Stock Market Manipulations How Market is Manipulated cover

Stock Market Manipulations – How Market is Manipulated?

List of Stock Market Manipulations: It might sound a little weird for beginners, however, the stocks in the Indian markets too get manipulated, even though under the presence of big regulatory bodies like SEBI. Sometimes these stock market manipulations are noticeable, but most of the time they are not- it can even be difficult for the authorities and regulators to detect them. This is because there are a wide variety of factors that are affecting the prices of a stock on a daily basis and not all the impacts from these factors are quantifiable.

Today, we go through some of the popular ways of Stock Market Manipulations and widely used techniques manipulators use in order to get a better understanding. This would allow us as retail investors better understand and position ourselves. 

Stock Market Manipulations – Ways in which the market is manipulated!

Market manipulation refers to the creation of false inflated/deflated misleading prices of security by interfering in the operations of the market. Market manipulation involves the intent to do so with the aim of making personal gains. If stock manipulation is caught then it is subject to prosecution.

There are multiple ways in which the stock prices are manipulated. Generally, it is easier to deflate stock prices in bearish markets and inflate them in bullish markets. Most of the market manipulation involves sending misleading signals in order to influence the retail investors. By creating positive perceptions manipulators influence retail investors to buy stocks increasing the price. The opposite happens when negative perceptions are created. The following are some of the methods of market manipulation.

1. Wash Trading

Here a single stock is sold and repurchased for the purpose of generating activity and increasing the price.  The rapid buying and selling pump up the volume in the stock, attracting investors who are fooled by the increasing trades. This happens as the impression of increased activity influences uninformed traders.

2. Brokers and Pledged Shares

At times promoters pledge a part of their holding as collateral for raising loans which is a standard industry practice. At times as a last resort for the necessity of funds, the promoters are forced to pledge large chunks of their holdings – not a good sign for investors. For smaller companies, this funding is facilitated by brokers as their size makes it difficult for them to be deemed credible to raise funds through other sources. Lenders here generally offer 60-70% of the value of the shares pledged.

What manipulators do here is try and influence the markets to reduce the price which in turn reduces the total price of shares pledges. This now reduces the value of shares pledged and would require promoters to make up for lost collateral due to price loss. If news breaks out that the promoters are failing to do so retail investors begin to panic assuming the company is in for the worst and the share prices begin to fall. The markets react this way as in such cases the lender loan the money to the brokers and the company. And if the prices fall and the margins required are not met the lenders simply dump the shares in the market to ensure that they themselves do not make a loss. Manipulators recognize and take advantage of this fragile system.

Some experts, however, are not fully convinced that this is what is actually happening. They feel that there is a good chance that promoters and manipulators play a well-orchestrated game to reduce prices. This is possibly done to increase holdings at cheaper rates.

3. Pump and Dump

The pumping of stocks begins with manipulators buying huge chunks and then releasing positive announcements at times even along with the company in order to increase the share price. Uninformed retail investors here are lured-in to buy these stocks with the assumption of them being the next big thing. The high demand results in inflated prices marking the completion of the pumping stage. 

Once the prices are inflated enough to make profits the bear cartels then start dumping the shares. This causes the prices to fall back to pre pumping levels resulting in losses among retail investors.

Also read:

4. Short and distort

This is a stock manipulation tactic employed by the bear cartels. Short selling is a completely legal practice selling borrowed stock in the hopes that the stock price will soon fall, allowing the short seller to buy it back at a profit. It is encouraged as authorities believe that it provides the markets with more information as often the short-sellers employ extensive research to uncover facts that support their suspicion that the target company is overvalued. Short selling also increases the market liquidity and provides investors with long positions an alternate source of income by lending shares. But unfortunately, bear cartels use this instrument differently. 

Bear cartels target stocks that have been increasing in the recent past due to their positive results. They first artificially further pump up the price while taking short positions against the stock in the market. They then begin to spread negative information through public smear campaigns about the stock and offer poor predictions and targets. This eventually causes the price to fall where the cartels buy back the shares at lower rates earnings a profit by short selling. This is another version of the pump and dump but here the manipulators do not actually buy the stock. This scheme can only succeed if the manipulator here has credibility.

5. Spoofing the Tape

Spoofing also known as layering. Here the manipulator places orders in the market with no intention of actually buying. Other investors see the large orders waiting to be executed are led to believe that a huge investor is in the process of buying or sell at a certain price. Therefore, the uninformed retail investors to place their order at the same level to buy or sell.

Seconds before the market trades at the price of the large order, the order is pulled back from the market. But the retail investor, unfortunately, does not have the time to back out and their order is filled. This results in market drops and losses for anyone unfortunate enough to be tricked into buying.

6. Bear Raiding or Poop and Scoop

Bear raiding is when a large player forces share prices lower by placing large sell orders. The price plunges as stops are hit, adding to the selling. Once this happens, the manipulator buys the undervalued shares, thus making a profit.  Although both are based on the same principle poop and scoop generally target medium or large-cap companies. It is rarer as it is harder to artificially affect the prices of a good company.

Closing Thoughts

Although Illegal, financial market manipulation is rampant in today’s stock market and has always been so. Being retail investors with lower individual influence on the markets it is easy for investors o fall prey to these schemes. But understanding the stock market manipulations and other scamming methods allows us to come to the realization that the manipulations are part of the system.

Investors who realize this become not only better and in tune in identifying stocks that are manipulated but also find means to profit through them by adjusting their positions. 

October 29, 2020 Market, News 2 comments
what is Coat Tail Investing meaning

What is Coat Tail Investing?

A Guide to Coat Tail Investing Strategy: If you had invested Rs. 1000 in Berkshire Hathaway, in 1970 it would have grown Rs 48.6 lakh by 2014. Stunning isn’t it! How many times have you been hit with stats like this? Always leaving you wishing that you knew what Warren Buffet or your investing hero knew then.

Lucky for us there is a whole strategy based on mimicking portfolios of those whom we look up to in order to make the same gains. Today, we discuss a strategy popularly known as Coat Tail Investing which would help us mimic the investments made by our idols.

What is Coat Tail Investing?

Coattail investing refers to an investment strategy where an investor replicates the trades of well-known and historically successful investors. Smaller investors here ride the coattails of their idols in hopes of multiplying their investments. The investors that are worth replicating in this context are those who have enjoyed continuous success for a period of 20-30 years. The strategy is based on the logic that if these top investors would buy a stock for their own portfolio then it must be a great investment and hence we should buy them too.

Simple as it sounds it’s amazing that more people don’t do it. It may interest you to know that even Institutional investors tend to track several successful investors to see what they are investing in according to a report by Aite Group. In fact, even investment guru Warren Buffet admitted that much of his early success was the result of “coat-tailing” great investors like Benjamin Graham. 

( Source)

How to Coat Tail Invest?

Thanks to regulations put in place by SEBI and media coverage individual investors like you and I are quickly informed about where these big investors are investing their money. Following are some of the means that have made this possible:

– Due to Company Disclosure requirements put in place it is mandatory for a company to disclose the names of all the shareholders holding more than a 1% stake in the company. The company reports would include the names of the major stockholders of the company.

– Mutual Funds are required to disclose their portfolios every month. This allows investors to gather information on what stocks have been bought or sold by the fund.

– Whenever there is a  block or bulk deal takes place the Stock exchanges publish data of investors involved, no. of stock traded, no. of stocks that exchanged hands, and the price at which the trade took place on a daily basis on the NSE and BSE website. A bulk deal is when the total quantity of shares traded exceeds 0.5% of the equity shares of the listed company and a block deal is a trade of more than five lakh shares or a minimum amount of Rs 5 crore of a listed company.

– Media outlets, business journals, finance websites also disclose the portfolios of big investors. Of late there are even sites specifically dedicated to this purpose.

Quick Note: You can follow the investment portfolio of big investors in India using our Trade Brains Portal here.

(Source: Trade Brains Portal)

Advantages and Disadvantages of Coat-Tail Investing?

Coat Tail Investors to date have made significant fortunes by copying the portfolio of great investors. But they also have suffered a massive loss due to this purpose. Following Advantages and Disadvantages shed some light on why this has been so

Advantages of Coat-Tail Investing

– It is easy to implement 

The requirements for this strategy are to find an investor you admire, and then start copying his market moves. The heavy-duty which includes analysis and research is already done by the investors. This helps us save a lot of time and effort and at the same time reap the benefits. 

– It costs us nothing

Big investors and institutional investors spend millions of dollars on creating teams specifically for identifying these stocks. The end info that they spend so much on is made available to us free of cost after they make the trade.

– Chances of Succes are high

Here investors who are already familiar with the industry or stock put in their years of expertise. Therefore following these big investors increases the odds of success.

 Disadvantages of Coat-Tail Investing

– Abrupt exits may catch us off guard

Big Investors do not announce that they will be exiting the stock as this may negatively affect their gains. The news of a big investor buying or selling stock will have positive or negative effects on the share price respectively. If investors continue to hold the stock even after the big investor has sold and the price has fallen the investor may incur losses.

– Different interests

Your financial goals may not match the investors. Some investors may want to buy stock in order to make quick profits from trading, blindly copying them oud prove to be disastrous. Also, investors who want to make quick profits i.e. in the next 6-12 months may not have much to gain if they follow investors like Buffet who make investments for a lifetime. If is easy for one to confuse trading with investment picks or vice versa. 

– There are too many investors already applying this strategy

Every move made by these investment gurus is constantly watched by lakhs of people. Technology has made it possible for information to be transferred in less than seconds. As mentioned earlier this now causes the prices of shares to fluctuate wildly with the smallest sign of the investors moving in or out due to market reactions. If an investor is delayed even by the shortest period of time he may end up in losses.

– Everyone makes mistakes

It is very much possible for even stock market experts to make errors. These errors, however, may result in severe consequences for those that blindly follow them. The best example, in this case, would be Warren Buffet picking IBM. He later admitted that his thesis on IBM was flawed

Closing Thoughts 

After observing the disadvantages above it doesn’t take a genius to note that the stacks are piled against the common investor. Then how can one even make this strategy work?

For this, we can take notes from Mohnish Pabrai one of the most famous names in Dalal Street. Unknown to many Pabrai himself has adopted the coning approach. He is known to have joked that  he’s never had an original idea in his life, but this doesn’t bother him.  “ we copy the best ideas and make them our own.”

It is the latter part – ‘making them our own’ which is most important. Most of the problems that the strategy has can be eroded simply if the individual assesses and does his own research after gathering information. The investors we pick to follow are also of importance in this strategy.

Picking Buffet with the aims of making quick profits would not make any sense just like picking any other activist investor when the investor has the aims of the long term. As long as we keep ourselves updated, pick the investors whose strategies meet our aims, and do our own research after gaining trade information, Coattailing may actually lead us to personal gains. 

October 27, 2020 Investing Psychology No comments yet
what are the roles of depositors CDSL and NSDL

CDSL and NSDL – What are the Roles of Depositors?

Understanding the Roles of Depositors – CDSL and NSDL in the equity market: As investors and traders, we are well versed with the term Demat (Dematerialization) account. This is because a Demat account is one of the most basic requirements in order to trade or invest in the stock market. Today, we take a look at the organization behind these accounts in the Indian markets i.e. Indian depositories, the NSDL, and the CDSL.

Through this article, we’ll discuss the various roles of depositors in the equity market and the services provided by CDSL and NSDL to Indian investors. Let’s get started.

What are CDSL and the NSDL? And why are they Important?

The Central Depositories Services India Ltd. (CDSL) and  National Securities Depository Ltd.(NSDL) are depositories for the Indian markets.

nsdl vs cdsl - What are the Roles of Depositors?

In order to understand what a depository does let us compare securities to cash. The depositories are to securities what banks are to cash. Just like a bank holds your cash and allows you to access it through an electronic form, the depository holds our shares, bonds, mutual funds, etc. for all shareholders in electronic form. These entities have played a pivotal role in the digitalization of the Indian Stock Markets. 

Let us go back in time to the early ’90s a period when the stock markets still were heavily dependant on the physical transfer of shares. This was done through share certificates. Thanks to the move initiated by Stock Holding Corporation of India Limited(SHCIL) in 1992 when it paid the groundwork for the NSDL through a concept paper “National clearance and Depository System”. The Government of India promulgated the Depositories Ordinance in September 1995, followed by the passing of The Depositories Act by the Parliament in August 1996. 

The NSDL was soon established in 1996 followed by the CDSL in 1999. These two act as depositories to the two exchanges in the country; the NSDL to the NSE and the CDSL to the BSE. The Demat accounts mentioned earlier are actually just a front for the CDSL and NSDL holding your shares.

The transfer from a physical to digital format saw numerous benefits like:

  • Faster settlement cycles
  • Elimination of all risks associated with physical certificates
  • Elimination of bad deliveries
  • No more stamp duty
  • Immediate transfer and registration of securities
  • Faster distribution of non-cash corporate benefits like rights and bonus 
  • Elimination of problems related to the transmission of Demat shares
  • Reduction in the handling of huge volumes of paper
  • Periodic status reports
  • Reduction in brokerage for trading in dematerialized securities. 
  • Elimination of problems related to change of address of the investor
  • Elimination of problems related to selling securities on behalf of a minor
  • Ease in portfolio monitoring

The depository system effectively ensured a smooth transition to an electronic one. 

Can you Choose your Depository?

An investor does not have the option to select a depository. The depository is selected by the depository participant. A Depository Participant is a financial institution, broker, bank, etc that the shareholder may be in touch with, and respectively can create a Demat account through them. The CDSL has 599 depository participants registered with itself whereas the NSDL has 278 depository participants registered with it.

For an investor or trader to choose a depository of his liking there has to be some difference between the two depositories. Apart from the exchanges, the number of depository participants and years formed there are no striking differences between the two. The services provided, their functioning, and strategy remain the same. 

We, however, can find outwith which depositories we have our Demat account with using the account number. A Demat account with NSDL will begin with ‘IN’ followed by 14 numerals. A Demat account with CDSL will have 16 numerals. 

What are the Roles of Depositors? Services by CDSL and NSDL!

Here are a few of the top roles and the services provided by NSDL and CDSL for Indian equity investors:

  • Maintenance of Demat accounts
  • Rematerialisation and dematerialization
  • Trade settlement
  • Share transfers
  • Market and off-market transfers
  • Distribution of non-cash corporate actions
  • Nomination/transmission
  • Account opening
  • Account statement
  • Changing account details

The Depositories also provide shareholder details to companies at the time of dividend payouts. The companies use this information to pay dividends to shareholder accounts.

