NSE – Dutch Uncles

Minimising Losses by Implementing Circuit Limit

Shalmoli Sarkar — Mon, 11 Oct 2021 05:35:07 +0000

The retail investors were startled when they witnessed the stocks of three out of six listed companies of Adani group began hitting the lower circuit limits on June 2021. The stock values of overall Adani went down by 20%.

It can make any investor anxious looking at the stock prices jumping a never seen before high or low and, this is natural.

In the above case, a term circuit limit has been mentioned. Let us dig deeper to know what are circuit limits and how are they of use to investors

What is a circuit limit?

A circuit limit or circuit breaker are limits that restrict the movement of indices or stock prices of a certain index on a particular day. In simpler terms, there will be no trading of indices if it goes above the set upper limit and falls below the defined lower limit, trading is paused at that time. It is a tool to protect the interest of investors that curbs extreme price movement, speculation, and market volatility with the sudden emergence of any positive or negative news resulting in panic buying or selling of shares.

These limits are based on the previous day’s closing price.

Circuit limits are defined by SEBI that are revised every day. Similar to circuit limits, stock prices have price band limits to control pricing. There are no limits set for the companies launching their IPOs.

Why circuit limits are placed?

The malpractices committed by Ketan Parekh forced SEBI to implement index-based market-wide circuit limits with immediate effect from 2nd July 2001. News and information whether positive or negative have a profound impact on the movement of indices. Any time of the trading day if news of the government’s new policy, any civic unrest, or war arises, it can result in high market volatility and panic sell or purchase of shares. Since, retail investors are almost always the last to react to the news, in case of a sudden market swing they will not have adequate time to exit the trade thereby, incurring significant losses. Let us imagine a scenario where there are no circuit limits and an investor has bought stocks of a fertiliser company priced at Rs 200 five years back. The same stock is currently trading at Rs 1000 but due to the government’s decision to refrain from the usage of Urea in fertiliser, the stock falls back sharply to Rs 100 or even lower, resulting in heavy losses for the investor. A lower limit here could have cushioned the losses.

The upper limit ensures that a stock price does not rise sharply and the lower limit restricts the stock prices to go lower.

How limits work for the Indian stock markets

The circuit limit system of the Indian exchanges is applied at three stages of the index movement. The limits are set at 10%, 15%, and 20%. When a stock falls or increases by 10%, 15%, or 20% the trading is halted at that moment and remains paused until it resumes to the normal trading range. The limits also pause the trading in all equity and derivative markets. It is generally applied if either the BSE Sensex or Nifty 50 breaches the limits. When a stock hits an upper circuit there are only buyers present and while hitting the lower circuit there are only sellers present. Limits also differ from market to market for example in the US markets limits are set upto 7%, 13%, and 20%.

The duration of the halt after hitting the limits

The lower limit comprises of sellers only and the higher limit has buyers only, as long as there is no balance of sellers or buyers no trade is possible. Therefore, the halt is imposed until buyers and sellers are available for the trade to take place

The halt depends on the number of times a stock breaches the limits and the number of times it falls. Trading can halt for as short as 15 minutes to the whole day. Here is a table that shows halt times against breaching of limits.

New circuit limit rules

To control excessive price movement on companies listed exclusively on its platform, BSE has released a circular stating the new price brands for the movement of securities. The new circuit limit rules also known as add-on price bands will be implemented in case the price of the stock has moved 6 times in 6 months, 12 times in a year, 20 times in 2 years, and 30 times in 3 years. The stock should have a price of ₹10 or more and the market capitalisation should be less than ₹1,000 crores.

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Types of Financial Intermediaries in Stock Market

Shalmoli Sarkar — Tue, 28 Sep 2021 08:35:11 +0000

The stock market ecosystem is made up of several intermediaries which are regulated by SEBI. To the newbie investors and borrowers who are not financial experts but want to take part in financial markets, these financial intermediaries act as convenient platforms to trade. Moreover, they help investors manage risk by analysing and interpreting the risk to reward ratio to provide a safer and more secure manner of investment.

Financial intermediaries are institutions that act as a link between two parties to a financial transaction. An investor must know about the several types of intermediaries and the role they play in the stock market.

