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.
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 0.01% on Intraday trading (whichever is lower) and Delivery investments are FREE. Therefore, for the above table, assuming the same scenario, the person would be paying only Rs 2.45 in Intraday Trading and Zero Brokerage on Delivery, if he prefers Zerodha as its broker.
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 the difference between ROE vs ROCE: As investors, the financial ratios have become an essential part of our decision-making process. This is because ratios measure and give us a more comprehensive picture of companies’ operational efficiency, liquidity, stability, and profitability in comparison to the raw financial data from various statements. Today we look at two profitability ratios namely the ROE and the ROCE with an attempt to better understand them
Return on Equity (ROE)
The Return on Equity ratio enables us to measure a company’s performance by dividing the annual net returns by the value of the shareholders’ equity. The ROE ratio helps us to judge the effectiveness of a company’s management to use the shareholder contribution available in order to generate profits
— ROE Formula
Return on equity (ROE) can be calculated as Net Income of a company divided by its Shareholder Equity.
Net Income: The Net Income considered here is the income remaining after the taxes, interest, and dividend to preference shareholders is paid out.
Shareholder Equity: Assets – Liabilities
ROE brings together two financial statements. It includes the Net income from the income statement and the shareholders’ equity from the Balance Sheet.
— Example to understand ROE
Take two companies A and B in the ice cream business. Both companies have made a profit of 20 lacs for the financial year 2019-20. But how are we to compare the greater of the two in this scenario. After taking a closer look we find that the investments received by the 2 companies are: Company A – 1 crore and Company B – 2 crores.
The ROE computed for company A is 0.2 and for company, B is 0.1.
This puts the returns from the two companies in a whole new perspective. Despite both of the companies reporting the same profits, the management of Company A is more efficient in converting the money invested into profits. Hence, it would be wise to invest in Company A as management is more efficient in generating profits.
When the ROE’s are compared over a period for a company it enables us to judge how the management had evolved in allocating the shareholders’ equity appropriately. An increasing ROE will mean that the management has been improving its efficiency of investing the shareholders’ capital over the years in order to generate higher profits.
On the other hand, a decreasing ROE represents a deficiency in the management’s ability in using the resources and poor decisions made in investing capital over the years.
Return on Capital Employed (ROCE)
The Return on Capital Employed ratio shows us the effectiveness of a company’s allocation of capital. The ROCE ratio is acquired by dividing a company’s operating income by the capital employed.
— ROCE Formula
Return on capital employed can be calculated by dividing EBIT (Operating Income) by its Capital Employed.
Operating Income: The operating income is what we get after the total sales is deducted by the operating expenses like wages, depreciation, and cost of goods sold. In other words, it is the Earnings before interest and tax charged (EBIT).
Capital Employed: Assets – Current Liabilities or Equity + Debt.
— Example to understand ROCE
Let us take a similar example as that taken in the case of ROE. The same companies A and B are in the ice cream business. They have earned a profit of 20 lacs and have an investment as follows: Company A -1 crore and Company B – 2 crores. But in addition to this, the debt taken by the companies is Company A – 3 crores in loans and Company B – 1 crore in loans.
The ROCE computed for Company A is 0.05 and Company B is 0.067.
This provides a better perspective as to how the two companies have employed the capital available with them in order to earn profits. This shows that an investment in company B would be favorable.
When it comes to ROCE, as the ratio considers capital as a whole it is also important to take into account the cost of capital when making judgments. When the Return on Capital (ROCE) is higher than the Cost of that Capital it would make a favorable investment. But a case where the Cost of Capital is higher than the return on that capital (ROCE) is a red flag. Here the existing shareholders would choose to exit and potential investors would prefer to stay away.
ROE vs ROCE: Key Differences
ROE
ROCE
Income consideration
The income considered here is the Profit after all the Interest and Taxes are charged.
In a situation where the government has increased the taxes, the ROE will take into effect its impacts.
The Income taken into consideration here is the earnings before the taxes and interests are charged.
Changes in Interest and taxes do not impact the ROCE. The ROCE is only impacted by the changes in operating expenses like wages etc.
Capital
The ROE considers only the shareholder capital employed.
The ROCE considers the total capital employed (inc.debt) by the company.
Ratio Depicts?
Effective management of shareholders' capital.
It shows the efficiency of a business operation.
Stakeholder Significance
The ROE is of more significance to the shareholders as it shows them the returns the company provides for every Rs.1 they invest. It is of greater significance to shareholders as it shows them what is left for them after the debt is serviced.
The ROCE is of significance to both the shareholders and the lenders. This is because the ROCE also shows the effectiveness of the total capital employed in the company.
Using ROE and ROCE – The right way?
A shareholder may also use the ROE and the ROCE ratios in comparison to each other. When the ROCE ratio is greater than the ROE it signifies that a major portion of the profits earned is diverted to service the debt of the company. This would not be taken positively by shareholders. However, it is also important to consider that a company with a high ROCE ratio is able to raise debt at attractive terms. The high ROCE improves the valuations of a company. This is because it shows that the company can easily raise debt for its future operations.
Both the ratios even when used individually cannot be used as a comparative across various industries. The averages ROE for the computer services industry is 17.29%. Whereas the average ROE for a Biotech company is 3.83%. Hence they can only be judged effectively only when they are compared with companies in the same industry.
In the case of judging companies on the basis of ROE and ROCE, Warren Buffet prefers companies that have ROE and ROCE which are close to each other. According to him, a good company should not have a gap of more than 100-200 basis points. A situation where the ROE and ROCE are close implies that both the equity shareholders and the lenders are taken care of. And at the same time not compromised at the cost of the other.
An overview of Company Annual Report, it’s meaning, purpose, contents and more: You might not be surprised to know that Warren Buffett, the third most richest person on this planet and one of the most successful investor of our time, reads over 500 pages each day. Most of the time, he’s busy reading the annual reports of different companies that either he’s planning to invest or already invested in. And believe me, reading the annual report of multiple companies is not an easy task as each report easily consists of 200-300 pages or more.
“So I do more reading and thinking, and make less impulse decisions than most people in business. I do it because I like this kind of life.” – Warren Buffett
In this article, we are going to discuss what is a company annual report, its meaning, purpose, why investors read annual reports and finally how to read annual reports efficiently. Let’s get started!
What is a Company Annual Report?
While some companies publish their Annual Reports to provide necessary information about its company’s financial performance and to comply with the statutory requirements, there are some other companies that use the Annual Reports as a tool to advertise their products and services and that is reasonable too.
The Annual Report is the medium of communication between the company and its shareholders, investors and other readers. It is the best source to know about any company’s operations, services along with its financial performance in the past, present and what are its upcoming plans and goals.
Moreover, the Annual Report is a statutory compliance every company must adhere to. It is a single source of highly useful information that is used differently by a different set of users such as Shareholders, Income Tax Authorities, Investors, Securities and Exchange Board of India (SEBI), etc. Be it either financial statements or corporate governance, or company vision and mission or ratio analysis, everything is compiled and presented in an Annual Report. The financial health is measured from these reports.
What is Purpose of the Annual Reports?
Basically, the purpose of issuing an Annual Report is to communicate to the shareholders, stakeholders, media and other relevant authorities that how the company performed in the financial year, its vision and mission, whether the company is working towards its set targets, what all are its assets, liabilities, what are their main areas of operations and what other activities they are doing. The ultimate purpose is to showcase the financial performance and provide an assurance that the company’s financials have been audited by the professionals and they represent true and fair financial statements in all manner.
Contents of the Annual Report
Whilst the fundamental purpose of publishing the Annual Report is to provide company information, financial performance, significant accounting policies and related notes and future goals to its shareholders, investors and other related users, many companies use Annual Report to advertise their products and services and other achievements along with the basic necessary information as discussed above. We will be highlighting the critical and important contents of every Annual Report that is required by every company by some of the other regulatory body.
(Example: Asian Paints Annual Report for Year 2018/19 – Source)
— Director’s Report
The Director’s Report is a letter from the Board of Directors of the company to its shareholders and other investors and readers about a brief of the company’s main activity, financial performance, management’s responsibility in preparing the books of accounts and financial statements and appointment or re-appointment of auditors in the annual general meeting of the company along with other particulars of major accounting policies followed in the recently completed financial year.
The report will also communicate details if the company is planning anything major that will impact significantly on shareholders’, investors’, its payables’ or receivables’ decisions such as any merger or acquisition, or any other occurrence of extraordinary event. The Directors will also communicate the reasons if the company had losses during the financial year and their plan to recover or make it profitable.
— Auditor’s Report
The Auditor’s Report is a letter of auditor’s opinion about the truthfulness and fairness of the financial statements and that the financial statements comply with generally accepted accounting principles and any other recognized accounting standards. Auditors address the shareholders of the company and express their opinion about the financial statements to them.
Auditors are the professional Chartered Accountants recognized and authorized by the professional bodies and government authorities to issue and certify such reports. The auditor’s report contains auditor’s opinion on the financial statement, the basis of the opinion, auditor’s responsibility to carry out the audit and to issue such report, management’s responsibility and any other reporting responsibility such as compliance to legal and regulatory requirements.
For the readers of the financial statement, an auditor’s report and his opinion provide very crucial details. The opinion can be unqualified opinion, qualified opinion or the auditors may give a disclaimer of opinion.
The unqualified opinion means that in an auditor’s opinion, the financial statements give a true and fair view of the financial statements. Whereas, the qualified opinion means the auditors believe that the company has deviated from its mandatory compliance to represent true and fair financial statements or certain accounting policies and principles are not complied by the company. The disclaimer of opinion represents that the auditor is not able to give any opinion on the financial statements for certain reasons such as, the management might not allow them to qualify the report or they were refrained to carry out the audit as per their satisfaction or any other such matter.
— Statement of Financial Position or Balance Sheet
The statement of financial position is a balance sheet of a company as on the last date of the financial year. The balance sheet contains assets, liabilities and shareholders’ funds or equity. This statement will indicate what are the Non-current assets, current asset a company holds, how much non-current or current liabilities a company needs to settle and how much is shareholders fund including accumulated profits and reserves.
— Statement of Income and Comprehensive Income
This is the statement where readers of the Annual Report will find financial performance during the year for a company. The statement contains Income, Expenses and other extraordinary income or expense made by the company during the financial year. The income and expenditure from operations and major services and other general, sales and distribution expenses are covered under the first part of the income statement that will give the net income or net profit during the year. The second part will include details of unrealized income, foreign currency transaction loss or gain, dividend, transfer to reserves under comprehensive income statement.
— Statement of Cash Flow
The Income statement will include only the income and expenses of that year for a company which may also include such income or expenses that are accrued but actually not paid. For example, the receipt of payment for the revenue booked in the last week of the financial year might be pending. Hence, it may happen that actual cash has not been received or paid but it is booked as it relates to that year and to comply with the accounting principles. However, from the statement of cash flow, the readers can understand that how much cash inflow or outflow has been made by a company from operational, financial and investing activities.
