Market capitalization is nothing but the total number of outstanding shares of a company multiplied by the market price per share.
Sounds quite easy, doesn’t it? But there is more to the concept of market capitalization than just the above basic definition.
Market capitalization of a stock shows the size of the company and most of the times, the volatility of a stock depends on its market capitalization.
Let me put this in a different way.
So we have three images. Image A- a bike, Image B- a car and Image C- a truck. If I ask you a simple question as to which of these is easy to push in case these vehicles are stuck, the answer would be the bike, then the car and the most difficult to push would be the truck.
You see this is very much comparable to the market capitalization of the stocks.
Image A depicts stocks with smaller capitalization. Image B depicts stocks with medium capitalization and Image C represents the stocks with large capitalization. The people pushing these vehicles are the investors. The more they push the more the vehicle move ahead. If they stop pushing it, the vehicle would move back.
CASE A- Pushing the bike
A bike requires one or two people to push and can be very easily pushed. So is the case with small cap stocks. A lot lesser number of investors can lift the stock up or bring it down.These small cap stocks show great movement both upwards and downwards. Hence, they tend to be more volatile. For the same reason when such small cap stocks are performing really well, they can turn out to be potential multibagger. But then again, these are high beta stocks and they are riskier than the blue chip large cap stocks.
CASE B- Pushing the car
A car requires more people than a bike to push it. Hence again this is comparable to mid cap stocks. These too tend to be more volatile than the large cap stocks. But they tend to give fancier returns than the large cap stocks.
CASE C- Pushing the truck
A truck requires many people to push it. The behavior of large cap stocks is akin to this. The large cap stocks require lot of investors showing great deal of interest in them for it to show a big move both ways. So, even if few investors sell the stock, the stock won’t fall much. The same is true the other way round as well. The stock won’t go up a lot if few investors buy it. Hence, these stocks are less riskier than the small and mid cap stocks. People who hate the volatility in the stock market and are having conservative approach of investing their money generally invest in large cap stocks. They tend to be safer bet as compared to the small or mid cap stocks.
Before we understand these two concepts, let me explain you these two terms:
Face Value: It is nothing but the nominal value of the share so fixed by the company in the beginning. It is the value at which the company registers itself initially. It won’t change daily with the market forces.
Market Price: It is the price at which the share is trading in the stock exchange. It is always fluctuating depending on buyer(s) and seller(s).
The Market Price of Infosys ltd. is around Rs.1400 whereas its Face Value is only Rs.5.
Okay, another small basic economic concept which one must know.
More the supply, lesser would be the Market Price. Less the supply, more would be the Market Price.
Say, you have a rectangular piece of chocolate. It was worth Rs.10. You decide to cut this into two equal parts. So now, you have two pieces of chocolate each worth Rs.5.
This is what happens in case of a Stock Split. The company going for a stock split will reduce its ‘Face Value’ and the number of shares would increase proportionately.
Say, a company has issued 1 lakh shares of Face Value Rs.10 and the Market Price is Rs.500.
If the company is going for stock split and say the Face Value is reduced to Rs.5, then the total shares would increase to 2 lakh. Also, the Market Price would be adjusted as the supply of the share has now doubled.
That’s all about the stock split.
Bonus is something completely different from Split.
Say, I have 1 chocolate and now I am getting 1 free on this chocolate, so now I have 2 chocolates. This is how Bonus shares work.
Say, a company has issued 1 lakh shares of Face Value Rs.10 and the Market Price is Rs.500.
Now, if the company declares Bonus of 1:1, then every shareholder will get 1 extra share for 1 share held. This would double the number of shares. Here, the Face Value shall not change. It is intact at Rs.10.
If you remember the above concept, you will now know that the supply of share has doubled and hence the Market Price will also proportionately get adjusted to half.
What difference will it make to a shareholder?
The total market valuation of all the shares in totality held by the shareholder in case of Stock Split and Bonus will remain the same as before and technically it actually won’t make much of a difference to a shareholder.
But, in case of Bonus Share, you have extra shares with the same Face Value and when a company declares dividend, it is always declared on Face Value. Hence, a Shareholder will get double dividend as compared to the one in case of a Stock Split.
Hence, for a shareholder’s point of view, Bonus is more rewarding than a Stock Split.
Say, you are driving a car. You start the engine and put the car in first gear. The car runs smoothly till the speed reaches 20 km/hr. No much harder you try, the car speed won’t increase unless you change the gear.
