Understanding the Roles of Depositors – CDSL and NSDL in the equity market: As investors and traders, we are well versed with the term Demat (Dematerialization) account. This is because a Demat account is one of the most basic requirements in order to trade or invest in the stock market. Today, we take a look at the organization behind these accounts in the Indian markets i.e. Indian depositories, the NSDL, and the CDSL.
Through this article, we’ll discuss the various roles of depositors in the equity market and the services provided by CDSL and NSDL to Indian investors. Let’s get started.
What are CDSL and the NSDL? And why are they Important?
The Central Depositories Services India Ltd. (CDSL) and National Securities Depository Ltd.(NSDL) are depositories for the Indian markets.
In order to understand what a depository does let us compare securities to cash. The depositories are to securities what banks are to cash. Just like a bank holds your cash and allows you to access it through an electronic form, the depository holds our shares, bonds, mutual funds, etc. for all shareholders in electronic form. These entities have played a pivotal role in the digitalization of the Indian Stock Markets.
Let us go back in time to the early ’90s a period when the stock markets still were heavily dependant on the physical transfer of shares. This was done through share certificates. Thanks to the move initiated by Stock Holding Corporation of India Limited(SHCIL) in 1992 when it paid the groundwork for the NSDL through a concept paper “National clearance and Depository System”. The Government of India promulgated the Depositories Ordinance in September 1995, followed by the passing of The Depositories Act by the Parliament in August 1996.
The NSDL was soon established in 1996 followed by the CDSL in 1999. These two act as depositories to the two exchanges in the country; the NSDL to the NSE and the CDSL to the BSE. The Demat accounts mentioned earlier are actually just a front for the CDSL and NSDL holding your shares.
The transfer from a physical to digital format saw numerous benefits like:
Faster settlement cycles
Elimination of all risks associated with physical certificates
Elimination of bad deliveries
No more stamp duty
Immediate transfer and registration of securities
Faster distribution of non-cash corporate benefits like rights and bonus
Elimination of problems related to the transmission of Demat shares
Reduction in the handling of huge volumes of paper
Periodic status reports
Reduction in brokerage for trading in dematerialized securities.
Elimination of problems related to change of address of the investor
Elimination of problems related to selling securities on behalf of a minor
Ease in portfolio monitoring
The depository system effectively ensured a smooth transition to an electronic one.
Can you Choose your Depository?
An investor does not have the option to select a depository. The depository is selected by the depository participant. A Depository Participant is a financial institution, broker, bank, etc that the shareholder may be in touch with, and respectively can create a Demat account through them. The CDSL has 599 depository participants registered with itself whereas the NSDL has 278 depository participants registered with it.
For an investor or trader to choose a depository of his liking there has to be some difference between the two depositories. Apart from the exchanges, the number of depository participants and years formed there are no striking differences between the two. The services provided, their functioning, and strategy remain the same.
We, however, can find outwith which depositories we have our Demat account with using the account number. A Demat account with NSDL will begin with ‘IN’ followed by 14 numerals. A Demat account with CDSL will have 16 numerals.
What are the Roles of Depositors? Services by CDSL and NSDL!
Here are a few of the top roles and the services provided by NSDL and CDSL for Indian equity investors:
Maintenance of Demat accounts
Rematerialisation and dematerialization
Trade settlement
Share transfers
Market and off-market transfers
Distribution of non-cash corporate actions
Nomination/transmission
Account opening
Account statement
Changing account details
The Depositories also provide shareholder details to companies at the time of dividend payouts. The companies use this information to pay dividends to shareholder accounts.
The efficient functioning of an economy is highly dependant on its financial system. In this article, we discussed the key roles of depositors i.e. CDSL and NSDL in the equity market.
The CDSL and NSDL have been pivotal in not only ensuring facilitating the system but also enhancing its productivity post digitalization. It is also important to note that ever since their existence there have never been any major glitches, a testament to the efficient transformation from physical to electronic format.
A Guide to Most Common Technical Indicators for Beginners: The most common problem for anyone willing to use the technical indicators, is to select the indicator which is the easiest and commonly used. This problem also arises because of the availability of hundreds of indicators.
Through this article, we aim to solve this problem. Here, we try and understand the two most common technical indicators that are comprehensive yet easy to use. We will be understanding the concept of moving averages and Bollinger bands. By the end of this article, we are sure that you would have a clear understanding of these indicators. Let’s get started.
Most Common Technical Indicators for Beginner
1) Moving Averages
Moving average is the most simple and commonly used technical indicators. If we read any research report or any article on technical analysis, the most commonly used technical indicators is the Moving average. There are generally two types of Moving averages – Simple Moving average and Exponential Moving average, which we’ll discuss later in this article.
In simple terms, a moving average creates a series of averages of different subsets of the full data set in order to analyze data points. To illustrate it with the help of an example:
In a game of cricket, if we were to analyze the performance of a batsman, consistency is the most common parameter. And the best way to analyze the consistency is the average number of runs scored by the batsman in each innings. For example, if the batsman scores 1,000 runs in the 20 innings, then the average number of runs scored by him in each innings is 50. This simple method of calculating the average is also known as the Simple Moving Average.
Moving Average is said to be a lagging indicator as is it is constructed with the help of the data, which is the End of day prices. Let us understand the concept with the help of a simple example:
Consider the following closing prices of shared of ITC limited:
Date
Closing Prices
14/09/2020
192
15/09/2020
188
16/09/2020
180
17/09/2020
182
18/09/2020
178
Total
920
Therefore, the average price of shares of ITC limited over 5 days will be = 920/5 = Rs. 184.
The average price changes as the closing price the next day changes. Imagine if the closing price of ITC on the next day changes to 185, then the 5 days simple moving average of ITC limited will also change.
The moving averages can be calculated for any timeframe. It could be 5 minutes, 15 minutes, hours, days, weeks, and so on. Depending on one’s trading style and trading objective, one can choose the charting pattern. If we are using 13 observations within the selected time frame, it is called 13 SMA, and if we are using 34 observations within the selected time frame, it is called 34 SMA and so on.
The daily chart shown below is that of Infosys limited and the red line plotted is 50 SMA.
If we carefully look at the chart above, 50 SMA clearly divides the chart into two halves. Till the end of April, the bears were having a higher say and 50 SMA was acting a resistance of the market. Any move till the red line was seen as an opportunity to short.
However, once the market closed above 50 SMA on daily basis, it started acting as a support to the market. Any move towards 50 SMA was seen as an opportunity to buy in the market. So, it can be summarized that if the market is trading below SMA, it is taken as an opportunity to sell or short in the market and if the market is trading above it, can be seen as an opportunity to go long.
— Exponential Moving Average
This is the more advanced and more trusted form of moving average. The main difference between EMA and SMA is the weightage given to values. In a simple moving average, all the values are given equal weightage. But in the case of Exponential Moving Average, the more recent values are given more weightage.
The chart below is the daily chart of Kotak Bank and the red line plotted is the 50 EMA.
If we carefully analyze the chart above, 50 EMA gives a better signal of buying and selling. If the market is trading above the EMA, it can be taken as an opportunity to buy and the level below this line can be kept as a point of stop loss for this trade.
Similarly, if the market is trading below EMA, it can be used as an opportunity to short in the market and the level above it can be kept as a point of stop loss.
Why EMA is more preferred?
The simple answer to this question is that EMA gives comparatively less false signals (than SMA), as the more recent values are given higher weightage.
2) Bollinger bands
The concept of Bollinger bands was introduced by John Bollinger in 80’s. This is the most common technical indicator and widely used by traders while making day to day trading decisions. With the help of Bollinger bands, we can understand if the price of an asset is trading at overbought or oversold levels.
When the price is overbought, it is generally an indication to sell and when the price is oversold it is generally an indication to buy.
Components of Bollinger bands:
The Middle line, which is a 20 day Simple Moving Average
The Upper Band which is a 2 Sigma (i.e. 2 Standard Deviation of the middle line)
The Lower Band which is a 2 Sigma (i.e. 2 Standard Deviation of the middle line)
Note: The upper and the lower band can also be 3 Sigma i.e. 3 standard deviation of the middle line.
But before understanding the Bollinger bands, it is important to have a brief understanding of the concept of Standard deviation.
What is Standard Deviation?
The Standard Deviation is a statistical pillar, which measures the Variance from the mean/average price. The standard deviation in the equity/stock market represents volatility. A 10% standard deviation would mean a 10% volatility in the stock. In Bollinger Bands, the standard deviation is applied on the middle line i.e., the 20 SMA
Let us understand:
The 2 Sigma upper and lower band means 2 SD
Say, if the 20 SMA of nifty is 9500
And say the Standard Deviation is 1%
Then the Upper band SD = 2*95 = 190
The Lower SD = -2*95 = -190
So, the three components of BB will be
SMA = 9500
Upper Band= 9500+190 = 9690
Lower Band = 9500 – 190 = 9310
In the Last Example-
If the Market it trading near 9700, then a short/sell position can be initiated, by keeping a target of 9500
If the Market it trading near 9300, then a long/buy position can be initiated, by keeping a target of 9500
Let us understand it with the help of an example. The image below is the daily chart of Axis bank.
If we carefully analyze the image above, all the trade opportunities have been circled. The circles near the upper band give us an opportunity to sell in the market and the circles near the lower band give us an opportunity to buy in the market.
If we were to take the example of the circle near the lower band, it gave an opportunity to buy near the lower band, and trade gave a return of nearly 20% (i.e., Rs. 50). And similar returns were achieved while shorting near the upper band circles.
In this article, we covered two of the most common technical indicators for beginners. Here are the key takeaways from this post:
Moving Average gives us a lot of buying and selling signals
When the price is trading above a certain MA, it usually signals strength in the market and buyers are having more say. On the other hand, When the price is trading below a certain MA, it usually signals weakness in the market and sellers are dictating in the Market
The Bollinger bands capture the volatility. The Upper bands and lower bands help us to understand the overbought or oversold levels
Bollinger bands work in all types of markets but they are better suited for Rangy markets
The most important thing is to have a predefined loss for every trade entered in the market.
That’s all for this post on common technical indicators for beginners. Happy Trading and making money!
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!
Hi Investors & Traders. Hope you are well and safe. It’s been a journey of over three years since we started our journey to simplify stock market investing. And as a new milestone, we recently launched a few exciting features on our stock research website “Trade Brains Portal“. Through this article, we are happy to share the same with you.
What is Trade Brains?
Our bootstrapped fintech startup, Trade Brains, is simply focused to simplify Stock Market Research to help people invest better by providing all essential knowledge and tools! The basic idea behind Trade brains is to give new and existing investors a platform through which they can enhance and update their knowledge in the world of Investment on a continuous basis.
We recently launched a financial Portal to make Stock Market Research, even more, simpler for new Investors. Through this new platform, we are trying to challenge the rigidity of Bloomberg and other traditional financial terminals to make stock analysis easy and affordable for all.
Our portal has financial data and stock quotes of over 4,000 Public companies listed on Indian Stock Exchanges. In addition, we offer many key features like complete fundamental analysis with simple visualizations, creating multiple watchlists and stock comparison, super investor tracking, etc. We are building this product to make the stock market journey of new investors easier while analyzing companies.
The real motivation behind creating this portal was to solve the ever persisting problem of having a dedicated place where the stock research and analysis can be done. Therefore, through this portal, we have created an environment whereby which, the investors can come and complete their stock research and analysis on one single platform.
All the facts and information about more than 4,000 companies listed in the stock exchange (NSE and BSE) are available at the click of a single button. There are other dedicated features like stock Screeners, Compare multiple stocks at one screen, Multiple watch lists, various Stock Baskets, and Bundles, Superstar traders portfolio, Financial Blogs, etc.
How Trade Brains Portal can help You?
Here are a few key features that we have focussed on that can help new and existing stock market participants to make better investment decisions.
Through this portal, we have a unique feature whereby which we can do a complete stock analysis with a single click. We just need to plug in the name of stock for which we want to do investment analysis. And all the information which are of help for making investment decision are flashed on the screen.
For example, if you are looking to perform investment research of say, Reliance industries, you just need to put in the keyword and all the information is available there.
And, on the next page, we get all the information we seek for making the investment decision like key metrics, price charts, financial ratios, etc.
In addition, you can also find the last five years of financial data for Profit and loss Statement, Balance Sheet, Cashflow Statement, Shareholding pattern, and more on the same page.
Now, if you look at all the images above, we get information about the current price of the share, market capitalization, various valuation parameters, growth parameters, profitability parameters, leverage and liquidity parameters, all the financial statements (cash flow statement, income statement, quarterly statements, balance sheet, annual reports, etc.). In short, Trade Brains Portal becomes a one-point solution for all the investment research.
As the name suggests, through this feature, we can scan and shortlist the stocks which fit our investment style and the various parameters we choose while making an investment decision. The main advantage of this feature is that, rather than going through each and every share and testing the set parameters, we can just set in the parameters, and the rest of the work is done with the help of algorithm designed filters.
Currently, we have launched a simple stock screener. However, we are working on an advanced stock screener on Trade Brains Portal which will be launched soon.
This feature is very crucial for the investors who are willing to invest and also have a watch list of the stocks which they want to keep an eye on. Therefore, as and when the share prices reach the desired levels, alerts are received and one can initiate trades. This portal allows you the option of having multiple watch-list, so one can have different sets of watch-lists with different objectives.
This feature is very exclusive and one of its kind in the stock research eco-system. Through this feature, we can compare stocks within the same industry or within stocks from different industries. This feature allows us to compare up to 5 stocks at one time.
The main benefit of this feature is that it saves a lot of time for the investors. Rather than researching individual stocks, we can research multiple stocks at the same time. And it makes investment decisions easier because of the presence of the factor of comparative study.
With a collection of over 50 buckets, it is safe to say that the investors are spoilt for choice. These buckets are designed with various themes, sectors, investors, etc. in mind.
1) To cater to theme-based profiling we have various bundles like Infrastructure, Rural, Housing, Transportation, Healthcare, Chemicals, etc. These buckets will help you find the hidden gems in the fast-growing themes in India.
2) To cater to Sector-based profiling, we have various bundles like the Banking sector, IT sector, Metals, Auto, Consumer packaged sector, etc.
3) Next, we have a separate section for showing the various businesses of big business names (Ambanis, TATA’s, Wadia’s, RPG group, Hinduja Group, Vedanta group, etc.) which are listed on the stock exchange.
4) Finally, the fourth list includes all the investors who are a part of the big boys club. These are ace investors (Rakesh Jhunjhuwala, Radhakrishna Damani, Dolly Khanna, Ashish Kacholia, etc) in the market. Complete details about their portfolios are available on our website.
Through this wing, we aim to provide basic investor education by publishing articles on regular basis. We have over 500 articles published on Trade Brains. The articles cater to both Financial and Non-Financial sectors. We also have a series of infographics giving information about the various companies and brands and what businesses do they foray in.
Also on this website, we have different financial calculators like the SIP calculators, Intrinsic value calculators. And, also on this website, we have our discussion forum, via which we have regular discussions with our regular subscribers on various stock market-related topics.
This website is best suited for investors or traders who are willing to learn the mechanics of investing and trading. We have dedicated courses on value investing, how to pick the winning stocks, mutual fund investments, Understanding financial statements, Options trains, technical analysis for beginners, etc. Therefore, for a new/experienced investor/trader, this website understands and solves the various investment-related issues.
Closing Thoughts
If you are someone who is on the lookout for a portal that solves all the problems of stock research and analysis then this portal will go a long way in answering your investment queries. Stock screeners, watchlist, stock comparison, superstar portfolios, etc are some of the new and exclusive features of our portal.
Anyways, Blogs and Academy are some of the important wings of Trade brains. we aim to provide continuous education and update our viewer with the regular and latest information. Have a great day ahead. Happy Investing & Money Making !!
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!
List of Must Know Financial Ratio Analysis for Stock Market Investors: Evaluating a company is a very tedious job. Judging the efficiency and true value of a company is not an easy task it demands rigorously reading the company financial statements like balance sheet, profit and loss statements, cash-flow statement, etc.
Since it is tough to go through all the information available on a company’s financial statements, the investors have found some shortcuts in the form of financial ratios. These financial ratios are available to make the life of a stock investor comparatively simple. Using these ratios, the stock market investors can choose the right companies to invest in or can compare the financials of two companies to find out which one is a better investment opportunity.
In this post, we are going to discuss eight of such Financial Ratio Analysis that Every Stock Investor Should Know.
This article is divided into two parts. In the first part, we’ll cover the definitions and examples of these eight must know financial ratios. In the second part, after the financial ratio analysis, we’ll discuss how and where to find these ratios. Therefore, be with us for the next 8-10 minutes to enhance your stock market analysis knowledge. Let’s get started.
