A stock broker is an intermediary who enables buying and selling of stocks and securities in a stock exchange on behalf of financial institutions and firms. Needless to say, all the stocks are traded through major stock exchanges. However, an investor cannot directly trade in stock exchanges.
To successfully carry the transaction of stocks trading, you are required with an intermediary who helps you in purchasing and selling the stocks in a much better way. This intermediary can be a person or a company that is authorized to do the transaction of stocks on your behalf. Such a company or person is known as a stock broker in India.
A stock broker in India can be anything a stockbroking firm or an independent firm; known for providing stockbroking services for the customers.
In general, a stock broker is the one who performs a service for the investor. The main job of a stockbroker is to buy and sell stocks for a client. Also, a stock broker helps their customers to get a detailed insight into a stock that helps investors to make informed decisions about the investment.
Before we step into the importance of stock broker, let’s figure out how to choose the best online stock broker:
Selecting the right online stock broker is an extremely crucial decision you will make as an investor. This is because a perfect stock broker not only helps investors to determine the stocks but also guides them to pick the best stocks which are capable enough to generate better returns for them.
If you are a newbie who wants to invest in stock market trading, it is suggested to pick the best online stock broker, as with the help of it, you can handle all the stock market operations at a fingertips. Although there are different types of broker available online, choosing the best one is still a challenging task.
1. Comprehend your Basics
Understanding needs while investing in the stock market is the foremost point. That’s why opt for a stock broker who clearly understands what you expect from stock trading.
Many online stock brokers charge high brokerage charges which may not satisfy new investors. Hence, it is suggested to go through the stockbroker who provides excellent stock trading services at affordable brokerage charges.
2. Stock Market Pricing
It is important to check the pricing of a stock broker before deciding to move further. Try to find out the AMC annual maintenance charges. These charges vary from broker to broker. Some of the stock brokers charge a very high amount while there are some stock brokers, who charge quite low brokerage charges.
3. Range of Trading Segments
Different investors have different priorities in trading financial products such as Equity, commodities, IPOs, FDs and more. Go for the stock broker who has different financial products.
4. Fund Transfer Process
Select a stock broker which comes with 3 in 1 Demat account as the stock broker provides seamless fund transfer services which allow investors to trade with ease. Conversely, if you open demat account with a non-bank stock broker, then you will need to transfer money every time you start trading.
5. The Expertise of Research Team
While selecting a stock broker, it would be ideal to check the research team provided by the stock broker first. This is because the research reports generated by the stock broker help investors in picking the best stocks that would give them high returns.
In share trading, margin trading refers to the process where individual investors buy more stocks than they can afford. Also known as intraday trading, margin trading allows all the transaction of stocks (buying and selling) in a single day.
Now Intraday’s stock brokers are well capitalized. Here, stock broker lends capital to the traders who want to leverage their positions. A margin amount is to be paid by traders after which they are allowed to take positions in the stock market. Generally, the margin amount is 50%.
Mostly, a broker deals in all types of securities. The stock brokers suggests the best deals to its clients such as when to buy or sell a stock. Majorly suggest the stocks on the basis of advisory, and research reports suggested by them.
A stock broker receives orders from multiple traders and places those orders on a stock exchange. Once the order is successfully placed, trades will get to know about it. However, this is the case with full-service stock broker of India, online brokers facilitate trades with trading platforms where traders can place their orders on their own.
All the orders are automatically visible in your Demat account once they are successfully placed and executed.
Full-service stock brokers charge commissions in the form of brokerage for the services they provide to traders. This charge is some percentage of the trader they provide to clients. Discount brokers charge a flat commission which is pre-decided on every executed order.
Now, many of you have acknowledged the fact that how share trading can play a valuable role in your life. Yes, you heard it right. Investing in online share trading gives you bundles of opportunities to invest in different types of stocks.
Once you gain appropriate knowledge about stock trading, you can easily perform transactions with such an ease and book a significant amount of profit. In case you need any help, you can easily connect with an online stock broker, during the initial days. Once you become a thorough expert in buying and selling shares then you can try to do it on your own.