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Financial intermediaries are institutions that act as a link between two parties to a financial transaction. An investor must know about the several types of intermediaries and the role they play in the stock market.

Financial intermediaries in the stock market

The financial markets are divided into the primary and secondary markets and so are the intermediaries:

Intermediaries in the primary market

Merchant banker: They are a unique combination of banking and consultancy and usually offer their services to large enterprises and individuals of high net worth.

For companies releasing their IPOs, a merchant banker’s role is to review a company’s strategy, structure, and functioning and help in corporate restructuring. After reviewing, they draft a prospectus and application form that needs to be submitted to SEBI for seeking approval in being able to list stocks on exchanges.

They also look into all the compliance formalities and are responsible for appointing registrars. Registrars take care of activities such as collecting and recording investor applications, determine the allotment of shares and keep a track of money received from investors or money paid to sellers of shares.

Merchant bankers also help to buy and sell securities in the stock exchange on behalf of their clients, conduct research on equity markets and help in the growth of primary markets by ensuring capital flow.

Underwriters: Underwriters are appointed by companies in consultation with merchant bankers. When a new company wants to list its stocks, an underwriter determines the risk and price of a particular stock. If by any chance, the available shares of the initial public offering remain not sold, they agree to buy all the shares to sell in the market in return for a premium amount paid by the issuer company.

Investors benefit a lot from the underwriting process as the information provided by an underwriting agency can help them make a more informed buying decision.

Intermediaries in the secondary market

Portfolio manager: A portfolio manager with a team of analysts and researchers is responsible to create and manage an individual’s investment allocations. They use their knowledge and skills to select the right kind of investment instrument for their client to invest either in mutual funds, ETFs, stocks, etc. Some managers of portfolios work with individuals and families, while others focus on institutional or corporate investors.

They buy and sell securities via an investor’s account to maintain a specific investment strategy or objective over time.

Asset management firms: Asset management companies are firms that collect funds from various individual and institutional investors and invest in various securities such as stocks, bonds, real estate. They own a dedicated team of fund managers who manage the investment and the research team selects the right stocks or securities to invest in.

Fund managers identify investment options that align with objectives. For instance, if the fund objectives are to receive steady returns with low risk, then the appropriate investment option will be to invest in bonds issued by government firms or private firms. If the fund’s objective is to get maximum returns then the investment will take place in equity markets for investing in shares.

Securities: Also known as clearing corporations that are wholly owned subsidiaries of NSE and BSE. The role of a securities intermediary is to ensure all trades are happening under complete transparency by finding the buyer and seller pair completing the trade by matching the debit and credit process. Neither the buyer nor the trader should default. It means that if X number of stocks of Rs 10 is sold, there should be a seller who has bought those X shares at Rs 10.

Although intermediaries in the stock market help to create efficient markets and lower the cost of business, retail investors, especially the active ones that have portfolio managers or invest in asset management companies should be careful about the fees or commission charged to ensure that the expense ratio does not impact the returns.

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Understanding India’s Derivatives Market: All you Need to Know Before Investing

Shalmoli Sarkar — Sun, 19 Sep 2021 03:35:08 +0000

The origin of India’s derivative market dates back to 1875 when the Bombay Cotton Trading Association first began trading and by 1900, India became the world’s largest derivatives market.

But what is a derivative market?

A derivative is a financial contract between one or more sellers where the trading amount is dependent on the value of assets such as stocks, bonds, commodities, currencies, and market indices. Stocks, bonds, and market indices are known as financial derivatives, and gold, silver, food grains, and crude oil are commodities. The value of the financial contract or derivative is derived from the value of its underlying asset.

Let us understand this with an example.

Suppose a person named B, wants to book an IPL ticket for the front row. But on reaching the booking counter, he finds that all the front row tickets are sold. Moreover, other tickets were expensive now. His friend who works with the Cricket Board, on learning the situation, assures him of the availability of a middle row ticket for which booking will begin after four days. B’s friend hands him a letter that promises B to purchase the ticket at Rs 2000 irrespective of the ticket’s price at that time which may increase due to high demand.