— Notes Accompanying to Financial Statements and Significant Accounting Policies
This portion of an Annual Report will contain company basic information about the activities, its date of incorporation, its license number and the shareholding pattern. The significant accounting policies will contain the company’s policies for accounting income, expense, recognizing asset or liability or any other such policy as approved and issued by the relevant accounting bodies for companies to mandatorily follow. The notes will also include off-balance-sheet items such as contingencies from which the information regarding the company’s liability or gain can be guessed based on its possibility to occur.
Types of Readers of an Annual Report and their Purposes
The different kind of audience of an Annual Report would fetch different information and the focus of information will also be changing depending on who is reading the financial statement.
Shareholders: Shareholders of the company would want to know from the company’s Annual Report whether the money they invested is being utilized properly or not, whether the company is adequately utilizing its resources and utilizing them for the main activities of the company keeping in mind the vision and mission of the company and if it makes enough profits to pay dividends.
Investors: The investors would want to know whether the company is making money if they invest into their company’s stocks, what are company’s future plans that will raise its market value so that if they invest now, they can get more return, is the company paying the dividend to its shareholders.
Employees: Employees would read the Annual Report to understand how much company as a whole has performed during the financial year and if the company is making necessary profits to pay their salaries and other benefits in future. Many times, employees are working at some remote location where the corporate offices are not located, when they read the Annual Report, they can understand the ‘big picture’.
Customers: Customers would focus on the quality and new additions to the products and services. The Annual Report will provide and highlight these details and ensure the sustainability of the business.
Apart from the above, there are other readers too such as suppliers who would focus on company’s business progress and how quickly they can repay their dues and receivables would focus on whether to continue buying from them as a trusted supplier or not.
Quick Note: If you want to download the annual report of any specific publicly listed company, you can check the stock page of our Stock analysis and research portal here.
Other Key Information Provided in Annual Reports
The off-balance-sheet items in the notes to accounts will provide how much liability or any unrealized income company has which has yet not been effected into the financial statements since its possibility to occur or not to occur is remote.
The notes will also contain whether corporate governance is maintained or not and if there are deviations to it then what caused such deviations.
Audit Report’s other regulatory and legal reporting section shall provide the company’s adherence to such other statutory compliances.
The notes will also reveal if the company has changed any particular accounting policy and if the change is made then to what extent it has impacted the financials.
The notes will also communicate whether the company is undergoing any legal proceedings or not that any potential investor would want to know.
The risk analysis is also given in the notes from where various associated risks such as credit risk, interest risk, foreign currency risks are detailed. The company will also mention what steps are taken to mitigate such risks.
A Guide on NSE Indexes that you should know: An Index is basically the stock exchange creating a portfolio of the top securities held by it. Indexes have always played an important role for both investors and companies by offering a reliable benchmark. They have also been used as an investment strategy where Investment Managers just set up their fund portfolios to simply track the index in an attempt to gain similar market returns. Indexes play an important role as they also stand in representation of a country’s market and economy.
Today, we discuss the various indexes offered by the National Stock Exchange (NSE) and the role they play for different stakeholders with an attempt to help you get a better insight into indexes. Here, we’ll look into popular NSE indexes and sectorial indexes like Nifty50, Nifty100, Nifty largecap, Nifty midcap, Nifty smallcap etc. Let’s get started.
Indexes offered by the NSE
— Broad Market Indexes
Broad Market Indexes are used to give an indicator of the movement of the economy. They are considered suitable for this as they include stocks from all industries. The indexes are designed to reflect the movement of a group of stocks considered in that portfolio or the market as a whole. The broad market index considers the stock from various sectors. Broad market indexes consider only the top stocks in the market. Hence it can be safe to say that the broad market indexes are the buffet among indexes.
Assessing the broad market index from their names
The broad market indexes generally have the Index_name pertaining to the stock market followed by the number of stocks of different companies it considers. This allows a stakeholder to assess accordingly the degree of diversification and exposure available in that index.
Broad market indexes from NSE India
Nifty 50
Nifty 100
Nifty 150
Nifty 200
Nifty 500
Here the number next to the index name ‘Nifty’ represents the number of stocks the index considers. The greater the number of shares the more diversified the portfolio will be. But the greater the number of stocks also represents the greater exposure to risk. Indexes like Nifty 500 will have the top 500 stocks available in the NSE universe. This index will have a considerable number performing well but also a great number of stocks performing negatively. The Nifty 200 will contains the top 200 stocks from Nifty 500. The Nifty 150 will contain the top 150 stocks from Nifty 200 and so on. The Nifty 50 consists of the top 50 stocks in the NSE.
Nifty 50 is considered to be a representation of the Indian markets over other broad market indexes by NSE. This is because it represents the best-case scenario in both bullish and bearish times represented by the best companies. All companies considered in these broad market indexes are large-cap.
The broad market indexes are made available based on the extent of capitalization. Market capitalization is the total value of the companies stock. Market cap is calculated by multiplying the share price of a stock with the total number of public shares offered by the company. This ensures that both the size and prize are given consideration. Based on this computation the stock market is divided into large-cap, mid-cap, and small-cap.
How are large-cap, small-cap, and mid-cap classified?
Large-cap refers to a company with a market cap of more than 28,000 crores.
Mid-cap refers to a company with a market cap valuation of more than 8,500 crores and less than 28,000 crores.
Small-cap refers to companies with a market cap valuation of fewer than 8,500 crores.
Assessing broad market indexes from their names
Here the indexes have the Index_name followed by the cap. size further followed by the number of shares held in the index portfolio. Eg. Nifty Midcap 50 — This shows that the index holds 50 different stocks of companies from the Mid-cap category.
Broad Market Indexes based on cap size offered by NSE India?
The broad market indexes offered based on capitalization are
Nifty Smallcap (50, 100, 250)
The companies included in this index portfolio are those with relatively small market capitalization. This index is important because they include stocks that are not considered in other broad market caps like Nifty ( 50, 100, 150, 200). This is because indexes like Nifty 50 include stocks from the top-performing industries which are from the large-cap category. The Nifty small-cap includes securities from which investors can earn higher amounts of returns due to the possibility of the range of growth available to small-cap companies. However, these higher returns come with higher risk from higher volatility to investors. The risk is increased considering that the information available on these companies is low.
Nifty Mid-cap (50,100,150)
The shares of the companies included here are those whose market cap falls in between large and small-cap. Mid-cap includes shares that offer better growth potential than large-cap funds and lesser risk than those from small-cap securities. The stocks included here are for investors with moderate risk appetite. The Nifty Midcap indexes can be used by companies that have a market cap of more than 5000 crores but less than 20,000 crores to assess their performance growth rate and returns offered to their investors. The same can be done by investors.
Nifty MedSml 400
The Nifty Mid Small 400 Index includes shares of 400 companies from both the Medium and Small-cap. The Nifty Midsml 400 is a combination of the Nifty Midcap 150 and Nifty Smallcap 250 index. Hence it includes 150 companies with medium-cap and 250 companies with small-cap. It is appropriate for funds to attract and offer investors a higher growth rate and returns from the small-cap companies and some degree of increased security from mid-cap companies.
Nifty Large Midcap 250
The Nifty Large Midcap includes a portfolio of 100 large-cap and 150 mid-cap companies. It is a combination of the Nifty 100 and the Nifty Midcap 150 index. This index can be followed by funds that want to offer the least risk but low returns available from large-cap to balance off the high risk and high returns of midcap.
— Other Broad Market Indices
The Nifty Next 50
The Nifty Next 50 includes shares of stock that are from Nifty 100 but do not make it into the Nifty 50 Index. Therefore it is the Nifty 100 index excluding the Nifty 50.
Nifty VIX
The Nifty VIX stands for the Nifty volatility index. Generally, indexes only include shares of companies but this index includes derivative products. This index is based on the Nifty index option prices.
Sectoral indexes summarise top performing stocks from the respective industry together and provide a summary of how the specific sector is performing. This acts as a benchmark for its users to either compare company performance with the respective sector index or compare the sector’s performance to the market. This is done by comparing the sectoral indexes with the broad market indexes.
Sectoral Indexes Offered by the NSE
Sectoral Index
Sector
Types of companies included
Number of companies Considered to portfolio
Nifty RealtyÊ
Real EstateÊ
Real Estate Companies
10
Nifty BankÊ
Banking
Large Indian Banks
12
Nifty Auto
Automobile
All vehicle Manufacturing, tires, and other auto auxiliaries
15
Nifty Financial Services
FinancialÊ
Banks, Financial Institutions, Housing Finance, and Other Financial Services
15
Nifty FMCG Index
FMCG
Companies that produce durable and mass consumption productsÊ
15
Nifty IT Index
IT sector
Companies included are those that have over 50% of their income from IT-related activities like IT infrastructure, IT education and software training, Telecommunication services and Networking Infrastructure, Software development, hardware manufacturing, and Support and Maintenance.
10
Nifty Media
Media and Entertainment
Stocks from printing and publishing are also included apart from Media and Entertainment.
Strategy indices involve adopting one of the following strategies to create a portfolio. They give investors the possible top stocks that suit the respective factors. The major strategy indices are
Nifty Alpa 50
Alpha is generally the difference between the returns from an investment or portfolio in comparison to the overall market. The condition for an alpha stock to be considered into the index portfolio is that it should have a pricing history of at least a year.
Nifty 100 Quality 30
A stock qualifies as quality stock if it has
A high Return on Equity (ROE = Net Income/ Shareholders Equity)
Low Debt-Equity Ratio
An average change in Profit After Tax(PAT)
The condition for the quality stock to be considered into the index portfolio is that it should have a positive PAT in the previous year.
Nifty 50 Value 20
A stock qualifies as value stock if it has
High ROCE ( Operating Profit/Capital Employed)
High Dividend Yield
Low Price to Earnings Ratio
Low Price to Book Ratio
The condition for the value stock to be considered into the index portfolio is that it should have a positive PAT in the previous year.
Nifty 100 LowVol 30
A stock qualifies as low volatility stock if it has a low standard deviation of price returns. The condition for the low volatility stock to be considered into the index portfolio is that it should have a pricing history of at least a year.
— Multi-Factor Indices
The quest to beat the returns offered by the broad market index has given rise to multi-factor indices. In investing when the fund manager follows the portfolio of an index it is known as Passive Investing. When the fund manager devises his own strategy to create a portfolio with the aim of beating the benchmark it is known as active investing.
Multi-Factor indices use the rule-based approach of following an index from passive investing and the strategy of relying on multiple factors to select stock from active investing. The factors majorly used by strategy indices are – Alpha, Quality, Value, and Low Volatility. A strategy index creates a portfolio of 30 stocks based on 2 or more of these factors.
Some of the Multi-Factor Indices are-
NIFTY Alpha Low-Volatility 30
NIFTY Quality Low-Volatility 30
NIFTY Alpha Quality Low-Volatility 30
NIFTY Alpha Quality Value Low-Volatility 30
Performance of multi factor indices in comparison to other indices
(Source: All NIFTY multi-factor indices outperformed market cap based indices over the long term)
Closing Thoughts
The indexes discussed here form a very small portion of the indexes offered by the NSE. As of data in 2016, there were 67 Indexes offered by the NSE. Just like popcorn, which is not a necessity in any staple diet, it still has a role to play during recreation. Similarly, there are various indexes offered which may not represent the market but still have an important role to play.