Here are 5 steps through which you can buy shares online:
PAN Card
For the Demat account opening process, you must require the important document as proof i.e PAN Card. PAN stands for permanent account number; a primary requirement for entering any financial transaction across any country. It is a valid ID proof that is issued by the government of India.
Depository Participants
NSDL (National Securities Depository Limited) and CSDL (Central Security Depositories Limited) are the primary depository participants of India that helps you to store the shares you hold. They provide you with a unique account pertaining to the same.
Many people often get confused with the term Demat and Trading account. Demat Account shows the number of shares you hold. Trading account, on the other hand, allows you to buy and sell shares that you currently have.
Picking the right Stock Broker
If you are a beginner then it is suggested to consult a full-service trusted broker. This is because the full-service broker gives you guidance on the day to day aspects of share trading. These stock brokers are SEBI (Security and Exchange Board of India) certified and given license to act as a broker. In other words, a broker is an intermediary between an independent stock broking firm and share trader.
Ways to Perform Buying and Selling of Shares
This is how you perform in buying and selling shares. For instance, you have bought shares of Rs 890 with the assistance of a broker, the broker will ensure you regarding the purchase order or stop order. Also, they help you to execute the stop order if you want to stop the transactions during the day.
How Best Stock Broker in India regulated?
Stock brokers in India are regulated under the Securities and Exchange Board of India Act 1992, Securities Contract Regulations Act, 1956, and also the Securities and Exchange Board of India (Stockbrokers and sub-brokers Regulations), 1992.
In addition to this, stock brokers are also regulated under other regulations and bylaws that SEBI may issue from time to time.
Important Note:
Every stockbroker in India needs to be a member of stock exchanges and also requires to be registered with SEBI. Stockbrokers display their registration details on their websites and even on official documents. To get any inquiry about registration, one can also visit the SEBI website and find details of registered stockbrokers.
Now you all know about a stock broker and how they are regulated, let's take a quick tour of the types of stock brokers.
Based on the types of service provided, there are majorly two types of stockbrokers - full-service stockbrokers and a discount stockbroker.
Full-service stockbrokers offer full trading services along with a wide range of add-ons to their clients. They are traditional brokers who provide advisory services, research reports and relationship managers aside from assisting you in buying and selling shares. Furthermore, Stock Broker also provides a variety of services including IPO, mutual fund, insurance, loans etc.
Many investors preferred to take services from full-service brokers. The foremost reason is that stock brokers are established players as they have opened their branches all over the country. Therefore, it becomes easier for the clients to use these branches for services and advice.
Discount stockbrokers, on the other hand, do not provide any advisory services and research facilities. They have come into existence because of the easy accessibility and usage of the internet. These top stock broker in India, provide an online trading platform for their clients. And hence, discount brokers charge flat brokerage charges which is mostly a flat fee.
In the world of digitization, all brokerages have started to provide online stock trading services to their clients where users can log in to the stock trading account with a username and password for the execution of trades.
Online stock broking services are faster than traditional service as transactions can occur with the internet.
Also, online stockbroking services provide stockbrokers with a facility to connect with the clients through emails, chatbox and provide real-time updates.
After getting a lot of information regarding stockbrokers, it is also essential to take a quick glance at a sub broker.
A sub-broker is appointed by brokers who act on the behalf of a trading member or stockbroker for helping investors in the dealing of financial securities through trading members. A sub-broker is a person or agent who is not a member of the stock exchange. Sub brokers don't have direct permission to deal in securities. Firstly they need to register with SEBI to trade in financial securities.
All the parties involved in trading services whether it is clients authorized persons or stock brokers, all are governed by SEBI. This states that all the transactions, liabilities involved in share trading must maintain clarity and transparency.
Here is a list of rights and responsibilities of the top stock broker in India:
A stock broker shall maintain full integrity, fairness and promptitude in the conduct of all the business.
A stock broker shall act with care, diligence and due skill in the conduct of all his business.
A stock broker shall not indulge in deceptive schemes, fraudulent transactions or spread rumors in order to distort market equilibrium or making any personal gains.