Now, you change the gear and the car is in the second gear. Due to this, the speed limit has increased to say 30 km/hr. And if now you want to increase the speed further, you need to shift the gear to the higher side.
This is what happens to a stock in stock market. A stock which is moving up, will go up till it reaches a level where it has exhausted. This is called as ‘Resistance Level’. When we say that a stock price is showing resistance, it means that the stock has shown signs that it will not go up further. At resistance, one needs to sell the stock because it has little room left to run further.
However, when a stock crosses resistance, it means that it has entered into a new zone. Hence, there will be more chance of it moving further up. This is akin to the car shifting the gear to a higher number and hence the car can increase the speed till the limit is exhausted.
Whenever a stock reaches its 52 weeks high (which means the highest price in past one year), there will be more chance of it moving further up if it enters a new zone and an uncharted territory. Hence, one must buy when this happens. As the stock has got new legs to run.
2] UNDERSTANDING SUPPORT:
Say, you are driving a car uphill. Now, the car is moving slowly and steadily upwards. However, unfortunately your car runs out of fuel. Now, will you leave the car as it is and let it go down the hill with great speed or apply breaks and stop it midway?
Well, if you choose the later, then the car will stop at someplace and we can say that the hand break supported the car from falling further.
The same happens in a stock market. When a stock has fallen a lot, people who feel that the price is too low to fall further, start to buy the stock. This means that the stock price won’t fall at a certain limit. And this price level is called as ‘Support Level’.
One must buy at ‘Support Level’. This is because at this level there is more upside and less downside. Having said this, there are other associated risks too. Say, if a stock breaks it support level, this would mean that it has more room left for further downside. Hence, it will fall further, till it reaches a new ‘Support Level’.
Hence, they say, whenever a stock is at its 52 weeks low, investors must be cautious. Because, if it breaches the support level, then there will be more scope for it to fall further. So, buying a falling stock in hope of it finding the support is similar to catching a falling knife. The risk reward is high!
3] UNDERSTANDING CONSOLIDATION:
It is scary when a stock moves up or down fast in a short span of time. Hence, they say that for a stock it is very important to consolidate. Basically, ‘Consolidation’ means a stock is spending too much time in a particular zone. Hence, if the upper limit is crossed, we say that after spending too much time, the stock has now entered a new zone which will take it up further. Same is true for its downside.
A prudent person may think of buying cheap and selling at high price. But, when we study the technical terms like ‘Support’ and ‘Resistance’, we realize that when a stock crosses ‘Resistance’ it must not be sold even if the price is higher. As, it can move up further.
And when a stock breaches ‘Support’ it must not be bought even if the price is lower. As, it can go down further. In a way, we can say that there is little application of ‘Law of Demand’ in short run in stock market
These terms are used for financial market and signify a particular meaning to the financial instruments. These terms have a different value for every financial instrument and should be taken into consideration. So let us know about every term in detail:
Face value: This is the value which represents the nominal value of the company. For stocks (original cost) it is generally at 10 and for bonds (par value) 100. This value usually remains the same for stocks and is of very much importance when a company decides to do most of the corporate actions (dividends, bonus, splits, etc). It changes if the company decides to split (the value goes lower) and when the company chooses a share consolidation (the value goes higher but usually not above 10). Both of these actions happen in the form of ratios, like 1:2 or 1:5 etc, with the left value denoting the initial amount andright the final value. The face value of a company does not change due to any other reason (results, news, change in government policies, etc.)
If the face value of a company is multiplied by the shares outstanding, then we get the equity capital. For bonds the face value is the amount of money the issuer provides to the investor when it becomes mature. The face value of bonds changes along with the interest/inflation rates. It may go higher (premium) or lower (discount). In the case of zero-coupon bonds the face value is always lower while purchasing.
FACE VALUE= EQUITY SHARE CAPITAL
NO. OF SHARES OUTSTANDING
Book value: The book value of a company is the net value which is in the books. It means it is the value a company will provide to the investors if the company goes bankrupt. This value is determined by selling off all the assets and paying off the liabilitiesand dividing the left amount by the number of shares. Although not very high in comparison to the market value, but if the market value of a stock goes below the book value then it is a good buy signal. Market value (coming up next) to book value is an excellent indicator in determining if the company is overvalued or undervalued. This value helps in making a few financial ratios also like price to book value, sales to book value, etc. The value changes only due to the results shared by the company, it doesn’t get much affected by the corporate actions, news, etc.