Also read: What is SEBI? And What is its role in Financial Market?

Closing Thoughts

The efficient functioning of an economy is highly dependant on its financial system. In this article, we discussed the key roles of depositors i.e. CDSL and NSDL in the equity market.

The CDSL and NSDL have been pivotal in not only ensuring facilitating the system but also enhancing its productivity post digitalization. It is also important to note that ever since their existence there have never been any major glitches, a testament to the efficient transformation from physical to electronic format. 

October 26, 2020 Beginner's guide, Investment Basics 1 comment
Eligibility Criteria for an IPO going public norms

Eligibility Criteria for an IPO: Requirements for a company to Go Public!

List of Eligibility Criteria for an IPO in India: An Initial Public Offering( IPO) is a route through which a company raises funds through the market. The Indian markets saw 123companies opting for IPO’s in the FY 18-19 in order to get themselves listed on the country’s two primary exchanges, the BSE (Bombay Stock Exchange) and NSE ( National Stock Exchange).

But as open these exchanges may be for companies to apply and get listed on them there are still requirements a company has to meet in order to be considered eligible to be listed. Today, we take a look at the eligibility criteria for an IPO in India. Here, we’ll look into financial requirements and other legal & compaliance norms that a company has to meet for an IPO.

Eligibility Criteria for an IPO: What makes a company ready for an IPO?

1. Paid-up Capital

The paid-up capital of a company is the amount of money it receives from shareholders in exchange for shares in an IPO. according to the eligibility requirements, it is necessary that the company has a paid-up capital of at least 10 crores.

 In addition to this, it is also necessary that the capitalization (Issue Price * No. of equity shares post issue) of the company should not be less than 25 crores.

2. Offering to be made in IPO

If the minimum requirements are met then based on the post IPO equity share capital the minimum percentage to be offered in an IPO is decided.

  • If the post IPO equity share capital is less than Rs. 1600 crore then at least  25% of each class of equity shares must be offered.
  • If the post IPO equity share capital is more than Rs. 1600 crore but less than Rs. 4000 crore then a percentage of equity shares equivalent to Rs. 400 crore rupees must be offered.
  • If the post IPO equity share capital is more than Rs. 4000 crore then at least  10 percent of each class of equity shares must be offered.

Companies that do not meet (a) and satisfy (b) and (c)  are required to increase the public shareholding to at least 25% within 3 years of the securities being listed on the exchange.

3. Financial requirements of a company

  • The company must have a net worth (assets – liabilities) of at least 1crore for each of the last 3 years.
  • The company must have tangible assets of at least Rs. 3 crore in each of the 3 preceding years. Out of these assets, a maximum of 50% must be held in monetary assets. 
  • The average operating profit for each of the last three years must be at least Rs.15 crore.
  • If the company has changed its name in the last one year it must have earned at least 50% of the revenue  for the preceding full year from the activity indicated by the new name;
  • The existing paid-up share capital of the company must be fully paid or forfeited. This means that the company looking for an IPO should not have partly paid-up shares as a part of its equity.

4. Other requirements for the company

The company looking to get listed on a stock exchange must provide the annual reports of the 3 preceding financial years to the NSE. It can go ahead with the listing requirements if 

  • The company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).
  • The net worth of the company has not been wiped out by the accumulated losses resulting in negative net worth.
  • The company has not received any winding up petition admitted by a court.

4. Promoters/Directors Requirements

The next set of requirements are pertaining to the promoters, directors, selling shareholders of the company. Promoters here are people who have experience of a minimum of 3 years in the same line of business. In order to be considered a promoter, they also have to hold at least 20% of the post IPO equity share. This 20% can be held either individually or severally.

It is necessary that these promoters/directors/selling shareholders (henceforth individuals)

  • Do not have any disciplinary action taken against them by the SEBI. i.e. they should not have been debarred from accessing the markets. If these individuals are still serving their debarred period then the company cannot go ahead with the IPO with them as promoters/directors. But if the period of debarment is already over at the time of filing a draft offer prior to IPO then this restriction is not applicable.
  • If these individuals were prior to the IPO also promoters/ directors of another company that is debarred from accessing the markets then the company cannot go ahead with the IPO with them as promoters/ directors. But if the period of debarment is already over for the other company at the time of filing a draft offer prior to IPO then this restriction is not applicable.
  • If these individuals have been classified as wilful defaulters by any bank or financial institution or consortium then the company can not go ahead with the IPO with them as promoters/ directors. A willful defaulter is one who has not met repayment obligations like loans to these banks, financial institutions, etc.
  • It is necessary that none of the promoters/ directors have been categorized as a fugitive economic offender under the Fugitive Economic Offenders Act 2018.

Note on Statutory Lock-in:

It is also necessary to note that after the IPO the post-IPO paid-up capital of the promoters is subject to a one-year lock-in period.  After one year at least 20% of post-IPO paid-up capital must be locked in for at least 3 years (Since the IPO). This, however, is not applicable to venture capital funds or alternative investment funds (category I or category II) or a foreign venture capital investor that has invested in the company.

If the post IPO shareholding is less than 20 percent, alternate investment funds, foreign venture capital investors, scheduled commercial banks, public financial institutions, or IRDAI registered insurance companies may contribute for the purpose of meeting the shortfall. This contribution, however, is subject to a maximum of 10% post issue paid-up capital. This 20% statutory lock-in is not applicable if the issuer does not have any identifiable promoters.

5. Other factors that SEBI considers in an IPO Verification

The SEBI may also reject the draft offer document for the IPO for any of the following reasons.

  1. The ultimate promoters are unidentifiable;
  2. the purpose for which the funds are being raised is vague;
  3. The business model of the issuer is exaggerated, complex, or misleading, and the investors may be unable to assess risks associated with such business models;
  4. There is a sudden spurt in business before the filing of the draft offer document and replies to the clarification sought are not satisfactory; or
  5. Outstanding litigation that is so major that the issuer’s survival is dependent on the outcome of the pending litigation.

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

Closing Thoughts

In this article, we discussed the Eligibility Criteria for an IPO in India. After going through the requirements one would realize that these requirements hover around the financial and litigations faced by the company its directors and promoters. These requirements are put in place to ensure quality companies are offered to investors.

These requirements also go a step further to protect investors by ensuring that the company and the people managing it are credible. These restrictions filter out financially weak companies and companies that are run by those that have the potential of swindling investors of their money. Most importantly the restrictions play an important role in ensuring the quality of the Indian stock markets.

October 23, 2020 Beginner's guide, IPO, Market 2 comments
4 Most Common Technical Indicators for Beginners

Most Common Technical Indicators -Trading Basics for Beginner!

A Guide to Most Common Technical Indicators for Beginners: The most common problem for anyone willing to use the technical indicators, is to select the indicator which is the easiest and commonly used. This problem also arises because of the availability of hundreds of indicators.

Through this article, we aim to solve this problem. Here, we try and understand the two most common technical indicators that are comprehensive yet easy to use. We will be understanding the concept of moving averages and Bollinger bands. By the end of this article, we are sure that you would have a clear understanding of these indicators. Let’s get started.

Most Common Technical Indicators for Beginner

1) Moving Averages

Moving average is the most simple and commonly used technical indicators. If we read any research report or any article on technical analysis, the most commonly used technical indicators is the Moving average. There are generally two types of Moving averages – Simple Moving average and Exponential Moving average, which we’ll discuss later in this article.

In simple terms, a moving average creates a series of averages of different subsets of the full data set in order to analyze data points. To illustrate it with the help of an example:

In a game of cricket, if we were to analyze the performance of a batsman, consistency is the most common parameter. And the best way to analyze the consistency is the average number of runs scored by the batsman in each innings.  For example, if the batsman scores 1,000 runs in the 20 innings, then the average number of runs scored by him in each innings is 50. This simple method of calculating the average is also known as the Simple Moving Average.

Moving Average is said to be a lagging indicator as is it is constructed with the help of the data, which is the End of day prices. Let us understand the concept with the help of a simple example:

Consider the following closing prices of shared of ITC limited:

Date Closing Prices
14/09/2020 192
15/09/2020 188
16/09/2020 180
17/09/2020 182
18/09/2020 178
Total 920

Therefore, the average price of shares of ITC limited over 5 days will be = 920/5 = Rs. 184.

The average price changes as the closing price the next day changes. Imagine if the closing price of ITC on the next day changes to 185, then the 5 days simple moving average of ITC limited will also change.

The moving averages can be calculated for any timeframe. It could be 5 minutes, 15 minutes, hours, days, weeks, and so on. Depending on one’s trading style and trading objective, one can choose the charting pattern. If we are using 13 observations within the selected time frame, it is called 13 SMA, and if we are using 34 observations within the selected time frame, it is called 34 SMA and so on.

The daily chart shown below is that of Infosys limited and the red line plotted is 50 SMA.

moving average chart

If we carefully look at the chart above, 50 SMA clearly divides the chart into two halves. Till the end of April, the bears were having a higher say and 50 SMA was acting a resistance of the market. Any move till the red line was seen as an opportunity to short.

However, once the market closed above 50 SMA on daily basis, it started acting as a support to the market. Any move towards 50 SMA was seen as an opportunity to buy in the market. So, it can be summarized that if the market is trading below SMA, it is taken as an opportunity to sell or short in the market and if the market is trading above it, can be seen as an opportunity to go long.

— Exponential Moving Average

This is the more advanced and more trusted form of moving average. The main difference between EMA and SMA is the weightage given to values. In a simple moving average, all the values are given equal weightage. But in the case of Exponential Moving Average, the more recent values are given more weightage.

The chart below is the daily chart of Kotak Bank and the red line plotted is the 50 EMA.

Exponential Moving Average

If we carefully analyze the chart above, 50 EMA gives a better signal of buying and selling. If the market is trading above the EMA, it can be taken as an opportunity to buy and the level below this line can be kept as a point of stop loss for this trade.

Similarly, if the market is trading below EMA, it can be used as an opportunity to short in the market and the level above it can be kept as a point of stop loss.

Why EMA is more preferred?

The simple answer to this question is that EMA gives comparatively less false signals (than SMA), as the more recent values are given higher weightage.

 

2) Bollinger bands

The concept of Bollinger bands was introduced by John Bollinger in 80’s. This is the most common technical indicator and widely used by traders while making day to day trading decisions. With the help of Bollinger bands, we can understand if the price of an asset is trading at overbought or oversold levels.

When the price is overbought, it is generally an indication to sell and when the price is oversold it is generally an indication to buy.

Components of Bollinger bands:

  • The Middle line, which is a 20 day Simple Moving Average
  • The Upper Band which is a 2 Sigma (i.e. 2 Standard Deviation of the middle line)
  • The Lower Band which is a 2 Sigma (i.e. 2 Standard Deviation of the middle line)

Note: The upper and the lower band can also be 3 Sigma i.e. 3 standard deviation of the middle line.

But before understanding the Bollinger bands, it is important to have a brief understanding of the concept of Standard deviation.

What is Standard Deviation?

The Standard Deviation is a statistical pillar, which measures the Variance from the mean/average price. The standard deviation in the equity/stock market represents volatility. A 10% standard deviation would mean a 10% volatility in the stock. In Bollinger Bands, the standard deviation is applied on the middle line i.e., the 20 SMA

Let us understand:

  • The 2 Sigma upper and lower band means 2 SD
  • Say, if the 20 SMA of nifty is 9500
  • And say the Standard Deviation is 1%
  • Then the Upper band SD = 2*95 = 190
  • The Lower SD = -2*95 = -190
  • So, the three components of BB will be
  • SMA = 9500
  • Upper Band= 9500+190 = 9690
  • Lower Band = 9500 – 190 = 9310

In the Last Example-

  • If the Market it trading near 9700, then a short/sell position can be initiated, by keeping a target of 9500
  • If the Market it trading near 9300, then a long/buy position can be initiated, by keeping a target of 9500

Let us understand it with the help of an example. The image below is the daily chart of Axis bank.

Let us understand it with the help of an example. The image below is the daily chart of Axis bank.

If we carefully analyze the image above, all the trade opportunities have been circled. The circles near the upper band give us an opportunity to sell in the market and the circles near the lower band give us an opportunity to buy in the market.

If we were to take the example of the circle near the lower band, it gave an opportunity to buy near the lower band, and trade gave a return of nearly 20% (i.e., Rs. 50). And similar returns were achieved while shorting near the upper band circles.

Additional read for Beginners:

Conclusion

In this article, we covered two of the most common technical indicators for beginners. Here are the key takeaways from this post:

  • Moving Average gives us a lot of buying and selling signals
  • When the price is trading above a certain MA, it usually signals strength in the market and buyers are having more say. On the other hand, When the price is trading below a certain MA, it usually signals weakness in the market and sellers are dictating in the Market
  • The Bollinger bands capture the volatility. The Upper bands and lower bands help us to understand the overbought or oversold levels
  • Bollinger bands work in all types of markets but they are better suited for Rangy markets
  • The most important thing is to have a predefined loss for every trade entered in the market.

That’s all for this post on common technical indicators for beginners. Happy Trading and making money!

October 22, 2020 Investment Basics, Technical Analysis 1 comment
what are commodities and What is Commodity Trading?

What is Commodity Trading? Basics of Commodities in India!

Understanding the basics of Commodity Trading in India: Commodity trading had been around in India for hundreds of years. But as history took its course we were victims of invasions, government policies, and their amendments made commodity trading a rarity even though it was flourishing in other countries.

Today with favorable laws being implemented commodity trading is once again being accepted even in rural India. And with the strengthening of our stock markets commodity trading has regained its impotence. Today we try and understand what commodity trading is and the different means through which they can be accessed. 

what is commodity trading

What is a commodity?

Commodities in simple terms are raw materials or agricultural products that can be bought and sold. These are basic goods in commerce used as building blocks of the global economy. One very important characteristic of a commodity is that its quality may differ slightly but is essentially uniform across producers. These commodities are asset classes just like bonds and apart from being exchanged for money in real life they are also traded on dedicated exchanges throughout the world.

Classification of Commodities.

Commodities are classified into 4 broad categories. 

  • Agricultural – Corn, beans, rice, wheat, cotton, etc.
  • Energy – Crude Oil, Coal, and other fossil fuels
  • Metals – Silver, Gold, Platinum, Copper.
  • Livestock and Meat – Eggs, Pork Cattle.