A stock broker shall not create a false market either single or in concert with others. Also, stock brokers shall not indulge in any act detrimental to investors interest that leads to interference with the fair or smooth functioning of the market.
A stock broker shall not involve himself in excessive speculative business in the market beyond reasonable business not commensurate with his financial soundness.
A stock broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the board and the stock exchange from time to time as may be applicable to him.
As there are no specific educational requirements for becoming a stock broker, there are certain courses that may help you leverage the benefits of a stock trading job.
The minimum qualification for becoming a stock broker is graduation with at least 2 years of experience in a stock broking firm. Many stock brokers also have a master's degree called an MBA in finance which helps them to get knowledge of mathematics, statistics, qualitative analysis and more.
Stock brokers often gain experience in stock training by working in a stock broking firm as it will help them to get a deep understanding of the regulation of the stock market, financial markets and accounting practices.
Brokers should also pass the entrance exam that is available in this field:
BSE Certifications on Central Depository
BSE Certifications on Derivative Exchange
BSE Certifications on Currency Futures
BSE Certifications on Security Market
Indian capital market is considered as one of the most organized and regulated sectors. The foremost reason for the excellent organization is SEBI. Whether you are an investor or a stock broker, you should work in stock trading according to the guidelines governed by SEBI or else you may find it in a difficult spot.
Mergers and acquisition is a common term you must have heard before. Even if you are surfing the internet, you must have heard about the news of many companies which are going through a process of mergers and acquisition. It happens when two companies decide to combine and form a stronger company. But the question is what is merger and acquisition and how does it affect the stock prices.
As there are several ways in which two companies can combine, one of the most common processes is Mergers and Acquisitions. If two companies want to combine to form a big company, there are numerous reasons behind it: increasing market share, minimizing competition, increasing geographical reach and more.
Although, there are many companies who go into the merger and acquisition process, yet they are still not recognized. This is because either these companies are not big enough to catch the fresh headlines of the news.
Today we will talk about mergers and acquisition and how does it impact stock prices:
Mergers is an act where two companies of similar sizes and structure combine to form a new company. It is important to note that mergers usually happen between the companies which are considered equal in many ways.
There are different types of mergers:
A horizontal merger refers to a business consolidation between two companies operating in the same sector and selling similar products. A horizontal merger can be done to reduce competition, make more market control and benefit from the economy from the sale.
When two companies provide different supply chain functions including product development/selling cycle for a common good service, then it is known as a vertical merger. For instance, a manufacturing company can vertically merge with a raw material provider to create a bigger company.
When two or more companies in unrelated business activities merge and create synergy to enhance value, boost performance and save cost. In simpler terms, conglomerates consist of companies that don't have much in common.
In the product extension merger, two companies operating in the same sector and having a similar target audience with the aim of creating a new company with a huge range of products.
When two companies operate in the same sector but different markets come together to form a big company with an objective of a bigger client base and the wider market.
As mergers are all about the amalgamation of two companies, Acquisitions is, however, initiated by a larger company to absorb the smaller ones. It is a process where one company purchases more than 50 per cent of another company’s shares to gain control of that company.
If a company purchases more than 50% of a target firm’s stock, then the acquirer has a full right to make decisions about the newly acquired assets without the approval of the company’s other shareholders.
The primary reason for the acquisitions of smaller companies by large companies are:
When a large company that has reached its full limit of operations, resources, logistics. Then it might start looking at young and promising companies to acquire and incorporate into its revenue stream.
In order to get benefits from new technologies, a large company acquires a young and technologically driven one to benefit from new technologies. This is a cost-efficient way to implement new technology in any organization.
When a company tries to expand its operations, it acquires a small company rather than setting up a new business. By doing so, companies can save a lot of hassle and cost associated with setting up a new business.
Every merger or acquisition marks a great impact on the stock prices of the participating companies. Here, we will highlight the effects of mergers and acquisitions:
You may notice high volatility in the stock prices of the companies who are getting involved in mergers and acquisition.
