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
Duopolies in Indian Market:Visa vs MasterCard, Boeing vs Airbus, Coke vs Pepsi, Netflix vs Amazon prime, etc are some of the companies that have already been etched most notable duopolies throughout the world. Be it a boon or a bane, these mega-corporations cannot be named individually without mentioning the other. Such has been the tale of Duopolies, their fierce competition, and respectful cooperation eventually forming an interdependence where each has scaled summits.
(Rivalry noticed through Advertisements)
(Pepsi responded to the above-attempted sale of Coke’s secret ingredients by notifying Coka-Cola)
In this article, we further look at Duopolies that have shaped and extended their segments, particularly in the Indian markets.
Duopolies in Indian Market
— Zomato vs. Swiggy – Food tech
A decade ago Dominoes and their ’30 minutes or free’ scheme stood for food delivery in India. However, the real credit has to be given to Zomato and Swiggy for the development of the Food tech industry in India. They have now formed an integral part of our lives and also sets the perfect example of a duopoly in the Indian context in the food tech/delivery industry.
Zomato was founded in 2008 initially as a website that provided information on restaurants, access to their menus, the ability to view and provide reviews. However, they eventually ventured into the food delivery segment. On the other hand, Swiggy was set up as a food delivery platform from the beginning in 2014. Both competitors have used a strategic discounting model to attract and keep customers. Moreover, advertisements through social media have played a significant role in their growth and competition.
Strategies used by Zomato
Each of these corporations has strategically acquired other new entrants to enhance their growth to gain an upper hand. This was also done to use them as a doorway into new markets. Zomato has made 12 acquisitions which include companies throughout the globe. The acquisitions are involved in restaurant search service, table reservation, restaurant management platforms, logistic tech startups, food delivery startups with their most notable recent acquisition being UberEats. Zomato has also acquired companies involved in drone technology focusing on the possibility of a future with drone-based food delivery.
Strategies used by Swiggy
Swiggy also has made notable acquisitions like 48 east, Scootsy logistics and also invested in Fingerlix- a ready to eat food brand. They also enhanced its customer base by easing the payment systems for working customers by partnering with Sodexo. In addition, Swiggy has also partnered with Indifi technologies, a financing program for partner restaurants.
The strategies used by Zomato and Swiggy show how the food tech duopoly in India has competed using the technique of an acquisition. As mentioned earlier, this was also used as a medium to enter new markets and build on the structure already set up by the company taken over.
But when the pages are flipped over it also shows the difficulty a startup could face when competing with companies having greater control over the market. This is because they have already built resources over the years and are ready to burn through cash even after going through losses. They will eventually have to give in to the offer placed by either of the duopolies as it would be an uphill battle to compete with strategic discounting employed by either of the companies.
The ride-hailing segment in India is dominated by Ola and Uber. Uber a globally recognized corporation known for its ride-hailing service in 785 metro cities worldwide. They entered the Indian market in 2013 and currently boasts 14 million rides a week in India. Ola, on the other hand, had a three-year head start and currently boasts a reach of over 250 cities with 28 million weekly bookings.
Strategies used by Ola vs Uber
Ola and Uber too have used the strategies of acquisition and investment. Uber acquired Kareem particularly known for its service in the middle east and Ola has invested in VOGO to further its reach in the two-wheeler ride-hailing segment. Both Uber and Ola have competed aggressively in all road transport segments ( inc. two-wheeler, three-wheeler).
They have also entered other segments namely the food tech industry with Uber initiating UberEats and Ola acquiring Foodpanda. Uber has also extended its service to other means of transport through UberAir which uses VTOL aircraft in the US and also UberBoat in Mumbai at the jetty from Gateway of India to Alibaug. In addition, they are particularly keen on developing self-driving cars to be introduced in the ride-hailing segment.
However, in the case of Ola and Uber, we also see another side of the duopoly segment. Ola had been earlier accused of attempting to eliminate competition by lowering prices. This makes it impossible for new entrants to survive and then hiking prices when convenient.
Besides, both Ola and Uber have been accused of overcharging in situations where the same ride is charged different amounts based on the day, time, profile, history, rating of both the rider and the driver. This was opposed as both attempt to show a front of transparency to attract customers to their reasonable pricing. The same surge in pricing would not be acceptable when applied by local players.
They have also been accused of baiting riders with discounts and bonuses and then hiking fares without passing the gain from the price hike to the drivers. One of the main reasons that Uber and Ola have been in controversy is the fact the drivers are not considered employees of these corporations. They are instead considered as ‘contractors’ as this allows them to skirt legal obligations mandated towards employees.
If we look into the strategies used by Uber at a global stage to remain market heads they would seem to be straight out of a conspiracy novel. Uber to compete with Lyft in new York had formed a street team to gather information on Lyft’s expansion plans and lure their drivers into Uber. In 2014, 177 employees of Uber were accused to have intentionally ordering and canceling 5560 rides.
Uber also has been criticized for the development and implementation of the software tool ‘Greyball’ which was used to gather user data from their phones and avoid giving rides to law enforcement officers and those involved in sting operations. Uber also used the Ripley a panic button 24 times at the times of raids. Ripley would shut off and change the passwords of the staff computers when initiated. The controversy with Uber gets worse as they have been accused of implementing ‘God View’ a function used to track journalists and politicians.
When it comes to E-commerce the duopoly Flipkart and Amazon are said to have a combined market share of over 90% in the Indian market. Flipkart was founded in India in the year 2007 whereas Amazon had been launched in India in the year 2012.
Strategies used by Flipkart and Amazon
In comparison, the homegrown company ‘Flipkart’ has been a market leader even when facing Amazon. Flipkart being an Indian company has used this to its advantage by spreading its reach even to rural areas whereas Amazon had initially limited itself only to metro cities. Almost 45% of Flipkart’s sales currently come from smaller towns and cities giving them an edge over Amazon in India. Amazon, on the other hand, has targeted metro cities which formed 65% of its sales.
Flipkart too as noticed in the earlier examples has used similar strategies of acquisition ( Myntra, Jabong, PhonePe, and eBay). Amazon, on the other hand, has relied less on acquisition and more on forming partnership with local logistic companies to bolster business.
The entry of Walmart into India through the purchase of Flipkart gives an insight of means used by MNCs to enter new markets. This was also used by Zomato and Uber in the previous examples.
Disrupting a Duopoly
The duopoly held by MasterCard and Visa in the international payment segment was disrupted by the introduction of RuPay in India. After noticing multiple examples of new entrants not being able to compete with already set Duopolies eventually leading them to being acquired, the question arises on how RuPay was able to achieve this in India.
RuPay belonging to the domestic payment system was set up in India in the year 2005 by the Board of payment and Settlement systems by the Reserve Bank of India. The RuPay card was introduced in 2012. As the processing of the transaction in RuPay is within India they are lower than that of MasterCard and Visa. This is because the processing in MasterCard and Visa take place abroad resulting in a higher processing fee along with their higher fee structure.
The rise of RuPay can also be attributed to Prime Minister Narendra Modi who had publicly endorsed it. One of Modi’s schemes namely the PM Jan Dhan Yojana helped RuPay contend with global players. Here, financial services, bank accounts, and a RuPay card were made available to most of the rural population free of cost.
Government support, Deep Pockets and a focus on the local problems that MNCs overlook seem to have worked for RuPay to become the top player in India. However, this led to the government facing a lot of backlash on the global stage with Visa and MasterCard crying foul and alleging that Modi used patriotism which they viewed as a way of protectionism against them.
Closing Thoughts
After considering three of the most notable duopolies in India we can note that for the successful functioning of a company a certain degree of cooperation is required to maximize the profits. With both companies acting as a check on each other the greatest benefit reaches the consumer.
Example – strategic discounting used by Zomato and Swiggy. These benefits are not available in a monopoly. It is also important for the government to maintain stringent checks to avoid the formation of cartels. The best comparison can be seen in Uber. The management has been termed as a ‘ Group of Thugs’ in the US ( where it has a market share of over 65%) due to its unethical practices. In India however due to a stronghold by its competitor Ola it has had to forego its ‘win at all costs’ attitude which was also later forgone in its operation in the US.
Another disadvantage a duopoly may have is on the stakeholders in the operating region, particularly its employees. All the companies taken as an example burn through cash without achieving profitability for a considerable period of time. This is done to survive the competition and eliminate new entrants. Failure of any of the companies will result in mass layoffs. Even if they enter a position of being acquired, employees that may increase duplication of jobs will not be hired.