Going through the examples above the characteristics of commodities being uniform becomes clearer. The market treats all goods of the same type as equals regardless of who produced them as long as they meet certain quality requirements. This characteristic is known as fungibility regardless of who mined, farmed or produced. 

Take the example of cold drinks. The demand for a Coke differs from that for Pepsi. This is because the brand too comes into play. Even if one of them loses their quality it still may be favored due to brand loyalty. Let us compare this with a commodity. Never would you have heard that “ the crude oil this year sourced from the US is bad unlike that from Saudi Arabia the previous year”. Despite them having some differentiating properties. Karl Marx describes it best:

commodity quote

What is commodity trading?

Now that we have gone through what commodities are let us have a look at how commodity trading comes into the picture.

1. Commodity trading by buyers and sellers

Commodity trading came into play as a means to protect the buyers and producers from price volatility that takes place. Take a farmer for eg. Inorder to protect himself from future price fluctuations what a farmer can do is enter into a futures contract. A futures contract is a legal agreement to buy or sell a commodity at a predetermined price at a specified time in the future. The buyer of the futures contract has the obligation to buy and receive the underlying commodity when the contract expires. The seller here takes on the obligation to provide and deliver the underlying commodity at the contract expiration date. 

This instrument is useful to farmers as he already knows the production cost of his soft commodity is going to take. Adding the required percentage of profit he can enter into the future contract with the buyer i.e. regardless of what the price in the market 6 months hence he will sell his commodity at Rs.50/kg. The buyer in this contract agrees to buy the commodity at Rs. 50/kg. regardless of the price 6 months hence. The farmer protects himself from losses of price falls but in return also forgoes the additional profit he may make from an increase in price in exchange for guaranteed cash flow.

Such future contracts are available for all categories of commodities. These contracts are also widely used in the airline sector when it comes to fuel. This is done in order to avoid market volatility of crude oil and gasoline.

2. Commodity Speculators

Another type of commodity trader is the speculator. The speculator enters the future contract but never intends to make or take delivery of the actual commodity when the futures contract expires. These investors participate in order to profit from the volatile price movements. Investors here close out their positions before the contract is due in order to avoid making or taking actual delivery of the commodity.

These investors enter into the future contracts generally to diversify their portfolio beyond traditional securities and hedge against inflation. This is because the prices of stocks generally move in the opposite direction o commodities.

In times of inflation the prices of commodities increases. This is because the demand for goods and services increases due to investors flocking to invest in commodities for protection. With the increase in demand, the price of goods and services rises as commodities are what is used to produce these goods and services, their price rises too. This makes commodities a good asset for hedging. Over the years this has also led to various assets traded in the financial markets. These include currencies and stock market indices.

Speculative Trading in Commodities for profit

It goes without saying that commodities are extremely risky because of the uncertainties associated with it. One cannot predict weather patterns, natural calamities disasters, epidemics that may occur. But then why do speculative investors still indulge in commodities if not for hedging and diversification? This is because of the huge potential for profits. Due to the high levels of leverage that exists in a future contract small price movements can result in large returns or losses.

In order to reduce this risk, most futures contracts also provide ‘options’. In the case of options, one has the right to follow through on the transaction when the contract expires. Unlike a future where you are obligated. Hence if the price does not move in the direction that you predicted you would have limited your loss to the cost of the option you have purchased. To understand better we can look at options as placing a deposit on a purchase instead of outrightly purchasing. In case things go sideways the maximum you stand to lose is your deposit.

Commodity trading in India

Commodities just like other asset classes are bought and sold on an exchange. These exchanges are called commodity exchanges and they tend to be specialized for such securities.

The commodity exchanges present in India are:

  1. Multi Commodity Exchange – MCX
  2. National Commodity and Derivatives Exchange – NCDEX
  3. National Multi Commodity Exchange – NMCE
  4. Indian Commodity Exchange – ICEX
  5. Ace Derivatives Exchange – ACE
  6. The Universal Commodity Exchange – UCX

The trading of commodities in the commodity market is regulated by SEBI and facilitated by MCX. The MCX provides a platform for trading in stocks. More than 100 commodities are traded in the Indian Commodity futures markets. Some of the top traded commodities are Gold, Crude oil, Copper cathode, Silver, Zinc, Nickel, Natural Gas, and Farm Commodities.

Also read: How to Trade Commodities in India? Step-by-Step Guide for Beginners!

Other Commodity investment options for individual investors.

Using futures and options to invest in commodities is often challenging for amateur investors. They may prove to be extremely risky for investors who do not have a background or understand how prices or commodities will likely move in the future. Hence investors can also opt for indirect exposure when it comes to commodities in the following ways.

1. Stocks

Investors interested in entering the market for a particular commodity can do so by investing in stocks related to that commodity. For eg. If one is looking to use gold in order to hedge, diversify or make a profit he can go ahead and invest in the stock of a jewelry company, mining company, or any firm that deals in bullion. The advantage that a new investor receives here is that of public information related to the company which will help him make decisions and predictions. The disadvantage that comes along with investing in commodities is that the price of the stock is not purely based on the commodity but is also influences by company-related matters.

2. ETF’s and ETN’s

Investors can make use of ETF’s and ETN’s in order to take advantage of the price fluctuations. Using futures contracts, commodity ETFs track the price of a particular commodity or group of commodities that comprise an index. The price of these indexes is tracked by these ETF’s. In order to simulate the fluctuations in price or commodity index supported by the issuer, ETN’s are dedicated. ETN’s are unsecured debts designed to mimic the price fluctuations of the commodity.

3. Mutual and Index Funds

Mutual funds at times invest directly in commodity-related industries like Energy, Food processing, metals, and mining giving exposure to the portfolio. There also exists a small number of commodity index mutual funds that invest in futures contracts and commodity-linked derivative instruments providing investors with greater exposure to commodity prices.

4. Physical investment in commodities.

Another method through which investors receive exposure to commodities is by investing directly in them i.e. by purchasing physical raw commodities. This is more common with metals as other commodities require a purchase in huge quantities to have any useful impact. We often see people buy gold in times of crisis. This may be done through the purchase of gold biscuits.

Closing Thoughts

Commodity trading provides investors with a vast number of benefits. These benefits range from the increased potential of returns, diversification, and a potential hedge against inflation.

But there also exist a number of disadvantages that mainly revolve around the volatile and speculative nature of the security. The increased opportunities in these markets come with increased risks.  

October 21, 2020 Beginner's guide, Trading No comments yet
satyam scam story accounting fraud

Satyam Scam – The Story of India’s Biggest Corporate Fraud!

A Case Study on ‘Satyam Scam’ Accounting Scandal: When the 2008 recession hit the world, India was only going through a financial crisis but also an ethical crisis. Imagine a hypothetical scenario in the stock market where the very basic financials provided to you by a company are manipulated. This was what happened with Satyam Computer Services.

The Satyam scam was finally exposed early in 2009. Analysts dubbed the scam as India’s own Enron. Today, we take a look at the scandal that hit the nation in the midst of a recession was carried out, its effects, and how it was dealt with.

satyam computers

The Flawless Public Facade

Satyam Computer Services Ltd was founded in 1987 in Hyderabad by brothers, Rama Raju and Ramalinga Raju (henceforth Raju). The name in the ancient Indian language Sanskrit meant ‘Truth’. The firm began with 20 employees offering IT and BPO services across various sectors.

The initial success of the company soon led to it getting listed and opting for an IPO in the BSE in 1991. Post this the company soon got its first Fortune 500 client- Deere and Co. This further allowed the business to grow rapidly into becoming one of the top players in the market.

Satyam soon became the fourth largest IT software exporter in the industry after TCS, Wipro, and Infosys. 

Ramalinga Raju Satyam Scam

At the peak of its success, Satyam employed more than 50,000 employees and operated in 60+ countries. Satyam was now seen as the prime example of an Indian Success story. Its financials too were perfect. The firm was worth $1billion in 2003. Satyam soon went on to cross the $2billion mark in 2008.

During this period the company had a CAGR of 40%, operating profits averaging 21% with a 300% increase in its stock price. Satyam was now an example to other companies as well. It was showered with accolades from MZ Consult for being a ‘leader in Indian Corporate Governance and Accountability, the ‘Golden Peacock Award’ for Corporate Accountability in 2008. Mr. Raju too was revered in the industry for his business acumen and was awarded the Ernest and Young Entrepreneur of the Year Award in 2008. 

Late in 2008, the board of Satyam decided to takeover Maytas a real estate company owned by Mr. Raju. This did not sit well with the shareholders which led to the decision being reversed in 12 hours, impacting the stock price. On December 23rd the World Bank barred Satyam from doing business with any of the banks’ direct contacts for a period of 8 years.

This was one of the most severe penalties imposed by the World Bank against an Indian outsourcing company. The World Bank had alleged that Satyam had failed to maintain documentation to support fees charged to its subcontractors and the company also provided improper benefits to the banks’ staff.

But were these allegations true? At this point, Satyam was India’s crown jewel! Just 2 days later Satyam replied demanded the World Bank to explain itself and also apologize as its actions had damaged Satyams investor confidence.

Satyam Scam: What was behind the Curtains?

As the investors were still coping up with the failed acquisition of Maytas and the allegations by the World Bank on January 7th, 2009 the markets received the resignation by Mr. Raju and along with it a confession that he had manipulated accounts of Rs. 7000 crores. Investors and clients all around the World were left shocked. This just couldn’t be happening!

In order to understand the scam, we would have to go back to 1999. Mr. Raju had begun inflating the quarterly profits in order to meet the analyst expectations. For eg the results announced on October 17, 2009, overstated quarterly revenues by 75% and profits by 97%. Raju had done this along with the company’s global head for internal audit.

Mr. Raju used his personal computer to create a number of bank statements in order to inflate the balance sheet with cash that simply did not exist. The company’s global head for internal audit created fake customer identities and fake invoices in order to inflate the revenue. This, in turn, would allow the company easy access to loans and the impression of its success led to an increase in the share price.

Also, the cash that the company had raised from the markets in the US never even made to the balance sheets. But this was not sufficient for Raju, he went onto create records for fake employees and would withdraw salaries on their behalf.

The increased share price drove Raju to get rid of as many shares as possible and maintain just enough to be a part of the company. This allowed Raju to make profits from their sales at high prices. He also withdrew $3 million every month as salaries on behalf of employees that did not exist.

Satyam Maytas

But where did all this money go? Although Raju had set up a great IT company, he was also interested in the real estate business. The real estate business in the early 2000s was booming in Hyderabad. It was also rumored that Raju knew the plan(route) for a metro that was to be built in Hyderabad. The foundation of the metro plans was laid in the year 2003. Raju soon diverted all the money into real estate with hopes to make a good profit once the metro was functional. He also set up a real estate company called Maytas.

But unfortunately, just like every other sector the real estate sector too was hit badly during the recession of 2008. By then almost a decade of manipulation of the financial statements had led to the hugely overstated assets and underreported liabilities. Nearly $1.04billion in bank loans and cash that the books showed was nonexistent. The gap was simply too big to fill!

By now whistleblowing attempts were also starting to arise. Company director Krishna Palepu received anonymous mails by the alias Joseph Abraham. The mail exposed the fraud. Palepu forwarded it to another director and to S. Gopalkrishnan a partner at PwC – their auditor. Gopalkrishnan assured Palepu that there were no truths in the mail and a presentation would be held before the audit committee in order to assure him on 29th December. The date was later revised to 10th January 2009. 

Despite this Raju had a last resort. The plan included a takeover of Maytas by Satyam which would bridge the gap that had accumulated over the years. The new financials would justify that the cash had been used to purchase Maytas. But this plan was foiled after shareholder opposition. This forced Raju to put himself at the mercy of the law. Raju later mentioned It was like riding a tiger, not knowing how to get off without being eaten.

Satyam Scam: How Raju was able to get away with the Scandal?

The next big question while studying this big scandal is how was Ramalinga Raju able to get away with Satyam Scam in a company of over 50,000 employees?

The answer to this lies in the miserable failure of PriceWaterhouseCoopers(PwC) their auditor. PwC was the external auditors to the company and it was their duty to examine the financial records and ensure that they are accurate. It is surprising how they did not notice 7561 fake bills after auditing Satyam for almost 9 years.

There were multiple red flags that the auditors could have caught upon. Firstly a simple check with the banks would have revealed that the bills were not valid and the cash balances were overstated. Secondly, any company with that big of cash reserves as Satyam would at least invest them in an interest yielding account.

But that was not the case here. Despite these obvious signs, PwC seemed to be looking the other way. Suspicion towards PwC was later increased when it was found out that they were paid twice the fees for their services. 

PwC was not able to detect the fraud for almost 9 years but Merrill Lynch discovered the fraud as part of their due diligence in merely 10 days.

The Aftermath of Satyam Scam Exposure

Two days after the confession was made Raju was arrested and charged with criminal conspiracy, breach of trust, and forgery. The shares fell to Rs.11.50 on that day compared to heights of Rs.544 in 2008. The CBI raided the house of the youngest Raju sibling where 112 sales deeds to different land purchases were found. The CBI also found 13,000 fake employee records created in Satyam and claimed that the scam amounted to over Rs. 7000 crores.

PwC initially claimed that their failure to catch the fraud was due to the reliance placed by them on information provided by the management. PwC was found guilty and its license was temporarily revoked for 2 years. Investors too became vary of other companies audited by PwC. This resulted in their share prices of these companies falling by 5-15%. The news of the scam led to the Sensex falling by 7.3%

Mahindra Satyam

The Indian stock markets were now in turmoil. The Indian government realizing the impact this could have on the stock markets and future FDIs immediately spurted to action. They began investigating and quickly appointed a new board to Satyam. The board’s goal was to sell the company within the next 100 days.

With this aim, the board appointed Goldman Sachs and Avendus Capital to help fast track the sale. SEBI appointed retired SC justice Barucha to oversee the transaction in order to instill trust. Several companies bid on April 13, 2009. The winning bid was placed by Tech Mahindra who went onto buy Satyam for 1/3rd of its value before the fraud was revealed.

On 4th November 2011, bail was granted to Raju and two others accused. In 2015 Raju, his 2 brothers, and 7 others were sentenced to 7 years in prison.

Also read: 3 Past Biggest Scams That Shook Indian Stock Market!

Closing Thoughts

There has been no scam that affected the CA and audit firms like the Satyam Scam. The increasing nature of these scams has made dependence on such professionals much more crucial highlighting the importance of ethics and CG in their roles.