In this article, we are going to discuss the difference between BSE and NSE, the two biggest stock exchanges in India. However, in order to study the Bombay stock exchange (NSE) and the National Stock Exchange (NSE), first, we need to understand what is a stock exchange and its importance. Let’s get started.
What is the Stock Exchange?
According to the Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as, “an association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.“
The stock exchange is a very important component of the capital market for the sale and purchase of financial and industrial securities and bonds. It is a place that is well organized and systematic as it is regulated under strict conditions and rules. The stock exchange performs various functions and offers services to a wide range of investors and other borrowers.
The main features of any stock exchange market can be summed up as follows:
The stock market serves as a market for securities where bodies from the corporate sector, governmental, non-governmental or semi-governmental come together to sell and buy these securities.
It also serves as a secondary market where old and existing second-hand securities, shares and bonds are dealt with.
Stock exchange functions as the regulator of securities. It tries to ensure free and fair trading.
In order to serve as a safe haven for investors and companies, the Stock Exchange involves in trading of only official and listed securities. The securities which are not listed called the unlisted securities are not allowed to be traded on the exchange but may trade through Over the trade (OTC) counters.
The way only listed securities are allowed, in the same manner, only the authorized investors are allowed. Investors can only participate in buying or selling the securities at the Stock Market through official or authorized brokers only.
It works as a recognized indicator of the development of the economy of the country. It is also the best reflector of industrial growth and corporate stability.
Now that you understand the basics of stock exchanges, let’s discuss the difference between BSE and NSE.
In India, there are two main stock exchange markets, namely the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Let’s start with BSE.
Bombay Stock Exchange (BSE)
The Bombay Stock Exchange or BSE is the oldest which was established in 1875 in Dalal Street of Bombay (now Mumbai). It was earlier known as ‘the native share and stockbrokers association but got recognized as the only important stock market of India under the Securities Contract Regulation Act of 1956.
Here are some of the key features of the Bombay Stock Exchange:
The BSE is the first and oldest stock exchange market of Asia which offered such a huge variety of services.
It has over five thousand companies listed as of the year 2018.
“Sensex” is the benchmark index of the Bombay Stock Exchange. Other popular indexes of BSE are BSE largecap, BSE midcap, BSE 500, etc.
As of April 2018, BSE is the world’s 10th largest stock exchange with an overall market capitalization of more than $2.29 trillion dollars.
National Stock Exchange (NSE)
The National Stock Exchange or NSE is the country’s leading stock exchange marketplace. It was India’s first digitalized stock exchange in the country. NSE was established in the year 1992 to decrease the monopoly of BSE in the Indian stock market. With NSE’s coming into existence, it brought about an electronic exchange system that did away with the practice of the paper-based exchange system.
Here are some of the Key features of National Stock Exchange:
NSE was established in 1992 to end the monopoly of BSE and one of the biggest stock exchanges in India.
Over 1,800 companies are publically traded on the National Stock Exchange.
“Nifty 50″ is the benchmark index of NSE. Other popular indexes of NSE are Bank Nifty, Nifty 100, Nifty Small cap, Nifty sectoral indexes like Nifty Auto, Nifty Pharma, etc.
As of April 2018, National Stock Exchange has a total market capitalization of more than US$2.27 trillion, making it the world’s 11th-largest stock exchange.
Although both of the stock exchange markets are very important in India, there are some ground differences which we need to take into account:
Both the Bombay Stock Exchange and the National Stock Exchange are the leading exchange marketplaces in India. However, the oldest one is the Bombay Stock Exchange established in 1875 and the National Stock Exchange is a younger exchange established in 1992.
Both the National Stock Exchange and the Bombay Stock Exchange were recognized by the Securities and Exchange Board of India (SEBI) in the year 1993 and 1957 respectively.
The number of listed companies on the National Stock Exchange is around 1,800 and around 5,000 for the Bombay Stock Exchange.
The electronic system of exchange was first introduced under the National Stock Exchange in the year 1992 and later in the Bombay Stock Exchange in 1995 under BOLT i.e. BSE On-Line Trading.
The official index used by the National Stock Exchange is the NIFTY 50 while for the Bombay Stock Exchange, it is the SENSEX.
The National Stock Exchange’s index — Nifty 50, computes the top fifty stocks listed on the NSE. And on the other, the Bombay Stock Index, SENSEX accounts for the top thirty stocks on BSE.
Another major difference between the two relates to the volume of trading of individual stocks which is higher in the National Stock Exchange than in the Bombay Stock Exchange.
Quick Note: While trading or investing in the Share market, you can buy stocks from either of the stock exchanges. It does not matter much about which stock exchange you prefer as most of the big and popular companies are traded on both NSE and BSE.
Closing Thoughts
Apart from the differences, we can say that both the stock exchange markets are nationally and globally well renowned. The trading mechanisms, settlements and trading hours of both the stock exchange marketplace are almost similar.
On top of it, both of them are designated as the premium stock exchange markets recognized by the Securities and Exchange Board of India (SEBI). The Bombay Stock Exchange and the National Stock Exchange are under very tight control and regulation by the SEBI implying that both are under the same provisions.
By way of conclusion, we can add that the choice of any investor to participate in the trading of security is subjected to personal choice and therefore, can be different from one investor to another.
However, it is said that the National Stock Exchange is for those investors who want to involve in high volume day trade and derivatives trading. It has better software as compared to its rival, the Bombay Stock Exchange for any high-risk transactions made online. The Bombay Stock Exchange is an ideal marketplace for those investors who are a little conservative in nature who choose to invest and wait for their investments to grow gradually.
Anyways, you can trade or invest in equities through any of the stock exchanges, NSE or BSE, and may not find a noticeable difference. According to your choice and activity, you may decide on where to sign up and participate.
Understanding how crude oil prices impact Indian market & Indian economy: The Liquid Gold, as the name goes, is the most important factor in understanding Global economic health. We have seen a 150% fall in the prices of WTI crude oil over a period of the last four months (Feb-May 2020) and a bounce-back of nearly 75%. Therefore, this year has been a year of massive swings in the prices of crude oil.
The price at the beginning of the year was above $60 per barrel and we saw the price of negative (-) $30 per barrel on around 20th April 2020. Hence, in all practical sense, one was paid to buy a barrel of oil. The current price of WTI crude is $35.46 per barrel (1st June 2020). This has caused a crisis in OPEC nations and other countries like Russia, which are dependent on oil exports.
(Source: www.Bloomberg.com)
How Crude Oil Prices Impact Indian Market?
Let us now understand how crude oil prices impact Indian market and its effect on different segments of the economy like current account balance, fiscal deficit, stock market, and more.
1. Impact on Current Account Balance
India imports nearly 84% of its domestic demand and it is one of the largest importers of oil in the world. Indian Oil imports account for nearly 27% of its total imports. Therefore, a fall in the prices of oil will reduce the cost of importing oil from other countries. And this in turn has a direct impact on the current account deficit (the amount that India owes in foreign currency).
Therefore, in the current crisis time (COVID-19 pandemic and economic slowdown), reduced crude oil prices have been a blessing in disguise to the Indian economy. In general, a 5 % increase in oil prices will impact the trade deficit by nearly $4 billion.
2. Impact on Fiscal Deficit
The price of the oil is fixed by the government and it is at a subsidized rate. And then the government compensates the companies for selling the oil at lower prices. These losses are also called under-recoveries. Therefore, the losses incurred because of compensating the companies losses, adds to the Fiscal deficit of India. But with the reduced oil prices, the compensation to be paid to these companies also reduces and which in turn helps in narrowing the fiscal deficit.
3. Impact on Stock Market
Now, if research and history are to be believed, then there is an inverse relationship between the oil price and the Indian equity market. This is because the Indian oil industry is majorly an importer of oil. Therefore, industries like tyre, lubricants, logistics, refinery, airlines, paints, etc are directly affected by a change in oil prices.
Further, as we are aware, energy stocks have nearly 12.5% weightage in Nifty 50 and nearly 15% weightage in Sensex. So, strength in crude oil prices adversely affects these oil-dependent industries and weakness in oil prices, usually signals strength in these companies’ stock prices. If we were to take an example of the paint industry, companies like Asian paints, Kansai Nerolac, etc use oil as a major ingredient in their paint. So, any movement in oil prices directly impacts their performance in the stock market.
(Fig: Nifty Energy Index – 10 Yrs Chart)
(Fig: Crude Oil WTI Futures – 10 Yrs Chart)
Now, if we were to look at the two charts above. The one on the top shows the line graph of the Nifty Energy index for the last ten years and the one at the bottom shows the performance of WTI crude over the period of the last ten years.
At first glance, it may be very clear that there is an evident negative correlation between the performance of two. During 2011-12, when oil was trading near its peak of $140 per barrel, the Nifty energy index was trading near its low. And, when the Nifty energy index was nearing its peaking in early 2019, the per-barrel cost of crude oil was hovering around $55.
Now, we all must be wondering, that our equity market should have really outperformed when the oil prices crashed to sub-zero levels. But the global pandemic (COVID-19) has slowed down all global economies and we are no exception to it.
4. Impact on Exchange Rate
Rupee, being a free currency (value of rupee depends on the demand in the currency market), its value depends on the current account deficit. Therefore, if the oil prices are high, then the country will have to sell rupees and buy dollars to pay for oil bills. Similarly, if the price of the oil is low, then the current account deficit is low and the amount of dollars required to pay for oil bills are also low.
5. Impact on Inflation
India, being a vast country, the goods need to be transported from one place to another. And oil is a very important catalyst in the movement of vehicles from one place to another. A rise in oil prices leads to a direct increase in the price of goods and services. And it has a direct bearing on the prices of petrol and diesel. And hence it contributes to the rise in inflation in the country.
Therefore, a reduced price of oil comes as a boon to the economy of India. Reports published by Moneycontrol.com and State Bank of India(SBI) suggest that a $10 change in the oil price, impacts inflation by 0.3%.
Closing Thoughts
In conclusion, we can say that weak or reduced oil prices have a major positive impact on the Indian economy. India being an importer of crude oil, so higher oil prices imply, more payment needs to be made in foreign currency. And oil prices have a major say in the financial markets of our country. A weak oil price usually signals strength in the performance of the stock market. And a strong oil price has a negative impact on the performance of the stock market.
And similarly, if we were to take the example of oil-exporting nations, strong oil prices have a very positive effect on their incomes, balance of payments, and their financial markets.
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 is delisting of shares and what it means to shareholders: With the latest news of Vedanta delisting plans buzzing in the market, a lot of investors are confused about what delisting of shares actually means and why companies go for delisting. Moreover, investors are worried about what happens to the shareholders once the company gets delisted from the stock exchange.
In this article, we take a look at the delisting of shares and will try to demystify most of the frequently asked questions and facts around it. Let’s get started.
