Category: Knowledge Center

RBI Left the Policy Unchanged

Economic Projections by RBI

The RBI has kept the rates unchanged, considering its goal of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

Projection for CPI inflation has been revised to 5.2% in Q4: 2020-21, 5.2% to 5.0% in H1:2021-22 and 4.3% in Q3: 2021-22.

Impact on Banks and Economy

This can be considered slightly positive news for banks and the economy, as the RBI didn’t increase the repo rate, with a view to infuse more liquidity in the market.

#Beelinebroking #RBI #RBIPolicy #RBIRates #RepoRate #RBIUpdate #CPI #Banks #Bankingsector #MSFR #MAFRate #Inflation

Losses Due to Explosive Cocktail, Recovered

The calendar year 2020 has been a roller coaster wild ride for the equity markets all over the world as the once in a lifetime pandemic hit at the start of the year. Nifty and Sensex took a historic toll of 38.3% and 37.8% respectively in March end this year as compared to 31^st Dec-19 closing, to fall at the levels of 7,511 and 25,639 respectively. However, no one could have anticipated that the markets will not only recover the losses of March, but will also give eye-popping gains by the end of the year. Nifty and Sensex has gained tremendously by almost 83% each, to end at 13,981.75 and 47,751.33 respectively on 31^st Dec-20 as compared to the steep levels of Mar-20. This year has been full of events outside the realm of imagination.

Amidst the down-moves, the domestic market had also witnessed a few up-moves in March-April after the RBI stepped in with emergency liquidity support as the Dalal Street wasn’t able to digest the explosive cocktail of deadly pandemic, resultant global meltdown and weak economic conditions of the world. The turbulence was also felt by the global market as Dow Jones suffered its worst hit and US oil futures turned negative for the first time in the history.

#beelinebroking #stockmarket#stocks#investing#trading#money#investment#finance#forex#investor#business#trader#stock#sharemarket#nifty#daytrading#wealth#forextrading#sensex#success#nse Disclaimer: http://bit.ly/2uLiAVH

Mainboard IPOs Raised ~ ₹26,640 Crores in 2020

Total number of mainboard IPOs in 2020 decreased just marginally as compared to that in 2019, despite the pandemic that crashed the world’s global markets and economy badly in the month of March this year. As compared to 16 mainboard IPOs in 2019, which collectively raised around ₹ 12,362 crs, a total of 15 mainboard IPOs raised around ₹ 26,639 crs in 2020, which is 2.15x more. In 2019, a total of 47 IPOs were set to raise funds worth ₹ 51,000 crs, but the companies lapsed their SEBI approval due to weakness in broader market. However, even 2020 was not that great of a year for the companies. As a result, we didn’t see as many IPOs as we expected during the year.

Out of 15 mainboard IPOs, 6 of them gave more than 50% listing gains, whereas, 4 IPOs gave negative listing gains. Chemcon gave the highest listing gains of 115%, followed by Happiest Minds Technologies Limited which gave 110.8%.Route Mobile also gave more than 100% of listing gains.

In 2021, more mainboard IPOs are expected. However, if the new COVID-19 strain spreads at a faster pace, it can hit the broader and domestic markets.

#beelinebroking #ipo #stockmarket #stocks #investing #trading #money #investment #finance #investor #business #trader #stock #sharemarket #daytrader #nifty #daytrading #wealth #stockmarketnews #forextrading #sensex #success #nse #2020

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What is an IPO?

IPO or an initial public offering is the process by which a company executes its decision to go public by selling its stocks on the bourses. A new, young or old company can decide to go public and hence make a debut on the stock exchanges by means of an IPO. The company offering its shares is called the “issuer” and it lists on the exchange with the help of investment banks. After the IPO, the shares of the company are traded in the open market.

Pricing an Issue

The era of free pricing was introduced in the primary markets in India in 1992. Following this the issuer in consultation with its investment bankers decide upon a price. The company and its investment bankers are however required to make full disclosures and explain the parameters considered for pricing the issue in its red herring prospectus.

There are two types of issuances that can be made in the primary market

• A fixed price issue- where the issuer and merchant banker stipulate a fixed price at which the company should list.
• A book built price- where the company and the merchant banker come up with a price band or a floor price and leave it to the market dynamics to determine the final price. This process of price discovery is called the book building process.