Quick note: Do not worry much about calculations of these ratios or try to mug up the formulas by-heart. All these financial ratios are easily available on various financial websites. Nonetheless, we will recommend you to understand the basics of the financial ratio analysis as it will be helpful in building a good foundation for your stock research in future.
PART A: 8 Financial Ratio Analysis For Stock Investor
1. Earnings Per Share (EPS)
EPS is the first most important ratio in our list. It is very important to understand Earnings per share (EPS) before we study any other ratios, as the value of EPS is also used in various other financial ratios for their calculation.
EPS is basically the net profit that a company has made in a given time period divided by the total outstanding shares of the company. Generally, EPS can be calculated on an Annual basis or Quarterly basis. Preferred shares are not included while calculating EPS.
Earnings Per Share (EPS) = (Net income – Dividends from preferred stock)/(Average outstanding shares)
From the perspective of an investor, it’s always better to invest in a company with higher and growing EPS as it means that the company is generating greater profits. Before investing in any company, you should always check past EPS for the last five years. If the EPS is growing for these years, it’s a good sign and if the EPS is regularly falling, stagnant or erratic, then you should start searching for another company.
2. Price to Earnings (PE) Ratio
The Price to Earnings ratio is one of the most widely used financial ratio analysis among investors for a very long time. A high PE ratio generally shows that the investor is paying more for the share. The PE ratio is calculated using this formula:
Price to Earnings Ratio= (Price Per Share)/( Earnings Per Share)
Now let us look at the components of the PE ratio. It’s easier to find the price of the share which is the current closing stock price. For the earnings per share, we can have either trailing EPS (earnings per share based on the past 12 months) or Forward EPS i.e. Estimated basic earnings per share based on a forward 12-month projection. It’s easier to find the trailing EPS as we already have the result of the past twelve month’s performance of the company.
For example, a company with the current share price of Rs 100 and EPS of Rs 20, will have a PE ratio of 5. As a thumb rule, a low PE ratio is preferred while buying a stock. However, the definition of ‘low’ varies from industries to industries.
Different industries (Ex Automobile, Banks, IT, Pharma, etc) have different PE ratios for the companies in their industry (Also known as Industry PE). Comparing the PE ratio of the company of one sector with the PE ratio of the company of another sector will be insignificant. For example, it’s not much use to compare the PE of an automobile company with the PE of an IT company. However, you can use the PE ratio to compare the companies in the same industry, preferring one with low PE.
3. Price to Book (PBV) Ratio
Price to Book Ratio (PBV) is calculated by dividing the current price of the stock by the book value per share. Here, Book value can be considered as the net asset value of a company and is calculated as total assets minus intangible assets (patents, goodwill) and liabilities. Here’s the formula for PBV ratio:
Price to Book Ratio = (Price per Share)/( Book Value per Share)
PBV ratio is an indication of how much shareholders are paying for the net assets of a company. Generally, a lower PBV ratio could mean that the stock is undervalued.
However, again the definition of lower varies from industry to industry. There should be an apple to apple comparison while looking into PBV ratio. The price to book value ratio of an IT company should only be compared with PBV of another IT company, not any other industry.
4. Debt to Equity (DE) Ratio
The debt-to-equity ratio measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity).
Debt to Equity Ratio =(Total Liabilities)/(Total Shareholder Equity)
Generally, as a firm’s debt-to-equity ratio increases, it becomes riskier as it means that a company is using more leverage and has a weaker equity position. As a thumb of rule, companies with a debt-to-equity ratio of more than one are risky and should be considered carefully before investing.
5. Return on Equity (ROE)
Return on equity (ROE) is the amount of net income returned as a percentage of shareholders’ equity. ROE measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. In other words, ROE tells you how good a company is at rewarding its shareholders for their investment.
Return on Equity = (Net Income)/(Average Stockholder Equity)
As a thumb rule, always invest in a company with ROE greater than 20% for at least the last 3 years. Year-on-year growth in ROE is also a good sign.
6. Price to Sales Ratio (P/S)
The stock’s price/sales ratio (P/S) ratio measures the price of a company’s stock against its annual sales. P/S ratio is another stock valuation indicator similar to the P/E ratio.
Price to Sales Ratio = (Price per Share)/(Annual Sales Per Share)
The P/S ratio is a great tool because sales figures are considered to be relatively reliable while other income statement items, like earnings, can be easily manipulated by using different accounting rules.
7. Current Ratio
The current ratio is a key financial ratio for evaluating a company’s liquidity. It measures the proportion of current assets available to cover current liabilities. The current ratio can be calculated as:
Current Ratio = (Current Assets)/(Current Liabilities)
This ratio tells the company’s ability to pay its short-term liabilities with its short-term assets. If the ratio is over 1.0, the firm has more short-term assets than short-term debts. But if the current ratio is less than 1.0, the opposite is true and the company could be vulnerable. As a thumb rule, always invest in a company with a current ratio greater than 1.
8. Dividend Yield
A stock’s dividend yield is calculated as the company’s annual cash dividend per share divided by the current price of the stock and is expressed in annual percentage. Mathematically, it can be calculated as:
Dividend Yield = (Dividend per Share)/(Price per Share)*100
For Example, If the share price of a company is Rs 100 and it is giving a dividend of Rs 10, then the dividend yield will be 10%.
A lot of growing companies do not give dividends, rather reinvest their income in their growth. Therefore, it totally depends on the investor whether he wants to invest in a high or low dividend yielding company. Anyways, as a thumb rule, consistent or growing dividend yield is a good sign for dividend investors.
Further, you can also use our stock market analysis website “Trade Brains Portal“, to find these ratios. Let me show you how to find these key financial ratios on Trade Brains Portal. Let’s say, you want to look into all the above-mentioned financial ratios for “Reliance Industries”. Here’s what you need to do next.
2) Select the company. This will take you to the “Reliance Industries” stock detail Page.
3) Scroll down to ‘5 Year Analysis & Factsheet’ and here you can find all the financial ratios for the last five years.
You can find all the key financial ratio analysis discussed in this article on this section of stock details. In addition, you can also look into other popular financial ratios like Profitability ratio, Efficiency ratio, Valuation ratio, Liquidity ratio, and more.
Conclusion
In this article, we discussed the list of Must Know Financial Ratio Analysis for stock market investors. Now, let us give you a quick summary of all the key financial ratios mentioned in the post.
8 Financial Ratio Analysis that Every Stock Investor Should Know:
Earnings Per Share (EPS) – Increasing for last 5 years
Price to Earnings Ratio (P/E) – Low compared to companies in the same sector
Price to Book Ratio (P/B) – Low compared to companies in the same sector
Debt to Equity Ratio – Should be less than 1
Return on Equity (ROE) – Should be greater than 20%
Price to Sales Ratio (P/S) – Smaller ratio (less than 1) is preferred
In addition, here is a checklist (that you should download), which can help you to select a fundamentally strong company based on the financial ratios. Also, feel free to share this image with those whom you think can get benefit from the checklist.
That’s all for this post. Hope this article on ‘8 Financial Ratio Analysis that Every Stock Investor Should Know’ was useful for you. If you have any doubt or need any further clarification, feel free to comment below. We will be happy to help you. Take care and happy investing.
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
A Quick Guide on how to invest in Foreign Stocks from India: Apple, Google, Facebook, Amazon, Microsoft, Samsung, Tesla, Twitter… These are some well-known companies in the world. We all have grown up using the products/services offered by these companies. Moreover, these companies are global leaders in their respective businesses, as well as innovators, who are likely to benefit in the future. But along with using their products, can we also own some shares of these companies?
Wait, these are not Indian companies, right? Therefore, they won’t be listed on the Indian stock exchanges. Even if you’ve a demat and trading account in India, you can trade/invest only in companies listed on Indian stock exchanges (BSE/NSE). But these companies will be listed in their respective country’s stock exchanges like US stock exchanges. Then, how to buy shares of a company that are not registered in India, but trades in the foreign stock exchanges?
Don’t worry, if you really want to buy these stocks- you’ll get it. In this post, we are going to discuss three simple ways through which you can invest in foreign stocks. Let’s get started.
Why should you invest in foreign stocks?
Before we start this post, let us first discuss why should you invest in foreign stocks? Are they better than Indian companies? Here, you need to make up your mind why you want to invest in foreign companies. There are over 5,500 listed companies in the Indian stock market. Aren’t they enough? Why do you need to invest alternative stocks?
Further, which one is better to invest in- Indian companies or foreign companies?
Well, I’m really not in a position to answer the second question. It won’t do justice if a guy in his 20s sitting on the comfort of his couch judges these companies. These are giant multi-billionaire companies that we are talking about here. Google, Apple, Facebook, Amazon, Samsung, Cisco, Tesla, etc are too big companies to comment upon. These companies have lots of cash, highly qualified professionals, employees in their management team and they are big innovators in their industry. Anyways, there are even many big Indian companies that can give competitions to many foreign companies.
Now, let me answer the first question i.e. why to invest in foreign stocks. Here are my personal learnings on this question.
Top reasons why many Indian invests in the US
Here are my top reasons why many Indian invests in the US or other foreign stock exchanges:
1. People want to invest in their favorite companies
Apple, Google, Twitter, Facebook, Amazon, Tesla etc. are the darlings of this generation. And of course, many people want to invest in these companies.
2. Diversification with Global Investments
Investing in foreign stocks helps in diversification. Let’s assume that the Indian equity market starts falling due to some local region. However, investing in foreign stocks can mitigate the risk in your portfolio as the local reason may not have a significant effect on the international markets.
3. To seize bigger opportunities
Once you start to invest in foreign stocks, there are no boundaries anymore. You can hunt for better (profitable) opportunities in the international markets.
Besides the above-mentioned points, few investors believe that foreign companies have better resources, facilities, government cooperation, and standards. That’s why they invest in these foreign companies, compared to Indian companies. Nevertheless, while deciding to invest in foreign stocks, you should also remember that India is one of the fastest-growing economies in the world. On the other hand, most of the international markets are a little saturated. Therefore, growth-wise, India has better potential.
Overall, it totally depends on your preference regarding where and how much to invest. As already discussed, there are both pros and cons to trade in international stocks.
Cons of Investing in Foreign Stocks
There are two sides to every coin. Here are a few critical points to know before you invest in foreign stocks:
1. Be ready for the high charges
While investing in international stocks, you’ll be transacting in foreign currencies. For example, if you are trading in the US stock market, you have to pay the brokerages in the US dollar. And hence, the stock brokerages may be a little higher compared to the charges in the Indian stock market. Similarly, the annual/monthly maintenance charges may also be higher compared to domestic accounts.
2. Profits are subjected to the currency exchange rate
Let’s assume that you are investing in the US stock market. When you bought the US stock, the currency exchange rate was $1= Rs 68. However, next year- when you sold the US stock, let say the Indian currency got stronger, and the currency exchange rate becomes $1 = Rs 62. In such a case, you have already lost 8.8% due to the change in the exchange rate. That’s why when you invest in foreign stocks, profits are always subjected to the currency exchange rate.
3. Up to $250,000 can be invested overseas by the Indian residents
As per the RBI notification in the Liberalised Remittance Scheme (LRS), an Indian resident individual can only invest up to $250,000 overseas per year. With the current exchange rate of ($1= Rs 68), this amount turns out to be over 1.7 Crores. Anyways, if you have a family of four, you can invest 4 x $250,000 = $ 1 Million. That’s enough money to invest, right?
Quick Note: Besides the above factors, you also need to keep in mind the foreign stock risks. As these stocks will be listed on foreign stock exchanges – the environment and the factors (like local government policies, local trends, etc) will affect the share price of those companies.
How to invest in foreign stocks?
Now that you have learned the basic concept of investing in the international stock exchanges, here are three simple ways to invest in foreign stocks—
1. An account with Indian Brokers having a tie-up with a foreign broker
Many full-service Indian brokers like ICICI Direct, HDFC Securities, Kotak Sec, Axis Securities, Reliance money, etc has a tie-up with the foreign brokers. They have made it very simple to open your overseas trading account with their partner (foreign) brokers. You can invest in foreign stocks using these full-service brokers.
For example, if you’ve an account with ICICI direct, you can invest in global markets using their broker partner Interactive Brokers LLC.
A few international brokerage firms like Interactive Brokers, TD Ameritrade, Charles Schwab International Account, etc permits Indian citizens to set up an account and trade in US stocks, mutual funds, etc. In fact, US-based brokerage like ‘Interactive brokers’ also has an office in India where you can visit, get your queries answered, and open your overseas trading account.
3. Investing in Foreign stocks through new startups Apps
In the past few years, many new starts have been launched in India and abroad than helps Indians to invest in foreign stocks. For example, recently launched startup Vested Finance, helps Indians to invest in US stocks. They are a US Securities and Exchange Commission (SEC) registered investment advisor. Similarly, you can also invest in foreign stocks using the Webull app, another popular startup company that is also committed to building the best investing and trading experience for India and Global stock markets.
Extra: Buying Indian MF/ETFs with global equities
There are a number of mutual funds/ETFs who invest in international markets (global market, emerging market, etc). You can invest in those mutual funds/ETFs to indirectly invest in foreign equities.
This is the easiest approach to invest in foreign stocks. An advantage of investing through mutual funds is that you won’t need to open any overseas trading account. Further, you won’t also require to invest a hefty amount. Compared to direct investing in foreign stocks (where you might be asked to maintain a minimum of $10,000 deposit), investing in mutual funds/ETFs are cheap.
For example, Motilal Oswal recently started their subscription for its Motilal Oswal S&P 500 Index Fund. It is an open-ended scheme replicating the S&P 500 Index, which consists of leading 500 companies listed in the US. A few of the popular of popular mutual funds who trade in global equities are—
Quick Note: Many other Indian stockbrokers are also planning to offer their clients a facility to invest in the US and foreign stocks. For example, Zerodha is planning to offer option to invest in US stocks with no minimum investment. However, these features are yet to be launched. Nevertheless, these stockbrokers internally working on these features is a good sign for the Indian retail investors who are enthusiastic about investing in foreign companies.
Closing Thoughts
In this article, we discussed three easy ways to invest in foreign stocks from India, along with the forth way of mutual funds route. We also covered the advantages and disadvantages of investing in foreign stocks.
Investing in the foreign market will help you widen your investment horizon. Here, you can invest without boundaries in your favorite companies. Moreover, in the era of the internet- it’s not much difficult to invest in the international market. The most significant advantage is that it helps in diversifying your portfolio. However, the obstacles are higher expense charges and currency exchange rates.
That’s all for this article on different ways to invest in foreign stocks. Let me know what you think about investing in international stocks in the comment section below. Further, if you’ve got any questions on this topic, feel free to mention below. 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
List of Best Stock Market Apps in India 2020: Now a day, if you are a stock market trader, then it’s essential for you to stay updated with every minute market movements. The modern stock market traders keep tabs on the rising and fall of the stocks on daily basis and sometimes that too hourly. The high-speed internet and handy mobile apps have made the life of traders simple, faster, and efficient. These financial apps help the traders to stay informed and ready all the time.
From checking the real-time streaming market price of the stock, making a virtual portfolio, drawing stocks charts, following market trends to tracking your portfolio; everything is now accessible from your smartphone or tablet.
Therefore, today I am going to present to you the 7 Best Stock Market Apps that will make your stock research easier in India. Moreover, all the apps listed here are free. In short, be with me for the next 5-8 minutes to learn the best stock market apps for Indian stock research.
7 Best Stock Market Apps in India 2020
1. MoneyControl
Play store rating: 4.0/5 Stars (335k Reviews)
Downloads: +10 Million
Available on: Android, IoS, Windows
This is my personal favorite mobile app for stock market news and updates. If you are planning to keep only one stock market app on your smartphone, then I will highly recommend you to have this one. The money control app is simple, yet have tons of information and news.
You can track the latest updates on Indian and Global financial markets on your smartphone with the Moneycontrol App. It covers multiple assets from BSE, NSE, MCX and NCDEX exchanges, so you can track Indices (Sensex & Nifty), Stocks, Futures, Options, Mutual Funds, Commodities and Currencies with ease.
Key Features:
Ease of Use: Easy navigation to all financial data, portfolio, watchlist and message board. Single search bar with voice search for stocks, indices, mutual funds, commodities, news, etc
Latest Market Data: Latest quotes of stocks, F&O, mutual funds, commodities and currencies from BSE, NSE, MCX, and NCDEX
News: All-day coverage of news related to markets, business and economy; plus interviews of senior management
Portfolio: Easy monitoring your portfolio across Stocks, Mutual Funds, ULIPs, and Bullion. Timely updates on the performance of your portfolio, and news & alerts relating to stocks you hold
Personalized Watchlist: Adding your favorite stocks, mutual funds, commodities, futures, and currencies to monitor. Get timely alerts in form of news and corporate action
Message Board: Follow your favorite topics and the top borders to get recommendations. Engage and participate in conversations relating to your portfolio or interest
Play store rating: 4.3/5 Stars (28k Reviews)
Downloads: +1 Million
Available on: Android, iOS
Stock Edge helps Indian Stock market traders and investors do their own research and make better decisions by providing them with end-of-day analytics and visualizations and alerts.