What is Delisting of Shares?
Delisting refers to a listed company removing its shares from trading on a stock exchange platform. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange. The company will now be a private company.
A long as the stock is traded in one of the exchanges that are made available to investors throughout the country it is considered as a listed stock. Anyways, if a company is listed in multiple stock exchanges in a country and decides to stop trading from just one of the exchanges, it is not considered as delisting. However, if it removes its shares from all the stock exchanges barring people to trade, then it is considered as delisting of shares.
Types of Delisting
If we try and figure out why a company is getting delisted the reasons can be grouped into two categories.
1. Voluntary delisting
Voluntary delisting occurs when a company decides on its own to remove its securities from a stock exchange. The company pays shareholders to return the shares held by them and removes the entire lot from the exchange.
Why would a company want to delist from the exchange?
Voluntary delisting generally occurs when the company has plans to expand or restructure. At times a company may be acquired by an investor who is looking to hold a majority share. This share may be greater than that permissible by the government. In India, it is mandatory that at least 25% of the shareholding be available to the public. An acquirer who wants over 75% of holdings may expect the company to go private and hence delist. At times the company is also delisted to allow the promoters a greater share.
The exchange regulations may also be a cause for voluntary delisting. This is because companies may find it difficult to comply with regulations as they may hinder their functioning. These companies would prefer to delist.
Existing shareholder approval for delisting
A delisting that is of voluntary nature can only occur if shareholders holding up to 90% of the share capital agree to the delisting offer made by the company. The shareholders at times may not agree to delist. if they foresee a rise in the price of the shares or are not happy with the current offer made by the company to buyback the shares as they feel the shares are worth much more. A delisting process may take years to complete hence the shareholders get ample time.
2. Involuntary or Compulsory Delisting
In the case of involuntary delisting, the company is forced by the regulatory authority to stop its shares from trading. This is also used by the regulatory authority to penalize the company. The investors do not have the opportunity to vote against the delisting in this case.
Failure to maintain the requirements set by the exchange
The shares of the company being suspended from trading for more than 6 months or being traded infrequently over the last three years
Bankruptcies, where the company has posted losses for the last three years and has a net worth which is negative
Here, the Promoters are required to purchase the shares from the public shareholders as per a fair value determined by an independent valuer.
Voluntary Delisting process
Assuming that promoters, shareholders, and the company’s board of directors agree, the delisting process will take a minimum of 8-10 weeks from the date of announcement of the shareholder meeting to approve the delisting proposal. Here are the steps involved in voluntary delisting of stocks:
1. Appointment of a Merchant Banker
Once the board takes the decision to delist the first major step is appointing an independent merchant banker. A merchant banker overlooks the Reverse book building process. Reverse book building is the process by which a company that wants to delist from the bourses, decides on the price that needs to be paid to public shareholders to buy back shares. Here, it has to follow a detailed regulatory process.
2. Initiate the Reverse Book Building Process through online bidding
The merchant banker oversees the Reverse book building process. It is the process used by the company to set a price that is used to attract the investors into agreeing to the delisting. In this process, the shareholders bid online the prices at which they would be willing to sell the shares. The reverse book building process is used only in India.
To protect the investors the SEBI has also set a floor price which is the minimum the company can offer to the shareholders. The floor price should be the average of weekly closing highs and lows of 26 weeks or of the last two weeks, whichever is higher.
3. Set up Escrow Account before offering terms of delisting to public
To ensure that the company has the ability to purchase the shares from the shareholders it is required to create an account specifically for this purpose. This account is known as an Escrow account. The amount in the escrow account will only be used towards delisting.
4. Gaining Shareholder Approval
Once the merchant banker receives the prices he makes an appropriate offer to the shareholders in the form of Offer Letters sent by post. The shareholders may or may not accept the offer. The company has to gain the approval of over 90% of the shares of all the shareholders. To acquire this approval what the company does is, make an offer to the existing shareholders to buy the shares from them at a premium. The shares must be bought back by the company at a price that is equal to or higher than the floor price.
Say a situation arises where 25% of the shareholders do not participate in the book-building process. Here as long as it can be proved that the offers were delivered to the shareholders by registered or speed post and the delivery status can be confirmed, the shareholders will be deemed as compliant to the divesting of the company.
If 90% of the shareholders agree to the prices and the companies decision to delist then the company can go ahead and delist from the stock exchange.
What happens to shareholders who refuse to sell?
If investors do not take part in the reverse book building process they still have the option to sell their shares back to promoters. It is mandated that the promoters accept the shares. The price here would be the same price exit price accepted from the reverse book building process. The shareholders will be allowed to do this for one year from the date of closure of the delisting process.
If a shareholder still doesn’t sell the shares back within a year he will end up holding non-tradable securities. Shareholders do this in cases where they expect the company to begin trading publicly again after a period. The shares of the shareholder, however, will still be affected by all corporate actions taken by the company.
It must be noted here retail investors (i.e. investment of less than 2 Lakh in the company) do not have much influence over the price and delisting decisions. In the case of a recent delisting announcement of Vedanta Ltd, Retail investors made up only 7.26% of the total holdings.
However, if the shareholders are unhappy with the prices or the delisting they can move to the courts. In 2005, shareholders who held 2.4% holdings moved to the courts over Cadbury offering Rs. 500 per share for being delisted. This was done despite Cadbury acquiring over 90% approval for delisting. After a decade the Bombay High Court ordered the company to pay Rs.2014.50 per share.
In 2010 the government made it compulsory for companies that are traded in the stock exchange to make at least 25% available to the public. This encouraged companies that had promoters owning more than 75% of the company to delist their securities. This caused investors to target companies where the promoters have ownership of 80-90%. This was done in anticipation that the company will buy back the shares at a premium. This increased the demand and hence increased the prices.
Investors also have to consider that a failed delisting may result in a fall in the prices as investors who may have anticipated premiums may engage in mass selloffs. Not to mention that a delisting procedure may take years.
Apart from this investors also should take note of the period during which a delisting takes place. Say a company tries to delist in times of market downturn or elongated bearish markets, it may be a strategy to buy back shares at a cheaper rate when investors are desperate for liquidity.
An overview of Intraday Trading vs Long-term Investing: The stock market is risky but equally rewarding. There are basically two ways by which people make money in the stock market – trading or investing. Here, you may either invest for the long-term or trade to build wealth through day trading (also known as Intraday trading). However, both these are two different approaches to make money in the equity markets.
When you invest in stocks for the long-term, it primarily means that you hold on to the investment for a longer period of time, probably between three to five years or more. In comparison, intraday trading means that you square off all your positions before the end of trading hours on the same day. You do not hold the shares for more than a day i.e. do not take delivery of the shares when you undertake intraday trading.
In this post, we are going to discuss the difference between Intraday trading and long-term investment. Here, we’ll look into different factors like holding period, capital growth potential, risks involved, and more. Let’s get started.
Differences between Intraday Trading vs Long-term Investing
1. Holding period
Long-term stocks are held for several years and any fluctuations in the short-term do not affect your investment decision. Here, holding period may vary from two years to even several decades. In comparison, in Intraday trading you do not keep any position open at the end of the hours on a trading day. A holding period maybe between just a minute to a few hours.
2. Capital growth
When the price moves in the expected direction, the trader will exit his intraday stock position. For example, if you have purchased 100 shares of ABC Limited at INR 50 and the price increases to INR 55, you will sell the shares and book the profits. Similarly, you will cut your loss in case the price decreases, using tools like stop loss.
However, with long-term investments, short-term price fluctuations do not affect your decision. The stocks are held for several years allowing you to build wealth through capital appreciation.
3. Risks Involved
There are inherent risks to intraday trading as well as long-term investing. However, the risks in day trading are higher as price volatility can be significant in just a few hours. Because daily market fluctuations do not affect long-term stocks, risks involved with long-term investments are lower. Here, investors have the potential to create wealth through dividends and price appreciation over the years.
4. Art versus skill
Day traders require technical skills to analyze and study market trends. Moreover, Intraday trading is also related to market psychology. On the other hand, long-term investing requires skills to identify good and reliable stocks. Here, investment decisions are primarily based on the business model, financial strength, and company philosophy.
5. Investor profile
Traders want to potentially earn higher profits from the daily price fluctuations. However, here if you miss the right time, it may result in huge losses. Intraday stocks are identified based on price volatility during the trading hours. On the other hand, long-term investors do not rely on trends and invest based on the fundamentals and value of the company over the years. They patiently hold on to the shares until the desired price levels are reached.
Let us now look at the pros and cons of intraday trading and long-term investing.
Pros and Cons of Intraday Trading vs Long-term Investing
— Pros of intraday trading
While Intraday trading, substantial profits may be earned in a shorter period
You require a lesser principal amount and enjoy benefits of margins.
You do not have to lock-in your investment for the long-term enabling you to trade more frequently for higher profits
Most reliable brokers like mastertrust offer margin trading on intraday stocks providing higher leverage for your capital
— Cons of intraday trading
The price volatility increases the risk of losing money
Knowledge of technical analysis is necessary and you cannot rely on tips received from others
— Pros of long-term investing
Historically, when you invest in the equity market for a longer period, you are able to earn returns that are more than the rate of inflation, which allows you to build wealth over the years
Long-term stocks benefit from economic growth resulting in higher revenue through an increase in consumer demand, which bodes well for an increase in its share price.
Long-term investing not only provides capital growth through price appreciation but also allows you to earn more returns through periodic dividends.
These days, it is very easy to invest in shares for the long-term through a stockbroker or online platforms.
— Cons of long-term investing
There is an inherent risk of losing the principal in case the company does not perform as per expectations resulting in the decline of its share price.
Share prices change from one minute to the next. Many times, the investment may be based on emotions rather than sticking to the fundamentals.
Long-term investing means a long holding period that may last for three to five years or longer. This also means that you won’t be able to leverage your money to earn higher returns, from other alternatives.
Closing Thoughts
Both intraday trading vs long-term investing are proven ways to make money from the stock market. The decision to invest for the long-term or intraday totally depends on your requirements, financial goals, investment horizon, and risk profile. Further, here the diversification to allocate your money to various assets should be based on your financial goals.
Seek expert advice from professionals at mastertrust to know the best investment strategy to meet your goals. This stockbroker offers online broking, in-depth research and analysis, and investment advice at affordable charges. Open demat account and start trading today!
An overview of Coffee Can Investing Approach: A middle class Indian would spend most of his youth being forced into education, his early adulthood building a career, and taking care of his parents. He would be hit by a midlife crisis before 50. His late adulthood would be spent preparing for retirement i.e. if he hasn’t started already and ultimately banks on his kids to take care of him. As young adults, the kids now take up the responsibility with pride as is demanded by the Indian tradition and culture.
A squirrel life, on the other hand, lives chiefly on trees as they forage for food and escape predators. One thing that is interesting about squirrels is that they too try and stock up on nuts for the future. Unfortunately for the squirrels and fortunately for us, millions of trees are accidentally planted by squirrels who bury nuts and then forget where they hid them. Because of a squirrels life spanning only 11-12 months, they do not generally get to reap the benefits of an oak they planted, as oaks take up to 30 years to grow. But they still live in forests that may well have been accidentally planted by squirrel fathers decades ago.