Reservation for different categories of investors in an IPO

In a book built issue allocation is made to different categories of investors. These are retail Investors, non institutional investors (NIIs) and Qualified institutional buyers. The ratio of allocation is 35: 15: 50. In case a book built issue is pursuant to the requirement of 60% allocation to QIBs, the ratio in that case becomes 30:10:60.

The Bidding Process

If you are a retail investor willing to participate in an IPO, you can bid in a book built issue for a value of not more than Rs 1 lakh. Retail investors have the freedom of bidding at the cut off price (a price arrived at that is above the floor price and within the price band). During the time the IPO remains open, you can change or revise your bid by using the form that is made available to you along with your application form. After the book building process is complete, the allotment of shares are carried out.

The Allotment Process

If you have been allotted shares, you are entitled to receive a Confirmatory Allotment Note (CAN) in case you have been allotted shares within 15 days from the date of the closure. On the other hand if you have not been given any share allotment, the registrar of the issue ensures that you receive the refund in your demat account within 15 days.

How should you invest in an IPO?

As an investor, it is easy to get excited by a company that promises to make a sparkling debut on the markets. However there are some vital questions that you must consider before you decide upon investing in an IPO

• Who are the key executives of the company, and what is their track record?
• Is the business model of the company a sustainable one, or is it based on some latest fad or trend?
• Are the growth prospects of the company, justifying the price of the issue?
• What are the probabilities of failures occurring?
• Will you be convinced to hold on to the stock for the long term if there is a sudden and substantial fall in price in the short term?

Is an IPO a good avenue to invest in?

That purely depends upon your financial goals and risk tolerance. You can rely on the research team of Beeline to go through the executive summary, the forward looking statement and the price band to provide a thorough and well researched opinion of the issue on offer. This can help you in making a better investment decision.

 

What are Commodity Futures?

For those who seek for diversification of their portfolios and are keen on looking beyond traditional asset classes such as equities and debt, can consider commodity futures. Just like in the equity market, the underlying instruments are shares, in the case of commodity market, the underlying instruments are commonly traded goods such as wheat, jute, cotton and sugar and a host of other commodities. It also includes bullion like gold and silver.

A commodity futures contract, thus, is a commitment made between the buyer and the seller to either make or accept (as the case may be) delivery of a pre-specified quality or quantity of a commodity at a future date at a price that has been pre stipulated. This is called the contracted price. When the date that has been agreed upon arrives, both the participants can liquidate their positions by way of a cash settlement at the price between the contracted price and the liquidated price on the expiry date of the contract.

Alternatively, a physical delivery of the commodity can also be made or taken when the contract expires. In that case, both parties must inform the exchange and own the requisite warehouse receipts of the location in which the delivery must take place.

Commodities futures are popular with people who have knowledge of the underlying commodity. For instance individual farmers or food processing companies operate as hedgers in the commodity market to protect themselves from the risk of a price fluctuation. Take for instance, an example of a ata (wheat flour) manufacturer A. A is expecting a good crop of wheat by March 2015, but is scared that the prevailing price of wheat may decline by then.

• A therefore enters into a contract with B (another ata manufacturer) to deliver 50 kgs of wheat at the current market price.
• B agrees to such a contract because he believes that the price of wheat will escalate over the same time frame.
• In trading parlance, A is said to be going short while B is considered to be going long
• On the expiry date of the contract, if the price of wheat actually declines, A makes a profit and pockets the difference between the contracted price and the liquidated price.
• On the other hand if the prices go up A will need to pay this difference to B.

Hedging with commodity futures

This is a mechanism that is used by market participants to cover their price risk. The relationship between future and cash prices is determined by cost of carry. By taking an opposite position in the futures market, a participant can hedge his price risk in the cash market.

Let’s take an example step by step

• On Dec 1, 2014 A purchases 10 tons of jeera seeds in the spot market @ 4000
• To hedge his price risk, he sells 10 contracts each of one ton in the futures market at the prevailing price
• Assuming that the ruling price in May 2015 will be 4750 p.q. A locks in spread of 750 p.q about 18% for 6 months.
• If the spot price drops to 3900 p.q in the month of April, and A decides to sell his stock he incurs a loss of 100 p.q. on his physical stock. He also loses the amount incurred on the cost of carry or the amount spend for holding the stocks.
• However, one must bear in mind that the spot and the future prices move in tandem so the futures price is likely to decline from 4750 p.q to 4500 p.q.
• If A liquidates his contract by entering into a purchase agreement at 4500 p.q, he gains a profit of 250 p.q in the futures segment.
• Thus, as we can see that by taking opposite positions simultaneously in two markets, he can hedge his price risk.