The book value for bonds refers to the current price for the remaining coupons plus the redemption value at the coupon rate. If we need to know the price in between the coupon dates then we will not consider the value of the next coupon.
Market value: This is the value at which the stocks trade in the stock exchanges. The definition is also equally valid for bonds at the bond market. This is commonly known as Current Market Price (CMP). The market value of the stock keeps on changing (almost every second) until the stock exchanges settle down. This change of prices is due to multiple reasons such as results, news, changes in government policies, corporate actions, etc. The market value faces a drastic turn when there’s a stock split (gets halved) or share consolidation (gets doubled). The market value tells the amount that the buyer pays and seller sells for every share that is purchased or sold. In cases of high volatility speculators earn good money. This value helps us in determining the capitalization of a company by simply multiplying it with the number of shares outstanding. A very high market value does scare a lot of investors/speculators but shouldn’t be bothered if we know how well is the company performing. Some companies due to either about to wind up or due to some other reasons have a very low market value and they are often called pennies (penny stocks). This value is not only used in financial instruments but in every possible thing like groceries, cattle, property, etc.
Intrinsic value: It is the actual value that the investor decides to pay/get for the investments. This is also the value which is commonly known as the discounted value of the future benefits.“It is the discounted value of the cash that can be taken out of a business during its remaining life.” This is the famous quote by the great investor Warren Buffet. Although it is tough to calculate but if someone knows how to, then that person will soon become the king of investments. If the intrinsic value is perceived to be lower than the market value then the investment is said to be overvalued and vice versa. This value is determined by qualitative and quantitative analysis. Therefore, this value is regarded as a part of the valuation and not the fundamental value or technical value. The intrinsic value is mostly calculated for stocks and other investable instruments (that provide capital appreciation).
So, while reading any financial reports or analyzing the value of a company, an investor should be careful about the type of value he/she is using as it can significantly affect the decisions to be taken.
The Price to Book (P/B) Ratio is used to compare a company’s market price to book value and is calculated by dividing price per share by book value per share.
The price-to-book ratio measures a company’s market price in relation to its book value. The ratio denotes how much equity investors are paying for each rupee in net assets.
Book value, usually located on a company’s balance sheet as “stockholder equity,” represents the total amount that would be left over if the company liquidated all of its assets and repaid all of its liabilities.
Book value = Net Worth
Book Value per Share = Book Value / Total number of shares
P/B Value Ratio = Market Price per Share / Book Value per Share
Use of Book Value per Share:-
The book value per share may be used by some investors to determine the equity in a company relative to the market value of the company, which is the price of its stock.
For example, a SMG Ltd company that is currently trading for Rs. 200 but has a book value of Rs. 100 is selling at twice its equity. This example is referred to as price to book value (P/B), in which book value per share is used in the denominator. In contrast to book value, the market price reflects the future growth potential of the company
There are basically two methods to calculate the book value,
1. Liability Side Approach:
Under this approach the book value is calculated by adding The Share capital and Reserves & surplus which nothing but the Net worth of the firm.
Book Value = Net Worth (Shareholders’ fund)
2. Asset Side Approach:
Under this method we calculate the book value by subtracting the outsiders’ liabilities (Non current liabilities and Current liabilities) and the fictitious assets from the Total assets.
Book Value = (Total assets – Fictitious assets) – Outsiders’ liability
If you ask me, I personally prefer the Asset Side Approach to measure the book value.
This is because when we calculate the book value by liability side approach; we don’t deduct the Fictitious assets value.
Fictitious assets are current assets which have no market value but just created out of some miscellaneous expenditures such as preliminary expenses, loss on issue of shares, discount on issue of debentures etc.
So considering them in book value makes NO SENSE.
Now to calculate book value per share just divide Book value by the total number of outstanding shares.
That is, Book Value per share = Book Value / No. of outstanding shares
Can it help me in valuing or knowing the true (Intrinsic Value) value of the stocks I am holding???
Well, that’s true to certain extent. PE ratio of a particular stock is much useful in finding whether the stock I am holding or planning to add to my current portfolio of stocks is worth the price I am paying for it.
Formula of PE ratio :
PE ratio of Stock X = Market Price of the Stock X/Earning per share of the Stock X
How to interpret PE ratio of a stock??
