oversaw as President). In 1985 Gorbachev started an anti-alcohol campaign due to its ill effects on health and crime in society.

In the first half of the 1980s, 13000-14000 deaths were drunk accidents. Over 800,000 people were caught for drunk driving and by 1985 these numbers kept increasing. The soviet union faced multiple problems due to the influence of alcohol. Accidents at work were common and at a period the condition worsened to a point where crops were not even gathered due to intoxicated farmworkers (Socialism, SMH).

Gorbachev’s campaign was a success and the government claimed increased life expectancy in males and even reduced crime rate. But all this was just a silver lining to a darker cloud. The loss of 100 billion rubles of revenue from alcohol sales led to an economic crisis after the alcohol sales moved to the black market. The campaign ended in 1987. The Berlin wall fell in 1989. The Soviet Union collapsed in 1991.

— Alcohol and India

booze money in India finshots

(Image Credits: Finshots)

The data presented above shows the revenue a state earns from the sale of alcohol. Alcohol revenues make up to 20%  of a state’s revenue. In the midst of the pandemic states like Delhi have faced a 90% fall in their revenues. For the state governments to fight the virus without any source of income will only lead to a nationwide economic crisis.

Punjab was the only state to officially request the government to ease restrictions over the sale of alcohol. Several other states like Karnataka, Maharashtra, Haryana, Rajasthan, Kerala, Tamil Nadu, Goa, and those in the Northeast raised the issue informally.

why government lifted restriction on alcohol sale

The states named in no way represent a stereotype of the people’s dependence on alcohol but instead how the state governments depend on alcohol. Investing in alcohol has been the simplest and most profitable source of income for the state governments. In 2017 as per the Kerela State Beverages Corporation (BEVCO) earned around Rs.600 for every Rs. 100 spent on alcohol. This example sums up why a government would actually consider investing in alcohol-based businesses. It incomes earned also explain why the prohibition on alcohol sale had to be lifted.

Problems with alcohol prohibition

Gujarat, Bihar, Nagaland, and Mizoram are the states in India that have prohibited all sale of alcohol to its citizens. It can already be estimated that just like Delhi, these states too will face a huge loss of revenue due to the lockdown. But these are just the beginning of their financial troubles as they would not be able to raise revenue from alcohol sales either.

If we believe that these dry states are successful in the prohibition of liquor it would present us to be too naive. By banning liquor the governments have only succeeded in diverting the funds from their pockets to the black markets. 

Similar bootlegging practices can be expected in a nationwide prohibition. But what is even more troubling features of the prohibition are the thefts and the scams. An alcohol store, for example, was looted for 4.18 lakhs in Bengaluru. Scams promising delivery of alcohol had already begun to see the light of day during the 40 days of prohibition.

Even the manufacturing of illicit liquor saw an increase. The consumption of such illicit liquor is much more dangerous and harmful to health. All these crimes have resulted in wastage of police resources. The energies that could be focussed on controlling the virus were spread to solve these cases which could have been avoided.

Raising the price of Alchohol

After the confusion and the idea of social distancing being flouted on the first day of the alcohol prohibition being lifted, the government resorted to discourage guzzlers by raising the taxes. The Delhi government added a 70% corona tax. The state of West Bengal levied a 30% tax. However, the highest increase in the prices was from the Andhra Pradesh government. The prices were 75% higher after 3 revisions. The Karnataka and Tamil Nadu government also raised the excise on alcohol.

— The relation between prices and Alcohol

The reasons for the increased price lie in obtaining the twin objective of raising revenues and discouraging alcohol purchase. This is so that lesser people venture out of their homes in search of alcohol. A survey conducted in North West England with 22,780 in 2008 speaks differently. It was conducted to explore alcohol consumption changes if the prices were adjusted.

According to the survey, 80.3% considered a lower alcohol price would increase consumption. 22.1% considered that rising prices would reduce consumption. This meant that alcohol consumption was lower price elastic. This meant that you could lower alcohol prices to increase its consumption but an increase in price would still keep consumption at the regular levels. In other words, you can increase the harm by reducing the prices but not reduce the harmful effects of alcohol by increasing prices.

— Alcohol and Growth

Alcohol Prohibition Lifted

( Source: The prices above are from the year 2017. The government would earn over 600% in the case above)

In India, a major portion of alcohol consumption is from the middle and lower-income groups. An increase in the prices of alcohol would not discourage a habitual drinker as discussed earlier. This increase would just decrease the disposable income or savings available for essential goods. Their spending on alcohol would deprive their children of nutrition and families of other essentials.

We just had a look at the impact of increased prices from an individual’s perspective. Let us have a look at what would be the case if due to this the consumption of essential goods is reduced in the economy. At the end of the day, it is essential goods that have the ability to kickstart the economy and not alcohol products. It is the demand for essential products that will enable industries to employ more labor. A study of the US states between 1971 to 2007 found that a 10% increase in per capita beer consumption resulted in a 0.41 percentage point drop in the annual income growth. The government has successfully increased its revenue but unfortunately directed demand away from essential products.

Also read: [COVID19] 10 Most Severely Affected Industries by Coronavirus

Which Direction to head in?

The points raised above have built walls to every decision taken in association with alcohol prohibition being lifted. The only exception being the decision to lift the prohibition itself.

Firstly the economy is too dependant on alcohol. The government cannot harvest any other source of income and liquor stores increase the risk of contraction. Secondly raising taxes does not discourage drinkers. Instead, it slows the opening of the economy. Thirdly a complete alcohol prohibition will only finance the black market and increases other crimes.

The following action taken by some state governments or possible consideration would help the government find a middle ground. Their application through states would result in being beneficial to both the government and the people.

— Open Alcohol outlets only after planning for appropriate social distancing measures.

The Supreme court on May 1st suggested the states to consider home delivery of alcohol. This would not only encourage social distancing the increased demand for home delivery would increase employment in the home delivery service. The food delivery company Zomato has already shown interest. This can be taken up by other delivery apps too. In a worst-case scenario even if any one of the parties comes in contact with someone who has contracted the virus, the linkage would be able to be traced by the app. This, however, should only be applied after ensuring age restriction are in place. West Bengal and Chattisgarh have already adopted the home delivery model.

The Delhi government has started issuing E-Tokens to buy liquor. Allowing only limited people at a set time only at particular stores with the pass. This also could also enforce social distancing but still involves the risk of venturing out.

— Reduce the price to levels the same as before the lockdown

The price increase has to be curbed. It is understood that the government is in dire need of income. This, however, will not even benefit the economy in the long term perspective as all revenue will stop once people run out of their savings. A habitual drinker will continue drinking even at higher prices. Also, the present condition involves people losing jobs and taking salary cuts. The price increase would do greater harm than good.

— Set a limit on Quantity

Settling a limit to the quantity available person is a very important step. We have already seen the survey earlier which concluded that a reduction in the prices would lead to increased demand. Hence applying the previous point without ensuring this will only negate all benefits. When clubbed with the first point, tracking the quantity via App or an online portal makes it easy.

All decisions being taken with the expectation of the worst would help us better prepare and forsee such situations. With no vaccine in sight for a year, all decisions must enable us to live accordingly for at least a year. The pandemic already has and will keep changing the way we live forever. Online Delivery with limits is the new Black!

May 11, 2020 Economics, News No comments yet
Option Greeks Basics - The Gods In Option Trading

Option Greeks Basics: The Gods In Option Trading

Introduction to Option Greeks Basics: What are the makings of a great cricket match? Is it just that brilliant hundred by a batsman, or one 5 wicket haul by a bowler or is it that sparkling catch or run-out by the fielder. Or is a combination of all of these along with some crucial moments in the game.

Let us take the example of the inaugural World T20 final 2007. The biggest match of the tournament. The Arch rivals, “India Vs Pakistan”. No bigger setup in the world of cricket. But what made this match memorable was the quality of cricket played. India did eventually win the world cup final by 5 runs.