The Safety Aspect

Commodity futures are always traded on an organized exchange such as MCX, NCDEX or NMCE in India. When a buyer and seller enter into a futures contract with an exchange, they must make a deposit of money which is called the “initial margin”. The exchanges also prescribe a “maintenance margin” which is the lowest amount an account can reach before it needs to be infused with funds again. The margin you need to maintain varies from 5-10% of the total value of the contract (differs across different categories of commodities and exchanges). The position of the investor is “marked to market” daily and any profit or loss (depending on the spot price) is adjusted to his margin account.

Once the margin has been deposited, one can begin trading through a broker. The key to a good trading plan is research. For instance at Beeline we specialize in research and with our analysis of price movements, we can devise an apt trading plan for you.

Although, commodities seem unfathomable and risky to most retail investors, commodity futures are in fact highly standardized instruments that operate in a regulated market environment. The futures market is closely regulated by the Forward Markets Commission in India (FMC) that ensures fair practices in the market. The counterparty risks are also eliminated in the trading of commodity futures as exchanges work in tandem with clearing houses to ensure that terms of futures contract are fulfilled.

The Benefits of Trading in Commodity Futures

The commodity market is an organized market with many unique features which can be particularly beneficial to particular classes of investors.

If you are an importer or exporter of any particular agri commodity, commodity futures can help you hedge against price fluctuation. If you are an exporter, you can use the futures markets effectively to get an indication of the price of the commodity that is likely to prevail in the future. This in turn enhances your chances in securing a contract by quoting a realistic price. On the other hand an importer can benefit by protecting against price uncertainities in local markets.

If you are a Farmer

• You can use commodity futures to take effective positions and lock in the price for your produce. This will help you in case the price comes down substantially at the time of harvest.
• At the time of harvest, you can sell your commodity futures, thus assuring a demand for your produce.

If you are an industrialist, and a regular commodity is your raw material you can

• Control your cost- Any sudden hike in the price of your raw materials may force you to pass on the price hike to your customers. If you take position in the commodity futures market, you can control the cost of your raw material by hedging your price risk.
• A shortfall in the supply of raw materials can hamper your business in a major way. To avoid this and ensure a continual supply of raw materials you can opt to take the delivery of a fixed quantity of the particular commodity at a pre stipulated price at a specific location, thus ensuring that there is no fear of a shortfall.

For Investors, Commodities can be a good investment because

• They offer optimum diversification and are a different asset class altogether that is not influenced by equity and debt.
• They are less prone to price manipulations
• The leverage opportunities are maximum in the commodity markets as the margins as far lesser as compared to the equity derivatives market.

• Like any other asset class, commodities are prone to market risks or loss on account of adverse movement of price.
• If the markets are illiquid, unwinding transaction may be a little difficult thus posing some liquidity risks.
• Rarely there may be some legal risks or change in a regulatory framework that may disallow some transactions.
• Operational difficulties may arise at certain times due to some infrastructure breakdown like failure of electricity.

The risks having been stated, we must also bring to your notice that there is enough statistical evidence to prove that commodities derivatives are less riskier than equities as they are less volatile. Besides, the market is always under strict vigilance from the regulatory authorities making them free from manipulation. Commodities as a segment can thus be an exciting investment avenue for those who are keen on diversifying their portfolios.

 

What are Derivatives?

If you are a novice in the stock markets, you may have heard TV anchors or financial websites mentioning the F&O market. F&O stands for futures and options. These are called derivatives. Derivatives are so named because they are “derived” from an underlying asset class which can be equities, currencies, commodities, etc. The common factor between all underlying asset classes, is that they carry the risk of change in value.

A derivative contract is an agreement between a future buyer, and a future seller based on a value that is closely linked to the current market price of the instrument. When you are investing in a derivative you are actually placing a bet on whether the value of the asset will increase or decrease within a certain period of time. The most common of types of derivatives (and the most actively traded) are futures and options.

