The 2013 Taper Tantrum

The 2008 financial crunch led to a prolonged recession. As a result, the stock market experienced an unprecedented atmosphere of panic selling shares and other securities. Using the quantitative easing strategy, the US federal government immediately took steps to purchase large government bonds to maintain some form of liquidity in the economy. 

This assisted in keeping the lending charges low and increased liquidity in the economy, assuring the investors of a better future.

Low-interest rates encouraged many people to increase credit and spending and accelerated the growth of businesses. From 2008 to 2015, the US government’s investment in the economy was approximately $4.5 trillion, up from $870 billion until 2007.

It’s important to remember that government-led investing in the economy is a short-term solution to a financial crunch. A long-term liquidity infusion by the government can lead to a high inflation rate in an economy. 

When the US economy started to improve, the federal government announced a plan to lower the quantitative easing program by 2013. The US market weakened and fell by 4%, fuelling an international stock market downturn. The ‘digitally super-charged’ investors blew it up worldwide, and international markets reacted negatively to an event they should have already been expecting.

Indian stock market

Due to low interest rates on loans during the QE phase in the US, borrowers were in an accessible position when the lending position was stressed. Even though there was more money to be borrowed, lower interest rates hurt lenders. The financial sector needed more consistency. Around this time, American investors began parking funds in Asian markets, including the emerging Indian market—this boosted foreign investment and FDI in India.

A high percentage of floating stock represents fewer controlled shares. In such a case, stocks are less prone to the influence of institutions, management, or insiders who have confidential control. 

A large number of floating stocks means more shares are available for public trading. Therefore, this facilitates buying and selling and attracts many investors. Institutional investors want to invest in large stocks in highly liquid companies. However, these significant acquisitions do not have a significant impact on the share price.

The stock prices of companies with substantial floating stocks are susceptible to company or industry news information. This volatility and liquidity provide more opportunities to buy and sell stocks in the market.

Limitations 

Investors in small floating stocks companies are limited because insufficient stock prevents investors from investing. No matter the company’s business ability, this lack of stocks availability certainly hinders the opportunity to expand its investor pool.

The company may issue additional shares to increase the floating stock, even if no additional capital needs to be raised. This measure, however, may cause the share price to fall due to dilution, which will have a significant impact on existing shareholders.

Impact of floating stocks

A free float does not directly affect individual investors, especially those who invest in mutual funds, ETFs, and other securities. It also has no direct impact on investors investing in the company’s shares in the long run. 

This is because the stock’s efficiency can be significantly improved by reducing the variable float stock. So, in that situation, it is the marketer’s responsibility to correctly assess the company’s future, its vision, performance, growth, and more such aspects.

However, low floating stocks directly impact investors who often buy and sell stocks as the value fluctuates a lot in the short term. In addition, when the size of the float decreases, investors may face the problem of lack of funds, which worsens the overall problem. Hence, if you are a short-term trader, it is not recommended to choose low float stocks; you may end up selling them at a lesser price when you invest in low stock floats.

Which is better – NSDL or CDSL? 

There is no significant difference between CDSL and NSDL’s working domains. Both depositories are registered with the Indian government, regulated by the Securities and Exchange Commission of India (SEBI), and provide electronic copies of the securities to investors.

On the customer side, depository services keep evolving. The question of superiority is thus rooted in an investor’s preference of the stock exchange they want to indulge in, i.e., either the National Stock Exchange or the Bombay Stock Exchange.

Moreover, the investor does not have the liberty of choosing the depository they want to open their Demat account with. The decision of choosing the depository lies with the brokerage firm or the agent. A broker or depository participant selects either NSDL or CDSL by analysing which depository will be more economical and conveniently accessible to open a Demat account. 

For clients, the brokers can debit or credit securities from either of these depositories, given that they hold valid power vested in them by an attorney permitting them to do so. 

Investor’s concern

There are no major concerns for investors regarding the depository with which their account gets registered. However, some brokers outline specialised benefits in opening CDSL or NSDL accounts as further leverage. This is just a marketing ploy to get you to create an account with them.

