Different Charges on Share Trading Explained- Brokerage, STT & More cover

Different Charges on Share Trading Explained- Brokerage, STT & More!

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:

  1. 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
  2. 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:

  1. 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.
  2. 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.

Also read: 8 Best Discount Brokers in India – Stockbrokers List 2020

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 TradingDelivery Trading
Brokerage0.275% of total turnover0.55% of total turnover
TurnoverIf you buy 100 stocks at Rs 120 and sell at Rs 125, total turnover is (120*100+ 125*100=) Rs 24,500If you buy 100 stocks at Rs 120 and sell at Rs 125, total turnover is (120*100+ 125*100=) Rs 24,500
Total Brokerage CostTotal brokerage charge on Intraday trading (for both buying and selling) = 24,500 * 0.00275 = Rs 67.38Total brokerage charge on Delivery (for both buying and selling) = 24,500 * 0.0055 = Rs 134.75

As the competition among the brokers is continuously increasing, these brokerage charges offered by the different brokers are also decreasing. For example, the discount brokers like Zerodha offers a flat fee of Rs 20 or 0.03% on Intraday trading (whichever is lower) and Delivery investments are FREE. Here are the Brokerage charges for different segments offered by Zerodha.

— Delivery Trading: FREE (Rs 0)
— Intraday Trading: Rs 20 per trade or 0.03% (whichever is minimum)
— Equity Futures: Rs 20 per trade
— Equity Options: Rs 20 per trade

Therefore, for the above table, assuming the same scenario, the person would be paying only Rs 7.35 in Intraday Trading and Zero Brokerage on Delivery, if he prefers Zerodha as its broker. Other discount brokers like 5Paisa, Upstox, Angel Broking, etc, also offer similar lower brokerage charges.

Now, apart from brokerage charges, there are also an additional couple of charges and taxes to be paid while share trading. As already mentioned earlier, some of them are Security transaction tax, service tax, stamps duty, transaction charges, SEBI turnover charges, depository participant (DP) charges, and also capital gain tax (which you’ve to pay at the end of the financial year but not while transacting).

Let’s understand these other different charges on share trading and taxes involved first. Further, we will also discuss an example at the end of this post to understand the charges and taxes involved better.

Different Charges on Share Trading

– Security Transaction Tax (STT)

  1. Apart from brokerage, this is the second biggest charge involved while trading in stocks.
  2. 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).
  3. 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.
  4. 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 tradeNew stamp duty rate
Delivery equity trades0.015% or Rs 1500 per crore on buy-side
Intraday equity trades0.003% 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
Currency0.0001% or Rs 10 per crore on buy-side
Mutual funds0.005% or Rs 500 per crore on buy-side
Bonds0.0001% 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

  1. 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.
  2. 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.
  3. 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

  1. 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.
  2. 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.
  3. The SEBI turnover charge is equal to Rs 10 per crore of the total turnover.

– Depository Participant (DP) Charges

  1. 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.
  2. 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).
  3. 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.
  4. 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.

  1. There are two types of Capital gain taxes in India – Short-term capital gain tax and Long-term capital gain tax.
  2. 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.
  3. 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.
  4. 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 Price120120
Sell Price125125
Quantity400400
Total TurnoverRs 98000Rs 98000
ExchangeNSENSE
StateMaharashtraMaharashtra
Brokerage ChargeRs 40 (Flat Rs 20 Per trade i.e. Buying & Sellling)Rs 0 (FREE Delivery Trades)
STT0.025% of sell side = 0.025 % of Rs 50,000 = Rs 12.50.1% on buy & sell = 0.1% of 98000 = Rs 98
Stamp Duty0.003% of buy-side = 0.003% of 48,000 = Rs 1.440.015% of buy-side= 0.015% of 48,000 = Rs 7.2
Transaction Charges0.00325% of total turnover = 0.00325% of Rs 10,000= Rs 3.180.00325% of total turnover = 0.00325% of Rs 10,000= Rs 3.18
SEBI Turnover ChargesRs 10 / Crore of Total Turnover= Rs 0.10Rs 10 / Crore of Total Turnover= Rs 0.10
GST18% on (brokerage + transaction charges) = 0.18 * (40+ 3.18)= Rs 7.7718% on (brokerage + transaction charges) = 0.18 * (0+ 3.18) = 0.57
Total Brokerage And Taxes64.99109.05
Total Profit or Loss1935.011890.95
Capital Gain TaxDepends on the tax SlabDepends on Short/long term holding period

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.

Quick Note: If you’re interested in opening your demat account with Zerodha, the No 1 stockbroker in India, here’s a direct link to the account opening page.

































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!


 September 25, 2020  Investment Basics, Online Brokers 82 comments

What are Preferred Stocks? Meaning, Types, Benefits & More cover

What are Preferred Stocks? Meaning, Types, Benefits & More!




Understanding what are Preferred Stocks and why are they beneficial: The dream security for many would be one that provides you both the inherent security found in bonds and returns of an equity stock at the same time. Luckily enough for us, such financial instruments exist and not only provide security but also steady returns in the form of dividends. This flexible security is known as a Preferred Stock or a Preference Share. 


Today, we are going to discuss what are preferred bonds. Here, we’ll cover their meaning and also clear out what these bond and equity hybrids are in order to better understand and decide if they can actually be preferred over their parents


What are Preferred Stock/Preference Shares?


Many of us do not know that there are two types of stocks. The first being the common stock which we are accustomed to. The second being preference shares. 


Preference Shares or Preferred Stocks offer investors preferential right over common stock when it comes to earnings and asset distribution. However, in exchange for these preferential rights, preference shares do not possess the voting rights in a company that the common stock holds.


What are the benefits of Preferred Stocks?


The investors benefit in the following ways when it comes to preference shares


1. Fixed Income


This means when dividends are announced, the payments will first have to be made to preference shareholders and only then to common shareholders. The dividend rates of preference shares are fixed at a predetermined rate or some other floating factor depending on the terms of the issue. 


The decision on when dividends have to be paid is at the discretion of the board. This is because the Preference shareholders do not possess and voting rights in order to influence the board members or decisions.


2. Security in the case of winding up


Also in the case of winding up of a company, it is the preference shareholders who have priority in claiming the company assets. Only after the obligations to Preference shareholders are fulfilled will the obligations to common stock begin.


It is because of the above reasons that the Preference shares are known to be a hybrid. Just like bonds they offer regular returns with no voting rights. But like equity, the shares are allowed the trade and have the potential to appreciate in price.


Hierarchy of Bonds, Preference shares, and Equity shareholders


— In terms of Returns


It is the interest on bonds that are first serviced from the profits made by the company. Only then will the preference shareholders be paid the dividends due to them. In a case where the profits made are not sufficient then the preference shareholders and common shareholders can be left out. This is because unlike for bonds if the company does not pay preference shareholders it does not mean that the company is in default. 


The bonds here are treated as debt whereas preference shares are not. In a scenario where there are sufficient returns first the interest on bonds is paid. Next, the preference shareholders are paid based on the rates set. Lastly, the remaining amount is paid to the equity shareholders. Only then is the remainder paid to the common shareholders. The dividends to preferential shareholders are preferred but not guaranteed. 


Unlike bonds and preference share, there is no rate set to equity. This means that there is no upper limit nor lower limit to the dividends they receive. In exchange for preferential treatment, the preference shareholders will never receive dividends in excess of the rates prescribed to them.


Despite this common stock are greater wealth creators in comparison to preferred stock and bonds. This is because there is no limit on the increase in the stock price. When it comes to Preference shares the price generally looms around the face value.


— In terms of Claim over Assets


In the case of winding up, it is the bondholders who are first paid off followed by the preference shareholders and then the common stockholders. 


— In terms of Risk 


Preferred stocks are less riskier in comparison to equity. But when compared to bonds preference shareholders are considered to be riskier. This is because they fall back when it comes to being compared over the claim of assets and fixed interest rates that bonds have. 


Equity shareholders are the riskiest here as they get leftovers of the bondholders and preference shareholders in the case of winding up. In a case, where the company is performing poorly, the share prices of common stock are also adversely affected.


Types of Preferred stock


There are various types of preferred stock. The following are the most commonly used


1. Cumulative Preference Shares 


Say a company is in a bad shape and is forced to suspend dividends for the year. Here if the shares are Cumulative Preference shares, they are still entitled to receive the dividend for the year. Such a missed dividend payment will be added to the dividend payments of the following years and paid to the cumulative preference shareholders. 