But what made this match unforgettable? Was it the innings by Gautam Gambhir (75 off 54 deliveries), was it the dash by Rohit Sharma (30 off 16 deliveries) that propelled India to a competitive score, was it the genius of Robin Uthappa to get a direct hit run-out of rampaging Imran Nazir, was it the onslaught by Misbah-ul-Haq or was it the masterstroke by none other, but M S Dhoni, to give last over to Joginder Sharma and seal the deal. I guess it was a mix of everything that made it an event to remember.

What are Greek Options?

Similarly, the Option Greeks are the ingredients of the recipe which eventually helps in pricing the options. Option Greeks are various factors which help option trader in trading options. With the help of these Greeks, one is able to price the options premium, understand volatility, manage risk, etc. These Greeks also have a major impact on each other.

There are majorly four different types of option Greeks – Delta, Gamma, Theta, Vega, and Rho. We will be discussing all of them in this post.

Quick Note: If you’re new to options trading, you can read our series of articles on options here.

Delta of an Option

In simple terms, Delta measures the change in the value of premium with respect to change in the value of underlying. For a call option, the value of Delta varies between 0 and 1 and for a Put option, the value of Delta varies between -1 and 0.greek options basics Delta of an Option

The above Option chain is for Nifty at 09:57 am. Nifty spot is trading at 9320.

delta of an option nifty option greeks

The above Option chain is for Nifty at 10:07 am. Nifty spot is trading at 9316.

Now, form the above two tables, it is clear that with a small change in the value of Nifty, the premium for the option changes. The premium for 9100 CE in the first option chain is 291.65 and in the second option chain is 289.40.

Now, say if I were bullish on the market, so how would I find the premium for all the strike price if I were to expect the Nifty spot to be trading at 9400 by End of Day. So, this is where Delta comes into the picture.

For a call option, assume the delta for a strike price is 0.40. So for every 1 point change in the value of underlying, the value of premium will change by .40 points. Say, if I had bought 9350 CE at a premium of 142.70. The Nifty spot price is 9316 and the Delta for this option is .40. And if by the End of the day, the spot price of Nifty jumps to 9350.

So the change in the Premium will be = (9350-9316)*0.40 = 14.4 points. So the new Premium will be = 157.1. Similarly, if the spot price were to come down to 9250, then the change in the Premium will be = (9250-9316)*0.40 = 26.4 points. So the new premium in this case will be = 142.7-26.4 = 116.3.

Delta value dependency on the Moneyness of an Option

The value of the Delta is derived using the Black & Scholes model. Delta is one of the output form this model. The Moneyness of the contract helps in deciding the value of Delta:

MoneynessDelta Value (Call Option)Delta Value (Put Option)
In the Money0.6 to 1-0.6 to -1
At the Money0.45 to 0.55-0.45 to -0.55
Out of Money0 to 0.450 to -0.45

Delta of a Put Option: The delta of a Put option is always negative. The value ranges between -1 to 0. Let us understand it with the help of a situation. Say the spot price of Nifty 9450. And the strike price in consideration is 9500 PE (Put option). The Delta for this option is (-) 0.6 and the premium is 110.

Now, in Scenario 1, if the spot price of Nifty goes up by 80 points, then

New Spot price = 9530

Change in Premium = 80*(-.6) = -48 points

So the New Premium = 110-48 = 62. In case of Put options if the spot price of underlying asset goes up, then the premium is reduced (the premium and spot price of Put option are negatively co-related)

In Scenario 2, if the Spot price goes down by 90 points, then

New Spot price = 9360

Change in Premium = 90*(-.6) = 54 points

The New premium = 110+54 = 164 points

Risk profiling for choosing Delta

The risk taking ability of a trader has an impact in choosing the right strike price. It is always advisable to avoid trading in Deep out of Money Options as the chances of those options expiring In the money is like their Delta (5% to 10%). For a Risk Taker trader, a slight out of Money or At the Money contracts are the best strategy. A Risk Averse trader should always avoid trading Out of Money contracts. They should always trade At the Money or In the Money contracts as the chances of trade expiring in their favour is significantly higher than Out of Money contracts.

Gamma of an Option

As we have seen, the Delta of an option measures the change in the value of premium with respect to change in the value of underlying. The value of delta also changes with the change in the value of underlying. But how does one measure the change in the value of delta? We introduce you to ‘GAMMA’.

Gamma measures the change in the value of Delta with respect to change in the value of underlying. Gamma calculates the Delta gained or lost for a one-point change in the value of underlying. One important thing to remember here is that Gamma for both Call and Put option is positive. Let’s understand:

Spot price of Nifty: 10000

Strike price: 10100 CE

Call Premium: 25

Delta of option: .30

Gamma of option: .0025.

Now if Nifty goes up by 100 points, then

New Premium = 25 + 100(.3) = 55

Change in Delta will be = Change in Spot price * Gamma = 100*.0025 = .25

New Delta will be = .30+.25 = .55 (Option is now an At the Money contract)

Similarly if Nifty goes down by 70 points, then

New premium = 25 – 70(0.3) = 4

Change in Delta will be = Change in Spot Price * Gamma = 70*.0025 = 0.175

New Delta Will be = .30-.175 = 0.125 (Option is now a Deep Out of Money contract)

Gamma Movement

The movement of the gamma changes and varies with the change in the Moneyness of a contract. Just like Delta, the movement in Gamma is the highest for At the Money contracts and it is least for Out of Money contracts. So, one should ideally avoid selling/writing At the Money contracts. Out of money contracts are the best ones to write as they have a very good chance of expiring worthless for option buyer and the seller can pocket the premium.

Also read: Introduction to Candlesticks – Single Candlestick Patterns

Theta of an Option

Theta is an important factor in deciding option pricing. They uses time as an ingredient in deciding the premium for a particular strike price. Time decay eats into the option Premium as it nears expiry. Theta is the time decay factor i.e., the rate at which option premium loses value with the passage of time as we near expiry.  If we could recall, Premium is simply the summation of Time Premium and Intrinsic value.

Premium = Time premium + Intrinsic value.

Say, The Nifty spot is trading at 9450 and the strike taken into consideration is 9500 CE (call option). So the option is currently out of Money. There are 15 days to expiry and the premium charged for this option is 110. Now, the Intrinsic Value (IV) of this option = 9450-9500 = -50 = 0 (Since IV cannot be negative)

Now, Premium = Time value + IV

=> 110 = Time value + 0, hence the time value for this Out of Money option is 110 i.e., the buyer is willing to pay a premium for an Out of Money option. So, the analogy “TIME IS MONEY” holds true in case of options pricing.

Let’s take another example:

  1. Say, Time to expiry = 15 days, Spot price of share of XYZ company = Rs. 95, Strike price = 100 CE, Premium = 5.5
  2. Now, if the spot price of XYZ = 96.5, time to expiry = 7 days, then for the same strike the Premium reduces to 3
  3. Again if the share price increases to 98.5, for same strike price and with just 2 days to expiry, the premium reduces to 1.75
  4. Therefore, from the above example it is clear that even though the spot price is moving towards the strike price, the premium is reduced as the time remaining to make a substantial move above strike price is reduced. The option has less chances of expiring In the Money. The Greek Theta is a friend to Option writers. It is advisable for option writers to write/sell the option at the starting of contract as they will be able rise the premium erosion with passage of time.

So from the above example, it is clear that the value of Premium is Depreciating with the passage of time.

Vega of an Option

Vega as a Greek is sensitive to the current volatility. It is one of the most important factors in determining the option pricing. Volatility is simple terms is the rate of change. Vega simply signifies the change in the value of an option for 1% change in the price of underlying asset. Higher the volatility of underlying asset, the more expensive it is to buy the option and vice versa for lower volatility.

Say the spot price of XYZ Company is Rs. 250 on 5th May and the 270 call option is trading at a premium of 8.

Let’s assume that the Vega of the option is 0.15. And the volatility of the XYZ Company is 20%.

If the volatility increases from 20 % to 21%, then the price of the option will be 8+0.15 = 8.15

And similarly, if the volatility goes down to 18%, then the price of the option will drop to 8 – 2(0.15) = 7.7

Key Takeaways

If options is a team, then it has various players are Option Greeks like Delta, Gamma, Theta, Vega, volatility, etc. Each and every Greek has its own pivotal role in finding the exact pricing of the option. They play a pivotal role in deciding the Moneyness of the option.