Suppose Mr X wants to interpret or understand the meaning of PE ratio of TITAN Company [this is the stock which made more than Rs 4000 crores(approx figure) for Mr Rakesh Jhunjuhunwala] Stock
I am taking Standalone (Means excluding the data of subsidiaries of TITAN Company) figures out here.
Here EPS is Rs. 15.48 and Market price of the share is Rs. 1,091.05, so accordingly PE ratio be 1091.05/15.48=70.48 . This PE ratio or commonly also known as PE multiple shows that investors are ready to pay Rs.70 for each rupee of profits company earns.
Please note that EPS=Profits earned by company/No of shares of the company
Now take another example of Rajesh Exports(A peer group company of Titan)
It’s PE ratio would work out to be 685.35/15=45(Approximately). It shows that Investors are ready to pay Rs 45 for each rupee of profits earned by Rajesh Exports.
Your next question would be why People are ready to pay Rs. 70 for TITAN and Rs 45 for Rajesh Exports. It is mainly due to the investors expectations about the future earnings and growth in those earnings of the company.
People are more optimistic about future of Titan’s earnings as compare to the earnings of Rajesh Exports.
Can PE RATIO help me in finding the valuation of a stock ?????
Yes, it can..
Now talking with a generalistic view, stocks above 50 PE ratio can be considered as overvalued and below that can be identified as undervalued securities.
But if the size of business opportunity for a company is big then it is advisable to buy that share even though it is trading above 50 PE.
Like TITAN Company was is now trading at 70 PE, so if an investor would have invested in that share at 50 PE even then he would have made mind blowing gains in it also i.e around 40% appreciation, and this is purely due to the size of business opportunity existing for TITAN at 50 PE ratio even.
Note: there is no perfect value of PE parameter around which we can determine the exact valuation of a company’s share.
What is Forward Price-To-Earnings
These two types P/E ratios: the Forward P/E and the trailing P/E.
The forward (or leading) P/E uses future earnings expectations. It helps provide a clearer picture of what earnings of the company will look like.
Predicting forward P/E requires estimating the expected earnings per share , which in itself is subject matter of judgement on the part of Investors and it can vary substantially from person to person.
When trying to figure out whether a company’s price, and its forward P/E ratio, are “fair,” an investor should try to figure out what assumptions have been made regarding the company’s fundamentals.
The trailing P/E relies on past EPS of the company and is derived by dividing the current share price by the EPS over the previous 12 months.
Some investors prefer to look at the trailing P/E because there is lack of objectivity in another individuals earnings predictions.
But Trailing P/E suffers from a major drawback and is the earnings of company(EPS) can not be expected to grow at the historical growth rates of company’s profits.
Specifically in the case of cyclical industries or commodity based companies whose profits can not be predicted with assurance, trailing PEs can not be used for valuation of shares.
LIMITATIONS OF THE PE RATIO
A. Comparability: One should only use P/E as a comparative tool when considering different companies in same sector. P/E can not be used to compare companies working in altogether different sectors. Like we can not compare PE multiple of Infosys and TATA steel as one is an IT company and other one is in steel sector.
B.Considering P/E solely: Rather than treating the P/E ratio as a derivative of the fundamental characteristics like EPS, Growth rate, Return on Equity(ROE) that drive the intrinsic value of a share, they treat it as a characteristic unto itself, capable of being evaluated on its own terms.
For example, you might hear someone say that a stock is trading below its 20-year average P/E, and that therefore it is cheap. Or they might compare one stock’s P/E to another; for example, “This stock has historically traded at a 20% higher P/E than that stock, but today it is trading at a 30% higher multiple, so it is expensive.” These sorts of statement implicitly assume that P/E ratios have a kind of life of their own.
But this kind of thinking is ultimately just a way to avoid the harder work of understanding whether something has changed at the company, specifically whether there have been changes in the fundamentals(like EPS, EBIT, SALES, COSTS, DEBT) that drive the stock price.
While understanding P/E ratios it seems pertinent to mention PEG ratios also.
PEG ratio= P/E ratio/ Growth rate
Now there is a fraction of analysts who feel that P/E ratio does not consider growth rates(provided the share has been valued ignoring growth rates in earnings of share) while finding whether the share is under or over valued actually.
So PEG ratio is the one which removes this inherent drawback of using P/E ratio and gives us a better estimate of value of the share.