Eg. Company ABC has issued Cumulative Preference shares. ABC has issued 3000 10% cumulative preference shares at Rs.100 face value. Here the dividends payments ABC is obliged to make is Rs 30,000. But due to COVID-19, the ABC can only pay Rs. 10,000 of the dividend in 2020. Here the Rs. 20,000 is carried forward as arrears and paid the next year. Hence ABC will have to make a total dividend payment of Rs. 50,000 in 2021. Amount arising from Rs. 20,000 carried forward and Rs. 30,000 accruing in 2021.


2. Convertible Preference Shares


These preference shares can be exchanged for a predetermined number of common shares. Convertible Preference Shares can be converted only when the Board of Directors decides to convert them.


3. Callable preference Shares


Callable preference shares can be called back similar to bonds. In a call, the shares issued are bought back by the company by paying its holders the par value and at times a premium. This is done by the company in situations when the interest rates in the market fall. In such a situation the company realizes that it does not have to keep servicing the preference shares at the high rates it was issued a few years ago. The company simply calls back the shares and then reissues it at lower rates.


4. Perpetual Preferred Stock


 Here there is no fixed date on which the investors will receive back the capital. Here shares are issued in perpetuity.


The types of preference shares mentioned above are common examples. The company, however, may combine one variant with the other and issue a preference share eg. Convertible Cumulative Preference Shares. If there are multiple issues of preference shares the shares may be ranked by priority. 


In preference shares, the highest-ranking is called prior, followed by preference, 2nd preference, etc. The dividends and final settlements will be made in the order of this ranking.




Where are these Preference Shares available?


Preference shares are traded on the same exchanges like that of common stock. However, their issues are rare as companies do not generally go for preferred stock making their market small and their liquidity limited. The price of preference shares on these exchanges are determined by a variety of factors like dividend rate, the creditworthiness of a company, type of preference share eg, cumulative, convertible, etc. 


The share prices of Preference shares like bonds have an inverse relationship with interest rates.


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


What to look before buying Preference Stocks?




Apart from looking at the type of preference share and the interest offered, it is also important necessary to figure out why the company issuing Preference Shares?


It is a known fact that companies issue preference shares in order to avoid dilution of capital. But it is also noticed that companies issue preference shares when they have trouble accessing other means of capital. This may be because banks are refusing loans due to their low creditworthiness. Raising money through Preference Shares is cheaper as it gives the option to the company to only serve them when they are able to, unlike other debt instruments. 


Another reason may also be that preference shares do not reduce the creditworthiness of a company, unlike debt that is added to the balance sheet. The company can issue preference shares that act like debt but are shown as equities in the balance sheet. Happy Investing!


 September 23, 2020  Beginner's guide, Investment Basics 2 comments

what is Socially Responsible Investing

Socially Responsible Investing (SRI): Why it matters?




Introduction to Socially Responsible Investing (SRI): Deciding how you want to invest your money is often hard. You need to take many factors into consideration such as risk, returns, taxes, and inflation. It takes a lot of forethought and groundwork to figure out a way to get the best return on your investments.


Yet, there are some investors who choose to invest in companies that are not only financially stable but also make a positive impact on the environment. Here, we are talking about Sustainable or ethical investors, who in the investing world are also known as Socially responsible investors.


Today, we are going to discuss what is Socially responsible investing or SRI, why it is important, and finally, how to become a Socially Responsible investor. Let’s get started.


What is Socially Responsible Investing?


Socially Responsible Investing or SRI is choosing to invest in stocks that provide a financial gain as well as do social good. Here, investors tend to look into the ethical factor along with the fundamentals of a company become investing.




In SRI, the companies are evaluated based on the ESG index: environment, social justice, and corporate governance.


SRI helps in creating a big impact on the world along with making good returns. Although the socially-responsible investing concept is still up and coming in India, it is expected to gain greater momentum in the next few years. Companies have become more aware of the ESG factors and are looking to incorporate more of it into their business practices.


Socially Responsible Investing History


Socially responsible investing began in the early 1700s when the Quakers refused to participate in the slave trade in the U.S. Pastor John Wesley, the leader of the Methodist church claimed it was a sin to make a profit at the cost of your neighbor’s well-being. He stated that it was unethical to gamble and invest in industries that used toxic chemicals.


For many decades after John Wesley’s speech, investors avoided industries such as tobacco and liquor referring to them as ‘sin industries’. This evolved in the 1960s when investors decided to invest their money in companies that promoted social causes such as women’s rights and civil liberty.


Socially responsible investing played a huge role in South Africa during the 1980s when investors began pulling out their money due to the apartheid or the segregation of races. SRI had a prominent role in helping bring an end to the apartheid in 1994.


Sustainability Indexes


If you look into the American and European nations, they already a family of indices evaluating the sustainability performance of thousands of companies trading publicly. The Dow Jones Sustainability Indices (DJSI) launched in 1999, are the longest-running global sustainability benchmarks worldwide. To be incorporated in the DJSI, companies are assessed and selected based on their long-term economic, social and environmental asset management plans.


For India, S&P BSE has three main indices that measure corporate sustainability: S&P BSE 100 ESG INDEX,  S&P BSE GREENEX, and S&P BSE CARBONEX. For NSE, a few of the Sustainability Indexes are the Nifty 100 ESG Index and Nifty 100 enhanced ESG index.


    

  • Nifty100 ESG Index is designed to reflect the performance of companies within the Nifty 100 index, based on Environmental, Social and Governance (ESG) scores. The weight of each constituent in the index is tilted based on ESG score assigned to the company i.e. the constituent weight is derived from its free-float market capitalization and ESG score.
    • 

  • Nifty100 Enhanced ESG Index is designed to reflect the performance of companies within the Nifty 100 index based on Environmental, Social and Governance (ESG) score. Companies should have a normalized ESG score of at least 50% to form part of this index. The weight of each constituent in the index is tilted based on ESG score assigned to the company, i.e. the constituent weight is derived from its free-float market capitalization and the ESG score.
    • 



How to be a Socially Responsible Investor?


Here are a few points that can help you become a socially responsible investor:


— Know the difference


The first and foremost important step to becoming a socially responsible investor is to know the difference between traditional and responsible investing. The difference might be in returns that you get from your investments. The returns from socially responsible investing may differ a little from the traditional one as you might be leaving behind a lot of high return investment options. However, always remember the reason why you have opted for this way of investing.


— Do your research


This is where investors use negative and positive screening to shortlist investment options. In the negative screening, they avoid investing in companies that don’t relate to their social values. Many mutual funds that are socially responsible screen out tobacco and liquor companies. One type of negative screening is divestment, this is where investors take their money out of certain companies because they do not like their business practices or social values.


Along with screening out negative companies, it is also important for investors to choose companies that align with their values. These are companies that strive to bring change to a social aspect that the investor finds important along with their socially responsible business practices. This is also known as impact investing or incorporation of ESG.


— Use your influence as a shareholder


Shareholders not only invest in companies that align with their values but they also use their position to influence the actions of the company in which they own stock. Investors do this by filing a shareholder resolution. This is a document outlining the shareholder’s suggestions for management on how to run the company in a more socially responsible way.


— Invest in the community


This is where an investor invests in companies that have a positive impact on the community. This is usually done in low-income areas where the investment is used to provide loans to people and small-business owners who would otherwise have trouble getting approved for a loan. Community investments also support ‘green companies’ that have a large carbon footprint on the environment.


— Lead by examples 


Socially responsible investing is still in the early adoption phase. By making the right investment choices, you can make a real positive impact on the community- along with building wealth. Moreover, sooner or later, social consciousness will become the selling point for global companies. And you, being a part of it, can lead the movement.




How to get started with Socially Responsible Investing?


1. Decide what your social principles are


Before you choose your stocks you need to decide what social goals you want to promote. You should focus on your values and what you want to achieve through your investments.


2. Decide what your financial goals are


The next step is to decide what financial goals you want to achieve through your investment just as you would with any other investment. You need to decide how much return you need to meet your goals as well as how much risk you are willing to handle. SRI has been shown to provide comparable returns as a traditional stock would.