Acquiring a major market share does not then limit the competition in the Duopoly to each other. In the future, we will see many new entrants ready with deep pockets to take on these duopolies.
Amazon seems to be keen to make an entry into the food-tech segment. Also the Mukesh Ambani backed Jiomart has just made an entry into the eCommerce platform offering attractive incentives to users like savings of Rs. 3,000 on pre-registration.
The telecom sector, on the other hand, seems to be headed towards a duopoly with the supreme court taking a strong stand against Vodafone-Idea which owes the government $3.9 billion in dues interest and penalties. In the coming years, India will see Duopolies entering other segments and at the same time disrupt those that are currently in play.
10 Best Youtube Channels to Learn Indian Stock Market: With the boom of the internet, self-education has never been easier. Now, you can learn any skill that you crave by sitting on your couch and watching youtube videos. And that too for FREE. There are tons of information and resources available on youtube to learn whatever you want. And if you want to acquire financial literacy without spending a dime, Youtube is definitely one of the best places where you should be.
Anyways, if you are a newbie to investing world, you might not know the best youtube channels to learn Indian stock market. After all, there are thousands of youtube channels that discuss stocks. But which ones give the best information? We’ll answer this question today. In this post, we are going to discuss ten Best Youtube Channels to learn Indian stock market.
Quick Note: There may be a few more good channels that we might miss in this post. This may be because we never watched their videos or the channel is launched recently. If we miss any of your favorite youtube channels feel free to mention in the comment box. We’ll be glad to add it to our list of best youtube channels for Indian Stock Market.
Nonetheless, you might not synergize with all the channels as they may cover different core areas like fundamentals, technicals or future/options trading strategies. Only subscribe to the channels that suit you the best and whose ideology you would like to follow. So, let’s get started with our list of 10 Best Youtube Channels to Learn Indian Stock Market. Here it goes.
10 Best Youtube Channels to Learn Indian Stock Market
This channel uploads animated financial education videos on stock market tutorials, mutual fund basics, book summaries, case studies, etc. FinnovationZ has uploaded over 320 videos on their channel and had got +41 million views on their videos with +670k subscribers. The videos on this channel are mostly in the Hindi language and very simple to understand. If you are a complete newbie to the stock market, this is a definite channel to subscribe.
Also known as Finology, Pranjal Kamra runs this channel and teaches the philosophy of value investing. On his channel, you can find over 130 videos on investing, stock analysis, mutual funds, and behavioral finance. Along with educational videos, Finology also offers courses, workshops, Excel tools, Advisory & research services etc on their website.
With over 550 videos and +210,000 subscribers, Elearn Markets is definitely ranked among one of the best youtube channels to learn Indian stock market. They cover videos on financial literacy, stock market trading, fundamental analysis, technical analysis and more. Besides, one of the most popular segments on their Youtube channel is ‘Meet market rockstars’.
Quick fact: The founders of Elearn markets are also the creator of one of the most downloaded and highest rated stock analysis app in India, named Stockedge.
This channel is hosted by Kritesh Abhishek and is focused to teach stock market investing and personal finance to the do-it-yourself (DIY) Investors. On Trade brains youtube channel, you can find simplified investing videos on stock market basics, valuations, mutual funds, investing strategies and much more. You can subscribe to the channel using this link.
Sunil Minglani is an expert on behavioral aspects of Stock Market and has rich experience in analyzing stock chart patterns which he has co-related with human psychological patterns at a deeper level. He has uploaded over 250 videos on his channel and got over +410k subscribers. On Sunil Miglani’s channel, you can find videos on stock market basics, human psychology, Q&A with Sunil Miglani, etc.
Nitin Bhatia is a Youtuber and founder of the blog nitinbhatia.in. On his youtube channel with over +549k subscribers, Nitin Bhatia uploads videos about stock trading & investing, Real Estate and Personal Finance to provide ‘Smart Ideas for Your Money’. He’s very consistent in making videos and has uploaded over 690 videos on his channel.
This channel uploads simple investing videos in Hindi & English on the stock market, mutual funds, taxes and other investment options in India. The videos are extremely simple to understand. They have uploaded over +720 videos on their youtube channel and received over +190k subscribers. Invest Yadnya also offers different services like financial planning on their website.
This channel is run by Ghanshyam Yadav, a trader and trainer in stock market from Mumbai. This channel focuses on stock market trading and technical analysis. Ghanshyam has uploaded over 1,400 videos on his channel and here you can find videos on Nifty Trading, Technical analysis, Candlestick patterns, charting software and more.
This channel is run by Mohd Faiz and the objective of this channel is to help the subscribers create wealth. Mr. Faiz has uploaded over +4,700 videos on this channel which has received over +95 million views. This channel upload videos on current news, technical analysis, stock charts, patterns and more.
The host of this channel, Varun Malhotra, Director EIFS, started investing at an age of 17. He dropped out of his Campus placements at IIM-A to continue his journey in the investment world. Since 2010, Varun Malhotra has trained over 500,000 Investors including the entire 250,000 strong force of Border Security Force. On his youtube channel, he uploads videos on stock market investments & mutual funds. Varun Malhotra has uploaded over +45 videos on youtube and earned+225k subscribers.
The marketGurukul channel is managed by Mr. Edward and is one of the best technical analysis youtube channels in Hindi. He uploads videos on Indian Stocks, Commodity or Forex Trading including Trading Psychology, Money Management along with hardcore Technical Analysis. You can find over +170 videos on this channel teaching technical analysis, Strategies, and Indicators to know the markets better, demo trading platform and more.
If you are not from a finance, commerce, business background or from a family of stock market enthusiasts, the chances are that you do not know the stock market lingo or even the frequently used terms like dividends, market cap, etc. Moreover, if you are in the learning stage, it’s a little difficult to master everything by yourself. Enters Youtube.
With the help of youtube channels, you can find online mentors who can help you to make your investing journey a lot easier. Further, interacting with Youtubers is also not very difficult. You can simply leave a comment on the videos and if the Youtuber is active, most likely, you’ll get the reply.
Final advice, watch the videos but do not copy their entire investment strategy or stock picks of the Youtubers. Ideally, Copycat investing doesn’t work. Be original and create your own investment style.
That’s all for this post. I hope it was useful for you. Have a great day and comment below which is your favorite YouTube channel to learn Indian stock market. Happy Investing!
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
Everyone who enters the stock market wants to make money from their investments. And in order to do that, first, they need to understand how people really make money from stocks. Basically, there are two ways to make money from the stock market – Capital appreciation and making money from dividends.
When it comes to capital appreciation, most of the people know this method to make money from stocks. Buy low and sell high. Purchase a good stock at a low valuation and wait until the price goes up. The difference in the purchase and selling price is the profit (capital appreciation).
This is the core principle of value investing. Find an amazing stock at a cheap valuation and hold it for a long time until the market realizes its true/real value.
However, there is also a second method to make money from the stock market which is (generally) ignored by most newbie investors. It is called dividends. In this post, we are going to discuss how to make money from dividends -the right way.
— Important terms to know regarding dividends
Before we dig deeper, first you need to learn few important terms regarding dividends-
1. Dividends: Dividends are the profits that a company shares with its shareholders as decided by the board of directors.
2. Dividend yield: Dividend yield is the ratio of annual dividend per share divided by the price per share. The formula for dividend yield is given below:
Dividend yield = (Dividend per share/ price per share)
For example, if a company gives an annual dividend of Rs 10 and its current market price is Rs 200, the dividend yield of the company will be 10/200 = 5%.
Here are the annual dividends of a few famous companies in India (2019).
Bharat Petroleum – Rs 17.24 per share
Hero Motocorp – Rs 87.12 per share
Tata Steel – Rs 13 per share
Infosys – Rs 21.70 per share
Hindustan Zinc – Rs 20 per share
Now, if you calculate the dividend yield given by the above companies, you may find it very small.
If a company gives a dividend yield of 2% per year, it’s really difficult to build a livelihood using this income, right? For example, if you want an annual income of Rs 2 lakhs in dividends, then you have to invest Rs 1 Crore in that stock. This is not feasible for most of the average Indian investors.
However, there’s an important lesson that you need to learn here—
— Dividends increase over time…
This means that a good fundamentally strong company will increase its dividends with time.