As an investor, you can easily open a Demat account and a trading account, with a DP linked to one of the depositories. If you are starting your investment journey in the stock market, never forget to choose a trusted and reliable broker. Always look for features like a free online Demat account and no annual maintenance fee (AMC). They can offer you the most advanced trading platform and the best Demat services.

Let us assume that you want to buy one hundred shares of company XYZ. The current price of XYZ’s shares is Rs. 145 per share, and you set the buy price at Rs. 143.70 or below per share. When you reach the validity portion of your buy process, you get to choose between DAY or IOC for the order’s validity. 

Here, DAY means that if you initiate the buy order with the DAY option, your buy order will only be executed if the share’s price reaches your desired limit or is below it. Your order will stay pending for the entire day of trading (i.e., till 3.30 PM). But, if the price does not reach your set limit of Rs.143.7 by the day’s end, this order will expire (or get cancelled) on its own.

On the other hand, if you choose the immediate or cancel option, you will be able to buy the shares that are immediately available at your set price. If the number of shares you are looking to buy is available immediately in the volume, your IOC enabled order will fulfil the trade altogether. 

But suppose you have placed an order of more shares than what is available. In that case, you will only be able to buy the ones available immediately, and the order for the remaining shares will get cancelled or expired immediately.

The availability of shares is shown in the market depth of the particular share you are interested in buying.

The graph shows that if you invest for one year, you have a 68% probability of making a higher return (an almost 2/3rd profit return). But if the investment period is around 8-10 years, there are practically 0 chances of losing money on your investment in BSE Sensex, which is a diversified basket of top stocks.

Over ten years, 20-30% of companies in your portfolio might not perform at all or even underperform. 40-50% of companies may give a consistent but average growth. The remaining 20-30% of companies that outperform will average your portfolio to provide outstanding returns.

Investing in a Coffee Can Portfolio

Lump-Sum Investment  

• • A lump sum investment can bring huge capital returns on your investment. You can do it once a year.
  • Employees can use the bonus amount for lump sum capital investments.
  • If you have significant income from real estate sales and business income, you can use it for lump sum investment.

Systematic Investment Plan

• • A systematic investment plan (SIP) helps a salaried person invest a pre-determined amount monthly.

Buy on Dips

• • Buying a low-price asset (security) after its value falls with the hopes that it will recover in the future with an upward trend is called Buy on Dips. You can use this method to buy new assets or simplify an existing investment portfolio.

Concerns – what if I lose all my money?

Coffee Cans are non-perishable. So, even if you forget about the money in a coffee can investment portfolio, you will not lose it.

More advantages

• You earn dividends over and above the stock price. 
• The chances of making negative returns are meagre.
• As you invest in the present and sell after many years, the transaction costs reduce significantly.

In a nutshell, Coffee Can Portfolios are proper for investors who prefer to get a higher yield than index funds and are prepared to invest for over ten years. For those who want to invest passively, it is a viable option to other choices.

• • Initial Public Offering

Sometimes the bandwagon effect arises from a company’s initial public offering (IPO). Once the offers are announced, and investors see that the stock is doing well, they often rush to the first day of trading. The motivation for the rush is that stocks are cheaper when they are listed fresh. This creates a demand that temporarily drives the stock price up. However, when investors have time to gauge the stock’s earnings and expectations later, their enthusiasm settles, and the bandwagon effect recedes eventually.

Investing and the bandwagon effect 

The bandwagon effect is synonymous with herd behaviour. This effect is seen in practice when investors have too much faith in others and base their strategy on copying what others do. The bandwagon effect thrives on the investor’s fear of missing out. This, in turn, forms an unsustainable financial trend in the market.

Due to the bandwagon effect, investors may seek a significant stake in trending stocks, or even sectors, due to too much buzz and excitement surrounding them. Another place you can see the effect is when investors sell out stocks because of crash presumptions or buy into them for the same reasons for short selling. Whatever may be the goals, investors rally behind the herd because of the bandwagon effect.

Interestingly, this trend often occurs when investors are unwilling to buy stocks above the market or rush to sell stocks below the market. The stance, without a doubt, goes against the logical route of sustainable profit-making in stock markets. Essentially, herd behaviour is motivated by the groups’ enthusiasm and not by information and technical analyses.

What can be your best plan of action?