Key Features
Daily Updates Section for filtered major market tracking with News, NSE & BSE Corporate Announcements, Forthcoming events, & Corporate Actions and more.
FII/ FPI & DII Cash and Derivatives with strong historical data visualization Daily, Monthly & Yearly.
Opportunity Scans: Price Scans, Last week high/ low, Last Month high/ low, 52 weeks high/low, 3 days price behavior, etc
Track what Big Indian Investors are doing. Use MyInvestorGroup section to create your own group of Investors with their multiple names/entities etc
Sector Research: Sector List, Industries in a sector, Companies in a sector/Industry, Price Movement of last 30 days presented in a simple graph, Gainers, Losers etc.
Play store rating: 4.7/5 Stars (37k Stars)
Downloads: +1 Million
Available on: Android, IoS, Windows
This is another of the best stock market apps. I regularly use ET Markets app for reading market news and updates as they provide the best latest news. Moreover, the stock details feature on this app is always very well organized.
Key Features:
To track BSE Sensex, NSE Nifty charts live and get share prices with advanced technical charting.
Follow stock quotes real time, get tips on intraday trading, stock futures, commodities, forex market, ETFs on the go.
One-stop destination for mutual fund news, NAVs, portfolio updates, fund analysis, SIP calculator
Simple swipe to build, manage and access your portfolio; get customized news, analysis and data of the Indian stock market
To create your watchlist and track them regularly
Get analyses/expert views delivered to you, participate in discussions/conversations through comments
Play store rating: 4.2/5 Stars (2.8k reviews)
Downloads: +500k
Available on: Android, IoS,
This app has become quite popular in the best stock market apps in India in recent months and relatively newer when compared to other apps in this list. Tickertape is a modern stock analysis platform that is designed for keeping you at the center of the process. It focuses on salient metric analysis with powerful tools and robust ecosystem support that can be a catalyst to improve your knowledge about the market and their participation in the same.
Key Features:
Detailed stock analysis for all the publically listed companies in India.
Advanced Screener with 130 filters for you to analyze any Indian stocks.
Market mood Index (MMI) which is the market sentiment indicator trusted to correctly time their trades.
Peer comparisons, news, and events are presented in such a way that will help in your investment decisions.
Finally, Broker Connect to help you log in and connect your broker account to the Tickertape account.
Play store rating: 4.2/5 Stars (168k reviews)
Downloads: +5 Million
Available on: Android, IoS, Windows
First of all, after downloading this app, you need to change the settings. In the region settings, select ‘India (English)’ for getting the updates about the Indian stock market. The simple yet dynamic user interface makes it one of the best stock market apps for stock research.
Key Features:
Follow the stocks you care about most and get personalized news and alerts.
Access real-time stock information and investment updates to stay on top of the market.
Add stocks to watchlists to get real-time stock quotes and personalized news
Track the performance of your personal portfolio.
Find all the financial information you need with sleek, intuitive navigation
Go beyond stocks and track currencies, bonds, commodities, equities, world indices, futures, and more
Compare stocks with interactive full-screen charts
Play store rating: 4.4/5 Stars (1.9k Reviews)
Downloads: +100,000
Available on: Android
This is a new yet powerful app for stock market research. Market Mojo is great for the fundamental analysis of stocks. It offers pre-analyzed information on all stocks, all financials, all news, all price movement, all broker recommendations, all technicals and everything that matters in the Indian stock markets.
Key Features:
The Mojo Quality rank reflects the company’s long-term performance vs its peers.
Its Valuation determines how the stock is valued at its current price
The current financial trend indicates if the company is currently on a growth path and its ability to generate profits.
The Portfolio Analyser evaluates every hidden opportunity and risk in the portfolio and tells the investor what he should be doing rather than what he should be just tracking. Every portfolio goes through our test of seven parameters-Returns, Risk, Diversification, Liquidity, Quality, Valuation & Financial Trend
Play store rating: 4.6/5 Stars (355k Reviews)
Downloads: +10 Million Downloads
Available on: Android, iOS
Investing.com is a popular stock market app uses worldwide. Along with Indian stock details, you can also find the details about the world indexes and foreign stock exchanges. It offers a set of financial informational tools covering a wide variety of global and local financial instruments.
Key Features:
Live quotes and charts for over 100,000 financial instruments, traded on over 70 global exchanges.
Live updates on global economic events customized to your personal interests.
Build your own customized watchlist and keep track of stock quotes, commodities, indices, ETFs and bonds – all synced with your Investing.com account.
Breaking news, videos, updates and analysis on global financial markets, as well as technology, politics and business.
Quick access to all of our world-class tools, including: Economic Calendar, Earnings Calendar, Technical Summary, Currency Converter, Market Quotes, advanced charts and more.
Play store rating: 4.4/5 Stars (344 Reviews)
Available on: Android
Trade brains is a FREE financial education app focused on teaching stock market investing and personal finance to the DIY (do-it-yourself) Investors. Trade Brains app will guide you on how to invest in the Indian stock market with simple, easy-to-understand, and original content.
Key Features:
Pocket guide for stock market Investment.
LEARN- Step-by-step stock investing lessons.
Easy to understand contents on various investment concepts and strategies.
Financial Calculators to Simplify your investment planning
Stockbrokers section to compare the best Online Stockbrokers in India.
Play store rating: 4.0/5 Stars
Available on: Android
Want to find the undervalue valued stocks? Then, download this app!! The intrinsic value calculator App helps the users to calculate the true value of stocks by offering different IV calculators like a Discounted cashflow calculator or DCF Calculator, Return on Equity Valuation or ROE Valuation calculator, Graham number valuation or Graham Calculator, Price to Earnings valuation, PE Valuation calculator and more.
Key Calculators and Features:
Discounted Cashflow (DCF) Calculator: DCF analysis is a method of valuing a company using the concepts of the time value of money.
Fair Value Calculator: This is a simple discounted model calculator to help you find the fair value of a company using Earnings per share (EPS) forecast. With a few simple values, you can estimate the intrinsic value of a company.
Graham Calculator: This calculator is a good tool to find a rough estimate of the intrinsic value. It is simple and very easy to use.
Future Value Calculator: This is a basic compound interest calculator. It will give the future value of one time lump-sum investment.
That’s all. I hope this blog post ‘7 Best Stock Market Apps that makes Stock Research 10x Easier’ is useful to the readers. If I missed any amazing app that you believe should be mentioned here, feel free to comment below.
Further, please comment below which Stock market app is your favorite? 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
List of most important Financial ratios for investors: Reading the financial reports of a company can be a very tedious job. The annual reports of many of the companies are over hundreds of pages which consist of a number of financial jargon. Moreover, if you do not understand what these terms mean, you won’t be able to read the reports efficiently. Nevertheless, there are a number of financial ratios that have made the life of investors very simple. Now, you do not need to make a number of calculations and you can just use these financial ratios to understand the gist.
In this post, I’m going to explain the 19 most important financial ratios for investors. We will cover different types of ratios like valuation ratios, profitability ratios, liquidity ratios, efficiency ratios, and debt ratios.
Please note that you do not need to mug up all these ratios or formulas. You can easily find all these ratios of any public company in India on our stock research portal here. Just understand them and learn how & where they are used. These financial ratios are created to make your life easier, not tough. Let’s get started.
19 Most Important Financial ratios for Investors
A) Valuation Ratios
These ratios are also called Price ratios and are used to find whether the share price is over-valued, under-valued, or reasonably valued. Valuation ratios are relative and are generally more helpful in comparing the companies in the same sector (apple to apple comparison). For example, these ratios won’t be of that much use if you compare the valuation ratio of a company in the automobile industry with another company in the banking sector.
Here are a few of the most important Financial ratios for investors to validate a company’s valuation.
1. Price to Earnings (PE) ratio
The price to earnings ratio is one of the most widely used ratios by investors throughout the world. PE ratio is calculated by:
P/E ratio = (Market Price per share/ Earnings per share)
A company with a lower PE ratio is considered under-valued compared to another company in the same sector with a higher PE ratio. The average PE ratio value varies from industry to industry.
For example, the industry PE of Oil and refineries is around 10-12. On the other hand, the PE ratio of FMCG & personal cared is around 55-50. Therefore, you cannot compare the PE of a company from the Oil sector with another company from the FMCG sector. In such a scenario, you will always find oil companies undervalued compared to FMCG companies. However, you can compare the PE of one FMCG company with another company in the same industry, to find out which one is cheaper.
2. Price to Book Value (P/BV) ratio
The book value is referred to as the net asset value of a company. It is calculated as total assets minus intangible assets (patents, goodwill) and liabilities. The Price to book value (P/B) ratio can be calculated using this formula:
P/B ratio = (Market price per share/ book value per share)
Here, you can find book value per share by dividing the book value by the number of outstanding shares. As a thumb rule, a company with a lower P/B ratio is undervalued compared to the companies with a higher P/B ratio. However, this ratio also varies from industry to industry.
3. PEG ratio
PEG ratio or Price/Earnings to growth ratio is used to find the value of a stock by taking into consideration the company’s earnings growth. This ratio is considered to be more useful than the PE ratio as the PE ratio completely ignores the company’s growth rate. PEG ratio can be calculated using this formula:
PEG ratio = (PE ratio/ Projected annual growth in earnings)
A company with PEG < 1 is good for investment.
Stocks with a PEG ratio of less than 1 are considered undervalued relative to their EPS growth rates, whereas those with ratios of more than 1 are considered overvalued.
4. EV/EBITDA
This is a turnover valuation ratio. EV/EBITDA is a good valuation tool for companies with lots of debts. This ratio can be calculated by dividing enterprise value (EV) of a company by its EBITDA. Here,
EV = (Market capitalization + debt – Cash)
EBITDA = Earnings before interest tax depreciation amortization
A company with a lower EV/EBITDA value ratio means that the price is reasonable.
5. Price to Sales (P/S) ratio
The stock’s Price to sales ratio (P/S) ratio measures the price of a company’s stock against its annual sales. It can be calculated using the formula:
P/S ratio = (Price per share/ Annual sales per share)
Price to sales ratio can be used to compare companies in the same industry. Lower P/S ratio means that the company is undervalued.
6. Dividend yield
Dividends are the profits that the company shares with its shareholders as decided by the board of directors. Dividend yield can be calculated as:
Dividend yield = (Dividend per share/ price per share)
Now, how much dividend yield is good? It depends on the investor’s preference. A growing company may not give a good dividend as it uses that profit for its expansion. However, capital appreciation in a growing company can be large. On the other hand, well established large companies give a good dividend. But their growth rate is saturated. Therefore, it depends totally on investors whether they want a high yield stock or growing stock.
As a rule of thumb, a consistent and increasing dividend yield over the past few years should be preferred.
7. Dividend Payout
Companies do not distribute its entire profit to its shareholders. It may keep a few portions of the profit for its expansion or to carry out new plans and share the rest with its stockholders. Dividend payout tells you the percentage of the profit distributed as dividends. It can be calculated as:
Dividend payout = (Dividend/ net income)
For an investor, a steady dividend payout is favorable. However, a very high dividend payout like 80-90% maybe a little dangerous. Dividend/Income investors should be more careful to look into the dividend payout ratio before investing in dividend stocks.
B) Profitability ratio
Profitability ratios are used to measure the effectiveness of a company to generate profits from its business. A few of the most important financial ratios for investors to validate the company’s profitability ratios are ROA, ROE, EPS, Profit margin & ROCE as discussed below.
8. Return on assets (ROA)
Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. It can be calculated as:
ROA = (Net income/ Average total assets)
A company with a higher ROA is better for investment as it means that the company’s management is efficient in using its assets to generate earnings. Always select companies with high ROA to invest in.
9. Earnings per share (EPS)
EPS is the annual earnings of a company expressed per common share value. It is calculated using the formula
EPS = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares
As a rule of thumb, companies with increasing earnings per share for the last couple of years can be considered as a healthy sign.
10. Return on equity (ROE)
ROE is the amount of net income returned as a percentage of shareholders’ equity. It can be calculated as:
ROE= (Net income/ average stockholder equity)
It 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. Always invest in companies with an average ROE for last three years greater than 15%.
11. Net Profit Margin (NPM)
Increased revenue doesn’t always mean increased profits. The profit margin reveals how good a company is at converting revenue into profits available for shareholders. It can be calculated as:
Profit margin = (Net income/sales)
A company with a steady and increasing profit margin is suitable for investment.
12. Return on capital employed (ROCE)
ROCE measures the company’s profit and efficiency in terms of the capital it employs. It can be calculated as
ROCE= (EBIT/Capital Employed)
Where EBIT = Earnings before interest and tax. And further, Capital employed is the total number of capital that a company utilizes in order to generate profit. It can be calculated as the sum of the shareholder’s equity and debt liabilities. As a rule of thumb, invest in companies with higher ROCE compared to their competitors.
Liquidity ratios are used to check the company’s capability to meet its short-term obligations (like debts, borrowings, etc). A company with low liquidity cannot meet its short-term debts and may face difficulties to run it’s business efficiently. Here are a few of the most important financial ratios for investors to check the company’s liquidity:
13. Current Ratio
It tells you the ability of a company to pay its short-term liabilities with short-term assets. The current ratio can be calculated as:
Current ratio = (Current assets / current liabilities)
While investing, companies with a current ratio greater than 1 should be preferred. This means that the current assets should be greater than the current liabilities of a company.
14. Quick ratio
It is also called an acid test ratio. The quick ratio takes accounts of the assets that can pay the debt for the short term.
Quick ratio = (Current assets – Inventory) / Current liabilities
The quick ratio doesn’t consider inventory as current assets as it assumes that selling inventory will take some time and hence cannot meet the current liabilities. A company with a quick ratio greater than one means that it can meet its short-term debts and hence quick ratio greater than 1 should be preferred.
D) Efficiency ratio
Efficiency ratios are used to study a company’s efficiency to employ resources invested in its fixed and capital assets. Here are three of the most important financial ratios for investors to check the company’s efficiency:
15. Asset Turnover Ratio
It tells how good a company is at using its assets to generate revenue. Asset turnover ratio can be calculated as:
Asset turnover ratio = (Sales/ Average total assets)
The higher the asset turnover ratio, the better it’s for the company as it means that the company is generating more revenue per rupee spent.
16. Inventory Turnover Ratio
This ratio is used for those industries which use inventories like the automobile, FMCG, etc. A company should not collect piles of shares and should sell its inventories as early as possible. The inventory turnover ratio helps to check the efficiency of cycling inventory. It can be calculated as:
Inventory turnover ratio = (Costs of goods sold/ Average inventory)
The inventory turnover ratio tells how good a company is at replenishing its inventories.
17. Average collection period:
The average collection period is used to check how long the company takes to collect the payment owed by its receivables. It is calculated by dividing the average balance of account receivable by total net credit sales and multiplying the quotient by the total number of days in the period.
Average collection period = (AR * Days)/ Credit sales
Here, AR = Average amount of accounts receivable
Credit sales= Total amount of net credit sales in the period
The average collection period should be lower as a higher ratio means that the company is taking too long to collect the receivables and hence is unfavorable for the operations of the company.
Debt or solvency or leverage ratios are used to determine a company’s ability to meet its long-term liabilities. They are used to calculate how much debt a company has in its current financial situation. Here are the two most important Financial ratios for investors to check debt:
18. Debt/equity ratio
It is used to check how much capital amount is borrowed (debt) vs that of contributed by the shareholders (equity) in a company.
As a thumb rule, invest in companies with debt to equity ratio less than 1 as it means that the debts are less than the equity.
19. Interest coverage ratio
It is used to check how well the company can meet its interest payment obligation. Interest coverage ratio can be calculated by:
Interest coverage ratio = (EBIT/ Interest expense)
Where EBIT = Earnings before interest and taxes
The interest coverage ratio is a measure of the number of times a company could make the interest payments on its debt with its EBIT. A higher interest coverage ratio is preferable for a company as it reflects- debt serving ability of the company, on-time repayment capability, and credit rating for new borrowings
Always invest in a company with a high and stable Interest coverage ratio. As a thumb rule, avoid investing in companies with an interest coverage ratio less than 1, as it may be a sign of trouble and might mean that the company has not enough funds to pay its interests.
Closing Things
In this article, we discussed the list of most important Financial ratios for investors. If you want to look into these financial ratios for any publically listed company on Indian stock exchanges, you can go to our stock research portal. Here, you can find the five year analysis and factsheet of all these ratios.
That’s all for this post. I hope this article on the most important Financial ratios for investors is useful to the readers. In case I missed any important financial ratio, feel free to comment below. 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
Stock Market Timings in India: There are two major stock exchanges in India- the Bombay stock exchange (BSE) and the National stock exchange (NSE). However, the timing of both BSE & NSE is the same.