For example, if a healthy company gives a dividend of Rs 10 this year and makes more profit in the upcoming years, then it will increase its dividends in the future.
Another important lesson to learn here is that– your dividends are going to increase. But your purchase price is going to remain constant throughout your holding time frame.
Therefore, if you look at the dividend yield, the numerator (dividends) is going to increase with time. But the denominator (purchase price of the stock) is going to remain constant for you. In short, the dividend yield for that stock is going to increase in the future.
Let us understand this better with the help of an example.
— How To Make Money From Dividends?
Suppose you purchased 100 stocks of a company at Rs 200. The annual dividend for that year was Rs 10. So, for the first year, the dividend yield will be 5%. This yield is small here compared to the returns from most of the debt investments.
Nevertheless, let us assume that the company is fundamentally healthy and going to give a consistent (increasing) dividends in the upcoming years. Here is a table describing the annual dividends in the upcoming years.
Year
Dividend
Purchase Price
Dividend Yield
Total Annual Dividends
YEAR1
Rs 10
Rs 200
5%
Rs 1,000
YEAR2
Rs 12
Rs 200
6%
Rs 1,200
YEAR3
Rs 15
Rs 200
7.50%
Rs 1,500
YEAR4
Rs 18
Rs 200
9%
Rs 1,800
YEAR5
Rs 21
Rs 200
10.50%
Rs 2,100
Moreover, along with the dividends, your capital will also appreciate in value as you are holding the stock for a long time. In the next 5 years, maybe the purchase price of Rs 200 has now appreciated to Rs 400, 500 or whatever high price.
For the investors, who buy that stock directly in the fifth year (at an appreciated price- let’s say Rs 500), the dividend yield for them might be low. However, as you have purchased that stock long ago at a decent price, the dividend yield will be quite high (even higher than the fixed deposits). From the above table, you can notice the increase in the dividend yield as the dividend increases.
In short, here dividends are allowing you to receive a healthy income without selling your original assets.
The biggest point of concern regarding dividend stocks is that dividends are not obligations. This means that the company may reduce or discontinue the dividends in future.
For example, if a company suffers a heavy loss in a year or if the company is planning to invest its profit in some new project/plant, then it might reduce the dividends or do not give any dividends to its shareholders.
Therefore, if you are investing in any dividend stock, then first make sure to look at the dividend history of that company. A consistently increasing dividend for the last 10-12 years can be considered a healthy sign.
Buy low and sell high is not the only way to make money from the stocks. There are many long-term investors who are generating big wealth through their annual dividends. If you want a good consistent return on your stocks without selling it, then investing in a healthy dividend stock can be a good strategy.
That’s for this post on how to make money from dividends. I hope it was helpful to you. Have a great day 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
The majority of Commerce students that I come across these days are looking to make their career in the field of Finance. Even, a substantial number of engineering graduates whom I personally know, are currently changing their career to the Financial Services. At present, the Finance industry in India and across the globe is growing at a rapid pace. Therefore, it is of no doubt in saying that professional degrees and courses like MBA (Finance), CFA, FRM, and CFP are attracting a huge number of students every day.
However, apart from these mentioned courses, is there any other course which can give you the license to work as a self-employed individual in the Finance sector? Do you know of any course which is comparatively easier to pursue, affordable and gives you the ticket to pursue a career in the Finance industry?
The answer to both the questions is “NISM certification”.
But hey! Are you hearing the word ‘NISM’ for the first time? Even if yes, then you don’t need to worry at all. In this article, I would share a brief overview of the wide range of NISM courses available and how you can get certified with NISM.
What is NISM?
NISM (National Institute of Securities Markets) is headquartered in Navi Mumbai, India and offers a wide range of courses to the Indian students. It is a public trust which was established by SEBI (Securities and Exchange Board of India). SEBI is the apex body which regulates the securities markets in India.
The SCI (School for Certification of Intermediaries) is one of the six schools of excellence at NISM. The SCI is engaged in the development of Certification examinations and Continuing Professional Education (CPE) programmes in the Financial Markets domain. These are conducted for validating and enhancing the abilities of the associates working in the Indian capital markets.
What does the NISM offer?
The NISM campus in Patalganga (Maharashtra) offers two full-time courses in Finance. The first one is PGPSM (Post Graduate Programme in Securities Markets) and the other is PGD (Post Graduate Diploma) in FinTech.
Apart from these two stated courses, NISM also offers a few other long term courses in collaboration with international bodies. You can have a look at those courses clicking here.
Further, there are 22 short term certification courses offered by NISM. In this article, we would predominantly hold a discussion on these certifications. A majority of these short term courses are mandated by SEBI for those who are either self-employed like an investment advisor or research analyst or working in the Financial Services industry in India.
The rests are voluntary certifications which have not been mandatory for the finance professionals. But, the voluntary certifications are beneficial in the sense that they provide advanced knowledge in some specific area.
For example, Mutual Fund Distributors Certification Examination (Series V C) is a voluntary exam but its contents and way of testing the candidates is more difficult than other Mutual Funds exams.
Note: You can find the list of all the available 22 courses on the website of NISM here.
How to register for a NISM certification exam?
In order to register for any course offered by NISM, you first need to create your account on the NISM website. Click on this link and it will take you to the home page of the website. While creating your account, make sure you have a digital copy of your photograph, aadhar card and PAN card with you.
After you are done with the account creation, you can choose any module of your choice. To register for any module exam, you have to select the exam date, time and center first. After that, it will take you to the payment gateway.
Once you have paid the required exam fees, you would get the soft copy of the workbook (study material) and the hall ticket in your account. Take a physical printout of your hall ticket and carry it with you to the exam center on the day of your exam.
The NISM provides the students with soft copies of the study materials in the ‘pdf’ format. The content covers both theoretical and practical aspects of the Financial Markets. These courses teach you various jargons which you need to know for pursuing a career in the Financial Markets.
Anyways, you can also enroll in these courses if you are simply interested in gaining knowledge. These programmes teach you the key theoretical concepts of the Stock Market, Mutual Fund, Financial Planning, and many others. The exams are based on MCQ (Multiple Choice Questions) and the students are tested on their conceptual understanding. Although you don’t get the opportunity to work on demo projects here, you certainly get the chance to solve case study questions in the exams. Further, you cannot carry a scientific calculator in the exam. But, you are definitely allowed to do rough works in MS Excel, OpenOffice or digital calc on the given desktop in the exam hall.
The NISM certification exams majorly focus on the practical understanding rather than emphasizing on mugging up theories. The best feature of these certifications is that the course modules are updated in every year.
How much time does it take for the completion of a NISM course?
In case of a NISM certification examination, you don’t need any significant amount of time to complete the same unlike CA, CFA, or MBA (Finance). Practically speaking, you can book your exam slot at any time. However, it is recommended that you should prepare for at least two weeks to a month before taking any module exam. This is because when you register for an exam, you get the study material covering a minimum of 100 pages which needs a decent time for complete reading.
If you are only looking to clear the exam, you can do the same by referring to the mock tests of private institutions. But, if you are looking to gain knowledge of the financial markets and clear the exams with distinction marks, you must study the workbooks given to you by NISM.
What is the registration fee to be paid to opt for a NISM certification exam?
The registration fee for any exam is pretty reasonable in nature. Here, you don’t need to pay over 30 or 40 thousand rupees to write a semester of MBA or a level exam in CFA.
Today, you can register in a NISM exam for as low as Rs 1200. The module exam with the highest registration fee is Rs 3000. Whenever you are enrolling for an exam of NISM, you have to pay the required fees. If you are unable to attempt that exam or fail in the same, you have to pay the same fee again for re-appearing in the exam.
How’s the difficulty level of a NISM exam?
The difficulty level of the NISM exams is between average to moderately high. For some exams, the contents and way of testing could be more difficult than the rests. The NISM Investment Advisor Exams (Level 1 and 2) contain relatively more practical contents as compared to the other courses. On the other hand, exams like the NISM (Series VI) Depository Operations Certification Examination contain a very high share of theory portion in their syllabus.
In order to pass a module, you need to secure a minimum of 60% score in most of the module exams. Besides, these exams come with negative marking of 25% per question. A very few exams like NISM (Series V A) Mutual Funds Distributors Certification Examination have a minimum passing marks criteria of 50% and also they don’t have any negative marking feature.