As expected, the demand causes the ticket value to rise to the price of Rs 4000, but due to the letter, B can purchase the ticket at Rs 2000, giving him 50 percent profit. This also means that the value of the letter is Rs 2000, which is the profit.

Now, due to some reason B met with a small fracture due to which he cannot collect the ticket at the said date. The catch here is that since the said date has passed, he will not get the ticket priced at Rs 2000, and the letter provided by his friend holds no value now.

In this case, the letter was the derivative or in simpler terms a contract whose value was dependent on the ticket. So, the ticket is the underlying asset and the derivative is the ticket.

Similarly, in real life, petrol and diesel are derived from crude oil. Crude oil is the underlying asset and petrol and diesel are derivatives. A price change in crude oil will simultaneously impact the price of petrol and diesel.

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A derivative is a financial contract between one or more sellers where the trading amount is dependent on the value of assets such as stocks, bonds, commodities, currencies, and market indices.

What are the types of derivatives?

Derivatives can be classified into four types :

Option: It is a financial contract that allows the buyer to buy or sell an asset at a specific price during a specific period. However, in an option contract, the advantage lies in its flexibility that allows the trader to decide whether to purchase the asset or not at the said time. For instance, in the above example – Had B signed an option contract with his friend, then he could have avoided purchasing the IPL ticket at that date since he met with a fracture.
Future: Future is a financial contract that allows the trader to buy or sell an underlying asset at the agreed price mentioned in the contract at the said time. Here, the only difference that lies between future and option is that the trader cannot step down to purchase the assets. He has to purchase, irrespective of favourable market prices. Taking the same example, had B signed a futures contract with his friend then he would have to purchase the ticket for Rs 2000, even if he is not able to attend the IPL finale due to his broken leg. He is obliged to carry out the contract as agreed. Sadly, B in this has made a loss of Rs 2000.
Forwards: Similar to future derivatives, the trader is obliged to perform the contract with the only difference being that forwards are not standardised and not traded on stock or derivative exchanges. In this type, the chances of sellers or traders turning down the contract become high when the market price does not favour them. Had this been a future contract, and by chance, the seller or trader does not perform the contract then the risk is borne by the derivative exchange. As the contracts are not bound by a regulatory body’s rules and regulations, they are customisable to suit the requirements of both parties involved.
Swaps: Involves two parties where the exchange of cash flows or liabilities takes place from two different financial instruments. Most swaps involve cash flows based on a principal amount such as a loan or bond. Interest rate swaps are the common swaps contract that takes place. They are not traded on stock exchanges and are over-the-counter contracts between businesses or financial institutions.

What is the difference between capital and derivatives markets?

Though in both capital and derivative markets both small and big businesses intend to raise capital, few know about the difference between the two.

Which body regulates the derivatives market?

In India different derivative instruments are regulated by various bodies such as commodity derivative market in India is regulated by Securities and Exchange Board of India (SEBI), and RBI regulates the interest rate derivatives, foreign currency derivatives and credit derivatives.

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Understanding The 50/30/20 Rule: Get Your Finances In Order

Anju Nambiar — Tue, 14 Sep 2021 03:31:08 +0000

Every salaried professional or businessperson who gets a fixed income each month is aware of the importance of dividing expenditures into parts so that every commitment is taken care of. For example, apart from fixed daily and monthly expenses, your income must also accommodate savings, investments and bill payments in equal proportions. The 50/30/20 rule in the basic sense is the division of your monthly expenses as follows:

50% – Needs (Necessary expenditure)
30% – Wants (Expenses that are not mandatory which you wish to undertake)
20% – Savings

What is the 50/30/20 rule?

The 50/30/20 rule is a planned method for expenditure by segregating one’s expenses into three categories

Indisputable expenses
Hearty expenditures (maybe on a car down-payment, a vacation, or a new gadget)
Savings

If handled well, this money rule will allow an individual to easily meet all kinds of investment goals. It’s a simple, yet smart monthly budgeting rule that will allocate your income into different fields. It will provide you with a clear picture of your finances for each month. The 50/30/20 rule is applied on the ‘after-tax’ income. To calculate your after-tax income, subtract your tax liability from your total income to obtain your net ‘after-tax’ income.

