Tag: First Time Investors

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IPO Fundamentals

WHAT ARE GMP AND KOSTAK RATES?

GMP (Grey Market Premium)

IPO Grey Market is an unofficial market of an IPO and there is no official authority which governs it. GMP is a rate is used to buy IPO before even listing on stock exchanges.

GMP is the extra premium one has to pay to buy an IPO share before it gets listed on the stock exchange. These transactions are done in cash only and as said earlier it is not regulated by SEBI or stock exchanges.

Kostak Rates

It is the overall premium one will get by selling 1 lot of IPO. One can easily calculate Kostak rates by multiplying GMP by the number of shares in a lot.

Use of GMP and Kostak rates

These rates are used by investors to check the demand and supply of an IPO. In case GMP and Kostak rates are high, one can expect a good listing of IPO on the stock exchange. But one should not rely entirely on GMP and Kostak rates. As said earlier these rates are not officially managed therefore an investor should do his complete study on the IPO before investing.

Do not get carried away with high GMP or Kostak Rates

These both should not be used as a sole criterion to invest in an IPO. There is no substitute for Fundamental analysis of the company before participating in an IPO. There have been cases in past when a lot of investors have lost their hard-earned money because of their greed and over-dependence on GMP or Kostak rates. As an investor, you should do peer analysis to find the competitiveness of the company and its valuations

For example, these 2 IPO were showing Good GMP and Kostak rates but both of them listed below their issue price.

  1. CL Educate
  2. BRNL

An investor should only participate in an IPO after he is fully convinced about the company and its IPO prospects.

Read: How to identify right a winning IPO?

Categories
IPO Fundamentals

CURIOUS ABOUT HNI, QIB OR RII?

Today we will get familiar with the type of participants in an IPO.  In each IPO some amount of shares are reserved for the participants of that category. Therefore it is very much necessary that you should know about the participants in IPO.

Retail Individual Investor (RII)

These are investors like us who usually apply for IPO less than 2 Lakh.  Usually, 35% is reserved for retail investors. NRI who bid for less than 2 Lakh also come under this category.

High Networth Individual (HNI)

When retail investors apply for more than 2 Lakh they come in this category.

Qualified Institutional Bidders (QIB’s)

Financial Institutions, Banks, FII’s and Mutual Funds who are registered with SEBI are called QIB’s. They do not have a minimum threshold of 2 Lakh but usually, they apply in very high quantity.

Non-institutional bidders

This is the last category among investors and these investors are not registered with SEBI. They also apply for more than 2 Lakh and usually have 15% reservation in total IPO.

References

1. Chittorgarh

2. Quora

Read: How to identify right IPO?

Categories
IPO Fundamentals

PLANNING TO APPLY FOR IPO: MUST READ IPO FACTS

When the markets are at peak, every company wants to encash their profits by raising money from investors at premium valuations. We are witnessing a huge hype in the market with increased greed among investors. In this post, we will try to analyze some of past IPO facts and understand the where the IPO is going. As our banks are constantly reducing interest rates every year, therefore, investors are left with few choices of investment. They are pouring money into markets to get good returns on their investments.

In 2016, around 26 companies raised around 26,372.48 crores from the primary markets. 

Let us look at IPOs of 2016


2016

The major contributor, ICICI Prudential Life Insurance raised around 6000 Crs. Do you think the IPO mania was over in 2016?


Coming to present the year 2017, so far 27 companies have raised and 2 IPOs are going through subscriptions. In 2017, till date companies have raised around 34,465.17 crores from primary markets


2017

All major insurance companies (HDFC Standard Life Insurance, General Insurance Corporation of India) will go for IPO this year itself and will raise around 25,000 crores from the primary market. Two of them already got listed this year on heavy valuation against their peers. A high valuation leaves very less on an investor table.

Now, let us try to see what were the listing gains and the subscription of IPOs released in 2017.