For a quick answer, the stock market timings in India for normal trading in the equity market is between 9:15 am to 03:30 pm, Monday to Friday, without any lunch or tea break. This means that you can buy or sell your stocks on BSE or NSE at any time between this time period.
Anyways, the trading timing for the commodity market is different and longer. Moreover, this stock market timings in India is also divided into different segments that we’ll discuss in detail in this post. Let’s get started
Stock Market Timings in India
First of all, you need to know that the stock market in India works only five days and is closed on weekends i.e. Saturday and Sunday.
Further, the markets are also closed on national holidays like Republic Day, Independence Day, Gandhi Jayanti, etc. You can find the list of the holidays of the stock exchange here: NSE India
The normal trading time for equity market is between 9:15 am to 03:30 pm, Monday to Friday.
The trading time for commodity (MCX) market is between 10:00 AM to 11:30 PM, Monday to Friday.
The normal trading time for Agri-community (NCDEX) market is between 10:00 AM to 05:00 PM, Monday to Friday. (Source: McxIndia)
Now, there is continuous trading by the traders/investors in this time period. This means that there is no lunch break or tea break in the Indian stock market timings, unlike banks or other government/private offices.
Different Segments of Stock Market Timings in India
The timings of the Indian stock market are divided into three sessions:
Normal session (also called a continuous session)
Pre-opening session
Post-closing session
Now, let us discuss all these sessions to further understand their importance in the stock market timings in India.
— Normal Trading Session
Basically, this is the trading session or stock market timings that everyone should know.
The normal trading session is the actual time where most of the trading takes place.
Its duration is between 9:15 AM to 3:30 PM.
You can buy and sell stocks in this session.
The normal trading session follows a bilateral matching session i.e. whenever the buying price is equal to the selling price, the transaction is complete. Here transactions are as per price and time priority.
— Pre-Opening Session
The duration of the Pre-opening session is between 9:00 AM to 9:15 AM i.e. before the Normal trading session. This is further divided into three sub-sessions.
9:00 AM to 9:08 AM:
This is the order entry session.
You can place an order to buy and sell stocks in this duration.
One can also modify or cancel his orders during this period.
9:08 AM to 9:12 AM:
This session is used for order matching and for calculating the opening price of the normal session.
You cannot modify or cancel the buy/sell order during this time.
9:12 AM to 9:15 AM:
This session is used as a buffer period.
It is used for the smooth translation of the pre-opening session to the normal session.
The opening price of the normal session is calculated using a multilateral order matching system.
Earlier, a bilateral matching system was used which caused a lot of volatility when the market opened. Later, this was changed to a multilateral order matching system to reduce the volatility in the market. You can read more on how Pre-Opening prices of stocks are calculated here.
Anyways, most traders do not use the pre-opening session and only use the normal session for trading. That’s why there is still huge volatility even in the normal session after the pre-opening session.
The time between 3:30 PM to 3:40 PM is used for closing price calculation.
The closing price of a stock is the weighted average of the prices between 3:00 PM to 3:30 PM.
For the indexes like Sensex & nifty, its closing price is the weighted average of the constituent stocks for the last 30 minutes i.e. Between 3:00 PM to 3:30 PM.
— Post-Closing Session
Finally comes the 20 minutes session of the post-closing session.
The duration of the Post-closing session is between 3:40 PM to 4:00 PM.
You can place orders to buy or sell stocks in the post-closing session at the closing price. If buyers/sellers are available then your trade will be confirmed at the closing price.
NOTE: Pre-opening session and the Post-closing session is only for the cash market. There are no such sessions for future & options.
Summary of Different Session of Stock Market Timings in India
Overall, the stock market timings in India and its different sessions can be briefed as:
In addition, if you are unable to trade between these time periods, you can place an AMO (Aftermarket order). There is no actual trading here but you can place your buy or sell order.
Special Trading Session – Muhurat Trading
Further, the Indian stock market also opens a special trading session during Diwali, the festival of light. This is known as ‘Mahurat Trading’. Its trading time is declared a few days before Diwali.
However, generally, Mahurat Trading timings is not similar to normal trading and is traded in the evening. You can find more details about mahurat trading here: 60-minute ‘Muhurat Trading’ on BSE, NSE this Diwali
Bonus Section for Stock Market Beginners
By the way, if you are new to investing and want to learn how to start investing in the Indian stock market, check out this video for beginners. Here I have explained the step-by-step process for beginners to start investing in stocks. And I’m sure it will be helpful to you!
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Different Charges on Share Trading Explained. Brokerage, STT, DP & More (Updated): There are a number of charges and taxes involved while trading in India i.e. buying or selling of shares. Some of them are quite popular like Brokerage Charge & GST, while there are many others that the traders and investors are not aware of. In this post, I am going to explain all types of different charges on share trading. Some common ones are brokerage charges, Security transaction charges (STT), stamp duty, etc.
Anyways, before we start discussing them, let us spend a few minutes to learn a few basics things that you need to know first. So, be with me for the next 10-12 minutes to understand the explanation of all the different charges on share trading. Let’s get started.
1. Intraday Trading and Delivery
A lot many beginners trades in stocks and confuse it by investing or delivery. However, both of them are really different:
Intraday Trading: When you buy & sell a share on the same day, then it’s called Intraday trading. For example, you bought a share in the morning and sold it before the market closes on the same day, then it will be considered as an intraday
Delivery Trading: On contrary to Intraday, when you buy a share and hold it for at least one day, then it’s called a delivery. For example, you bought a share today and sold it after three days (or any day but today) then it will be considered as a delivery. Here you can sell the stock tomorrow, or the day after that, or a week later, a year later or 20 years later.
2. Full-Service Brokers and Discount Brokers:
Full-Service brokers: These are the traditional brokers who offer full-service trading services in stocks, commodities, currencies, mutual funds, etc along with research and advisory, portfolio and asset management, banking all in one account. For example, ICICI Direct, Kotak Securities. HDFC securities, etc.
Discount brokers: These are those budget brokers who offer high speed and the state-of-the-art execution platform for trading in stocks, commodities and currency derivatives. They charge a reduced commission (flat price) and do not provide trading advice. For example, Zerodha, 5Paisa, Angel Broking, Trade Smart Online, etc.
In general, a full-service broker charges a brokerage between 0.03% – 0.60% of the transaction volume while trading in stocks. On the other hand, the discount brokers charge a flat fee (fixed rate of Rs 10 or Rs 20 per trade) on intraday. The majority of discount brokers also do not charge any fee on delivery trading.
It is important to note that you have to pay a brokerage charge on both sides of trading i.e. while buying a share and selling a share. Let’s take an example to understand the brokerage charge better.
Suppose there is a brokerage firm called – ABC. Now, this broker charges a brokerage fee of 0.275% on intraday trading and 0.55% on delivery trading. The total charges on both tradings can be given as-
Intraday Trading
Delivery Trading
Brokerage
0.275% of total turnover
0.55% of total turnover
Turnover
If you buy 100 stocks at Rs 120 and sell at Rs 125, total turnover is (120*100+ 125*100=) Rs 24,500
If you buy 100 stocks at Rs 120 and sell at Rs 125, total turnover is (120*100+ 125*100=) Rs 24,500
Total Brokerage Cost
Total brokerage charge on Intraday trading (for both buying and selling) = 24,500 * 0.00275 = Rs 67.38
Total brokerage charge on Delivery (for both buying and selling) = 24,500 * 0.0055 = Rs 134.75
As the competition among the brokers is continuously increasing, these brokerage charges offered by the different brokers are also decreasing. For example, the discount brokers like Zerodha offers a flat fee of Rs 20 or 0.03% on Intraday trading (whichever is lower) and Delivery investments are FREE. Here are the Brokerage charges for different segments offered by Zerodha.
— Delivery Trading: FREE (Rs 0) — Intraday Trading: Rs 20 per trade or 0.03% (whichever is minimum)
— Equity Futures: Rs 20 per trade
— Equity Options: Rs 20 per trade
Therefore, for the above table, assuming the same scenario, the person would be paying only Rs 7.35 in Intraday Trading and Zero Brokerage on Delivery, if he prefers Zerodha as its broker. Other discount brokers like 5Paisa, Upstox, Angel Broking, etc, also offer similar lower brokerage charges.
Now, apart from brokerage charges, there are also an additional couple of charges and taxes to be paid while share trading. As already mentioned earlier, some of them are Security transaction tax, service tax, stamps duty, transaction charges, SEBI turnover charges, depository participant (DP) charges, and also capital gain tax (which you’ve to pay at the end of the financial year but not while transacting).
Let’s understand these other different charges on share trading and taxes involved first. Further, we will also discuss an example at the end of this post to understand the charges and taxes involved better.
Different Charges on Share Trading
– Security Transaction Tax (STT)
Apart from brokerage, this is the second biggest charge involved while trading in stocks.
For delivery trading, STT is charged on both sides (buy & sell) of transactions and is equal to 0.1% of the total transaction price (on each side of trading).
For intraday and derivate trading (futures and options), STT is charged only when you sell the stock. For intraday, the STT charge is 0.025% of the total transaction price while selling.
For equity Futures, the STT is equal to 0.01% on the sell-side. On the other hand, for equity options trading, STT is equal to 0.05% on sell-side (on premium).
– Stamp Duty
Stamp duty is charged uniformly irrespective of the state of residence effective from July 1st, 2020. These new rates are only on the buy-side (and not on both buy and sell-side). Here are the new rates on stamp duty on different types of trades:
Type of trade
New stamp duty rate
Delivery equity trades
0.015% or Rs 1500 per crore on buy-side
Intraday equity trades
0.003% or Rs 300 per crore on buy-side
Futures (equity and commodity)
0.002% or Rs 200 per crore on buy-side
Options (equity and commodity)
0.003% or Rs 300 per crore on buy-side
Currency
0.0001% or Rs 10 per crore on buy-side
Mutual funds
0.005% or Rs 500 per crore on buy-side
Bonds
0.0001% or Rs 10 per crore on buy-side
Quick Note: Previously, the stamp duty was charged by the state government and hence not similar across all the states in India. A few states charged higher stamp duty, whereas a few of them charges lower duty taxes. Different states charge different stamp duty. Moreover, Stamp duty used to be charged on both sides of transactions while trading ( i.e. buying & selling) and hence are charged on the total turnover. **This rule changed after 1st July, 2020.
– Transaction Charges
The transaction charges is charged by the stock exchanges and that too on both sides of the trading. This charge is the same for intraday & delivery trading.
National stock exchange (NSE) charges a fee of 0.00325% of the total turnover as Transaction charges on Equity and Delivery Trading. On the other hand, Bombay stock exchange (BSE) charges a fee of 0.003% of total turnover as Transaction charges on Equity and Delivery Trading.
For Derivatives trading, BSE doesn’t cost any transaction charges. However, on NSE, the Exchange transaction charge is 0.0019% for futures trading and 0.05% of total turnover for Options Trading.
– SEBI Turnover Charges
SEBI stands for the Securities exchange board of India and it is the security market regulator. SEBI makes the rules and regulations on the exchanges for its proper functioning.
SEBI Turnover fee is charged on both sides of the transaction i.e. while buying and selling and is the same for all equity intraday, delivery, futures, and options trading.
The SEBI turnover charge is equal to Rs 10 per crore of the total turnover.
– Depository Participant (DP) Charges
There are two stock depositories in India- NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). Whenever you buy a share, it is kept in an electronic form in a depository. For this service, the depositories charge some fixed amount.
The depositories don’t charge the traders or investors directory but charge the depository participant. Here, the brokerage firm or your demat account company is the depository participant (DP).
DP acts as a linkage between the depository and the investor as the investors cannot directly approach the depository. In short, the depository charges the DP and then the depository participant (DP) charges the investors.
For example, while trading with Zerodha, DP charge is equal to ₹13.5 + GST per scrip (irrespective of quantity), on the day, is debited from the trading account, i.e. when stocks are sold. This is charged by the depository and depository participant.
– Goods & Service Taxes (GST)
GST is the mandatory tax levied by the government on the services rendered and is equal to 18% of total brokerage and transaction charges.
– Capital Gain Taxes
Lastly, Capital gain taxes is the most important tax to understand in this article for the traders and investors. We are not going to cover all the details regarding capital gain taxes in this article, but just a short over. If you want to read the complete details, you can refer to this article.
There are two types of Capital gain taxes in India – Short-term capital gain tax and Long-term capital gain tax.
When you sell a stock before one year of buying, then it is considered as a Short-term. Here a flat 15% of the profit is charged as short-term capital gain tax.
When you sell a stock after one year of holding, then it is called the long-term. For the long term capital gain, you have to pay a tax equal to 10% of the gains, if it exceeds Rs 1 lakh.
For Intraday Traders, they need to pay taxes on their capital gains which depends on their tax slab. For example, if you’re in the highest tax slab and made some profits while intraday trading, you’ve to pay taxes of 30% on those gains.
Quick Note: You can also download our FREE android app of ‘Brokerage Calculator’ to find the total brokerage and actual profits/loss while trading in stocks ‘on your phone’. Here is the quick link!
Example of Different Charges on Share Trading
Now, let us see an example to understand these different charges on share trading and taxes involved better. Suppose there are two traders- Rajat and Prasad. Here, Rajat is a delivery trader who invests in the long-term i.e. for 2-3 years. On the other hand, Prasad is an intraday trader.
They both have their accounts in the same discount brokerage company named ABC. The brokerage charge for ABC is Rs 20 Per trade on intraday trading and FREE for delivery trading.
Also, let us suppose that both Rajat and Prasad have traded a total turnover of Rs 98,000 in a share (i.e. total cost involved while buying and selling). In addition, they both live in Maharastra.
Now the different charges and taxes paid by them for complete trading i.e. from buying to selling the shares can be given as-
Prasad (Intraday Trader)
Rajat (Delivery Trader)
Buy Price
120
120
Sell Price
125
125
Quantity
400
400
Total Turnover
Rs 98000
Rs 98000
Exchange
NSE
NSE
State
Maharashtra
Maharashtra
Brokerage Charge
Rs 40 (Flat Rs 20 Per trade i.e. Buying & Sellling)
Rs 0 (FREE Delivery Trades)
STT
0.025% of sell side = 0.025 % of Rs 50,000 = Rs 12.5
0.1% on buy & sell = 0.1% of 98000 = Rs 98
Stamp Duty
0.003% of buy-side = 0.003% of 48,000 = Rs 1.44
0.015% of buy-side= 0.015% of 48,000 = Rs 7.2
Transaction Charges
0.00325% of total turnover = 0.00325% of Rs 10,000= Rs 3.18
0.00325% of total turnover = 0.00325% of Rs 10,000= Rs 3.18
At first glance, it looks cheap to invest in intraday as the total charges are comparatively less here. But you should note that the frequency of trading for intraday traders is quite high. Many intraday traders easily make 2-3 high volume trades every day. So, they have to pay these brokerage charges and taxes again and again. On the other hand, delivery traders or long-term investors do not make such frequent trades.
Overall, charges and taxes are a very important part of trading and should not be ignored. You might think that you are in profit, but the real profit is the one which is left after deducting the charges and profit. I hope the traders will keep this in mind before trading the next time.
Zerodha Brokerage Calculator
Before ending this article, here’s the brokerage calculator for equity trades using Zerodha, the discount broker.
That’s all for this post. If you’ve any doubts related to the different charges on share trading in India, feel free to comment below. I’ll be happy to help you out. Cheers & Happy Trading!
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
Understanding what are Preferred Stocks and why are they beneficial: The dream security for many would be one that provides you both the inherent security found in bonds and returns of an equity stock at the same time. Luckily enough for us, such financial instruments exist and not only provide security but also steady returns in the form of dividends. This flexible security is known as a Preferred Stock or a Preference Share.
Today, we are going to discuss what are preferred bonds. Here, we’ll cover their meaning and also clear out what these bond and equity hybrids are in order to better understand and decide if they can actually be preferred over their parents
What are Preferred Stock/Preference Shares?
Many of us do not know that there are two types of stocks. The first being the common stock which we are accustomed to. The second being preference shares.
Preference Shares or Preferred Stocks offer investors preferential right over common stock when it comes to earnings and asset distribution. However, in exchange for these preferential rights, preference shares do not possess the voting rights in a company that the common stock holds.
What are the benefits of Preferred Stocks?
The investors benefit in the following ways when it comes to preference shares
1. Fixed Income
This means when dividends are announced, the payments will first have to be made to preference shareholders and only then to common shareholders. The dividend rates of preference shares are fixed at a predetermined rate or some other floating factor depending on the terms of the issue.
The decision on when dividends have to be paid is at the discretion of the board. This is because the Preference shareholders do not possess and voting rights in order to influence the board members or decisions.