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The 50/30/20 budgeting rule helps achieve financial stability by identifying the problem areas in your finances.

How does it help investors meet investment goals?

The 50/30/20 budgeting rule helps achieve financial stability and will help you understand the problem areas in your finances to fix them accordingly. Here’s how you can categorically divide your income to meet your investment goals:

Essential expenditure

By restricting your essential expenditure to 50% of your income, you will be able to successfully fulfill your financial commitments that are unavoidable including paybacks, household expenses, dependents expenditure (children, spouse, family), fuel costs, rent/mortgage payments, etc. This will give you enough legroom to focus on investments while keeping you safely within your obligations.

Discretionary expenditure

Also perceived as ‘lifestyle expenditure’, these are not strictly necessary but are light-hearted expenses including casual shopping, travel, fine dine bills, etc. which are allotted a 30% share in your monthly income. They can be dodged but you are welcome to accommodate them in your monthly expenses as long as they don’t cross the assigned threshold. Discretionary expenses tend to balloon uncontrollably and are hence dependent on the individual’s ability to restrict themselves and their vision for their financial goals.

Investments

The third and most important part of your investment goal setting is to smartly divide 20% of your income for saving and investing purposes. This is the most crucial aspect since it will take you closer to your financial goals.

Expert advice

A calculator for your expenses

According to Jitendra Solanki, SEBI registered tax expert, the 50-30-20 rule of investing and budgeting has a high scope of implementation in India. It is helpful for an earning individual to decide how much and what needs to invest in. It’s a sort of calculator that advocates for the important and semi-important expenses.

He also advises that important and necessary expenses include the kind that are unstoppable. On the other hand, important yet not strictly necessary expenses are covered in the 20% of the budget allotment.

Possess wealth in ‘liquid form’

The Founder & CEO of Optima Money Managers, Pankaj Mathpal, believes that this money rule benefits earning individuals since they will have a devoted amount of investment for various goals. Additionally, it will allow them to dedicate their money for different options to help meet short-term, mid-term, and long-term investment goals.

This ‘calculator’ will also pave the way for redirecting the 30% of non-essential expenses that are unattainable during the pandemic to the 20% of allotment towards savings and investments. A lot of earners are left with surplus amounts due to lack of avenues for unimportant expenses. Backed by the social and financial lessons left behind by Covid, investors need to possess wealth in ‘liquid form’.

If you are left with savings from the unused 30% of your income, create an emergency liquid corpus from this excess amount as reserve cash in the event of loss of income source. Meet your liquid needs, following which you can increase or decrease allotment based on your various investment goals.

Takeaways for readers

Budgeting and financial planning are the toughest tasks for most individuals. By following simple money rules like the 50/30/20, you can guard against overspending and instability in your financial outcomes. Popularised by ‘Elizabeth Warren’, 50/30/20 will create a balance in your financial health since you won’t tend to overspend, nor will you have to compromise with your lifestyle.

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Everything You Need To Know About EPS

Anju Nambiar — Sat, 11 Sep 2021 03:35:14 +0000

You would have come across ‘EPS’ while watching the stock market. This widely-watched financial measure is key to determining the quality of a stock. Let’s decode all the fundamentals you need to know before comparing EPS for different listed stocks.

What is EPS?

EPS or Earnings per Share is a market prospect ratio that indicates the earnings of a company from each share. It is a straightforward method to determine the company’s profitability and gives accurate results when calculated in conjunction with other metrics. EPS is widely watched by investors and analysts and is ideal for researching and analyzing the best stocks. In other words, EPS can be defined as the money that each stock share would get if the profits of the company were to be distributed to shareholders at year-end.

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Just using its absolute value, an investor cannot make a judgement about whether it is a good or bad EPS.

How to calculate EPS

The basic formula for calculating EPS is as follows:

(Net income of the company – Preferred dividends) / Number of outstanding shares of the company

Net income = Amount of money left over in the company’s reporting period post deduction of cash and non-cash expenditure.