The process of merger and acquisition is quite a long term process where several things need to be taken care of before signing the merger agreement. Many traders and analysts predict the outcome of a company and assess whether the new company post-acquisition will be stronger than the previous one or not. This gives a lot of information to the investors regarding the stock market volatility.
Therefore as an investor, if you invested in the stocks of the companies that are undergoing merger and acquisition, then expect the stock prices to be volatile during the process.
Stock prices make a huge impact on the companies that are going through the process of mergers and acquisition as it depends on the wide range of factors like macroeconomic factors, market capitalization and more. Usually, when the merging companies are similar in size, profitability and achieve an advantage, experience a hike in the stock prices.
The volatility in stock prices tends to increase in its trading volume which further increases the stock market prices. Once the merger process is complete, the stock prices of the company are generally higher than the price of each underlying company.
In the case of acquisition, the stock price of the target company increases. The main reason behind this belief is that in an acquisition, the acquiring company pays a premium to acquire the target company.
Here, the investor made a belief that an acquisition takes place only when both the acquirer and acquire benefit from the deal. The acquirer agrees to make a deal if it sees potential in it and the targeted company accepts the deal if the purchased price offered is greater than its current market price.
In an acquisition, the market tends to choose favorites. In other words, investors tend to look for winners and losers in the proposed deal. Since the acquiring company is making the purchase, unless the profitability of the deal is not evident to the investors, the stock price of the acquiring company tends to get affected negatively.
Earnings per share is an important metric which is used to identify a company's earnings. It is calculated by dividing a company's profit by its common stock’s outstanding shares. This is considered to be a significant factor as it provides a brief insight into the company’s profitability.
In simple terms, EPS tells how much money a company makes for each share and is primarily used to measure the company's financial health. Increasing EPS reflects higher profitability and vice versa.
Here is how EPS is calculated:
EPS = Net Income - Preferred Dividends / End-of-period common shares outstanding
For instance, a company ABC Ltd has a net income of Rs 12 lakh and announces 2 lakh as preferred dividends and has 5 lakh common shares outstanding (weighted average).
Hence the EPS of the company ABC ltd as per earnings per share formula would be:
EPS = Rs (1000000 - 200000)/ 500000
= Rs 2 per share.
You may not know but the company’s balance sheet and income statement are based on EPS calculations. It is recommended to use a weighted average number of outstanding shares as the actual number of shares may vary over a period of time.
It should be noted that the dividends earned on cumulative preferred stocks and non-cumulative preferred stocks affect the EPS results differently. For example, the dividend on cumulative preferred stock for the current period is subtracted from the net income.
The EPS is considered as one of the important factors to identify a stock’s price. It is also an essential component used for calculating price to earnings P/E ratio, which measures a company’s value as a factor of its current share price relative to its EPS.
In P/E ratio, the E stands for EPS. If you divide a company’s stock price by its EPS, investors can calculate the share value in terms of how much the stock market can afford to pay for each earned Rupee.
Although there are numerous variations of earnings per share and each of them tends to signify a different aspect of the financial parameter.
Earnings per share play an important role in measuring a company’s profitability and financial standing. There are several points investors need to know about earnings per share.
As discussed above, EPS depicts the profitability of a company, which in turn suggests that the company may increase its high dividend payout ratio.
EPS helps companies to compare the performances with their respective competitors.
With EPS, investors can easily determine the company’s current and anticipated stock’s value. Also, it helps investors to analyze whether the stock price is valued according to market performance and stock market research.
Although earnings per share are known to be a potential financial tool, investors need to understand that EPS has its share of drawbacks.
Here are the limitations of earnings per share:
Stock market timings play an important role in helping investors to know about the market opening and market closing to ensure easy yet fast transactions. Also, it helps investors to take advantage of stock movements in the market and hence it becomes easier for them to make easy money.
It is important to know that the stock market opening time and stock market closing time vary for different countries in different time zones. Indian stock markets enable investors to trade only during a fixed timing of the day.