Derivatives can be used to hedge or protect one’s portfolio against price risk or the risk of the price of the underlying asset going in an unfavorable direction. However, when used without adequate knowledge or recklessly, they can be agonizing. Warren Buffet has thus famously called them “weapons of mass destruction.”

The most popular kind of derivatives and what they mean

Futures

A futures contract is a legally binding agreement between the buyer and seller. In this contract the two parties agree to make the transaction at a future date based on a speculation they are making about the underlying asset. The quantity, delivery time and date of settlement are mentioned in the contract. On the pre-stipulated date, the transaction is settled by taking delivery of the underlying stocks, and you simply pocket the profit or the loss as a result of the sale.

Short selling of a futures contract

If you are absolutely sure that a price of a stock is overvalued, you can “short sell” in the furtures market technique called “short selling”. A short sale can be made when the prices of a stock are expected to drop. Although this is a speculative call, if you have reason to believe that the stock price will definitely fall, you could offset the position with a buy and make a neat profit by this transaction.

Let’s consider an example with you as a short seller. Here is how you go about your short selling transaction step by step

• You sell a lot of 100 shares of company XYZ at a price of Rs 10 each
• As expected by you the price of XYZ drops to Rs 8 per share
• You buy back a lot of 100 shares at Rs 8 each
• You make a profit of Rs 200 by short selling XYZ.

Options

In the case of futures, the buyer and seller is obligated to make the transaction and square off the deal. However there is another type of derivative contract called options. That are a little different from Futures and enhances the chance of the profits of the dealer as well as reduces the chances of his losses.

The buyer of an Option has the right to go through with the sale but is not obligated to make the sale at a pre determined price within the end of a stipulated time period. However, since the seller of the option can use his discretion to exercise his right to sell, he needs to compensate the seller by paying a premium.

Options are of two types

Call Option and Put Option

• Call option gives a right to the holder to buy the asset at a fixed price while Put option gives the right to sell at fixed price. The price at which the holder decides to buy or sell his option is called the strike price or the exercise price.
• At the time of settlement, the seller of the option, must pay the buyer the difference between the strike price and the price of the underlying stock.
• In the Indian context, all options are excercisable on the date of expiry. This method is called the European Option, and is the only one prevalent in India.
• In international markets the holder has the choice of excercising his option on or before the date of delivery. This is called the American option.

Options at a Glance	Buyer	Seller
Call Option	Right to BUY but no obligation	Obligation to sell
	Pays premium	Receives premium
	Profits from rising prices	Profits from falling prices
	Limited loss and potential for unlimited gain	Limited gain and potential for unlimited loss
Put Option	Right to sell But no obligation	Obligation to buy
	Pays premium	Receives premium
	Right to sell at strike price	Obligation to buy at strike price
	Profits from falling prices	Profits from rising prices
	Limited loss and potential unlimited gains	Limited gain and potential unlimited loss

Now let us understand this with appropriate examples

An investor buys a call option of stock X at a strike price of Rs 3500 at a premium of Rs 100. If the market price of X is more than Rs 3500 he would like to exercise his option. Suppose the price of X moves up to Rs 3800 (in the spot market) he will exercise his option by buying one share of X from the seller of the option at the 3500 and sell it in the market at Rs 3800. His profits would thus work out to be Rs 200 {Spot price (Rs 3800) – strike price (Rs 3500) – premium (Rs 100) = 200}

An investor buys a put option on stock Y at a strike price of Rs 300 and pays a premium of Rs 25 on it. If the price of Y is less than Rs 300 he would want to exercise his option. Suppose the price of Y falls to Rs 260 in the spot market, he immediately buys Y at a price of Rs 260 in the spot market and sells Y by excercising his option in the derivatives market . He thus makes a profit of Rs 15. { Strike price (Rs300) – Spot Price (Rs 260) – Premium (Rs 25)= Rs 15}

Margin and the contract value

In order to ensure that an investor does not ditch the exchange after having entered into a derivatives contract, the exchange asks for a margin- which is a deposit of safety. The margin is a certain portion of the contract value ( may range from 15 to 50% and is determined by the broker or the exchange). On the day you buy or sell your futures contract you need to pay this margin. On the day your contract gets over (the future date) you get back your margin plus whatever profit you may have made or the loss amount is deducted from your margin amount.

Mark to market

The difference between the spot price and the agreed future price of the underlying stock is called mark to market. You can incur a mark to market profit or a mark to market loss depending upon the price of the spot.