Generally a share available at 1 or 1.5 PEG is considered a good investment and above that shares are reckoned as expensive or overvalued.
Here we would like to summarize books related to investing that every investor either beginner or professional must read
It is a widely acclaimed book by Benjamin Graham on value investing. Written by one of the greatest investment advisers of twentieth century, the book aims at preventing potential investors from substantial errors and also teaches them strategies to achieve long-term investment goals.
Over the years, investment market has been following teachings and strategies of Graham for growth and development. In the book, Graham has explained various principles and strategies for investing safely and successfully without taking bigger risks. Modern-day investors still continue to use his proven and well-executed techniques for value investment.
The current edition highlights some of the important concepts that are useful for latest financial orders and plans. Keeping Graham’s unique text in original form, the book focuses on major principles that can be applied in day-to-day life. All the concepts and principles are explained with the help of examples for better clarity and understanding of the financial world.
Combination of original plan of Graham and the current financial situations are the reason behind this book’s preference today’s investors. It is a detailed version with several wisdom quotes that are likely to change one’s investing career and lead to the path of financial safety and security.
How To Use What You Already Know To Make Money in The Market explains how your knowledge alone can assist you beat the pros of investing. From the viewpoint of America’s most triumphant money manager, investment chances are extensively accessible. Whether supermarket or work place, you can find goods and services everywhere. You have to select these organizations in which to invest, before they are found by skilled analysts. You will find more interesting knowledge on investment. Thus the book has become one of the best seller and treasure among readers. Moreover, this book provides time less recommendation on money business. This book has discussed the tips, ebb and flows on building it big in the investment market.
Jim Simons is the greatest moneymaker in modern financial history. His record bests those of legendary investors, including Warren Buffett, George Soros and Ray Dalio. Yet Simons and his strategies are shrouded in mystery. The financial industry has long craved a look inside Simons’s secretive hedge fund, Renaissance Technologies and veteran Wall Street Journal reporter Gregory Zuckerman delivers the goods.
After a legendary career as a mathematician and a stint breaking Soviet codes, Simons set out to conquer financial markets with a radical approach. Simons hired physicists, mathematicians and computer scientists – most of whom knew little about finance – to amass piles of data and build algorithms hunting for the deeply hidden patterns in global markets. Experts scoffed, but Simons and his colleagues became some of the richest in the world, their strategy of creating mathematical models and crunching data embraced by almost every industry. Simons and his team used their wealth to upend the worlds of politics, philanthropy and science. They weren’t prepared for the backlash.
In this fast-paced narrative, Zuckerman examines how Simons launched a quantitative revolution on Wall Street, and reveals the impact that Simons, the quiet billionaire king of the quants, has had on worlds well beyond finance.
April 2017 marks 20 years since Robert Kiyosakis Rich Dad Poor Dad first made waves in the Personal Finance arena. It has since become the 1 Personal Finance book of all time translated into dozens of languages and sold around the world Rich Dad Poor Dad is Roberts story of growing up with two dads his real father and the father of his best friend his rich dad and the ways in which both men shaped his thoughts about money and investing. The book explodes the myth that you need to earn a high income to be rich and explains the difference between working for money and having your money work for you 20 Years 2020 Hindsight In the 20th Anniversary Edition of this classic Robert offers an update on what weve seen over the past 20 years related to money investing and the global economy Sidebars throughout the book will take readers fast forward from 1997 to today as Robert assesses how the principles taught by his rich dad have stood the test of time In many ways the messages of Rich Dad Poor Dad messages that were criticized and challenged two decades ago are more meaningful relevant and important today than they were 20 years ago As always readers can expect that Robert will be candid insightful and continue to rock more than a few boats in his retrospective Will there be a few surprises Count on it Rich Dad Poor Dad Explodes the myth that you need to earn a high income to become rich Challenges the belief that your house is an asset Shows parents why they cant rely on the school system to teach their kids about money Defines once and for all an asset and a liability Teaches you what to teach your kids about money for their future financial success
Intraday trading refers to buying and selling of stocks on the same day. It is done using online trading platforms. Suppose a person buys stock for a company, they have to specifically mention ‘intraday’ in the portal of the platform used. This enables the user to buy and sell the same number of stocks of the same company on the same day before the market closes. The purpose is earning profits through the movement of market indices. It is also referred to as Day Trading by many.