There are two major exchanges in the country namely Bombay stock exchange and National Stock Exchange in which the investors can trade through. Now, we will cover the stock market opening and stock marketing closing timings of the leading indices in India BSE and NSE.
The pre-opening timings start from 9.00 am and end at 9.15 am. The session is also known as order entry session. Here, investors can buy or sell any securities during this time.
The session is classified into three sub-sessions.
9.00 am - 9.08 am - This session is also known as order entry sessions where orders for any transactions can be placed. In other words, you can easily place the orders for transactions of any stock. Moreover, you can also modify or cancel orders during the time.
9.08 am - 9.12 am - The segment is used for price determination of security as it is used to calculate the opening price of the regular session. Also, this session is used for matching orders as it is done by corresponding demand and supply prices to ensure accurate transactions among investors who want to purchase or sell a security.
Price matching orders help investors in determining the price at which security is transacted during the Indian stock market timings.
9.12 am - 9.15 am - This session is used as a transition period between the pre-opening session and normal Indian share market timings. Also, no such transactions can be placed during this time.
This is the fundamental Indian share market timing that lasts from 9.15 am to 3.30 pm. Transactions processed during this time follow a bilateral order matching system, whereas price determination is done through demand and supply. Bilateral order machine systems are highly volatile in nature and hence there are multiple market fluctuations which can be reflected at any time in security prices.
This is one of the busiest sessions as in this trading session, mostly buying and selling of shares takes place. Hence, it is also known as primary share market timings. The continuous trading session starts from 9.15 am and ends at 3.30 pm. During this period, trades continue as orders match at time priority.
There are few things, which investors need to consider while trading during the session:
The closing price of the stock is measured as the weighted average of the stock prices between 3.00 - 3.30 pm. The closing price for BSE and NSE is calculated as the weighted average of the stock for the last 30 minutes or between 3.00 pm -3.30 pm.
Post Closing Session
The stock market timing in India is marked at 3.30 pm. It is held between 3.30 pm to 04.00 pm. During this time period, you are allowed to bid for the following day’s trade. If there are enough buyers and sellers, bids placed during this period are confirmed. It should be noted that the bids placed during 3.30 pm - 4.00 pm are not affected by the opening price of the stock market. Hence, if the closing price exceeds the opening price, then bids can be cancelled by the investors.
After Market Order (AMO)
AMO in which you can place orders to buy or sell the stock for the next trading day. This is apt for investors who are unable to monitor the market during the opening and trading session.
The overall stock market timings in India can be described as follow:
S.NoNameTime1Pre-opening 9.00 am -9.15 am2Normal Session9.15 am - 3.30 pm3Closing Session3.30 pm - 4.00 pm
Needless to say, the stock market is a great place where investors can grow their wealth. Strategic trading on the stock market can help you increase your income, also well-managed trading helps you to get constant returns which can be more than your income.
Intraday trading is considered as quite riskier than other trading strategies as it involves buying and selling of stocks on the very same day. This is because, in intraday trading, a large number of stocks are bought and sold with the intention of booking profit. Here, the objective is plain and simple: to buy and sell shares within the same day. Before we begin, let's understand what exactly is Intraday trading and what are the strategies investors need to apply while intraday trading.
Needless to say, intraday trading means purchasing and selling of stocks on the very same day. However, with intraday trading, traders can short sell their shares and then buy back during the rolling settlement period. Experienced traders always recommend selecting the shares which are highly liquid.
It is important to determine the entry-level and target price before placing the buy order. It’s quite understandable for a person’s psychology to change post buying of shares. Hence, many traders may sell shares even if the price experiences high growth. As a result, they may lose the best chance of achieving gains because the price goes upward.
Stop loss is defined as an advanced order placed with the assistance of a broker to buy or sell a specific stock once it reaches a price point. It is generally used to restrict the loss or gain in a trade. This is beneficial in limiting the potential loss for investors due to downfall in a stock.
Stop-loss also works great in short selling. Investors who short sell their shares, stop loss acts a boon by minimizing the losses if the price goes up beyond their expectations.
