Track where the Big Players are investing in the market: There are many investors who keep an eagle-eye on where the big players are investing in the market their stock portfolio. It makes complete sense to track where the big players are investing in the market as these players have already proved their expertise in stock picking through their success in the share market and created huge wealth for themselves. Moreover, a common investor cannot match the mastery, opportunity, resources, and expertise available to these investors.
Therefore, a retail investor can avail the maximum benefit of their expertise by keeping an eye on where the big players are investing in the market.
NOTE: Tracking the portfolio of successful investors is a good idea. However, investing blindly in the stocks where these big players are investing, might get you in trouble. Please do a proper study of the stocks before investing. After all, even these big players are humans and are capable of making mistakes. (Also read: Is Copycat Investing Hurting Your Portfolio?)
How to trackwhere the big players are investing in the market?
There are a few ways by which you can track the investments of big players of the stock market in any share. Let’s discuss those ways.
1. Check the block/bulk deals list
This list of the block and bulk deals are publicly disclosed on NSE/BSE website daily. Investors can check the block and bulk deals to track where the big players are investing in the market.
In a block deal, either theminimum number of 5 lakh shares or an investment amount of Rs 5 crores should be executed. On the other hand, a bulk deal happens when the total quantity of shares bought or sold is greater than 0.5% of the total number of shares of a listed company. Read more here.
You can use this list to find the names of the big players in any stock. Here’s the link for the bulk/block deal on BSE website: Bulk Deals / Block Deals
2. Check the shareholding pattern of the companies
Every company discloses the names of those investors who are holding 1% or greater of the total number of shares. You can check the shareholding pattern to find the name of big players in any stock. You can find the shareholding pattern of a company on the company’s website, NSE/BSE website or financial websites like money control, investing, etc.
For example, here’s the publicly available shareholding pattern for TITAN COMPANY. We all know who holds a large chunk of this stock (RAKESH JHUNJHUNWALA)!!
3. Track Portfolio using financial aggregator websites
There are many financial websites that track the latest portfolio of these big players. For example TRENDLYNE- Superstar Large Shareholder Portfolios. You can follow these financial websites to get the names of the big players in any stock.
Similarly, you can also use the Stockedge mobile app or website to find out the portfolio of big investors in the market. Here’s the link to Stockedge web.
Here are links to the portfolio of a few of the most successful investors in the Indian stock market:
That’s all for this article. Using these simple strategies, any common investor can track where the big players are investing in the market. I hope this post is useful to the readers. If you’ve any questions, feel free to comment below. I’m eager to help. Till next time. Happy Investing.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Hi Investors. Today we are going to discuss one of the most basic topics for a beginner- How to invest in share market? I have been planning to write this post for a number of days as there are many people who are willing to invest, however, do not know how to invest in share market.
Please note that this post might be a little longer as I am trying to cover all the basics that a beginner should know before entering the stock investment world. Make sure that you read the article till the end, cause it will be definitely worthwhile reading it.
Pre-requisites before you start investing
For investing in the Indian stock market, there are few pre-requisites that I would like to mention first. Here are the few things that you will need to invest in share market:
Savings account
Trading and demat account
Computer/laptop/mobile
Internet connection
(Thanks to Reliance Jio, everyone has 4G internet connection now.. 😀 )
For opening a demat account, the following documents are required:
PAN Card
Aadhar card (for address proof)
Canceled cheque/Bank Statement/Passbook
Passport size photos
You can have your savings account in any private/public Indian bank.
Where to open your trading and demat account?– This will be discussed later in this post on the section ‘choose your stock broker’ (STEP 4).
Get your documents ready. If you do not have a PAN card, then apply as soon as possible (if you are 18 years old or above).
3 basic advice before you start investing
When you are new to the stock market, you enter with lots of dreams and expectations. You might be planning to invest your savings and make lakhs in return.
Although there are hundreds of examples of people who had created huge wealth from the stock market, however, there are also thousands who didn’t.
Here are a few cautionary points for people who are just entering the world of investing.
— Pay down your ‘High-Interest’ debts first
If you have any kind of high-interest paying debts like personal loans, credit card dues debts, etc, then pay them first. The interests of these loans can be even as high as your returns from the market. There is no point in wasting your energy to give all the returns you made from the market as interests of your debts. Pay down these debts before entering the market.
— Invest only your additional/ surplus fund
Stop right there if you are planning to invest your next semester tuition fee, next month flat rent, savings for your daughter’s marriage which is going to happen next year or any similar reasons.
Only invest the amount that won’t affect your daily life. In addition, investing in debts/loans is really a bad idea, especially when you are new and learning how to invest in the share market.
— Keep some cash in hand
The cash in hand doesn’t just serve as your emergency fund. It also serves as your key to freedom. You can take big steps like changing your little flat, or quit your annoying job or simply shifting to a new city, only when you have cash in hand.
Do not get trapped by investing all your money and later losing your freedom. Do not sacrifice your personal freedom in the name of financial freedom.
Now that you have understood the pre-requisites and the basics, here are the seven steps to learn how to invest in share market on your own. Do follow the step sequences for an easy approach to enter the stock market world.
How to invest in share market?
Step 1: Define your investment goals
It’s important to start with defining your investment goals. Start with end goals in mind. Know what you want.
Do you want to grow you saved money (capital appreciation) to beat inflation and get higher returns? Do you want to build a passive income from your investments through dividends? Are you investing for a specific goal? Or do you just want to have fun in the market along with creating wealth?
If you want to just have fun and want to learn, that’s okay. But make sure that you do not over-invest or get too much attracted to the market? Moreover, most people start the same way and define their goals later.
Anyways, if you are starting for Goal-Based Investing, do remember that the time frame for different investment goals will be different. Your goal can be anything like buying a new house, new car, funding your higher education, children’s marriage, retirement, etc. However, if you are investing in your retirement, then you have a bigger time frame compared to if you are investing in buying your first house.
When you know your goals, you can decide how much you want and for how long you have to remain invested.
Step 2: Create a plan/strategy
Now that you know your goals, you need to define your strategies. You might need to figure out whether you want to invest in the lump sum (a large amount at a time) or by SIP (systematic investment plan) approach. If you are planning small periodic investments, analyze how much you want to invest monthly.
There’s a common misconception among our society that you need large savings to get started. Say, one lakh or above. But that’s not true. As a thumb rule, first, build an emergency fund and next start allocating a fixed amount let’s say 10-20% of your monthly income to save and invest. You can use the remaining portion of your earnings for paying your bills, mortgages, etc. Nevertheless, even if your allocated amount turns out to be Rs 3-5k or more, it’s good enough to build an investing habit.
Step 3: Read some investing books.
There are a number of decent books on stock market investing that you can read to brush up the basics. Few good books that I will suggest the beginners should read are:
Besides, there are a couple of more books that you can read to build good basics of the stock market. You can find the list of ten must-read books for Indian stock investors here.
Step 4: Choose your stock broker
Deciding an online broker is one of the biggest steps that you need to take. There are two types of stockbrokers in India:
Full-service brokers
Discount brokers
— Full-Service Brokers (Traditional Brokers)
They are traditional brokers who provide trading, research, and advisory facility for stocks, commodities, and currency. These brokers charge commissions on every trade their clients execute. They also facilitate investing in Forex, Mutual Funds, IPOs, FDs, Bonds, and Insurance.
Few examples of full-time brokers are ICICIDirect, Kotak Security, HDFC Sec, Sharekhan, Motilal Oswal, etc
— Discount Brokers (Budget Brokers)
Discount brokers just provide the trading facility for their clients. They do not offer advisory and hence suitable for a ‘do-it-yourself’ type of clients. They offer low brokerage, high speed and a decent platform for trading in stocks, commodities and currency derivatives.
A few examples of discount brokers are Zerodha, ProStocks, RKSV, Trade Smart Online, SAS online, etc.
I will highly recommend you to choose discount brokers (like Zerodha) as it will save you a lot of brokerage charges.
Initially, I started trading with ICICI direct (which is a full-service broker), but soon realized that it was too expensive when compared to discount brokers. It doesn’t make sense to pay extra brokerage charges even if you get similar benefits. And that’s why I shifted to Zerodha as my broker. (Related Post: Different Charges on Share Trading Explained- Brokerage, STT & More)
Zerodha (a discount broker) charges a brokerage of 0.01% or Rs 20 (whichever is lower) per executed order on Intraday, irrespective of a number of shares or their prices. For delivery, there is a zero brokerage charge in Zerodha. Therefore, the maximum brokerage that you’ve to pay per trade while using the Zerodha platform is Rs 20 and it doesn’t depend on the volume of trading.
This is way cheaper compared to ICICI direct (full-service broker) which asks a brokerage of 0.55% on each transaction. If you buy stocks for Rs 50,000 in ICICI direct, then you have to pay a brokerage of Rs 275 for delivery trading i.e. when you hold the stock for more than one day in your demat account.
Further, as this amount is charged on both sides of the delivery transaction (buying & selling), hence you have to pay a total of Rs 550 for the complete transactions in ICICI direct (way too expensive than Zerodha).
Step 5: Start researching common stocks and invest.
Start noticing the companies around you. If you like the product or services of any company, dig deeper to find out more about its parent company, like whether it is listed on the stock exchange or not, what is its current share price, etc.
Most of the products or services that you use in day to day life — From soap, shampoo, cigarettes, bank, petrol pump, SIM card or even your inner wears, there is a company behind everyone. Start researching about them.
For example- if you’ve been using HDFC debit/credit card for a long time and satisfied with the experience, then investigate further about HDFC Bank. The information of all the listed companies in India is publicly available. Just a simple ‘Google search’ of ‘HDFC share price’ will give you a lot of important pieces of information. (Try it now!)
Similarly, if your neighbor bought a new Baleno car lately, they try to find out more about the parent company, i.e. Maruti Suzuki. What other products it offers and how is the company performing recently- like how are its sales, profits, etc.
You do not need to start investing in stocks with hidden gems. Start with the popular large-cap companies. And once you are comfortable in the market, invest in mid and small caps.
Step 6: Select a platform to track your performance
You can simply use an excel or google spreadsheet to track your stocks. Make a spreadsheet with three tables containing:
The stocks that you are interested in and need to study/investigate,
Those stocks that you have already studied and found decent,
Miscellaneous stock- for the other stocks that you want to track.
This way, you can easily follow the stocks. Further, there are also a number of financial websites and mobile apps that you can use to keep track of the stocks. However, I find using google sheets the easiest for tracking my stocks.
Its always good to have an exit plan. There are two ways to exit a stock. Either by booking profit or by cutting a loss. Let’s discuss both these scenarios.
Basically, there are only four scenarios when you should sell a good stock in your portfolio: 1) When you badly need money 2) when the stock fundamentals have changed 3) When you find a better investment opportunity and 4) When you have reached your investment goals.
If your investment goals are met, then you can exit the stocks happily. Or at least, book a portion of the profit from your stock portfolio and shift it to other more safer investment options. On the other hand, if the stock has fallen under your risk appetite level, then again exit the stock. In short, always know your exit options before entering.
That’s all. There were seven steps that will help you learn how to invest in the share market. Now, here are a few other important points that every stock market beginner should know:
10 Additional points to take care
1. Start small
Do not put all your money on the market in the beginning. Start small and test what you have learned. You can start even with an amount of Rs 500 or 1000. For the beginners, it’s more important to learn than to earn. You can invest in a large amount once you have more confidence and experience.