3. Choose the fund that meets your needs and goals


Once you have decided what your social and financial goals are, the next step is to find the investment that’s right for you. The most common ESG funds in India include Tata Ethical Fund, Taurus Ethical Fund, and Reliance ETF Shariah BeES.


Social investing has also resulted in the success of micro-finance. This was created by social investors to create an impact on small businesses and has now become an industry worth over $8bn and is now a mainstream financial service.


Socially Responsible Investing cover


Also read:



Conclusion


Socially Responsible investing is becoming increasingly popular in India and there has been a visible shift in the market strategy adopted by many participants as they incorporate social, economic and governance (ESG) factors into their investment process. Stakeholders realize the importance of their role in financial markets to influence sustainable growth.


According to the Indian Impact Investors council ‘more than 30 impact funds have invested in social enterprises in India’. There has been $2billion investment in over 300 companies in India.


While socially responsible investing is still not as big as traditional investing in India, it is still a rapidly growing market. Social investing in India has helped provide basic needs such as housing and education to the poor. Many investors have now realized the power and influence they have to make a positive impact on society.
 September 14, 2020  Beginner's guide, Investment Basics No comments yet



How to follow Stock Market? Basics for Beginners!




When a newbie enters the stock market, one of the first questions that come to their mind is How to follow stock Market? Here, by following the stock market, we mean how to know the share prices of the Indian companies, market index, or the most basic paraments of the market.


For seasoned investors, it’s easier to follow the stock market as they have been doing it for years. They already know lots of websites or apps to track and follow stocks or indexes. However, for beginners, they might get easily confused about how to follow stock market, and may even feel silly asking this basic question to a mature investor.


If you’re one such stock market beginner, do not worry. We have got you covered. In this post, we going to exactly teach you how to follow stock market. These few simple tricks about following the stock market and its trends, which once known, even a beginner can follow the market like a pro.


Please note that although this post about ‘how to follow stock market’ is basically targeted for beginners, however, intermediate and advanced level investors can also get benefits from this article. Do read it till the end to get the maximum benefits. Also, there is a bonus tip for the readers in the last section. Let’s get started.


How to follow Stock Market?


Here are a few of the simple yet powerful websites from where you can follow stock market.  Below, we have also described how to easily navigate and use these sites efficiently. Here it goes:


1. Google Search


Google is the first and easiest source to follow a stock. Just type the name of the stock and google will give you all the details about that stock. For example, if you want to follow the stock of Tata Motors and want to know its, just type ‘Tata motors share price’ on google. The result will be like this:


tata motors share price nov 2020


Please note that here you have to type “Company name + Share” or “Company name + Stock” to get the stock details.


Further, On Google, you can track the share price movement of the stock for a given period of 1 day, 5day, 1 month, 1 year, 5 years or max, by simply clicking on different tabs. For example, if you click on ‘1 month’ in the tab, you can see the price movement of that stock for the last 1 month i.e. how the share price moved in the last 30 days to date.


The best part is that the simplicity of google makes it best for beginners to start following the market. The only disadvantage of tracking stock market prices on Google is that you have to type the names of different stocks every time when you want to track that stocks. If you have many stocks to track, say more than 10 (Ex Reliance, Tata Steel, HPCL, ONGC, BPCL, Titan, Infosys…..) then it will become a hectic job for you as you have to type the stock name over and over again. Here a shortcut is “Following” the stock or creating a watchlist.


Nevertheless, Google is the first place for all the beginners where they can learn how to follow the stock market. Therefore, you should also get used to it. Try googling the stock price of a few stocks and indexes on google on your own now.


Exercise: Type “Nifty50” on google and see what appears.


Further, also try different stocks that you are interested in. This is the first step to learn how to follow stock market. In case, you do not remember much names, here is a list of few major stocks in NIFTY50 that you can search:






 NameIndustryWeight






1.Reliance Industries Ltd.Energy - Oil & Gas14.00%




2.HDFC Bank Ltd.Banking9.56%




3.Infosys Ltd.Information Technology7.56%




4.Housing Development Finance Corporation Ltd.Financial Services6.59%




5.Tata Consultancy Services Ltd.Information Technology5.12%




6.ICICI Bank Ltd.Banking4.80%




7.Kotak Mahindra Bank Ltd.Banking4.27%




8.Hindustan Unilever Ltd.Consumer Goods4.22%




9.ITC Ltd.Consumer Goods3.62%




10.Bharti Airtel Ltd.Telecommunication2.85%




11.Larsen & Toubro Ltd.Construction2.38%




12.AXIS Bank Ltd.Banking2.08%




13.Bajaj Finance Ltd.Financial Services1.84%




14.Maruti Suzuki India Ltd.Automobile1.78%




15.Asian Paints Ltd.Consumer Goods1.65%




16.HCL Technologies Ltd.Information Technology1.64%




17.State Bank of India Banking1.57%




18.Nestle India Ltd.Consumer Goods1.26%




19.Mahindra & Mahindra Ltd.Automobile1.24%




20.Sun Pharmaceutical Industries Ltd.Pharmaceuticals1.23%




21.Dr. Reddy’s Laboratories Ltd.Pharmaceuticals1.17%




22.UltraTech Cement Ltd.Cement1.02%




23.Power Grid Corporation of India Ltd.Energy - Power0.98%




24.HDFC LifeInsurance0.97%




25.Britannia Industries Ltd.Consumer Goods0.96%




26.Titan Company Ltd.Consumer Goods0.93%




27.Tech Mahindra Ltd.Information Technology0.90%




28.NTPC Ltd.Energy - Power0.90%




29.Wipro Ltd.Information Technology0.89%




30.Bajaj Auto Ltd.Automobile0.84%




31.Bajaj Finserv Ltd.Financial Services0.80%




32.Cipla Ltd.Pharmaceuticals0.78%




33.Hero MotoCorp Ltd.Automobile0.74%




34.Bharat Petroleum Corp. Ltd.Energy - Oil & Gas0.71%




35.IndusInd Bank Ltd.Banking0.68%




36.Shree Cement Ltd.Cement0.62%




37.Eicher Motors Ltd. Automobile0.61%




38.Oil & Natural Gas Corporation Ltd.Energy - Oil & Gas0.61%




39.Coal India Ltd.Energy & Mining0.58%




40.Tata Steel Ltd.Metals0.58%




41.UPL Ltd. Chemicals0.56%




42.Grasim Industries Ltd.Cement0.53%




43.Hindalco Industries Ltd.Metals0.51%




44.Adani Port and Special Economic ZoneInfrastructure0.51%




45.JSW Steel Ltd.Metals0.48%




46.Indian Oil Corporation Ltd.Energy - Oil & Gas0.48%




47.Tata Motors Ltd.Automobile0.40%




48.GAIL (India) Ltd.Energy - Oil & Gas0.38%




49.Bharti Infratel Ltd. Telecommunication0.35%




50Zee Entertainment Enterprises Ltd.Media & Entertainment0.27%






NOTE: Do not search Facebook, Google, Apple’s stock price. Although you can find the share details of these companies, but the stock prices will be shown in dollars on Google. This is because these are foreign stocks and listed in foreign stock exchanges, not India. They trade in foreign currency.


Only Indian companies are listed on Indian Stock Exchanges. Therefore, companies like Apple, Facebook, Samsung, etc that are not Indian companies can’t be traded in India. They are listed on their respective country’s stock exchange. For example- Facebook on New York Stock Exchange (NYSE), Samsung on South Korea Exchange, etc.


2. Trade Brains Portal


First of all, if you are confused about where to get started, you can start by visiting the ALL STOCKS page at Trade Brains Portal. Here, you’ll get the list of all the +5,000 publically listed companies in India and also their industry. You can start researching on this page to at least know Indian stocks and what stock investment options are available to you.


Next, you can make a watchlist of stocks on Trade Brains Portal. This means that you can save stocks in your own created list for tracking their price movements and also you can set a target price. Let’s say you add 10 stocks to your watchlist. Now, you just have to go to your watchlist whenever you want to follow the stocks or market.




(Image: Watchlist of Trade Brains Portal)


Trade Brains Portal – How to use for Stock Research?




3. Moneycontrol


Moneycontrol is probably the oldest and most popular website in India if you want to learn how to follow stock market. The website gives you all the info you want to know about a stock along with the latest financial news.  In addition, moneycontrol also offers a mobile app, which is in fact even better than the website. You can download the app and easily follow the market using it.