In the above graph,  subscription data is mentioned in the circle for respective IPO. For eg., BSE was subscribed 51.2 times at the end of last day of IPO.

Surprisingly, Salasar Techno Engineering Ltd IPO received a maximum number of bids against an IPO of an issue of 35 crores and eventually, it also listed on huge premium with gains close around 140%.

Having seen this IPO boom shows investors are too much in euphoria. But how long will this euphoria last?

Here is the trend of money raised through IPO from the year 2007 to 2017.

It clearly shows after reaching the top of 33,000- 36,000 crores of raising money by IPOs, companies have slowed down raising money. But the question is Why?

Let us see how was market ie Nifty50 performing during the same duration.

In the year 2007, the market crisis started which lasted till early 2009. From the year 2009, the market seems to be recovering again. We again saw the increase in IPOs offering in that year. In late 2014 the Nifty50 made a new debut to 8000 levels and with that IPO market also started to boom.

Now in the present year, 2017 we are again at new high so is the IPO market. We can see that every other IPO is getting oversubscribed and giving a decent listing gains. In 2017, an IPO has given an average return of 23% just on its listing.

Now, as long as the market remains healthy, IPO market will boom. We can witness much more IPO oversubscription for some more time but it is already getting saturating.

Read: Why long-term investment creates wealth?

Why will IPO boom be going to fade out in near future?

According to a report by Livemint IPO markets are getting frenzy as more and more PE investors are encashing their stake in the companies. In 2017, PE (private equity) funds sold shares worth $1.17 billion which is highest in recent times.

As soon as the market starts getting corrected these listing gains or quick money for investors will start to fade out. The pain point is that no one can predict when the market will get corrected or crash. It is investor’s responsibility that he/she does not apply for every IPO which comes for an offering. An investor should go through financial history and management background before going for an IPO.  He should develop a decision based on facts available to him. Brokers usually have a biased opinion and we should ignore them.

Remember companies only raise money to benefit themselves. Any company going for IPO chooses its favourable time and also selects the valuation of IPO. There have been a lot of cases in which IPO does leave anything for the new investor as they are being offered at premium valuations. Therefore it is very important an investor should evaluate IPO properly.

Read:  How to identify right IPO?

Happy investing and thanks for reading.

Graph Credits: Chittorgarh, Tradingview

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General Investing Important Concepts Investing Lessons

BITTER TRUTH ABOUT STOCK MARKET

Bitter truth about Stock Market

I am sure, you have listened or read about making money from the stock market but very rarely you must have read or discussed how one’s wealth is destroyed by it. In fact, if you bet on any stock without knowing the anything about the company and its fundamentals then there are good chances of your wealth getting destroyed. Today, we will focus on some of the bitter truth about stock market.

Analyst on TV keeps talking about big ace investors like Rakesh Jhunjhunwala, Porinju V Veliyath etc. They will tell how much wealth these ace investors have created in a decade. But today I want to show you if one is not diligent and up to date with the market scenario he/she can lose all its money, instead of creating wealth for future.

Read: Why long-term investing creates wealth?

Let us see some prime example in Indian scenario where investors have lost close to 80 to 95% of their invested money.

1. Suzlon Energy Ltd

Suzlon energy

Over the last decade, from the peak of 395 to 15-20 level, Investors have lost 95% of their money in this share. The primary reasons for its fall are poor management practices including huge debt on books, low promoter holding, negative cash flow over a long time.

2. Unitech Limited 

unitech

From the highest level of 500, it presently trades at mere 7 Rs. Investors have lost close to around 98% of their wealth. The company was very popular in the real estate construction sector. The main reason for their downfall is huge debt on their books, lawsuit against management, extended project deadlines etc.

In future, there is no sign of any recovery of even half of the topmost level for this stock.

3. Jaiprakash Associates Ltd

Jaiprakash associate


This stock was daring of stock market and a decade ago, everyone wanted to own it because of its diversified businesses. A big conglomerate in Infrastructure, Cement and Power sector.