Conclusion
NISM exams are definitely one of the best in the industry if you are a fresher and willing to make a career in Finance. These certification exams are sufficient to give you an initial push in your career. They are strong enough to add a few keywords in your resume and make it look better than your peers. But, you must understand that clearing these exams are not going to make you stand at par with the jobseekers having CA, CFA, FRM or MBA (Finance) in their portfolio.
Nonetheless, in case you are looking for a job after graduation, these courses can help you in getting shortlisted on India’s top job websites. It is easy to start your career as a Mutual Fund Selling Agent or an Equity Dealer clearing the required NISM exams. But, if you are aiming for a career in Portfolio Management, Investment Banking or Fund Manager, you should look for the premier courses in Finance.
“Price is what you pay. Value is what you get.” -Warren Buffett
There are many successful strategies in the stock market. However, three of the most popular investing strategies are- Value investing, growth investing and dividend investing. It’s really difficult to say which one is better as it totally depends on the investor’s knowledge, style, and preference.
Nevertheless, value investing is one such proven strategy that has created huge wealth for many investors who have followed this strategy with discipline. In fact, one of the biggest followers of value investing is the legendary investor, Warren Buffett.
In this post, we are going to discuss the principles of value investing. It’s going to be a captivating post for the long-term investors who are trying to understand the concept of value investing in India. So, without wasting any further time- let’s get started. Here are the topics that we are going to cover today:
What is value investing?
The basic strategy of value investing in very simple.
You find an amazing company, calculate its true (intrinsic value) and pay a lot less to purchase the stock (when it is on sale in the market). As you have bought the stock at a discount, you can make a profit by selling the stock when the price reaches its true value.
Few common tools that value investors use in order to find undervalued stocks are- lower than average price to book value, a low PE ratio or higher dividend yields.
Quick Note: I’ve already covered important financial ratios and valuation methods like relative valuation, DDM etc in my earlier posts. Further, if you want to learn different valuation tools (in details), feel free to check out my online course: ‘HOW TO PICK WINNING STOCKS?’
A brief history of value investing:
“It is much better to buy a wonderful company at a fair price than a fair company at a wonderful price.” -Benjamin Graham
Although value investing is a very old strategy of investing in stocks, however more than anyone else, Benjamin Graham is credited for popularising this concept. Graham developed the value-investing philosophy after surviving the great depression of 1929-30s -when the Dow lost an unbelievable 89% over a three-year span.
Graham was the professor of finance at Columbia business school and authored the book ‘The Intelligent Investor’ in 1947. Coincidently, Benjamin Graham was also the mentor of the ace investor-Warren Buffett. After inheriting the concept of Value investing from Graham, Buffett further popularised it among the investing population.
Like Graham, Warren Buffett also looked for undervalued companies that have a steady cash flows driven by straightforward models. His company- Berkshire Hathaway has generated an average annual return of above 20% for more than 50 years, making Buffett one of the richest people in this world.
3 Fundamental philosophies of Value investing
Value investors believe that the market overreacts to good and bad news and hence they do not correspond with the company’s long-term fundamentals. Therefore, at a specific time in the market, stocks can be overvalued, undervalued or decently valued.
The strategy of value investing is to find the undervalued stocks -which are trading at a discount because of short-term reasons or market not yet realizing their true potential. Here are the three fundamental philosophies of value investing:
1. Look for the true/intrinsic value
What distingue value investing from other popular strategies is that value investors believe that stocks have an intrinsic or true value. They find this concrete number using different valuation methods like discounted cash flow analysis. When the market value of that stock is below the calculated value, the value investors purchase that stock. Further, as these investors have bought the stock at a discount, they sit back and relax until the stock reaches its true value.
The margin of safety is the guiding philosophy of value investing to reduce risk and avoid loss. Here, the value investor gives a benefit of doubt to themselves by purchasing a stock with a margin of safety.
For example, let’s assume that an investor calculated the true value of a company to be Rs 100. Here, buying the stock at any price below Rs 100 can be considered as an undervalued price. However, if the investor wants a margin of safety of 20%, then he/she will buy that stock at Rs 80 or less. Here, the value investor is safeguarding his investment by adding a significant margin of safety in his/her purchase price.
3. Avoid following the herd
“Be greedy when others are fearful and be fearful when the other’s are greedy.” -Warren Buffett
Interestingly, you can find a large population of investing community following herd mentality psychology in making various financial decisions like buying a new property or investing in the stock market. Seeing others getting profited with investment, our brain tells us to go for it without a second thought.
However, the value investors avoid herd mentality. They do not believe in group thinking or buying a stock just because everyone else is buying. That’s why, many a time- the value investing strategies looks similar to the contrarian investing.
Does value investing in India works?
Yes, Definitely!!
Tell me one thing- If I offer you to purchase a brand new iPhone X at a discount of 50%- Isn’t this deal profitable to you?
Yes!!!. Even if you don’t plan to keep the iPhone, still you can sell it for a price way higher than your original purchase price. There are a number of online websites like Olx or Quickr where you can easily find a buyer for this phone.
Value investing works on the same concept. Here, you buy terrific stocks at a price below their intrinsic value (i.e. discount price) and hold it till they reach their true value.
So, does value investing in India works?
Absolutely!! Value investing is a time-tested strategy. From Benjamin Graham to Warren Buffett to Joel Greenblatt to Raamdeo Agrawal -all have made a massive fortune by following the strategies of value investing.
Best books to learn value investing in India.
Although, I tried to cover most of the critical points related to value investing in India in this post. However, there are still many concepts yet to learn for beginners. Here are the best books to learn value investing in India. (Note that few of the books mentioned below are written by foreign authors, but the concepts are applicable everywhere)-
Value investing is a proven strategy to build wealth. And value investing in India definitely works for those who apply this strategy with discipline.
However, value investing is subjective and depends on the investor’s style of investing. While many value investors only look for undervalued stocks, few also consider the future earnings expectations and cash flows to determine the future value. For example, the star fund manager Peter Lynch (Author of One up on wall street) was more interested in undervalued stocks with good growth prospects. That’s why he preferred PEG ratio over PE ratio.
Whatever the approach- the underlying principle of value investing is the same– find an amazing company and pay less than what its true worth with a significant margin of safety.
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
Why did this happen? Why do shares fall on good news?
This is one of the most common questions asked by the stock market beginners.
In this post, we are going to discuss why do shares fall on good news? Why a good news may not always be a good news for the investors?
Let’s first understand the basics. Why stock price fluctuates?
We all know that stock market works on demand and supply. If the demand of a stock is greater than the supply, then its price will go up. On the other hand, if the supply is high and the demand is less then the share price will fall.
Further, the reason for increase/decrease in the demand or supply of a stock depends on a number of factors.
For example, negative news like bad earnings reports, failed products, resignation in top-level management, lawsuits etc can decrease the demand for the stock which will further lead to the decrease in its share price.
On contrary, positive news like increased earnings report, favorable government regulations, significant dividends, bonus etc can increase the demand for that stock and push the price high.
Besides, the reactions for some news might depend on the interpretation. For example, during mergers and acquisitions, the public need to figure out which company will get more benefits- Acquiring company or the target company. And the share price of that company will move accordingly.
Overall, the price movement seems simple, right?
However, the share price movement is not always that straightforward. There are many things happening underneath that you need to understand as they might the driving the prices.
Why do shares fall on good news?
Good news may not always be good for the shareholders. There can be a couple of situations when good news can be a bad news for the investors.
So, why do shares fall on good news? One of the simplest factors can be the phase of the economy. Whether the economy is in expansion phase or contraction phase right now?
For example, if the whole economy is going down- globally or locally, then it might be dragging the stock down in spite of the good news.
This can be easily understood, right?
Nevertheless, many a time market is good and the economy is doing perfectly. Still, the stock goes down after a good news. How to explain such scenarios?
Here, the reason for that stock to go down maybe stock specific (and might doesn’t have to do much with the economy).
Here you can read the quarterly and yearly estimates by the analysts regarding the company’s earnings, revenue, growth etc.
There are a couple of more similar websites where you can find the estimates by the analysts.
Anyways, coming back to the original question- Why do shares fall on good news?
The stock price may fall if the company is not able to meet these expectations.
For example, if a company/management forecasted its next quarterly EPS to be Rs 40.
However, the analysts are expecting the EPS to be Rs 45.