On the website or app, enter the stock name on the top search box and you will get all the details that you wish to see. You can read this article if you wish to know more about moneycontrol features:


Money Control App – Best hacks for Beginners




4. Screener.in


screener website


Screener.in is another of the powerful financial website for fundamental analysis of stocks. One of the good features of this site is that the last 10 Years’ financial reports of all the Indian companies are available here.


In addition, you can also download data from this website in excel form. Further, you can add stocks to your Wishlist to get notifications in your mail the alerts if there is any corporate action on the stocks in your Wishlist. Therefore, you can easily stay updated with the latest news like quarterly results, dividend dates, etc once you log in to the site and add the stock names to your Wishlist.


5. Yahoo Finance


Yahoo Finance and Google Finance are the most searched finances website for stock market analysis. This website is very resourceful to learn how to follow stock market and contains massive data of stocks along with the latest news and other powerful tools. Yahoo Finance is very friendly and you will get all the major information which you want to learn about the stock here.




Summary


In this post, we tried to cover e major sources on how to follow stock market. Surely, there are many other websites too that can be used if you want to keep up-to-date with the market trends. However, for beginners, we recommend you to first familiarize yourself with these websites and get used to how to get the stock information from these sites. Definitely, these websites will give you all the information that you want to learn about the stock market. Do check them out.


Here is a summary of links to all the financial websites discussed in this post for your ease.


    

  1. Google: http://www.google.com
    2. 

  2. Money control: http://www.moneycontrol.com
    3. 

  3. Screener: https://www.screener.in
    4. 

  4. Economic Times market: http://economictimes.indiatimes.com/markets
    5. 

  5. Yahoo Finance: https://in.finance.yahoo.com
    6. 



That’s all for this post. If you think we missed any big website that needs to be mentioned in our post on how to follow stock market, please comment below. We will be happy to get feedback. Have a great day and happy investing!


 September 4, 2020  Investment Basics, Portfolio 41 comments

10 Best Blue Chip Companies in India that You Should Know

10 Best Blue Chip Companies in India that You Should Know!




List of Best Blue Chip Companies in India: If you start counting the numbers, you’ll find that the stocks can be categorized into many groups. Based on market capitalization, they can be defined as small-cap, mid-cap, and large-cap companies. Based on the stock characteristics, there are categorized as growth stocks, value stocks, and dividends (income) stocks.


However, there is one particular type of stock that gets a lot of attention from every kind of investor (beginners to the seasoned players)- and they are the BLUE CHIP stocks. Moreover, when most newbies enter the exciting world of the stock market, they are suggested to look into blue chip stocks as safer investment options. However, being new to investing, most of them are simply confused and are not able to understand what other means when they say blue chip companies.


In this post, we are going to look into what exactly are blue chip stocks and then cover ten of the best blue chip companies in India that every investor should know. Please note that this is going to be a long post, but I promise that it will be worth reading. Therefore, without wasting any further time, let us understand the blue chip companies in India.


A Quick Introductory Story


“… but blue chip companies are boring. It’s better to invest in growth stocks with huge upside potentials.”, Gaurav argued energetically.


“Yes, blue chips are not the ‘hot’ stocks in the market. However, they are a good option for the investors who are looking for low-risk investments with decent returns.”, I replied.


Gaurav has been investing in the stock market for the last two years and he likes to discuss his investment strategies with me. Nevertheless, his investment style is totally different from that of mine. Gaurav loves to invest majorly in mid-caps and small-cap companies (including penny stocks) which can grow at a fast pace. On the other hand, I like investing in a diversified portfolio.


“That’s true, dude. But most of these blue chip companies have already reached a saturation point. They can not continue to grow at the same pace and hence can’t similar returns as they used to give in the past. Once a company has sold a billion products, it’s difficult to find the next billion customers.”, Gaurav challenged me with his witty reply. 


“I know the rule of large numbers, Gaurav. Thank you for reminding me. Moreover, I agree that the large-cap companies cannot maintain the same pace of growth forever. But bro, it doesn’t mean that they won’t be profitable in future or can’t give good returns to their shareholders… They have already established their brand. If they use their resources efficiently, they can make huge fortunes for themselves as well as for their shareholders… 


For example- take the case of Reliance Industries. Reliance is a market leader in its industry and has a lot of customers. But they are also using their capital efficiently to grow their business. Two years back, they entered a new market- Telecommunication Industries, and now they are also a leader in that industry.


 Because of their strong financials- they were able to bring the latest 4G technology to the Indian market and hence were able to quickly acquire a lot of customers. As the initial set-up cost in this industry is very high, they have created an entry barrier for the small and mid-cap companies. This is what a blue-chip company can do if they use their resources properly.“


Gaurav looked a little mind-boggled. That’s why I thought better to give him another example to make him understand the capabilities of blue chip companies.


“Let’s discuss another example- Hindustan Unilever. If you think that HUL cannot grow any further because it is a large-cap company, then you might need to reconsider it. HUL already have popular products in the market like Lux, Lifebuoy, Surf Excel etc which are generating them a good revenue from those products. But, they still have a large rural area to cover. They are not so popular in the village areas, are they? So, they can definitely grow in the rural areas…”


…besides, as they have enough resources and financials, they are also continuously working on new product development in their Research & development (R&D) department. If they can make another great product, their profits will add-up in the future….“


Finally, when Gaurav didn’t argue further, I concluded-


“…a good blue chip company is like Rahul Dravid. If you want fast scorers (or T-20 players), then you may not like his batting style. However, if you are looking for dependable players, then you will definitely appreciate Rahul Dravid’s consistency.”


What are Blue Chip companies?


Blue chip companies are large and well-established companies with a history of consistent performance.  These companies are financially strong (usually debt-free or very low debts) and are capable to survive in tough market situations.


Most of the blue chip companies are the market leaders in their industry. A few of the common examples of blue chip companies in India are HDFC Bank, HUL, ITC, Asian Paints, Maruti Suzuki etc.


best blue chip stocks for long term investment


— Signature Characteristics of Blue Chip Companies


Here are a few signature characteristics which you can look forward while researching blue chip companies—


    

  1. They are large reputed companies.
    2. 

  2. They have widely used products/services.
    3. 

  3. Most of these companies are listed in the market for a very long time.
    4. 

  4. Blue chip companies have survived a number of bear phases, market crises, financial troubles, etc. But they are still going strong.
    5. 

  5. Blue chip companies have a strong balance sheet (a large number of assets compared to liabilities) and a healthy income statement (revenues and profits continuously growing for the last few decades).
    6. 

  6. These companies have a good past track record of stable growth.
    7. 



Almost all blue chip stocks are older companies. You might already know many of the blue chip companies in India and have been using their products/services in your day-to-day life. 


For example-  Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Wall’s and Pureit —- all these products are offered by the same blue chip company in India – Hindustan Unilever (HUL).


New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 


— Why are they called blue chips?


Oliver Gingold- who worked at Dow Jones, is credited to name the phrase ‘Blue Chip’ in 1923. The term ‘blue chips’ became popular after he wrote an article where he used ‘Blue chips’ to refer the stocks trading at a price of $200 or more.  


Quick Note: There are other sets of investors who believe that blue chip companies got its name from the Poker game, as in that game- blue chips are relatively more valuable. Similar to the game, the stocks which are more valuable in the market are termed blue chip stocks.


Although Oliver Gingold used the term ‘blue chips’ for high priced stocks, however, later people started using this word more often to define high-quality stocks (instead of high priced stocks).


— Financial characteristics of blue chip stocks


Apart from the signature characteristics discussed above, here are few key financial characteristics of blue chip companies –


1. Blue chip companies have a large market capitalization -As a thumb rule, the market cap of most of the blue chip companies in India is greater than Rs 20,000 Crores.


2. Good past performance: Blue chip companies have a track record of good past performance (like consistently increasing annual revenue over a long-term).


3. Low debt to equity ratio: The bluest of the blue chips are (generally) debt free stocks. However, a lower and stable debt to equity ratio can also be considered as a significant characteristic of blue chip companies.


4. Good dividend history: Blue chip companies are known to reward decent dividends to their loyal shareholders.


5. Other characteristics: Apart from the above four- few other key characteristics of blue chip companies are a high return on equity (ROE), high-interest coverage ratio, low price to sales ratio etc.


Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?