White-collared crimes like these do not only make the company look bad but also the industry and the country. 

October 20, 2020 Market, News 1 comment
top 10 insurance companies in India in 2020

Top 10 Life Insurance Companies in India (2020)

List of Top 10 Life Insurance Companies in India: Our lives are riddled with uncertainty. Despite being on terms with this fact we still do our best to predict the foreseeable future and live with the assumption that we can foresee ourselves growing old with our loved ones. The only things we can focus on is the immediate present where we do our best to create a safety net if not for us then at least for our loved ones which would better enable them to deal with an unpleasant situation.

One such way of trying to manage such an unforeseeable future has been life insurance. The basic premise of a life insurance policy is that in the situation of your demise the insurance company you have a policy with will pay your family a certain sum of money agreed upon in the policy.  Today, we take a look at the Top 10 Life Insurance Companies in India. Here, we rank the top 10 life insurances in India in order to give you a better outlook at the top companies in the industry.

Top 10 Life Insurance Companies in India

The insurance industry of India has 57 insurance companies – 24 of which are life insurance. The following are the top 10 life insurance companies in India.

1. LIC – Life Insurance Corporation of India

life life corporation

LIC is the largest life insurance company in India is the only public company out of the 24 life insurers present in the Indian market. The government entity came into existence in the year 1956 is also one of the oldest insurance companies in India. The company is famous for its slogan “Zindagi Ke Saath Bhi, Zindagi Ke Baad Bhi”.

The company’s main strength lies in the trust it has among Indians due to its well-established presence for over half a century and also because of it being a government entity.  LIC’s total asset under management is Rs. 3,111,847 crores (USD 450 billion). The claim settlement ratio of the life insurance policy of this company is 97.79%. LIC has so far secured over 250 million life insurance solutions.

Also read: LIC IPO 2020 – Are You Ready? | Expected IPO Dates & Details

2. ICICI Prudential Life Insurance

ICICI Prudential Life Insurance Company was founded in the year 2000 and since then has maintained its status as one of the most extensively recognized insurance companies in the country. The insurance company is a joint venture between ICICI bank Prudential Corporation Holdings Limited. ICICI Bank holds a 74% stakeholding and Prudential Plc holds a 26% stake in the venture. Its customer-centric approach and strong bancassurance and distribution channels have made it the second-best insurance company in the country. The Total Assets Under Management of the company are Rs. 1,604.10 billion. The company has a Claim Settlement Ratio of 98.58%.

3. HDFC Standard Life Insurance

HDFC Standard Life Insurance company is a joint venture between HDFC Ltd, India’s biggest financial institution, and Standard Life Aberdeen, a global investment company. The company was founded in the year 2000 and went on to become one of the most reputed life insurance providers in the country. HDFC Life makes its services accessible easily to the customers through its 412 branches along with its strong digital platform. The claim settlement ratio of HDFC Standard Life Insurance is 99.04%.

4. Max Life Insurance

Max Life Insurance Company founded in the year 2000. The insurance company is a joint venture between Indian Max India Ltd, and Mitsui Sumitomo Insurance Company, a Japanese Insurance Company. Max Life Insurance Company is the largest non-bank private sector insurance company in India. One of the major reasons for its success has been the very low premium its offers making it one of the best policies in India. The company has an asset under management crossing Rs. 50,000 crores. With its high-quality customer service through its strong online presence, a wide portfolio of products, multi-distribution channels, and 1090 offices across the country, the company has accumulated a customer base of more than 30 lakhs. The claim settlement ratio of Max Life Insurance Company is 98.74%.

5. SBI Life Insurance

SBI Life Insurance is a joint venture between India’s largest bank – State Bank of India and the leading global insurance company BNP Paribas Cardiff a French multinational bank and financial services company. It was founded in the year 2001 and is well-known insurance in the country. SBI Life Insurance has an authorized capital of USD 290 million. SBI Life Insurance Company has a claim settlement ratio of 95.03%. 

6. Bajaj Allianz Life Insurance

Bajaj Allianz Life Insurance Company founded in the year 2001. The company joint venture between Bajaj Finserv Limited of Bajaj Group and Allianz SE a German company. The company is popular for its innovative products and timely customer survive provided through its 759 branches across the country.  The Claim Settlement Ratio of this life insurance company is 95.01%.

7. Tata AIA Life Insurance

Tata AIA Life Insurance Company is a joint venture between Tata Sons Private Limited and AIA Group Limited- Asia’s largest insurance group. The company’s strengths have been in Tata’s established position as a reliable brand in the Indian market along with AIA being the largest independent insurance group in the world crossing 18 markets in the Asia Pacific. Tata AIA Life Insurance Company’s asset under management in 2019 is Rs.28,430 crores. The Claim Settlement Ratio of this life insurance company is 98%.

8. Reliance Nippon Life Insurance

Reliance Nippon Life Insurance Company is a joint venture between Reliance Capital and Nippon Life the largest Japanese Life insurance company. The company was founded in 2001 as a Reliance Life Insurance Company. In 2006 Nippon Life went on to acquire a 26% share in the company. In 2011 Nippon went ahead to again acquire an additional stake in the company making it the majority shareholder at 75%. The company has a strong distribution network of 727 branches across the country. Reliance Nippon has assets under management is Rs.20,281 Cr and a Claim Settlement Ratio of 99.07%.

9. Bharti AXA Life Insurance

Bharti AXA Life Insurance is a  joint venture between Bharti Enterprises and AXA Group – a French multinational insurance firm. The company was founded in the year 2006 and since then has developed a distribution network across 123 cities and has a customer base of more than 1 million. The company has a claim settlement ratio of 97.28%. 

10. Aditya Birla Sun Life Insurance

Aditya Birla Sun Life Insurance Company was founded in the year 2000. The company is a joint venture between Aditya Birla Group and Sun Life Financial a Canadian financial services organization. The company has its presence across the country with 425 branches and 9 bancassurance partners. The company has a Claim Settlement Ratio of Birla Sun Life Insurance Company is 97.15%.

Closing Thoughts

Life insurance policies over time have also evolved to plan for unforeseen and upcoming expenses for eg. the Unit Linked Insurance Plans that provide returns through investment in the market. However, insurances although a financial decision cannot be entirely looked at from a financial perspective. This is because they are mainly emotional decisions. But still crores of people opt for insurances for reasons that are difficult to express.

The investment comes with the realization that it is not about an individual’s life but about his family. Life insurances would give the already distraught family the financial assistance when they need it the most which also allows them to buy time rather than look for other financial means right away. 

October 19, 2020 News 1 comment
8 Financial Ratio Analysis that Every Stock Investor Should Know cover

8 Financial Ratio Analysis that Every Stock Investor Should Know!

List of Must Know Financial Ratio Analysis for Stock Market Investors: Evaluating a company is a very tedious job. Judging the efficiency and true value of a company is not an easy task it demands rigorously reading the company financial statements like balance sheet, profit and loss statements, cash-flow statement, etc.

Since it is tough to go through all the information available on a company’s financial statements, the investors have found some shortcuts in the form of financial ratios. These financial ratios are available to make the life of a stock investor comparatively simple. Using these ratios, the stock market investors can choose the right companies to invest in or can compare the financials of two companies to find out which one is a better investment opportunity.

In this post, we are going to discuss eight of such Financial Ratio Analysis that Every Stock Investor Should Know.

This article is divided into two parts. In the first part, we’ll cover the definitions and examples of these eight must know financial ratios. In the second part, after the financial ratio analysis, we’ll discuss how and where to find these ratios. Therefore, be with us for the next 8-10 minutes to enhance your stock market analysis knowledge. Let’s get started.

Quick note: Do not worry much about calculations of these ratios or try to mug up the formulas by-heart. All these financial ratios are easily available on various financial websites. Nonetheless, we will recommend you to understand the basics of the financial ratio analysis as it will be helpful in building a good foundation for your stock research in future. 

PART A: 8 Financial Ratio Analysis For Stock Investor

1. Earnings Per Share (EPS)

EPS is the first most important ratio in our list. It is very important to understand Earnings per share (EPS) before we study any other ratios, as the value of EPS is also used in various other financial ratios for their calculation.

EPS is basically the net profit that a company has made in a given time period divided by the total outstanding shares of the company. Generally, EPS can be calculated on an Annual basis or Quarterly basis. Preferred shares are not included while calculating EPS.

Earnings Per Share (EPS) = (Net income – Dividends from preferred stock)/(Average outstanding shares)

From the perspective of an investor, it’s always better to invest in a company with higher and growing EPS as it means that the company is generating greater profits. Before investing in any company, you should always check past EPS for the last five years. If the EPS is growing for these years, it’s a good sign and if the EPS is regularly falling, stagnant or erratic, then you should start searching for another company.

2. Price to Earnings (PE) Ratio

The Price to Earnings ratio is one of the most widely used financial ratio analysis among investors for a very long time. A high PE ratio generally shows that the investor is paying more for the share. The PE ratio is calculated using this formula:

Price to Earnings Ratio= (Price Per Share)/( Earnings Per Share)

Now let us look at the components of the PE ratio. It’s easier to find the price of the share which is the current closing stock price. For the earnings per share, we can have either trailing EPS (earnings per share based on the past 12 months) or Forward EPS i.e. Estimated basic earnings per share based on a forward 12-month projection. It’s easier to find the trailing EPS as we already have the result of the past twelve month’s performance of the company.

For example, a company with the current share price of Rs 100 and EPS of Rs 20, will have a PE ratio of 5. As a thumb rule, a low PE ratio is preferred while buying a stock. However, the definition of ‘low’ varies from industries to industries.

Different industries (Ex Automobile, Banks, IT, Pharma, etc) have different PE ratios for the companies in their industry (Also known as Industry PE).  Comparing the PE ratio of the company of one sector with the PE ratio of the company of another sector will be insignificant. For example, it’s not much use to compare the PE of an automobile company with the PE of an IT company. However, you can use the PE ratio to compare the companies in the same industry, preferring one with low PE.

3. Price to Book (PBV) Ratio

Price to Book Ratio (PBV) is calculated by dividing the current price of the stock by the book value per share. Here, Book value can be considered as the net asset value of a company and is calculated as total assets minus intangible assets (patents, goodwill) and liabilities. Here’s the formula for PBV ratio:

Price to Book Ratio = (Price per Share)/( Book Value per Share)

PBV ratio is an indication of how much shareholders are paying for the net assets of a company. Generally, a lower PBV ratio could mean that the stock is undervalued.

However, again the definition of lower varies from industry to industry. There should be an apple to apple comparison while looking into PBV ratio. The price to book value ratio of an IT company should only be compared with PBV of another IT company, not any other industry.

4. Debt to Equity (DE) Ratio

The debt-to-equity ratio measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity).

Debt to Equity Ratio =(Total Liabilities)/(Total Shareholder Equity)

Generally, as a firm’s debt-to-equity ratio increases, it becomes riskier as it means that a company is using more leverage and has a weaker equity position. As a thumb of rule, companies with a debt-to-equity ratio of more than one are risky and should be considered carefully before investing.

5. Return on Equity (ROE)

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders’ equity. ROE measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. In other words, ROE tells you how good a company is at rewarding its shareholders for their investment.

Return on Equity = (Net Income)/(Average Stockholder Equity)

As a thumb rule, always invest in a company with ROE greater than 20% for at least the last 3 years. Year-on-year growth in ROE is also a good sign.

6. Price to Sales Ratio (P/S)

The stock’s price/sales ratio (P/S) ratio measures the price of a company’s stock against its annual sales. P/S ratio is another stock valuation indicator similar to the P/E ratio.

Price to Sales Ratio = (Price per Share)/(Annual Sales Per Share)

The P/S ratio is a great tool because sales figures are considered to be relatively reliable while other income statement items, like earnings, can be easily manipulated by using different accounting rules.

7. Current Ratio

The current ratio is a key financial ratio for evaluating a company’s liquidity. It measures the proportion of current assets available to cover current liabilities. The current ratio can be calculated as:

Current Ratio = (Current Assets)/(Current Liabilities)

This ratio tells the company’s ability to pay its short-term liabilities with its short-term assets. If the ratio is over 1.0, the firm has more short-term assets than short-term debts. But if the current ratio is less than 1.0, the opposite is true and the company could be vulnerable. As a thumb rule, always invest in a company with a current ratio greater than 1.

8. Dividend Yield

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

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

For Example, If the share price of a company is Rs 100 and it is giving a dividend of Rs 10, then the dividend yield will be 10%.

A lot of growing companies do not give dividends, rather reinvest their income in their growth. Therefore, it totally depends on the investor whether he wants to invest in a high or low dividend yielding company. Anyways, as a thumb rule, consistent or growing dividend yield is a good sign for dividend investors.

Also Read: 4 Must-Know Dates for a Dividend Stock Investor

PART B: Finding Financial Ratios

Now that we have understood the key financial ratio analysis, next we should move towards where and how to find these financial ratios.

For an Indian Investor, many big financial websites where you can find all the key ratios mentioned above along with other important financial information. For example –  Money Control, Yahoo Finance, Economic Time Markets, Screener, Investing[dot]com, Market Mojo, etc.

Further, you can also use our stock market analysis website “Trade Brains Portal“, to find these ratios. Let me show you how to find these key financial ratios on Trade Brains Portal. Let’s say, you want to look into all the above-mentioned financial ratios for “Reliance Industries”. Here’s what you need to do next.

Steps to find Key Ratios on Trade Brains Portal

1) Go to Trade Brains Portal at https://portal.tradebrains.in/ and search for ‘Reliance Industries’.

2) Select the company. This will take you to the “Reliance Industries” stock detail Page.

3) Scroll down to ‘5 Year Analysis & Factsheet’ and here you can find all the financial ratios for the last five years.

financial ratios 5 Year Analysis & Factsheet trade brains portal

You can find all the key financial ratio analysis discussed in this article on this section of stock details. In addition, you can also look into other popular financial ratios like Profitability ratio, Efficiency ratio, Valuation ratio, Liquidity ratio, and more.

Conclusion

In this article, we discussed the list of Must Know Financial Ratio Analysis for stock market investors. Now, let us give you a quick summary of all the key financial ratios mentioned in the post.