2. Diversify your portfolio
It’s really important that you diversify your portfolio. Do not invest all in just one stock. Buy stocks from companies in different industries.
For example, two stocks of Apollo Tyres and JK Tyres in your portfolio won’t be called as a diversified portfolio. Although the companies are different, however, both companies belong to the same industry. If there is a recession/crisis in tyre sector, then your entire portfolio might be in RED.
A diversified portfolio can be something like Apollo tyres and Hindustan Unilever stocks in your portfolio. Here, Apollo Tyres is from Tyre industry and Hindustan Unilever is from FMCG industry. Both the stocks are from different industry in this portfolio and hence is diversified.
Blue chips are the stocks of those reputed companies who are in the market for a very long time, financially strong and have a good track record of consistent growth and returns in the past many years.
For example- HDFC banks (leader in the banking sector), Larsen and turbo (leader in the construction sector), TCS (leader in the software company), etc. A few other examples of blue-chip stocks are Reliance Industries, Sun Pharma, State bank of India, etc.
These companies have stable performance and are very less volatile. That’s why blue-chip stocks are considered safe to invest compared to other companies.
It’s recommendable for beginners to start investing in blue chips stocks. As you gain knowledge and experience, you can start investing in mid-cap and small-cap companies.
This is the biggest reason why people lose money in the stock market. They do not carry enough research on the stocks and blindly follow their friends/colleague’s tips and advice.
The stock market is very dynamic and it’s stock price and circumstances change every second. Maybe your friend has bought that stock when it was underpriced, however now it’s trading at a higher price range. Maybe, your friend has a different exit strategy than yours. There are a number of factors involved here, which may end up with you losing the money.
Avoid investing in tips/advice and do your own study.
5. Avoid blindly following the crowd
I know a number of people who have lost money by blindly following the crowd. One of my colleagues invested in a stock just because the stock has given double return to another of my college in 3 months. He ended up losing Rs 20,000 in the market just because of his blind investing.
Will you buy ABC company which produces Vinyl sulphone easter and dye intermediates even though you have zero knowledge of the chemical industry?
If you will, then it’s like giving some stranger 1 lakh rupee and expecting him to return the money with interests. If you are lending money to someone, you ask a number of questions like what he does, what is his salary, what is his background, etc.
However, while investing Rs 1 lakh in a company which people do not understand, they forget this common logic.
7. Know what to expect from the market
Do not set unrealistic expectations for the stock market. If you want to make your money double in one month, from the stock market, then you have set your expectations wrong. Have a logical expectation form the market.
People are happy with 4% simple interest from the savings account, but a return of 20% in a year sounds underperformance for them.
Do not get distracted if your portfolio starts performing too well or too bad in the first few months of investing. Many people increase their investment amount just in few weeks if they see their stock doing too well, and end up losing in the long run.
Similarly, many people exit the market soon and are not able to get profits when their stocks start performing. Have discipline and follow your strategy.
9. Invest regularly and continuously increase your investment amount
The stock investment gives the best returns when you invest for the long term. Do not invest in lump sump at just one time and wait for the next 10 years to see how much returns you got. Invest regularly whenever you get a good opportunity. Further, increase the investment amount as your savings increase.
10. Continue your education
Keep learning and keep growing. The stock market is a dynamic place and changes continuously. You can only keep up with the stock market if you also continue your education.
Besides, there are a number of more lessons which you will learn with time and experience.
Ready to start your journey to become a succesful stock market investor? If yes, then here’s an amazing course for newbie investors: HOW TO PICK WINNING STOCKS?
That’s all for this post on how to invest in the share market. I hope this is helpful to the readers. If you have any doubts, feel free to comment below.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Top Down and Bottom Up approach of Stock Investing: While performing the fundamental analysis of companies, two of the most common strategies to research stocks that are used by investors are top down and bottom up approaches. In this post, you’ll learn what exactly is top down and bottom up approach.
Here, we’ll learn how top down and bottom up approach work, the difference between them and which one may be more suitable to you. Let’s get started.
Top down approach
Have you ever heard any investor/analyst saying something like- “The electric vehicle industry looks particularly promising now. The industry is growing at a fast pace and I should invest in this industry”.
Well, here the investor is following the top down approach to find stocks.
In the top down approach, the investors first look into the macro picture of the economy and later work down to research the individual stocks.
The overall steps involved in top down approach is to first look at the big picture of the world i.e. which economy is doing great, then look at the general market in that economy, next find the particular sector that may outperform and finally research the best stock opportunity to invest within that sector.
For example, let’s say you studied that the European economy is growing at a very fast rate. Next, when you looked further into the European market, you found that especially the biotechnology industry in outperforming. And finally, you researched some appealing stocks in that industry to invest. This is the top down approach for stock investing.
Here, you start with the big picture and ultimately move down to find the suitable investing opportunity. Top down approach looks at the performance of the economy & sector and believes that if the industry is doing good– the chances are that the stocks in that industry will perform too.
A few of the major areas where the top down analysts pay attention are economic growth, GDP, monetary policy, inflation, prices of commodities, bond yields, etc before moving into the specific industry study.
The biggest advantage of top down approach is that there’s no pre-conceived notion about what may work and the selection of economy, industry & stocks are based on the real-time studies. Further, as they focuses on the strong sectors, the chances of underlying companies performing well are favorable.
However, one of the major flaw of top down approach is that here you may miss out a few good bargain stocks in the eliminated industries.
This approach is exact opposite of the top down approach. Here, you first start with company research and later move up to find the other details.
Bottom up approach tries to study the fundamental of the company regardless the market conditions, industry or the macroeconomic factors. While performing the bottom up approach, the investors studies how fundamentally strong the company is by focusing on its revenues, earnings, financial ratios, products/services, sales growth, management etc.
The key here is to find the potentially strong company which may outperform the industry and market in future. If the fundamental factors are good, then regardless of what the industry is doing, the bottom up investors will pick such companies to invest.
The biggest advantage of the bottom up approach is that the investors may find the best potentially strong company which can outperform even if the economy or industry as a whole declines. Bottom up approach helps in picking quality stocks.
On the other hand, one of the cons of bottom up approach is that the investor may have some pre-conceived notion of the company and in such condition, their investment decisions may be a little biased. Further, as these investors ignore the longer economic influence and market conditions, some investment returns may be adversely affected because of these factors.
Closing Thoughts
Top down and bottom up are entirely different approaches to analyze and invest in stocks. However, both have their own advantages and disadvantages.
The top down approach first looks at the broader economy and macroeconomic factors, and then move to the specific industry and the company within. On the other hand, bottom up approach starts at the company level and later moves up for the other important details.
In general, top down approach can be a little easier for the less experienced investors as they do not have to perform the intense stock research and analysis. They can start studying the most appealing industry and find the companies within to invest.
Anyways, both approaches have their own effectiveness and hence, difficult to say which one is better. Moreover, it also depends on the knowledge and preference of the investor. My final advice would be to better try out both the approaches and find out which one suits you the best for your investment strategy.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Stock Market Timings in India: There are two major stock exchanges in India- Bombay stock exchange (BSE) and National stock exchange (NSE). However, the timing of both BSE & NSE is the same.
First of all, you need to know that the stock market in India is closed on weekends i.e. Saturday and Sunday. It is also closed on the national holidays. You can find the list of the holidays of the stock exchange here: NSE India
The normal trading time for equity market is between 9:15 am to 03:30 pm, Monday to Friday.
The trading time for commodity (MCX) market is between 10:00 AM to 11:30 PM, Monday to Friday.
The normal trading time for Agri-community (NCDEX) market is between 10:00 AM to 05:00 PM, Monday to Friday.
(Quick Note: Revision in MCX trade timings – Due to the COVID-19 virus outbreak and nation-wide lockdown, MCX has revised its trading hours. MCX will open at 9:00 AM and close at 5:00 PM from Monday, March 30, 2020, to April 14, 2020.)
In addition, there is no lunch break or tea break in the Indian stock market timings.
The timings of the Indian stock market are divided into three sessions:
Normal session (also called continuous session)
Pre-opening session
Post-closing session
Now, let us discuss all these sessions to further understand their importance in the stock market timings in India.
This is the actual time where most of the trading takes place.
Its duration is between 9:15 AM to 3:30 PM.
You can buy and sell stocks in this session.
The normal trading session follows bilateral matching session i.e. whenever buying price is equal to the selling price, the transaction is complete. Here transactions are as per price and time priority.
PRE-OPENING SESSION:
The duration of the Pre-opening session is between 9:00 AM to 9:15 AM. This is further divided into three sub-sessions.
9:00 AM to 9:08 AM:
This is the order entry session.
You can place an order to buy and sell stocks in this duration.
One can also modify or cancel his orders during this period.
9:08 AM to 9:12 AM:
This session is used for order matching and for calculating the opening price of the normal session.
You cannot modify or cancel buy/sell order during this time.
9:12 AM to 9:15 AM:
This session is used as a buffer period.
It is used for the smooth translation of pre-opening session to the normal session.
The opening price of the normal session is calculated using multilateral order matching system. Earlier, the bilateral matching system was used which caused a lot of volatility when the market opened. Later, this was changed to multilateral order matching system to reduce the volatility in the market.
However, most people do not use the pre-opening session and only use the normal session for trading. That’s why there is still huge volatility even in the normal session after the pre-opening session.
The time between 3:30 PM to 3:40 PM is used for closing price calculation.
The closing price of a stock is the weighted average of the prices between 3:00 PM to 3:30 PM.
For the indexes like Sensex & nifty, its closing price is the weighted average of the constituent stocks for the last 30 minutes i.e. Between 3:00 PM to 3:30 PM.
POST-CLOSING SESSION:
The duration of the Post-closing session is between 3:40 PM to 4:00 PM.
You can place orders to buy or sell stocks in the post-closing session at the closing price.If buyers/sellers are available then your trade will be confirmed at the closing price.
NOTE: Pre-opening session and the Post-closing session is only for the cash market. There are no such sessions for future & options.
Overall, the stock market timings in India can be briefed as:
In addition, if you are unable to trade between this time periods, you can place an AMO (Aftermarket order). There is no actual trading here but you can place your buy or sell order.
Further, the Indian stock market also opens a special trading session during Diwali, the festival of light. This is known as ‘Mahurat Trading’. Its trading time is declared a few days before Diwali. However, generally, Mahurat Trading timing is in the evening. You can find more details about mahurat trading here: 60-minute ‘Muhurat Trading’ on BSE, NSE this Diwali
BONUS
By the way, if you are new to investing and want to learn how to start investing in the Indian stock market, check out this video. I’m sure it will be helpful to you!
Final Tip: When you enter the share market, you’ll need to open your demat account to start investing/trading. We’ll highly recommend opening an account with Zerodha, No 1 stockbroker in India. Here’s a detailed post on how to open Zerodha account step-by-step.
That’s all. I hope this post on the ‘Stock Market Timings in India‘ is helpful to the readers. If you have any doubts regarding the Indian stock market timings, feel free to comment below. I will be happy to help you.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Hi Investors & Traders! Today, I am writing this post regarding the demat vs trading account because of the popular demand by our readers. Many of the readers of ‘Trade Brains’ asked me to cover this topic as they are constantly confused about what is a demat and trading account and their difference.
Therefore in this post, I am going to explain what is the difference between the demat and trading accounts in a very simplest possible words.
Most of the newbies who enter the stock market might already know that they’ll need a demat and trading account to start trading/investing in India. However, the majority of beginners do not know the difference and consider both the demat account and trading account to be the same. But in reality, both these accounts are entirely different and serve different purposes.