What does it take to retire?
Humans, unlike the squirrel, have an average lifespan of 79 years. Yet we see the middle-class Indian category struggling and not reaping any benefits. According to Saurabh Mukerjea, for a couple to retire and survive for another 25 years with a reasonably good lifestyle post-retirement, they’ll need a crore a year pre-tax which is 60-70 lakhs post-tax.
This does sound reasonable considering the expenses of their adolescent children, the fragility of their health, and most importantly inflation a few years hence. This will mean that for a family to retire in a good shape they’ll need to have financial assets of at least 15 crores. Need a minute? Today we discuss an investment strategy called Coffee Can Investing that shines some light on what seeds to plant for our 15 crore oaks in the long term.
What is coffee can investing?
Coffee Can Investing was first coined by Robert G. Kirby in a paper written by him in 1984. The strategy gets its name because in the old west people who invest in the stock market would receive physical certificates of proof which they would put away in coffee cans. They would hide these cans in their mattresses later forgetting about them.
These stocks would eventually grow enormously making its holder rich when he found it again. The success of Coffee Can Investing depends entirely on the wisdom and foresight used to select stocks in the portfolio.
The Story behind Coffee Can Investing
Robert Kirby first observed the pattern dramatically in the 1950s when working in a large investment counsel organization. One of their woman clients who had just been widowed approached him. She wanted the securities inherited from her husband to be added to her portfolio under the organization. Her husband, who was a lawyer, would look after her financials.
Robert Kirby noticed that the husband had been piggybacking on the advice she would get from the advisors within the company. He would apply the advice as directed by the advisors to his wife’s portfolio. But when it came to his portfolio he would only follow those that were related to buying shares. He paid no attention whatsoever to the sell recommendations. He would simply put $5,000 in all purchases.
When Robert Kirby reviewed the portfolio created, the husband had many stocks that were worth only $1000. However, there were quite a few considerable investments that were now worth $100,000. One jumbo holding worth $800,000 exceeded his wife’s whole portfolio. These were shares of a company called Haloid. This investment later turned out to be a zillion shares of Xerox.
This surprised Kirby as the wifes’ portfolio was no match to that of her deceased husband. This happened despite the wifes’ portfolio being managed by an Investment organization. And all he did was buy the shares as suggested by the investment counsel organization but ignore the sell orders even if the stocks were moving negatively.
Coffee Can Investing and Index Funds
When Kirby first wrote the paper in 1984, he noticed that there was an increase in the index funds following. This has continued to this day. An Index in a market creates a portfolio of the top securities held in that market. The Index, however, does not hold the securities. The US has the S&P 500 Index. What Index Funds do is create an actual portfolio by investing in the securities.
In the paper, Kirby criticizes these funds as they are required to trade securities on a regular basis to keep up with the portfolio the index would have. Kirby also explains how the S&P 500 Index made several hundred stock additions and eliminations. An Index fund would actively be required to trade on these stocks. The transaction costs on these alone would have a huge impact on the portfolio and the index funds growth. Hence Kirby introduced Coffee Can Investing. He identified that leaving the stocks alone was one of the reasons why the widows’ husband had grown his portfolio enormously in the 1950s. And he also considered transaction costs from trading as the greatest detriment to superior investment returns.
What is required for a Coffee Can Strategy?
To tap into these superior investment returns of Coffee Can Investing one would have to
Carefully assess and select stocks based on the company’s performance.
Invest and forget about them for a long period of time. In Coffee Can Investing to reap the maximum benefits, one would have to let the investments be for at least a period of 10 years.
How to pick stocks for this approach?
In their book, ‘Coffee Can Investing: The low-risk road to stupendous wealth’ Saurabh Mukherjea, Rakshit Ranjan, and Pranab Uniyal discuss how to pick stocks to create a Coffee Can portfolio. According to them, the stocks considered must be filtered in the following manner.
1. The company selected must have a market cap of at least 500 crores.
This is because we will need a company that has established itself. Also because we will need the past records of the company for at least 10 years.
2. Revenue growth of the company must be at least 10% each year for the last 10 years.
3. The ROCE of the companies must be more than 15%
The ROCE will show if the management is capable of allocating that the money put by you into the company correctly. ( ROCE = Net Income/ Shareholders Equity)
The stocks selected in the portfolio still have to be diversified. The investment must be done across industries and also across different capital classes. This would, however, depend on the investor and vary accordingly. The investor would have to keep in mind that the scope for growth is limited when the companies are too big. The potential for smaller companies to grow is much higher. This, however, does not stand true for longer periods. In long term say 20 years this benefit no longer would exist with the companies in the small-cap in comparison to large-caps.
Results of Coffee Can Investing Approach
After studying trends and putting together a portfolio, The book ‘Coffee Can Investing: The low-risk road to stupendous wealth’ brings forward the concept of Patience Premium. As per Patience Premium, a period greater than one year would give you a higher probability of higher returns. Investors are not really rewarded much for periods like 1 year or even up to 7 years. The chances of returns as per the book even reduce during the 3 to 5 year period. After the 7-year and 10-year mark, the patience premium is much higher.
The best-case scenario occurs when patience premium combines with quality premium. Quality premium is the premium associated with the quality companies selected in the portfolio. A dream mix would be of good quality companies selected as per the Coffee Can portfolio filter and an investor letting the investment be for a long period. With both the premiums combined the probability of losing money is -3% yearly. After a period of 10 years, the returns would stand at 20%. They would, however, remain stagnated after this period. Hence 10 years onward the returns expected will be more or less 20%.
Why do the returns stagnate after 10 years?
Pranab Uniyal explains this citing reference to the book ‘Mathematics of everyday life’. According to the book, large numbers behave differently from small numbers. They use a dice analogy to explain this. Say 3 people were each to roll a dice 5 times. The average obtained from rolling the dice 5 times will vary or have an extremely high probability to vary from each other. On the other hand, if all of them roll the dice say 1000 times, the average will cumulate to 3.5 for all of them.
Similarly in investing. Short periods will subject us to market volatility, which would be the easiest way to lose our investment and the results would vary too much to different investors. However, when we look at longer periods say 10 years if different investors create a Coffee Can portfolio the returns would converge at 20% yearly.
Greater the Risk, Greater the reward?
The book also challenges the quote on every investor’s tongue which says more the risk, higher the reward. Coffee Can Investing provides a way for investors to earn huge returns on their investments instead of gambling in the short term. These returns can only be achieved however only if the portfolio is held for a long period of time. One of the major reasons the investor earns here is by saving up on all the transaction costs.
Why not select assets outside the stock market?
Only 2% of the Indian population indulges in the Indian stock markets. Over 95% prefer to invest their savings in Land and Gold. This could be because we as people tend to put our trust in assets that we can see and touch. Also, a great deal of cultural influence is at play when it comes to gold.
The land came to be considered as one of the best investments due to the boom in the period between 2003 to 2013. Due to this India has currently become one of the priciest markets in the world. But the prices are not followed by an apt demand. This has left a lot of unsold properties in the market. This has made land and gold one of the worst investments in recent times especially if one wants to stay ahead of inflation. And an even worse investment if they want to compete with the stock market.
Benefits of Coffee Can Investing
1. Minimum Expenses
Coffee Can Investing can be said to have been built on this factor. Apart from the cost that occurs during the one-time investment, there will be no more transaction cost for the remaining 10 year period. Tracking an index involves multiple additions and eliminations to a fund portfolio. Due to this, the investments are affected regularly from brokerage and other expenses transaction costs.
In addition to this investment management firms have their own set of charges charged to the investors. Expenses to the investment manager are spread to all the funds and not just Index funds. Also, the quest for alpha in the market has investment managers charging investors for their apparent skills. However, for the period the investors remain the market we rarely see them beat the markets.
A Coffee Can Portfolio created by the individual would not have an Expense Ratio. Also, investors rarely consider how taxes affect their investments. Regular purchases and sales would result in added taxes on any profit earned.
2. No need for tracking the portfolio.
This is also one of the necessities of Coffee Can Investing. Once we have filtered and achieved a portfolio of quality stock the only thing that is required is for them to be put aside and left alone for a decade.
When we invest we unfortunately always try and keep track of what is going on with the company. CEO changes, political and other economic changes would all stimulate us to act on our holdings. In fact, a Coffee Can Portfolio would even require us to not even look at our stocks during the pandemic.
3. Not Affected by volatility
The filters to create a suitable coffee can portfolio ensures that only the best stocks as per the present scenario make it to your portfolio. However, in the short term, these stocks will face very high volatility in reaction to the market, political, and other changes. In the long term, the stocks will only be judged by their intrinsic quality. However, even if a few stocks turn out to be bad investments it is best to cite what Kirby saw in the deceased husbands’ portfolio. There were stocks that did not perform as well as the others but they were more than made up for by the stocks that performed better. In the long term, the portfolio will face reduced impact from market volatility.
4. Outperformance by 8-10%
According to ‘Coffee Can Investing’ a portfolio that has followed all the steps will be performing better than the market and beating it by 8-10%
Why don’t funds just follow Coffee Can Investing?
If this investment strategy enables you to outperform the market by such a large margin then the question arises as to why shouldn’t mutual funds just follow this investing strategy.
— One of the major reasons is the wait for 10 years. In Coffee Can to judge how you have performed, you will have to wait for over a decade. Very few investors would be willing to commit to such a fund.
– Imagine a scenario where a fund does start coffee can investing. It would have to set up a team that would prepare a portfolio for the fund. What next? Coffee can would require you to simply ignore the investment for the next decade. Setting up a fund only as Coffee Can will have a huge setup cost at the beginning with returns only after a decade. In regular investment firms, the employees are rewarded for the right decisions, investments, and performance. These benefits would only be available to the employees of such firms only after a decade. This would be highly unfair to them.
Despite Coffee Can Investing not being popular in the Indian markets there still are a few Asset management companies still offering the coffee can route.
Closing Thoughts
Coffee Can Investing makes us question if we really are investors. Or due to our reaction to every market change has resulted in us inadvertently become traders. Traders holding the facade of an investor.
At the end of his paper where Robert Kirby introduced Coffee Can Investing, he makes it clear that his argument wasn’t against index funds. They were directed towards the transaction costs, brokerage fees, taxes that are associated with every trade. Instead, if the stocks are just left alone they would perform much better
What should an Investor with limited liquidity do?
If we take a regular Indian Investor, for him to be expected to contribute a huge amount for the one-time investment would be unrealistic. Instead if one would want to follow coffee can investing but is not able to set aside a huge amount at once it would be better if he does the following.
Create a coffee can portfolio where the investor invests what he can and set it aside for a decade. When he has saved enough again say in a year, create a coffee can portfolio which is completely independent of the one he created earlier with no references to it. It should be solely based on the market conditions prevalent filtering companies based on the present scenario and set it aside for a decade.