Now, in next quarter, the actual earnings turn out to be Rs 42.5. Then it’s good, right? Better than what forecasted by the company.
However, here the price may fall as it doesn’t meet the public expectations.
Conversely, if a company posts loss in a quarter, but the loss is less than what expected by the public, then the share price may go up.
Here, whether the price will move up or down depends a lot on the actual report vs the estimates.
— Future expectations
The stock market is all about the future expectations. Current or past ‘good’ news is good for the investors but the comments about the future can easily scare them (no matter how good was the past).
For example, suppose you got your electricity bill today where the total bill turns out to be Rs 1400 (which is way less than the last month). Good, right?
However, you also received a notice that the ‘price per unit’ is going to significantly increase from next month.
Here the current news is good but the future is scary and hence instead of celebrating, you might be worried about the next month electricity bill.
In the same way, if a company announced a good result for the last quarter. However, in the same quarterly report/announcement, they also highlighted some issues which might affect the profitability of the company in upcoming months/years.
In such scenarios, instead of enjoying a good result for last quarter, the shareholders might take the news adversely and it may lead to a fall in the share price.
Sometimes the stock price of a company may even fell after a good news because of something announced/reported in the annual/quarterly report by the management/board of the directors of the company that you ‘missed’.
For example, the board of directors saying something negative/fearful regarding the future or some setbacks in the quarterly/annual report which you missed to read/notice.
Here, something is hidden underneath the big positive news that scares the people.
For example, if we go back to the original discussion that we started at the beginning of this article-
“HDFC bank announced its Q4 results for the year 2017-18 where the net profit in the March quarter stood at Rs4,799 crore, up 20% on a y-o-y basis. And the share price the share price fell -1.03%.”
If you read the report, you will find that although Q4 result was good, however, HDFC Bank’s unsecured loans have grown at a rapid pace, and the home loan segment hasn’t grown much. And these trends may cause some concern for the investor. That’s why HDFC Bank’s share price fell a little next day.
In short, if the stock falls down on good news, there can be some part that you missed which might be scaring the people.
— Noise Traders:
With the boom in online trading, the noise trader has increased a lot over the last decade. They are those traders who sell on technicals i.e price trend and momentum.
Here, they simply copy what the others are doing. They do not analyze the fundamentals of the company but make their trades based on news/technicals.
For example- in scenarios of sell-offs in a stock due to whatever reason, these noise traders will sell their shares too and leave their position.
Many a time, noise traders drag the share price further down.
Few addition reasons why shares fall on good news –
The market anticipates the results and prices already starts adjusting before the actual announcement. This simply means that before even the company announces its result, the market might be anticipating the outcome and hence, the prices might already by rising high before the announcement. As the prices keep rising since past few days/weeks, it might take a little rest/correction on the day on the result and the share price may fall a little.
Profit booking by the early investors: Many investors who might be holding the stock for a long time, may opt to book profit on the good news. This may further push the stock price down.
How should you react in such scenarios?
Fairly simple!!
If the stock is fundamentally strong, hold the stock despite the stock price going down. It won’t matter much in the long term if the company. Most of the great companies focus on their long-term goals. This means that few times, they might miss the short-term expectations.
Although, short-term concerns shouldn’t be ignored completely by the company or investors. However, if the company is overall performing good in the long run, then there’s no point of worry. In any business, there will be few setbacks in the short run.
Besides, do not get attached to the short-term expectations. Analysts will keep on making expectation every quarter. It’s their job and this is what they are paid for. If a company keeps on working for the short-term goals, it might never be able to focus on the long-term growth.
Overall, if the temporary setbacks are not going to affect the long-term profitability of the company, then ignore the short-term fluctuations and hold your stock ‘tightly’.
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.
TAGS: Why Do Shares Fall on Good News, how earnings affect stock price, Why Do Shares Fall on Good News on earnings
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
Learning how to invest your first Rs 1,000 in the stock market is a significant step towards starting your financial journey and future investments. You might be surprised to know that even less than 2.5% population of India participates in the Indian stock market (although Indian economy is one of the fastest growing economies in the world).
Nevertheless, investing your first Rs 1,000 will help you to get prepared for your journey ahead.
In this post, I’m going to tell you the simplest answer of how to invest your first Rs 1,000 in the stock market. It’s a no-brainer way. Further, for the method described here, you don’t need to be an expert or any help from the financial advisors to invest your first Rs 1,000 in the stock market.
Quick Note: Here, I’m not going to discuss how to open brokerage accounts. I’m assuming that you have already had set up your demat and trading accounts. If you haven’t, then read this post to learn how to choose the best stock broker.
A little advice:
While interacting with my blog readers and subscribers who are new to the stock market, I learned that most of the first-time investors like to wait until they have amassed thousands of rupees to invest. However, that’s a mistake. You can start investing with an as little amount as Rs 1,000. Further, you can increase the investment amount in future when you have increased your savings. By following this strategy, you can utilize the time efficiently to learn the stock market so that you will be prepared when you invest a big amount in future.
Second, you do not need to be an expert to invest your first Rs 1,000 in the market. You can invest this money while you are learning or even if you just started a few weeks ago.
Third, the point here is to learn- not to earn. Rs 1,000 is not a very large money that will get you bankrupt if you lose this amount. However, Rs 1,000 is more than enough to make you enter the exciting world of stock market and enhance your financial knowledge.
In addition, do not worry about the technicalities like how to buy/sell using your trading account initially. Once you are ready to invest, you can learn all these within 20 minutes using different sources on the internet. (I have also written a couple of articles on how to invest using ICICI direct, SBI smart etc). These days, purchasing stock is even a lot easier compared to booking an online train ticket on IRCTC. All you need is a phone/laptop, internet connection, brokerage accounts and some cash in your saving account.
Now that I’ve cleared the basics, let’s learn how to invest your first Rs 1,000 in the stock market. Further, please read this post till the end as there is a bonus in the last section of this article.
How to invest your first Rs 1,000 in the stock market?
1. Invest in Just One Stock:
Rs 1,000 is not a big amount. If you are buying a stock worth Rs 300, then you will be able to buy just three units of that stock. Moreover, those stocks which are trading at a market price above Rs 1,000 are already ruled out here. Therefore, if you are planning to invest your first Rs 1000 in the stock market, then you need to widen your selection criteria to the stocks pricing between Rs 1 to Rs 1,000. Otherwise, you might have to reject many good stocks whose market price is high (Say 800-900), if you are planning to purchase multiple stocks.
Further, for such an investment amount, you do not need to waste time diversifying your portfolio. Selecting multiple stocks takes time and it’s not worth the value.
The easiest approach of stock selection for the beginners is to invest in what you know. There are a number of companies that you might have heard from childhood and might already know a lot about it. For example- Maruti Suzuki, HDFC Bank, ITC, Yes Bank, HPCL, Bata, Coal India, Colgate India, Hindustan Unilever, etc.
There are tons of companies whose products/services you already have been using and might be more than happy with them. Find out those companies and investigate them. Visit the company website, check its portfolio (product/services), know who is the boss of the company, its future products/plans etc.
You’ll be surprised to know that how many common companies has given uncommon profits.
For example Eicher Motors- Royal Enfield bikes parent company (over 80 times returns in last 10 years), MRF Tyres (over 17 times return in last 10 years), Symphony- coolers (over 12 times return in last 5 Years) etc.
The bottom line is to look around yourself and find some popular companies worth investing.
Search for the companies that you already know that they are doing great (like expanding at a fast rate) for the last couple of years or provide excellent product/services or has an amazing business model (easy to scale).
If you are a working guy/girl, it will be quite easy for you to find such companies. Just look in your industry and find which one is leading. For example, if you are in the banking sector, you might already know which bank is expanding fast in urban and rural areas, opening new branches every week and has low non-performing assets (NPA) etc.
If you are a doctor, you might already know a few good pharmaceutical companies which are producing the best medicines at a cheap price or are working on the medicines for a rare disease.
Even if you are a housewife, you can find a number of good companies that manufacture day-to-day life products like soap, shampoo, towels, edible oils etc.
In short, the idea here is to invest in what you already know rather than wasting too much time reading financial magazines to search for hidden companies.
3. Don’t spend weeks researching your first stock:
Although I’m confident that you find a good company using step 2, however, if you are unable to find any company that you have good knowledge, then invest in blue-chipstocks.