Square off

On the agreed date that a derivatives contract comes to a close the exchange will square it off. This means all buyers and sellers of derivatives contracts will be given their margins back with their profits or minus their losses. For convenience sake, in India there are only three open dates when such transactions can take place. These are the last Thursday of the current month (when a contract has been entered into) the last Thursday of the month after that and the last Thursday of the following month. In trading parlance these are referred to as month, month +1 and month +2.

The risk factors and how to manage derivative trading

Derivatives, as you may have figured by now are great tools to maximize your profits and reduce your risks. But that having said, they do come laced with inherent risks since they are based on speculation. So here are some words of caution for you, before you consider trading in derivatives.

• Firstly, consider derivatives as an avenue of diversifying your portfolio only after your financial needs are taken care of.
• You need to have a thorough understanding of the markets and the financial acumen required to use derivatives as a tool to take advantage of market conditions.
• Conduct thorough research before you decide upon a strategy. Textbook formulas will not work in derivatives market as the market conditions differ and you need to make a judgement call based upon your views of the market at the time you are entering into a derivatives contract.
• Keep the requisite margin amount ready in your trading account at all times. Also bear in mind that due to market conditions that underlying stock may rise or fall drastically, so keep the extra money in your account to deal with such a situation.
• Consult with your broker beforehand if you intend to deal in derivatives. The required services need to be activated for you to deal in them.

What are Equities?

One of the most traditional ways of seeing your portfolio grow is to invest in equities/stocks/shares. When a company lists on a stock exchange, it gives all investors to own a part of the company in the form of equities or stocks as they are popularly known. As you become a part owner of the company by owning its shares, you get rewarded (in the form of dividends) when the company makes a profit. However, you need to bear with the losses too when the stock price plummets reacting to negative news or developments. Although investing in equities can reward you with handsome gains if you stay invested for the long term, you must also recognize the fact that they are the riskiest asset class and should be chosen after careful consideration.

What are the Benefits of Investing in Equities?

Although stocks are considered risky, here are some reasons why equities as an asset class is considered the most rewarding

• Gives you an opportunity to diversify across sectors and industries
• As a result of diversification your risk is well spread
• If you make the right choices, your portfolio remains liquid
• Yields impressive returns over the long term
• Grants you the ability to invest in small amounts as often as you want
• You can remain invested as long as you want or book profits as per your wish

A developing economy in India makes it a land of opportunities. There are therefore a variety of investment options across asset classes such as equity,debt, commodity and real estate. When it comes to making investments the first thing you should consider are your financial goals. The other most important factor one must evaluate while making an investment is the risk factor involved in the investment and the quantum of returns it would yield. In financial parlance it is called judging the risk reward ratio of an investment. Therefore while a bank FD may be considered “safer” the returns are much lower as compared to equities as an asset class.

For the longer term equities pay higher returns as compared to investments such as real estate and gold. To put things in perspective consider a comparison of the returns of various asset classes over the past five years

Asset Class	% of Returns
Real estate	30
Gold	10
Bank FDs	8.5
Equity	35

Factors to Consider before Investing in Stocks

The first factor that you should consider before investing in stocks is your current financial position. Make sure you have a well stashed emergency fund and your bread and butter money kept aside to take care of your everyday needs before you consider investing in stocks.

Once you are sure that you have the financial wherewithal here are the basic things you need to consider while investing in stocks

Price

Before you make any investment decision the first factor you consider is the price, and stocks should be no different. Just like you wouldn’t pay extra even for a great product unless you are getting it at a good price, the same holds true for stock investing as well. If you buy into a good company, at a wrong time you will lose money on your investment. The trick is to look for value buys that also ensures that you remain invested for a longer period of time.

Intrinsic value

Before buying or selling the shares of any company, look at its intrinsic value or its true value. A simple way of finding the intrinsic value of a company is subtracting its liabilities from its assets. This gives you the net worth of the company. If you are comfortable with some advanced analysis you can look at earnings per share (EPS), Price/ Earning ratio, market capitalisation, future cash flow and growth prospects and corporate governance, to arrive at an investment decision.

Although, you can use various tools of analysis, there is no knowing for sure if you have made the right decision as things may go haywire at any time. But as you get more and more comfortable with stock analysis, you will be able to discern a pattern and thus make better purchase or selling decisions over time.