Stock market earns you great returns if you are a long-term investor. But even on the short term, they can help you earn profits. Suppose a stock opens trade at Rs 500 in the morning. Soon, it climbs to Rs. 550 within an hour or two. If you had bought 1,000 stocks in the morning and sold at Rs 550, you would have made a cool profit of Rs 50,000 – all within a few hours. This is called intraday trading.
Traders base their profits on different kinds of purposes. One may be a long-term investment which is a gradual process, yet may produce high returns. The other can be a short-term strategy which includes trading with quick gains. One such method is Intraday Trading.
Intraday trading refers to buying and selling of stocks on the same day before the market closes. If you fail to do so, your broker may square-off your position, or convert it into a delivery trade.
Whether a person is an experienced trader or a beginner, looking at the trends and indicators is always beneficial for intraday trading.
Intraday Trading Indicators
Traders often face difficulties with concurrent events occurring in intraday trading. Whether a person is an experienced trader or a beginner, looking at the trends and indicators is always beneficial for everyday trading. Let us look at some indicators :
Moving Average Most traders rely on the daily moving average (DMA) of the stocks. The moving average is a line on the charts that show the behavior of a stock over a period of time. These charts show the opening and closing rates of the stock. The minimum average line shows the average closing rates of that particular stock in the given interval and helps you comprehend the ups and downs in the price and determine the flow of the stock.
Bollinger Bands:These are bands that show the standard deviation of the stock. It consists of three lines – the moving average, the upper limit and the lower limit. If you seek the trading ranger of a particular stock, these help you locate the price variation of the stock over a period of time, hence, you can put your money around the observations.
Momentum Oscillators:The stock prices are highly volatile. Such variations largely depend on market situations. If a trader wants to know whether a stock would rise or fall, this is where the momentum oscillator is beneficial. It is depicted in a range of 1 to 100 and shows whether a stock would further rise or fall, helping you in determining when to buy a particular stock. It shows the right time to trade, not making you lose your chances.
Relative Strength Index (RSI):This is the indexed form of all the trading that happens over a stock in a period of time. It ranges from 1 to 100 and graphically shows when a stock is sold or bought highest. The RSI is considered overbought when over 70 and oversold when below 30. It uses a formula for this calculation, that is,RSI = 100 – [100 / ( 1 + (Average of Upward Price Change / Average of Downward Price Change ) ) ]
Intraday Time Analysis
When it comes to variations and movements in intraday trading, the most helpful tools are the daily charts. These can provide all the necessary information about the stocks with indicators that show the trend of any particular stock over a definite period of time. They convey the movement of the prices from the start to the close of market. Time analysis becomes a useful tool for intraday trading as the momentum tends to shift quickly. You won’t be able to comprehend the charts before the stock you put your money in goes down steeply or shoots right up. Hence, it becomes necessary for day traders to look for such charts that would help you understand the flow better – we’ve covered these concepts extensively in things to know while investing in Intraday Trading.
How to choose stocks for Intraday Trading?
Choice of stocks is the first and the most vital step when it comes to Intraday Trading. After all, the money you put in is only worth the time if you get a return, otherwise, it is done and dusted. So how do we choose stocks wisely? Let us take a look.
Avoid volatile stocks: It is always preferable to stay away from what clearly looks unstable. Why put your money in something that might never let you have it back. Hence, it is advisable to track the stock behavior and consider trading over potentially stable stocks.
Correlate stocks with geopolitical changes: It is better to invest in stocks that have a correlation with major sectors. If the index for the sector goes up, it might also affect the price of the stock in a positive manner. For example, strengthening of Indian Rupee against Chinese Renminbi would affect the iron industries. Resultantly, the income from exports would increase and the stocks would go up. Picking stocks while keeping in mind such market situation would help you a lot.
Research: Looking, analyzing and comprehending are the basic steps of trading. Nothing goes right without proper calculation unless you really have luck on your side while trading. As luck does not often show its grace, it is always necessary to research before trading.
Trends: Sometimes it’s better to follow the herd rather than being a lone wolf. Look for the general flow in the market or the stocks that have raised the most interests in traders. When the market rises, traders must look for the stocks that rise, when it falls, looks for the stocks that show a potential decline.
Five things to know about intraday trading:
Trading Strategy: Intraday trading is a strategy where you buy and sell your stock holding in the same trading day. Traders thus take advantage of the price fluctuations that take place during market hours. In case the trader expects the price to rise during the day, he or she would first buy a lot of securities and then sell some time during the day. The reverse, called short-selling, can also happen. To take advantage of a falling market, traders would short-sell. This is when they borrow shares and sell it in the market. Once the price falls as required, the traders buy shares at the lower price and then return them to the lender.