To calculate EPS for a company, you will need to dive into the company’s public filings which are provided in the quarterly Forms 10-Q and 10-K

A simple example

To perform a basic EPS calculation for a stock, let’s consider the Asian Paints stock ASIANPAINT. Assume the net profit of ASIANPAINT to be INR 574 Cr for the latest fiscal year. Now assume they had 959,20,000 (959.20 Mn) outstanding shares. By analysing ASIANPAINT’s balance sheet, if we discover 0 dividends, application of the above formula would result in

EPS = (5,74,00,00,000 – 0) / 959,20,000 = 59.84

Types of EPS

EPS calculations are broadly classified into three main categories

Trailing EPS: It is calculated based solely on the previous year’s figures for the company.
Current EPS: This value is based on the company’s current projections along with the available figures.
Forward EPS: This value depends on the company’s anticipated future projections and estimated figures.

There are many different types of EPS calculations including

Basic EPS: The basic EPS is derived using the simple calculation:
(Net income of the company – Preferred dividends) / Number of outstanding shares of the company
Diluted EPS: This accounts for all potential outstanding shares. It takes into account the company’s convertible securities. The formula for calculating the diluted EPS is as follows:

Diluted EPS = (Net income – Preferred Dividends) / (Common Shares + Diluted Shares)

Adjusted EPS: Adjusted EPS is the EPS calculated using a net income figure adjusted for one-time expenses and profits.
Reported EPS, also known as GAAP (Generally Accepted Accounting Principles) EPS: This is an EPS variation disclosed in the company’s SEC (Securities and Exchange Commission) filings.
Ongoing EPS, also known as Pro Forma EPS: This is an EPS variation based on ordinary net income.
Retained EPS: Retained EPS is the profit held by the company rather than being distributed as dividends to shareholders
Cash EPS: Cash EPS provides the exact cash amount earned.
Book Value EPS: Using the Book Value EPS, investors can calculate the aggregate company equity in each share.

What’s in it for investors?

Determining the EPS will help investors understand which company has higher profitability over others since a higher EPS indicates higher profitability.

Using the EPS value, investors can zero-in on the absolute profitability of the company.
It’s also used to calculate the P/E (price-to-earnings) and the PEG (price-to-earnings growth) valuation ratio.

What makes for a good EPS?

A good EPS is one that achieves a year-on-year change. Just using its absolute value, an investor cannot make a judgement about whether its a good or bad EPS. Since it’s a relative measure, it cannot be viewed in isolation and must be judged from different perspectives.

Here are 4 perspectives to judge the EPS for a company:

Evaluation of the company’s historic data.
Through comparison against the company’s peers, alongside industry benchmarks.
By analyzing the market expectations.
Through the lens of the company’s P/E Ratio.

A growing EPS can be considered good until it conforms to the analyst estimate. If EPS misses the estimate, there is a probability that the stock price could fall.

Ideal method to look at EPS for investors

The best way to look at EPS is in conjunction with the share price through PE ratio. Another way is to check the company’s recent overall performance, competitor performance, as well as analyst predictions alongside the absolute value of EPS.

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Securities Transaction Tax (STT): All You Need To Know

Anju Nambiar — Thu, 09 Sep 2021 03:35:09 +0000

You can’t escape tax even in capital gains. Taxpayers are required to declare their profits on sales of stocks. Naturally, the government has stepped in to prevent tax evasion and to enforce tax outflow on financial market transactions.

What is Securities Transaction Tax?

Securities Transaction Tax (STT) is a tax accrued on the buying and selling of shares and other tradable securities of publicly listed companies. This tax is levied on listed securities including equity, derivatives, and units of equity-oriented mutual funds. STT is a turnover tax levied on the total consideration traded in shares. It’s a small tax but nonetheless significant for a retail investor. A financial transaction tax, it is similar to the Tax Collected at Source (TCS) and is applicable for all the recognised stock exchanges in India.