Difference between demat and trading account
— Trading Account
A trading account is a medium to buy and sell shares in a stock market. In simple words, it is used to place buy or sell order for a stock in the exchange.
Different stockbrokers offer different trading tools to their clients to simplify their trades. For example, Zerodha, the biggest stockbroker in India offers ‘KITE’ as their platform to trade in stocks. Once you have opened your trading account with a stockbroker, you can place your buy/sell orders using those platforms.
(Image: Kite Trading Platform by Zerodha)
— Demat Account
Demat account is the short form for ‘Dematerialised account’. It is similar to a bank account. Just as money is kept in your savings account, similarly your bought stocks are kept in your demat account.
In other words, a demat account serves as a facility where stocks that you buy are deposited and the stocks sold are taken away. Demat account is used only for the storage of stocks, not for transactions (buying/selling).
Example of Demat and Trading Accounts
Let us understand the difference between trading and demat account further with the help of an example. Assume that you wish to buy 100 stocks of Maruti Suzuki. Here, the sequence followed during the procedure will be as follows:
First of all, you’ll need to have a savings equal to or greater than the buying amount in your savings account.
Next, you’ll transfer the money from saving account to trading account.
Now, you’ll buy stocks of ‘Maruti Suzuki’ from the stock exchange by using your trading account and paying the amount.
Finally, the money is transferred to the seller through your trading account and stocks of ‘Maruti Suzuki’ will be transferred to your demat account.
Now let us assume that after a few months, you wish to sell 20 stocks of ‘Maruti Suzuki’ from your holdings of 100 stocks. Here, the sequence followed will be as follows:
First, you’ll place a sell order in the market using your trading account to find a buyer.
If a buyer is found, then the shares will move from your demat account to the buyer.
Finally, the money gained by selling your stocks will flow through your trading account to your linked savings account.
Before the internet became popular in India, there were no demat accounts. Share certificates were provided whenever you buy stocks (on papers). However, there were many limitations to using paper share certificates. They used to get torn, stolen, faced safety-related issues or the ink just gets fade away with time.
Nevertheless, after coming of the internet from the mid-1990s, the stocks started getting kept in the electronic dematerialized form in the demat account of the buyers. It resolved most of the limitations of the old paper share certificates.
A few other points to know about demat and trading account
Demat and trading accounts are opened together (also known as 2-in-1 account) with most of the popular stockbrokers in India. For example, Zerodha, Angel Broking, 5 Paisa, etc.
A few big stockbrokers (generally bank brokers) also offer a 3-in-1 account i.e. Saving+Demat+Trading account to their clients. For example ICICI Direct, HDFC Securities, etc.
In general, there are no annual maintenance charges for a trading account, where for the demat account this maintenance charge may vary from broker to broker. It is typically around Rs 300-400 per year.
These days, the investors and traders can open instant (paperless) demat and trading account within 10 minutes with major stockbrokers. Nonetheless, the facility of offline account opening is still popular in India and offered by all these brokers.
The account opening charge for demat and trading account also varies from broker to broker. A few brokers offer free account opening. However, the majority of them will charge somewhere between Rs 300-500 to open your brokerage account.
In addition, you are also allowed to open multiple demat and trading accounts using same PAN card. For instance, You can have multiple accounts- one in ICICI direct and other in Zerodha.
Finally, choose your broker wisely to open your demat and trading account if you want to avoid unnecessary charges and risks.
Let us quickly summarize what we discussed in this article regarding trading and demat account in India.
A trading account provides a platform to buy or sell the share in the market. It acts as an intermediary between your saving accounts and demat accounts. In simple words, it takes share from your demat account and sells them in the market.
On the other hand, it takes money from your savings account and buys a share to keep in a demat account. Further, a demat account is a facility to keep your shares in an electronic dematerialized form.
That’s all. I hope this post on the difference between demat and trading account is useful to the readers. If you have any doubts, comment below. I will be happy to help you out. Happy Investing!
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Do You Need a Finance Degree For a Career in Stock Market? The finance industry in India has been growing at a very fast pace for the last two decades. And along with the growth in the industry, there’s also a boom in job opportunities and enthusiasts willing to work in this field.
Although there are many job opportunities available in the stock market, however, one of the most frequently asked questions is- “Can a student from non-finance degree get a job on Dalal street?” How much relevant is having a finance, commerce or business degree to land a job in the world on the stock market.
Well, the short answer to this question is that you do not need a finance or business degree to get all the jobs in the stock market. A lot of financial companies hire employees from Engineering, mathematics, science, computing or economics background. In the era of internet technology, most of the financial giants are looking more for the skills and the aptitude of the candidates rather than just the degree.
Anyways, there are still a few careers in the market like Investment Banking, Equity Research, Risk Management, Portfolio Management, etc where a special skill set and expert knowledge of finance is required and having a degree can give an advantage to the candidates.
Nonetheless, having or not having a finance/commerce/business degree is just the starting point. There are a lot more things that you need to know if you want to build a career in the stock market industry which we are going to discuss in this post.
It’s always beneficial to have a background in Finance
When you have a background in finance, business, accounting or commerce, you already have got a minor exposure to the investing world. You might already know the lingo and familiar with the frequently used terms in the stock market like dividends, assets, liabilities, etc.
On the other hand, most of the non-finance guys are not even familiar with the most common terms of the market. Moreover, they find reading and understanding financial statements is quite challenging compared to people with a finance background.
Getting a job at Dalal Street Market
In a scenario where you are appearing in a job interview for a financial position, knowing these financial terms can help you impress the interviewer or at least not feeling like a dumb one. Besides, as stated, in a few financial positions, the interviewers create a barrier by shortlisting only candidates with a graduate degree in finance, commerce, business or accounting. And in all these cases, having a degree can be advantageous for you.
Moreover, if you want to become a SEBI registered investment advisor or research analyst, you will require an educational qualification of graduate or post-graduate degree in finance/accounting/commerce, etc. If you don’t meet the educational qualification, you cannot become a SEBI registered advisors/analyst and hence can’t have a career in the advisory field.
Overall, if you’re planning to become an investment advisor/research analysis, you’ll require a degree in these fields. Nonetheless, you can always enroll in post-graduate degrees of one or two years to get the degree and meet the educational qualifications.
When it comes to trading & investing or managing your own portfolio, you don’t require any degree.
Anyone can open their trading accounts and start trading in stocks. Many engineers, math/science majors, arts graduate or even people who don’t have any degree have been investing successfully and made a huge fortune from the market. A lot of successful stock market traders/investors do not have any background in finance or never did any course in this field. One of the best examples is Charlie Munger, a successful stock investor and vice-chairman of Berkshire Hathaway.
In short, if you are not interested in a 9-to-5 job or career in the Dalal street and just want to trade in stocks on your own, you won’t require any degree or certification. Here you can make money by using your knowledge and skillsets.
What to do when you don’t have a degree in Finance/Commerce?
It’s often said that Self-Education is the best form of learning. Even though if you do not have a degree in finance, you can learn the skills and impress the interviewer with your enthusiasm to master the market.
Start by learning the lingo. It’s really important to know financial terms if you want to break the initial barrier of entering the stock market world. Know the most frequently used investing terms and how to read the financial statements.
Further, if possible, take a few online courses to learn the trading/investing concept. Attend local investing workshops, seminars, etc. It would be best if you can find a mentor. Expand your knowledge base and try simulating platforms to trade in stocks without risking your money. And finally, try to land an internship in the finance company so that you can have a real experience of how things work in this industry.
Most people believe that a career in the stock market is only for people with finance or business background. But this is not true. Do not stop yourself from entering the exciting world of the stock market just because you do not have a finance degree. Here, having a skill set is more important compared to a degree. Moreover, even if you do not have a graduation degree in Finance/Commerce, you can go for reputed financial certifications like CFA, FRM, PRM, etc that will put you in the same position as those with degrees.
My final advice will be to focus on enhancing your skills and acquiring specialized knowledge. This will help you more in building your dream life than chasing over degrees.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
The coronavirus outbreak has resulted in a huge crash in the stock market in India and the world. As the number of cases and casualties are rapidly increasing, there seems no stoppage in tanking the stock prices. In the last 30 days, the Indian benchmark Indexes ‘Sensex’ and ‘nifty’ fell over 30%. This is one of the fastest crashes ever seen in the stock market history.
Moreover, the month of March 2020 also witnessed two lower circuits where the exchanges were forced to stop trading for 45 minutes as the market fell over 10% within a day trading session.
Anyways, as the indexes and stock prices are down significantly since the outbreak, there may be some silver lining for the investors to pick good stocks at a huge bargain. Here is a quick study of the Nifty 50 constituent stocks and how they performed in the month of Feb-March 2020.
Nifty 50 Stocks – Feb March 2020 Performance
SYMBOL
COMPANY NAME
Price as of 1st Feb 2020
Current Price (24 March 2020)
Change (%)
INFY
Infosys Ltd
767.4
600
-21.81%
ADANIPORTS
Adani Ports and Special Economic Zone Ld
367.35
236.5
-35.62%
BRITANNIA
Britannia Industries Ltd
3230.05
2390
-26.01%
BAJFINANCE
Bajaj Finance Ltd
4359.35
2511
-42.40%
MARUTI
Maruti Suzuki India Ltd
7011.3
4545
-35.18%
HCLTECH
HCL Technologies Ltd
579.1
449
-22.47%
HINDUNILVR
Hindustan Unilever Ltd
2178.95
2011
-7.71%
KOTAKBANK
Kotak Mahindra Bank Ltd
1676.25
1178.65
-29.69%
RELIANCE
Reliance Industries Limited
1385.5
946
-31.72%
NESTLEIND
Nestle India Limited
16301
13639.95
-16.32%
ICICIBANK
ICICI Bank Ltd
515.55
298.55
-42.09%
WIPRO
Wipro Limited
237.4
178.25
-24.92%
TATAMOTORS
Tata Motors Limited Fully Paid Ord. Shrs
163.85
68.95
-57.92%
DRREDDY
Dr.Reddy's Laboratories Ltd
3144.15
2880
-8.40%
ONGC
Oil & Natural Gas Corporation Limited
103.45
62.7
-39.39%
TITAN
Titan Company Ltd
1186.4
828
-30.21%
NSE:UPL
UPL Ltd Fully Paid Ord. Shrs
513.3
263
-48.76%
EICHERMOT
Eicher Motors Ltd
19883.45
14150
-28.84%
SUNPHARMA
Sun Pharmaceutical Industries Limited
417.55
334
-20.01%
NTPC
NTPC Limited
110.25
78.4
-28.89%
ASIANPAINT
Asian Paints Ltd
1867.65
1536
-17.76%
JSWSTEEL
JSW Steel Limited Fully Paid Ord. Shrs
251.5
148
-41.15%
TECHM
Tech Mahindra Ltd
793.15
498
-37.21%
SBIN
State Bank of India
298.1
185.4
-37.81%
TCS
Container Store Group Inc
4.19
2.81
-32.94%
BAJAJ-AUTO
Bajaj Auto Ltd
3284.5
1969.1
-40.05%
VEDL
Vedanta Ltd
7.71
3.44
-55.38%
HINDALCO
Hindalco Industries Ltd
181.8
89
-51.05%
CIPLA
Cipla Ltd
444.55
379.5
-14.63%
BHARTIARTL
Bharti Airtel Limited
510.05
411.55
-19.31%
COALINDIA
Coal India Ltd
178.65
129
-27.79%
SHREECEM
Shree Cement Limited
23267.5
17030
-26.81%
HDFCBANK
HDFC Bank Limited
1192.8
774.8
-35.04%
TATASTEEL
Tata Steel Limited Fully Paid Ord. Shrs
436.05
271.9
-37.64%
HEROMOTOCO
Hero Motocorp Ltd
2376.15
1618
-31.91%
GAIL
GAIL (India) Limited
114.5
77.7
-32.14%
BAJAJFINSV
Bajaj Finserv Ltd
9086.15
4600
-49.37%
BPCL
Bharat Petroleum Corp Ltd
460.3
268
-41.78%
LT
Larsen & Toubro Limited
1286.65
710
-44.82%
ULTRACEMCO
UltraTech Cement Ltd
4370.65
3030
-30.67%
HDFC
Housing Development Finance Corp Ltd
2259.75
1504.35
-33.43%
IOC
Indian Oil Corporation Ltd
108.05
79.75
-26.19%
AXISBANK
Axis Bank Ltd
708.95
304.8
-57.01%
ZEEL
Zee Entertainment Enterprises Limited Fully Paid Ord. Shrs
256.6
119.6
-53.39%
ITC
ITC Ltd
207.6
151
-27.26%
INFRATEL
Bharti Infratel Ltd
229.3
140
-38.94%
POWERGRID
Power Grid Corporation of India Limited
187.35
148.8
-20.58%
INDUSINDBK
Indusind Bank Ltd
1263.1
313.6
-75.17%
GRASIM
Grasim Industries Ltd
780.4
400
-48.74%
M&M
Mahindra & Mahindra Limited
558.7
270
-51.67%
As you can notice from the above table, none of the constituents of Nifty 50 has given positive returns from 01 Feb 2020 till 24th March 2020. All of these stocks have given negative returns. However, the magnitude of the hammering in their prices varies from stocks to stocks.