Blue chips are the stocks of those reputed companies who are in the market for a very long time, financially strong and have a good track record of consistent growth and returns in the past many years.
For example- HDFC bank (leader in the banking sector), Larsen and turbo (leader in the construction sector), TCS (leader in the software company) etc. Few other examples of blue-chip stocks are Reliance Industries, Sun Pharma, State bank of India etc. Here is the list of few top blue chips stocks in the Indian stock market:
The idea here is to ‘not’ waste too much time researching for stocks. This is your first investment and the investment amount is also small. It’s not worth your time spending weeks to research a stock just to invest Rs 1,000.
4. Don’t make it a very big deal.
To be frank, do not make this investment a very big deal of your life. The investment amount is too small to hurt you financially. Even if you lose 50% of your investment amount, you won’t go broke.
Don’t worry too much thinking about what if the stock price goes down. IT’S NOT A BIG DEAL!
Here your motive should be to learn, not to earn. If you are able to learn today, you can make tons of money in future. However, if you want to ‘save’ Rs 1,000 today and are not willing to take any risk, you might save this 1,000 rupee, but miss opportunities to earn lakhs in the future.
Penny stocks are those stocks which trade at a very low market price (less than Rs 10) and have a very low market capitalization (typically under 100 crores) are called penny stocks in Indian stock market.
These are the darlings of the new investors. The low market price of these stocks makes them quite attractive to the beginners.
However, these stocks are very risky. You might have never heard the names of most of these companies and very limited information about the company is available to the public. The stock prices of these companies are easy to manipulate. Overall, penny stocks are difficult to investigate for a newbie investor.
My advice, stay away from penny stocks until you have got good knowledge and experience in the stock market.
This is my final advice. Do not expect high returns while investing your first Rs 1,000 in stocks. Stocks are not ‘lottery’ tickets.
Even if you get a return of 100% in 6 months, still you will make a profit of only Rs 1000 (Rs 166 per month on an average).
This isn’t going to affect your life financially. Until the investment amount is large or the principal is invested for a long duration (power of compounding), the returns won’t be too big to affect you financially.
That’s why mark my words and set a realistic expectation for your first Rs 1,000 investment.
New to stocks? Confused where to start? Check out my amazing online course: HOW TO PICK WINNING PICKS? The course is currently available at a discount. #HappyInvesting
Bonus Quiz:
Before you invest your first Rs 1,000 in the stock market, why not to find out how good is your investing instincts? Try it out with this FREE Quiz NOW…!!
Do you consider yourself a ‘Smart Investor’?
Well, your success in the stock market depends on how you invest and react to different market situations.
Here are 10 questions to put your 'Investing Instincts' to test.
One thing I can take guarantee is that your experience after buying your first stock will be amazing!
Trust me, you’ll get more involved in the market if you have some money is invested in it, no matter how small it is. By investing your first Rs 1,000 in the market, you will learn ‘fast’ and learn ‘efficiently’.
Moreover, as discussed in the post, investing is not a rocket-science, rather it’s quite simple to invest your first Rs 1,000 in the stock market if you follow the steps described above.
I hope this post on- “How to invest your first Rs 1,000 in the stock market?” is useful to you. If you have any questions or doubts, feel free to comment below. I’ll be happy to help you out.
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
What are Multi-Bagger Stocks? And How to Find Them?
This may be one of the most awaited posts that I’ve ever written. Since I started writing about stock market investing, I have received at least a million emails asking recommendations/ suggestions regarding multi-bagger stocks.
Most of the emails covered a content similar to this- “Tell me the name of a stock which can give 10 times returns in next few years” Or “Which stocks can give multiple time returns like that of Eicher Motors in Future”.
Instead of recommending stocks, I decided to cover an entire post of multi-bagger stocks and how to find them.
“Give a Man a Fish, and You Feed Him for a Day. Teach a Man To Fish, and You Feed Him for a Lifetime.”
Here are the topics that we are going to cover in this post:
What are Multi-bagger stocks?
Recent Examples of Multi-bagger stocks.
Things to know about multi-bagger stocks.
Known traits to find Multi-bagger stocks.
How to find multi-bagger stocks?
Summary.
Further, please read this article completely as you may find a number of valuable contents in between. Now, without wasting any more time, let’s understand what are multi-baggers stocks and how to find them.
1. What are Multi-bagger stocks?
The Multi-bagger stocks are those stocks who give several times return compared to their original purchase price.
For example, if you bought a stock at Rs 100 and after a few years, you sold it for Rs 600, then this is a multi-bagger stock. In fact, this is a 6-bagger as you earned 6 times return.
Similarly, if you get 2 times return compared to your original investment amount, then it is a 2-bagger stock. if you get 10 times return compared to your original investment, then it is a 10-bagger stock. And obviously, the higher the bagger, the better it is.
2. Recent Examples of Multi-bagger stocks.
Few of the recent examples (*June’18) of multi-bagger stocks are given below:
HEG Limited (+2,138.98% returns in the last 5 Years)
Swaraj Auto (+3,865.42% returns in the last 5 Years)
Dolat Investments (+1,492.72% returns in the last 5 years)
Balaji Amines (+1528.5% returns in the last 5 years)
Graphite India (+1,172.86% returns in the last 5 years)
Before you start researching multi-bagger stocks, here are few things that you should know about them:
Multi-baggers are those companies who are financially strong and has a good business model that can be scaled within a short period of time.
What really makes a stock multi-bagger is “Time + Continuous growth”. If a company is delivering continuous growth for a longer sustainable period of time, then it would turn out to be a multi-bagger in the future.
These stocks take a long interval of time (5-15 years) to become a multi-bagger. That’s why you need to have a high degree of patience while investing in these stocks. If you are gonna book a profit of 60-70% after 10-12 months, then you might never be able to get a multi-bagger stock. Maybe, you’ll find it but you’ll not be able to get maximum profit out of it.
In order to hold multi-bagger stocks, you need to understand the business. Only after doing so, you can be confident and patient enough to hold the stock for several years.
Historically speaking, small and mid-cap companies have given the most number of multi-bagger stocks. However, this doesn’t mean that large-cap companies cannot become multi-bagger stocks.
Don’t feel bad if you missed a few multi-baggers in the past. Even if you are able to find and hold one multi-bagger stock in your portfolio, your overall returns will be amazing.
4. Known traits to find Multi-bagger stocks.
Here are few known traits that can help you find multi-bagger stocks:
Growth at a reasonable price (GARP) stocks: Instead of investing in entirely ‘growth’ or entirely ‘value’ stock, select growth at a reasonable price (GARP) stocks, which has the mixed characteristics of both growth and value stocks. This can help you find a growing company without overpaying for it.
Turn-around stocks: These are those companies who once got beaten badly by the market, however, now are getting back on the track.
Mis-priced opportunities – You can find multi-baggers returns by investing in those companies who have a good potential, however, either ignored by the market or is out of flavor for the investors.
Structural or management change in the organization: If there’s a major structural or management change in the organization that can drive the growth of the company, then it may be a potential multi-bagger.
High Return on Equity: ROE shows how good is the company in rewarding its shareholders. A higher ROE means that the company generates a higher profit from the money that the shareholders have invested.
Sustainable competitive advantage: If the company is one of the kind or have created an entry barrier for the competitors, then definitely it can give multiple times return in the future.
5. How to find multi-bagger stocks?
First of all, you need to understand that it’s not easy to find and hold multi-bagger stocks. Else, most of the stock market investors would have been a millionaire by now.
However, finding multi-bagger isn’t even ‘rare’. Ask any investor who has been investing in the stock market for few years, and he will easily name at least 5 stocks that he has come across during his investing career.
In short, it’s ‘difficult’ but ‘do-able’. You too can find multi-bagger stocks if you are willing to spend your time and energy in an ‘intelligent’ approach.
Here are the smart steps to find multi-bagger stocks:
For the initial screening, you can use a few simple financial ratios to shortlist stocks on the basis of high performance, low debt, price to earnings multiples and liquidity.
ROE > 20%,
Debt/Equity < 1,
PE Ratio (less than industry avg),
Current Ratio>1.5.
Note: You can find the list of few other significant financial ratios to check here. This can help you to reduce the number of shortlisted companies (in case the list is too big).
2. Fundamental Analysis:
After initial screening, read the financials of the company find out the revenue, sales, profit, book value, cash flows etc. Few crucial points that you should check to find potential multi-bagger stocks are:
Is the company’s sales, revenue, and profit stable or growing over time?