Coffee Can Investing: The Book
For a thorough study, I would recommend giving ‘Coffee Can Investing: The low-risk road to stupendous wealth’ by Saurabh Mukherjea, Rakshit Ranjan, and Pranab Uniyal a read. Although there might be quite a few books out there on investing there are very few books written keeping the Indian Markets particularly in mind.
It would be highly rewarding to break the loop mentioned in the introduction. Happy Investing.
Most Important questions to ask before purchasing a stock: Picking a winning stock that can give consistent returns for many years requires a lot of analysis and research. However, you can simplify the research process if you have an investment checklist.
Having a reliable checklist for picking stocks can reduce the chances of missing an important detail that you should have studied before investing in the stock. As Charlie Munger, Vice-Chairman of Berkshire Hathaway has famously quoted:
“No wise pilot, no matter how great his talent and experience, fails to use a checklist.” — Charlie Munger
In this post, we are going to discuss ten key questions to ask before purchasing a stock by every stock investor. Let’s get started.
Quick Note: Although there are hundreds of points to check while picking a stock to invest, however, most of them can be categorized among the ten questions listed below. Anyways, by no means, I claim that this is the best checklist for picking stocks. My suggestion would be to study the investment checklist given below, improvise and make your own list of questions. Further, for simplicity, I’ve not included financial ratios.
10 Questions to ask before purchasing a stock.
Here are the ten key questions that every investor should ask before investing in a stock.
1. What does the company do?
What are the products/services that the company offers? Do you understand the company’s business model? How does the company actually make money? What are the top/best-selling products of the company?
2. Who runs the company?
Who are the promoters/owners of the company? It the company a family-owned or professionally managed one? Who is managing the company? What are the credentials/background of CEO, MD, Board of directors and the management team? What is the shareholding pattern of the company?
3. Is the company profitable?
How much profits did the company generated in the last few years? How are the company’s gross, operating and net profit and what is the profit margin at each level? Is the profit of the company growing over time or stagnant/declining?
4. Does the company have a sustainable competitive advantage?
Does the company have a moat like intangible assets, customer switching cost, network effect, cost advantages or any other sustainable competitive advantage that can keep the competitors away from eating their profits?
5. How was the past performance of the company?
How is the company’s financials in the past few years? What’s the trend in the company’s income statement and cash flow statement? How are the sales, EBITDA, Cash from operating activities, free cash flow and other financial metrics over the past few years?
6. How strong is the company’s balance sheet?
Are the assets of the company growing over time? How much is the liability of the company? Is the company’s shareholder equity increasing? How much cash does the company have on the asset side? How much is the company’s Intangible assets, Inventories, Receivables, Payables and more? Does the company invest in its Research & Development, especially in a few sectors like Technology, Pharmaceutical, etc?
7. Was the management involved in past fraud or scams?
Was the company’s promoters or management involved in any past scam? Does the company has any history of cheating the shareholders or any past penalty by SEBI?
8. Who are the key competitors?
Who are the direct and indirect competitors of the company? What is the market share of the company vs the competitors in the industry? What this company is doing differently compared to its competitors? Are there any global competitors or the possibility of global leaders entering the same market anytime soon?
9. How much debt the company has?
How much short-term and long-term debt the company has? Does the company generate enough profits or Free cash flow to cover the debt in the upcoming years? Have the promoters pledged any of their shares?
10. How is the stock valued?
What is the true intrinsic value of the company? Is the company currently over-valued, under-valued or decently valued? Is the company relatively undervalued compared to the competitors and industry? What is the calculated intrinsic value by different valuation method? How much is the margin of safety? Will you be overpaying if you buy the stock right now?
Although getting a recommendation or investing where friend/colleague suggested may land you into a few profitable deals. But if you want to make consistent returns from the market (and not just being lucky), you need to build your own trustable investing strategy.
It’s true that picking a winning stock required a tremendous amount of research. However, having an investment checklist of questions to ask before investing in stock significantly reduce the chances of investing in fundamentally weak stocks. Moreover, you can easily eliminate over 90% of the companies that don’t meet your checklist.
I hope the questions discussed in this post is helpful to you. If I missed any additional important to ask before purchasing stock in this investment checklist, feel free to mention below in the comment box.
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 beginner’s guide on how to invest your first Rs 1,000 in Stock Market (Updated): Learning how to invest your first Rs 1,000 in the stock market is a significant step towards starting your financial journey and future investments. You might be surprised to know that even less than 2.5% population of India participates in the Indian stock market, even when the Indian economy is one of the fastest growing economies in the world. Nevertheless, investing your first Rs 1,000 will help you to get prepared for your journey ahead.
In this post, I’m going to tell you the simplest answer to how to invest your first Rs 1,000 in the stock market. It’s a no-brainer way. Further, for the method described here, you don’t need to be an expert or any help from the financial advisors to invest your first Rs 1,000 in the stock market.
Quick Note: Here, I’m not going to discuss how to open brokerage accounts. I’m assuming that you have already had set up your demat and trading accounts. If you haven’t, then read this post to learn where to open your demat and trading account.
A little advice before we start
While interacting with my blog readers and subscribers who are new to the stock market, I learned that most of the first-time investors like to wait until they have amassed thousands of rupees to invest. However, that’s a mistake. You can start investing with as little amount as Rs 1,000. Further, you can increase the investment amount in the future when you have increased your savings. By following this strategy, you can utilize the time efficiently to learn the stock market so that you will be prepared when you invest a big amount in future.
Second, you do not need to be an expert to invest your first Rs 1,000 in the market. You can invest this money while you are learning or even if you started just a few weeks ago.
Third, the point here is to learn, not to earn. Rs 1,000 is not a very large money that will get you bankrupt if you lose this amount. However, Rs 1,000 is more than enough to make you enter the exciting world of stock market and enhance your financial knowledge.
In addition, do not worry about the technicalities like how to buy/sell using your trading account initially. Once you are ready to invest, you can learn all these within 15-20 minutes using different sources on the internet. These days, purchasing stock is even a lot easier compared to booking an online train ticket on IRCTC. All you need is a phone/laptop, internet connection, brokerage accounts, and some cash in your savings account.
Now that I’ve cleared the basics, let’s learn how to invest your first Rs 1,000 in the stock market. Further, please read this post till the end as there is a bonus in the last section of this article.
How to invest your first Rs 1,000 in the stock market?
1. Invest in Just One Stock
Rs 1,000 is not a big amount. If you are buying a stock worth Rs 300, then you will be able to buy just three units (quantity) of that stock. Moreover, those stocks which are trading at a market price above Rs 1,000 are already ruled out here. Therefore, if you are planning to invest your first Rs 1000 in the stock market, then you need to widen your selection criteria to the stock pricing between Rs 1 to Rs 1,000. Otherwise, you might have to reject many good stocks whose market price is high (Say 800-900), in case you are planning to purchase multiple stocks.
Further, for such an investment amount, you do not need to waste time diversifying your portfolio. Selecting multiple stocks takes time and it’s not worth the value.
The easiest approach of stock selection for the beginners is to invest in what you know. There are a number of companies that you might have heard from childhood and might already know a lot about it. For example- Maruti Suzuki, HDFC Bank, ITC, Yes Bank, HPCL, Bata, Coal India, Colgate India, Hindustan Unilever, etc.
There are tons of companies whose products/services you already have been using and might be more than happy with them. Find out those companies and investigate them. Visit the company website, check its portfolio (product/services), know who is the boss of the company, it’s future products/plans, etc.
You’ll be surprised to know how many common companies have given uncommon profits.
For example Eicher Motors- Royal Enfield bikes parent company (over 80 times returns in last 10 years), MRF Tyres (over 17 times return in last 10 years), Symphony- coolers (over 12 times return in last 5 Years), etc. The bottom line is to look around yourself and find some popular companies worth investing in.
Search for the companies that you already know that they are doing great (like expanding at a fast rate) for the last couple of years or provide excellent product/services or has an amazing business model (easy to scale).
If you are a working guy/girl, it will be quite easy for you to find such companies. Just look in your industry and find which one is leading. For example, if you are in the banking sector, you might already know which bank is expanding fast in urban and rural areas, opening new branches every week, and has low non-performing assets (NPA), etc.
If you are a doctor, you might already know a few good pharmaceutical companies which are producing the best medicines at a cheap price or are working on the medicines for a rare disease. Even if you are a housewife, you can find a number of good companies that manufacture day-to-day life products like soap, shampoo, towels, edible oils, etc.
In short, the idea here is to invest in what you already know rather than wasting too much time reading financial magazines to search for hidden companies.
3. Don’t spend weeks researching your first stock
Although I’m confident that you find a good company using step 2, however, if you are unable to find any company that you have good knowledge, then invest in blue-chipstocks.
Blue chips are the stocks of those reputed companies who are in the market for a very long time, financially strong and have a good track record of consistent growth and returns in the past many years.
For example- HDFC bank (leader in the banking sector), Larsen and turbo (leader in the construction sector), TCS (leader in the software company), etc. A few other examples of blue-chip stocks are Reliance Industries, Sun Pharma, State bank of India, etc. Here is the list of few top blue chips stocks in the Indian stock market:
The idea here is to ‘not’ waste too much time researching for stocks. This is your first investment and the investment amount is also small. It’s not worth your time spending weeks researching a stock just to invest Rs 1,000.
To be frank, do not make this investment a very big deal of your life. The investment amount is too small to hurt you financially. Even if you lose 50% of your investment amount, you won’t go broke. Don’t worry too much thinking about what if the stock price goes down. IT’S NOT A BIG DEAL!
Here your motive should be to learn, not to earn. If you are able to learn today, you can make tons of money in the future. However, if you want to ‘save’ Rs 1,000 today and are not willing to take any risk, you might save this 1,000 rupee, but miss opportunities to earn lakhs in the future. Stay calm and enjoy the ride.
Penny stocks are those stocks which trade at a very low market price (less than Rs 10) and have a very low market capitalization (typically under 100 crores) are called penny stocks in Indian stock market. These are the darlings of the new investors. The low market price of these stocks makes them quite attractive to the beginners.
However, these stocks are very risky. You might have never heard the names of most of these companies and very limited information about the company is available to the public. The stock prices of these companies are easy to manipulate. Overall, penny stocks are difficult to investigate for a newbie investor. My advice, stay away from penny stocks until you have got good knowledge and experience in the stock market.
This is my final advice. Do not expect high returns while investing your first Rs 1,000 in stocks. Stocks are not ‘lottery’ tickets. Even if you get a return of 100% in 6 months, still you will make a profit of only Rs 1000 (Rs 166 per month on an average).
This isn’t going to affect your life financially. Until the investment amount is large or the principal is invested for a long duration (power of compounding), the returns won’t be too big to affect you financially.
That’s why mark my words and set a realistic expectation for your first Rs 1,000 investment.
New to stocks? Confused where to start? Check out my amazing online course: HOW TO PICK WINNING PICKS? #HappyLearning
Bonus: Stock Market Investing Quiz
Before you invest your first Rs 1,000 in the stock market, why not find out how good is your investing instincts? Try it out with this FREE Quiz NOW…!!