Out of the 50 stocks in NSE Nifty, only two companies were able to limit losses within -10%. These were Hindustan Unilever (-7.71%) and Dr Reddy’s laboratory (-8.4%).
Next, 17 out of 50 companies’ share price has fallen between 10-30% in this time period. This list includes companies like Kotak Mahindra Bank (-29.7%), Eicher Motors (28.84%), ITC (-27.26%), Infosys (-21.81%), Asian Paints (-17.76%), NESTLE (-16.32%), etc.
For 24 companies in Nifty 50, the share price has fallen between 30-50%. This might be a good opportunity to look into these companies from an investing point of view. A few major stocks in this range are Bajaj Finserv (-49.37%), ICICI Bank (-42.09%), Bajaj Finance (-42.4%), ONGC (-39.39%), Maruti Suzuki (-35.18%), HDFC Bank (-35.04%), Reliance Industries (-31.72%) etc.
For the remaining 7 stocks, the coronavirus has turned out to be a disaster. Their share prices have fallen more than 50% from Feb 1 2020 till 24 March 2020. ‘IndusInd bank’ is the biggest loser in this list with the share price falling more than 75% in this time period.
Other beaten-down stocks with a decline more than 50% are Tata Motors (-57.92%), Axis Bank (-57.01%), Vedanta (-55.38%), Zee Entertainement (-53.39%), Mahindra & Mahindra (-51.67%) and Hindalco (-51.05%).
As India and the world are still fighting the war against coronavirus, the market is expected to decline further until this pandemic is contained. However, for the bargain hunters, this might be a great opportunity to pick the biggest companies in India at an amazingly discounted price.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Market Circuit Breakers Explained: Yesterday i.e. on 23rd March 2020, the Indian equity market hit a lower circuit breaker. The BSE benchmark index ‘Sensex’ fell over 10% in the morning because of which trading was halted on both NSE & BSE for 45 minutes.
A similar scenario happened on 13th March 2020 (10 days back), when nifty hit the lower circuit resulting in closing off the market for an hour (45 mins halt and 15 mins pre-opening session).
Anyways, what are these circuit breakers that result in halting the normal trading in the market? This is what we are going to understand in this article. Here, we’ll discuss what exactly are circuit breakers and in which situations trading are stopped in the Indian stock market and for how long. Let’s get started.
What is Market Circuit Breakers?
The Indian stock exchanges have implemented the index-based circuit breakers according to the guidelines of SEBI w.e.f 02 July 2001.
These circuits (lower or upper ) are an automatic mechanism to stop a freefall/crash or a massive surge in a security or an index during trading hours. If the index hits the lower or upper circuit, the trading session is stopped for some time. Overall, market circuit breakers are used to check the volatile swings in the market.
According to the SEBI rules:
The circuit breakers for the indexes will be applied at three stages, whenever the index crosses 10%, 15%, and 20% level. The stock exchanges calculate these Index circuit breaker limits levels based on the previous day’s closing level of the index.
When these circuit breakers are triggered, it will result in a trading halt in all equity and equity-based derivative markets nationwide.This means that if the index crosses its first stage of 10% (either upside or downside), the trading will halt in entire India i.e. no trading will take place on NSE and BSE.
Moreover, this circuit breaker can be triggered by the movement of any of the market benchmark index (Sensex or Nifty) whichever crosses the limit level first.
Let’s say Sensex fell above 10% and nifty is still at 9.7% down. In this scenario, the circuit breaker will be triggered as Sensex has breached the level. The circuit breaker does not require both the indexes to breach and either one crossing the level will trip the circuit breaker.
After the first circuit filter is breached, the market will re-open with a pre-opening session after a specified time. The extent of market halt and the pre-open session decided by the SEBI is given below:
Let’s understand the concept of circuit breaker better with the help of the same example discussed at the starting of this post.
On March 23, 2020, the Sensex lost 2,991 points or 10% at 9: 58 am. At the same time, Nifty 50 too declined 9.40% or 822 points to 7,923. This led to led to the triggering of circuit breakers on BSE and NSE. Trading on both these exchanges stopped and commenced at 10: 58 am (45 min halt and a 15-minute pre-open session).
Although market circuits breakers intend to control the volatility, however, it cannot stop a falling market. By the end of the day, Sensex and nifty post biggest one day fall ever. Sensex tanked nearly 4,000 points yesterday.
This is the second time this year (2020) when the Indian indices have hit the circuit breaker. On March 13, Nifty plunged 10.07% or 966 points to 8,625 at 9:20 am after which trading was halted for 45 minutes in the Indian equity market. Sensex plunged 3,090 points or 9.43% in early trade that day. However, as Nifty breached the circuit first, the trading session was stopped for an hour.
Market Circuit Breakers are an automatic mechanism used to check the volatile swings in the market. When these circuit breakers are triggered, they result in a trading halt in all equity and derivative markets nationwide.
This year the Indian stock market has already witnessed two lower circuits in the month of March. This is mainly because of the rising cases of coronavirus and the various announcements of the lockdown of states in India. If the Indian government and its people are not able to contain the outbreak of this coronavirus, we may expect other circuit breakers in the market soon. Take care. Till next time…!
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Life During Coronavirus Times: In the last few weeks, if you’ve been living in a metropolitan city in India, you might have noticed several changes. A lot of usual day-to-day activities that you used to easily perform in previous months, might not be accessible to you now. For example, going out for dining with friends, attending the gym, relaxing at parks, partying, etc.
The reason behind all these changes is the pandemic coronavirus, an infectious disease caused by a new virus, that was originally found in China, and which later spread throughout the world. As of 22nd March 2020, this virus has affected over 340,000 people worldwide and resulted in the death of over 14,000 people. Here’s a live counter of coronavirus pandemic with real-time counts and world news:
As Coronavirus disease spreads primarily through contact with an infected person (when they cough or sneeze) and its vaccine has not been found yet, the government has taken various steps to tackle the situation and to limit its spread. In this post, we are going to discuss such changes that have already been made in India and its effects in the short and long-term. Let’s get started.
Changes Made to Tackle Coronavirus
Here are a few of the big and necessary changes that the government and the Indian population have implemented to fight back with coronavirus. Although these changes are temporary, however, they may last even for months:
1. Social Distancing
Although not a new concept, nonetheless, a lot many people are not familiar with social distancing. It is a set of non-pharmaceutical infection control actions intended to stop or slow down the spread of a contagious disease.
As this virus is contagious and spread by touch or when people come in contact, it is suggested to maintain a minimum distance of 1 m (or 3 ft) with others and not to indulge in groups bigger than five. Social/Physical distancing is the most common change seen in this coronavirus days.
2. Work from Home
A lot many corporate employees are mandatorily offered work from home for a sustained longer period for the first time in their career. Almost all big and small companies in the metropolitan cities have now given work from home to their employees. Although this might have resulted in lower productivity. However, work from home means less physical interaction, less traveling and minimal spread of the virus among colleagues at the workplace.
3. Lock-down/Curfew
After the success of ‘Janata Curfew’ started by PM Narendra Modi on 22nd March 2020, over 75 districts in India have now imposed a complete lock-down. As a lock-down is the only noticeable successful strategy that been followed by other big countries infected by the coronavirus, Indian states have also started implementing a similar lock-down/curfew strategy.
4. Travel Ban/Restrictions
As of 22nd March 2020, all the international flights are banned. Moreover, on the same day, Indian Railways also announced to cancel all passenger trains, and reduce suburban trains. By passenger trains, the ministry of railways means all mail, express trains, suburban trains, passenger trains, Kolkata Metro Rail, Konkan Railways, etc.
Effects of Coronavirus Spread
If the spread of coronavirus is not contained, the number of cases and casualties in India is expected to increase in the upcoming weeks. The total number of affected cases has already crossed +400 in India. The above-mentioned changes may help to fight back the virus. Nonetheless, here is a few common effects that may be noticed among the people because of coronavirus changes:
1. Dealing with Fear, Social (& Mental) Anxiety
Fear and anxiety are quite common during a pandemic. As the number of cases with coronavirus casualties in India will increase, it may increase the fear and anxiety among the population.
2. Personal cleanliness & hygiene
To control the spread of this contagious virus, washing hands frequently and cleanliness are a few of the key steps. Indians have now started taking care of their hygiene and cleanliness.
3. New kind of patriotism
Because of different changes made in the country like International travel ban, lock-down, and country first approach, it is expected to see a rise of new kind of patriotism among people. During Janata Curfew (22nd March 2020), we’ve already seen how the people of India appreciated the work done by Doctors, and servicemen by banging thalis, ringing bells and clapping hands for five minutes at 5 pm.
Financial and economical Effects
Now, let us talk about the stock market, finance and economy. How coronavirus days may impact us financially and economically:
1. Continued Bear Market
During the coronavirus days, the share prices and market have already witnessed a sharp crash. Within less than one month, all the major market indexes have fallen over 30%. Nonetheless, it is expected that the market will continue to run in a bear market for a continued longer duration. This is because the aftermath of this pandemic virus will take a lot more time to make things normal, both in the personal and professional lives of people.
2. Pay-cut or lay-offs
Due to the spread of the virus, a lot of companies are not able to perform well and their revenues are continuously tanking. And in order to avoid bankruptcy or financial stress, these companies may have to cut salaries, delay new hirings or even lay-off some employees. Moreover, the lay-off scenario may be worse in some highly affected industries like travel, tourism, hotels, airlines, bars, malls, etc that are heavily affected by the lockdown.