Investors have lost close to 93% of their total wealth.

4. Reliance Power Ltd

R power


This company had a very ambitious plan in power sector but failed to capitalize its power business. This company’s huge IPO went to a whopping subscription of 73 times and still, it comes under one of the top 10 IPO in Indian stock market history. During its grand IPO company raised close to 11,863 Cr of money from the public.

Now, Investors have lost around 87% of their total money in this share.

5.  Reliance Communication

rcom


In the last 9 year investors has lost 97% of their wealth in RCOM. This company also has the same story behind its losing market capitalization. It has huge debt on books and promoters have pledged some of their holdings.

There is no ray of hope for all these fallen stocks. They will never be going to recover their investor’s money. If you stay with these fallen rocks you will stay forever waiting for these rocks to move. Therefore, Investors should always be careful while investing and be in touch with current economic and political scenarios which can effects business to a large extent.

Read: New to investing, Learn Fundamental analysis

Thanks for reading.

Image credits Tradingview

Categories
General Investing

WHAT IS SENSEX OR NIFTY 50?

In this post, we will discuss more on indices. Sensex and Nifty 50 are Indian stock market indices and are also used to study the trend of the investor sentiments.

Let us take an example of different types of markets like wholesale market and consumer market. They also have indices like consumer inflation index, wholesale inflation index. Economists use these indices to analyse and plan different policies. Our government periodically monitors the inflation rate and changes monetary policy accordingly.

Today we will see what is Sensex or Nifty50?.

Sensex is the index managed by BSE which contains top 30 companies by market capitalization whereas Nifty50 is the index managed by NSE which contains top 50 companies by market capitalization.  BSE and NSE periodically review the list of companies in the index and make changes accordingly.

Now the question arises what conclusions could be drawn based on these indices. As I told, an index gives a broader picture of a trend in the stock market. If an index is going up, then we can note the following observations:

  1. Investors are optimistic about the growth of the companies.
  2. There is more demand in the market and investors are investing more and more money in the stock market.
  3. As investors are optimistic about the companies, it directly shows they are optimistic about the country’s growth and its GDP.

Let us understand what is happening when an index is going down

  1.   Investors are pessimistic about the growth of companies.
  2.   Investors are pulling out money from the market, therefore, creating more supply and less demand in the markets.
  3.   Generally, the growth of companies is not affected by the decline in the index. But on a long run like 1-2 years, it can impact their businesses also.

I hope, now you will have a good picture of Sensex 30 and Nifty 50.

Read:  Why stock markets exist?

The same principle could be applied when an index is going down.

I hope now it will give you good picture what Sensex and Nifty stand for. We will take more such small concepts on our journey to improve financial literacy.

Read:  Why stock prices change every second?

Thanks for reading.

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Must Know Facts

NEW TO INVESTING: FUNDAMENTAL ANALYSIS FOR BEGINNERS

I see these days beginners struggle a lot when they start investing. This post will help then which kind of strategy is optimum for them and why?

Fundamental analysis is most sought methodology where an Investor looks at the business and valuations of the company rather than just its stock price. The success of the business could be easily determined by the company’s Balance sheet and Profit and Loss statements. One should never invest in a company whose business one could not understand. By not understanding business one can miss out certain information and will not identify its intrinsic value of the company.

Basics of business?

A business mainly involves 3 parties. The parties involved are the seller, buyer and business owner who is also a seller. Business owner purchases something from the seller. He modifies or enhances or create a new product out of things which he purchased earlier. He sells the new product at a profit to a buyer.

Fundamental stock pickers should dive deep into how these parties interact with each other. Once someone has understood how business is functioning, it is good to have look at the financial condition and future aspects of the business. An investor always invests his money to create wealth. So it is necessary that his invested money grows with time. Invested money will grow only when a company will do a profitable business.

P&L statement tells us about the profitability of the company. Balance sheets give the value of the company. A company’s value is measured in its assets and liabilities. So, it is very critical for someone to understand the nutty-gritty of these financial aspects.