2. Security in the case of winding up
Also in the case of winding up of a company, it is the preference shareholders who have priority in claiming the company assets. Only after the obligations to Preference shareholders are fulfilled will the obligations to common stock begin.
It is because of the above reasons that the Preference shares are known to be a hybrid. Just like bonds they offer regular returns with no voting rights. But like equity, the shares are allowed the trade and have the potential to appreciate in price.
Hierarchy of Bonds, Preference shares, and Equity shareholders
— In terms of Returns
It is the interest on bonds that are first serviced from the profits made by the company. Only then will the preference shareholders be paid the dividends due to them. In a case where the profits made are not sufficient then the preference shareholders and common shareholders can be left out. This is because unlike for bonds if the company does not pay preference shareholders it does not mean that the company is in default.
The bonds here are treated as debt whereas preference shares are not. In a scenario where there are sufficient returns first the interest on bonds is paid. Next, the preference shareholders are paid based on the rates set. Lastly, the remaining amount is paid to the equity shareholders. Only then is the remainder paid to the common shareholders. The dividends to preferential shareholders are preferred but not guaranteed.
Unlike bonds and preference share, there is no rate set to equity. This means that there is no upper limit nor lower limit to the dividends they receive. In exchange for preferential treatment, the preference shareholders will never receive dividends in excess of the rates prescribed to them.
Despite this common stock are greater wealth creators in comparison to preferred stock and bonds. This is because there is no limit on the increase in the stock price. When it comes to Preference shares the price generally looms around the face value.
— In terms of Claim over Assets
In the case of winding up, it is the bondholders who are first paid off followed by the preference shareholders and then the common stockholders.
— In terms of Risk
Preferred stocks are less riskier in comparison to equity. But when compared to bonds preference shareholders are considered to be riskier. This is because they fall back when it comes to being compared over the claim of assets and fixed interest rates that bonds have.
Equity shareholders are the riskiest here as they get leftovers of the bondholders and preference shareholders in the case of winding up. In a case, where the company is performing poorly, the share prices of common stock are also adversely affected.
Types of Preferred stock
There are various types of preferred stock. The following are the most commonly used
1. Cumulative Preference Shares
Say a company is in a bad shape and is forced to suspend dividends for the year. Here if the shares are Cumulative Preference shares, they are still entitled to receive the dividend for the year. Such a missed dividend payment will be added to the dividend payments of the following years and paid to the cumulative preference shareholders.
Eg. Company ABC has issued Cumulative Preference shares. ABC has issued 3000 10% cumulative preference shares at Rs.100 face value. Here the dividends payments ABC is obliged to make is Rs 30,000. But due to COVID-19, the ABC can only pay Rs. 10,000 of the dividend in 2020. Here the Rs. 20,000 is carried forward as arrears and paid the next year. Hence ABC will have to make a total dividend payment of Rs. 50,000 in 2021. Amount arising from Rs. 20,000 carried forward and Rs. 30,000 accruing in 2021.
2. Convertible Preference Shares
These preference shares can be exchanged for a predetermined number of common shares. Convertible Preference Shares can be converted only when the Board of Directors decides to convert them.
3. Callable preference Shares
Callable preference shares can be called back similar to bonds. In a call, the shares issued are bought back by the company by paying its holders the par value and at times a premium. This is done by the company in situations when the interest rates in the market fall. In such a situation the company realizes that it does not have to keep servicing the preference shares at the high rates it was issued a few years ago. The company simply calls back the shares and then reissues it at lower rates.
4. Perpetual Preferred Stock
Here there is no fixed date on which the investors will receive back the capital. Here shares are issued in perpetuity.
The types of preference shares mentioned above are common examples. The company, however, may combine one variant with the other and issue a preference share eg. Convertible Cumulative Preference Shares. If there are multiple issues of preference shares the shares may be ranked by priority.
In preference shares, the highest-ranking is called prior, followed by preference, 2nd preference, etc. The dividends and final settlements will be made in the order of this ranking.
Where are these Preference Shares available?
Preference shares are traded on the same exchanges like that of common stock. However, their issues are rare as companies do not generally go for preferred stock making their market small and their liquidity limited. The price of preference shares on these exchanges are determined by a variety of factors like dividend rate, the creditworthiness of a company, type of preference share eg, cumulative, convertible, etc.
The share prices of Preference shares like bonds have an inverse relationship with interest rates.
Apart from looking at the type of preference share and the interest offered, it is also important necessary to figure out why the company issuing Preference Shares?
It is a known fact that companies issue preference shares in order to avoid dilution of capital. But it is also noticed that companies issue preference shares when they have trouble accessing other means of capital. This may be because banks are refusing loans due to their low creditworthiness. Raising money through Preference Shares is cheaper as it gives the option to the company to only serve them when they are able to, unlike other debt instruments.
Another reason may also be that preference shares do not reduce the creditworthiness of a company, unlike debt that is added to the balance sheet. The company can issue preference shares that act like debt but are shown as equities in the balance sheet. Happy Investing!
Introduction to Socially Responsible Investing (SRI): Deciding how you want to invest your money is often hard. You need to take many factors into consideration such as risk, returns, taxes, and inflation. It takes a lot of forethought and groundwork to figure out a way to get the best return on your investments.
Yet, there are some investors who choose to invest in companies that are not only financially stable but also make a positive impact on the environment. Here, we are talking about Sustainable or ethical investors, who in the investing world are also known as Socially responsible investors.
Today, we are going to discuss what is Socially responsible investing or SRI, why it is important, and finally, how to become a Socially Responsible investor. Let’s get started.
What is Socially Responsible Investing?
Socially Responsible Investing or SRI is choosing to invest in stocks that provide a financial gain as well as do social good. Here, investors tend to look into the ethical factor along with the fundamentals of a company become investing.
In SRI, the companies are evaluated based on the ESG index: environment, social justice, and corporate governance.
SRI helps in creating a big impact on the world along with making good returns. Although the socially-responsible investing concept is still up and coming in India, it is expected to gain greater momentum in the next few years. Companies have become more aware of the ESG factors and are looking to incorporate more of it into their business practices.
Socially Responsible Investing History
Socially responsible investing began in the early 1700s when the Quakers refused to participate in the slave trade in the U.S. Pastor John Wesley, the leader of the Methodist church claimed it was a sin to make a profit at the cost of your neighbor’s well-being. He stated that it was unethical to gamble and invest in industries that used toxic chemicals.
For many decades after John Wesley’s speech, investors avoided industries such as tobacco and liquor referring to them as ‘sin industries’. This evolved in the 1960s when investors decided to invest their money in companies that promoted social causes such as women’s rights and civil liberty.
Socially responsible investing played a huge role in South Africa during the 1980s when investors began pulling out their money due to the apartheid or the segregation of races. SRI had a prominent role in helping bring an end to the apartheid in 1994.
Sustainability Indexes
If you look into the American and European nations, they already a family of indices evaluating the sustainability performance of thousands of companies trading publicly. The Dow Jones Sustainability Indices (DJSI) launched in 1999, are the longest-running global sustainability benchmarks worldwide. To be incorporated in the DJSI, companies are assessed and selected based on their long-term economic, social and environmental asset management plans.
For India, S&P BSE has three main indices that measure corporate sustainability: S&P BSE 100 ESG INDEX, S&P BSE GREENEX, and S&P BSE CARBONEX. For NSE, a few of the Sustainability Indexes are the Nifty 100 ESG Index and Nifty 100 enhanced ESG index.
Nifty100 ESG Index is designed to reflect the performance of companies within the Nifty 100 index, based on Environmental, Social and Governance (ESG) scores. The weight of each constituent in the index is tilted based on ESG score assigned to the company i.e. the constituent weight is derived from its free-float market capitalization and ESG score.
Nifty100 Enhanced ESG Index is designed to reflect the performance of companies within the Nifty 100 index based on Environmental, Social and Governance (ESG) score. Companies should have a normalized ESG score of at least 50% to form part of this index. The weight of each constituent in the index is tilted based on ESG score assigned to the company, i.e. the constituent weight is derived from its free-float market capitalization and the ESG score.
How to be a Socially Responsible Investor?
Here are a few points that can help you become a socially responsible investor:
— Know the difference
The first and foremost important step to becoming a socially responsible investor is to know the difference between traditional and responsible investing. The difference might be in returns that you get from your investments. The returns from socially responsible investing may differ a little from the traditional one as you might be leaving behind a lot of high return investment options. However, always remember the reason why you have opted for this way of investing.
— Do your research
This is where investors use negative and positive screening to shortlist investment options. In the negative screening, they avoid investing in companies that don’t relate to their social values. Many mutual funds that are socially responsible screen out tobacco and liquor companies. One type of negative screening is divestment, this is where investors take their money out of certain companies because they do not like their business practices or social values.
Along with screening out negative companies, it is also important for investors to choose companies that align with their values. These are companies that strive to bring change to a social aspect that the investor finds important along with their socially responsible business practices. This is also known as impact investing or incorporation of ESG.
— Use your influence as a shareholder
Shareholders not only invest in companies that align with their values but they also use their position to influence the actions of the company in which they own stock. Investors do this by filing a shareholder resolution. This is a document outlining the shareholder’s suggestions for management on how to run the company in a more socially responsible way.
— Invest in the community
This is where an investor invests in companies that have a positive impact on the community. This is usually done in low-income areas where the investment is used to provide loans to people and small-business owners who would otherwise have trouble getting approved for a loan. Community investments also support ‘green companies’ that have a large carbon footprint on the environment.
— Lead by examples
Socially responsible investing is still in the early adoption phase. By making the right investment choices, you can make a real positive impact on the community- along with building wealth. Moreover, sooner or later, social consciousness will become the selling point for global companies. And you, being a part of it, can lead the movement.
How to get started with Socially Responsible Investing?
1. Decide what your social principles are
Before you choose your stocks you need to decide what social goals you want to promote. You should focus on your values and what you want to achieve through your investments.
2. Decide what your financial goals are
The next step is to decide what financial goals you want to achieve through your investment just as you would with any other investment. You need to decide how much return you need to meet your goals as well as how much risk you are willing to handle. SRI has been shown to provide comparable returns as a traditional stock would.
3. Choose the fund that meets your needs and goals
Once you have decided what your social and financial goals are, the next step is to find the investment that’s right for you. The most common ESG funds in India include Tata Ethical Fund, Taurus Ethical Fund, and Reliance ETF Shariah BeES.
Social investing has also resulted in the success of micro-finance. This was created by social investors to create an impact on small businesses and has now become an industry worth over $8bn and is now a mainstream financial service.
Socially Responsible investing is becoming increasingly popular in India and there has been a visible shift in the market strategy adopted by many participants as they incorporate social, economic and governance (ESG) factors into their investment process. Stakeholders realize the importance of their role in financial markets to influence sustainable growth.
According to the Indian Impact Investors council ‘more than 30 impact funds have invested in social enterprises in India’. There has been $2billion investment in over 300 companies in India.
While socially responsible investing is still not as big as traditional investing in India, it is still a rapidly growing market. Social investing in India has helped provide basic needs such as housing and education to the poor. Many investors have now realized the power and influence they have to make a positive impact on society.
However, there is one particular type of stock that gets a lot of attention from every kind of investor (beginners to the seasoned players)- and they are the BLUE CHIP stocks. Moreover, when most newbies enter the exciting world of the stock market, they are suggested to look into blue chip stocks as safer investment options. However, being new to investing, most of them are simply confused and are not able to understand what other means when they say blue chip companies.
In this post, we are going to look into what exactly are blue chip stocks and then cover ten of the best blue chip companies in India that every investor should know. Please note that this is going to be a long post, but I promise that it will be worth reading. Therefore, without wasting any further time, let us understand the blue chip companies in India.
A Quick Introductory Story
“… but blue chip companies are boring. It’s better to invest in growth stocks with huge upside potentials.”, Gaurav argued energetically.
“Yes, blue chips are not the ‘hot’ stocks in the market. However, they are a good option for the investors who are looking for low-risk investments with decent returns.”, I replied.
Gaurav has been investing in the stock market for the last two years and he likes to discuss his investment strategies with me. Nevertheless, his investment style is totally different from that of mine. Gaurav loves to invest majorly in mid-caps and small-cap companies (including penny stocks) which can grow at a fast pace. On the other hand, I like investing in a diversified portfolio.
“That’s true, dude. But most of these blue chip companies have already reached a saturation point. They can not continue to grow at the same pace and hence can’t similar returns as they used to give in the past. Once a company has sold a billion products, it’s difficult to find the next billion customers.”, Gaurav challenged me with his witty reply.
“I know the rule of large numbers, Gaurav. Thank you for reminding me. Moreover, I agree that the large-cap companies cannot maintain the same pace of growth forever. But bro, it doesn’t mean that they won’t be profitable in future or can’t give good returns to their shareholders… They have already established their brand. If they use their resources efficiently, they can make huge fortunes for themselves as well as for their shareholders…
For example- take the case of Reliance Industries. Reliance is a market leader in its industry and has a lot of customers. But they are also using their capital efficiently to grow their business. Two years back, they entered a new market- Telecommunication Industries, and now they are also a leader in that industry.
Because of their strong financials- they were able to bring the latest 4G technology to the Indian market and hence were able to quickly acquire a lot of customers. As the initial set-up cost in this industry is very high, they have created an entry barrier for the small and mid-cap companies. This is what a blue-chip company can do if they use their resources properly.“
Gaurav looked a little mind-boggled. That’s why I thought better to give him another example to make him understand the capabilities of blue chip companies.
“Let’s discuss another example- Hindustan Unilever. If you think that HUL cannot grow any further because it is a large-cap company, then you might need to reconsider it. HUL already have popular products in the market like Lux, Lifebuoy, Surf Excel etc which are generating them a good revenue from those products. But, they still have a large rural area to cover. They are not so popular in the village areas, are they? So, they can definitely grow in the rural areas…”
…besides, as they have enough resources and financials, they are also continuously working on new product development in their Research & development (R&D) department. If they can make another great product, their profits will add-up in the future….“
Finally, when Gaurav didn’t argue further, I concluded-
“…a good blue chip company is like Rahul Dravid. If you want fast scorers (or T-20 players), then you may not like his batting style. However, if you are looking for dependable players, then you will definitely appreciate Rahul Dravid’s consistency.”
What are Blue Chip companies?
Blue chip companies are large and well-established companies with a history of consistent performance. These companies are financially strong (usually debt-free or very low debts) and are capable to survive in tough market situations.
Most of the blue chip companies are the market leaders in their industry. A few of the common examples of blue chip companies in India are HDFC Bank, HUL, ITC, Asian Paints, Maruti Suzuki etc.
— Signature Characteristics of Blue Chip Companies
Here are a few signature characteristics which you can look forward while researching blue chip companies—
They are large reputed companies.
They have widely used products/services.
Most of these companies are listed in the market for a very long time.
Blue chip companies have survived a number of bear phases, market crises, financial troubles, etc. But they are still going strong.
Blue chip companies have a strong balance sheet (a large number of assets compared to liabilities) and a healthy income statement (revenues and profits continuously growing for the last few decades).
These companies have a good past track record of stable growth.
Almost all blue chip stocks are older companies. You might already know many of the blue chip companies in India and have been using their products/services in your day-to-day life.
For example- Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Wall’s and Pureit —- all these products are offered by the same blue chip company in India – Hindustan Unilever (HUL).
New to stocks? Confused where to begin? Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount.
— Why are they called blue chips?
Oliver Gingold- who worked at Dow Jones, is credited to name the phrase ‘Blue Chip’ in 1923. The term ‘blue chips’ became popular after he wrote an article where he used ‘Blue chips’ to refer the stocks trading at a price of $200 or more.
Quick Note: There are other sets of investors who believe that blue chip companies got its name from the Poker game, as in that game- blue chips are relatively more valuable. Similar to the game, the stocks which are more valuable in the market are termed blue chip stocks.
Although Oliver Gingold used the term ‘blue chips’ for high priced stocks, however, later people started using this word more often to define high-quality stocks (instead of high priced stocks).
— Financial characteristics of blue chip stocks
Apart from the signature characteristics discussed above, here are few key financial characteristics of blue chip companies –
1. Blue chip companies have a large market capitalization -As a thumb rule, the market cap of most of the blue chip companies in India is greater than Rs 20,000 Crores.
2. Good past performance: Blue chip companies have a track record of good past performance (like consistently increasing annual revenue over a long-term).
3. Low debt to equity ratio: The bluest of the blue chips are (generally) debt free stocks. However, a lower and stable debt to equity ratio can also be considered as a significant characteristic of blue chip companies.
4. Good dividend history: Blue chip companies are known to reward decent dividends to their loyal shareholders.
5. Other characteristics: Apart from the above four- few other key characteristics of blue chip companies are a high return on equity (ROE), high-interest coverage ratio, low price to sales ratio etc.
Now that you have understood the basic concept, here is the list of top 10 best blue chip companies in India. (Disclaimer- Please note that the companies mentioned below are based on the author’s research and personal opinion. It should not be considered as a stock recommendation.)