There is a famous quote saying “ As long as greed is stronger than compassion, there will always be suffering”. Many investors suffer from greed or fear in terms of high earning. With the help of stop-loss, investors not only minimize their losses but also book their profits once the target is achieved.
Successful traders advised to include 10-12 shares in their wish-list and research all the stocks in depth. For instance, do fundamental analysis and technical analysis of stock and try to understand the trend such as the history of a stock, merger, present return and more.
Experienced professionals fail to predict the exact market movement. There are many times when all the technical indicators depict a bull market; there is still a decline. However, these factors do not provide any guarantee. If the market does not move according to your expectation, then it is important to exit your position to avoid huge losses.
Bonds are the securities that represent a kind of loan, which is to be completely defined, the loan amount, time for which the loan is taken and the rate at which it is taken, must be known. These three are known as Principal, Maturity, and Coupon respectively. They are also classified based on the issue type and its credibility.
Following are some common names.
Bonds that do not pay a coupon in their entire term are known as Zero-Coupon Bonds or simply 'Zeroes'. Such bonds are issued at a discount to their face values and are redeemed at par. Thus, the return on these bonds is not in the form of periodic payment of interest but the form of the difference between the issue price and redemption value.
Treasury Bills (T-Bills) issued by the Government of India, Commercial Papers (CPs) issued by corporates, and Certificate of Deposits (CDs) issued by banks and financial institutions are examples of short term zero-coupon bonds.
These are bonds whose coupon is not fixed, as in the case of vanilla bonds but is reset periodically concerning a defined benchmark. This could be the inflation index or inter-bank rates or call rates or some other relevant benchmark.
Resetting the coupon periodically ensures that these bonds pay interest that reflects current market rates. Due to their unique nature of constant adjustment of coupon rates, these bonds carry lower interest rate risk or 'price risk'.
Such bonds are especially useful in a rising interest rate scenario as they continuously keep tracking the interest rates prevalent in the market and adjust their coupons periodically, every 6 months.
A convertible bond or debenture is generally issued as a debt instrument with the option to investors to convert the amount invested into the equity of the issuer company later.
This security has features of both debt and equity. The issuer specifies the details of the conversion at the time of making the issue itself.
Bonds usually pay interest during the tenor and the principal is repaid as a bullet payment upon maturity. However, there is a type of bond, known as 'Amortization Bond', in which each payment carries interest and some portion of the principal as well.
Housing loans, auto loans, and consumer loans are an example of this type of bond, in which every month the borrower pays the same amount (Equated Monthly Instalment – EMI) but each month the composition of this EMI is different from the initial interest forming a larger part and later principal forming a larger part.
Callable bonds allow the issuer to redeem the bonds before their original maturity date. In other words, bonds that have an embedded call option in them are known as Callable Bonds. This feature poses a risk for investors but is beneficial for the issuers. An embedded call option gives the issuer the right to call back the bond before maturity.
When interest rates fall, the issuer would be in a position to raise the same amount of loan, at a lower interest rate. It is to the advantage of the issuer to redeem the existing high-cost bond before maturity and replace it with a new low-cost bond.
To compensate for the risk to investors, The investor in a callable bond, however, loses the opportunity to stay invested in a high coupon bond, if the call option is exercised by the issuer.
A Putable bond gives the investor the right to seek redemption from the issuer before the original maturity date. These bonds have embedded Put options in them. In this case, the risk is on the issuer, as the investor can, at any point of time give the bond back to the issuer and ask for his principal, earlier than maturity.
This would mean cash flow problems for the issuer. Investors would exercise their right to put the bond back to the issuer when interest rates start rising. They would simply ask for their money earlier than maturity and reinvest that at a higher rate.
Crude Oil is one of the most popular trading instruments among commodity traders. But before doing trade on any instrument every trader must know about the news related to that instrument, fundamental outlook, demand & supply factor, technical outlook.
Some important inventory data needs to keep in focus while analyzing crude oil inventory:
These are the important crude oil reports released in the United States among these all U.S. API Weekly Crude Oil Stock and U.S. Crude Oil Inventories are the two main important crude oil inventory reports.