Stock price impact: By doing so, they often affect the stock’s price trend. For example, a stock is trading at Rs 100-102 range. Intraday or day traders decide to bet on the stock and 1,000 shares each. Thus there is a sudden rise in demand for the share. This causes prices to go up marginally. As soon as it hits a certain level, traders sell their stocks. This, in turn, causes prices to fall.
Technical analysis: Since day-traders are only concerned with the volatility in price and volume of the stock, these traders rarely look into the financial viability of the underlying company. They usually employ technical analysis. This includes analyzing historical trends in stock prices and volumes to forecast the future price. Technical analysis helps determine the right conditions to buy and sell stocks. This usually requires a lot of time and effort. As a result, day traders are usually full-time traders, closely monitoring each and every movement in the stocks.
How to day-trade:First of all, the idea is to select stocks which have a high volume of trade. This means they are highly liquid. This could include penny stocks – shares of small-scale companies with prices as low as Rs 20. Select a maximum of two or three stocks at a time. It would become difficult to monitor more shares. Decide the price at which you want to buy and sell – your entry and target prices. Most importantly, ensure you have a stop loss order to act as a safety net. This will help reduce your risks. Once you have placed your order, monitor closely and exit when the price has hit your target or stop- loss levels.
High risks:Since day traders essentially take advantage of the volatility, they are exposed to great risks. This is much higher than the risks taken by a long-term stock investor. As a result, intraday traders are usually speculators, who are willing to take high risks. They usually conduct high-value trades worth lakhs and crores of rupees by using margin trading.However, intraday traders can also make an extraordinary amount of profits.
Delivery V/S Intraday trading: If you buy stock on delivery basis, you can pretty much do anything with it. You can keep it for as long as you want, or sell it the next day. It all depends on what you wish to do with it. Anytime you feel the market is high or the value of the stocks held is adequate enough to trade, you can sell them to earn the benefits.
In intraday trading, you are required to sell the stocks on the same day, before the market closes. If you fail to do so, there can be two outcomes. Some online platforms automatically convert those stocks into delivery trades and levy a brokerage, so that you can sell them at your own desired time. Others just square-off your trades at the market price during the close time, even if you’re making a loss, and sadly you have to bear the losses.
Intraday Trading is done not with the interest of investment, but with the motive of quick profit.
Common indicators which prove to be helpful for traders are Moving Average, Bollinger Bands, Relative Strength Index, Momentum Oscillators.
It is advisable to avoid volatile stocks. Traders should look out for stocks which are correlated with major sectors.
Research and following the trends prove vital for a trader, may they be a beginner or a professional
Everything you wanted to know about IPO in simplest possible way.
Mr X has a small Burger shop X burgers . Mr. X wants to increase the number of locations so more people can enjoy its delicious Burger. Although X burgers is profitable but he doesn’t have the money to open new stores without taking debt from banks because for the loan he has to pay the interest. Mr. X doesn’t want to take on more debts so decided to sell the shares of his business to the public in order to fund its expansion plans Mr. X goes to an investment bank to SET up the IPO .The investment bank values X Burgers as 3,00,000 and decided to split it into 50,000 shares priced at 6 Rs per share, the investment bank sells 25,000 shares to the public and Mr X keeps 25,000 shares as he owns the company. Mr . X now has 150000 from investors who purchased its shares and Mr, X still holds 50% ownership in its company.
Happy Mr. X used money to open 5 new stores increasing the company’s profits and values of its investor’s shares.
As simple as that.
So, An initial public offering, or IPO, is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it’s known as an IPO. Companies fall into two broad categories: private and public to the public”
Who can invest – everybody like Me , You , Your father , Your GF or BF (as the case might be ) your neighbor , your maid , or any other you know.
What are returns – IPOs gave average 15–20% in just 15 days. what Proofs? Economic times of 10th June ( not sure about date)
You can buy it in slots , ( i.e. 1 slot = approx 15000)
Means 15,000 can turn into 18,000 30,000 can turn into 36,000 45,000 can turn into 49,000 60,000 can turn into 72,000 and so on.