Purpose of STT

The main purpose of introducing STT was as an initiative to curb evasion of tax on capital gains or profits for transaction on securities. It was also meant to be a clean and efficient means of extracting taxes within the finance market. STT is governed under the Securities Transaction Tax Act which was introduced during the Union Budget of 2004. It was aimed at replacing the low tax on Short-Term Capital Gains (STCG) and 0 tax on Long-Term Capital Gains (LTCG) on equities. The initial tax bracket was too high for brokers and the trading community and a request for reduction was subsequently accepted by the government.

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STT is a turnover tax levied on the total consideration traded in shares.

How is it levied?

STT is added to the stock price during a transaction and is auto-added to the transaction price. The STT must be collected by a recognised stock exchange or by a prescribed person in the case of mutual funds. In the case of an IPO, it must be collected by the lead merchant banker. The STT collected is payable to the government by the 7th of the following month. Tax evasion is near impossible since the broker or the asset management company deducts it at the source.

Securities that comes under the ambit of STT

The securities defined under the Securities Contracts (Regulation) Act, 1956 that come within the scope of STT include the following:

Marketable securities including shares, scrips, stocks, bonds, debentures, and debenture stocks.
Derivatives
Government equity securities
Equity oriented units of Mutual Funds
Security rights
Securitized debt instruments

STT calculation

STT is calculated as a percentage of the unit value of the security being traded and can be anywhere between 0.001% to 0.2%.

Let’s see how STT is calculated for Intraday Trades. For the sell side of the transaction at 0.025%, let’s assume that a trader purchased 100 shares of HDFC at INR 1000 each on a Monday morning and sold them off at INR 1005 in the evening. A simple STT calculation will be

STT = (1005 X 100 X 0.025) / 100 = INR 25.125.

About STT Tax Rate

The rate of STT levied may vary depending on several factors including the type of security traded and on the type of transaction (purchase or sale). The tax rates are decided by the Central Government. Off-market, commodity, and currency transactions do not accrue tax. Here is a breakdown of the varying tax rates levied on various transactions.

Although STT’s tax quantum is a relatively small amount, it contributes to a high transaction cost and may impact the profits of investors. Apart from STT, two other taxes are imposed on stock market investors namely, the Capital Gains Tax and the Dividend Distribution Tax. Although the investments in the stock and share market cannot be predicted, investors are still required to pay taxes even if they incur losses.

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Understanding the difference between Fundamental and Technical Analysis

Anju Nambiar — Wed, 08 Sep 2021 03:35:10 +0000

Value determination methods are used to evaluate the value of an asset or a stock. However, these methods are on equal footing. Any one of these methods are not ultimate and are best used in conjunction. Depending on the risk factor and the type of trade, it’s better to employ one type of value analysis over the other.

What is Fundamental Analysis?

Fundamental Analysis mainly studies ‘price movement’ to determine stock value. Through this method, the trader measures macro and micro economic factors including supply and demand, economic strength and growth. Fundamental Analysis is used to find out both the long-term as well as short-term value of an asset or stock.

What is Technical Analysis?

Technical analysis employs the use of elements like patterns, trends, price movement, and volume to analyse trading activity in the stock market. By utilising the two key parameters namely, price movement and volume of a stock, it predicts the future potential of the stock.

Differences between Fundamental & Technical Analysis

Here is a basic chart to help you understand the fundamental differences between the two

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When it comes to your investment strategy, you don’t need to stick to only one form of investing, long-term or short term.

Which one is recommended for stock market investing?

The three types of stock analyses namely Fundamental, Technical, and Sentiment Analysis are meant for stock market investing. Each of the three methodologies are useful in their own way for understanding the ‘pulse’ of the market.

Sentiment Analysis

is a methodology of feeling the ‘tone’ of the market by studying crowd psychology. Also referred to as ‘reading the news’, or ‘reading the price action’. This is best suited for short-term trading rather than long-term investing and patience is key while choosing this methodology.

Choosing any one form of stock analysis depends on the preferences of the trader.

If you are confident in the statistics of trading signals, you can choose technical analysis. TA is also recommended for measuring and controlling risk.

Fundamental analysis may not be successful for the short term.

Irrespective of whether you are a short-term or long-term trader, a well-rounded approach that relies on both methodologies will improve your chances of success.