3. Rise of online businesses
Although the market and economy are continuously falling during the coronavirus days, however, there may be a silver lining for a few sectors during this time. A few industries like online learning (Byju’s, Unacademy, etc), online payment (Phonepe, Paytm), Online Grocery (Bigbasket, Amazon), E-commerce, etc are performing quite well as people are opting for their product/services from their homes. These industries are expected to boom during the coronavirus days.
In this post, we tried to discuss a few common changes and their effects in India during the coronavirus days. Nonetheless, these are just assumptions and it might be a little early to say what will exactly happen.
The next two weeks are quite crucial for India in its fight towards coronavirus and they may be the deciding factor. In these times, how the government of India and its people handles the situation will play a major role among the changes, effects, and aftermath that we may see in the future. Take Care and till next time…!
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
3 Best Sites to Learn Virtual Stock Trading in India (Without Risking Your Money): Entering the Indian stock market can be a tedious job for beginners. First, you need to open your brokerage account (demat and trading account). This means that you have to pay the account opening charges and go through the complex documentation process. Further, as stock market trading involves market risk, you can always lose some money— especially, you are a beginner.
So, how to solve this problem? How to Learn stock trading in India without actually risking any money. The answer is by using virtual stock trading platforms.
In this post, we are going to discuss how to use virtual stock trading platforms in India. It’s going to be an exciting post. Therefore, without wasting any time, let’s get started. Here are the topics that we’ll cover today:
1. What is Virtual Stock Trading?
A virtual stock trading (also known as paper trading) is similar to the actual trading where you can buy and sell stocks. However, here no real money is involved. You invest only in virtual money. Such platforms that provide virtual trading facilities are called stock simulators.
When you register in these stock simulators, you will get virtual money (Say Rs 10 lakhs or 1 Crore) in your account. You can use this money to practice trading.
Stock simulators provide real-time stock data, which means that you can try out different strategies of trading in stocks just like the real world stock market, but risk-free.
It’s a really straightforward process to use a stock simulator to do the virtual stock trading. Here are the steps required to start virtual stock trading in India-
Open a free account (using your email-id) on a simulating platform (discussed below).
Get instant virtual money in your account.
Start buying/selling stocks like real trading scenarios.
Monitor your portfolio and track profit/loss.
Try different strategies and learn the trading basics.
When you get enough confidence and experience- move to real trading.
3. What are the pros and cons of using the virtual trading platform?
Nothing is perfect in this world. Although there are many advantages of using virtual trading platforms (especially for beginners), however, there are also a few disadvantages. Let’s discuss them- one by one:
— Advantages of using Virtual stock trading platforms
No need to open a demat/trading account or go through any documentation process.
No real money is required to start virtual trading.
Real-time market scenarios to try out different strategies and to learn the basics.
Risk-free trading practice.
Okay to make mistakes and take risks as there’s no real loss here.
— Disadvantages of using virtual stock trading platforms
There’s no emotional attachment as real money is not involved.
You can quickly get bored as winning/losing virtual money is not much exciting.
The real market scenario might be a little different than the virtual trading environment. (In the virtual trading platforms, participants take extra risks and bets than they would actually take in a real scenario.)
Moneycontrol website offers Moneybhai. It is a free virtual trading platform where you’ll get Rs 1 crore virtual cash on registration which you can use to invest in shares, commodities, mutual funds, or fixed deposits on the platform.
At Moneybhai, you can also compete with fellow Indian traders by joining different leagues. There’s also a free forum on this website where you can ask your queries or participate in the on-going discussion threads.
TrakInvest is a global trading platform that helps you to learn, develop and improve your investing skills. Currently, it provides a curated market data and news from 10 exchanges. It also offers beginners’ guides and videos, certification courses designed by industry experts and simulations for competing for rewards.
At TrakInvest, you can also track other traders and dig deeper into their trading activity (portfolio) where you can replicate their trades using the ‘Copy Trade’ facility. Overall, TrakInvest provides a simple and friendly platform for ‘Social’ virtual trading for beginners.
Dalal Street Investment Journal (DSIJ) popular virtual stock trading platform in India which helps you to understand the different trading nuances and to test your investment strategies.
On registration, you’ll get virtual cash of Rs 1,000,0000 to create your portfolio. At DSIJ, you can also discuss strategies with like-minded participants in the discussion group.
New to stocks? Confused where to begin? Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount.
Investopedia provides a FREE stock simulation platform where you can easily learn how to place trade orders (like market order, limit order, stop loss, etc), how to create a portfolio, how to create a watchlist and more. On registration, you’ll get $100,000 as virtual cash which you can use to trade. You can also compete with thousands of Investopedia traders/players on the same platform.
The reason why I didn’t place this platform in the top 3 is that you cannot trade in Indian stocks on the Investopedia stock simulator. Therefore, if you’re looking to learn virtual stock trading in India, then it might not be a good option. However, if you are comfortable with trading in foreign stocks like Apple, Google, Amazon, etc, then feel free to check out this simulating platform.
Closing Thoughts on Virtual Trading
Virtual stock trading in India is an excellent way to learn the basics of trading in the stock market. Using these platforms, you can try different investment/trading strategies without any fear to lose your real money. It’s always advisable to try paper trading (virtual stock trading) for a few weeks before directly jumping into the market.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Have you ever been in a situation where you went to watch a movie in the theatre, 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 which have already been occurred and cannot be retrieved. Here, the costs can be in term 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 being 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 of your ticket. This is a classic example of 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
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 in the project also do not seem a good idea because the outcomes are uncertain. This dilemma of deciding whether to proceed further or to quit is called 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 result 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 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 the 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.
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.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Investing vs Trading: What’s the difference? — There are two common approaches to make money from the stock market. The first one is investing and second is trading. However, the difference between them might not be easily understandable for beginners. A lot of people trade in stocks and confuse them by investing. In this article, we are going to discuss the difference between investing vs trading.
Investing vs Trading
To start with, while investing aims to create wealth over the long term by buying good companies and holding it for a long duration, trading is quite the opposite of it. Trading aims at generating profits by frequently buying and selling stocks.
Example 1: If you buy a stock today and commits to holds the stock for the next three years, then you are investing. Here you believe that the price of that stock will be way higher after three years than what it is today.
Example 2: If you buy a stock today morning and commits to selling the stock by evening (before the market closes on the same day), then you are trading. Here you believe to make a profit by the difference in your purchase and selling price.
The time period for investing is long term and many a time the holding period maybe even decades. You can find many peoples investing for their children or grandchildren. In fact, a lot of people inherit the stocks that were bought by their parents and they might worth millions today.
On the other hand, the time period for trading is short-term. It can be minutes, hours, day or a few weeks. Sometimes the trading period is even less than a minute when traders buy/sell stocks with explosive movements and book profit soon enough.
Further, the attitudes of the people who follow these approaches are different. The investors are inclined towards stress-free sound investment for wealth creation over the long term. However, traders tend to make big profits in a short period of time. They also have a love for the game of trading and find it entertaining.
Investors tend to make sound investments and relax. On the other hand, traders are actively involved in the market and require their time & presence to make profits.
Creating wealth over a long period of time by buying and holding.
Generating profit by frequent buying and selling of stocks.
Daily market fluctuations
Daily market fluctuations do not affect investors as they aim for long-term.
They tend to get benefit of the daily market fluctuations by buying and selling stocks
Add on benefits
Investors enjoys perks like the bonus, dividends, stock split etc
Traders hold the stocks only for short interval and hence doesnÕt enjoy these perks.
Protective element
Investing in the fundamentally strong company that will bounce back to true value over time and losses will be recovered.
Stop loss is used to limit the losses.
Indicators
Fundamental indicators like Earnings per share, Price to earnings, current ratio etc are used.
Technical indicators like moving averages, stochastic oscillators, RSI etc are used.
Period
Long term
Short term- day/week
Strategy
Creating wealth by compound interest and dividend
Timing the market (finding the right time to enter and exit a stock)
Risk
Low risk but low potential return in short term. Good returns in long term.
High risk but higher potential return in short term.
Factors affecting the approach.
Business fundamentals like industry, economy, financials, market, competitors etc.
Technical indicators, the psychology of the market, money management, risk-reward etc
Belief
The company will perform well in the future and will reward its shareholders.
Share price will move in a direction to achieve the target profits.
Expected return
15-20% return per annum (compounded).
8-10% return per month.
Brokerage charges
Very fewer brokerage charges are involved due to buying and holding strategy.
Trading involves high brokerage due to frequent buying and selling.
Involvement required
Investors make the sound investment after deep study of a company and relax afterward.
Require activeÊinvolvement in the market to find the correct time to enter and exit in order to book profits.
Quick Note: If you are new to stocks and want to learn stock market investing, here is an amazing online course for the beginners: How to pick winning stocks? Enroll now and start your financial journey today #Happy Investing.
Conclusion
Both these approaches are a successful way to make money from the stock market. However, if you planning to choose one approach, think about the time that you can spend ‘daily’ on market activities. If you can daily spend hours in the market, then trading suits you. Otherwise, investing is a better approach for you.
Moreover, it also depends on your knowledge. If you have an interest in reading financials, accounting, news, economy, etc then investing is good for you. On the other hand, if you are good with trends and charts, trading makes more sense.
Finally, comes your preference. As discussed in the post many people enjoy the game of trading while many want to be relaxed once they invested their money. Your personal preference has a high weight for selecting your style.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Baron Rothschild, a British banker and politician from the wealthy international Rothschild family, once said that the best time to buy is “when there is blood in the streets.”
In simple words, when everyone else is selling, it’s a great time to purchase. However, this advise is far easier said than done. Although it seems logical advice, yet very few people follow it. (Btw, by streets we are referring wall street/ Dalal street or just the stock market.)
Why are people afraid to invest when the market is down?
Before diving more in-depth, let’s first understand why people are afraid to invest when the market is down.
For beginners, they are simply scared that the market may go further down and hence, it might not be the right time to invest. Sounds legit, right?
However, here the problem is that even the most experienced investors can’t time the market correctly and repeatedly. If you are planning to invest in the stocks at the bottom-most price, you would most probably fail. The better approach would be to buy when they are cheaper, not the cheapest.
On the other hand, the existing investors are afraid to invest further because they are already bathing in their blood. As many of the stocks in their portfolio may be in red, these investors might be scared to make further investments. However, this approach doesn’t sound correct, does it?
I mean, let’s assume that you bought some seeds to plant in your field which may produce big returns in the long-term. However, after a few months, the price of those seeds dropped significantly. What would you do? Would you buy more of those seeds so that you can enjoy a bigger discount and secure your future even further? Or will you just stay out of the market, even though you have a larger field left to sow?
In my opinion, it would be a better outlook to buy more seeds at a cheaper price which might produce a greater return in the future.
The Law of supply and demand
The laws of supply and demand say that whenever demand is lower, the price must come down.
Now, when there is blood in the streets, there is panic selling and a majority of people tend to sell their stocks. In such scenarios, the demand for the stocks decreases a lot compared to the supply.
And obviously, when demand is less (and the supply is more), you can buy stuff at a better discount. (On the contrary, when the market is high — the demand goes higher and hence the buyers have to purchase the same stock at a premium).
That’s why bad times make for good buys. Invest in the market when there’s blood in the street and you can get great bargains.
The market always gives opportunities, but only a few are brave enough to take it.
If you look at the stock market history, you can find that the market always gives opportunities to purchase shares at a lower price. Whether it was correction during March 2018 (after the announcement of re-introduction of LTCG tax) or the demonetization, the market has always given amazing opportunities to the buyers.