Read: Why long-term investing creates wealth?

Aspects to look upon in business

  1. one that can understand
  2. With favourable long-term prospects
  3. Operated by honest and competent people, and
  4. Available at a very attractive price.

An investor should invest only when the underlying business is available at an attractive bargain or price. Attractive price should be understood as the worth of the business of the company.

Stock prices of a company have a direct correlation with the underlying business of the company. One should not worry too much about 1-10% fluctuation in the share prices as political and global affairs have some or other effect on stock prices.

A fundamental investor should not directly jump on how much return stock has given so far. He should give more weight to the company business and its profitability. In the end, one can look at the stock price and its return over a period.

I hope this post has helped you in enriching your knowledge. In the next post, we will dive into the technical analysis of stocks.

Read: Investing when a market is all time High

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IPO Fundamentals Must Know Facts

ALL YOU NEED TO KNOW ABOUT IPO

In the present scenario, it is very unlikely that you have not heard about IPO. IPO stands for an Initial public offering and a company can go for it only once, though a company can raise money through other sources as well.

Need for IPO?

An IPO allows a company to raise funds from a large number of people and it also allows a company to get listed on stock exchanges (NSE/BSE). As everyone knows for doing business money or capital is needed and it is one source through which they can raise money.

Read: What are the Sensex and Nifty?

How will IPO help a company?

Apart from providing funds for the growth of the company, it also helps in providing an exit for existing investors.

How IPO proceeds?

Whenever a company decides to go for an IPO, it generally hires an investment bank. Investment bank prepares a Red herring prospectus and also decide the base price for the shares which will be going to be issued to the public. Finally, a company needs permission from SEBI in order to get listed on the exchanges. Once the approval is given, usually within a few weeks the company get listed on exchanges.

How to apply for an IPO?

Applications for IPO are allowed through a bidding system. Here one has to bid for the price between the prescribed limit and number of shares one wants to get allotted. There is minimum and maximum limit for the number of shares one can purchase. Nowadays, IPO Applications are processed only through ASBA (Application Supported Block Amount).In the application process, the amount remains blocked in your bank account for the IPO application. The amount is debited only when the shares are allotted to you.

When IPO company get listed?

Usually, the company get listed within 10 days of bidding application closure.

When can one sell IPO shares?

You can sell your allotted shares as soon as the company get listed on the exchanges.

Read: Thinking to apply for an IPO for 50% profit, Past known facts

I hope this will be useful. Thanks for reading.

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Important Concepts

DO HIGHER PRICE STOCK OFFER LESS RETURN ON INVESTMENT

Today in this post we will understand that higher price stock doesn’t mean a lower return on investment amount.

We are in a generation of smartphone where a new phone is launched every alternate day and we change smartphone every 2 years. We select a new phone by selecting higher RAM, storage, speed. This shows that whatever is higher is more valuable and better. In the end, we also check our budget and necessity before making any decision to buy a smartphone.

We should apply the same common sense while buying stocks. There are more than 5000 companies listed on NSE. Some of the stocks worth more than 50,000 Rs and some below 10 Rs. It doesn’t mean that you should go and accumulate the stocks which are less than 10 Rs.

Then how to check whether a particular stock is worth buying or not?

When anyone is buying stock of a company, it means that person is buying part of the business of the company. This directly means that the stock should be valued in terms of the profitability of the running business of the company. So, before investing in the company we should evaluate the business on different parameters like present status, future goals, the management of the company, the product or services offered by company etc.

Note that I have not even discussed the stock price of the company yet because that is the last thing an investor should look upon.

Example of MRF & Apollo Tyres

Let us take an example of a company named MRF, Stock price Rs 64,100. Yes, this stock seems to be very expensive and I am sure you will not be willing to buy this stock. but as said above before buying any company we should check the valuations of the business.