The Egg and Basket rule in the context of long-term and short-term investment

When it comes to your investment strategy, you don’t need to stick to only one form of investing, long-term or short term. Do a blend of both and even combine both forms namely fundamental and technical. By blending all of these together, you will come up with the right approach in your investment strategy with minimal risk and a greater chance of sustainable results.

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Building a solid portfolio: Everything you need to know as a retail investor

Anju Nambiar — Tue, 07 Sep 2021 03:35:08 +0000

A long-term investor is always on the lookout for the ideal time to invest in profitable companies. When this window of opportunity opens up, usually during events like a market correction, you need to quickly build your portfolio. By building your portfolio at this time, you can dodge market volatility while giving you time to reap in the returns of your investments in the long-term.

What is an investment portfolio?

Your investment portfolio is a crucial part of your long-term investment strategy. It’s a curated collection of financial asset classes, mainly your stock investments that collectively reflect your personal investment goals.

Why it’s important to build a solid portfolio

A solid portfolio is a tool that generates long-term profitable returns. It’s a medium through which investors can reap benefits. A solid portfolio helps meet future capital requirements. A strong portfolio is also one that’s diversified which means that your capital is spread across multiple investment categories. By having a stronghold over multiple financial assets, a strong and diversified portfolio will balance out your capital if any one or few of your asset classes aren’t performing.

Steps for creating a profitable portfolio

Build your goals:

Before picking stocks for your profile, it’s important to clearly define your goals and your risk profile. First, define your goals clearly. What are you trying to achieve with your investment? Nurture realistic goals like ‘raising INR 10 Lakhs in the next 2 years’ rather than investing for vague reasons like ‘I want to become the next Jordan Belfort’ or ‘I want to become rich’.

Make healthy investments

Healthy investments include a good collection of high-quality stocks. They need not necessarily be cheap but are guaranteed to perform well. Don’t get tempted to purchase a ton of penny stocks.

Restrict your portfolio to a decent number of stocks

Collect a few high-performing stocks for your portfolio rather than hoarding too many stocks uncontrollably.

Think in the long-term

Choose stocks backed by strong fundamentals and valuations since these will give you good long-term returns. On the other hand, stocks that are guaranteed to give you short-term returns are unsuitable for long-term returns and are hence not a good choice while building your portfolio.

Create a risk profile for yourself

Depending on your age and financial position, determine the amount of risk you are willing to take. For instance, if you are in your late years, you might want to minimise risk. Depending on your risk profile, you can invest in stocks that match your risk appetite.

Choose an investment strategy

Pick either a conservative or an aggressive investment strategy.

Conservative strategy

This entails investing in safe, large cap stocks. As a conservative investor, you can allocate up to 80% of your investment for large cap, blue chip stocks.

Aggressive strategy

An aggressive strategy entails investing in high-risk, high-return stocks, mainly small and mid-cap stocks. An aggressive investor must invest 20% of their capital in small caps, 30% in midcaps, and 50% in large cap stocks.

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A strong portfolio is also one that’s diversified which means that your capital is spread across multiple investment categories.

While creating a portfolio, it is important to follow the egg-basket rule of not allocating your entire capital to one investment category. This is the essence of diversification and the biggest takeaway for retail investors who are building their portfolio for the first time.

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Primary Market and Secondary Market: What an Investor Must Know

Shalmoli Sarkar — Mon, 06 Sep 2021 06:35:10 +0000

For any newbie investor, it is essential to know that the stock market consists of two segments: primary and secondary. Let us dig deeper into knowing what happens in both these market segments.

What is a primary market?

The market where a company decides to go to the public for the first time to raise funds is known as the primary market. Companies in the primary market issue IPO (Initial Public Offering) in the primary market first. The primary market offers an opportunity to retail investors to buy stocks directly from the issuing company. On purchasing stocks from the companies in the primary market, the investors help them to raise capital. The balance sheet of the company will now reflect the overall capital contributed by the investors.

Other than IPO, a company in the primary market can raise funds in the below ways:

Rights issue

In this, a company raises more capital from the existing shareholders. To its existing shareholders, it will offer more shares at discounted rates than the market price. The number of shares offered here is on a pro-rata basis.