Investment decisions should always be based on data and logic; they are usually more dependable for intelligent investment decisions than herd trends. While looking at herd trends is essential, you should primarily look at them to learn what others believe and not what you should do. Ultimately, you need to build on your research and experience and make smart decisions based on essential technical elements rather than jumping on the bandwagon.

As the above chart displays, there is an inverse relationship between NIFTY and India VIX. Depending on the market, the VIX fear factor is looked for negative volatile connotations. Since low VIX values are associated with long-term market growth, stable VIX growth will follow any market adjustment.

The VIX is an essential indicator for measuring the perception of market risks. A sharp rise in the VIX ascertains that market fluctuations have increased significantly. Usually, this means that the value of NIFTY Options increases, and the volatility forecast rises simultaneously. This could be a good chance for long-term investment experiments on NIFTY stocks.

The historical correlation falls between (-0.80 and -0.85), indicating a strong negative correlation. This can help you trade a popular range for the VIX. 

For example, VIX usually attains a minimum value in the range of 10-12. If VIX has remained at this level for a long time, it can indicate an unfavourable fluctuation triggered by political or industry events. In such a case, VIX can rise sharply and NIFTY can sink. It can therefore be a good opportunity for short traders and position holders. 

On the other hand, the usual high value of VIX ranges between 26-29. You can use these levels as an indicator of bottoming out of the Nifty, and you can appropriately initiate long positions around these levels.

At its heart, VIX reflects fear, and the market always co-varies negatively with fear. That is the gist of the link between VIX and the NIFTY index. You can check India VIX here on the NSE India website.

Market risk to reward anticipation

Set reward and risk targets before you start investing. It would help if you studied market charts of companies you are looking to invest in to identify the next resistance level affecting your market durability. This helps mark the reward target. Then find a price that contradicts your estimates if the security turns and hits it. This is your risk objective. 

Now calculate the Risk/Reward ratio and aim for a 2:1 ratio; it is suitable for a sound investment plan. If your evaluation gives a percentage that is less than 2:1, it is a lousy trade opportunity, and you should move on to better ones.

Scaling exit 

You need to equalise your stop loss to break even when a new trade moves to profit levels in the scaling exit method. It can boost confidence as you can now trade freely. You then have to wait until the price reaches 75% of the distance between risk and reward targets. This will give the option to exit entirely or in segments.

This decision depends on position size and the strategy used. For example, there is no point in breaking a small trade into even smaller pieces. So, it is more effective to find last-minute strategies that either eliminate the bet entirely or use the stop-at-reward approach.

Pros and cons 

There is always the opportunity to make large profits in trading. Traders can make a profit by participating in short trading without the need for short covering. Short sellers make a profit by selling short and repurchasing shares at reduced prices. This also increases supply, so there is the potential to push a stock down.

However, buying shares for short covering has a different impact on the market than trading through regular buy orders. If many people buy simultaneously, there is a greater demand for a stock and can lead to profit costs (reduction).

Or worse, it can potentially trigger a short squeeze. When several short sellers close simultaneously, a short contraction occurs. As everyone tries to buy to close their positions, the demand rises, and so does the stock price.

The short covering can occur on its own when a stock with high short interest is forced to a “buy-in”. The term refers to a situation when the broker temporarily closes the position. In this case, it is difficult to borrow the securities, and the creditors demand payment. This happens with less liquid shares that have even fewer shareholders.

In a nutshell, to indulge in the short trade and related practices successfully, it is crucial to understand the way the stock market works and seek expert guidance in case of doubts to avoid significant losses in volatile situations.

Short squeeze

When a big deal of short covering occurs in a security, it may result in a short squeeze. Resellers are forced to liquidate positions at progressively higher prices as they lose money, and their brokers invoke margin calls.

Selling under pressure (squeeze) is an abnormal condition caused by a rapid increase in a stock or other security’s trading price. In case of a short reduction, the deposit must have an unusual degree of short-sellers holding positions in it. The squeeze begins when the price unexpectedly rises. This position is essential for retail investors’ strategy as short-sellers reduce losses by exiting their positions. 

The bottom line is this: the Indian stock markets’ regulatory body and government rules give the option of short trade and related practices, so why not use them vigilantly to make profits?