10 Best Blue Chip Companies in India: 


Now that you have understood the basic concept, here is the list of top 10 best blue chip companies in India. (Disclaimer- Please note that the companies mentioned below are based on the author’s research and personal opinion. It should not be considered as a stock recommendation.) 


— Reliance Industries


reliance industriesThis company needs no introduction. Reliance Industries is an Indian conglomerate holding company and owns businesses across India engaged in energy, petrochemicals, textiles, natural resources, retail, and telecommunications.


In December 2015, Reliance Industries soft-launched Jio (Reliance Jio Infocomm Limited) and it crossed 8.3 million users as of January 2018.


Reliance is one of the most profitable companies in India and the second-largest publicly traded company in India by market capitalization. On 18 October 2007, Reliance Industries became the first Indian company to reach $100 billion market capitalization. It is also the highest income tax payer in the private sector in India.


how reliance industries makes money 2020


— Hindustan Unilever (HUL)


hulHUL is one of the largest Fast Moving Consumer Goods (FMCG) Company in India with a heritage of over 80 years. It is a subsidiary of Unilever, a British Dutch Company. HUL’s products include foods, beverages, cleaning agents, personal care products, and water purifiers.


Few famous products of HUL are Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Walls and Pureit.


hul company infographic


— HDFC BANK


hdfc bankHDFC Bank is India’s leading banking and financial service company. It is India’s largest private sector lender by assets and has 84,325 employees (as of March 2017).


HDFC Bank provides a number of products and services which includes Wholesale banking, Retail banking, Treasury, Auto (car) Loans, Two Wheeler Loans, Personal Loans, Loan Against Property and Credit Cards. It is also the largest bank in India by market capitalization and was ranked 69th in 2016 BrandZ Top 100 Most Valuable Global Brands.


— Asian Paints


Asian paint is one of the largest Indian paint company and manufacturer. Since its foundation in 1942, Asian paint has come a long way to become India’s leading and Asia’s fourth-largest paint company, with a turnover of Rs 170.85 billion. It operates in 19 countries and has 26 paint manufacturing facilities in the world, servicing consumers in over 65 countries. 


Asian Paints is engaged in the business of manufacturing, selling and distribution of paints, coatings, products related to home decor, bath fittings and providing of related services.


— Tata Consultancy Services (TCS)




Tata Consultancy Services Limited (TCS) is an Indian multinational information technology (IT) service, consulting and business solutions company. It was established in 1968 as a division of Tata Sons Limited. As of March 31, 2018, TCS employed 394,998 professionals.


TCS is one of the largest Indian companies by market capitalization (Rs 722,700 Crores as of June 2018). It is now placed among the most valuable IT services brands worldwide. TCS alone generates 70% dividends of its parent company, Tata Sons.


— Infosys


infosysInfosys Limited is an Indian multinational corporation that provides business consulting, information technology and outsourcing services. It has its headquarters in Bengaluru, Karnataka, India. Infosys is the second-largest Indian IT company by 2017 and 596th largest public company in the world in terms of revenue. On April 19, 2018, its market capitalization was $37.32 billion.


Infosys main business includes software development, maintenance, and independent validation services to companies in finance, insurance, manufacturing and other domains. It had a total of 200,364 employees at the end of March 2017.


— ITC


itcIndian Tobacco Company (ITC) is one of the biggest conglomerate company in India. ITC was formed in August 1910 under the name of Imperial Tobacco Company of India Limited. It has a diversified business which includes five segments: Fast-Moving Consumer Goods (FMCG), Hotels, Paperboards & Packaging, Agri-Business & Information Technology. Currently, ITC has over 25,000 employees. 


As of 2016, ITC Ltd sells 81 percent of the cigarettes in India. Few of the major cigarette brands of ITC include Wills Navy Cut, Gold Flake Kings, Gold Flake Premium lights, Gold Flake Super Star, Insignia, India Kings etc. 


Apart for the cigarette industry, few other well-known businesses of ITC are Aashirvaad, Mint-o, gum-o, B natural, Sunfeast, Candyman, Bingo!, Yippee!, Wills Lifestyle, John Players, Fiama Di Wills, Vivel, Essenza Di Wills, Superia, Engage, Classmate, PaperKraft etc.


ITC company infographic


— Eicher Motors


Eicher Motors is an automobile manufacturer and parent company of Royal Enfield, a manufacturer of luxury motorcycles. Royal Enfield has made its distinctive motorcycles since 1901 which makes it the world’s oldest motorcycle brand in continuous production. Royal Enfield operates in over 40 countries around the world. 


The Eicher Group has diversified business interests in design and development, manufacturing, and local and international marketing of trucks, buses, motorcycles, automotive gears, and components.


— Bajaj Auto


bajaj autoBajaj Auto is a global two-wheeler and three-wheeler Indian manufacturing company. It manufactures and sells motorcycles, scooters and auto rickshaws. Bajaj Auto was founded by Jamnalal Bajaj in Rajasthan in the 1940s. It is the world’s sixth-largest manufacturer of motorcycles and the second-largest in India. 


A few of the popular motorcycle products of Bajaj Auto are Platina, Discover, Pulsar and Avenger and CT 100. In the three-wheeler segment, it is the world’s largest manufacturer and accounts for almost 84% of India’s three-wheeler exports.


— Nestle India


nestleNestle India is a subsidiary of Nestle SA of Switzerland- which is the world’s largest food and beverage company. It was incorporated in the year 1956. Nestle India Ltd has 8 manufacturing facilities and 4 branch offices in India.  The Company has continuously focused its efforts to better understand the changing lifestyles of India and anticipate consumer needs in order to provide Taste, Nutrition, Health and Wellness through its product offerings.


Few famous products of Nestle India are Maggi, Nescafe, KitKat, MUNCH, MILKY BAR, BARONE, NESTLE CLASSIC, ALPINO etc. (On 8 March 2018, Nestle Indias food brand MAGGI completed 35 years of existence in India.)


Also read: Market Capitalization Basics: Large cap, Mid cap & Small cap companies


Closing Thoughts


Most people invest in blue chip companies become of their long history of consistent performance and a similar expectation of standard performance in the future. Blue chip companies are low-risk high return bet for the long term.


 Many blue chip companies in India like Tata, Reliance, Infosys etc are considered as ‘Too-big-to-fail’ companies as they have survived and remained profitable for a very long time. Nevertheless, this is not always true!!


 September 1, 2020  Investment Basics, Stocks 23 comments

Investing in Foreign Stocks -Advantages and Risks cover

Investing in Foreign Stocks: Advantages and Risks




Understanding the pros and cons of Investing in Foreign Stocks: Indian investors have always been known to be inward-looking. That is, they would prefer to invest in the Indian markets over foreign ones. This has been the case even though it’s been over 15 years since they were first permitted to invest in foreign equities. 


One of the major reasons for this has been the fact that India being a developing nation has an economy that grows faster than many developed countries. Today we discuss the possible benefits that an investor may receive while investing in foreign markets and also the limitations of doing so.


largest stock exchanges by region


Benefits of Investing in Foreign Stocks /International markets


1. Diversification


Generally, when we talk about diversification we generally refer to investing across various industries and different MCAP’s. But by investing in foreign markets we can receive the same benefits of diversification even if the companies that we include in our portfolio already exist in the same industry or MCAP. The main purpose of diversification is to protect the portfolio. By investing abroad the portfolio is safeguarded from any domestic risks that might affect the domestic markets as a whole. 


2. Market rebound rate 


market rebound rate


We earlier mentioned that that Indian investors prefer to invest in Indian securities as they provide a better growth rate. Markets around the world at times undergo crises at the same time. Rare as this should be this has already occurred twice post 2000. Keeping the growth rate aside let us try and notice the performance of markets post such crisis.


The Recession of 2008 saw economies stagnating all around the world. Even though they were first triggered by problems in the US, the Indian economy too suffered from the crash. The Indian markets suffered a fall of 55% compared to the heights it touched at the end of 2007. It can be noticed that the period of December 2007 to December 2013 the Indian markets gained only 4.3% after rebounding. Let us compare this to the US markets. During the recession, the US markets fell by about 50%. But during the same period from December 2007 to December 2013, the US market provided close to 50% returns after rebounding to previous levels. 