8 Financial Ratio Analysis that Every Stock Investor Should Know:

  1. Earnings Per Share (EPS) – Increasing for last 5 years
  2. Price to Earnings Ratio (P/E) – Low compared to companies in the same sector
  3. Price to Book Ratio (P/B) – Low compared to companies in the same sector
  4. Debt to Equity Ratio – Should be less than 1
  5. Return on Equity (ROE) – Should be greater than 20% 
  6. Price to Sales Ratio (P/S) – Smaller ratio (less than 1) is preferred
  7. Current Ratio – Should be greater than 1
  8. Dividend Yield – Consistent/ Increasing yield preferred

In addition, here is a checklist (that you should download), which can help you to select a fundamentally strong company based on the financial ratios. Also, feel free to share this image with those whom you think can get benefit from the checklist.

5 simple financial ratios for stock picking

That’s all for this post. Hope this article on ‘8 Financial Ratio Analysis that Every Stock Investor Should Know’ was useful for you. If you have any doubt or need any further clarification, feel free to comment below. We will be happy to help you. Take care and happy investing.

October 19, 2020 Investment Basics, Valuations 36 comments
5 Common Behavioral Biases That Every Investor Should Know cover

5 Common Behavioral Biases That Every Investor Should Know

Common Behavioral Biases For Investor: Ever heard of Tech gender problem? It is a situation where the employer favors male candidates over female thinking women are no good at tech because they are women. Even one of the biggest companies in the world, Amazon, faced this bias. (Read more here: Amazon’s machine-learning specialists uncovered a big problem: their new recruiting engine did not like women — The Guardian.)

Anyways, gender bias is nothing new. Throughout history, when jobs are seen as more important or are better paid, women are squeezed out. And similar to this one, there are multiple common biases that we can notice in our day to day life. But, what actually is a bias?

According to Wikipedia– “Bias is disproportionate weight in favor of or against one thing, person, or group compared with another, usually in a way considered to be unfair.”

In other words, it is an inclination or preference that influences judgment from being balanced. Biases lead to a tendency to lean in a certain direction, often to the detriment of an open mind.

Behavioral Biases in Investing:

Investors are also ordinary people and hence they are subjected to many biases that influence their investment decisions. Although it takes time to control the behavioral biases, however, knowing what are these biases and how they work — can help individuals to make rational decisions when they are susceptible to these situations.

In this post, we are going to discuss five common investing biases that every investor should know.

— Confirmation Bias

When a human mind is determined towards one particular behavior, it subconsciously rejects the pieces of evidence against it while confirming the ones that go in its favor. This is known as confirmation bias.

Psychologically speaking, an investor would be more inclined towards his pre-occupied information and knowledge about certain kinds of investing. While considering the pros and cons of a certain kind of investment, the buyer would most likely go with what he used to believe until now.

For example: Making an investment in Bitcoin is dangerous and pointless. If this is an investor’s pre-occupied notion then he would most likely not invest in bitcoins in future.

— Gambler’s Fallacy

Gambler’s Fallacy is one such proof which states that a human mind often interprets the outcomes of a future event judging by its corresponding past events even if the two are completely independent of each other. It is inspired by the “failures of gamblers” due to their probabilistic illusions to make decisions in casino games.

Gambler’s Fallacy can be very well explained with the help of a basic example involving a coin. For future reference, let’s suppose that the coin is fair with both sides (heads & tails) having an equal probability of landing on top.

Suppose a coin is flipped 10 times and the result of each event was “Heads”. What would you bet for the next coin flip?

Now, if a human bet on the outcome of the 11th flip of the coin to be “Head” seeing the past events, then it can be considered a bias.

The above context does only imply a simple rule: The occurrence of an independent event is not dependent on past events. In this example, the 11th flip of a coin would result in both heads and tails with a 50% chance of being associated with each one of them.

— Buyer’s Remorse

The regret after purchasing a product is called a buyer’s remorse. Here, the buyers may regret that either they overpaid for the product or they didn’t actually need that product.

Nevertheless, purchasing commodities are not the only thing where people feel “buyer’s remorse”. Stock investors are also like ordinary people, and they too feel this remorse after purchasing equities.

“Was buying this stock a mistake?”

“Was my timing right?”

“Did I just buy a lemon of a stock?”

“Is the market going to collapse?”

“What if I lose money?”

In general, investors feel remorse when they make investment decisions that do not immediately produce results.

— Herd Mentality

An investor’s natural instinct goes with the ones of masses, which means that he/she doesn’t seem to have a rational view on a certain investment but is more likely to deviate where the majority mass is moving — this little phenomenon is known as the “Herd Mentality”.

The term has been derived from the natural instinct of a number of sheep walking together in a herd so as to avoid falling into the pitfalls of danger.

Interestingly, you can also find a large population of investing community following herd mentality psychology in making various financial decisions like buying a new property or investing in the stock market. Seeing others getting profited with an investment, our brain tells us to go for it without a second thought.

herd mentality

— Winner’s Curse

A bidder sitting in an auction and trying to repeatedly bid on an asset often gets intimidated to continue his bidding even if it is not profitable.

As obvious, in such scenarios, the last one to bid gets the asset and hence gets the title of “the winner”. But has he actually won? What do you think? The inference can be a bit deeper than you are assessing it to be.

Such scenarios are quite noticeable everywhere, including investing.

In the stock market, every now and then, you may come across a storyline where people are buying expensive stocks because they don’t wanna lose the opportunity. Here, they are ready to bid a huge price to win that stock. However, purchasing an overvalued stock (only for the sake of winning) is most of the time disadvantageous for the investors. Another example of the winner’s curse is bidding in expensive IPOs.

Closing Thoughts

Most biases are pre-programmed in human nature and hence it might be a little difficult to notice them by the individuals. These biases can adversely affect your investment decisions and your ability to make profitable choices.

Anyways, knowing these biases can help you to avoid them causing any serious damage. Moreover, a good thing regarding these biases is that — like any habit, you can change or get over them by practice and efforts.

October 16, 2020 Investing Psychology 8 comments
What is Sunk Cost Fallacy? And how it Can Affect Your Decisions? cover

What is Sunk Cost Fallacy? And How it Can Affect Your Decisions?

Demystifying Sunk Cost Fallacy: Have you ever been in a situation where you went to watch a movie in the theatre thinking it would be great, however, it turned out to be terrible? What did you do next? Did you walked out of the theater or continued watching it till the end because you were afraid that you have already paid for the ticket? If you choose the latter, you have fallen for the sunk cost fallacy.

In this post, we are going to discuss what exactly is a sunk cost fallacy and how it can affect your investment decisions. But first, let us understand what are sunk costs.

What are sunk costs?

Sunk costs are those irrevocable costs that have already been occurred and cannot be retrieved. Here, the costs can be in terms of your money, time, or any other resource.

For example- Let’s suppose that you bought a brand new machine. However, after using it for three months, you realize that the machine is not actually working as you desired. And obviously, the return period of the machine has surpassed. Here, even if you sell the machine, you will get a depreciated value compared to what you originally bought. This cost is called the sunk cost.

In general, people should not consider sunk costs while making their decisions as these costs are independent of any happenings in the future. However, humans are emotional beings and unlike robots, we do not always make rational decisions.

Examples of Sunk Cost Fallacy

Sunk cost fallacy, also known as Concorde fallacy, is an emotional situation where the individuals take sunk costs into consideration while making the decisions.

We have already discussed the example of watching the entire movie (even if it is terrible) just because you, as a consumer, won’t get back the money for your ticket. This is a classic example of the sunk cost fallacy.

Another example can be when you eat foods that you do not like because you have already bought that food and cannot revoke that sunk cost. Similarly, overeating after ordering foods in restaurants because food has been already ordered is also an example of sunk cost fallacy.

Further, a typical example of the same fallacy is when you keep attending the miserable classes of your college (that you do not enjoy) because you have already invested a lot of time in that course and also have paid the tuition fee. Besides, salaries, loan payments, etc are also considered as sunk costs as you cannot prevent these costs.

A quick point to mention here is that not all past costs are sunk costs. For example, let’s suppose you bought a shoe and you didn’t like it after reaching home. However, as the shoe is still in the return period of 30 days, here, you can return the shoe and get back your purchase price. This is not a case of ‘sunk cost’.

Sunk Cost Dilemma

what is sunk cost fallacy and how to handle it

Sunk cost dilemma is an emotional difficulty to decide whether to continue with the project/deal where you have already spend a lot of money and time (i.e. sunk cost) or to quit because the desired result has not been achieved or because the project has an obscure future.

Here, the dilemma is that the person cannot easily walk away from the project as he has already spent a lot of time and energy. On the other hand, continuously pouring more money, time, and resources into the project also does not seem a good idea because the outcomes are uncertain. This dilemma of deciding whether to proceed further or to quit is called the sunk cost dilemma.

For example- Let’s say you started a business and invested $200,000 over the last three years. However, you haven’t achieved any wanted results so far. Moreover, you cannot see the business working out in the future. Here, the dilemma is ‘what to do next?’. Should you bear the losses and move on, or should you invest more resources in that uncertain business?

Another common example of a sunk cost dilemma can be a bad marriage. Here, the couples find it difficult to decide whether to save themselves (and their spouse) by splitting up when they are sure that things are not going to work out. Or should they hold on to the marriage just because they have already spend a lot of time together and breaking up will make them look bad?

Sunk cost dilemma in Investing

Even investors are common people and they face the sunk cost dilemma while making their investment decisions.

For example, let’s say that an investor bought a stock at Rs 100. Later, the price of that stock starts declining. In order to minimize the losses, the investor averages out the purchase price by buying more stocks when the price kept falling (also known as Rupee cost averaging). Here, the dilemma happens when the stock keeps underperforming for a stretched period of time. Here, the investors are uncertain whether they should book the loss by selling their stocks, or should they continue averaging out with the hope that they may recover the losses in the future.

Another example of the sunk cost dilemma is people buying/selling aggressively in risky stocks once they have incurred a few major losses in the past to ‘break-even’ those losses. However, the losses have already been incurred, and investing in risky stocks to cover those losses won’t do any good to such investors.

The better approach would be to choose those stocks that can give the best possible returns in the future, not the imaginary aggressive returns that they expect to match up the sunk cost. As an intelligent investor, people should ‘not’ consider the sunk costs while making their decision. However, this is rarely the case.

Also read:

Closing Thoughts

It is no denying the fact that nobody likes losing and hence the past losses can influence the future decisions made by the individuals. However, one must not consider sunk costs while making their investment decisions.

As sunk costs cannot be changed (recovered), a rational person should ignore them while making their judgments. Here, if you want to proceed, first you should logically assess whether the project/deal is profitable for the future. If not, then discontinue the project. In other words, try to forecast the future and react accordingly.

Anyways, a few methods of solving the sunk cost dilemma is by opting for incremental wins over the big ones, increasing your options (not just to completely quit or go all-in), and in the terminal case, cutting your losses. When stuck in this dilemma, try to make minimum losses by looking at the mitigating options.

October 15, 2020 Investing Psychology 3 comments
Understanding what are bonus shares

What are Bonus Shares? And How They Help Investors?

Understanding what are bonus shares: Everyone loves a bonus. This may be at work or also on simple shopping purchases. These bonuses also exist in the stock market under Bonus Shares. But does a bonus share issue in the stock resembles the same ones we experience in our day do day lives?

Today we take a closer look at understanding a Bonus Shares issue. Here, we’ll look into what are bonus shares, why are they issued, their pros, cons, and more. Let’s get started.

What are Bonus Shares?

bonus shares

Bonus shares, also known as scrip dividends are additional shares given to shareholders without any extra cost. These shares are issued to the shareholders based on a constant ratio that decides how many shares a shareholder is to receive based on the number of shares already held by him.

These shares, however, are issued from the company’s accumulated earnings. Hence these bonus shares are issued only by companies that have accumulated retained earnings or large free reserves. As bonus shares are issued from the profits (retained earnings or reserves) it is also called capitalization of profits.

Here are a few of the recent bonus shares offered by different public companies in India:

Recent bonus shares in India

(Source: Moneycontrol)

Why are bonus shares issued?

Here are some of the reasons why a company may opt to issue shares.

  • Bonus shares are issued by the company when the company has performed well but has not generated enough cash that they pay out dividends. This ensures that investors who depend on dividends for income will still be able to earn from the sale of the bonus shares in the market. On the other hand, it also pleases investors who are not looking for dividend payouts.
  • Bonus shares also issued to encourage retail participation. At times the price per share of the company becomes so high that it becomes difficult for investors to easily sell them or to buy them in the market. By issuing bonus shares take care of this as the total worth of the shares remains the same but the price per share reduces allowing them to be easily traded on an exchange. 
  • Another reason why a bonus share may be issued is when a company is looking to restructure its reserves.

How are bonus shares calculated?

Let us take the example of company ‘A’. Say the company announces a bonus in the ratio of 2:3. Here for every three shares held by the shareholder he receives two additional shares. 

The price in the above case also gets adjusted. If the shares are at a book value of Rs. 50 per share. Post the bonus issue the value would drop to Rs. 30. This would not change the total book value of the shares held by the shareholder if he held 3 shares valued at Rs. 150 prior to the issue he would be left with 5 shares post the bonus with a book value of Rs.150.

Similarly, the stock price too is adjusted on a proportionate basis. This also answers the question that “Does a Bonus share issue increase the net worth of your holdings?”. The answer is “No”.

What is the record and Ex-date in a bonus issue?

Shares are traded on a regular basis, this would make it hard for the company to decide which investor is eligible to receive the shares.

This is also because the delivery after the purchase of the shares into the Demat account happens on a T+2 days basis( 2 days after the shares are purchased). In order to avoid confusion, an Exdate and record date is used. An Ex-date is used to decide who receives the shares.

The record date is the cut-off date set by the company. The Ex-date is always one day before the record date. You are eligible for the bonus shares if you purchase the shares one day prior to the Ex-date. If you want to sell the shares but are holding onto them you need to hang onto the shares until the ex-date.

What are the advantages and disadvantages of a Bonus Issue?

Advantages of Bonus Shares

– Bonus shares increase the liquidity of the shares which makes it easier for the shareholders to sell and buy.

– The issue of Bonus shares creates the perception that its size has increased. This due to the increase in share capital due to the transfer from reserves and due to increase in shares outstanding after the bonus issue in accordance with the ratio set.

Disadvantages of Bonus Shares

– Investors who depend on dividends from the company may have to sell their shares to ensure liquidity. This, in turn, may reduce their stake in the company in comparison to those who hold onto their shares. This reduction in stake may be viewed unfavorably. 

– Bonus shares require the transfer of reserves to share capital. This may upset some shareholders as these reserves could have been paid as a dividend in later years resulting in increased dividends.