Preferential allotment

In preferential allotment, the company issues a fresh bulk issue of shares to individuals such as venture capitalists at a pre-determined price. The preferential allotment is chosen by the company when it wants to offer its present and existing shareholders – promoters, venture capitalists, and financial institutions a strategic stake in the company.

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The market where a company decides to go to the public for the first time to raise funds is known as the primary market.

What is the secondary market?

Companies that issue their shares in the primary market get listed on the secondary market. The secondary market is where shares, bonds, debentures are traded among investors. All exchange platforms like NSE, BSE, and international exchange platforms like Nikkei, NASDAQ, NYSE, and German DAX fall under the secondary market. Unlike the primary market the trading of stocks in the secondary market involves only investors and not the issuing company. Companies listed in the secondary market indicate a benchmark for fair valuation. It is easier for investors to liquidate their shares by selling as there are a large number of buyers in the secondary market.

Other than stock exchanges, there are two more secondary markets:

Auction market: It is a platform where the individuals and institutions come together at a mutual understanding about the rate at which stocks are to be traded. The information on stock pricing and the bidding price of the offer is made public.

Dealer Market: In this kind, dealers trade on specific securities. Mostly foreign exchange trade and bonds are traded in the dealer market.

Difference between primary and secondary market

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Delisting – The Dismissal Process of a Listed Company

Anju Nambiar — Mon, 06 Sep 2021 03:35:08 +0000

When a company gets listed on stock exchanges through the IPO process, they may not stay listed permanently. Owing to several factors such as internal changes, market, and environmental conditions, or even due to the health of the business, the company may stay listed on one exchange or multiple exchanges or may get delisted. When a company delists, it will no longer be available on the stock market for share purchase and thus its securities get removed.

What is delisting?

Deslisting is a process in which a company is offboarded from one or more stock exchanges. Such companies go from being public listed companies to private companies once again.

Reasons why companies delist from a stock exchange

Companies may choose to voluntarily delist.
Regulatory factors could also play a part in the delisting of a company.
If the company is struggling with their operations, it could get delisted or voluntarily delist.
If the business gets impacted due to fluctuating market prices. A good example for this is the sudden drop in petrochemical prices we witnessed last year.
Project payments getting delayed or stuck in the market.
Delayed commissioning of projects.
Other factors that could lead to the delisting of the company include bankruptcy, mergers, non-compliance during listing, etc.
The need to become a private company once again due to overshooting costs of staying publicly listed.

What happens to stocks held by shareholders after a company gets delisted?

Suppose shareholders purchase and hold stocks of a company that has been delisted. They will continue to hold ownership in the company based on the number of shares they own. However, the shareholder won’t be able to sell these stocks either on the BSE or the NSE.

Additionally, he/she is free to approach an over-the-counter market to sell them to a buyer outside the stock exchanges.

SEBI regulations and guidelines for delisting

The Securities Exchange Board of India has laid out certain guidelines and regulations for delisting companies. As per Section 5.1 of SEBI’s Delisting of Securities Guidelines, 2003:

A delisting company removing its securities from a stock exchange can only do so if they have been listed for a minimum period of 3 years on any exchange.
The delisting company must provide an exit opportunity for its investors.
The delisting company shall determine an ‘exit price’ that’s in accordance with the ‘book building process’ mentioned in clauses 7-10 and 13-14.

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Owing to several factors such as internal changes, market, and environmental conditions, or even due to the health of the business, the company may stay listed on one exchange or multiple exchanges or may get delisted.

Takeaways for retail investors

Delisting is not the be all and end all for a company’s time in the stock market. There is also a process called ‘relisting’ where a previously delisted company files for a fresh IPO and is listed back on the stock exchange. Several prominent, well-known companies have successfully relisted after a brief delisting.

For investors, delisting of a company is a profitable time if you have the right strategy. Investors can achieve huge gains by targeting companies about to delist because when the company relists, the shares are bought back at a premium price. Delisting is also an opportunity to purchase shares at the NSE and BSE at cheap rates amidst the urgency of liquidity. Even while investing in delisting companies, thorough research and strategy are necessary for an investor.

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