A simple and clear understanding of all the Greeks goes a long way in deciding the right strike price and right option strategy. Risk Management both for option writers can be handled with a better understanding of the Greeks. Option buyers should ideally avoid trading Out of Money options and Option sellers should ideally write/sell Out of Money Options.

May 11, 2020 Options Trading, Trading 1 comment
10 Questions to Ask Before Purchasing a Stock - Investment Checklist cover

10 Questions to Ask Before Purchasing a Stock - Investment Checklist!

Most Important questions to ask before purchasing a stock: Picking a winning stock that can give consistent returns for many years requires a lot of analysis and research. However, you can simplify the research process if you have an investment checklist.

Having a reliable checklist for picking stocks can reduce the chances of missing an important detail that you should have studied before investing in the stock. As Charlie Munger, Vice-Chairman of Berkshire Hathaway has famously quoted:

“No wise pilot, no matter how great his talent and experience, fails to use a checklist.” — Charlie Munger

In this post, we are going to discuss ten key questions to ask before purchasing a stock by every stock investor. Let’s get started.

Quick Note: Although there are hundreds of points to check while picking a stock to invest, however, most of them can be categorized among the ten questions listed below. Anyways, by no means, I claim that this is the best checklist for picking stocks. My suggestion would be to study the investment checklist given below, improvise and make your own list of questions. Further, for simplicity, I’ve not included financial ratios.

10 Questions to ask before purchasing a stock.

Here are the ten key questions that every investor should ask before investing in a stock.

1. What does the company do?

What are the products/services that the company offers? Do you understand the company’s business model? How does the company actually make money? What are the top/best-selling products of the company?

2. Who runs the company?

Who are the promoters/owners of the company? It the company a family-owned or professionally managed one? Who is managing the company? What are the credentials/background of CEO, MD, Board of directors and the management team? What is the shareholding pattern of the company?

3. Is the company profitable?

How much profits did the company generated in the last few years? How are the company’s gross, operating and net profit and what is the profit margin at each level? Is the profit of the company growing over time or stagnant/declining?

4. Does the company have a sustainable competitive advantage?

Does the company have a moat like intangible assets, customer switching cost, network effect, cost advantages or any other sustainable competitive advantage that can keep the competitors away from eating their profits?

5. How was the past performance of the company?

How is the company’s financials in the past few years? What’s the trend in the company’s income statement and cash flow statement? How are the sales, EBITDA, Cash from operating activities, free cash flow and other financial metrics over the past few years?

6. How strong is the company’s balance sheet?

Are the assets of the company growing over time? How much is the liability of the company? Is the company’s shareholder equity increasing? How much cash does the company have on the asset side? How much is the company’s Intangible assets, Inventories, Receivables, Payables and more? Does the company invest in its Research & Development, especially in a few sectors like Technology, Pharmaceutical, etc?

7. Was the management involved in past fraud or scams?

Was the company’s promoters or management involved in any past scam? Does the company has any history of cheating the shareholders or any past penalty by SEBI?

8. Who are the key competitors?

Who are the direct and indirect competitors of the company? What is the market share of the company vs the competitors in the industry? What this company is doing differently compared to its competitors? Are there any global competitors or the possibility of global leaders entering the same market anytime soon?

9. How much debt the company has?

How much short-term and long-term debt the company has? Does the company generate enough profits or Free cash flow to cover the debt in the upcoming years? Have the promoters pledged any of their shares?

10. How is the stock valued?

What is the true intrinsic value of the company? Is the company currently over-valued, under-valued or decently valued? Is the company relatively undervalued compared to the competitors and industry? What is the calculated intrinsic value by different valuation method? How much is the margin of safety? Will you be overpaying if you buy the stock right now?

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

Closing Thoughts:

Although getting a recommendation or investing where friend/colleague suggested may land you into a few profitable deals. But if you want to make consistent returns from the market (and not just being lucky), you need to build your own trustable investing strategy.

It’s true that picking a winning stock required a tremendous amount of research. However, having an investment checklist of questions to ask before investing in stock significantly reduce the chances of investing in fundamentally weak stocks. Moreover, you can easily eliminate over 90% of the companies that don’t meet your checklist.

I hope the questions discussed in this post is helpful to you. If I missed any additional important to ask before purchasing stock in this investment checklist, feel free to mention below in the comment box.

That’s all. Have a great day and Happy Investing!

May 8, 2020 Investment Basics 5 comments
Facebook Jio Deal 2020 mukesh ambani mark zuckerberg

Facebook- Jio Deal: What $5.7B investment means to Stakeholders?

Facebook- Jio Deal: The fourth of May bought us news different from those caused by the grim pandemic. In one of the first virtual deals, Mukesh Ambani and Mark Zuckerberg took to their Social Media to announce the agreement. According to the deal, Facebook would invest $5.7 billion in exchange for a 9.9% stake of Jio. This deal would be the largest investment for a minority stake by a tech company in India.

Soon after the deal was announced words bordering data privacy concerns and national security were thrown around. Today we go through what the characteristics of the deal are and its impact on the Indian markets.

How big are these numbers?

Facebook- Jio Deal: What $5.7 billion investment means to Stakeholders

Facebook investing 5.7 billion (Rs.43574 crore) for 9.9% would mean that they have valued Jio as a $57 billion company. If we take a look at FDI Equity inflow from 2019, the US totaled at only $2.7 billion. Facebook has been sitting on a huge cash pile of $52 billion and the investment hardly covers 11% of its reserves.

If we change perspective, Reliance Industries has invested 1.8 lakh crore into Jio. This would peg 10% at 18000 crores. Although Jio has been a force to reckon with, remapping the telecom industry. Questions do arise over what the additional amount means? and what Facebook saw in Jio considering it valuable to invest in?

Industries likely to face immediate impact

Facebook has struggled with its plans to turn Whatsapp into a payment app offering similar services like Paytm. Jio, on the other hand, is facing challenges entering the online consumer segment. This deal with the right exchange of data could help each with their respective goals.

Facebook-owned Whatsapp is being planned to be updated as an ordering and payment app. Facebook would also be able to use Jio’s reach to local Kiranas to promote the model. This would enable us to order products from local stores through WhatsApp and also make payments through it.

Although Jio is valued mainly as a telecom service provider, just by going through the immediate plans the effects of this deal will span across 3 Industries. The telecom, online retail, and online payments industry.

— Online Retail Industry

Of the Rs.43574 crores, 15000 crores will remain with Jio. This will be invested in its online grocery store, Jio Mart. Data collected by WhatsApp would enable Jio Mart to understand the demographics better for operations. This, however, would be a cause for concern to existing heavyweights like Amazon and Flipkart.

Online Grocery Shopping has been one of the few sectors in India that have gained demand during the pandemic. Before the outbreak, only 1% of the 80,000 crores grocery market in India was represented online. After the lockdown was imposed the online grocery shopping represents 50% of the grocery demand in the country.

— Online payments industry

Whatsapp entering the online payment service would pose a serious challenge to existing players. The need for additional apps would be challenged when a single app would allow you to text, order, and pay. Whatsapp already running deep through Indian veins, at times even being upgraded as the prime source of news would only be upgraded to the status of a super app if its goals are realized.

Also read: 5 Best UPI Apps in India in 2020 (For Android Users)

— Telecom Industry

With companies struggling with liquidity during the pandemic, a better time would not come for Jio to receive investment. The 5G debate is soon to be settled. The government would waste no time for spectrum sales to raise the revenue it is in desperate need of. The spectrum sale is aimed at 50,000 crores. This would make Jio the front runner. Closely followed by airtel looking for investments and Vodaphone-Idea as the smallest player trying to weather the tough times.

Facebook- Jio Deal: What’s in it for Facebook?

Although there has been no clear indication over the aims of the two companies. Facebook in recent times has faced stiff competition from Apps from China like WeChat and TikTok. Due to China being a market closed to foreign investments, the world views India as the next close contender. The coming together of the two giants will have more than what meets the eye.

1. Data – The New Money

To understand the role data plays we would first have to understand Facebook better. Have you ever searched for fashionable cloth wear that you always wanted? All this only to find yourself followed by advertisements related to the product on social media? Or perhaps an advert caught your eye and you decided to know more by clicking on it.