This company needs no introduction. Reliance Industries is an Indian conglomerateholding company and owns businesses across India engaged in energy, petrochemicals, textiles, natural resources, retail, and telecommunications.
In December 2015, Reliance Industries soft-launched Jio (Reliance Jio Infocomm Limited) and it crossed 8.3 million users as of January 2018.
Reliance is one of the most profitable companies in India and the second-largest publicly traded company in India by market capitalization. On 18 October 2007, Reliance Industries became the first Indian company to reach $100 billion market capitalization. It is also the highest income tax payer in the private sector in India.
HUL is one of the largest Fast Moving Consumer Goods (FMCG) Company in India with a heritage of over 80 years. It is a subsidiary of Unilever, a British Dutch Company. HUL’s products include foods, beverages, cleaning agents, personal care products, and water purifiers.
Few famous products of HUL are Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Walls and Pureit.
HDFC Bank is India’s leading banking and financial service company. It is India’s largest private sector lender by assets and has 84,325 employees (as of March 2017).
HDFC Bank provides a number of products and services which includes Wholesale banking, Retail banking, Treasury, Auto (car) Loans, Two Wheeler Loans, Personal Loans, Loan Against Property and Credit Cards. It is also the largest bank in India by market capitalization and was ranked 69th in 2016 BrandZ Top 100 Most Valuable Global Brands.
Asian paint is one of the largest Indian paint company and manufacturer. Since its foundation in 1942, Asian paint has come a long way to become India’s leading and Asia’s fourth-largest paint company, with a turnover of Rs 170.85 billion. It operates in 19 countries and has 26 paint manufacturing facilities in the world, servicing consumers in over 65 countries.
Asian Paints is engaged in the business of manufacturing, selling and distribution of paints, coatings, products related to home decor, bath fittings and providing of related services.
Tata Consultancy Services Limited (TCS) is an Indian multinational information technology (IT) service, consulting and business solutions company.It was established in 1968 as a division of Tata Sons Limited. As of March 31, 2018, TCS employed 394,998 professionals.
TCS is one of the largest Indian companies by market capitalization (Rs 722,700 Crores as of June 2018). It is now placed among the most valuable IT services brands worldwide. TCS alone generates 70% dividends of its parent company, Tata Sons.
Infosys Limited is an Indian multinational corporation that provides business consulting, information technology and outsourcing services. It has its headquarters in Bengaluru, Karnataka, India.Infosys is the second-largest Indian IT company by 2017 and 596th largest public company in the world in terms of revenue. On April 19, 2018, its market capitalization was $37.32 billion.
Infosys main business includes software development, maintenance, and independent validation services to companies in finance, insurance, manufacturing and other domains. It had a total of 200,364 employees at the end of March 2017.
Indian Tobacco Company (ITC) is one of the biggest conglomerate company in India. ITC was formed in August 1910 under the name of Imperial Tobacco Company of India Limited. It has a diversified business which includes five segments: Fast-Moving Consumer Goods (FMCG), Hotels, Paperboards & Packaging, Agri-Business & Information Technology. Currently, ITC has over 25,000 employees.
As of 2016, ITC Ltd sells 81 percent of the cigarettes in India. Few of the major cigarette brands of ITC include Wills Navy Cut, Gold Flake Kings, Gold Flake Premium lights, Gold Flake Super Star, Insignia, India Kings etc.
Apart for the cigarette industry, few other well-known businesses of ITC are Aashirvaad, Mint-o, gum-o, B natural, Sunfeast, Candyman, Bingo!, Yippee!, Wills Lifestyle, John Players, Fiama Di Wills, Vivel, Essenza Di Wills, Superia, Engage, Classmate, PaperKraft etc.
Eicher Motors is an automobile manufacturer and parent company of Royal Enfield, a manufacturer of luxury motorcycles. Royal Enfield has made its distinctive motorcycles since 1901 which makes it the world’s oldest motorcycle brand in continuous production. Royal Enfield operates in over 40 countries around the world.
The Eicher Group has diversified business interests in design and development, manufacturing, and local and international marketing of trucks, buses, motorcycles, automotive gears, and components.
Bajaj Auto is a global two-wheeler and three-wheeler Indian manufacturing company. It manufactures and sells motorcycles, scooters and auto rickshaws. Bajaj Auto was founded by Jamnalal Bajaj in Rajasthan in the 1940s. It is the world’s sixth-largest manufacturer of motorcycles and the second-largest in India.
A few of the popular motorcycle products of Bajaj Auto are Platina, Discover, Pulsar and Avenger and CT 100. In the three-wheeler segment, it is the world’s largest manufacturer and accounts for almost 84% of India’s three-wheeler exports.
Nestle India is a subsidiary of Nestle SA of Switzerland- which is the world’s largest food and beverage company. It was incorporated in the year 1956. Nestle India Ltd has 8 manufacturing facilities and 4 branch offices in India. The Company has continuously focused its efforts to better understand the changing lifestyles of India and anticipate consumer needs in order to provide Taste, Nutrition, Health and Wellness through its product offerings.
Few famous products of Nestle India are Maggi, Nescafe, KitKat, MUNCH, MILKY BAR, BARONE, NESTLE CLASSIC, ALPINO etc. (On 8 March 2018, Nestle Indias food brand MAGGI completed 35 years of existence in India.)
Most people invest in blue chip companies become of their long history of consistent performance and a similar expectation of standard performance in the future. Blue chip companies are low-risk high return bet for the long term.
Many blue chip companies in India like Tata, Reliance, Infosys etc are considered as ‘Too-big-to-fail’ companies as they have survived and remained profitable for a very long time. Nevertheless, this is not always true!!
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
Understanding the pros and cons of Investing in Foreign Stocks: Indian investors have always been known to be inward-looking. That is, they would prefer to invest in the Indian markets over foreign ones. This has been the case even though it’s been over 15 years since they were first permitted to invest in foreign equities.
One of the major reasons for this has been the fact that India being a developing nation has an economy that grows faster than many developed countries. Today we discuss the possible benefits that an investor may receive while investing in foreign markets and also the limitations of doing so.
Benefits of Investing in Foreign Stocks /International markets
1. Diversification
Generally, when we talk about diversification we generally refer to investing across various industries and different MCAP’s. But by investing in foreign markets we can receive the same benefits of diversification even if the companies that we include in our portfolio already exist in the same industry or MCAP. The main purpose of diversification is to protect the portfolio. By investing abroad the portfolio is safeguarded from any domestic risks that might affect the domestic markets as a whole.
2. Market rebound rate
We earlier mentioned that that Indian investors prefer to invest in Indian securities as they provide a better growth rate. Markets around the world at times undergo crises at the same time. Rare as this should be this has already occurred twice post 2000. Keeping the growth rate aside let us try and notice the performance of markets post such crisis.
The Recession of 2008 saw economies stagnating all around the world. Even though they were first triggered by problems in the US, the Indian economy too suffered from the crash. The Indian markets suffered a fall of 55% compared to the heights it touched at the end of 2007. It can be noticed that the period of December 2007 to December 2013 the Indian markets gained only 4.3% after rebounding. Let us compare this to the US markets. During the recession, the US markets fell by about 50%. But during the same period from December 2007 to December 2013, the US market provided close to 50% returns after rebounding to previous levels.
Let us also take the 2nd instance where we have seen markets all around the world contract. This has been due to the pandemic that we are still suffering through. If we notice the US markets since their heights in February we can see that the markets fell 30% by March but have already rebounded and touched new heights gaining 15% returns. The Indian markets, on the other hand, suffered a fall of over 35% and have still not previous levels.
3. Exposure
Another added advantage of investing in foreign markets is the exposure an investor will receive in terms of securities available to him. Let us dial back time to the early 2000s and observe the options available to Indian investors when it comes to technology-driven securities. They are limited to TCS, Infosys, and Wipro.
On the other hand, foreign markets provided the likes of Apple. Microsoft, Google. At times even legal jurisdictions bar from certain companies to operate in a country. Investors, however, have the option to simply invest in foreign countries.
Risks involved while Investing in Foreign Stocks
1. Currency Exchange
One of the major problems investors face is due to the changing exchange rates. International stocks are priced in the currency of the country they are based in. For an Indian investor, this causes is a problem because he is now not only exposed to the uncertainty of the stock but also the uncertainty of the currency.
Take for example the shares of ABC Ltd. in the US are worth $100. After the purchase is made the stock rises to $110. But at the same time, the dollar weakens by 15%. If a domestic investor sells off his position and converts it to rupees he would not only forgo the 10% gain but also suffer an additional 5% loss due to the exchange rate. But with the added risk there also exists the added opportunity of making gains during the exchange. If the rupee weakens in the above case, the investor would walk away with a 25% gain.
2. Taxability
The gains that an individual makes from foreign investments can be taxed twice. First when the shares are sold in a foreign country. And secondly in India. This, however, depends on whether the individual is considered as a resident or any other status. The rates applicable here will depend on whether the gains are considered as Long term capital gain or Short term capital gain depending on the period the asset was held. This is known as Double taxation.
This can be avoided if there exists a tax agreement between the foreign country and India. This tax agreement is known as the Double Tax Avoidance Agreement. India currently has DTAA with more than 80 countries, including the US, the UK, France, Greece, Brazil, Canada, Germany, Israel, Italy, Mauritius, Thailand, Spain, Malaysia, Russia, China, Bangladesh, and Australia.
3. Political Unrest
When investing in a foreign country the investor must be aware of the potential political risk. This makes it necessary that the investors follow up on major political events such as elections, trade agreements, tax changes, and civil unrest. A country with unfavorable factors makes investing there not worthwhile even if the company is a good performer.
4. Lack of regulation
Investors looking to invest in foreign markets must be aware that foreign governments may not have the same level of regulations that are followed in India. They may have different disclosure and accounting rules followed respectively. This makes it harder and time-consuming for investors to keep up with the inconsistencies that of regulations in different countries.
There exist numerous advantages and risks that exist while investing in foreign stocks. The existence of risks does not mean one should turn a blind eye to over half of the investment opportunities available to an investor. This is because a majority of such opportunities exist in foreign markets.
Investors should, however, pick an opportunity where the risks are considered and assessed and still remains attractive as an investment.
Demystifying whether you Should Invest During COVID19 times: Before we dig deeper into this topic of why investing is so important, let us try and understand as to what investment means. To put it in simple words, Investment can mean building something right now that will help your sustainability in the future. It is the stepping stone towards securing one’s future.
Moreover, investment is an ongoing and continuous process. And the worth of investing is understood more during the recessionary or pandemic e.g. COVID-19 times.
How is Investing different from Trading?
A lot of people lose money in the market because they trade in stocks confusing it as investing. There is a conceptual and structural difference between trading and investing. A few of the key ones are mentioned below:
Investing, in general, is targeted for a longer duration of time. However, trading is for a short duration of time (sometimes even for a few minutes).
While investing, the focus is to earn long term and sustainable gains, but in the case of trading, the focus is for short term gains.
Investors have set rules and goals for buying or selling. But, in the case of trading, the rationale behind a trade keeps changing from trade to trade.
The most important difference is the System. Investing is systematic by nature. The aim here is to have a gradual building of wealth over an extended period of time, by building a portfolio. It can be done via a basket of stock, mutual funds, bonds, or any other investment avenues. But trading follows only one rule i.e., the rule of short term gains.
Having understood the major difference between Investing and trading, let us understand as to why one should invest.
Should you Invest During COVID19 times? – Importance of Investing
Here are a few of the top reasons why one should invest:
To secure one’s Future: As we have already mentioned that investing is an ongoing and continuous process. And one does that to secure one’s own future. and we all know that the future is uncertain. But if we are able to financially plan our future, then it becomes easier to handle the tough times like the current global pandemic.
Investment compounds our savings: Let me explain this with the help of a simple example. Say, if we start an investment with an annual capital of Rs. 2,00,000 and if we do that for 15 years. Let’s say if the annual return on investment is 12% p.a. Here, the compounded value of the investment after 15 years would be Rs. 1,63,39,747.
Retirement Planning: This is one of the major reasons for investment for most people. As most of the people depend on salary for their livelihood and which is why investment becomes more pertinent. Lifestyle maintenance, when one does not have a job can only be possible with proper planning and investment
Planning future events: This is one of the most important benefits of investing. If we have some major expenses (children education, or marriage) a few years down the line. The expenses can be ascertained and proper financial planning can be done for them
Fulfilling one’s aspirations: As the good old saying goes, “If you don’t aspire, you are not living”. Therefore, to be able to fulfill one’s dreams (buying a house, international vacation, etc.) and aspirations, proper planning, and the right investment is a must. And the functionality of compounding also helps in swelling up the investment and meeting one’s goal
Why start Investing during Pandemic (COVID-19)?
As we can see the world economy has been struggling during the pandemic. And with most of the economies posting with near zero or negative GDP growth rate, the investing has become more lucrative. The following are some of the reasons to start investing right now:
The investment avenues are available at a cheaper cost. Say, if I have to buy shares of the blue-chip companies. They are all available at discounted prices and once when the world economy revives, they can give high returns.
To safeguard one’s own interest in the future. The uncertainties come without any warning. Therefore, to protect oneself against it, investing is very important.
Diversification into the various asset classes is of prime importance when one is looking to invest. Say, if someone is looking to invest via mutual funds, they can do so by allocating the portfolio in different funds like equity fund, debt fund, index fund, hybrid funds, gold fund, etc.
Various Investment Avenues in India:
There are various forms of investment avenues that are available in India. The investment can be in the form of stocks, mutual funds, deposits, Provident funds, Pension schemes, etc. We will be discussing here the most frequently invested upon.
Stocks: Stocks are basically the ownership of the company of which the stocks have been bought. These are ideal forms of long term investment if someone has a little risk appetite. This form of investment has the best return making possibility for money invested.
Mutual funds: These forms of investments are ideal for people who are not willing to manage their investment on their own. They rather put their money in a fund (pool of investment) and which in turn is managed by the fund manager. There are various forms of funds like the equity-linked fund, debt fund, hybrid fund, gold fund, etc. Depending on one’s risk profile, one can choose the kind of fund.
Fixed Deposits: Probably, the safe heaven when it comes to investing. Through Fixed deposits, one can a fixed amount of interest for a pre-decided tenure. The interest on fixed deposit keeps changing depending on the economic conditions and on banks’ discretion.
Recurring Deposits: Very similar to Fixed deposits except for the fact that there is a periodical investment (every month) for a pre-decided tenure. These forms of investment are best suited for smaller goals within a foreseeable future.
EPF (Employee Provident Fund): This is the favorite amongst the salaried class. This form of investment is exempted under section 80C. This is a fixed portion that is deducted from the salary on monthly basis and the same amount is matched by the employer as well. EPF is completely tax-free and the interest rates are decided by the government.
PPF (Public Provident fund): This investment instrument is a long term investment by nature. The usual duration is for 15 years. Investments in PPF can be used for tax exemption. PPF can be used as collateral if one wants to take a loan against them.
In this article, we discussed why it is so important to invest, especially amid the COVID19 pandemic. Here are a few of the key takeaways you from this post:
Investing is the most reliable way of securing one’s future and meeting one’s long term goals.
One should not confuse investing with trading, as investing is for the long term and trading is for the short term.
The purpose of Investing is to earn stable and long term gains. While the purpose of trading is to make quick and short term profits.
With the help of investing, one can plan their future goals and aspirations.
Lastly, the most important purpose of investing is to plan and secure one’s future.
That’s all for this post. I hope it was useful for you. If you’ve got any queries related to investing amid coronavirus times, feel free to comment below. I’ll be happy to help. Happy investing.
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!
Understanding what are Forward Contracts along with its risks and outcomes: One of the most important key concepts to understand for a derivate trader is forward contracts. Through this article, we aim to give a clear understanding of the Forward Market and Forward contract.
Today, we’ll cover what are forward contracts. We’ll also look into why do both the parties enter into the contract, possible outcomes, how they are settled, risks associated, and more. Let’s get started.
What are Forward Contracts?
The Forward contract, as the name suggests, is a financial derivative transaction that is settled at a specified date in the ‘future’. The forward contract derives its value from the value of the underlying asset. Therefore, in that regard, the futures and forward contracts have a lot of similarities.
The forward contract can be said to be the more ancient version of the futures contract. The basic framework of the futures contract is very similar to a forward contract. The forward contracts are still used, however, the scale and volume are very limited.
— Understanding Forward Contracts with an Example
Let us understand this concept further with the help of a simple example. Suppose, there are two parties involved. One is the manufacturer and designer of Silver jewelry. Let us call the manufacturer as “ABC Jewelers”. The other party involved is the importer of silver and he sells in bulk to jewelry shops. Let us call him “XYZ Dealer”.