Let us also take the 2nd instance where we have seen markets all around the world contract. This has been due to the pandemic that we are still suffering through. If we notice the US markets since their heights in February we can see that the markets fell 30% by March but have already rebounded and touched new heights gaining 15% returns. The Indian markets, on the other hand, suffered a fall of over 35% and have still not previous levels.


3. Exposure


Another added advantage of investing in foreign markets is the exposure an investor will receive in terms of securities available to him. Let us dial back time to the early 2000s and observe the options available to Indian investors when it comes to technology-driven securities. They are limited to TCS, Infosys, and Wipro. 


On the other hand, foreign markets provided the likes of Apple. Microsoft, Google. At times even legal jurisdictions bar from certain companies to operate in a country. Investors, however, have the option to simply invest in foreign countries.


Risks involved while Investing in Foreign Stocks


1. Currency Exchange


currency exchange problems while investing in foreign stocks


One of the major problems investors face is due to the changing exchange rates. International stocks are priced in the currency of the country they are based in. For an Indian investor, this causes is a problem because he is now not only exposed to the uncertainty of the stock but also the uncertainty of the currency. 


Take for example the shares of ABC Ltd. in the US are worth $100. After the purchase is made the stock rises to $110. But at the same time, the dollar weakens by 15%. If a domestic investor sells off his position and converts it to rupees he would not only forgo the 10% gain but also suffer an additional 5% loss due to the exchange rate. But with the added risk there also exists the added opportunity of making gains during the exchange. If the rupee weakens in the above case, the investor would walk away with a 25% gain.


2. Taxability


The gains that an individual makes from foreign investments can be taxed twice. First when the shares are sold in a foreign country. And secondly in India. This, however, depends on whether the individual is considered as a resident or any other status. The rates applicable here will depend on whether the gains are considered as Long term capital gain or Short term capital gain depending on the period the asset was held. This is known as Double taxation. 


This can be avoided if there exists a tax agreement between the foreign country and India. This tax agreement is known as the Double Tax Avoidance Agreement. India currently has DTAA with more than 80 countries, including the US, the UK, France, Greece, Brazil, Canada, Germany, Israel, Italy, Mauritius, Thailand, Spain, Malaysia, Russia, China, Bangladesh, and Australia. 


3. Political Unrest


political factors while investing in foreign stocks


When investing in a foreign country the investor must be aware of the potential political risk. This makes it necessary that the investors follow up on major political events such as elections, trade agreements, tax changes, and civil unrest. A country with unfavorable factors makes investing there not worthwhile even if the company is a good performer.


4. Lack of regulation


Investors looking to invest in foreign markets must be aware that foreign governments may not have the same level of regulations that are followed in India. They may have different disclosure and accounting rules followed respectively. This makes it harder and time-consuming for investors to keep up with the inconsistencies that of regulations in different countries.


Also read: 3 Easy Ways to Invest in Foreign Stocks From India.


Closing Thoughts


There exist numerous advantages and risks that exist while investing in foreign stocks. The existence of risks does not mean one should turn a blind eye to over half of the investment opportunities available to an investor. This is because a majority of such opportunities exist in foreign markets. 


Investors should, however, pick an opportunity where the risks are considered and assessed and still remains attractive as an investment.


 August 24, 2020  Beginner's guide, Investment Basics 2 comments

Should you Invest During COVID19 times cover(1)

Why Should You Invest During COVID19 times?




Demystifying whether you Should Invest During COVID19 times: Before we dig deeper into this topic of why investing is so important, let us try and understand as to what investment means. To put it in simple words, Investment can mean building something right now that will help your sustainability in the future. It is the stepping stone towards securing one’s future.


Moreover, investment is an ongoing and continuous process. And the worth of investing is understood more during the recessionary or pandemic e.g. COVID-19 times.


How is Investing different from Trading?


A lot of people lose money in the market because they trade in stocks confusing it as investing. There is a conceptual and structural difference between trading and investing. A few of the key ones are mentioned below:


    

  • Investing, in general, is targeted for a longer duration of time. However, trading is for a short duration of time (sometimes even for a few minutes).
    • 

  • While investing, the focus is to earn long term and sustainable gains, but in the case of trading, the focus is for short term gains.
    • 

  • Investors have set rules and goals for buying or selling. But, in the case of trading, the rationale behind a trade keeps changing from trade to trade.
    • 

  • The most important difference is the System. Investing is systematic by nature. The aim here is to have a gradual building of wealth over an extended period of time, by building a portfolio. It can be done via a basket of stock, mutual funds, bonds, or any other investment avenues. But trading follows only one rule i.e., the rule of short term gains.
    • 



Having understood the major difference between Investing and trading, let us understand as to why one should invest.


Should you Invest During COVID19 times? – Importance of Investing




Here are a few of the top reasons why one should invest:


    

  • To secure one’s Future: As we have already mentioned that investing is an ongoing and continuous process. And one does that to secure one’s own future. and we all know that the future is uncertain. But if we are able to financially plan our future, then it becomes easier to handle the tough times like the current global pandemic.
    • 

  • Investment compounds our savings: Let me explain this with the help of a simple example. Say, if we start an investment with an annual capital of Rs. 2,00,000 and if we do that for 15 years. Let’s say if the annual return on investment is 12% p.a. Here, the compounded value of the investment after 15 years would be Rs. 1,63,39,747.
    • 

  • Retirement Planning: This is one of the major reasons for investment for most people. As most of the people depend on salary for their livelihood and which is why investment becomes more pertinent. Lifestyle maintenance, when one does not have a job can only be possible with proper planning and investment
    • 

  • Planning future events: This is one of the most important benefits of investing. If we have some major expenses (children education, or marriage) a few years down the line. The expenses can be ascertained and proper financial planning can be done for them
    • 

  • Fulfilling one’s aspirations: As the good old saying goes, “If you don’t aspire, you are not living”. Therefore, to be able to fulfill one’s dreams (buying a house, international vacation, etc.) and aspirations, proper planning, and the right investment is a must. And the functionality of compounding also helps in swelling up the investment and meeting one’s goal
    • 



Why start Investing during Pandemic (COVID-19)?


As we can see the world economy has been struggling during the pandemic. And with most of the economies posting with near zero or negative GDP growth rate, the investing has become more lucrative. The following are some of the reasons to start investing right now:


    

  • The investment avenues are available at a cheaper cost. Say, if I have to buy shares of the blue-chip companies. They are all available at discounted prices and once when the world economy revives, they can give high returns.
    • 

  • To safeguard one’s own interest in the future. The uncertainties come without any warning. Therefore, to protect oneself against it, investing is very important.
    • 

  • Diversification into the various asset classes is of prime importance when one is looking to invest. Say, if someone is looking to invest via mutual funds, they can do so by allocating the portfolio in different funds like equity fund, debt fund, index fund, hybrid funds, gold fund, etc.
    • 



Various Investment Avenues in India:


There are various forms of investment avenues that are available in India. The investment can be in the form of stocks, mutual funds, deposits, Provident funds, Pension schemes, etc. We will be discussing here the most frequently invested upon.


    

  • Stocks: Stocks are basically the ownership of the company of which the stocks have been bought. These are ideal forms of long term investment if someone has a little risk appetite. This form of investment has the best return making possibility for money invested.
    • 

  • Mutual funds: These forms of investments are ideal for people who are not willing to manage their investment on their own. They rather put their money in a fund (pool of investment) and which in turn is managed by the fund manager. There are various forms of funds like the equity-linked fund, debt fund, hybrid fund, gold fund, etc. Depending on one’s risk profile, one can choose the kind of fund.
    • 

  • Fixed Deposits: Probably, the safe heaven when it comes to investing. Through Fixed deposits, one can a fixed amount of interest for a pre-decided tenure. The interest on fixed deposit keeps changing depending on the economic conditions and on banks’ discretion.
    • 

  • Recurring Deposits: Very similar to Fixed deposits except for the fact that there is a periodical investment (every month) for a pre-decided tenure. These forms of investment are best suited for smaller goals within a foreseeable future.
    • 

  • EPF (Employee Provident Fund): This is the favorite amongst the salaried class. This form of investment is exempted under section 80C. This is a fixed portion that is deducted from the salary on monthly basis and the same amount is matched by the employer as well. EPF is completely tax-free and the interest rates are decided by the government.
    • 

  • PPF (Public Provident fund): This investment instrument is a long term investment by nature. The usual duration is for 15 years. Investments in PPF can be used for tax exemption. PPF can be used as collateral if one wants to take a loan against them.
    • 



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


Conclusion


In this article, we discussed why it is so important to invest, especially amid the COVID19 pandemic. Here are a few of the key takeaways you from this post:


    

  • Investing is the most reliable way of securing one’s future and meeting one’s long term goals.
    • 

  • One should not confuse investing with trading, as investing is for the long term and trading is for the short term.
    • 

  • The purpose of Investing is to earn stable and long term gains. While the purpose of trading is to make quick and short term profits.
    • 

  • With the help of investing, one can plan their future goals and aspirations.
    • 

  • Lastly, the most important purpose of investing is to plan and secure one’s future.
     