Did you spend the following week being bombarded by advertisements for similar products? Have these come to be by chance or does the universe really want to see you in a suede jacket to align with its plans for you along with the stars? Unfortunately not!

— The Facebook Business Model

Facebook earned a revenue of $70.7 billion in 2018. This amount seems too huge for a social media platform that offers its services for free. However, social media has been only a front for the data mogul.

The very business model of Facebook lies in gathering information from its users and sharing it with advertising companies or other MNCs. The data-based on user preferences is shared with advertisement companies that are willing to pay for it. The user is then made the recommendation accordingly. Last year alone Facebook made 84$ per user in the North American region.

Unfortunately, it can also be said that the very business model by Facebook hurls away client privacy and data protection. The media giant has already been involved in public spats with the Indian government. This was over the Indian government’s data privacy concerns. It led the government to pressurize Facebook to localize Indian data storage.

facebook jio deal

The deal has already raised these privacy concerns as Jio has over 388 million clients. Jio, however, may view this as an advantage. This is because India has been Whatsapps biggest client. Whatsapp has 400 million users in India alone ( larger than Jio’s customer base). The exchange of data between the two may provide them with the opportunity to understand the preferences and needs better. There still may exist a quid pro quo as Facebook would benefit from Jio’s deep reach in the Indian markets.

— The disruption caused by Jio to Global Data plans

Data is primarily the reason why companies like Google offer free Wifi in railway stations. Facebook too had plans under the name Express Wifi. Here solar-powered drones would provide free internet beamed through the air. These models were quashed after the entry of Jio entered the market in 2016. Jio’s free internet made innovative investments from global giants a waste.

The Indian market is said to double its smartphone users to 859 million by 2022. If Facebook is even to gain 100 million clients, it would result in additional revenue every year. These numbers put Facebook’s data and investment in Jio in the right perspective.

2. Protectionism

digital india modi jio

Most of Facebook’s plans have been always roughed up by the Indian Laws. Even its Free Basics program aimed at providing affordable internet service to less developed countries was banned in India. TRAI rolled out the judgment as it was said to infringe on the principles of net neutrality.

Jio’s lobbying ability would be just as important to Facebook as Jio’s market penetration. Whatsapps online payment service is also still under review from the government. If Whatsapp plans to successfully roll out the payment service app, it’s deal with Jio will play an important role. Reliance Jio has already proved time and again its lobbying prowess in Delhi. Otherwise, how would the PM be used in a private company’s advertisements. And the companies still be get away with a hefty fine of Rs.500?

3. A platform for other products

Investing in Jio could also see an opportunity for similar products existing in both companies. They span from retail and gaming to education.

Facebook also has plans to launch its own digital currency again in 2020. This makes India a market to be explored as the Supreme Court verdict in March legalized Cryptocurrency. This, however, will be under scrutiny from the RBI. This is due to the concerns over the effects it may have on the Rupee.

Facebook- Jio Deal: What’s in it for Jio?

Jio has proven its ability to compete across sectors. A deal of this magnitude will extend Jio’s reach and further enhance its ability to compete. We have already discussed how Facebook will be benefitted from Jio’s market base. Jio in exchange will be provided with the opportunity to further expand. This is because the number of users with WhatsApp still exceeds Jio’s customer base.

Mukesh Ambani in his 2019 Annual General Meeting of Reliance Industries announced that Reliance would be debt-free by 2021. This seemed like a longshot as the outstanding debt as of September 2019 stood at 2.92 lakh crore. Instead of an IPO, Jio has decided to sell off ownership and enter into a strategic partnership with investors.

This would not only reduce debt but also provide invested partners with benefits in exchange. The first attempt at this stood with the $15 billion deal with Saudi Aramco. Unfortunately due to the Crude oil crisis, the deal fell apart. Apart from the 15000 crores aimed at Jio Mart, the remaining amount would be utilized for debt reduction. Reliance has also signed an agreement of 7000 crores with British Petroleum for 49% share in its fuel retail. Forming clever alliances would ensure Jio’s survival in the long term.

Mukesh Ambani has made it clear to not trod the same road his brother did. Too much debt was a major factor that eventually led to RCom filing for bankruptcy in 2019. The Facebook deal would result in Jio having a better Balance Sheet.

Closing Thoughts

— With regards to the Investment deal

According to former Airtel CEO Sanjay Kumar, the deal between Jio and Facebook can only be seen positively as it comes in a time where companies are cash strapped. Any Foreign investment in this period can only be seen in a positive light.

It has to be noted how Facebook has cleverly avoided being prey to oil price impact. They did this by directly investing in Jio instead of Reliance Industries, Jio’s parent company.

The deal, however, leaves a number of players affected in different industries. They will have to draw up new roadmaps. As now they will battle the pandemic and at the same time deal with the added competitive prowess of Jio. It would be unfair for Jio to be criticized on the ground of it being bought by a US MNC. Companies like Flipkart and Paytm are currently just tools for Walmart and Alibaba to be used in the Indian markets. The other companies in the telecom industry too have been financed from foreign investment.

— With regards to Data

When it comes to data privacy Mukesh Ambani’s stand provides some assurance. He has stated that data is a national resource. The value created by data generated should and be deployed by Indians. He also added that data generated in India shall remain localized within India’s geographical boundaries.

— With regards to the Future

India should take note of the Jio deal and encourage other industries to do so too. This is because global industrialists and investors will be looking for new markets to invest in. This can be expected as they would preferably avoid China due to the uncertainty in the future. Attracting investments would create jobs that were lost due to the pandemic. They would also provide the necessary boost required by the economy.

India must ensure that they are ready to contend for investments once the lockdowns are lifted. This would definitely save the plummeting economy.

May 8, 2020 Market, News 2 comments
what is barrier to entry cover

Understanding Barriers to Entry – Why they are Crucial!

Barriers to Entry Definition, Types & More: Any entrepreneur or company that ventures out into a business faces challenges. The external challenges that have a considerable economic impact to stop new entrants are termed as Barriers to Entry. Generally speaking, there have been many definitions of barriers to entry. Franklin Fisher defined it as “Anything that prevents entry when the entry is socially beneficial”. The vagueness of many such definitions has led to them being disregarded. If considered then even psychological barriers to becoming an entrepreneur would be included.

As per Investopedia, Barrier to Entry is the economic term describing obstacles from easily entering an industry or area of business. It goes without saying that these barriers are beneficial to existing players. This is because they result in increased profit from the market due to the reduced competition, thanks to the barriers. Today, we take a look at what exactly are Barriers to Entry.

barriers to entry meme

Types of Barriers

The barriers to entry may involve innocent or deliberate factors. Innocent factors are those that may have come into existence without much direct influence from any of the stakeholders. Deliberate factors are those that have come into existence due to the actions of the stakeholders. The barriers  are generally outlined under the following:

– Legal Barriers

Legal barriers are those that have been constructed by government or regulatory bodies. These may include licenses or permits required to conduct business, the red tape system or other standards and regulations to safeguard consumers. The legal factors vary from country to country further depending on the industry. According to the ease of doing business Index, India currently ranks 63rd.

Although it may seem that the legal factors may be independent of influence from existing players, this is not the case. Lobbying plays an important role too. Lobbying is the practice where an organization may undertake campaigns to pressure governments into specific public policy actions. In the US it is completely legal and protected by the law.

In India however, the legal status of lobbying is not clear. It is at times is mistaken for bribery. Bribery provides scope for favoritism but lobbying does not specifically ask for special treatment. Yet it is a means to influence legislative action. Lobbying by existing companies may result in barriers being put up by the government towards new entrants. 

– Technical Barriers 

The technical factors are industry-specific. They may pose themselves as barriers due to startup costs, patents, monopolies, etc. Patents are exclusive rights given to individuals or organizations for inventions in products or processes that are innovated and premiered in an industry. When the new entrants are not allowed to replicate similar products or processes it leaves very little scope for entry.

Startup costs act as barriers in industries that require huge capital to be invested in the initial stages. Some startup costs may also be classified as sunk costs. These are non-recoverable once invested eg. advertisement. The airline industry and petrochemical industry can be said to have a huge start-up cost barrier.