Tyre companies

Check the details of competitors of MRF. Above data says some the information about the company. Note that MRF has maximum sales turnover and net profit. Which says that the company is doing very good business compared to its peers.

Now check this data of MRF

MRF standalone

And this for Apollo Tyres

Apollo Standalone

Have a look at EPS of MRF and Apollo Tyres. EPS is the calculated by dividing profit by no. of shares outstanding for a company.

Clearly, data says that EPS of MRF is 202 times of EPS of Apollo Tyres.

Now we know, why MRF is expensive among peers. Its EPS is way higher compared to its peers. The PE ratio of MRF is also less than Apollo tyres which tell us that buying MRF is better than Apollo Tyres.

There are other factors also responsible which are not considered for checking the valuation of both companies.

Hope you were able to understand that stock price should be never considered as a factor for investment in any company.

Read:  How to invest when the market is all time high?

Thanks for reading.

Categories
Book Review General Investing

PICKING UP STOCKS FOR YOUR BASKET: SHOPKEEPER STRATEGY

A few days ago I came across a wonderful book written on investment with keeping a mind of a trader. The winning theory in the stock market by Mahesh Kaushik tell you some of the beautiful methods to pick stocks.

Mahesh Kaushik considers buying a stock is just like he buy vegetables in a large store. It the place where we should buy only when we are getting a proper bargain and should sell when those things have appreciated high in value. I have mentioned below some of the brief points from his book.

  1. Diversify your portfolio– do not invest more than 5% of your portfolio in the single stock.
  2. Don’t incline to the same sector.
  3. Profit book– should happen and don’t get married to any stock. But try to do at the end of the complete year.
  4. Stock nature– Prefer dividend-paying companies over non-paying companies.
  5. Averaging out a stock– Never ever average out a stock just because their prices are falling but because you have a high probability of winning.
  6. Opportunist– Keep free cash for an upcoming opportunity.
  7. Base price concept– It is an average price of a stock over 3 years.
    Buy case- Base price < CMP(current market price). Buy when CMP is around 80% of the Base price. Sell when CMP cross over 120% of base price.
  8. RPS vs EPS– Look at EPS (earning per share) but don’t forget to look at RPS (revenue per share) as EPS could be negative for a fast growing company for years.
  9. Book value– When book value is 20% lower than CMP then that company could be a value buy.
  10. Block deals– Stay away from those stocks where block/ bulk deals happen regularly.
  11. Buying opportunity- The ratio of stock year high price to year low price should be less than 2.5. Mostly it is recommended around 2.
  12. Face value comparison– While comparing 2 companies  Min(CMP/FV(face value)) is considered better than the other.
  13. Maximizing profits– If your stock has been appreciated above 20% of base price then you can keep a trailing loss at 5% of the CMP.
  14. Promoter holding– You should select only those stocks where promoter holding is not less than 15%.

I hope this article will give you basic information about the book. If you are a beginner and want to master the art of winning in the stock market then I would definitely recommend you to read the book. It will add a lot to your knowledge.

Read: Some bitter truths about the stock market

Thanks for reading.

Categories
General Investing

A INTRODUCTION TO THE STOCK MARKET

Introduction to Stock Market

Most of us have heard about SENSEX/ NIFTY at some or other point in our life. The SENSEX and NIFTY are the indices run by BSE and NSE respectively. We will talk more about these indices later on in this book. When I heard about SENSEX or NIFTY they did not matter much to me and they were very confusing to understand. Do not be amazed if I tell you a healthy stock market corresponds to the growing economy which directly correlates to a growing nation. Therefore the Stock Market is very much necessary for a nation.

How Stock Market came into the picture?

  1.      Starting of business

Now let me give you an example of why we need a stock market.

One fine day I was having a beer with my 2 besties. We were discussing our career and future prospects. Then I proposed to them a business idea of selling T-shirt merchandise. Both of them got excited about the idea and were willing to be a part of it.  But both of them were busy with their jobs. They decided to support me financially. Assume that we started our business next month with the basic capital I had and the rest contributed by my mates. Now, I and my mates are the promoters of the company. And after a month, I was lucky and my hard work paid off. We started earning decent profits within a month of starting my business.