Say, on 5th Aug 2020, the current price of 1 kg of silver is Rs. 65,000. ABC enters into an agreement to buy 50 kg of silver two months down the line. The agreed-upon price is the price of silver on 5th Aug 2020. Therefore, ABC has to pay Rs. 32,50,000 (65000*50) to XYX to buy 50 kg of silver on 5th Oct 2020.
In short, after two months, both the parties in the contract will have to honor their agreement irrespective of the price of silver at that time.
— Why both parties enter into the contract?
From the above context, the buyer of the silver (ABC) is of the view that the price will go up in the future and wants to lock in the prices to benefit from the increased price in the future. On the other hand, the seller of the silver (XYZ) is of the view that the price is most likely going to decline in the future and wants to benefit from the locked-in current price.
Both the parties involved in this transaction have opposing views and hence they enter into a forward contract to express their views.
— The possible outcomes of the Forward contract
Scenario 1: Either the silver price goes up
If the price of the silver goes up in the future, then ABC Jewelers stands to make a profit, and XYZ dealer is dealt loses. Say, if the price of silver goes up to Rs. 70,000 per kg after two months. So, the profit of ABC in this case will be = (70000-65000)*50 = Rs. 2,50,000. And the same is the loss for XYZ dealers.
Scenario 2: Either the silver price goes down
If the price of silver falls in the future, the XYZ dealers stand to make a profit, and ABC jewelers stand to make losses. For example, if the price of silver after 2 months falls down to Rs. 61,000 after two months. Here, the profit for XYZ dealers, in that case, will be = (65000-61000)*50 = Rs. 2,00,000. And, this will be the loss for ABC jewelers.
Scenario 3: If the price of silver remains unchanged
In that case, neither of the party (ABC or XYZ) will stand to lose or make any money from this contract.
How are forward contracts settled?
Forward contracts are settled via two ways, either cash-settled or the underlying asset is physically delivered.
1) Physical Settlement: Here, ABC jewelers pay XYZ dealers, the full agreed-upon amount (Rs. 32,50,000) of buying 50 kg of silver and in return gets the physical delivery of silver.
2) Cash Settlement: In this case, there is no actual physical delivery of silver. Just the cash differential has to be paid. Say, if the price of silver goes up, then XYZ dealers will have to give the cash differential to ABC jewelers. And if the price of silver goes down then XYZ dealers receive cash differential from ABC jewelers.
Assume, if the price of silver goes up to Rs. 67500 per kg. Then, XYZ dealer pays Rs. 1,25,000 ((67500-65000)*50) to ABC Jewelers for cash settlement.
Risks Associated while Trading Forward Contracts
Following are some of the risks associated with trading Forward contracts
Liquidity Risk: Theoretically, the parties with opposing views enter into a forward transaction. But, in reality, it is difficult to find two parties having an opposing view and willing to enter into the forward transaction. Therefore, the parties involved will have to approach the investment bank and who in turn scouts for willful parties willing to enter the forward contract.
Cost: The cost is a big factor in the forward contract. As the investment banks are involved in finding parties to enter into a forward contract, they come at a cost i.e., fee. Therefore, even if the price goes in favor of one of the parties, they make real profit only after the cost (fee to investment bank) is recovered.
Default Risk: The default risk is very much if losing party upon the expiry does not pay up the other party i.e., it defaults.
Regulation Risk: There is no regulatory framework while dealing with a forward contract. They are entered into with the mutual consent of the willing parties. Therefore, there is a situation of lawlessness and which is where the chances of default also increase.
Non Exit able before expiry: Say, halfway through the contact, if the view of one of the party reverses, then there is no way to exit the contract before expiry. There is no clause of foreclosure. The only option which they have is to enter into another agreement which again is a tedious and cost consuming process.
In this article, we tried to cover what are future contracts and how future market actually works in terms of transactions and settlement. Let us quickly conclude what we discussed here:
The basic premise while trading both forward and futures contracts are the same.
The forward contracts are contracts that are settled at a future date.
They are not traded via an exchange. The forward contracts are Over the counter – OTC derivative.
The forward contracts are non exit-able before the expiry.
These contracts can be either physically delivered or it can be cash-settled.
That’s all for this post. I hope it was useful to you. If you still have any queries related to future contracts, feel free to comment below. I’ll be happy to help. Happy trading and investing.
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!
Understanding Volume Profile for Technical Analysis: In today’s day and age, the success of any movie depends on the number of people viewing it. If the movie has a large audience anticipating it, then we can be assured that it will have a large audience watching it and which in turn garners success for the movie. Here, the number/volume of the audience plays a very key role in the success of the movie.
Further, if we were to take the example of television series or any online series, its success is measured by the number of viewers. Game of Thrones (GoT) is a classic example of it. It has one of the largest numbers of viewership in online content history. Therefore, eventually, it all boils down to the volume or number of people watching.
Similarly, in trading also, the volume is the number of shares traded on a day to day basis. If there is no volume, then the price of shares won’t move. In short, volume plays a key role in deciding the movement. In this article, we are going to discuss what is Volume Profile, how is volume calculated, the correlation between volume and price, and the Correlation between Candlesticks, Supports & Resistances with Volume. Let’s get started.
What is Volume Profile?
In simple terms, volume simply signifies the quantity of shares traded of a particular company within a specified time. If a move in prices of shares happens with high volume then, it is considered to be more reliable. And the move can be expected to continue. But if the move happens on low volume, then the authenticity of the move is always questionable.
To confirm any pattern or to apply any technical indicator on the market, the Volume profile plays the most critical role. It plays an important role in confirming the trends or patterns in the market. It also plays a very big role in understanding the buyers’ or the seller’s perspectives. Without sizable volume, even the strongest of technical indicator or pattern might not hold much significance.
Quick note: Market Profile or MKTP is the synonym for volume profile. They are used interchangeably.
How is Volume calculated?
From the above explanation, we understood that Volume simply signifies the number of shares bought or sold within a specified time-frame. The more active the share is, the higher the volume and vice-versa.
For example, in the case of RIL, if for the price of Rs. 1,900, a total of 50 share been bought and 50 share being sold, then the volume here is 50 (and not 100). For the correct volume calculation, there has to be a buyer for every seller to complete a transaction. We should not consider the volume to be 100 (50 buys + 50 sell). Let us understand it with the help of an example:
So, from the table above, we can notice different buying and selling activities for the security for the different levels of time. The buyers and sellers meet to create volume for the share. And the cumulative volume is a summation of all the volume traded for the day.
The following tables show the volume change in the market for the most active securities on NSE with a time gap of 40 minutes.
Figure 1: Most active share at 11.42 am (21/07/2020, NSE India)
Figure 2: Most active share at 12.22 pm (21/07/2020, NSE India)
Now, if we were to compare to the tables above, we can see the volume table of most active security and the change in them with a gap of 40 minutes.
If we take the example of Bajaj Finance from Table, we see the change in price by Rs 8 (reduced) and the volume has increased by nearly 50% in 40 minutes. So, the move with this volume can be said to be genuine and not artificial. Any move with sizable volume helps the technical charts and indicators to take shape.
Correlation between Volume and Price
While trading with keeping volume in mind, the prior price and volume trend is of high significance. If the move happens, with the volume near its average volume or more than average volume, then that move holds more significance, than the move with thin or low volume.
Now, let us understand the correlation between volume and price with the help of the following table:
If the price increases with an increase in volume, then the expectation from the market is that the bullishness or strength is expected to continue. And if the same move were to happen with low volume, we can say that one needs to be cautious and be careful about forecasting the next move.
Similarly, if the price of the share reduces, with increased volume, we can expect the bearishness to sustain and continue. And if the same move happens on less volume, we need to be careful with the next leg of this move. And similar interpretation can be done for Rangy markets.
Participants on Low and High Volume days
If the market is trading with low volume, we can say that there is a lot of retail player’s participation in the market.
However, if the market is trading on high volume, we can say that there is a lot of institutional buying and selling in the market. Higher volume moves have better conviction and a higher chance of a continuation of the move, in the near future.
Correlation between Candlesticks, S&R and Volume
If the candlestick pattern gives certain trade patterns and if the signal were to come near the supports and Resistances and to top it off if the volume profile were aligned with the technical signals, then the trade can be said to have a very high probability of being successful.
In other words, a marriage of technical factors along with volume goes a long way in generating strong trading signals. Traders can benefit significantly from it if spotted at the right time.
Let us quickly conclude what we discussed in this article:
Volume is one of the most important indicators in understanding the trend of the market.
It provides a very strong impetus to our technical view on the market.
If the market is trading on low volume, we can say that retail traders are participating in the move.
If the price increases with an increase in volume, we can expect the bullishness or strength to continue (and vice versa).
And, if the market trades on high volume, it generally is a signal that institutional players are participating in the market
That’s all for this post on Volume Profile. I hope it was useful for you. If you have any doubts regarding volume while trading in stocks, feel free to comment below. I’ll be happy to help. Happy trading.
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!
Understanding Mandatory vs Voluntary Corporate Actions: The announcement of a Corporate Action attracts significant attention in the markets and also creates an exciting atmosphere. It may be Christmas early in the cases of dividends or at times a shock in some unfortunate cases of delisting.
Today, we try to further understand the world of corporate action through the means of an important distinction i.e. on the basis of choice available to shareholders. Here, we are going to discuss what are Corporate Actions, types of Corporate Actions and difference between Mandatory vs Voluntary corporate actions.
A corporate action is a process initiated by a company after the approval of the company’s Board of Directors and brings material change to the organization and its stakeholders. Corporate Actions include dividends, mergers, and acquisitions, rights issues, name change, change of the security identification numbers like CUSIP, SEDOL, and ISIN, etc.
A Corporate Action at times may also impact the securities (both equity and bond securities) by affecting the price. Because of this, it is mandatory for a corporate action to be announced in order to keep the shareholder informed. This is done both by the company and also the exchange the security is listed on.
But did you know in certain cases shareholders too are given the option to vote over the processing of corporate action? Here we try to understand the basis on which corporate actions are differentiated as mandatory and voluntary.
Some corporate actions when announced are generally automatically applied to the investments of the shareholders. These are known as Mandatory corporate actions.
In some cases, the shareholders are given the option to participate in the respective corporate action. Here the shareholder decides if he will be a part of the corporate action or not. These Corporate Actions are classified as voluntary.
A mandatory corporate action is decided on by the board of directors and affects all shareholders once it is bought into effect. There is nothing much a shareholder can do in this case.
If the shareholder does not want to be affected by a mandatory corporate action he has to relinquish his ownership by selling off his holdings in the stock market.
Examples of Mandatory Corporate Action
Dividends: Here the shareholder is not required to do anything in order to receive the dividend. The only function the shareholder is limited to collecting the dividend and observing the effects on his shares.
Stock Splits: In this corporate action the shares of a company are divided based on the ratio provided. Say a company announces a 2 for 1 stock split. Here for every share held by the investor, he will receive an additional share. Or in other words, the number of shares held will be doubled. The value of the shares, however, will remain the same i.e. a share that was worth at Rs.10 will be 2 shares at Rs. 5 each.
The investor may be in favor of this decision as the shares which were earlier at a higher price may now be easily sold in the market. Or he may be disappointed as his investment may trade at a reduced market price due to its increased availability. But regardless of the scenario, he will only have to accede to the decision taken by the organization and not have any say.
Other Mandatory corporate actions include stock splits, mergers, bonus issues, name changes, Id change, etc.
Voluntary Corporate Actions
A voluntary corporate action is like an offer made by the board of directors of the company that only comes into effect if the shareholder elects to participate in the corporate action. Unlike a mandatory corporate action, a voluntary corporate action does not impact all the shareholders after it is announced. It only affects those in favour of it.
In the case of Voluntary CA, the shareholder is required to respond to the company. Only then will the company go ahead and process the corporate action. The shareholders not in favour are not impacted and their investments are left untouched.
Examples of Voluntary Corporate Action
Tender Offer: Although a tender offer may possess various forms. They however generally outline a company offering the shareholders to purchase the shares from them at a predetermined price. This price is generally slightly higher than the price the security is currently being traded at in the market. Here the investors have the option to either tender their shares to the company or simply not participate and continue to hold their shares.
Rights Offer: Here the existing shareholders are given the right to purchase new shares before the company offers them publicly. This right offer of new shares is made generally at below the market price. The existing shareholders may go ahead and exercise their right to purchase the shares or simply not take action and remain with their current holdings. The investors that decide not to exercise their right do so at the risk of having a diluted capital. At times the investors are also given the option to transfer their rights. In this case, they can trade their right in the market.
Closing Thoughts
Understanding corporate actions is of importance irrespective of them being voluntary or mandatory. This is because their occurrence or non-occurrence gives an insight into the company’s plans, performance, and strategy.
A guide on things to do before you start investing for Newbie Investors: So, you’re thinking to start investing. But before you enter, are you prepared? Do you actually meet all the requirements that will make your investment journey smoother? In this post, we’ll discuss seven such things that you should do before you start investing.
7 Things to do Before You Start Investing
1. Build an Emergency Fund
As the name suggests, an emergency fund is money that you put aside for emergencies. It is the money that you can reach out to during your hour of need and pay for those unforeseen and unexpected expenses such loss of a primary job, medical emergency, personal emergencies or even a car breakdown.
As a thumb rule, before you start making investments for your long-term goals, first you should build an emergency fund which should be greater than at least three times your monthly expenses. Keep this money aside in a separate account. You can read more about how to build an emergency fund here.
2. Have a budget & know your cash-flows
If you want to enjoy a healthy financial life, it’s really important to have a balance between your savings and your expenses. Budgeting your monthly finances and knowing your ‘cash’ inflow and outflow can help you plan how much you can afford to invest per month.
A simple profit and loss formula that you can use in your day-to-day life to understand your cash position is ‘Revenue — Expenses = Profit”.
Here, your total revenue (inflow) is the sum of all the income that you make from different sources like your job, business, interests on savings/fixed deposits, dividends, rental income, etc. And your total expenses (outflow) include your rent, groceries, transportation, bills, EMI’s, household expenses, etc.
When you deduct the total expenses from your net revenue, you’ll be able to find out how much you keep per month or year. And after calculating this, you can plan where to allocate this money and how much to invest in different investment options.
Note: If you are struggling with your personal budgeting, one of the easiest strategies that you can use to figure out how much should you save is the 50/20/30 Strategy.
50/20/30 is a really simple and straightforward budgeting strategy that can help you to define how much should you spend on your essential spendings (needs), savings and finally on your preferences (wants and choices). According to 50/20/30 strategy, you should allocate:
50% of your monthly income on ‘Needs’ (like rent, food, etc)
20% of your monthly income on ‘Savings’ (like your retirement fund, investments, etc)
And the remaining 30% of your monthly income on your ‘Wants’ (like traveling, dining out, etc)
First of all, please note that not all loans or debts are bad. Here, we are talking about high-interest debts. For example, if you have taken a personal loan, it’s interest rate may vary from 13–18%. Similarly, a credit card company may charge you even higher interest on the outstanding amounts.
It doesn’t make much sense to invest if the profits that you make on your investments are lesser than the interests that you pay on your debts. For example, if your returns are 12% and you’re paying 14% as interest on your previous debt, then overall you’re in a loss. Here, instead of investing, it will be better to use that money to pay back and become debt-free.
Before you start investing, try to minimize or eliminate debt, especially high-interest debts and your credit card debt. These interests can kill your investment profits.
4. Take a health Insurance
When people are in the best of their physical health, an obvious question among them is why should they invest in health insurance? Paying a premium plan for ensuring health may seem an unnecessary expenditure.
However, accidents or health issues may come up anytime unexpectedly which can put a lot of financial and mental pressure. Further, it is a fact that, as you grow older, health issues come along with it. And hence, it is highly necessary to incorporate healthcare planning within the budget of your family financial planning.
Before you start investing, make sure to take health insurance first. Being medically insured can help you avoid facing financial instability in the future and enables you to get the best health treatment.
One of the most critical things to do before you start investing is to define your investment goals/priorities and making plans to reach them. Here, you need to know why you are investing. It will keep you motivated and ‘on-track’ to achieve your goals.
Now, by definition, an investment goal is a realistic expectation to meet the returns by investing predefined money for a fixed time frame. The keywords to note here are ‘realistic expectations’ and ‘timeframe’.
Before you put your money in any investment options, set your short-term and long term goals and make plans for how you’re gonna achieve them. The goal can be person-specific like planning for children education, retirement fund, buying a new house or even financial independence. Once you’ve set your goal, you can choose the best investment options that can help you reach these goals in your defined time horizon.
Everyone has a different risk tolerance level depending on their age, financial situation, priorities, etc.
If you are young and have a stable job, you might be willing to invest in more unusual ‘high risk, high return’ options. However, as you grow old/retire, you might not have a job or primary source of income and hence you might depend on your retirement fund for meeting your expenses. Here, you may not be willing to take a higher risk and choose safer investment options.