– Strategic Barrier

Strategic barriers are caused by existing players. One of the strategies is Predatory pricing. This may be done by pricing lower on purpose. This will make it difficult for new entrants to survive as it removes all possibility for them to break even. The cash-rich existing players may then look at the possibility of acquiring these new entrants.

Monopolies or Oligopolies may also use aggressive marketing to drive out new entrants. Zomato has continuously used competitive pricing to its advantage. Also, they then acquire new entrants(Ubereats) unable to survive.  

Also read: The Equilibrium of Duopolies in Indian Market

– The Brand Loyalty Barrier   

the brand loyalty barriers of entry

Brand loyalty from consumers is another barrier in itself. In some industries, existing players have had such a  stronghold for a period of time. This has resulted in the product name itself being replaced by the brand name. Eg. Colgate. The cost to new entrants to acquire and keep new consumers is too high.

apple brand loyalty barriers of entry

Markets generally with high entry barriers have few players and thus high-profit margins. Markets with low entry barriers, on the other hand, will have lots of players resulting in lower profit margins.

Advantages of Barriers to Entry

– Ease of regulation

Sensitive industries will involve the government premeditatedly imposing restrictions. This is generally seen in industries that involve natural resources or pharmaceuticals. Industries based in natural gas will face this as the economy is affected gravely by their prices.

The pharmaceutical industry too due to its sensitivity cordoned off most of the probable players. In the US due to the FDA regulations, 93% of the applications are not approved in the first cycle. As per Forbes it may cost between $1.3billion to $12billion and may take up to 10 years before it is approved for a prescription.

– Benefits to Consumers

The greater the barriers the more benefit the consumer gets as only the best and standard products would reach the consumers. These barriers also protect the industry from subpar products.

Also read: Pat Dorsey’s Four Moats for Picking Quality Companies

Closing Thoughts

Although barriers may seem impossible to pass and then also compete with, however, most successful companies exist today because they were able to. Innovation in these aspects has the strongest ability to clear barriers. A disruptive pricing model too has been known to be effective. In the case of the telecom sector, the entry of Jio providing not reduced prices but free services revolutionized the sector.

However, a pricing strategy can be pursued only by cash-rich startups. It is also necessary for new entrants to clear barriers. Doing this will ensure that they are taken seriously. This seriousness will be reflected in the investor community with a more positive response towards the new entrants.

May 7, 2020 Economics, Market No comments yet
Right time to invest or is it

The Right time to invest, or is it?

“Imagine, always wanting to own something but not being able to, because that something was too expensive, maybe not worth the price tag or maybe it was the right price but your pockets were not deep enough to buy it”

The above thoughts must be crossing every investor’s or trader’s mind right now. The stocks which were expensive in January 2020 are right now available at a discount rate of 30%-50% in May 2020. So what led to this sudden decline in prices or undervaluation or availability at a sale? Is it just an impact of Global pandemic (COVID-19), or Is it the global uncertainties. Are we heading towards a bigger recession? Or Were these share prices simply too overvalued and had just the right trigger to correct them, which in this case was COVID- 19.

To get a little deeper into the discussion, let’s take an example of a few sectors. The auto sector, the health of which usually defines the ‘luxury health’ of a nation. But over some time we have seen a continuous decline in the Nifty Auto Index, which tells us a lot about the depleting health of the sector.

The Auto index which was trading near all-time highs of 11900 in January 2018 is right now trading near lows of 5000. As we can see that this decline in the sector started long before COVID-19 was born. This also tells us a lot about the consumer’s reluctance to spend less on luxury items and save more for future uncertainties. In the current scenario, most of the Auto sectors company shares are trading at almost half the price compared to early 2019 levels. The image below is the Auto Index for the last three years.

Nifty Auto Bloombergquint (Source: Nifty Auto –BloombergQuint)

So, it is still the right time to buy or are these companies still overvalued, especially knowing that consumer demand for luxury goods will still take quite some time to bounce back. But, seeing the lucrativeness of the prices of various stocks (as they are trading at a discount of 30%-50% from top), one can start investing a portion of his desired investment now. But, it is advised to not to empty the full clip right now, as we could see some more correction in the market. So investing parts of portfolio over time is the best way ahead. And as the saying goes, “it is never a wrong time, to do the right thing”

Similarly, if we were to take the example of the Nifty Pharma index, this index was at peak during March 2015 (13,300 levels) and at its low during March 2020 (6700 levels). The figure below shows the Nifty Pharma Index Now, in this case, one can say that this might be the right time to start investing in this sector as the pharma products will have higher demand during this global pandemic and we can already start seeing pharma companies doing well over last two months.

The index has almost recovered to 9000 levels. So one can start building their portfolio have some portion dedicated to the pharma sector. Again SIP is the best strategy.

nifty pharma bloombergquint

(Source: Nifty Pharma BloombergQuint)

From the above discussion it very difficult to say that the recovery mode for the market has started or we have seen the bottom. One can never be sure. But one thing is for sure, that the market will recover sooner rather than later. One has to be very prudent and use his/her bias-free judgment to pick his or her investment strategy and timing.

One best way to do it by having a systematic Investment plan (SIP) and diversify his/her risk across sectors. It is near impossible for anyone to pick the top or bottom for any indices or sector. So it is advised to invest a portion of total desired investment and keep investing at systematic intervals of time. This way the investor will be able to average his price and a major movement in one sector or indices would not dent his portfolio significantly.

May 6, 2020 Market, News 2 comments
Mukesh Ambani vs Anil Ambani What went Right Wrong cover

Mukesh Ambani vs Anil Ambani: What went Right/Wrong?

A case study on Mukesh Ambani vs Anil Ambani: Ever since the Cain and Abel fallout at the beginning of time, sibling rivalries haven’t been uncommon. Cleopatra securing the throne by killing her siblings, Adolf and Rudolf Dassler’s tussle which led to the formation of Adidas and Puma.

Similarly, the unfortunate split of Liam and Noel Gallagher eventually led to the breaking up of the Oasis band. And also the recently famed but unworthy (probably staged) Rob and Kim Kardashian squabble. Today we take a look at the most famous sibling feud in the Indian Subcontinent. The Mukesh vs Anil Ambani row. Here, we’ll discuss what went right or wrong in the case of the brothers.

Mukesh Ambani vs Anil Ambani: The BAD

Indian business tycoon Dhirubhai Ambani bought into existence the Reliance organization. At the time of his death in 2002, he had founded Reliance Capital, Reliance Infrastructure, Reliance Power, and Reliance Industries. But the lack of a will led to a scrimmage for assets between his two sons, Mukesh and Anil Ambani.

Until 2002, Anil was the face of the company attracting foreign investment. Mukesh after dropping out of Stanford worked behind the scenes. He focussed on running the organization and also building Reliance Communications (RCom).

Mukesh Ambani vs Anil Ambani: The Bad

(Right to Left: Mukesh Ambani with Mother Kokilaben Ambani and Brother Anil Ambani)

Tensions began when Anil demanded RCom to even out the assets. Eventually, their mother had to step in to resolve the feud that had now spilled into the public eye. The assets were finally split, with Mukesh getting Oil and Gas, Refining, and petrochemical companies. Anil got what was called the rising sun companies- Electricity, Telecom, and Financial services segment.

The companies under Mukesh were known as Reliance Industries. The companies under Anil were known as Reliance Anil Dhirubhai Ambani Group or Popularly the Reliance Group. The split of assets also came with a non-competition clause. According to this, the brothers were not allowed to venture into each other’s businesses for a decade.

The Reliance Industries Journey with Mukesh at its Helm

The Reliance Industries Journey with Mukesh at its Helm

Under the leadership of Mukesh Ambani, Reliance Industry slowly but steadily scaled new heights. By 2007, it was the first Indian company to exceed $100 billion in market capitalization. Although luck also played a role as Mukesh has been handed the petrochemical segment. The segment was based in the Krishna Godavari Basin. The basin has an excess of 1.2 billion barrels of crude oil. As time went by Reliance Industries ventured out into other segments that included the retail business, logistics, solar energy, entertainment (Reliance Eros), cloth, and SEZ development.