    • 



That’s all for this post. I hope it was useful for you. If you’ve got any queries related to investing amid coronavirus times, feel free to comment below. I’ll be happy to help. Happy investing.


 August 13, 2020  Investment Basics 2 comments

What are Forward Contracts cover

What are Forward Contracts? And How do they work!!




Understanding what are Forward Contracts along with its risks and outcomes: One of the most important key concepts to understand for a derivate trader is forward contracts.  Through this article, we aim to give a clear understanding of the Forward Market and Forward contract.


Today, we’ll cover what are forward contracts. We’ll also look into why do both the parties enter into the contract, possible outcomes, how they are settled, risks associated, and more. Let’s get started.


What are Forward Contracts?


The Forward contract, as the name suggests, is a financial derivative transaction that is settled at a specified date in the ‘future’. The forward contract derives its value from the value of the underlying asset. Therefore, in that regard, the futures and forward contracts have a lot of similarities.


The forward contract can be said to be the more ancient version of the futures contract. The basic framework of the futures contract is very similar to a forward contract. The forward contracts are still used, however, the scale and volume are very limited.


— Understanding Forward Contracts with an Example


Let us understand this concept further with the help of a simple example. Suppose, there are two parties involved. One is the manufacturer and designer of Silver jewelry. Let us call the manufacturer as “ABC Jewelers”. The other party involved is the importer of silver and he sells in bulk to jewelry shops. Let us call him “XYZ Dealer”.


Say, on 5th Aug 2020, the current price of 1 kg of silver is Rs. 65,000. ABC enters into an agreement to buy 50 kg of silver two months down the line. The agreed-upon price is the price of silver on 5th Aug 2020. Therefore, ABC has to pay Rs. 32,50,000 (65000*50) to XYX to buy 50 kg of silver on 5th Oct 2020.


In short, after two months, both the parties in the contract will have to honor their agreement irrespective of the price of silver at that time.


— Why both parties enter into the contract?


From the above context, the buyer of the silver (ABC) is of the view that the price will go up in the future and wants to lock in the prices to benefit from the increased price in the future. On the other hand, the seller of the silver (XYZ) is of the view that the price is most likely going to decline in the future and wants to benefit from the locked-in current price.


Both the parties involved in this transaction have opposing views and hence they enter into a forward contract to express their views.


— The possible outcomes of the Forward contract


Scenario 1: Either the silver price goes up


If the price of the silver goes up in the future, then ABC Jewelers stands to make a profit, and XYZ dealer is dealt loses. Say, if the price of silver goes up to Rs. 70,000 per kg after two months. So, the profit of ABC in this case will be = (70000-65000)*50 = Rs. 2,50,000. And the same is the loss for XYZ dealers.


Scenario 2: Either the silver price goes down


If the price of silver falls in the future, the XYZ dealers stand to make a profit, and ABC jewelers stand to make losses. For example, if the price of silver after 2 months falls down to Rs. 61,000 after two months. Here, the profit for XYZ dealers, in that case, will be = (65000-61000)*50 = Rs. 2,00,000. And, this will be the loss for ABC jewelers.


Scenario 3: If the price of silver remains unchanged


In that case, neither of the party (ABC or XYZ) will stand to lose or make any money from this contract.


How are forward contracts settled?


Forward contracts are settled via two ways, either cash-settled or the underlying asset is physically delivered.


1) Physical Settlement: Here, ABC jewelers pay XYZ dealers, the full agreed-upon amount (Rs. 32,50,000) of buying 50 kg of silver and in return gets the physical delivery of silver.


2) Cash Settlement: In this case, there is no actual physical delivery of silver. Just the cash differential has to be paid. Say, if the price of silver goes up, then XYZ dealers will have to give the cash differential to ABC jewelers. And if the price of silver goes down then XYZ dealers receive cash differential from ABC jewelers.


Assume, if the price of silver goes up to Rs. 67500 per kg. Then, XYZ dealer pays Rs. 1,25,000 ((67500-65000)*50) to ABC Jewelers for cash settlement.


Risks Associated while Trading Forward Contracts


Following are some of the risks associated with trading Forward contracts


    

  • Liquidity Risk: Theoretically, the parties with opposing views enter into a forward transaction. But, in reality, it is difficult to find two parties having an opposing view and willing to enter into the forward transaction. Therefore, the parties involved will have to approach the investment bank and who in turn scouts for willful parties willing to enter the forward contract.
    • 

  • Cost: The cost is a big factor in the forward contract. As the investment banks are involved in finding parties to enter into a forward contract, they come at a cost i.e., fee. Therefore, even if the price goes in favor of one of the parties, they make real profit only after the cost (fee to investment bank) is recovered.
    • 

  • Default Risk: The default risk is very much if losing party upon the expiry does not pay up the other party i.e., it defaults.
    • 

  • Regulation Risk: There is no regulatory framework while dealing with a forward contract. They are entered into with the mutual consent of the willing parties. Therefore, there is a situation of lawlessness and which is where the chances of default also increase.
    • 

  • Non Exit able before expiry: Say, halfway through the contact, if the view of one of the party reverses, then there is no way to exit the contract before expiry. There is no clause of foreclosure. The only option which they have is to enter into another agreement which again is a tedious and cost consuming process.
    • 



Also read- Options Trading 101: The Big Cat of Trading World


Conclusion


In this article, we tried to cover what are future contracts and how future market actually works in terms of transactions and settlement. Let us quickly conclude what we discussed here:


    

  • The basic premise while trading both forward and futures contracts are the same.
    • 

  • The forward contracts are contracts that are settled at a future date.
    • 

  • They are not traded via an exchange. The forward contracts are Over the counter – OTC  derivative.
    • 

  • The forward contracts are non exit-able before the expiry.
    • 

  • These contracts can be either physically delivered or it can be cash-settled.
    • 



That’s all for this post. I hope it was useful to you. If you still have any queries related to future contracts, feel free to comment below. I’ll be happy to help. Happy trading and investing.


 August 7, 2020  Investment Basics, Trading No comments yet

Understanding Volume Profile for Technical Analysis

How to use Volume Profile while Trading? – Technical Analysis Basics




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 number 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:


How is Volume calculated?


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.


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:


Correlation between Volume and Price


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.


Also read: Introduction to Candlesticks – Single Candlestick Patterns


Conclusion


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.


 July 22, 2020  Investment Basics, Stocks, Technical Analysis, Trading 2 comments

Mandatory vs Voluntary corporate actions explained

Corporate Actions Explained – Mandatory vs Voluntary Actions!




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.


(Source)


What is a Corporate Action?


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.


Also read: 11 Must-Know Catalysts That Can Move The Share Price


Mandatory vs. Voluntary Corporate Actions?


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.


Mandatory Corporate Actions


(Source)


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.


 July 21, 2020  Investment Basics No comments yet

7 Things to do Before You Start Investing cover

7 Things to do Before You Start Investing




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)
    • 



50-30-20 rule


You can read more about the 50/20/30 budgeting strategy here.


3. Pay down high-interest debt


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.




Also read: 6 Reasons Why You Should Get Health Insurance




5. Define your goals and make plans


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.




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




6. Evaluate your risk tolerance profile


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.


Also read:



7. Understand the investing basics


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.


That’s all for this post. I hope it was useful for you. Besides, if you are ready to get an education, here’s an amazing course on stock market investing for beginners that you should check out. Happy Investing.


 July 13, 2020  Investment Basics, Personal Finance 8 comments

What are Right Issues cover

What are Right Issues? And How it affect your investments?




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


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?


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.


Taking the Right decision


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


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.


Also read:



Closing Thoughts


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.


 July 7, 2020  Investment Basics 6 comments

Company Bankruptcy What will happens to your shares?