Do you consider yourself a ‘Smart Investor’?
Well, your success in the stock market depends on how you invest and react to different market situations.
Here are 10 questions to put your 'Investing Instincts' to test.
One thing I can take guarantee is that your experience after buying your first stock will be amazing! Trust me, you’ll get more involved in the market if you have some money is invested in it, no matter how small it is. By investing your first Rs 1,000 in the market, you will learn ‘fast’ and learn ‘efficiently’.
Moreover, as discussed in the post, investing is not rocket science, rather it’s quite simple to invest your first Rs 1,000 in the stock market if you follow the steps described above.
I hope this post on how to invest your first Rs 1,000 in the stock market? is useful to you. If you have any questions or doubts, feel free to comment below. I’ll be happy to help you out. Happy learning and investing.
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 Discussion Forums in India in 2020: One of the easiest ways to learn anything new is by participating in the discussions. And the same rule applies when you are trying to learn trading or investing. If you are new to stocks and looking for the best stock market discussion forums in India to start participating, then you’ve entered the right page.
In this article, we are going to share the list of seven best stock market discussion forums in India where you can ask your most troublesome questions or share your ideas/knowledge with fellow investors and traders. On all these forums, you can find active discussions on stock market investing, trading, investing strategies, stock picks, IPOs, mutual funds, taxation, personal finance and more.
Besides, all these forums are FREE to join and hence, it doesn’t cost you anything to signup and start participating in interesting topics on these Indian stock market discussion forums.
7 Best Stock Market Discussion Forums in India
Here are seven of the best forums in India for healthy discussions on stock market investing and trading:
1. Traderji
Started in 2004, Traderji is one of the oldest and most popular stock market discussion forum for investors and traders in India.
This platform has over 1.8 lakhs members participating in different threads on the stock market, derivates, Commodity and Forex trading of India. As per the statistics on this website, there are over 59,300 threads and 1,202,464 messages on this forum.
A few popular categories on the Traderji forum are Beginner’s guide, General trading and investing chat, technical analysis, mutual fund discussion forum, tools, and resources.
Trading Q&A is a famous online discussion platform for traders and investors which is managed by Zerodha, the biggest discount broker in India. With thousands of active participants on this forum, you can get all your trading queries answered here, along with sharing your own knowledge with fellow traders.
On Trading Q&A, you can ask questions about Intraday Trading, Derivatives, Commodity, Investing Strategies, Broker Review, Algo-Trading, Zerodha & its products, Taxation, IPOs and much more.
Trade Brains discussion forum is an online forum for the community of enthusiastic stock market investors and traders who are willing to learn, ask, and share their skills, thoughts, and knowledge. This forum has been listed among the top 9 Online Forums To Discuss Personal Finance and Trading in Asia by Fintech Singapore News.
On Trade Brains’ forum, you can find discussions on categories belonging to Share market investing and trading, fundamental analysis, mutual funds, IPO’s, personal finance and money management.
Here, you can participate in the forum for free by reading/writing the answers on the existing queries or asking your own questions by simply signing up for the forum.
One of the most active forum for stock market discussion in India. ValuePickr’s tagline is “Separating the Wheat from the Chaff” and focuses on discussions regarding the company’s Business Quality, Management Quality, Business Execution & Performance.
Here, you can find topics on stock opportunities (hidden gems, Untested but worth a good look category, top 5 picks), Investing strategies, Questions & Answers, Investor Toolkit, Investment Learning, Books and more. You can get a lot of knowledge about the Indian stock market by simply hovering over the topics and queries.
Stock Adda is an Indian stock investor community where along with the stock market discussions, you can also get information like stock ideas, investing strategies, news, market movements, books, etc.
Besides, on StockAdda, you can also create a stock portfolio or view the ranking of member portfolios based on Daily and overall gains(%). Overall, it is an amazing platform for social traders/investors.
Stocks Talk Forum by Rakesh Jhunjhunwala is yet another popular stock market discussion forums in India.
First of all, I should mention that this site is Inspired, Not Endorsed, By Rakesh Jhunjhunwala, one of the most successful Indian stock market investors.
On this discussion forum, you can find topics on categories like stock investment queries, stock picks of wizards, portfolio of famous investors, stock advisory services, must-read interviews, articles and more. You can find over 3,250 discussions on this forum.
Bse2Nse is another popular Indian Stock forum discussion for Equity, FnO, and commodity trading. Here you can find discussions on stock trading, investing strategies, broker reviews, IPOs, mutual funds and more. They also have a separate section on Chart Analysis which can be very helpful for technical traders.
In this article, we discussed the seven best stock market discussion forums in India. However, before ending this article, let me give you a piece of final advice.
All these forums are built by active members who are willing to share useful ideas and answers. Please keep your posts relevant to the forum category and do not ‘SPAM’! Else, you will be thrown out of the forum by the admins and moderators. Be respectful to others and don’t sweat the small stuff.
That’s all for this post. Comment below if you are part of any of the above-mentioned discussion forum or are willing to join soon. Else, if I missed any awesome Indian stock market discussion forum worth adding to this list, mention below in the comment box. Cheers and have a great day!
A complete overview of Penny stocks in India: Hello Investors! Penny stocks are the darlings of new investors. The low market price of these stocks makes them quite attractive to beginners. However, there are a number of things that an investor should know before investing in penny stocks. In this post, we are going to discuss penny stocks, their pros and cons, and whether an investor should buy it or not. Let’s get started.
What are Penny stocks?
Penny stocks are those stocks that trade at a very low market price, generally with a share price less than Rs 10. These stocks have a very low market capitalization and typically under Rs five hundred crores. Further, penny stocks in Indian stock market have low liquidity and are speculative in nature.
Being smaller than Small-cap companies, these stocks belong to the microcap category. However, you can find a number of penny stocks in India listed on both the Bombay stock exchange (BSE) and National stock exchange (NSE). Here are a few examples of penny stocks in India:
Company Name
Last Price (Rs)
Market Cap (Rs Cr)
Andrew Yule & Co
9.88
483.08
Bajaj Hindusthan
4.15
470.43
Future Enterp.
9.2
459.88
M T N L
6.95
437.85
GTL Infra.
0.35
431.17
GVK Power Infra.
2.6
410.59
Electrost.Cast.
9.3
402.65
JP Associates
1.6
389.19
CG Power & Indu.
6.2
388.58
Unitech
1.4
366.28
Jain Irrigation
6.95
358.19
Media Matrix
3.13
354.54
Welspun Special.
6.72
328.61
Mishtann Foods
5.73
286.5
Shriram EPC
2.75
267.17
3i Infotech
1.65
266.75
Subex
4.7
264.14
Zee Media
5.45
256.58
Dhanlaxmi Bank
9.9
250.48
HLV
3.8
239.61
Brightcom Group
5
238.13
Rel. Comm.
0.85
235.07
Nagarjuna Fert.
3.8
227.26
RattanIndia Infr
1.6
221.16
Sanwaria Consum.
2.9
213.47
SREI Infra. Fin.
4.05
203.75
HCL Infosystems
5.75
189.3
Reliance Capital
7.45
188.27
Lloyds Metals
7.75
174.51
Jayaswal Neco
2.7
172.43
Shiva Cement
8.51
165.95
Vikas Proppant
3.2
161.98
D B Realty
6.6
160.55
MSP Steel & Pow.
4
154.17
Orient Green
2
150.14
Siti Networks
1.7
148.25
Sakuma Exports
6.95
148.22
Essar Shipping
7.05
145.92
Opto Circuits
4.85
145.8
Sh.Global Trad.
1.25
142.44
Vascon Engineers
7.85
139.84
Vikas Multicorp
2
132.7
Uttam Value Ste.
0.2
132.16
Bombay Rayon
3.95
125.4
Moschip Tech.
8.2
123.9
Setco Automotive
9.1
121.73
JCT
1.45
121.57
JMT Auto
2.4
120.92
Nila Infrastruct
3.05
120.14
Vaarad Vent.
4.74
118.45
Quick Note: In the United States, penny stocks used to be those stocks who trade below one dollar ($1) i.e. the stock worth pennies. However, nowadays, even the stocks trading below five-dollar are considered penny stocks there.
PROS of Penny stocks
Penny stocks have a high potential of rewarding its shareholder. The returns are quite high if you are able to get a good penny stock. Many penny stocks have turned out to be multi-baggers for their investors.
These stocks are able to make explosive moves. There are a number of penny stocks that have given multiple times returns in just a few months. Moreover, due to the low market price of these stocks, investors are able to buy large quantities of penny stocks.
Generally, penny stocks are not known to many as retail investors do not have information about these stocks and the institutional investors do not invest in these companies because of their low market capitalization. Therefore, if you are able to find one such stock before the market does, then it can turn out to be a great wealth creator for you.
The cons list of penny stocks is too large compared to its pros. Here are few of common disadvantages of buying penny stocks:
High Risk: These stocks are quite risky as the percentage of a number of penny stocks outperforming the market are quite less. Many of the penny stocks become bankrupt and go out of the business.
These stocks have very low liquidity. Therefore there will be troubles on both ends of transactions i.e. buying and selling. While buying these stocks, you might not be able to find a seller. In case you bought the stock, and the stock price starts falling, then you won’t be able to find a buyer to sell the stock.
There is a large bid-ask spread in these stocks.
Limited information is available to the public about the company.
Price manipulations: There have been a number of cases of price manipulations in penny stocks where the insiders try to inflate the share price. Further, one can easily manipulate the penny stocks by buying large quantities of these stocks.
Sudden delisting and regulatory scrutiny: There are multiple cases where penny stocks have been delisted from the stock exchanges. Further, these stocks are regularly under the scrutiny by SEBI.
Prone to scams: There are a number of past scams in penny stocks (Ex- pump and dump).
Penny stocks are suitable for those investors who are ready to take high risks in expectations to get high returns. If you have a low-risk appetite, do not invest in these stocks.
Rules for investing in penny stocks
Here are the few guidelines that can help you to invest in penny stocks.
Look for value, not just the price: Even for penny stocks, you need to look at the value the company is giving. Understand the company’s business, product, services, etc. Investing in penny stock is not buying a lottery ticket.
Study the company’s fundamentals: Look at the company’s financials, management, debt, growth rate, etc
Check the liquidity: Buy stocks that have reasonably high trading volumes so that there is ample liquidity.
Promoter’s share and pledge: Check the promoter’s shareholding patterns and stock pledge if any.
Technical factors: If you know technical analysis, then also check the penny stock’s technicals. Moreover, if you’re purchasing penny stocks just for quick returns, do not ignore looking into factors like momentum, technical indicators like moving averages, RSI, etc.
Invest only a small portion of your investment in penny stocks: As these stocks have a high risk, you should only invest a small amount, less than 10% of your total investment amount in penny stocks.
Monitor continuously: Penny stocks are very volatile.As these stocks are known to make explosive moves, therefore monitor these stocks continuously. If the stocks are performing well, buy more. If they are continuously performing poorly, get rid of it.