Before investing, you need to define your risk sensitivity i.e. whether you’ve are high, moderate or low-risk tolerance profile.
As different investment options have different degrees of risks, you can choose your investment options depending on your profile. For example, if you have a high-risk tolerance, you may invest in stocks, mutual funds, real estate, etc. On the other hand, if risky investments keep you sleepless at nights, better to choose low-risk investment options like fixed deposits, PPF, bonds, etc.
Don’t dive in deep water if you don’t know swimming basics. Similarly, do not start investing your money, if you do not understand the elementary concepts.
Before starting your investment journey, make sure that you understand what is meant by stocks, bonds, mutual funds, diversification, liquidity, volatility, and other investing basics. Here, you do not need to become a finance geek or an accountant. However, you should have good enough knowledge of the industry to make intelligent decisions.
Closing Thoughts
These days, anyone can open their demat and trading account with minutes and start investing in stocks, mutual funds, etc. However, it is not advised to do so until you have met the basic requirements and completed a few other essential tasks. In this post, we discussed how 7 must things to do before you start investing. This included budgeting, planning, knowing your risk tolerance, and moreover, learning the basics.
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
Understanding What are Right Issues: Today if one is to pick up a newspaper he would find the pages riddled with issues on rights i.e. that related to liberty, equality, freedom of expression, opinions, speech, etc. However, you may be surprised that a few flips into the financial section will too include news with regards to the ‘Rights Issue‘. The rights mentioned here similarly outline the entitlement and privilege available but different from those concerned with social issues.
Today, we try and understand the term ‘Rights Issue’ as a corporate action as this would help in making a more accurate decision when offered rights by a company whose shares are held in our portfolio.
What are Right Issues?
A Right Issue is one of the options a company has in order to raise funds. In a Rights issue, the company gives an opportunity only to the existing shareholders to buy additional shares of the company.
The price offered by the company to the existing shareholders is at a discount to the market price. This is done in order to make the offer attractive to the shareholders and at the same time make up for any dilution of capital. A Right Issue also gives an opportunity for the shareholders the opportunity to increase their stake within the company. Shareholders here have a right but are under no obligation to purchase the shares.
— Why do companies go for a Rights Issue?
The nature of a Right Issue also turns the corporate action into a trump card due to its ability to provide companies a shot at raising capital irrespective of the environment they are in. Troubled companies may opt for a rights issue in order to pay off their debts or use it as a means to raise funds for its operations when they are unable to borrow money.
— Is Right Issue a Red Flag that the Company?
A Right Offering is definitely not a red flag. This is because the right offering is also seen as a means to raise additional capital for its expansion and growth needs.
At times when the gestation period of a project undertaken by a company may be too long before it generates profit. In such cases opting for debt would be unwise as they would require regular interest payments even before the project is functional let alone be profitable making debt too expensive. Hence, a Right issue would seem like a Win-Win situation for both the company and the shareholders. This is because the right issue would not require regular servicing as long as the project remains on track to successful completion and future.
In a recent scenario Reliance Industries too opted for a rights issue but this was done in order to rid their balance sheets of all debt and at the same time reward the shareholders.
Can you buy unlimited shares in a rights issue?
Rights issues function differently than an Initial Public Offer(IPO) or a Follow on Public Offer(FPO). In a Right issue, the shareholder will be given the option to purchase rights but only in proportion to the shares they already hold. In the recent issue by RIL, the shareholders were offered shares in the ratio of 1:15. This means that for every 15 shares held one share may be bought in the right issue.
Hence the extent to which the shareholders can purchase shares is limited to the shares they already hold. Investors, however, have the option to sell their right to purchase the shares. The shareholders, however, are free to purchase a right some other investor wants to sell in the market.
Different types of Right Issues
There are two main types of rights issue of shares, which are as follows:
— Renounceable Rights Issue: When Renounceable Rights are offered to a shareholder he has the option to purchase the shares by exercising his right, or ignore the right, or sell his right at the price that the rights are being traded at in the stock market.
— Non-Renounceable Rights Issue: When Non-Renounceable Rights are offered to a shareholder he only has the option to purchase the shares by exercising his right or ignore the right. When these rights are offered the shareholder cannot sell his right to another investor.
Taking the ‘Right’ decision?
The Right Issue not being an obligation gives the investors the option to buy the shares of the company, ignore the issue, or sell the ‘right’ itself. Now, we take a look at the different options purely on a financial basis.
Example: Say you are holding 1000 shares in the company Pineapple Ltd, whose shares are currently trading at Rs.21 in the market. Pineapple Ltd comes up with a rights issue where the shares are offered at a discount of Rs.15 per share. The right offering is made in the ratio of 2:10. The company already has 100,000 shares issued in its IPO and plans to further raise Rs. 300,000 through the rights issue bringing the total holdings to 120,000 shares.
1. Buying shares through the right issue
Here we look into the consideration of buying the shares. One of the integral portions of a rights issue is the Ex- right price. The Ex-Right price is a theoretical price that will result after the rights issue. Computation of this price helps an investor to take a stand on a financial basis on whether shares should be bought through the right or not. Let’s begin.
Shares held of Pineapple Ltd – 1000 shares (a)
The current holdings are valued in the market at Rs.21000.
The shares made available via. the rights offer is = (1000 x 2/10) i.e. ( shares held x ratio offered) = 200 shares. (b)
Cost that will be incurred through participation in the bonus issue = 200 x Rs. 15 = Rs 3000.
Total holdings if post right issue( if successful) = 1000 + 200 = 1200 shares.
Value of portfolio including investment from rights = 21000+3000 = Rs. 24000.
Ex Right price ( value per share post issue) = 24000/1200 = Rs. 20 per share
The investment above would prove to be beneficial as even though you have paid Rs.15 per share post the issue, they would theoretically be anticipated to be worth at Rs 20 post the issue.
2. Sell the right itself
The rights that you are entitled to as a shareholder with respect to the privilege to buy shares in a Right issue have an intrinsic value attached and can be traded in the stock market. These are known as Nil Paid Rights.
Above we have already calculated the ex right price. In certain cases, it is profitable if the ‘rights’ are traded at or above a price that is greater than the difference between the offered price and the ex right price.
I.e. (20-15) = Rs 5.
What happens if the shareholder simply gives up the right?
At times the shareholder may also choose to take no action on the right and simply ignore it. It is important for the shareholder to note that the preferential rights given here, come with the risk of dilution if ignored. This is because as discussed earlier, the shares issued derive value from the existing portfolio and investment made through the rights. This will be spread across the whole portfolio post the issue.
Also if we go back to the previous example the shareholder would be left with only 1000 shares post the issue. Say the prices are equal to the ex right price. This would mean that the ex right shares that were earlier valued at Rs. 21,000 would be valued at Rs. 20,000 posts the issue. These would be only the beginning of the effects as the shares will be affected in the future as well eg. income from the company distributed in the form of dividends will now be distributed among 120,000 shares instead of earlier 100,000.
Right Issues in the Covid-19 environment
In the wake of the COVID-19 environment, several companies resorted to raising capital through the right issues. This included companies with strong credentials like Mahindra Finance, Tata Power, and Shriram Transport Finance. These companies have been able to raise a total of 10,000 crores during the pandemic. RIL saw its right issue s oversubscribed by 1.59 times and received applications worth more than Rs. 84,000 crores and raised 53,124 crores through the issue.
The rights issue route was adopted by the companies due to the ease of raising funds. This was because all that is required for the right issue is the board of directors’ approval. Unlike other means that require shareholders’ approval in the shareholders meeting as well which is an added risk in the current environment. In addition to this SEBI also undertook several steps to ease the process of rights issues like reducing the market cap requirements and also the minimum subscription requirements.
Even though Right issues have been particularly popular during the COVID-19 environment the response has not always been the same. Shareholders were always quick to realize that no matter how democratic the corporate action may seem they still are in a way forced. This is because the threat of their portfolio being diluted always remained.
Despite this, when faced with the choice to participate in a rights issue it is always better to not just rely on the financial aspect. It is also very important to find out what the purpose of the rights issue is. In addition to this, it is also a positive sign if the promoters take part in the rights issue. It shows that they themselves believe in the cause. Happy Investing.
Understanding what happens to the equity shares when a company files bankruptcy: During the economic volatility period, investors tend to become more alert with regards to their investments in the form of shares of various companies. Generally, they try to sell their stocks if they find out that the company may not do well in the future or it may take longer than expected to recover. In such cases, companies get hit quite badly because investors are reducing and the market volatility affects the share price too.
The current unprecedented time of COVID-19 too is such that the majority of the investors have already taken necessary actions in order to safeguard their investments. The fear of losing money if the company goes bankrupt has made everyone scratch their heads quite often. However, it is not necessary that if a company is bankrupt then investors will certainly lose all of their money but the fact is that the common stockholders are the last ones on the list of preference for payment. There has also been a misconception of using insolvency and bankruptcy as a synonym but they both are different.
In this write-up, we will be discussing what happens to the shares of the equity shareholders when a company files bankruptcy. Here, we’ll be covering do we mean by insolvency and bankruptcy, options under the bankruptcy, the preference of the payment when any company files bankruptcy and relaxations, and exemptions provided by the government under the stimulus package during the global disease outbreak.
Understanding Insolvency and Bankruptcy
Solvency is a financial state or a condition when a person, firm, company, or any other legal entity’s total assets exceed its total liabilities at any point in time and it can meet its long-term debts and financial obligations. The opposite of it is called “Insolvency”.
The inability to repay its debts/obligations is a state of insolvency and it can be temporary as well. Such a situation may rise from poor cash management, increased expenses, reduction in cash inflow, or because of some unpredictable accidents, mishappenings or pandemic situations resulting in huge losses to the entity/firm. Here, the person or an entity is not even able to raise enough cash in order to pay off its liabilities and obligations in the due course.
The state of insolvency usually leads to filing for bankruptcy, although, it can be avoided by taking corrective actions such as negotiating terms with credits and other lenders, cutting down overhead costs to a large extent, and by generating surplus cash.
The Bankruptcy, on the other hand, is a legal procedure when an insolvent person or an organization declares its inability to pay off its debts. Under bankruptcy, the person or an entity seeks help from the government to repay its debts and obligations. The bankruptcy does not mean the closure of the company as there may be a chance for the company to recover to its normal state.
When a company files for its bankruptcy, it may ask the government to help the company restructure or reorganize its debts and repayment terms to ease out the repayments. The other option the company may seek from the government is to liquidate the company and decide the order of repayment by realizing cash from its assets.
Technically, the companies themselves file for their bankruptcy but sometimes, creditors may also file the application in the relevant court to declare the company as bankrupt. The Registrar of Companies may also pass a special resolution to declare an entity as bankrupt.
As discussed earlier, the two options under the Bankruptcy filing procedure provides flexibility to the corporates to either reorganize its debts and get some time to recover or to liquidate the company if the operations have already started closing down.
The Insolvency and Bankruptcy are now solely controlled by the Insolvency and Bankruptcy Code (IBC), 2016. In case of a reorganization, the relevant court appoints a resolution professional who will decide the terms of reorganization considering relevant laws and regulations of the code along with creditors’ and other lenders’ considerations.
Not only that, but the company is also given 180 days (further extended by 90 days upon presenting a valid reason) of the moratorium period. In this period, the company cannot transfer its assets or raise cash by itself, no creditor or any other lender can initiate any legal proceedings or enforcement against the company.
The common stockholders’ shares may reduce in value as the restructuring under insolvency affects the company’s share price. Also, since all other creditors and lenders will have more preference over the restructuring terms, the stock value after the reorganization may also get terribly hit. However, if the company proposes a strong plan post the restructuring then investors may be able to get the same value or more in the long term.
The second option of liquidation is more menacing and never liked by the investors. Under the liquidation procedure, the liquidator appointed by the court prepares liquidation terms and order of preference of payment where the common stockholders are the last ones to be paid back their investment. Sometimes, investors may not even get anything against the stock they hold.
— The Order of Preference for the Payment
While liquidating, an important point to mention is that everybody is not always equal in the tiers of creditors. Moreover, each tier must be paid in full before any money is repaid to the next tier. The order of preference under the Bankruptcy is provided under Section 178 of the Companies Act 2013 as provided below:
Firstly, the costs and expenses incurred by the bankruptcy professional appointed by the court, are paid.
Secured creditors are paid as they hold some security against their money receivable from the company.
Wages due to the employees
Financial debts payable to the unsecured creditors
Government and statutory dues
Any other debts of the unsecured creditors
Preference shareholders
Equity Shareholders
Quick Note: In the above order of Preference for the Payment, please note that the equity shareholders are last in the line and mentioned at the end. This is because the shareholders are practically the owners of the company and and therefore have accepted a greater risk compared to others.
Recent relaxations by the Government: COVID19 Stimulus Package
Due to the unprecedented time recently faced by everyone in our country and across the globe, the government as a part of the stimulus package announced the suspension of initiation of fresh insolvency proceedings for the next six months from 25th March. According to the stated announcement, there will be no default on the part of a company if the default is occurring out of the global disease outbreak.
Moreover, the minimum threshold amount to initiate the insolvency proceedings has also been increased from Rs. One Lakh to Rs. One Crore to cater many MSME sector companies. The government also declared sector-specific relaxations. This indicates that the investors’ money is safe for now and if the government can provide a pre-packaged resolution plan to certain companies then that will save the investors’ investments.
The Pre-Pakaged Resolution Plan (a Pre-Pack) is kind of a remedy provided by the government to the companies facing financial stress where the company and its creditors mutually agree on the sales terms with the buyer before initiating insolvency.
Companies that bounced back post Bankruptcy
Although, no investor would like his company to file bankruptcy but if that happens, there are examples of companies that filed bankruptcy and came back from the brink of the debt. Below are a few examples of such companies:
General Motors: During the economic fall down in 2009, GM had filed bankruptcy due to heavy debts and pensions exceeding its total value of assets. However, post-bankruptcy it had bounced back stronger than before.
Converse: The company filed for bankruptcy but later Nike acquired the stake in this company and since than the market cap of this company is rising.
Marvel Entertainment: Marvel had to file for bankruptcy due to the hefty debts as comic books sales fell badly, later on, Disney bought the stake and it managed to survive.
Closing Thoughts
The Bankruptcy and Insolvency are always scary for any investor. Being a holder of common stock of a listed company gives the last priority of being paid the invested money back. This is why it is always advisable to study the company before investing.
Studying the financials, due diligence reports, and other such statutory compliance will provide information to a greater extent about the company’s financial health and if they have any plan to file insolvency if their debts are already piling up. Moreover, post insolvency if the companies get better insolvency resolution plans then too the money will be safe.
The IBC 2016 has successfully reduced the time taken for resolution plans and not only that, but the recovery rates for the creditors have also increased over the period of time. Adding to that, the recent relaxations may also prove to be a financial booster for the majority of the MSME sector companies. However, the statistics of last year’s bankruptcy filing show a huge spurt by 123% compared to 2018.
The bottom line should be to study well before investing and be always cautious of what is happening in the company you have invested your money as the bankruptcy procedures can be sometimes painful or it may turn out to be a game-changer.
This company needs no introduction. Reliance Industries is an 
HUL is one of the largest Fast Moving Consumer Goods (FMCG) Company in India with a heritage of over 80 years. It is a subsidiary of Unilever, a British Dutch Company. HUL’s products include foods, beverages, cleaning agents, personal care products, and water purifiers.
HDFC Bank is India’s leading banking and financial service company. It is India’s largest private sector lender by assets and has 84,325 employees (as of March 2017).
Asian paint is one of the largest Indian paint company and manufacturer. Since its foundation in 1942, Asian paint has come a long way to become India’s leading and Asia’s fourth-largest paint company, with a turnover of Rs 170.85 billion. It operates in 19 countries and has 26 paint manufacturing facilities in the world, servicing consumers in over 65 countries. 
Tata Consultancy Services Limited (TCS) is an Indian multinational information technology (IT) service, consulting and business solutions company. It was established in 1968 as a division of Tata Sons Limited. As of March 31, 2018, TCS employed 394,998 professionals.
Infosys Limited is an Indian multinational corporation that provides business consulting, information technology and outsourcing services. It has its headquarters in Bengaluru, Karnataka, India.
Indian Tobacco Company (ITC) is one of the biggest conglomerate company in India. ITC was formed in August 1910 under the name of Imperial Tobacco Company of India Limited. It has a diversified business which includes five segments: Fast-Moving Consumer Goods (FMCG), Hotels, Paperboards & Packaging, Agri-Business & Information Technology.
Eicher Motors is an automobile manufacturer and 
Bajaj Auto is a global two-wheeler and three-wheeler 
Nestle India is a subsidiary of Nestle SA of Switzerland- which is the world’s largest food and beverage company. It was incorporated in the year 1956. Nestle India Ltd has 8 manufacturing facilities and 4 branch offices in India. 
(Source)
(Source)