However, most people miss out on these opportunities as they are busy following the crowd. Nevertheless, buying when the market is high and trying to sell during the lows can never be profitable for investors.
Moreover, making emotional decisions to sell stocks when the market is down is always a mistake.
The history says that market rebounds, and over the long term, it always gives decent returns (And this is a fact). Even during the worst economic crisis of 2008 (when the market fell around 60%), the market bounced back to the same points within two years. The biggest losers at that time were ‘not’ the ones who bought the stocks at the highs of 2008, but the ones who ‘bought at high’ and ‘sold at low’ (just because they didn’t have patience).
And if the market can survive such a big crisis, then it will definitely recover short-term corrections (or bears) and give good returns for the long-term investors. The intelligent investors should consider these times as opportunities, rather than threats.
The Time To Act is NOW!
In one of my previous post, I had suggested starting building your watchlist as the market was high then. And if you’ve followed my suggestion then, you might already have a list of a few amazing companies with terrific return potential in the future. (Btw, I believe everyone should keep a watchlist so that they do not miss out opportunities like these).
Next, look into your watchlist and find out the current valuation of those stocks. If any of them are currently undervalued or even trading at a decent valuation, then it is the right time to act.
(Quick Note: You can also use the Trade Brains’ free online calculator to find the intrinsic value of the stocks. Here is the link to the calculator).
Final tip: The best stocks to invest are the ones already existing in your portfolio.
I learned this lesson years back when I read ‘One up on wall street’ by Peter Lynch. And I believe it is a necessary lesson to share in this post.
The best stocks to invest are the ones already existing in your portfolio. Maybe they are trading at a lower valuation, and your portfolio is in red. However, they are still the best options available to you.
You have already researched those stocks, and they are still in your portfolio only because you’re confident that it will perform well in the future. Then, why not to invest more in such stocks when they are selling even at a better discount. Look into your portfolio and find out those stocks which are currently trading at a cheaper price.
Quick Note: This tip doesn’t work for the newbie investors. If you’re new to stocks and haven’t yet researched or invested in stocks, then this article that can help you to pick winning stocks.
At last, here’s an amazing quote by Warren Buffett to end this post:
“I’ll tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful”— Warren Buffett“
That’s all. I hope this post was useful to you. Happy Investing.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
11 Catalysts that can move the share price: While investing in the stock market, a number of times you may find that a new announcement regarding any company drastically spikes its share price within a few months. These are called catalysts.
The catalysts are certain special events (actual or potential) that are capable to push the share price of a company upwards or downwards in a short (accelerated) time period.
These catalysts may ‘not’ always push the share price upwards. However, most of the time, these catalysts allow the investors to get a fast profit by holding the share for a shorter period of time.
Moreover, the outcomes of these catalysts are comparatively easier to predict. Depending on the catalyst type, you can analyze whether the share price will go up or down. In this post, we are going to discuss the top eleven must-know catalysts that can move the share price of a company.
DISCLAIMER: Although most of the times these catalysts can move the share price of the company, however, there is no guarantee that the things will always work out as expected. Sometimes these catalysts may not be able to move the share price as much as logically predicted.
11 Must-Know Catalysts That Can Move The Share Price
1. Earnings release
A strong earnings report (which is more than what expected by the market experts) can be really good for the stock. The public takes this report enthusiastically and hence, the company’s share price is pushed higher. Further, this also raises the ‘bar’ for the future earning potentials of the company.
2. Mergers & Acquisitions
A merger occurs when two separate entities combine together to form a new joint organization. You can consider a merger as a corporate ‘marriage’. Whereas, when a company takes over another company and establishes itself as a new owner, then this action is called acquisition.
Mergers and acquisitions can push the share prices of the ‘acquiring’ and the ‘target’ company. However, here do take care of which company will get more benefits after the merger.
A share buyback is a situation when a company buys its own share back. This means that the company will purchase the outstanding shares and hence will reduce the total number of shares available in the market.
As stock buyback increases the value of the remaining shares. Hence, it increases the demand for the stocks of that company and pushes its share price in an upward direction.
4. Significant dividend announcement
A significant dividend announcement by the board of directors means that every shareholder will get a greater dividend per share. This will increase the demand for the stock and hence a rise in the share price can be expected.
However, in such scenarios, many times the share prices increase till the ex-dividend date of the company and might move a little downwards after the record date.
If a company announces the launch of a new product or the opening of a new plant that can help to generate more revenue in the future, then it will be taken positively by the public.
6. Stock splits
In a stock split, the company splits the share price into different parts. For example, in a stock split of 1:1, stock price splits into two parts. In a stock split of 1:5, stock splits into 5 parts. The fundamentals of a company remain the same in a stock split. There is neither an increase or decrease in the share capital or reserve in a stock split.
Stock splits make the company more affordable for an average investor. Further, it also increases the liquidity of the stock and its trading volume.
7. Bonus
The bonus shares are the additional shares given to the shareholders by the company. This is a method of rewarding shareholders.
Although, there will be no noticeable difference in the wealth of shareholders as the share price of the company will fall in the same proportion after the bonus date. However, the announcement of the bonus shares is considered a piece of positive news as it will increase the dividends that you’ll receive in the future (as you will hold more stocks which will be added as the bonus in future).
That’s why the bonus announced by the company is taken eagerly by the crowd resulting in an increase in the share price.
What are spinoffs? – A company may have several products or services. When a larger company ‘Spins off” a division and split the company up in two, then it is called spin-offs. Shareholders receive stocks from both companies.
Here, the independent companies perform better as the management can focus more on the individual company. In addition, after spinoffs, there’s a better stock valuation for each company sedately as opposed to one big entity. The announcement of spinoffs will easily move the share price of the company.
9. Liquidation
Liquidation is bad news as it means that the business went bankrupt and will be terminated. While liquidation, the company sells everything it owns.
The shareholders who are owning this company might want to get rid of it or start selling their shares to some other people. Hence, the liquidation announcement acts as catalysts that can move the share price in a negative direction.
10. Lawsuits and investigations
Many public companies are sometimes investigated. There can be various outcomes while dealing with lawsuits and investigations. The company share price can move in different directions once the public finds out about it.
In general, during the investigation time, the share price of that company moves in a downward direction. It declines further if the company is found guilty. However, if the company is found ‘not guilty’, then its share price may jump in the upward direction.
11. Addition to the index
When a company is added to the index (such as nifty or Sensex), then the index funds have to purchase that company. This increases demand and pushes the share price.
Bonus: A few other catalysts that can move the share price are ‘change in management’, takeovers, a spike in interest rates, political reasons, global issues, etc.
What can you do with this information?
Usually, most of these catalysts are ‘unpredictablein nature‘. It’s really difficult to predict when the company will announce the next bonus or a significant dividend (although few of these catalysts can be predicted by the experts, however, the exact news is known only after the announcement).
That’s why don’t make an entire investing strategy just based on this info. Take these catalysts into account and be ready for it.
In addition, you also need to follow the news regarding these catalysts in a ‘smart’ way. There are a lot of fake news or rumors in the market. Filter out the correct news before processing. You can use google alerts to get the relevant news.
There are a number of catalysts in the market that can accelerate the share price. These are the bonus information if known to the investors, can help to get profit within a short time period. Here are the top 11 Catalysts that can move the share price which we studied today.
Earning release
Mergers & Acquisitions
Stock buybacks (Repurchases)
Significant dividend announcement
Product launches
Stock splits
Bonus
Spinoffs
Liquidation
Lawsuits and investigations
Addition to index
Quick Note: New to stocks? Want to learn how to select good stocks for long-term investment? Check out my amazing online course: HOW TO PICK WINNING PICKS? The course is currently available at a discount.
That’s all. I hope this post is useful to you. Feel free to leave a comment below if you have any doubt or want to ask any questions. I’ll be happy to help you out. #HappyInvesting.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Have you ever bought a cheap stock, which later got cheaper and cheaper? If yes, then you might already have met with- Value traps.
Value traps are those stocks that may seem like a value stock because of their cheap valuation. However, in actuality, they are garbage stocks. Unlike value stocks, these value traps do not have true potential to give good returns to their investors and that’s why their price keeps on declining for a continuous period of time.
Why do investors fall in value trap?
There are some stocks which may appear cheap because they are trading at a low valuation metrics such as PE, price to book value ratio, cash flow ratio, etc.
The bargain hunters keep an eagle eye on these stocks as they appear cheaper compared to their historical valuation or relative to the market.
These investors buy these stocks at a low price considering them as a value stock. However, the problem arises when the price keeps on dropping for an extended duration of time.
Here, instead of purchasing a value stock, the investor has fallen for a value trap.
The value traps are those stocks that are ‘not’ cheap because the market has not realized their true potential or because of some temporary setbacks. These stocks are trading at a cheap valuation because the company has either lost its fire or else its fire is fading away.
A value trap is that stock which is not able to generate any significant profit growth or revenue. A few of the general reasons for the underperformance may be rising production/operational cost, declining market share, lack of new product/services, change in competitive dynamics or inefficient management.
The investors who buy such stocks just by evaluating its low valuation (without giving any regard to the reason why the valuation is low) falls in the value trap.
The real value stocks are those stocks that are trading below their intrinsic value. The reason for their cheap valuation may be either temporary factors or because the market has not yet realized their true potential.
A few common characteristics of value stocks are consistency, strategic advantage, strong business plan, growing cash flow and high-quality financials. Further, these stocks can be considered value stocks only if they are bought at a significant margin of safety by the value investors.
On the other hand, value traps are those stocks that are trading at a low valuation because of long-term or permanent setbacks (factors). These stocks are not actually trading below their intrinsic factor. They are just trading at a low valuation compared to their historical valuation or relative to the market (which might be even above its true intrinsic value).
Value trap stocks lack catalysts or momentum to retrace their original growth track.
Although these value trap stocks might be trading at a low valuation compared to its past valuation or market, however, the chances of these stocks bouncing back to their historical valuation are quite low.
Most of the value trap stocks suffer from lack of innovation, degrading competitive advantages, high debt, low-interest coverage potential, poor management, declining profitability, and no future growth prospects. Proper research is required while investing in these cheap stocks to understand the reason behind their low valuation.
For example- if the average PE of an industry is 18x and stock is trading at 5x, then considering the PE valuation, it might look like a value stock. However, whether it’s actually a value stock or a value trap can only be found after proper investigation.
Similarly, if a banking company is trading at a price to book value of 4x compared to the industry average of 9x, then again the bargain hunters first need to investigate the reason behind the low valuation of that stock before concluding it as a value stock.
A few common signs that the cheap stock is actually a ‘Value Trap’
1. Declining earnings
If the earnings and cash flow of a company are consistently declining for the past few couples of years, then the stock might be a value trap. The low valuations of these stocks are because of their dull future prospects. The market works on future expectations and if investors cannot see any future growth potential in the company, then the stock might even degrade further, no matter how low is the valuation.
2. Business plan
A company with outdated technology or a non-profitable business cannot be a value stock. Take the examples of the 2G/3G technology-based telecommunication companies. Most of such companies ran out of business just because of outdated technology.
3. Poor Management
Poor and inefficient management of a company is a sure sign of a value trap. If the management lacks the driving force and their strategic vision is cloudy, then the investors of that company might suffer from value traps.
4. High Debt
Huge debt and leverages are never favorable for a business. Big debt is an actual trigger for the most deadly value traps.
5. No change in management compensation structures
If the earnings have declined and still the management keeps on giving huge bonuses to their top management structures, then definitely they have not adapted to address the problem. During declined earnings or troubled times, a company needs to change its fundamental behavior in order to get back in the race.