Are earnings per share stable or growing over time?
Are free cash flows stable or increasing over time?
Is book value per share steadily growing or not?
Has the ROE been consistently high?
If you want to read more, I have written a detailed blog post on how to do the fundamental analysis of a stock which you can read here.
3. Qualitative analysis:
Apart from the fundamentals, it’s important to check the quality of the company which includes finding out your circle of competence, moat, management etc.
This is the most important aspect to check in order to find a multi-bagger stock. Here are a few questions that you should ask during the qualitative analysis:
What is the business model of the company? Is it scalable?
Does the company has a ‘Moat’ (sustainable competitive advantage)?
Is management capable to drive the growth and allocate the capital wisely?
A significant point that you shouldn’t ignore here is that the competitive advantage should be ‘sustainable’. If it can be copied or the company has a short-term advantage, then it won’t get benefits for the long-run.
4. Valuation:
While evaluating the stock, you’ll need to find a reasonable estimate of the intrinsic value of the company. You can use relative valuation or absolute valuation approach (dividend discount model, discounted cash flow (DCF) model etc).
After a conservative estimate, check whether the stock is trading at a decent margin of safety (discount to the intrinsic value). If the company is trading at a discount, choose that stock to invest.
Further, please note that most of the growth companies generally trade at a high PE. This is because their growth is consistently higher compared to the industry average and competitors. Therefore, if you are able to find a few good stocks, do not ignore the company just because they are trading at a high PE ratio. If this ratio is decent enough and the other factors are extremely favorable, then you can select that company to invest.
The most important ingredient of a multi-bagger stock is “Time + Continuous growth of the company”. You need to remain invested for the long-term and the company should consistently grow its earnings.
Further, finding a multi-bagger stock might seem too much work, however, it’s definitely worth doing. In addition, if you’re able to find good stocks to invest, then later you can easily sit back and relax in future with just a few minor monitoring.
That’s all. I hope this post is useful to the readers.
If you have a doubt or need any help, then feel free to comment below. I will be glad to help you out. Happy Investing.
New to stocks? Want to learn how to invest in Indian stock market from scratch? Here is an amazing online course: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your share market journey today.
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
If you want to invest successfully in the stock market, you need to learn how to read and understand the financial reports of a company. Financial statements are tools to evaluate the financial health of the company.
In this post, I am going to teach you the basics of how to read financial statements of a company.
To be honest, you won’t find this post very interesting. Many of the points might sound complex.
However, it’s really important that you learn how to read financial statements of a company. Reading and understanding the financials of a company differentiates an investor from a speculator.
So, let’s get started.
First of all, a few things that you need to know.
Where can you get the financial statements of a company?
You can find the financial statements of a company in any of the following sites:
Further, if you are using any other source, make sure that the reports are correct and not tempered.
In India, Securities exchange board of India (SEBI) regulates the financials announced by the company and try to keep it as fair as possible.
Now, let us understand the different financial statements of a company.
The financials of a company are split into three key sections. They are:
Balance sheet
Income statement (Also called profit & loss statement)
Cash flow statement.
Let’s understand each statement one-by-one.
How to read financial statements of a company?
1. Balance Sheet
A balance sheet is a financial statement that compares the assets and liabilities of a company to find the shareholder’s equity at a specific time.
The balance sheet adheres to the following formula:
Assets = Liabilities + Shareholders’ Equity
Here, do not get confused by the term ‘shareholder’s equity’. It is just another name for ‘net worth’. The above formula can be also written as:
Assets – Liabilities = Shareholder’s Equity
You can easily understand this with an example from day to day life. If you own a computer, car, house etc then it can be considered as your asset. Now your personal loans, credit card dues etc are your liabilities. When you subtract your liabilities from your assets, you will get your net worth.
The same is applicable to companies. However, here we define net worth as the shareholder’s equity.
Now, why are balance sheets important?
The balance sheet helps an investor to judge how a company is managing its financials. The three balance sheet segments- Assets, liabilities, and equity, give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.
Key elements of a balance sheet:
Assets and liabilities are the key elements of a balance sheet. Let’s define both of these to understand them in details:
Assets:
It is an economic value that a company controls with an expectation that it will provide future benefit. Assets can be cash, land, property, inventories etc
Assets can be broadly categorized into:
Current (short-term) assets: These are those assets that can be quickly liquidated into cash (within 12 months). For example cash and cash equivalents, inventories, account receivables etc.
Non-Current (Fixed) assets: Those assets which take more than 12 months to converted into cash. For example- Land, property, equipment, long-term investments, Intangible assets (like patents, copyrights, trademarks) etc.
The sum of these assets is called the total assets of a company.
Liabilities:
It is an obligation that a company has to pay in future due to its past actions like borrowing money in terms of loans for business expansion purpose etc
Like assets, it can also be broadly divided into two segments:
Current liabilities: These are the obligations that need to be paid within 12 months. For example payroll, account payable, taxes, short-term debts etc.
Non-current (Long-term) liabilities- There are those liabilities that need to be paid after 12 months. For example long-term borrowings like term loans, debentures, deferred tax liabilities, mortgage liabilities (payable after 1 year), lease payments, trade payable etc.
Now, let us understand these segments with the help of the balance sheet of a company from the Indian stock market.
Here is the balance sheet of ASIAN PAINTS for the fiscal year 2016-17. I have downloaded this report from the company’s website here.
Please note that there are always at least 2 columns on the balance sheet for consecutive fiscal years. It helps the readers to monitor the year-on-year progress.
Although the balance sheet looks complicated, however, once you learn the basic structure, it’s easy to understand how to read financial statements of a company.
Few points to note from the balance sheet of Asian Paints:
There are three segments in the balance sheet of Asian paints: Assets, equity, and liability.
It adheres the basic formula of the balance sheet: Assets = Liabilities + Shareholder’s equity. Please note that the first column of asset (TOTAL ASSETS = 9335.60) is equal to the second & third column of equity and liabilities (TOTAL EQUITY & LIABILITY = 9335.60).
There are much more points to cover in balance sheet topic, however, it’s not possible to explain everything in a single blog post. You can learn in great depth about balance sheet in my online course- HOW TO PICK WINNING STOCKS? Check it out now.
Now, let us move to the second important financial statement of a company.
2. Income Statement:
This is also called profit and loss statement.
An income statement summarizes the revenues, costs, and expenses incurred during a specific period of time (usually a fiscal quarter or year).
The basic equation on which a profit & loss statement is based is:
Revenues – Expenses = Profit
In simple words, what a company ‘takes in’ is called revenue and what a company ‘takes out’ is called expenses. The difference in the revenues and expenses is net profit or loss.
The fundamental structure of an income statement:
Revenue
– Cost of goods sold (COGS)
——————————————- = Gross Profit – Operating expenses
——————————————- = Operating Income – Interest expense
– Income taxes
——————————————– = Net Income
Note: The revenue is called TOP LINE and net income is called the bottom line in the income statement.
Most of the investors check the income statement of a company to find its earning. Moreover, they look for the growth in the earnings. It’s preferable to invest in a profit-making company. A company cannot grow if the underlying business is not making money.
Here is the Income statement of Asian paints for the Year 2016-17:
Here are a few points that you should note form the income statement of Asian Paints:
The top line (revenue) increased by 8.04% in the fiscal year 2016-17.
On the other hand, the bottom line (net profit) increased by 11.84% (Rs 1802.76 Cr –> Rs 2016.24 Cr) in the from the fiscal year 2015-16 to the fiscal year 2016-17.
This shows that the management has been able to increase the profits are a better pace compared to the sales. This is a healthy sign for the company.
For Asian paints, the diluted EPS also increased from Rs 18.19 in the year 2015-16 to Rs 20.22 in year 2016.17. This is again a positive sign for the company.
Last part of a company’s finances is its cash flow statement.
Cash flow statement (also known as statements of cash flow) shows the flow of cash and cash equivalents during the period under report and breaks the analysis down to operating, investing and financing activities. . It helps in assessing liquidity and solvency of a company and to check efficient cash management.
Three key components of Cash flow statements:
Cash from operating activities: This includes all the cash inflows and outflows generated by the revenue-generating activities of an enterprise like sale & purchase of raw materials, goods, labor cost, building inventory, advertising, and shipping the product etc.