The most notable industry entered would be when Mukesh Ambani led Reliance Industries ventured back into the telecom industry. It used its earlier acquisition of a telecom company called Infotel and came out with Jio Infotel popularly known as Jio. His new venture, Jio, caused severe disruption in the Industry. Its entry led existing players in losses, merging with one another to weather the storm. Its entry also meant the end of the road for his brother’s Rcom.

— Where has Mukesh Ambani reached

It can be said that Mukesh Ambani has had a lot of Sunshine. Reliance Industries was ranked 106th on the Fortune Global 500 list of biggest corporations as of 2019. The company has been responsible for almost 5% of the revenue the government of India earns from Customs and Excise duty. Mukesh Ambani is said to have a net worth of $53 billion as of 2020.

According to Bloomberg, his wealth could help the Federal government for 20 days in 2018.  This makes him Asia’s richest, a billion short of getting his entry into the top 10 richest list. He currently resides in Antilla which is claimed to be the world’s most expensive home at $1 billion. So much for a student at Stanford who wanted to work at World Bank or become a professor!

Also read: Top 10 Richest Person in India (As per Forbes Ranking)

The Reliance Groups’ journey with Anil at its Helm

The Reliance Groups’ journey with Anil at its Helm

Anil Ambani also saw immense growth in wealth in the initial stages. Anil Ambani began his solo ride by investing in industries that provided quick returns. It goes without saying that the risk was high too. In 2005, he bought Adlabs which got him into the entertainment business. A few years later in 2008, he signed a deal with Steven Spielberg’s DreamWorks. The Film Lincoln produced by DreamWorks also won an Oscar.

In 2008, Anil was the world’s 6th richest person with $42 billion in wealth. One of the most notable investments was the Mumbai Metro project.

2014, however, started brewing trouble for Anil Ambani as his companies had taken huge debts. This year his media venture with Adlabs also collapsed and he had to resort to selling the screens. He also began selling a stake in the remaining TV businesses to Zee Entertainment. Other bad decisions quickened his wealth loss. This included venturing into the defense segment in 2016 with Reliance Naval and Engineering.

By 2019 the valuation of the defense company fell 90%. 2016 was also the year in which Mukesh Ambani’s Jio entered the Telecomm industry. This catapulted RCom further into losses. By end of 2019, Rcom had lost 98% of its valuation. This hit Anil hard as he held 66% of its stake.

— Where has Anil Ambani Reached

As of March 2018, the Reliance group had a total debt of 1.7 lakh crore. This led to affected his wealth and also his Rs 13,500 crore investment in Nippon the financial segment. By 2019 things got so bad for Anil, that he was threatened with jail if he did not pay dues to Ericson.

Anil Ambani was also summoned by the UK court where he was directed to repay 100 million loans from Chinese banks. He claimed in courts that he would not be able to pay as his net worth was zero.

Mukesh Ambani vs Anil Ambani: The UGLY

— 2008 Anil’s Intelligence Agency

The court approved spit of assets in 2005 did not end the rivalry between the two brothers. In 2008, Anil filed a defamation case against Mukesh suing him Rs 10,000 crores. This was due to an interview given by Mukesh to the NYtimes. Mukesh claimed that the distinguishing factor of Reliance from its competitors was the intelligence agency run by his brother which included a network of lobbyists and spies. They had infiltrated New Delhi to find facts that may seem trivial and other vulnerabilities of the bureaucrats to gain greater control. 

— 2009 Pricing feud

The 2005 split of assets also included an agreement where Mukesh Ambani’s Reliance Industries would supply his brother’s electricity generation segment fuel at $2.34 per million British thermal units. This was agreed for a period of 17 years.

However, Reliance Industries began setting a different price. They sold fuel to the Reliance group at $4.20 in 2009. The disagreement was dragged into the courts until the government intervened. The government allegedly did so as the government also has a share in the profits made by Mukesh. The cost of production to Reliance Industries was only 1$.

Anil took the spat into the front pages of the Times of India. Here Anil Ambani placed an advertisement accusing the Petroleum Ministry of favoring Reliance Industries. The Ad campaign further intensified the feud between the two brothers. In the end, the ruling was in favor of Mukesh.

— Outside Corporate

The competition between the two brothers was not limited to business. When Mukesh had bought a $52 million jet for his wife it was alleged that Anil bought his wife an $80 million yacht. The feud at this scale sounds bizarre as the brothers shared the same house till 2012. When Mukesh moved out to his $ 1 billion Antilla, Anil was building one for himself of the same value.

— Other controversies that involved the brothers 

Infotel broadband

The Comptroller and Audit General of India alleged rigging in the auction mechanism for the 4G license. Infotel had acquired the license by bidding 5000 times its net worth. Infotel was then mysteriously sold to Reliance Industries.

Reliance vs. Kejriwal

Delhi CM Kejriwal in 2014 had filed an FIR alleging irregularities in the pricing of natural gases from Krishna Godavari Basin. He alleged that the gas was priced at 8$ even though it cost Reliance only 1$ in its production.

Proximity to politicians

Both the brothers have been accused of their proximity to politicians to gain an influential role. PM Modi’s close proximity with Anil Ambani also is alleged to have a role in the Rafale controversy which was later quashed by the courts.

Mukesh Ambani vs Anil Ambani: The GOOD

Even though the brothers have torn into each other in the last two decades, it is noteworthy that they also once ran Reliance together. It is also said that during the period they knew each other so well that they would finish each other’s sentences.

The biggest test of brotherhood in the Ambani family came when the younger was threatened to be jailed over non-payment of Rs 550 crore in dues. Mukesh swooped in for the rescue by clearing the dues on Anil’s behalf. Also, considering that Anil has no been convicted by the UK courts over a loan from Chinese banks, it looks like he received a lot more help.

May 4, 2020 News 7 comments
How to Invest Your First Rs 1,000 in The Stock Market

How to Invest Your First Rs 1,000 in The Stock Market?

A beginner’s guide on how to invest your first Rs 1,000 in Stock Market (Updated): Learning how to invest your first Rs 1,000 in the stock market is a significant step towards starting your financial journey and future investments. You might be surprised to know that even less than 2.5% population of India participates in the Indian stock market, even when the Indian economy is one of the fastest growing economies in the world. Nevertheless, investing your first Rs 1,000 will help you to get prepared for your journey ahead.

In this post, I’m going to tell you the simplest answer to how to invest your first Rs 1,000 in the stock market. It’s a no-brainer way. Further, for the method described here, you don’t need to be an expert or any help from the financial advisors to invest your first Rs 1,000 in the stock market.

Quick Note: Here, I’m not going to discuss how to open brokerage accounts. I’m assuming that you have already had set up your demat and trading accounts. If you haven’t, then read this post to learn where to open your demat and trading account.

A little advice before we start

While interacting with my blog readers and subscribers who are new to the stock market, I learned that most of the first-time investors like to wait until they have amassed thousands of rupees to invest. However, that’s a mistake. You can start investing with as little amount as Rs 1,000. Further, you can increase the investment amount in the future when you have increased your savings. By following this strategy, you can utilize the time efficiently to learn the stock market so that you will be prepared when you invest a big amount in future.

Second, you do not need to be an expert to invest your first Rs 1,000 in the market. You can invest this money while you are learning or even if you started just a few weeks ago.

Third, the point here is to learn, not to earn. Rs 1,000 is not a very large money that will get you bankrupt if you lose this amount. However, Rs 1,000 is more than enough to make you enter the exciting world of stock market and enhance your financial knowledge.

In addition, do not worry about the technicalities like how to buy/sell using your trading account initially. Once you are ready to invest, you can learn all these within 15-20 minutes using different sources on the internet. These days, purchasing stock is even a lot easier compared to booking an online train ticket on IRCTC. All you need is a phone/laptop, internet connection, brokerage accounts, and some cash in your savings account.

Now that I’ve cleared the basics, let’s learn how to invest your first Rs 1,000 in the stock market. Further, please read this post till the end as there is a bonus in the last section of this article.

How to invest your first Rs 1,000 in the stock market?