6. Poor financials and accounting principles
The financial accounts should be clear and transparent enough to give the true snap regarding the company. If the accounting of a company is not credible, they might be hiding some financial difficulty or even solvency.
7. No change in capital allocation method
With the shift in the scenarios, the company needs to change its capital allocation method like how much capital they want to allocate in their growth, dividends, capital expenditure or to get rid of big debt.
8. Strategic disadvantages
Declining market share, declining competitive advantage, and company not being able to contain its costs are again a few big signs of a value trap.
9. No growth catalysts
When the company starts moving in the wrong direction, it might need some kind of catalysts to move back to the growth track. These catalysts can be new innovations, products/services or even earning growth. If the company is lacking any sign of growth catalyst, then again that cheap stock might be a value trap.
Although, there can be a number of other signs that a company is a value trap, however, these nine are the top signs.
Quick Note: New to stocks? Want to learn how to select good stocks for long-term investment? Check out this amazing online course: HOW TO PICK WINNING PICKS? Enroll now and start your investing journey today.
Closing Thoughts
The actual goal of a value investor is to avoid value traps. Therefore, my first suggestion to every value investor would be to research the stock properly before investing.
However, even seasoned investors sometimes fall into the value trap and buy garbage stocks considering them undervalued.
In such a situation, the best you can do is to understand the problem and cut off the stock as soon as possible. Do not purchase more stocks in order to average down or hold the stock long enough with an expectation to break even. The faster you can get rid of that stock, the better it is for you. In the end, let me tell you the law of holes: “If you find yourself in a hole, stop digging”.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
While evaluating a company to invest, one of the biggest element to check is its debt level. Ideally, it is said to look for a company with Zero-debt as it means that the company is able to manage its finances predominantly through internally generated cash without any external obligations.
However, is debt always bad for a company? Should you ignore a stock just because it has some debt. Moreover, what if the debt level increases after you invest in a stock? Should you exit that company because the company is adding debts?
In this post, we are going to answer these questions and discuss whether debt is always bad for a company or NOT. Let’s get started.
How a company finances its debt?
A company can raise debt either by issuing debt securities like bonds, notes, corporate papers etc or by simply borrowing money as loans from banks or any lending institutions. However, once the company has taken a debt, it is legally obliged to pay it back based on the terms agreed by the lenders and lendee.
In general, if a company is currently debt free and later starts taking some debt, it might be good for the business as the company can invest that money in expanding its business. However, the problem arises when the company which already has a big debt in its balance sheet, decides to add more. This increasing debt level can negatively affect the shareholders as by norms, debts are to be paid first by the company and shareholders will always be the last in line to receive profits.
When debt is not bad for business?
Although a few matrices like declining profit margins or negative cash flow from operating activities for a consistently long period is considered as a bad sign for a business. However, the same is not true in the case of debts. The debt is not always bad for business.
If a company has a low debt level and decides to take a new debt to start a project which may double or quadruple their revenue, this debt may be good for the business and add more value to the investors in the long run. However, an important question to ask here is whether the company can afford the debt at that point in time. If yes, then it may not be a point of concern for the company or you as a shareholder.
To check whether the company can repay the debt or not, you can look at the free cash flow (FCF) of the company. As a rule of thumb, if the company’s long-term debt is less than three times the average FCF, it means that the company will able to repay its debt within three years using its free cash flow. Of the other hand, consistently negative free cash flow with increasing debt level can be a warning sign for the investors.
Quick note: Also check out this post by Harvard business review on When Is Debt Good?
Debt is cheaper than equity
For growing a business, the management may decide to raise money from investors (equity funding) or they may borrow money from banks as debts. However, an important concept to understand here is that debt is cheaper than equity.
In other words, equity is a comparatively expensive method of financing for a company. Why? Because, first of all, raising money by equity dilutes the ownership and control of the promoters. Second, the cost of equity is not finite. Here, the investors may be expecting bigger returns as they are taking higher risks.
On the other hand, the cost of debt is finite and they are sourced at lower rates. This is because the debt is less risky financing as the firm is obligated to pay it back (unlike equity funding where the company is not obliged to pay any dividends to the shareholders). Moreover, the company has no obligation to the lenders once the debt is paid off.
Further, debt financing doesn’t result in any dilution and change in control. Here, the lenders take no part in the equity of the company and hence the promoters and shareholders can enjoy the benefits.
How to evaluate the debt of a company?
Although checking the liability side of a balance sheet is always the first step to evaluate the debt of a company. However, there are a few financial ratios that you can use to evaluate the debt level. Here are the three most frequently used financial ratios to evaluate the debt of a company:
1. Current Ratio
This ratio tells you the ability of a company to pay its short-term liabilities with short-term assets. Current ratio can be calculated as: Current ratio = (Current assets / current liabilities)
While investing, companies with a current ratio greater than 1 should be preferred. This means that the current assets should be greater than the current liabilities of a company.
2. Quick ratio
This is also called the acid test ratio. Current ratio takes accounts of the assets that can pay the debt for the short term. It doesn’t consider inventory as current assets as it assumes that selling inventory will take some time and hence cannot meet the current liabilities.
Quick ratio = (Current assets — Inventory) / current liabilities
A company with a quick ratio greater that one means that it can easily meet its short-term obligations and hence quick ratio greater than 1 should be preferred while investing.
3. Debt/equity ratio
This ratio is used to check how much capital amount is borrowed (debt) vs that of contributed by the shareholders (equity) in a company. As a thumb rule, prefer companies with debt to equity ratio less than 0.5 while investing.
Contrary to the general belief, debts are not always bad for a company but can help it to speed up the growth. Moreover, debts are a more affordable and effective method of financing a business when it needs cash to scale up. The problem arises only when the management does not control its debt level efficiently.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
In this article, you’ll find out the exact process to apply for an IPO with Zerodha account. However, before we begin, let me tell you my experience of applying to an IPO’s through Zerodha Account.
I’ve been using Zerodha for over four years now and been a happy customer. This discount broker has helped me save a lot of un-necessary brokerage charges if I had used any other full-service broker instead.
Anyways, there was one ‘cons’ of using Zerodha as a broker which bugged me in the past. And it was not having the facility for the customers to directly invest in Initial public offerings (IPOs) through the Zerodha dashboard.
Prior to this recently launched facility, the Zerodha customers have to use ASBA (Application Supported by blocked account) on their net banking portal to apply for IPOs. However, this was not a simple one-click process unlike what most of the other traditional big brokers like ICICI direct, HDFC sec, etc offered.
Although I am not a regular investor in IPO’s and only invest if I find the new offer a lot appealing. Nonetheless, having a simple process to invest gives flexibility whenever the opportunity arrives. Nonetheless, investors can apply for IPO’s directly within Zerodha console. And the best part is that the process is really simple.
Next, you need is a UPI account. And this is nothing new. These days everyone uses UPI to make fast and secure payments. For example, you can use apps like Phonepe, Bhip app, iMobile by ICICI, etc. Here is the link to the UPI apps and banks that allow IPO payment.
4. Select the IPO that you wish to apply from the list of active IPOs and click on ‘Place bid’.
5. A pop-up screen will launch with IPO information. Here you can find details like issue date, issue price, market lot, discount (if any), minimum order quantity, etc.
6. Next, enter your UPI id. Make sure to select the correct bank account.
7. Place your bid by entering the ‘Quantity’ and ‘Bid price’.
For the quantity, it should be minimum order quantity or the multiple of the lot size. For the ‘bid price’ you can enter any price between the offered issue price range. Anyways, for the maximum chances to get an allotment, it is recommended to use the ‘Cut-off’ price.
8. After filling the details, click on the ‘checkbox’ stating that you’ve read the prospectus and you’re are an eligible UPI bidder as per the applicable provisions of the SEBI.
9. Finally, recheck the details and click on ‘Submit’.
10. Besides, if you want to make any changes if the bidding later, simply click on ‘Bid details’ on the IPO page and make the changes.
Once submitted, you’ll receive the request to complete the “UPI Mandate” on your UPI app.
Please note that sometimes it may take a few hours to receive the UPI mandate request. Anyways, in my case, it was instantaneous and I received payment request on my iMobile ICICI app as soon as I submitted the application on the Zerodha Console. Accept the request once you receive it to complete the process.
On accepting the payment request, your UPI app will block the IPO funds in your bank account till the date of allotment. You’ll receive an SMS from exchange once your application is placed successfully.
If you’re allotted the IPO shares, the amount will get debited from your account and shares will be credited in your demat account. On the contrary, if shares are not allotted, then blocked funds are released on the date of the payment. You can read more about the process of IPO share allotment to retail investors here.
That’s all. This is the exact step-by-step process to apply for an IPO with Zerodha Account.
Closing Thoughts
Zerodha is continuously innovating to provide a better investing and trading facility to its customer. The procedure to apply for IPO is a lot simpler now. You should definitely check it out. Further, comment below if you face any difficulty in applying for IPO using Zerodha account. Happy Investing!
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Although the idea of the Circle of Competence is quite old, however, it was popularised by the billionaire investor Warren Buffet. Here’s one of his quotes regarding the circle of competence.
“What an investor need is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.” – Warren Buffett (1996 Letter to the shareholders)
In this post, we are going to understand what exactly Warren Buffett meant by the Circle of competence. Moreover, you’ll learn how by understanding the concept of the circle of competence, you can significantly improve your investment strategy and returns. Let’s get started.
What is the Circle of Competence?
“I’m no genius. I’m smart in spots-but I stay around those spots.” – Tom Watson Sr., Founder of IBM
Because of different background, qualification, or experience, everyone has built up a greater knowledge in a specific area. In this certain field, these people have the expertise and hence, have a significant advantage. This is called the circle of competence.
Further, the circle of competence might vary from people to people depending on the criteria mentioned above.
For example, a doctor might have expertise in medicines, healthcare or pharmaceutical and he can consider this area as his circle of competence (COC). However, if he also runs his family, which is involved in the banking industry and he might have acquired a good knowledge of that field (through his family background). In such a case, both pharma and the banking sector lies within his COC. In other words, he has a bigger circle of competence.
An important point to mention here is that your circle of competence need not only be related to the career that you are pursuing or the education/qualification that you have. It could be ‘anything’ that you have a good knowledge of.
However, it’s really important that you should define your circle of competence and understand to operate inside it. The problem arises only when you do not exactly know your circle of competence and unknowingly believe yourself as an expert and invests in something that’s outside your circle.
Why You Should Invest inside your Circle of competence?
“We have to deal in things that we are capable of understanding.” Charlie Munger
If you cannot understand a business, then you will not be able to evaluate it effectively. Investing in something which you do not have much knowledge will lead you to the wrong evaluation and overall, it will turn out to be a bad investment. Warren Buffett’s right hand, Charlie Munger always says that the investors who get outside their circle of competence find themselves in a lot of trouble later.
Although this sounds obvious and you might be thinking – “Why would I buy something that I do not understand?”. However, most investors are not much disciplined to invest inside their circle of competence. The temptation of investing in a ‘hot’ or popular stock where most of their friends are making money is too strong.
Anyways, as mentioned earlier, you need not be an expert in a lot of areas. Just stick to where you are good and avoid the areas where you do not have much expertise. By doing so, you can maximize your chances of success.
How can you widen your ‘Circle of Competence’?
If you think that your circle isn’t too big, do not worry. With time, you can work on it and expand your circle of competence. How? By continuously learning new things. Just Read, Read, Read!