  1.      Expansion of business

Now, if I want to move ahead and expand my business I find there is a problem. I do not have enough capital to start the operation in another city. But I know a bunch of people who are willing to invest in my company. So, I approached an investor for some investment in my company. Now I need to give him something in return. Therefore, I decided to give 5% equity of my company and this made him a shareholder of the company. In order to finalize the investment, I brought a legal stamp paper and complete the deal.

  1.      Raising money from Equity

As you saw, I transferred some amount of shareholding of my company to an interested investor. This is the real meaning of shares. So, whenever you are buying a share of the market, you are buying some ownership in the company. And only a handful of the successful companies are listed on stock exchanges.

  1.      Sharing of Ownership

Irrespective of your shareholding in the company, whenever the company makes profits or losses you will be the part of its profit or loss-making. Usually, Investors do not like loss-making companies.

The companies distribute profits to their shareholders by means of dividends. The dividend amount which is needed to be distributed is decided by the company management. If the company has performed very well then maybe the company will distribute good dividends. Approval of dividends is subject to the approval of management and shareholders. Now you must be a clear idea that a person who is buying a share of the particular company is actually investing in the future growth of the company. When you are investing in the company you are also taking a risk involved in the future developments of the company.

Read: All you need to know about IPO

Regulator of Stock Market: SEBI

In India, we have a government body SEBI (Securities and Exchange Board of India) which regulates the listing of the company on the stock exchanges. SEBI also provides certain compliances and guidelines for all listed companies.

SEBI is like a watchdog which protects investors rights and monitors any fraud or illegal activities. When any company wants to get listed on market, they need to get permission from SEBI. For the purpose of raising money from the public, promoters of the company hired investment banks (SBI Capital, Morgan Stanley etc) which help them to raise capital known as IPO. These investment banks analyse the company’s financial health which includes the balance sheet, P & L, the past performance, and goodwill. After doing a thorough research, they prepare a document containing the company’s financial records, owners of the company, past investments in the company and the price band of shares with a lot size.  Now, the company can issue shares to the general public and whoever is interested could subscribe to the IPO of the company. Once the issue is fully subscribed, then within a week or so the company will be listed in the market.

Who Runs These Exchanges: NSE or BSE?

Stock exchanges are private organizations which list other companies. As said earlier, these exchanges are monitored and directly work under regulation laid by SEBI. In India, we have BSE and NSE exchanges and across the globe, there are exchanges like NYSE, NASDAQ etc.

What is an Index?

SENSEX 30 or NIFTY 50 is a number which represents top 30 and top 50 companies listed on their respective exchanges. One day Sensex or Nifty falls which indicates that top 30 or top 50 companies aren’t performing well and their share prices are decreasing.

Share Price Increasing or Decreasing, Why?

Now again a very important question should arrive. Why does the share price increase or decrease?

Initially, the share prices are decided by the investment bank during the IPO. Once a company is listed on the stock exchange, based on people sentiments the value of the share is decided. Stock prices move based on demand and supply in the market. One should understand that people usually see the company financial records like quarterly or annual earnings, any new progress made by the company, future scopes of the company etc. There may be the times that a company is not showing any profits but showing huge revenue growth. This could signify that may be the company is expanding very fast or implementing new ideas and due to which it was not able to show profits. In such cases, if investors think that the company will give profits in the future and then also the stock prices increases.

Read: Which factor pushes an increase or decrease in Stock Prices

So when there is a surge in a number of buyers of a share than the share price increases and vice versa. So the next time you go and buy a share do your homework first. You should be assured enough that why you are buying the share of the particular company, why not other company. What is the future of that company?

Read: Why long-term investing creates wealth? 

Read:  Some bitter truth about Stock Markets

I hope this small article has helped you in your investor journey.

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