Are there any tax implications for the bonus issue?

One may be under the impression that as the bonus shares are issued out of reserves that are used to pay dividends they too may be subject to taxes. This is not the case on receipt of bonus shares.

The shareholder is not required to pay any dividend if he receives bonus shares. However, he is subject to capital gain tax if and when he chooses to sell the bonus shares received.

October 14, 2020 Beginner's guide No comments yet
4 Best Intraday Trading Strategies for Beginners cover

4 Best Intraday Trading Strategies for Beginners!!

A Guide on Best Intraday Trading Strategies for Beginners: There are hundreds of Intraday Trading Strategies for traders apply to make money in the stock market. However, not all are simple enough for beginners to implement and make money.

In this article, we are going to cover four of the best Intraday Trading Strategies for beginners. Let’s get started.

What is Intraday Trading?

As the name would suggest, the Intraday is that event which completes within the same day. Similarly, Intraday trading is that form of trading, in which the buying and selling of the shares or assets are completed within the same trading session. Intraday trading is one of the most sought after (and one with maximum volume) form trading amongst traders in the market. With proper analysis and execution, it has the potential of generating very handsome returns.

The General MYTH with Intraday Trading

It is a general Myth among many, that Intraday trading is all about buying and selling throughout the day. And one has to be on the go, all the time. No doubt, that intraday trading requires more focus and attention than investing or delivery based trading. But the level of planning which goes about in finding the stock or move for intraday trading is second to none.

About 85-90 % of day traders’ time goes into analysis and planning of trade opportunity, and the rest 10-15% of the time goes in trade execution.

Therefore, the whole world of day trading is entirely based on proper planning and execution. It has the potential of making 20-30% returns on the investment amount, but intraday trading can never be a part-time avenue of making quick money. One has to devote a lot of time and to be a successful intraday trader, it is advised to be in front of your trading screen throughout the market trading hours.

Intraday trading Factors

Choosing the shares for intraday trading is no Rocket Science. One needs to keep certain parameters, which if met, can a share/stock be chosen for Intraday trading. Following are some of the parameters which should be given due importance while choosing stocks for intraday trading:

  • Liquidity: This is the single most important factor in choosing shares for intraday trading. Illiquid shares/assets should be avoided. Even while trading commodities for Intraday trades, liquid commodities like Gold, Silver, crude oil, etc. should be traded.
  • Volatility: As the sole purpose of Intraday trading is to earn quick returns. And for this objective to be fulfilled, the stocks need to have a broader range i.e., high beta stocks should always be preferred while doing intraday trading.
  • Volume: This tells us about the quantity of stocks that have traded within the specified time frame. The higher the volume, it generally means that there is more interest in that particular share that day. And any move which happens in the share price, with volume in the market is more trusted than the moves with low volume.
  • Consistency: It is a general rule while doing intraday trading that one should be consistent in his/her approach while doing trading. One should not let emotions take over while doing intraday trading. The decisions should be based on logic, maths, and price action.
  • Patience: This is very important is all forms of trading, let alone intraday trading. One should not expect wonder trades (i.e., the hope of making all the money in one trade). One needs to bide his time and grind it out if one expects to have a long and fruitful trading career.

Intraday Trading Strategies for Beginners

Now, having understood the basics of Intraday trading the various facets which should be kept in while choosing the shares to intraday trade. One thing which should always be kept in mind that these strategies do not guarantee to make money. Let us try and understand a few intraday trading strategies:

Intraday Trading Strategy 1: Momentum Strategy

As the name suggests, the whole premise of this strategy is to catch the momentum in the market. It is imperative to track these stocks before the actual momentum starts in the market. If spotted at the right time, these stocks have the potential of generating returns of 20-30% within one session.

These movements could be because of Fundamental (Overnight news, Quarterly earnings, some big order procurement, new projects, etc.) and Technical (breakout) factors.

Intraday trading strategy 1 - Momentum Strategy

Img 1: 15 mins Chart of ESCORTS (source: www.zerodha.com)

Now, if you look at the picture above, the market opened near the previous day high, but the momentum soon fizzled out and we saw selling pressure coming in the market. And we saw a series of lower highs and lower lows in the market. And it ended the day near the lows of the day. So, this is a classic case of momentum intraday trade in the market.

Intraday Trading Strategy 2: Breakout Strategy

As the name would suggest, this strategy focuses on finding the trade which is going to trade in a new territory or has broken out of its usual territory. One thing should be kept in mind that the breakout has happened with volume (thin volume breakouts generally tend to be false breakouts).

If the breakout is on the upside, then we go long and if the breakout is on the downside, then we go short. One should always mark the supports and resistances, so as to have right stop losses for the breakout trades.

Intraday trading strategy 2 - Breakout Strategy

Image 2: 15 Mins chart of Maruti (source: www.zerodha.com)

Now, if you carefully look at the image above, we see a classical breakout trade. These trades when spotted, have the potential of generating significant returns. The Stop loss for this kind of trades is always the low of the range prior to the breakout.

Intraday Trading Strategy 3: Scalping Strategy

This strategy is the most beneficial strategy for a day trader. The whole idea to constantly keep scalping in the market for small profits. This strategy is a very common method of trading while trading commodities. This kind of trading is generally done by high-frequency traders in the market. The overall technical and fundamental setup does not have a major bearing on this trade. Price action plays a very important role while selecting the trade for scalping.

The stocks or commodities chosen for purpose of scalping should be liquid and volatile. And one important thing to always keep in mind is to have a stop loss for every trade. One should not let the position drift away. The scalping strategy is best suited when the market is stuck in a tight range. Liquidity and tighter range are two friends of scalpers.

Intraday Trading Strategy 3: Scalping Strategy

Img 3: 15 Mins chart of TCS (source: www.zerodha.com)

If we look at the image above, the market is stuck in a tight range and it provides a great opportunity for scalpers.

Intraday Trading Strategy 4: Moving Average Strategy

This Strategy can also be called as the moving average crossover strategy. This is generally a trend reversal strategy in the market.

When the price of the underlying asset goes above or below the moving average, it generally signals a change of momentum in the market. When the crossover happens from bottom to top, it is called Bullish crossover and when the crossover happens from top to bottom, it is called a Bearish crossover.

Intraday Trading Strategy 4: Moving Average Strategy

Image 4: 30 Mins chart of ICICI Bank (source: www.zerodha.com)

The image above is a 30 minutes chart of ICICI Bank. We see an obvious weakness in the market when its price is trading below the two moving averages (13 EMA and 34 EMA). And when the market starts trading over the moving average, the dips are being bought back in the market.

Therefore, when the market is trading over MA, it is advised to go long and when the market is trading below MA, it is recommended to initiate a sell position. For a long position, the stop loss is below the Moving Averages (MA) and for a short position, the stop loss is above the MA’s.

Also read: How to do Intraday Trading for Beginners In India?

Conclusion

In this article, we covered the four best Intraday Trading Strategies for beginners. Here are a few key takeaways from this post:

  • Intraday trades are those trades for which the activity of buying and selling is completed within the same day.
  • About 90% of the time in intraday Trading goes for planning and the remaining 10% goes in execution.
  • Liquidity, Volatility, Volume, Patience, and Consistency are the key ingredients of Intraday trading.
  • One has to devote complete time and dedication if one wants to be a successful intraday trader.
  • Traders need to always have good Risk management. Always place stop loss for all orders while taking intraday trades.

That’s all for this post on Intraday Trading Strategies for beginners. I hope it was useful for you. Happy Trading and Money Making.

October 13, 2020 Technical Analysis, Trading 9 comments
List of Top Conglomerates in India cover

List of Top Conglomerates in India | Tata, Birla & More!

Top Conglomerates in India: It has been almost three decades since the Indian economy underwent liberalization and privatization and opened up to the world. Since then we have evolved into a $3 trillion economy in 2019 and have set sights on becoming a $5 trillion economy by 2025.

A portion of the achievements can be attributed to private players that have established themselves in multiple industries to form conglomerates. Today, we take a look at the top conglomerates in India.

innovation and growth of india

What is a Conglomerate?

A conglomerate in simple words is a multi-industry company. A conglomerate includes one group that overlooks multiple business entities in entirely different industries.

One may wonder why companies would even want to grow into multi industries instead of maintaining a profitable lead by focussing on one industry. It is because such companies put greater emphasis on growth and they realize the impacts they can have due to their capital potentials.

It is interesting to note that Amazon one of the top global conglomerates has never been profitable because the company makes long-term growth a priority over profits. This is also because of other means of financing have enabled firms to remain afloat and grow into multiple industries.

The success of conglomerates can also be attributed to brand recognition among consumers. The success of a company in one industry makes consumers more willing to experiment with their products in other industries. Another factor that plays the most important role in the success of these conglomerates is the men leading them. These are those that even we look up to. 

List of 7 Top Conglomerates in India

1. Reliance Industries Ltd.

reliance industries

This Indian conglomerate company was founded as Reliance commercial corp. 60 years ago by Dhirubhai Ambani. The company was partitioned after Dhirubhai Ambani’s death between his two sons. Hence came Reliance Industries headed by Mukesh Ambani. The company owns oil, petrochemical, textile, natural resource, banking, and telecommunication enterprises throughout India.

RIL is currently one of the most profitable and largest publicly-traded companies in India. The company has an MCAP of over Rs. 15 lac crore. RIL is currently the only Indian company ranking in the top 100 in the Forbes 2000 [2020] list. The company is ranked 71st in the world according to the list.

How reliance industries makes money 2020

2. Tata Group

tata group conglomerates

Tata Group is an Indian conglomerate giant founded in 1868 by Jamsetji Tata. The conglomerate is owned by Tata and Sons and is currently run by Natarajan Chandrasekaran.

However, it is Ratan Tata’s legacy of 21-years tenure that is admired by many.  During his tenure revenues grew over 40 times and profit over 50 times. Under him Tata acquired Tetley and Tata Motors acquired Jaguar Land Rover. Tata group has companies present in automobile, airline, chemical, defense, FMCG, electric utility, Finance, home appliance, hospitals, IT, retail, eCommerce, steel, industries, etc.

Its biggest companies include TCS [over 9 lac crore] and ITC [over 2 lac crore]. Both the companies made it to the Forbes 2000 list ranked 374 and 806 respectively. ITC is currently India’s largest employer with over 4.4 lakh employees.

TATA Group companies listed in India

3. Aditya Birla Group

Birlas are one of the most popular names in the business world in India and Aditya Birla Group is one of the biggest Conglomerates in India. The group was founded by Seth Shiv Narayan Birla in 1857 and currently headed by Kumar Mangalam Birla as its chairman. The group operates in Branded Apparels, Fashion, Textiles, Cement, Carbon Black, Metals, Chemicals, Telecom, Financial Services, and more.

Aditya Birla Group Companies

4. Mahindra Group

Anand mahindra

Mahindra was founded in 1945 as a steel trading company and is currently one of the largest Indian conglomerates. Its companies are present in aerospace, agribusiness, automobile, construction equipment, defense, energy, finance, insurance, industrial equipment, IT  leisure and hospitality, logistics, real estate, retail, and two-wheelers.

One of the most notable chairpersons from Mahindra is Anand Mahindra. One of its most successful investments includes Kotak Mahindra Bank Ltd.

5. Bajaj Group

bajaj group

The Bajaj Group conglomerate company was founded in 1926. The company is currently headed by Rahul Bajaj. Bajaj initially expanded into the scooter and three-wheeler manufacturing.

Today the company has its presence in the finance, electrical, iron, steel, home appliance sector, etc. Its most notable company is Bajaj Automobile which is ranked as the world’s fourth-largest 2&3 wheeler manufacturer.

Bajaj Group Companies Listed in Indian share market 

6. Adani Group

adani group

Adani was founded in 1988 as a commodity trading firm by its current chairman Gautam Adani. The company began trading coal in 1999 and began coal trading in 1999 and ventured into the market for edible oil under the Fortune brand.

The group currently holds a portfolio of companies which include the energy, resources, logistics, agribusiness, real estate, financial services, defense, and aerospace sectors. Today the group holds one of the largest electric companies in India i.e. Adani Green and is India’s largest port developer and operator.

Adani Group Listed Companies in India 2020

7. L & T Group

L&T Group

Larsen & Toubro Limited was founded in 1938 by two Danish engineers taking refuge in India. The two engineers, Henning Holck-Larsen and Søren Kristian Toubro escaped Germany’s invasion of Denmark during WW2.

The company has business interests in basic and heavy engineering, construction, realty, manufacturing of capital goods, information technology, and financial services.

Also read:

Closing Thoughts

Today, in this article, we covered seven of the top conglomerates in India.

Although there are multiple advantages that the company enjoys by extending into other industries, not all companies opt for it. Take Unilever for eg. The company in its pursuit to gain a larger margin branched itself into every activity that might be necessary for its business. Unilever in its pursuit to gain a larger margin branched itself into other activities that might be necessary for doing its business. The company owned plantations, oil mills, their own shipping line, logistics business, and even ran the stores themselves.

They, however, realized that they were better off only focussing on their core business i.e. creating FMCG products. This led to them selling off their supermarkets, chemical business, and cosmetics and investing in building their brands. Some other noteworthy Indian conglomerates are the Bharti Group, Godrej Group, and Wipro.

October 12, 2020 Market, Stocks 3 comments
3 Best Ever Stock Screeners For Indian Investors cover

3 Best Ever Stock Screeners For Indian Investors!

List of Best Stock Screeners For Indian Stocks: There are over 5,500 companies listed on Indian stock market. While investigating for good companies to invest, if you start reading the financials of each and every single stock, then it might take years.

Moreover, it doesn’t make sense to read the balance sheet, profit & loss statements or cash-flow statements of all the listed companies, if you can filter them out based on just a few preliminary filters like debt or growth rate. And that why stock screeners can be a very useful tool for the investors (and traders) to reduce lots of hassle.

In this post, we are going to discuss 3 best stock screeners that every Indian stock investors should know.

What is a Stock Screener?

A stock screener is a tool to shortlist few companies from a pool of all the listed companies on a stock exchange using filters. The investors specify the filters and the stock screener gives the results accordingly.

For example, if you want to find a list of companies whose

  • Market capitalization is greater than 10,000 Cr
  • The price to earnings is between 10 to 25.
  • Last 3 years average return on equity is 20%
  • And the debt to equity ratio is less than 1

Then, you can apply all these filters in a stock screener to get the list of the companies which fulfill the above criteria.