Cash from investing activities: These activities include all cash inflows and outflows involving the investments that the company made in a specific time period such as the purchase of new plant, property, equipment, improvements capital expenditures, cash involved in purchasing other businesses or investments.
Cash from financial activities: This activity includes inflow of cash from investors such as banks and shareholders by getting loans, offering new shares etc, as well as the outflow of cash to shareholders as dividends as the company generates income. They reflect the change in capital & borrowings of the business.
In simple words, there can be cash inflow or the cash outflow from all three activities i.e. operation, investing and finance of a company. The sum of the total cash flows from all these activities can tell you how much is the company’s total cash inflow/outflow in a specific period of time.
Here is the Cash flow statement of Asian paints for the fiscal year 2016-17.
From the Asian paints cashflow statement, we can notice that the net cash from operating activities has declined from Rs 2,242.95 Crores to Rs 1,527.33. This may be little troublesome for the company as the net cash from operating activities shows how much profit the company is generating from its basic operations.
As a thumb rule, an increase in the net cash from operating activities year over year is considered a healthy sign for the company. However, while comparing also look at the data for multiple years.
Quick note: In financial statements, generally accountants do not use the negative sign. For example, if the expense is to be deducted, it is not written as -40. When writing minus sign, accountants use parentheses (—). For the same example, it will be written as (40), not -40.
Summary:
It’s important to read and understand all the three financial statements of a company as they show the health of a company from different aspects.
The balance sheet shows the assets and liabilities of a company.
The income statement shows how much profit/loss the company has generated from its revenues and expenses.
Cash flow statement shows the inflows and outflows of cash from the company.
While investing in a company, you should pay special attention to all these financial aspects of a company. As a thumb rule, invest in a company with high-income growth, large assets compared to its liabilities and a high cash flow.
That’s all! This is how to read financial statements of a company.
Although it’s not enough, however, this post aims to give a basic idea to the beginners about the financial statements of a company.
If you want to learn (in details) about where to find the financial statements of an Indian company and how to effectively study the reports, feel free to check out my online course on HOW TO PICK WINNING STOCKS here. I have explained everything about financial statements in this course.
Further please comment if you have any questions. I’ll be happy to help you out.
Happy Investing!
Tags: How to read financial statements of a company, how to read financial statements, which financial statement is most important to investors, how to read financial statements India, company financial statements examples, How to read financial statements of a company
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
Everyone gets excited about new things. The new clothes, new bike, new car, new job etc. always attract the public.
Investors are also like ordinary people and hence they are also tempted by the word ‘NEW’. Be it a new technology, a new industry or a new company.
In this post, we are going to discuss whether it’s worth investing in these new companies which enter the market for the first time.
Here are the contents that we are going to discuss in this post:
What is an Initial Public Offering (IPO)?
What does ‘Going public’ mean?
Why do companies conduct IPOs?
What are the disadvantages of conducting IPOs?
Why do many IPOs come in the bull market?
Who gets benefits of IPOs?
Why are people excited about IPOs?
Is it worth investing in IPOs?
What is an Initial Public Offering (IPO)?
When a privately held company offers its shares for the first time to the public, then it is called Initial public offering (IPO). It is a way for companies to enter the stock market.
Until a company offers IPO, the public is not able to buy the company’s share.
Before IPO of a company, its shareholders include limited people like founders, co-founders, relatives, friends and initial investors (like an angel investor, venture capitalist etc). However, after the company offers its IPO, anyone (public, institutional investors, mutual funds etc) can buy the shares of the company.
Few of the famous IPOs of 2017 are BSE, CDSL, Avenue supermarket (Dmart), SBI Life insurance etc.
What does ‘Going public’ mean?
Going public means that a ‘privately owned company’ is conducting an initial public offer (IPO) to the public in order to enter the stock market as a ‘public company’.
In short, when a company is offering an IPO, it is said that the company is going public.
There can be a number of reasons why any company offer an IPO. Here are few of the top ones:
For a new project or expansion plan of the company
To raise capital (financial benefit)
For carrying out new research and development works
To fund capital expenditures
To pay off the existing debts or reduce the debt burden
For a new acquisition
To create public awareness of the company
For the group of initial investors desiring to exit the company by selling their stakes to the public.
In addition, IPOs generate lots of publicity for the company and hence helps in creating market exposure, indirect exposure and brand equity.
Why are the disadvantages of conducting IPOs?
Here are the few disadvantages for the companies who offer their IPOs:
Public disclosure: When a privately held company offers its IPO, it has to disclose a number of documents to the public like its financials, promoters list, debts etc.
Entering a regulated market: Indian stock market is highly regulated by Securities and exchange board of India (SEBI) and hence the newly public company has to play by the rules of SEBI. There has been a number of cases of companies getting delisted by SEBI as they do not follow the norms of the market.
Market pressure: The companies performance are closely scrutinized by the public and investors. Hence, the company’s management is consistently is pressure. Sometimes the companies focus more on short-term performance over long-term due to market pressure.
Loss of control: As the shares are distributed among the investors, the decision making power is now in the hands of the shareholders.
Failing of IPO: Many companies fail to attract investors during its IPO and the offered shares might remain under-subscribed. In such a scenario, the company is not able to raise enough capital that is expected to achieve the goal of IPO.
Why do many IPOs come in the bull market?
The promoters of the company sell their stakes only when they are confident of getting a good price. This generally happens only in a bull market.
During a bull market, the owners of the company can raise enough fund for their cause as the public is optimistic. People are willing to pay good prices to buy the shares of the company.
Why do not many IPOs come in bear market? During bear market, people are pessimistic and are not willing to pay a good price for the shares of a newly public company. The owners feel that they won’t be getting the right price for their shares and hence most owners do not introduce their IPO during a bear market
There is a common myth that the company’s shares are undervalued during its IPO and hence the early subscribers of the IPO feel that they have made a very good deal.
However, IPOs are the by-products of a bull market and they are generally over-priced.
The owner and the initial investors of the company (like angel investors, venture capitalist etc) are the ones who get maximum profits during an IPO as they are able to sell the shares at a good price.
Why are people excited about IPOs?
There are a few common reasons why people are excited about IPOs. They are:
Under-pricing myth: When a company announces its IPO, it’s presumed that the offered price is less than its true value. People are excited about the fact that they are the first one to buy the stock and will be rewarded handsomely when the company’s true price will be realized by the market. However, it’s very rare that the owners will be willingly underpricing the shares.
Herd-mentality: As everyone they know will be applying for the IPO, people do not want to be missed out.
Overhype by media/ underwriters: Media gets a high advertisement fee for the promotion of the IPO. Moreover, IPOs are intentionally overhyped by the investment banker and the underwriters. They make sure that these IPO’s get enough attention as this is their job to promote and sell the shares.
‘The Next …’ strategy: People compare the upcoming IPO with the Winners in the same industry and conclude that it will perform the same. ‘The next Eicher motors’, ‘The next symphony’, ‘The next Infosys’ etc. This ‘Next’ philosophy makes a lot of people excited about the upcoming IPO.
Is it worth investing in IPOs?
A lot of investors has made huge wealth be investing in IPOs. Had you invested in ‘INFOSYS’ when it got listed, you might have been sitting at a huge pile of wealth today.
However, the performance of the majority of the IPOs in the Indian stock market is under-satisfactory. The number of IPOs underperforming in long-term are comparatively quite larger than the number of IPOs that performs well in the market.
Further, IPOs are never priced in the benefits of the public.
In the case where few IPOs are fairly priced, it gets a lot of demand from the public during its offerings and gets over-subscribed. Moreover, it soon becomes over-priced once it starts trading in the market.
Few IPOs might give you a good return in the 1-2 months of its listing as they are introduced in the bull market, however, for the long run, their performance is quite poor.
If you are willing to invest for long-term, then be cautionary about investing in IPOs. Focus on the quality of the company, not the hype generated by media or underwriters.
Nevertheless, you can always pick these companies from the secondary market once the hype is over and the price is attractive.
There are over 5,500 companies listed in Indian stock market. It’s better if you pick a good one among them than picking the upcoming hyped (5,500+1)th company.
New to the stock market? Confused where to begin? Here is an online video crash-course for beginners: How to pick winning stocks?
Tags: Is it worth investing in IPOs, IPO good or bad, Is it worth investing in IPOs in India, should I invest in IPO, Is it worth investing in IPOs for long, IPO pros and cons
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.