Minimum investment : Now a days IPOs are ranging from 14,000 to 15,000 per slot,
Where can I apply : Open a 3 in 1 account in any bank . ( 3 in 1 means Trade , Demat and savings) , in your savings account active net banking , go to ASBA option , active it and apply. That’s all. Still any confusion , comment below I will clarify.
How can I make Profit : After announcing the IPO , The stock hits the stock exchange as its debut.
Ex- If you company issued 100 stocks at Rupee 150 and made debut at 180 then 30Rs profit per share or 3000 profit per slot
Factors To Evaluate In Order To Avoid Poor-Performing IPOs –
1. Company Financials: See if the company is making adequate profits over the years or not.
2. Know The Reason Behind The IPO Offering: If the company is raising the funds for expansion of the business, it will be good for the company and your investment.
3. Management’s Stake In The Company: Its wise to consider companies whose management holds a large stake in the company. This is a sign that the top management still believes in the company’s future.
4. Understand How The Sector Is Performing: Analyse the growth potential of the sector also along with the company. A sector which does not offer much growth, should be avoided.
5. Who’s Investing In The IPO: IPO’s anchor book gives prospective investors a hint about the credibility of the IPO’s performance. Anchor book subscription opens a day before the launch of an IPO. A healthy anchor book gives comfort to small investors as it indicates the faith shown by institutional investors
Many times we come across people who want to know what are mutual funds. I have tried to explain below a detailed answer on the same. Hope you will understand it
Let us simplify this for everyone to understand.
Consider this conversation between father and son. The curious teenager seeks advice from his Dad on Mutual funds. In the process, he realizes the importance of the same.
Son: Dad, what is a Mutual fund?
Dad: Do you know how to drive?
Dad: But, if you have a car and you don’t know how to drive, how will you reach your destination?
Son: Its simple Dad. I’ll hire a driver for me.
Dad: That’s exactly why we need mutual funds. You see son, investing in the stock market is a risky business. It is an art. If you know how to drive, then you do not need a driver. But, if you don’t know how to drive, you will need one. Mutual funds are managed by experts and people who do not want to take the risk of investing their money all by themselves, rely on the Mutual funds which are managed by the experts. It is akin to relying on a driver in case you do not know how to drive.
Son: Where is the money invested by the mutual funds?
Dad: There are different kinds of Mutual funds. Some invest only in equities, some invest in equities and debentures. Then there are other mutual funds who also put some money in gold and bonds.
Son: But how to know which category is best suited?
Dad: Okay, can you answer this simple question: ‘For how many minutes do you boil the milk?’
Son: Umm, 5–10 minutes may be! Or 15 minutes!
Dad: There is no one answer to this question. The answer depends on the fact as to for what purpose you are boiling the milk? If you want to drink the milk, then you boil it for 5 minutes. But, if you are making some dessert, then you would probably boil it for 15 minutes. You see, the same theory applies in case of selecting the category of a Mutual fund. If your investment goal is short term, say buying a car, then a hybrid of debt and equity would be more suitable as it is less risky and you need back the money in a less span of time. But, if your goal is something like marriage of your kids then equity oriented mutual funds are better suited. This is because over a longer period of time, equity can give handsome returns.
Son: But Dad, I don’t have much money to put in the Mutual funds. What should I do?
Dad: That’s the best part of investing in a Mutual fund. You can start even with Rs.500 a month. You can increase the amount to be invested as and when you have more money. Mutual Funds have a huge inflow of money from people like us and hence even with the investment of Rs.500 a month, you will be able to buy shares of companies whose share price is more than Rs.500.
Son: Don’t you feel it is a bit early for a teenager like me to put the money so early?
Dad: No son. It is never too early to invest in Mutual funds. We can not time the market. Hence, it is always better to start early. Plus, the power of compounding will help your fund to grow exponentially. All you need to have is discipline. Do not time the market but give your time to the market. In a cricket match a huge score can be chased even by singles and doubles if we are disciplined.
Son: What should I do in case of a stock market crash.
Dad: You can invest the money in the Mutual funds in two ways: Lump-sum amount or through SIP (Systematic Investment Plan). It is recommended to put the money through SIP. In case of an unstable market environment, you can avoid the risk of putting a lot of money at once if you follow the SIP route of investment. In case of a stock market crash, it is always recommended to continue your SIP. In longer term you will realize that you have gained a lot owing to buying the stocks at a cheaper price during the crash.
Son: Thanks! That was a lot to learn. I’ll be starting the investment as early as possible.