Company Goes Bankrupt: What will happen to your shares?




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.
 
Understanding Bankruptcy and Insolvency
 
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.
 
Also read: Is Debt always bad for a company?
 
What happens when Company Goes Bankrupt?
 
— Restructuring Debts Vs Liquidation Procedures
 
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:
 
     
  1. 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.
    2.  
  2. 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.
    3.  
  3. 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.
    4.  
 
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.
 July 2, 2020  Beginner's guide, Investment Basics 1 comment

ROE vs ROCE difference

ROE vs ROCE – What’s the difference?




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


power of ratios


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.


ROE formula


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.


ROCE formula 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 considerationThe 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.		




CapitalThe 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 SignificanceThe 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.


Also read: #19 Most Important Financial Ratios for Investors


What Warren Buffet has to say about ROE and ROCE?What Warren Buffet has to say about ROE and ROCE?


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.


 June 29, 2020  Investment Basics, Valuations 5 comments

What is a Company Annual Report And How to read it Efficiently cover

What is a Company Annual Report? And How to read it Efficiently?




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. 
 
asian paints annual report 2018 19 contents
 
(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. 
 
Also read: How to read financial statements of a company?
 
— 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.
 
Warren Buffett quote on reading
 
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.  
 June 24, 2020  Investment Basics, Valuations 1 comment

Nifty Indexes Explained - Nifty50, Nifty100, Nifty Smallcap & More!

Nifty Indexes Explained – Nifty50, Nifty100, Nifty Smallcap & More!




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.


Also read: What is Nifty and Sensex? Stock Market Basics


nifty nse chart


— Broad market indices based on capitalization.


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? 


    

  1. Large-cap refers to a company with a market cap of more than 28,000 crores.
    2. 

  2. Mid-cap refers to a company with a market cap valuation of more than 8,500 crores and less than 28,000 crores.
    3. 

  3. Small-cap refers to companies with a market cap valuation of fewer than 8,500 crores.
    4. 



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)
     
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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.


Also read: What is India VIX? Meaning, Range, Implications & More!


How have broad market indexes performed in the last 5 years?






IndexAs of 01/04/2020As of 24/01/2020% changeAs of 29/05/2020% change since 01/2020






Nifty 507713.0512248.2558%9580.3-21.78%




Nifty 1008404.1512386.9547.39%9648.2-22.11%




Nifty SmlCap 502696.593086.0514.44%1879.45-39.10%




Nifty SmlCap 2504051.1528030.33%3538.75-32.98%




Nifty MidCap 1504209.396742.4560.18%5053.7-25.05%




Nifty MidSml 4004151.766219.849.81%4507.5-27.50%






historical nse indexes


(Historical NSE Indexes Performance – Source Bloombergquint)


— Sectoral Indexes  offered by NSE




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 IndexSectorTypes of companies includedNumber of companies Considered to portfolio






Nifty RealtyÊReal EstateÊReal Estate Companies10




Nifty BankÊBankingLarge Indian Banks12




Nifty AutoAutomobileAll vehicle Manufacturing, tires, and other auto auxiliaries15




Nifty Financial ServicesFinancialÊBanks, Financial Institutions, Housing Finance, and Other Financial Services15




Nifty FMCG IndexFMCGCompanies that produce durable and mass consumption productsÊ15




Nifty IT IndexIT sectorCompanies 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 MediaMedia and EntertainmentStocks from printing and publishing are also included apart from Media and Entertainment.13




Nifty MetalMetalÊ and Mining SectorCompanies from both the metal and mining sectors.15




Nifty PharmaHealthcareHealthcare and Pharma companies15




Nifty Pvt Bank IndexBankingTop Private Banks10




Nifty Pub Bank IndexBankingTop PSU Banks13








historical sectorial indexes nse


(Historical NSE Sectorial Indexes Performance – Source Bloombergquint)


— Strategy Indices


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


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.


 June 22, 2020  Investment Basics, Market No comments yet

What is the Difference between BSE and NSE cover

What is the Difference between BSE and NSE?




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:
 
     
  1. 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.
    2.  
  2. It also serves as a secondary market where old and existing second-hand securities, shares and bonds are dealt with.
    3.  
  3. Stock exchange functions as the regulator of securities. It tries to ensure free and fair trading.
    4.  
  4. 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.
    5.  
  5. 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.
    6.  
  6. 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.
    7.  
 
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)
 
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:
 
     
  1. The BSE is the first and oldest stock exchange market of Asia which offered such a huge variety of services. 
    2.  
  2. It has over five thousand companies listed as of the year 2018. 
    3.  
  3. “Sensex” is the benchmark index of the Bombay Stock Exchange. Other popular indexes of BSE are BSE largecap, BSE midcap, BSE 500, etc.
    4.  
  4. 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.
    5.  
 
bse sensex chart
 
National Stock Exchange (NSE)
 
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:
 
     
  1. NSE was established in 1992 to end the monopoly of BSE and one of the biggest stock exchanges in India.
    2.  
  2. Over 1,800 companies are publically traded on the National Stock Exchange.
    3.  
  3. “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. 
    4.  
  4. 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.
    5.  
 
nifty nse chart
 
Also read: 10 Largest Stock Exchanges in the World 
 
The Difference between BSE and NSE
 
Although both of the stock exchange markets are very important in India, there are some ground differences which we need to take into account:
 
     
  1. 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.
    2.  
  2. 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.
    3.  
  3. The number of listed companies on the National Stock Exchange is around 1,800 and around 5,000 for the Bombay Stock Exchange.
    4.  
  4. 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.
    5.  
  5. The official index used by the National Stock Exchange is the NIFTY 50 while for the Bombay Stock Exchange, it is the SENSEX.
    6.  
  6. 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.
    7.  
  7. 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. 
    8.  
 
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.
 
Also read: What is SEBI? And What is its role in Financial Market?
 
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.
 June 8, 2020  Investment Basics No comments yet

How Crude Oil Prices Impact Indian Market & Economy cover

How Crude Oil Prices Impact Indian Market & Economy?




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.


The current price of WTI crude is $35.46 per barrel (1st June 2020)

(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.


Crude Oil Prices Impact on energy index


(Fig: Nifty Energy Index – 10 Yrs Chart)


Crude Oil Prices Impact on energy index (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.


 June 2, 2020  Economics, Investment Basics 5 comments

WHAT IS DELISTING OF SHARES_

Delisting of Shares – Here’s what you need to know!




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.


Here are the Grounds for the company being compulsorily delisted:


    

  1. Failure to maintain the requirements set by the exchange
    2. 

  2. The shares of the company being suspended from trading for more than 6 months or being traded infrequently over the last three years
    3. 

  3. Bankruptcies, where the company has posted losses for the last three years and has a net worth which is negative
    4. 



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.


vedanta delisting


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.


Also read: 11 Must-Know Catalysts That Can Move The Share Price


Using Delisting as an investment strategy


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. 


 May 29, 2020  Investment Basics, Market 5 comments

Intraday Trading vs Long-term Investing: What are Pros and Cons?

Intraday Trading vs Long-term Investing: What are Pros and Cons?




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
 
     
  1. While Intraday trading, substantial profits may be earned in a shorter period
    2.  
  2. You require a lesser principal amount and enjoy benefits of margins.
    3.  
  3. You do not have to lock-in your investment for the long-term enabling you to trade more frequently for higher profits
    4.  
  4. Most reliable brokers like mastertrust offer margin trading on intraday stocks providing higher leverage for your capital
    5.  
 
— Cons of intraday trading
 
     
  1. The price volatility increases the risk of losing money
    2.  
  2. Knowledge of technical analysis is necessary and you cannot rely on tips received from others
    3.  
 
— Pros of long-term investing
 
     
  1. 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
    2.  
  2. 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.
    3.  
  3. Long-term investing not only provides capital growth through price appreciation but also allows you to earn more returns through periodic dividends.
    4.  
  4. These days, it is very easy to invest in shares for the long-term through a stockbroker or online platforms.
    5.  
 
— Cons of long-term investing
 
     
  1. 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.
    2.  
  2. Share prices change from one minute to the next. Many times, the investment may be based on emotions rather than sticking to the fundamentals.
    3.  
  3. 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.
    4.  
 
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!
 May 25, 2020  Investment Basics, Trading No comments yet


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