1. Invest in Just One Stock 

Rs 1,000 is not a big amount. If you are buying a stock worth Rs 300, then you will be able to buy just three units (quantity) of that stock. Moreover, those stocks which are trading at a market price above Rs 1,000 are already ruled out here. Therefore, if you are planning to invest your first Rs 1000 in the stock market, then you need to widen your selection criteria to the stock pricing between Rs 1 to Rs 1,000. Otherwise, you might have to reject many good stocks whose market price is high (Say 800-900), in case you are planning to purchase multiple stocks.

Further, for such an investment amount, you do not need to waste time diversifying your portfolio. Selecting multiple stocks takes time and it’s not worth the value.

Also read: How Many Stocks Should you own for a Diversified Portfolio?

2. Invest in what you already know

The easiest approach of stock selection for the beginners is to invest in what you know. There are a number of companies that you might have heard from childhood and might already know a lot about it. For example- Maruti Suzuki, HDFC Bank, ITC, Yes Bank, HPCL, Bata, Coal India, Colgate India, Hindustan Unilever, etc.

There are tons of companies whose products/services you already have been using and might be more than happy with them. Find out those companies and investigate them. Visit the company website, check its portfolio (product/services), know who is the boss of the company, it’s future products/plans, etc.

nifty50 constituents april 2020

You’ll be surprised to know how many common companies have given uncommon profits.

For example Eicher Motors- Royal Enfield bikes parent company (over 80 times returns in last 10 years), MRF Tyres (over 17 times return in last 10 years), Symphony- coolers (over 12 times return in last 5 Years), etc. The bottom line is to look around yourself and find some popular companies worth investing in.

Search for the companies that you already know that they are doing great (like expanding at a fast rate) for the last couple of years or provide excellent product/services or has an amazing business model (easy to scale).

If you are a working guy/girl, it will be quite easy for you to find such companies. Just look in your industry and find which one is leading. For example, if you are in the banking sector, you might already know which bank is expanding fast in urban and rural areas, opening new branches every week, and has low non-performing assets (NPA), etc.

If you are a doctor, you might already know a few good pharmaceutical companies which are producing the best medicines at a cheap price or are working on the medicines for a rare disease. Even if you are a housewife, you can find a number of good companies that manufacture day-to-day life products like soap, shampoo, towels, edible oils, etc.

In short, the idea here is to invest in what you already know rather than wasting too much time reading financial magazines to search for hidden companies.

everyday stocks that you can also invest in

3. Don’t spend weeks researching your first stock 

Although I’m confident that you find a good company using step 2, however, if you are unable to find any company that you have good knowledge, then invest in blue-chip stocks.

Blue chips are the stocks of those reputed companies who are in the market for a very long time, financially strong and have a good track record of consistent growth and returns in the past many years.

For example- HDFC bank (leader in the banking sector), Larsen and turbo (leader in the construction sector), TCS (leader in the software company), etc. A few other examples of blue-chip stocks are Reliance Industries, Sun Pharma, State bank of India, etc. Here is the list of few top blue chips stocks in the Indian stock market:

best blue chip stocks for long term investment

The idea here is to ‘not’ waste too much time researching for stocks. This is your first investment and the investment amount is also small. It’s not worth your time spending weeks researching a stock just to invest Rs 1,000.

Also read: Why Warren Buffet Suggests- ‘Price Is What You Pay, Value Is What You Get’?

4. Don’t make it a very big deal

To be frank, do not make this investment a very big deal of your life. The investment amount is too small to hurt you financially. Even if you lose 50% of your investment amount, you won’t go broke. Don’t worry too much thinking about what if the stock price goes down. IT’S NOT A BIG DEAL!

Here your motive should be to learn, not to earn. If you are able to learn today, you can make tons of money in the future. However, if you want to ‘save’ Rs 1,000 today and are not willing to take any risk, you might save this 1,000 rupee, but miss opportunities to earn lakhs in the future. Stay calm and enjoy the ride.

Also read: #9 Things I Wish I had Avoided During my Initial Days in Stock Market.

warren buffett quote its not necessary to do extraordinary

Additional lessons for Newbies

1. Stay away from penny stocks

Penny stocks are those stocks which trade at a very low market price (less than Rs 10) and have a very low market capitalization (typically under 100 crores) are called penny stocks in Indian stock market. These are the darlings of the new investors. The low market price of these stocks makes them quite attractive to the beginners.

However, these stocks are very risky. You might have never heard the names of most of these companies and very limited information about the company is available to the public. The stock prices of these companies are easy to manipulate. Overall, penny stocks are difficult to investigate for a newbie investor. My advice, stay away from penny stocks until you have got good knowledge and experience in the stock market.

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

2. Don’t expect extraordinary returns

This is my final advice. Do not expect high returns while investing your first Rs 1,000 in stocks. Stocks are not ‘lottery’ tickets. Even if you get a return of 100% in 6 months, still you will make a profit of only Rs 1000 (Rs 166 per month on an average).

This isn’t going to affect your life financially. Until the investment amount is large or the principal is invested for a long duration (power of compounding), the returns won’t be too big to affect you financially.

That’s why mark my words and set a realistic expectation for your first Rs 1,000 investment.

New to stocks? Confused where to start? Check out my amazing online course: HOW TO PICK WINNING PICKS? #HappyLearning

Bonus: Stock Market Investing Quiz

Before you invest your first Rs 1,000 in the stock market, why not find out how good is your investing instincts? Try it out with this FREE Quiz NOW…!!

Do you consider yourself a ‘Smart Investor’?

Well, your success in the stock market depends on how you invest and react to different market situations.

Here are 10 questions to put your 'Investing Instincts' to test.

Answer Wisely!!

Conclusion

One thing I can take guarantee is that your experience after buying your first stock will be amazing! Trust me, you’ll get more involved in the market if you have some money is invested in it, no matter how small it is. By investing your first Rs 1,000 in the market, you will learn ‘fast’ and learn ‘efficiently’.

Moreover, as discussed in the post, investing is not rocket science, rather it’s quite simple to invest your first Rs 1,000 in the stock market if you follow the steps described above.

I hope this post on how to invest your first Rs 1,000 in the stock market? is useful to you. If you have any questions or doubts, feel free to comment below. I’ll be happy to help you out. Happy learning and investing.

May 3, 2020 Essential Reading, Investment Basics 28 comments
7 Best Stock Market Discussion Forums in India cover

7 Best Stock Market Discussion Forums in India

List of Best Stock Market Discussion Forums in India in 2020: One of the easiest ways to learn anything new is by participating in the discussions. And the same rule applies when you are trying to learn trading or investing. If you are new to stocks and looking for the best stock market discussion forums in India to start participating, then you’ve entered the right page.

In this article, we are going to share the list of seven best stock market discussion forums in India where you can ask your most troublesome questions or share your ideas/knowledge with fellow investors and traders. On all these forums, you can find active discussions on stock market investing, trading, investing strategies, stock picks, IPOs, mutual funds, taxation, personal finance and more.

Besides, all these forums are FREE to join and hence, it doesn’t cost you anything to signup and start participating in interesting topics on these Indian stock market discussion forums.

7 Best Stock Market Discussion Forums in India

Here are seven of the best forums in India for healthy discussions on stock market investing and trading:

1. Traderji

traderji forum Started in 2004, Traderji is one of the oldest and most popular stock market discussion forum for investors and traders in India.

This platform has over 1.8 lakhs members participating in different threads on the stock market, derivates, Commodity and Forex trading of India. As per the statistics on this website, there are over 59,300 threads and 1,202,464 messages on this forum.

A few popular categories on the Traderji forum are Beginner’s guide, General trading and investing chat, technical analysis, mutual fund discussion forum, tools, and resources.

Here’s a quick link to join the Traderji Stock Market discussion forum.

2. Trading Q&A

trading qna forum

Trading Q&A is a famous online discussion platform for traders and investors which is managed by Zerodha, the biggest discount broker in India. With thousands of active participants on this forum, you can get all your trading queries answered here, along with sharing your own knowledge with fellow traders.