Do not diversify: As you are only investing a small proportion of the amount in these stocks, diversifying will make the net investment even smaller. Select only 2 or 3 penny stocks and invest in them.
Be disciplined: Do not invest all in if your penny stocks start performing tremendously good. Similarly, do not quit if one or two of your penny stocks failed to give satisfactory returns.
Do not believe ‘it cannot go down any further’ myth. If the prices of the stock are falling, try to find the reason behind it.
Conclusion
While there are a number of peoples who have created huge wealth by investing in penny stocks, however for many penny stocks are wealth destroyers. If you are going to invest in penny stocks, do your research carefully and do not speculate about the stock. Moreover, there are high risks involved in these stocks. So, be ready for it.
Finally, here’s a short video to summarize what are penny stocks in India and how to research and analyze them.
That’s all for today on penny stocks. I hope this post was useful to you. If you have any doubts/queries, feel free to comment below. I’ll be glad to help. Happy Investing and Trading. Take care!
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
Key Difference Between Stock and Mutual Fund Investing: Hello Investors! When it comes to equity investing, a lot of beginners are confused about whether they should directly invest in stocks or take the mutual funds route. In this post, we are going to discuss the fundamental difference between stock and mutual fund investing.
However, before we start talking about the differences, let’s first exactly define what stock and mutual fund investing is.
What is stock and mutual fund investing?
Stock market investing means investing directly in the stocks of the company. Here, you are purchasing the companies listed on the stock exchange with an expectation to earn profits when the price of that stock goes up.
On the other hand, a mutual fund is a collective investment that pools together the money of a large number of investors to purchase a number of securities like stocks, FDs, bonds, etc. A professional fund manager manages this fund. When you purchase a share in the mutual fund, you have a small stake in all investments included in that fund. Hence, by owning a mutual fund, the investor participates in gains or losses of the fund’s portfolio.
11 key difference between stock and mutual fund investing
Here are the critical differences between stock and mutual fund investing based on eleven crucial factors–
1. Cost of investing
While investing in mutual funds, you have to pay different charges like an expense ratio, load fee (entry load, exit load), etc. For the top mutual funds, the expense ratio can be as high as 2.5-3%.
Nevertheless, if you compare the charges involved in stock and mutual fund investing, you can find that the costs while investing in stocks are still lower. This is because managing a mutual fund consists of a lot of expenses like management fee, the salary of the managers/employees, administration charges, operational charges, etc. However, for investing in stocks- the most significant burden is only the brokerage.
Direct investing in stocks has more volatility when compared to mutual fund investing. This is because when you invest in shares- you generally purchase 10-15 stocks.
On the other hand, the mutual fund consists of a diversified portfolio with investment in different securities like stocks, bonds, fixed deposits, etc. Even the equity-based mutual funds invest in at least 50-100 stocks. Due to the broad diversification, the volatility in the mutual funds is a lot less compared to that of shares.
3. Return potential
Stock market investing has a very high return potential. Most of the successful investors in the world and India like Warren Buffett, RK Damani, Rakesh Jhunjhunwala, etc. have built their wealth by investing directly in the stock market.
On the other hand, most of the good ranked mutual funds have given decent consistent returns to their shareholders. Although the returns are not as high as what many successful investors can make from stocks, however, this return is enough to build a massive wealth for an average person for a secured future.
4. Tax saving
If you invest in ELSS (Equity linked saving scheme) under mutual funds, you can enjoy a tax deduction up to Rs 1.5 lakhs in a year under the section 80c of the income tax act.
Another benefit of investing in the mutual fund is that you do not have to pay tax if the fund sells any stock from its portfolio as long as you are holding the fund.
On the other hand, when you sell stock while investing directly in the stock market, you have to pay a tax, no matter what’s the scenario. There are no tax benefits while investing in the stock market. You have to pay a tax of 15% on short-term capital gains and a tax of 10% (above a profit of Rs 1 lakh) on the long-term capital gains.
Investing in the stock market requires frequent monitoring. This is because the stock market investing is a personal thing. Here, no one is going to do this for you and hence you have to monitor your stocks yourself. Moreover, due to the high volatility of the share market, the frequency of the monitoring should be higher. At least every quarter or half-yearly.
On the other hand, for the mutual fund -there are fund managers who take care of the investments and make the buy/sell decision on your behalf. That’s why, when you invest in mutual funds, you do not need to monitor your fund much frequently. Anyways, you should watch your funds at least every year so that you can confirm that your fund’s performance is in line with your goals.
Mutual funds investment provides you with an option of a systematic investment plan.
A Systematic Investment Plan refers to periodic investment. For example, the investor can invest a fixed amount, say Rs 1,000 or 5,000, every month (or every quarter or six months) to purchase some units of the fund. SIP helps in investing automation and it brings discipline to the investment strategy.
On the other hand, there’s no option of SIP available in stock market investing.
7. Asset class restriction
While investing in the stock market, the only asset where you can spend is stocks of the company.
On the other hand, the mutual fund gives you an opportunity to invest in a diversified portfolio. Here, you can invest in a variety of asset classes. For example- debt mutual funds, equity-based mutual funds, gold funds, hybrid funds, etc.
8. The time required for investing
The total time needed for directly investing in stock is a lot more compared to that of a mutual fund. This is because a fund manager manages a mutual fund.
However, for direct investment in the stock market, you have to do your research. Here, you have to find the best possible stock for investing yourself, and that requires a lot of studies, time, and efforts.
For investing in the stock market, you have to open your brokerage account with the help of a stockbroker. Here, you need to start your Demat and trading account which can take as long as a week to open.
On the other hand, you can start by investing in a mutual fund within 10 minutes. You do not require any brokerage account to start investing in mutual funds. There are a number of free platforms (like Groww or FundsIndia) available on the Internet where you can register within a few minutes and start investing in mutual funds.
10. Time Horizon of investment
Generally, the investment time horizon in mutual funds for long-term like 5 to 7 years. Here, you are not trading funds, but investing for the long-run to make money by capital appreciation or regular income through dividend funds.
On the contrary, if you invest in stocks- it can be a long-term or short term. You can even keep the stock for a week and get good returns.
11. Control on investment
If you are investing directly in the stock market, you will have a lot of power and control. Here, you can make critical decisions like- when to buy, when to sell, what to buy, what to sell, etc.
On the other hand, while investing in the mutual fund, you do not have much control over your investments. It’s your fund manager who makes the decisions like which securities to buy, when to buy, when to sell etc. The highest control that you have is to find and invest in a good mutual fund. However, once you have spent your money, everything will be taken care of by the fund manager.
Further, mutual fund performance depends on the efficiency of the fund manager. If the fund manager is efficient, you can get high returns. Otherwise, if the fund manager is not that good, you might get fewer returns. In addition, there is always a possibility that the fund manager may quit or join some other fund house.
Overall, here you have to be dependent on the fund manager. However, while investing in the stock market, there is no dependency on anyone, and you can make your own decision to buy/sell whichever stock you want.
No investment is risk-free. There will always be some risk when you invest in the market or even if you invest in the safest fund. Nevertheless, investing in a mutual fund is comparatively less risky than the stock market. However, the returns are also slightly low in mutual funds compared to the stock market.
If you are a novice and new to the stock market, it would be salutary if you start investing with mutual funds.
For investing directly in the stock market, you will require a good knowledge or at least a strong passion for learning. However, if you have limited time, limited money, and not enough passion to invest your money on your own- then you should invest in the mutual funds.
That’s all for this post. I hope it was helpful. #HappyInvesting.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Types of Stocks That You should Avoid: Successful stock investing requires a lot of discipline. There are thousands of stocks listed in Indian stock exchanges, and all you need to find is 10-15 good stocks to invest. For the remaining, you just need to say ‘NO’.
In this post, we are going to discuss four specific types of stocks that you should avoid investing in. However, before we discuss these four kinds, let’s first learn the most generic rule of stocks that you should avoid investing.
Rule #1 of Stocks that you should avoid
“The difference between successful people and really successful people is that really successful people say no to almost everything.” -Warren Buffett
As an elementary rule, avoid investing in companies that you do not understand. If you can’t figure out how the company is generating its revenue, what is the company’s business model, what are the products/services offered by the company, or what is the use of the products- avoid investing in that company?
For example, if you have zero knowledge of semiconductors or microelectronics, and don’t understand the use of Zener diodes, MOSFETs, Amplifiers, etc.then avoid investing in semiconductor companies that manufacture these products. There’s no way that you can understand the market demand, product quality, future prospects, or even the competitors.
Instead, invest in companies that you can understand. A few common industries that anyone can understand with little efforts are Consumer goods, FMCG, automobiles, utility, etc.
4 Common Types of Stocks That You should Avoid Investing In
Here are four mainstream kinds of stocks that you should avoid investing to reduce the risks involved and safeguard your returns:
1. Low liquid Companies
There are some stocks whose prices may be continuously falling, but the investors are not able to sell that share just because there are no buyers. Exiting from a low-liquid company can be pretty stressful. Avoid investing in companies with low liquidity.
In general, stay away from companies with the daily average trading volume of fewer than ten lacks. The higher the volume, the better it is. (If you are new to this concept, try checking out the volumes of few of your favorite companies on moneycontrol or other financial websites to get a good idea of the daily trading volumes).
Besides, another way to check the liquidity of a company is by noticing the difference between Ask/Bid price. The smaller the difference, the higher is the liquidity.
2. High debt companies
Debts in the companies are like big holes in a ship. Until and unless, these holes are filled- the ship cannot go far. Avoid investing in companies with a lot of debt. As a thumb rule, keep away from investing in companies with a lot of debt in their balance sheet and debt/equity ratio greater than 1.
Do not try to catch a falling knife! Investing in companies whose share prices are falling continuously and significantly (for example- Geetanjali gems, Yes Bank, PC Jewellers, PNB, Suzlon energy, etc.) is never a good idea. There’s always a reason why the prices of these stocks are continuously falling, and the market is punishing that company.
Moreover, there are thousands of listed companies in the Indian stock market which you can explore. Trying to catch a falling knife generally results in hurting your own hand if you are not trained on how to do so.
There are few companies in the Indian market whose information is not easily (and transparently) available on the internet or financial websites. This is mostly in the case of small and micro-cap companies.
Researching such companies with low visibility can be a tedious job for investors. Further, there are also chances of information manipulation if you can’t cross-check the data or when the reference sources are not reliable. Hence, avoid companies that are less visible.
Penny stocks are very risky to invest in. Many of the penny stocks become bankrupt and go out of the business. In addition, penny stocks are prone to different scams like pump and dump, etc.
There have been plenty of cases of price manipulations in penny stocks where the insiders try to inflate the share price. One can readily manipulate the penny stock prices by buying large quantities of these stocks. Besides, these stocks also have very low liquidity. Overall, if you are a beginner, it is recommended to avoid investing in penny stocks.
Anyways, if you’re inclined toward any penny stock company- then allocate only a small portion of your net investment (less than 10%) in that stock.
That’s all for this post. I hope it was helpful to you. Happy Investing.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Figure 2: Most active share at 12.22 pm (21/07/2020, NSE India)
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