Stock screeners are very useful as it can save you a lot of time. You do not need to go through all the listed companies to shortlist a few good ones. You can just apply the basic filter to get the list of a few good ones that you want to investigate further.

Overall, the stock screener will help you to find good performing stocks according to your specifications with a single click.

Here is the list of the 3 best stock screeners for Indian stocks that every Indian investor should know. Further, please read this post until the end, as there is a bonus in the last section.

3 Best Stock Screener That You Should Know

Here is the list of the 3 best stock screeners for Indian stocks that you should know and bookmark on your browser. All these best stock screeners are powerful are simple to use:

1. Trade Brains Screener

trade brains portal stock screener

Website: https://portal.tradebrains.in/screener/

Through Trade Brains “Stock Screener”, you can scan and shortlist the stocks that fit your investment style by applying various parameters you choose while making an investment decision. Trade Brains Portal offers over sixty frequently used parameters to screen stocks. Using this portal, you can screen winning stocks based on different filters. Apply different parameters to shortlist the best ones among over 5,000 publically listed companies in India.

The biggest advantage of this feature is that rather than going through each and every share and testing the set of parameters, you can simply adjust it one time and the rest of the work will be done by our screener with the help of designed filters.

Here’s a quick demo on how you can screen stocks using the Stock screener feature offered by Trade Brains Portal:

2. Screener.in

Screener.in - best stock screeners

Website: https://www.screener.in/

The screener is a very simple yet powerful website for stock screening. The query builder of Screener allows the user to apply a number of filters to shortlist stocks based on PE ratio, market capitalization, book value, ROE, profit, sales etc.

The results of the stock screener can be powerfully customized and moreover, the screen can be saved for future use.

Also read: If you want to learn how to use the screener website efficiently for stock screening, you can find this post useful: How to use SCREENER.IN like an Expert

 

3. Tickertape

Website: https://www.tickertape.in/screener/

Tickertape Screener is yet another simple stock screener that has a lot more criteria to filter companies based on market cap, sector, close price, PE ratio, and other financial ratios.  What makes this website stand out from the rest is it’s easy to use interface and feature to apply all these filters on the same tab to find specific stocks.

The filters are fast to use and the results are easily customizable.

tickertape stock screener

Bonus: A few other useful stock screeners

4. Investing.com Stock Screener

investing stock screener

Website: https://in.investing.com/stock-screener/

Investing is also a very powerful website for stock screening. You can find the list of all the companies trading on NSE and BSE here.

There are a number of filters available on INVESTING for screening the stocks like ratios, price, volume & volatility, fundamentals, dividends, and technical indicators. Moreover, it’s a very useful site if you follow the top-down approach. You can select the industry which you want to research and then apply a number of filters like PE, P/Book value, ROCE, etc for shortlisting the best stock in that industry.

For example, if you are studying the chemical industry, then simply select this industry option. You will get the list of the companies in this industry. Next, you can apply different filters for screening the best one, according to your preference.

Other Useful Indian Stock Screeners

As always, I never end a post without some bonuses. Here is the list of few other useful stock screeners that you should also know.

That’s all. I hope that this list of the best stock screeners for Indian stocks is useful to you. If I missed the name of any other useful stock screener that deserves to be on this list, feel free to comment below. I’ll add them to the bonus section above so that the readers can get more benefits. #Happy Investing.

Also read: 3 Simple Tricks to Stock Research in India for Beginners.

Tags: stock screener, best stock screeners, stock screeners in India, best stock screeners for Indian stocks, best stock screeners India
October 12, 2020 Investment Basics 17 comments
Top Companies in Indian Airline Industry 2020 list

Top Companies in Indian Airline Industry 2020!

List of Top Companies in Indian Airline Industry: The aviation industry in India is one of the fastest-growing industries and has claimed the third spot among the largest domestic markets in the world. Although the industry is struggling during COVID19, however, no depression lasts forever. 

Today, we take a look at the future prospects of the Indian airline industry and the top companies in Indian Airline Industry in 2020.

Prospects of the Indian Aviation industry

This sector contributed close to $72 billion to Indian GDP and is en-route to also become the 3rd largest air passenger market by 2024. These bright prospects are mainly due to the untapped potential considering that air transport is still considered expensive for the majority of the country’s population which will change with the country’s economic growth. Today we  

The Indian government realizing this potential has allowed 100% FDI in these sectors. Investments over 49% will, however, require government approval. The Indian government has also planned to invest up to $1.82 billion for the development of airport infrastructure and aviation navigation services by 2026.

As of March 2019, India had 103 operational airports, this number is expected to increase to 190-200 by FY40. The rising demand expects the number of airplanes to reach 1,100 by 2027 and by 2038 will require 2,380 new commercial airplanes.

Indian Aviation Industry during COVID-19

Top Companies in Indian Airline Industry

The aviation industry played a very important role in assisting the government in midst of COVID-19. Under the ‘Lifeline Udan’ scheme operators like Air India, Alliance Air, IAF transported essential medical cargo throughout the country in order to combat COVID-19. 588 flights were operated as of June 20, 2020, under the scheme carrying 940 tonnes of cargo.

The civil aviation industry, unfortunately, was one of the worst-hit in the midst of the crisis. According to the Centre for Asia Pacific Aviation(CAPA) the sector is at a breaking point with domestic traffic declining by over 60% international traffic by 70-80% in FY21.

CAPA also states that 30% of the workforce is estimated to be impacted in the sector. Post the complete lockdown that took place earlier this year air travel was initially subject to only 45% capacity utilization and international flights were suspended till August 31st. Travel that does take place is currently only for essential purposes.

Top Companies in Indian Airline Industry — 2020!

1. Interglobe Aviation (Indigo)

Indigo

Indigo is the leader in the Indian aviation industry with the current market cap of Rs 49,923.47 Cr. This company trades on Indian stock exchanges with the latest share price of Rs 1,364.95 per share.

Indigo is India’s largest airline by passengers carried and fleet size and boasts a 60.4% domestic market share as of July 2020. The airline was founded by Rahul Bhatia of Interglobe Enterprises and Rakesh Gangwal in 2006 after it took delivery of its first aircraft in July 2006.

The company operates in Indian domestic markets as a low-cost carrier. The company has grown its fleet to 276 aircrafts today and has been one of the few airlines that have been profitable for 10 years. 

2. SpiceJet

spicejet

Spice Jet is India’s 2nd largest airline in terms of domestic passengers carried and has a market share of 13.6% as of July 2020. It has the current market cap of Rs 3,085.41 Cr.

The airline was established as ModiLuft in 1994 with backing from Lufthansa but ceased operations in 1996. In 2004 Indian entrepreneur Ajay Singh acquired the company and renamed it as SpiceJet. SpiceJet started its operations with 2 aircraft on lease and currently has a fleet of over 90 aircraft.

3. Jet Airways

Jet Airways Ltd is an Indian international airline. In March 2019 it was reported that nearly a fourth of Jet Airways’ aircraft was grounded from operations due to unpaid lease rates.  It is a smallcap company trading in the Indian stock market with a market cap of Rs 311.82 Cr. The stocks of Jet Airways used to trade at a share price above Rs 1,300 per share in 2005. However, as of Oct 2020, this stock is hovering at a share price of Rs 31.

4. Air India

air india

Air India is India’s flag carrier owned by the Indian government. The airline is India’s largest international carrier with a market share of 18.6%. Domestically the airline falls behind market leaders Indigo and SpiceJet with a market share of 9.1% as of July 2020. The airline was founded in 1932 by JRD Tata and made a profit of Rs 60,000 in its first year carrying weekly mail and 155 passengers.

After WW2 Tata airlines became a public ltd company under the name Air India. Unfortunately, years of loss-making operations have turned the airline into a debt-stricken entity. The government has time and again tried to sell the airline but unsuccessfully. The new owner would have to take on a debt of US$4.7 billion.

The airline operates flights domestically and to its Asian destinations through its subsidiaries Alliance Air and Air India Express. The airline currently has a fleet of 173 aircraft. 

5. Air Asia India

Air Asia India was established in 2013 as an Indian airline trough a joint venture between Tata Sons and Air Asia Investment Ltd. ( Malaysia).

The airline also marked the return of the Tata Group into the aviation industry after 60 years. Air Asia holds a 6.2% market share as of July 2020. The airline has a fleet of over 30 aircraft. 

6. Vistara 

Vistara is another airline that includes a Joint Venture between Tata and a global airline. The airline was founded in 2013 as a joint venture with Singapore airlines. Vistara is a name taken from the Sanskrit word meaning “ Limitless expanse”.

Vistara had a market share of 4.2% as of July 2020. The airline has a fleet of 42 aircraft.

7. GoAir

GoAir, part of the Wadia Grp. is a lowcost airline. It launched its operations in 2005 and as of July 2005 holds a market share of 3.8%. The airline has a fleet size of 55 aircraft.

The airline had earlier looked for a merger with Spicejet and later appointed JPMorgan to scout for potential investors. In its attempt to raise capital the airline had planned to go for an IPO this year but these plans been delayed. 

Also read:

Closing Thoughts 

The takeoff of the Indian Airline industry has been delayed unfortunately due to COVID-19. Industry experts CAPA expects the Indian aviation industry to shrink to 2-3 players if they do not receive additional funding. This according to them would result in sustainable damage in connectivity throughout India.

Ajay Awtaney, Founder, LiveFromALounge.com said that he expects only IndiGo, Vistara, and Air India will be able to survive post-COVID-19. “IndiGo is cash-rich. They are doing the right thing by raising liquidity and have also taken cost-cutting measures. Vistara too is in a good position right now. They are bleeding financially but have the support of two strong backers. Air India, on the other hand, has the backing of the government”. This calls for added government focus on the industry in order to ensure that the industry does not suffer irreparable damage.

October 11, 2020 Market, News 1 comment
5 Biggest Merger and Acquisitions in India cover

5 Biggest Mergers and Acquisitions in India!

List of the Biggest Mergers and Acquisitions in India: Mergers and Acquisitions (M&A) have increased in the Indian subcontinent over the years. These deals play a very important role in the growth of any company in the long term and also the economy. Today, we are going to cover the biggest Mergers and Acquisitions in India.

Here, we’ll take a look at the ever-evolving M&A environment and rank the biggest deals that included Indian companies. Let’s get started.

Mergers and Acquisitions in India

A business taking over another business occurs more frequently than you think. These takeovers are known as acquisitions. Situations, where two or more companies come together to form a single company, are known as mergers. The Indian law recognizes these mergers as ‘Amalgamation’.

The purpose of such M&A revolves around a company’s growth strategy. The M&A may take place in the company’s efforts to increase market share, geographical outreach, to reduce competition, profit from patents, or even enter new sectors or product lines. Companies often take advantage of other underperforming companies or governments looking to disinvest.

Mergers and Acquisitions in India handshake 

According to a report from Bain, the 3600 M&A deals that took place between 2015 and 2019 amounted to more than $310 Billion. According to the report over 60% of the deals by volume and trade were attributed to industrial goods, energy, telecom, and the media sector. One of the major reasons for the increasing competition is owed to the changing landscape after the increasing availability and use of the internet. The effects of increased competition are more evident in companies from the eCommerce industry. This industry has paved way for some of the most aggressive M&A in the recent past.

Another aspect that significantly affects the M&A environment is the political scenario of the country. This is because unfortunately for India the capital requirements do not meet the unexploited potential of the Indian markets. Foreign companies bridge this gap. Unfavorable laws present and those created against a foreign country severely impact their investment prospects in India. Initiatives by the government to quicken the M&A are examples of support given by the government. Such initiatives have assisted India to achieve the 63rd rank in Ease of doing business ranking by the World Bank.

5 Biggest Mergers and Acquisitions in India

1. Arcelor Mittal

The biggest merger valued at $38.3 billion was also one that was the most hostile. In 2006, Mittal Steel announced its initial bid of $23 billion for Arcelor which was later increased to $38.3 billion. This deal was frowned upon by the executives because they were influenced by the patriotic economics of several governments. These governments included the French, Spanish, and that of Luxembourg. The very fierce French opposition was criticized by the French, American, and British Media.

Then Indian commerce minister Kamal Nath even warned that any attempt by France to block the deal would lead to a trade war between India and France. The Arcelor board finally gave in to the deal in June for the improved Mittal offer. This resulted in the new company Arcelor-Mittal controlling 10% of global steel production. 

2. Vodafone Idea Merger

vodafone-idea-merger

Reuters reported the Vodafone Idea merger to be valued at $23 billion. Although the deal resulted in a telecom giant it is safe to say that the 2 companies were pushed to do so due to the entry of Reliance Jio and the price war that followed. Both companies struggled amidst the growing competition in the telecom industry. The deal worked both for Idea and Vodafone as Vodaphone went on to hold a 45.1% stake in the combined entity with the Aditya Birla group holding a 26% stake and the remaining by Idea.

On the 7th of September, Vodafone Idea unveiled its brand new identity ‘Vi’ which marked the completion of the integration of the 2 companies. 

3. Walmart Acquisition of Flipkart

walmart-flipkart-acquisition

Walmarts acquisition of Flipkart marked its entry into the Indian Markets. Walmart won the bidding war against Amazon and went onto acquire a 77% stake in Flipkart for $16 billion. Following the deal, eBay and Softbank sold their stake in Flipkart. The deal resulted in the expansion of Flipkart’s logistics and supply chain network.

Flipkart itself had earlier acquired several companies in the eCommerce space like Myntra, Jabong, PhonePe, and eBay.  

4. Tata and Corus Steel

Tata’s takeover of Corus Steel in 2006 was valued at over $10 billion. The initial offers from Tata were at £4.55 per share but following a bidding war with CSN, Tata raised its bid to £6.08 per share. Following the Corus Steel had its name changed to Corus Steel and the combination resulted in the fifth-largest steel making company.

The following years were unfortunately harsh on Tata’s European operations due to the recession in 2008 followed by reduced demand for steel. This eventually resulted in a number of lay-offs and sales of some of its operations. 

5. Vodafone Hutch-Essar

The world’s largest mobile operator by revenue – Vodafone acquired a 67% stake in Hutch Essar for $11.1 billion. Later in 2011 Vodafone paid $5.46 billion to buy out Essar’s remaining stake in the company. Vodafone’s purchase of Essar marked its entry into India and eventually the creation of Vi. Unfortunately, the Vodafone group was soon embroiled in a tax controversy over the purchase with the Indian Income Tax department. 