On Trading Q&A, you can ask questions about Intraday Trading, Derivatives, Commodity, Investing Strategies, Broker Review, Algo-Trading, Zerodha & its products, Taxation, IPOs and much more.

Here’s a quick link to join the Trading Q&A forum.

3. Trade Brains Discussion Forum

trade brains discussion forum

Trade Brains discussion forum is an online forum for the community of enthusiastic stock market investors and traders who are willing to learn, ask, and share their skills, thoughts, and knowledge. This forum has been listed among the top 9 Online Forums To Discuss Personal Finance and Trading in Asia by Fintech Singapore News.

On Trade Brains’ forum, you can find discussions on categories belonging to Share market investing and trading, fundamental analysis, mutual funds, IPO’s, personal finance and money management.

Here, you can participate in the forum for free by reading/writing the answers on the existing queries or asking your own questions by simply signing up for the forum.

Here’s the quick link to join Trade Brains’ forum.

4. ValuePickr Forum

valuepickr forum

One of the most active forum for stock market discussion in India. ValuePickr’s tagline is “Separating the Wheat from the Chaff” and focuses on discussions regarding the company’s Business Quality, Management Quality, Business Execution & Performance.

Here, you can find topics on stock opportunities (hidden gems, Untested but worth a good look category, top 5 picks), Investing strategies, Questions & Answers, Investor Toolkit, Investment Learning, Books and more. You can get a lot of knowledge about the Indian stock market by simply hovering over the topics and queries.

Here’s a quick link to join the forum.

5. Stock Adda

stockadda forum

Stock Adda is an Indian stock investor community where along with the stock market discussions, you can also get information like stock ideas, investing strategies, news, market movements, books, etc.

Besides, on StockAdda, you can also create a stock portfolio or view the ranking of member portfolios based on Daily and overall gains(%). Overall, it is an amazing platform for social traders/investors.

Here’s a quick link to join the forum.

6. Rakesh Jhunjhunwala Forum

rakesh jhunjhunwala stock talk forum

Stocks Talk Forum by Rakesh Jhunjhunwala is yet another popular stock market discussion forums in India.

First of all, I should mention that this site is Inspired, Not Endorsed, By Rakesh Jhunjhunwala, one of the most successful Indian stock market investors.

On this discussion forum, you can find topics on categories like stock investment queries, stock picks of wizards, portfolio of famous investors, stock advisory services, must-read interviews, articles and more. You can find over 3,250 discussions on this forum.

Here’s a quick link to join the Rakesh Jhunjhunwala forum.

7. Bse2Nse

bse2nse forum

Bse2Nse is another popular Indian Stock forum discussion for Equity, FnO, and commodity trading. Here you can find discussions on stock trading, investing strategies, broker reviews, IPOs, mutual funds and more. They also have a separate section on Chart Analysis which can be very helpful for technical traders.

Here’s a quick link to join this stock market discussion forum.

Closing Thoughts:

In this article, we discussed the seven best stock market discussion forums in India. However, before ending this article, let me give you a piece of final advice.

All these forums are built by active members who are willing to share useful ideas and answers. Please keep your posts relevant to the forum category and do not ‘SPAM’! Else, you will be thrown out of the forum by the admins and moderators. Be respectful to others and don’t sweat the small stuff.

Also read: 7 Best Indian Stock Market Blogs to Follow.

That’s all for this post. Comment below if you are part of any of the above-mentioned discussion forum or are willing to join soon. Else, if I missed any awesome Indian stock market discussion forum worth adding to this list, mention below in the comment box. Cheers and have a great day!

May 2, 2020 Investment Basics 9 comments
Rupee Cost Average meaning concept

Rupee Cost Average – Why it’s essential while Investing?

An overview of the Rupee Cost Average Approach: One of the basic strategies to succeed in the stock markets is to buy more when the prices are low. However, this involves in-depth knowledge to judge shares that are underpriced and perfect purchase timing. Today we try and look for answers in Rupee Cost Average (RCA) to reduce our losses from overpriced securities and make success in the long run.

What is Rupee Cost Average (RCA)?

Basically, Rupee Cost Average is an investment technique of buying a fixed amount of a particular investment consistently on a regular schedule over a long period of time, regardless of price. The Rupee Cost Averaging approach results in the average cost of the investment being lower in comparison to a single lump sum transaction.

RCA Relation with SIP

SIP (Systematic Investment Plan) allows an individual to invest in a fund, a predetermined amount at regular intervals. If we look at the above explanation of RCA we realize that a SIP allows us to buy fixed amounts in a fund on a regular schedule regardless of the price of the unit in the fund. Hence SIP helps an investor apply the RCA method and reap its benefits provided he/she indulges in the SIP for a long period of time.  

Example to Understand Rupee Cost Average in SIP

Say for example we have Rs 4000 and decide to invest in an Index fund that tracks with the Sensex. As of January 1st, you have 2 options i.e to either invest in a lump sum or to invest by means of a SIP. 

— Scenario 1: You Invest in a lump sum on January 1, 2020

DateAmount InvestedNAVUnitsSENSEX
01/01/20204000413.06029.683841,306.02

— Scenario 2: You decide to follow a SIP (with a decision to do so even after the amount is exhausted)

DateAmount InvestedÊNAVUnitsSENSEX
01/01/201000413.06022.420941,306.02
01/02/201000397.35532.516639,735.53
02/03/201000381.44022.621638,144.02
04/01/201000282.65313.357938,265.31
Total4000(Avg) 360.452211.0971

The difference we should note in the two scenarios above are :

– Breakeven 

In scenario one to make a profit the NAV per unit would have to rise above Rs 413.0602. In Scenario 2 if we are to observe the average cost on Investment would be lower.

Average cost = Amount Invested/ Units Received i.e. = 4000/11.0971 => Rs 360.45229.

Hence the breakeven is lower in the second case while investing through the SIP route.

— Units Received

If the units received are compared it becomes apparent the more units are received in Scenario 2. In RCA more securities are purchased when prices are low and fewer securities are bought when prices are high. This allows any losses that were made during a purchase made when the prices are high to be balanced off when the prices are reduced.

Also read: SIP or Lump sum – Which one is better?

RCA and Investor Psychology  

Generally, when we find products available at reduced costs we make sure we take advantage of the situation even if it resorts to hoarding. When it comes to stocks of a company, however, it is noticed that investors react differently.

Unfortunately, healthy companies with strong financials are also exposed to market falls. In such situations, investors panic and sell their shares invested in the company. Nonetheless, an investor with good financials observes the financials of the company, and if it looks good, he views the situation as an opportunity. He takes advantage of the situation and gains more shares.

Rupee cost average investor psychology

However, it is observed that many market participants follow basic human instincts. They do this to protect their capital from further reduction. What RCA does is protect us from our own psychology. When we indulge in RCA through a SIP we keep investing regardless of the price. When the market falls and even when the market rises. Hence if followed we reap the benefits of RCA in the long term.

Also read: 5 Common Behavioral Biases That Every Investor Should Know

RCA after a market crash

The Dow Jones market as on 03/09/1929 closed at $383. The Great Depression followed and devastated the US economy.  The US stock market then took over 25 years to reach levels it stood at before The Great Depression. On 23/11/1954 the Dow Jones closed at $385. This would mean an investor would gain only $2 ( per $385) over a period of 26 years if he invested in 1929.

the power of dollar cost averaging

However, if an investor invested using DCA( Dollar Cost Average in the US) $10000 every year, the $260,000 investments over 25 years would be worth $1.5 million as of 11/23/1954.

This is because by spreading the investments even to periods when the markets were low the investor would benefit by not only making up for the loss incurred when the markets were high but also make larger profits when the markets normalize.

Closing thoughts

The Rupee Cost Average investment strategy definitely safeguards an investor from market bubbles. Unlike other investment strategies, applying RCA doesn’t involve complex strategy and does not even require daily market tracking. This makes it easier for any individual to engage and take advantage of the market. RCA, however, does not shed light on the right time to sell.

In the current situation of ‘The Great Lockdown, we can notice that the Sensex has fallen from the all-time high of January. But if an investor understands RCA applies accordingly, he would be able to profit greater once the market normalizes.

May 2, 2020 Beginner's guide, Portfolio No comments yet
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