That’s the only way how experts increase their circle of competence. In fact, even an engineer can have a circle of competence is the pharmaceutical sector if he starts reading regularly. Here’s a quote by Charlie Munger highlighting the importance of reading:
“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero. You’d be amazed at how much Warren reads – at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.” -Charlie Munger
Further, to end this post here is an amazing quote by Warren Buffett that you should take away with you.
“Everybody’s got a different circle of competence. The important thing is not how big the circle is. The important thing is staying inside the circle.” – Warren Buffett
I hope this post is useful to you. If you’ve got any questions regarding the concept of the circle of competence, feel free to comment below. I’ll be glad to answer them. Take care and happy investing.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Suppose you believe in an idea and confident that it will perform well in future. For instance, let’s say you are optimistic towards the renewable source of energy. Here, you are assured that the grid and other conventional sources of energy will be replaced by the renewable source of energy like solar or wind energy in the future. And therefore, you want to invest in this idea.
However, you are not certain of the best leading company in this segment to invest. Moreover, you also do not want to invest in the entire energy sector through any sectoral mutual fund as you want to focus just on the renewable energy-related companies. How to proceed further with your investments? Enter the thematic investments.
What is Thematic Investment?
As you might already know, mutual funds also provide an option to invest in different sectors via sectoral funds. For example, pharmaceutical funds focus on pharma companies or banking funds focus on investing in companies in the banking Industry. However, thematic funds are different from the sectoral fund.
Thematic funds are growth-oriented equity funds that focus on investing in a set of companies based (or closely-related) to a particular theme. They follow a top-down approach and targets a broader macro-economic theme on which the fund manager has a good knowledge of. Here, the thematic fund investors studies and understand the impact of structural shift in economics, political, technological, corporate or social trends on sectors, demographics etc which may reveal investable opportunities.
For example, electric vehicles (EVs) can be considered a theme. Here, the thematic fund based on EVs do not just need to focus on one automobile industry, rather they can include a set of industries which are a part of the theme. For example- this theme may include companies from the automobile industry, battery industry, Metal companies involved in making battery parts like Graphite, Aluminium, Carbon, etc, auto-ancillaries industry or any other companies related to the EVs.
A few other popular themes in India right now are digital India, make in India, technological progress, Internet of things, blockchain, environmental sustainability, social security etc.
Mutual funds vs Thematic funds
As I already mentioned above, thematic funds are different from the mutual funds and here are a few major differences between them:
— Mutual funds are over diversified while thematic funds are compact. Mutual funds invest in somewhere between 40–100 stocks. On the other hand, the number of stocks in thematic funds are smaller, typically between 5–20.
— Mutual funds are rigid and not easily customizable. Although there are thousands of mutual funds available in the Indian market, however, they are not customizable. On the other hand, it’s easier for investors to choose their ideas/sentiments and factor their risk appetite through thematic funds.
— The costs involved with mutual funds are high. For managing a popular active fund, the fund house may charge an expense ratio as high as 2.5-3%. However, the fees involved with thematic funds are comparatively cheaper.
Advantages of Thematic Funds
Here are a few common advantages of thematic funds:
— Thematic funds are potentially more rewarding compared to diversified mutual funds.
— As thematic funds offer a compact theme, they have a concentrated impact because of news or happenings in other non-related industries.
— There are a lot of publicly available popular themes in the Indian market and hence, finding the right investment opportunity is not a tough task for investors. For example, you can use FYER’s thematic investment platform to try new different themes.
— Thematic funds allow strategic exposure to the investor’s portfolio and encourage common sense investing as themes represent the investor’s ideas and thoughts.
The risk associated with thematic funds
There’s no denying the fact that no investment strategy is perfect. And the same goes to the thematic investments. By making investments in thematic funds, you are preferring a concentrated theme. This portfolio concentration makes these thematic funds comparatively riskier over diversified mutual funds.
Moreover, there’s also a controversy regarding thematic investments which says that investing in a concentrated idea which is still untested and underappreciated, may not be a sound approach.
A major difference between thematic investments and traditional ones is that the thematic investors look into the future and makes decisions based on the predictions on the future trends or upcoming shift in the structure. On the other hand, traditional investors check the history and weights more importance to past performance, market behavior etc.
Moreover, we cannot deny the fact that themes change fast with time. In the last two decades, we have witnessed massive changes in the industrial and technology theme. Therefore, if you are planning to make thematic investments, be observant and careful regarding the entry and exit decisions. Only enter these funds after you have researched the idea thoroughly.
Nonetheless, if you are able to invest in right thematic funds, they are capable of giving huge returns to the investors compared to other index or diversified funds.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Good Debt vs Bad Debt: What You Need to Know?: A common misconception among most of the working population is that all debts are bad, and hence they should avoid debts at any cost. Now, it is possible that you may never take any debt/obligation throughout your lifetime. However, this is not a very smart move.
Many times, taking debts to reach your goals can be a wise action and can help people succeed in the long term. As a matter of fact, all those who run a business or have a winning mindset know that – “Not all debts are bad!”
Although buying luxury goods through debt on your credit card should definitely be considered as a bad debt, however, sometimes, it is okay to take a debt to start a business, buy your new house, for getting a higher education, etc when the possible returns in future are higher compared to the interests paid.
In this article, we are going to discuss good debt vs bad debt. By the end of this post, you’ll completely understand what good debts, bad debts, their characteristics, examples, and more are. Let us start with Good debts.
Good Debt vs Bad Debt
1) Good debts
There is a common saying in the business world– “Money makes money.” In other words, it means that you need money to make more money.
Concerning good debt vs bad debt, if you can use your debt to generate more money/value or simply increase your net worth, then it can be considered as good debt.
In general, these debts have lower interest rates than the potential returns and, therefore, treated as an investment for the future.
For example, if you’re starting a business, it is not necessary that you should have enough savings to get it off the ground. Here, if the future growth potential and expected returns from your business are high, you can take a business loan. The business loan can be considered as a good debt (on the condition that your business is fruitful).
Here are a few other common examples of good debts:
— Education loans:
“The more you learn, the more you can earn.”
If taking a degree can increase your earning potential as an employee (or an employer), it’s okay to go for that debt. You are more likely to be better paid if you have higher knowledge and degree. Always be ready to “Invest in yourself,” and hence, taking a student/college debt can be considered good debt.
Anyways, please note that an education loan may turn out to be bad debt if you do not get employment as per your developed skills after graduation. Therefore, always choose the degree/program carefully because if there’s no substantial earning potential after you have completed the education, it may not be a good debt.
— Business loan:
If taking a business loan can increase sales, earnings, and improve your company’s financial health in the future, it can be a good debt. Moreover, having a balance in the account can also reduce the financial stress of owners as they do not have to worry about running out of cash constantly. And therefore, they can make better decisions for their business.
With time, the owners can slowly pay down the debt when their business becomes profitable and moreover stable. Anyways, a business loan can also become a bad debt if the businessman is blindly taking money for a risky business idea.
— Mortgages:
Mortgages for buying a house or real estate debts for property ownership can be considered as good debt.
Generally, buying a house or property involves a massive upfront cost. If you do not have saved a lot of money to invest in a house/property, but the potential earnings that you can make from your real estate investment are way high, then taking a loan may be a good idea.
Here, you can buy the property, live in it for years, save money on rent, and also sell it in the future for making money. Else, you can buy the property and rent it out to make money as rental income. As you are taking a loan to build an asset that increases in value, mortgages can be considered as good debts in the long run.
Although good debts may sound like a viable option for a better future, however, they are always dependent on a lot of assumptions. There’s no guarantee that the future will turn out to be the same as planned. For example:
You can get a college degree from your education loan but may have no job offer.
Your business loan may be a waste if your business/startup fails
You may be paying high mortgages for your house and may be left with no savings for the future.
Even for good debts, there are a lot of risks involved as people are forecasting the future based on their assumptions. Therefore, before taking an obligation, carefully assess the risks and rewards.
For example, if you are planning to get an education loan, choose to take the loan for a degree/program that you’re confident to be fruitful. Know the expected salary after graduation so that you can plan to pay the money back.
Besides, considering the worst-case scenario may also help here as you can even plan for it. Overall, always act smartly as a good debt may not always be right for everyone.
2) Bad debts
Bad debts are the money that is borrowed to purchase depreciating assets or liabilities. In other words, if the value of assets doesn’t go up or generates income in the future, you should not buy it by borrowing money as they are bad debts.
In general, bad debts have a higher interest rate, and people can prevent taking these debts by making smart use of money. Here are a few examples of bad debts:
— Debts to buy fancy cars:
Cars cost a lot. While having a vehicle can be a necessity as it saves money and time, however, taking debt to buy an expensive car is never a good idea. The value of a vehicle depreciates over time, i.e. becomes less than what you paid for in the future. And hence, borrowing money to buy fancy cars can be considered as bad debt.
— Debts to buy luxuries:
Taking consumer/personal loans to purchase luxuries like expensive watches, clothes, dining in fancy restaurants, services, etc. are again bad debts. Personal loans have incredibly high-interest rates and are usually caused by living beyond one’s means. The money spent on these goods/services could have been used somewhere else.
— Credit Card debts:
Credit card debt is the worst form of bad debt. The interest paid on credit card debts is significantly higher than the rates on consumer loans. Moreover, as the outstanding amount accumulates each month, it makes it easy for the people to fall behind and become prey to the credit card companies.
Mixed/Special Cases of Good Debt vs Bad Debt:
The world is not just ‘Black’ and ‘White’. There’s also ‘Grey’!
Similarly, a debt cannot always be classified as good debt or bad debt. Sometimes, it can be both. It depends on your financial situation and preference. Here are a few examples:
— Borrowing to invest:
If you are getting money at a lower interest rate and making more money by investing it, then it can be considered as good debt. In the trading world, this is called leveraging, and it can help the traders to make a lot of profits using other people’s money.
Anyways, if the interest rate on the borrowed money is way high and the profits earned from your investment is low, then this money can be considered as a bad debt.
Overall, there’s a risk involved in borrowing money to invest. Until and unless, you’re trained and experienced to do so, this approach can be dangerous.
— Credit card rewards:
Although relying too much on credit cards be harmful, however, they are also a lot of benefits of using credit cards. Most of these cards come with amazing rewards like free airline tickets, movie tickets, cashback, etc. If you can use the credit cards efficiently, it can be considered as good debt.
— Consolidation loan:
In finance, consolidation occurs when someone pays off several smaller loans with one more jumbo loan. Here, the individual gets this loan at a lower rate to pay off the higher interest rate loans. In general, it can be considered a good idea to get rid of high-interest debts. However, the problem arises when the individual is not able to pay off the bigger loan or when the debts pile up.
Let us quickly summarize what we discussed about Good Debt vs Bad Debt in this article.
Good debt is a debt for getting product/service that has the potential to increase its value with time. As a thumb rule, if it increases your net-worth or value, it is good debt. The right amount of good debt can increase your net worth, value, and help you get the things that you want in your life without taking unnecessary risks.
On the other hand, if you are borrowing money to spend over depreciating assets or liabilities, it is bad debt. Bad debt tries to lure people for instant gratification. However, they do not create any significant long-term value. Try to avoid getting bad debs for luxury products/services or borrowing high-interest rate money.
Finally, there’s no fixed boundary for defining good and bad debts. A good debt for one can be bad for another, depending on their financial situations.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
The laws of supply and demand say that whenever demand is lower, the price must come down.