Closing Thoughts

In this article, we discussed the biggest Mergers and Acquisitions in India. While acquisitions are prevalent in almost every industry only a few of them turn out to be successful. We’ve already seen above that the reasons for M&A may be extremely varied. Most of these M&A are predatory and take place when the acquirer is doing well but unfortunately, there may be multiple reasons that may turn the M&A into a disaster.

That is why companies take extra precautions before entering into M&A and ensuring they are taking on an asset and not just a liability.

October 10, 2020 Market, News No comments yet
How to Trade Commodities in India? Step-by-Step Guide for Beginners!

How to Trade Commodities in India? Step-by-Step Guide for Beginners!

A Beginner’s Guide on How to Trade Commodities in India: In olden times, commodities like grains, cotton, oil, cattle, etc were heavily traded among the people and communities to meet their requirements. You might have seen movies of people carrying goods on the top of Camels to trade with others. Not much has still changed even in the 21st century. Even now, people and countries trade these items. And these days, anyone can trade in commodities to make substantial profits, apart from trading in traditional stocks and other derivatives instruments.

In this article, we are going to discuss the step-by-step process of how to trade commodities in India. Here, we’ll first cover the basics like what is a commodity, who are commodity buyers and sellers, the types of commodities traded in India, etc. Later, we’ll get into the technicalities like margin required and how exactly to trade in commodities in India. Let’s get started.

What is a Commodity?

In simplest words, a commodity is any raw material that has a physical form and which can be bought or sold and are interchangeable in nature with another similar commodity.  Some of the traditional examples of commodities include Grains, Wheat, corn, soybeans, or other foodstuffs, Cattle or other stock animals, Cotton, oil, gold, etc.

Investing/trading in commodities is a good way to diversify your portfolio with assets other than stocks, gold, etc. Investors or Traders can buy commodity directly in the spot (cash) market or via derivatives market by trading in Futures and Options.

Types of Commodity traders

There are generally two types of commodity traders – Hedgers and Speculators.

— Hedgers are buyers or producers of commodities that use commodities futures contracts for hedging purposes. These traders take the delivery position of the original commodity when the futures contract expires.

— The second types of trader are the Speculators who enter the market for the sole purpose of profiting from the price movement or volatility of commodity futures contract.

Commodity trading exchanges in India

In India, the commodities are traded via five exchanges. Traders are allowed to trade commodity derivative contracts from any of the following exchanges:

  • National Stock Exchange of India Limited (NSE)
  • Bombay Stock Exchange (BSE)
  • Multi Commodity Exchange of India Limited (MCX)
  • National Commodity and Derivatives Exchange Limited (NCDEX)
  • Indian Commodity Exchange Limited (ICX).

An interesting point to mention here is is that NSE and BSE launched trading in commodities only in 2018. Further, the commodities market is regulated by SEBI. (Earlier it was regulated by Forwards Markets Commission (FMC), which was later merged with the SEBI in 2015). All the commodities in India are traded via the online portals.

Margin required to trade Commodity in India

Commodities are products that require higher-margin, compared to any other product like equity futures or options. Different products under the preview of a commodity require a different amount of margins.

Here is a list of the most actively traded commodity along with the margin required for Normal (or delivery) mode and MIS (Margin Intraday Square off) mode.

Margin required to trade Commodity in India Margin required to trade Commodity in India

Pic: Intraday and Normal margin for various commodities (source: www.zerodha.com)

If we were to carefully look at the picture above, for different commodities the margin varies with the change in the price of the commodity futures contract. The images above clearly give information about the Normal margin, the Intraday margin, and the price levels for which the margins are calculated.

List of commodities traded in India

The commodity sector in India has been divided into five sectors namely – Agriculture, Metals and Materials, Precious metals and materials, Energy and, Services. These sectors are again classified and divided into various constituents.

(Image: List of various commodity sectors and its constituents (source: www.indiainfoline.com))

Tips before Entering the Commodity Trading

Here are a few factors to be kept in mind before deciding to enter the commodity trading:

  • Commodity trading is one the fastest growing product, for trading in India.
  • Although risky by nature, but if done with careful analysis and complete understanding, commodity trading adds the required pinch of diversification to the portfolio.
  • The margin required to trade commodities is slightly on the higher side.
  • The amount of margin required to trade the commodity keeps on changing depending upon changes in the price of futures contact of those commodities.

How to Trade Commodities in India? Step-by-Step Explanation

By now, you would have understood what commodity trading is, its various nuances, the margin requirements, the various players in commodity trading, and the different products. Let us now try and understand as to how does one start commodity trading in India.

For the sake of explanation, we have used Zerodha’s web (as they are the discount brokers with the highest customer base), to explain the steps.

Step 1: You need to have a trading account with one of the brokers that allow commodity trading (for example, Zerodha, Angel broking, 5Paisa, etc.). If you don’t have one, here’s an article on the best discount brokers in India, so that you can pick the one that suits you the best.

After opening the trading account, a separate form has to be filled, which activates the commodity trading along with equity trading in the same account. The margin account for equity trading and Commodity trading is different. The margin of Equity cannot be used for Commodity trading and vice-versa.

Step 2: We need to have a sufficient margin balance in our commodity trading account. Margin is the minimum amount of money required to trade. The amount of margin required varies from a Normal trade to a MIS (Margin Intraday Square off) trade.

The main difference between these two is that in case of Normal trade, the position can be carried over to the next day. However, in case of a MIS trade, the position will automatically get squared off before the end of the day.

The amount of margin required is the least for the Covered order. The covered order is that order for which the stop loss is pre-decided. And, hence the margin is least.

oil trading zerodha futures margin

Now, if we carefully look at all the images above, the first image shows the amount margin required for Crude oil October futures contract in Intraday MIS mode (Margin = Rs. 2,00,410). The second image shows the margin required when we trade NRML (Normal) contract (Margin = Rs. 4,00,882). And the third image shows the amount of margin required for a covered order (Margin = Rs. 88,026).

Step 3: The next important step that we need to consider, is to select the commodities, which we wish to trade. And upon selecting the commodities, it is advised to have all the commodities for various expiries pinned to the watch list.

Watch list of the commodities - How to Trade Commodities in India(Image: Watch list of the commodities (source: www.zerodha.com))

Step 4: After Shortlisting the commodities to be traded, the next step is to place the order. After selecting the contract, we just need to punch in the trade on the ticket.

Now, we have two ways to take the trade – Limit order & Market order. If we place the market then we end up buying or selling at the existing market price. But if we place a limit order then we can choose the price at which we want to place the order.

limit and market order commodity trading

Step 5: The next step while trading options is to check in the order book if the order has been placed.  We can do that by simply clicking on the orders tab, and we can see the list of all the order which have been placed or canceled or executed.

Step 6: The last, but the most important step is the continuous monitoring of the positions. We should always be on the constant lookout for opportunities to trade and always have a stop loss for the existing trade.

Conclusion

In this article, we discussed the step-by-step procedure on how to trade Commodities in India. Here are a few key takeaways from this post:

  • Commodity trading is done by both hedgers and speculators.
  • It is one of the most common form of portfolio diversification method used by investors or traders.
  • The amount of margin required to trade is slightly on the higher side, so the trades must be entered after doing a careful analysis of the technical and fundamental picture.
  • We can do both Intraday (MIS) trading and NRML (delivery based trading) while trading commodities.
  • It is always advised to have proper risk management (stop loss and target) for all the trades

That’s all for this post on how to trade Commodities in India for beginners. I hope it was useful to you. If you still have any queries to related to this topic, feel free to comment below. I’ll be happy to help. Happy Trading and Money Making!!

October 9, 2020 Beginner's guide, Trading 1 comment
What are Black Swan Events in Stock Market cover

What are Black Swan Events in Stock Market?

Understanding what are Black Swan Events in Stock Market: European explorers would have been more than taken aback when they first encountered the first black swan in the 17th century during their conquest in Australia. After all, if you’re habituated on seeing white swans all your life and suddenly a swan of black colour appears, you might also be astonished.

Anyways, this concept of seeing something rare and totally different is not only limited to swans or birds. The black swan we are discussing today in the world of investing holds the similar astonishing features of a real black swan. In this article, we’ll discuss what are black swan events in the stock market, examples of a few past black swan events and how can you handle black swan events while investing. Let’s get started.

What are Black Swan Events?

A Black Swan in finance is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. This theory is basically a metaphor that describes an event that comes as a surprise, but can have a major effect.

black swan events

The theory was put forward by former Wall Street trader, Nassim Nicholas Taleb in 2001 which was later popularized through his book ‘Black Swan’, which came out a year before the crash of 2009. The theory illustrates the limitations of learning from our observations and experience just as when a black swan was discovered in Australia.

One may have seen millions of white swans throughout his life but it would take only one black swan to shatter his belief that all swans are white. Today we take a closer look in order to understand black swans in the finance world and how we can prepare for them. 

What makes an event a Black Swan?

There are no limitations to ways in which a Black Swan event can manifest itself. The causes of black swan may be a natural disaster, wars, or even an outbreak of a virus. These events do not always have to have sudden consequences but instead can be slow like the fall of the Roman Empire. Taleb identifies three common characteristics between all Black Swans

  1. They are so rare that the possibility that they might occur is unknown.
  2. They have a catastrophic impact
  3. When it does occur and when it is explained in hindsight the event actually seems predictable.

The effects of black swan events are magnified and tend to be catastrophic primarily because they confound our expectations that a universe is an orderly place. 

A Few Different Black Swan Events in Stock Market in Past

The stock market has experienced multiple black swan events in the past. Here are some of the most infamous Black Swans in the recent past.

1. Harshad Mehta Scam

The Harshad Mehta Scam, when exposed, had staggering effects on the Indian economy that had just opened up to the world. The scam amounted to Rs. 4025 crores which today would amount to Rs. 24000 crores. The scam resulted in the BSE Sensex falling by almost 45%. It took almost 18 months to recover post this. You can read more about Harshad Mehta Scam here!

2. 2008 Recession

This recession was one of the biggest since the great depression. It is estimated that over $10 trillion was wiped out in the global equity markets. The financial crisis of 2008 is one of the most recent Black Swan events, caused due to the US mortgage and credit crisis. It also caused the largest bankruptcy in Lehman Brothers. In hindsight, many rightly say that it was bound to happen and a few outliers even predicted it. 

3. The 9/11 Attacks

The Attacks on the twin towers of New York World Trade Centre too is a Black Swan. The attacks led to the closure of the NYSE and NASDAQ. Estimates state that up to 1.4 trillion was lost within a week. The airline industry was the worst impacted due to the attack.

Quick Note: The event of Crude Oil Prices diving into negative in April 2020 that broke into the news for its extraordinarily inconceivable negative price dump, was also an example of Black Swan events. You can read more about this event here.

Is the COVID-19 Pandemic a Black Swan Event?

The pandemic has been argued to be a black swan event by many sources. But the classification would also depend on the region.

For a country like China, the virus is most definitely a black swan as they were caught by surprise when the virus first broke out in December. Other countries like India, however, could have seen it coming as they were adversely affected only months later.

In an interview with Bloomberg last week Nassim Nicholas Taleb said, “It was not a black swan. It was a white swan. I’m so irritated people would say it is a black swan,” while referring to coronavirus. “There is no excuse for companies and corporations not to be prepared for that. And there’s definitely no excuse for governments not to be prepared for something like this,” Taleb added.

How can Investors handle a black swan event?

We regularly come across predictions given by the so-called finance gurus on television etc. The very first step would be to ignore these so-called predictions and forecasts. Taleb criticizes prediction that may even extend up to 30 years bu what we don’t realize is that we cannot even predict the next summer because our cumulative prediction errors for political and economical events are so monstrous. 

– Steps Prior to the Black Swant Event

1. Diversifying Investments

Regardless of whether the market is undergoing a bull or bear run, it is best to also follow the basics of investing and diversify. Investors who only invest in equities face tremendous value damage. But instead, if his investments are spread across equities, liquid assets, and gold then the damages will be lower. This will help an investor survive the Black Swan. 

However, there are investors who strive during a black swan. It is also important to note that if a person invests solely with the fear that a black swan event may occur at any given moment his returns would severely be impacted. What we could do is hedge our portfolios by means of diversification so that they perform in a bullish run and reduce losses when a black swan hits. For this investors have a look for assets that are likely to underperform during the bull run but provide returns when the market crashes and then include them in your portfolio.

One example would be the Universa Investments fund run by Taleb and Mark Spitznagel. This fund has benefitted hugely during the coronavirus. Its returns for 10 years prior to the pandemic were low or loss-making. During the pandemic, however, the fund had risen by 3600%. Despite the losses made the fund is still up 200%. One report also shows that if an investor had only invested 3.3% of his portfolio in the Universa fund and the remaining in the S&P500 tracker fund, the investor would still see returns of 0.4% in March despite the benchmark index falling 12%.

– Steps to take during a black swan event

2. Staggering Investments

While investing during an ongoing black swan event it is best that the investors stagger their investments over a period of time instead of investing lump sums in one go. This is because the duration of a black swan event is difficult to predict. Staggered investments will provide investors the opportunity to take advantage of falling prices during bearish trends. 

3. Take Shelter in Safer Investment Options like Gold

Gold is considered a safe-haven when a black hawk event occurs. It is best to diversify investments beforehand into gold. During the Arab oil embargo between 1971 and 1979, when the world was rocked, the prices of gold skyrocketed 2400%. The increase in gold prices during black swan events has repeated time and again for eg. 9/11, the 2008 crisis, and again during COVID-19. 

4. Only look for companies that are already financially sound instead of ideas

Prior to black swans when the market is doing good even companies with weak financials but great innovative ideas are able to raise funds and strive. But after a crash, these companies find it hard to even survive. Hence during a black swan, it is best to invest in financially sound companies that are cash-rich, have good ROCE, low debt, and good management. 

Closing Thoughts

Black Swans are generally considered to result in negative connotations but the result generally depends on the perspective of the individual. Take the example of John Paulson during the 2008 crisis or George Soros in 1992.

Predicting a black swan can be next to impossible as there are just too many events that can happen at any given time and their prediction in the past took a lot of skill and luck. However, what we can control is making our portfolios as Black Swan Proof as possible.

black swan events quoteThat’s all for this article on Black Swan Events in stock market. I hope it was useful to you. If you have any queries related to black swan events, feel free to comment below. I’ll be happy to help. Take care and happy investing!

October 8, 2020 Beginner's guide, Investing Psychology 2 comments
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