API inventory report is released by the American Petroleum Institute (API) and other one U.S. Crude Oil Inventory is released by the Energy Information Administration (EIA).
API provides the information of all segments of America’s oil and natural gas industry. They have more than 600 members who produce, process and distribute most of the nation’s energy. The industry supports more than ten million U.S. jobs and is backed by a growing grassroots movement of millions of Americans.
API was established in 1919 as a Standards Setting Organization. EIA is an agency of the United States Federal Statistical System and also a part of the US energy department. The U.S. Energy Information Administration (EIA) collects, analyzes, and disseminates independent and impartial energy information to promote sound policymaking, efficient markets, and public understanding of energy and its interaction with the economy and the environment.
EIA provides a wide range of information and data products covering energy production, stocks, demand, imports, exports, and prices and prepares analyses and special reports on topics of current interest.
U.S. API Weekly Crude Oil Stock inventor is released on Tuesday Night at 02:00 AM (IST), which gives a glimpse of the movement of the crude oil for the day trading session on Wednesday before releasing US Crude Oil inventory data, whereas US crude oil inventory data is released on Wednesday night between (08:00 PM to 09:00 PM). In case of any holiday in the US are any other factors, release date and time may vary.
Other important data like U.S. Gasoline Inventories, U.S. EIA Weekly Distillates Stocks, U.S. EIA Weekly Distillates Stocks are also released at the same time with US Crude oil inventory (EIA) on Wednesday.
Gasoline is generally used as fuel in vehicles and it is made from crude oil and other petroleum products.
Oil refineries companies and blending facilities produce motor gasoline to sell it at retail fuel stations.
Now the question is how it affects the crude oil price so simply to understand this logic we have a case here.
Case - US crude oil inventory fell and in numbers, it is less as compared to forecast so it means the price should move upside according to US crude oil inventory data but at the same time, gasoline inventory data rose which is a ready fuel to use in-vehicle engines it means supply is more than expectation, which will cap the upside movement of the crude oil price.
You can check all these data and can keep yourself updated regularly by following the website: Investing.com under “Economic Calendar”.
The conclusion is that while analyzing US crude oil inventory data we have to analyze all other related inventory reports at the same time. If all the reports provide clear indications of demand and supply then we can decide whether we have to buy or sell. If data is mixed so it means that price will move in a range.
"A corporate action is an event carried out by a company that materially impacts its stakeholders ."
A company initiates several actions, apart from those related to its business, that has direct implications for its stakeholders. These include sharing of surplus with the shareholders in the form of a dividend, changes in the capital structure through the further issue of shares, buybacks, mergers, and acquisitions and delisting, raising debt, and others. In a company that has made a public issue of shares, the interest of the minority investors has to be protected.
Corporate benefits and actions apply to all investors who appear in the register of members, To determine this, the company announces a record date or book closure period, and investors whose names appear on the records on this date become eligible shareholders to receive notice of the relevant corporate action and benefit.
Some of them are mentioned below:
After the payment of taxes the profit remains for the shareholders, the company can do two things can retain it or distribute it among the shareholders in equal proportion, which is termed as the deceleration of dividend. A company can also declare an Interim Dividend within the year & a Final dividend by the end of the financial year. A company must distribute the dividend within 30 days after the deceleration.
It is an alternative to the cash dividend, also termed an Equity dividend. A company issues bonus shares to its existing shareholders. The entitlement to the bonus shares depends upon the existing shareholding of the investors.
A stock split is a corporate action where the face value of the existing shares is reduced in a defined ratio. Companies consider splitting their shares if prices of their shares in the secondary market are seen to be very high restricting the participation by investors. As the price per share comes down post-split, share split leads to greater liquidity in the market.
The share consolidation is the reverse of the stock split. In a share consolidation, the company changes the structure of its share capital by increasing the par value of its shares in a defined ratio and correspondingly reducing the number of shares outstanding to maintain the paid-up/subscribed capital.
Companies consider consolidating their shares if prices of their shares in the secondary market are seen to be very low affecting the perception of investors. An increase in the price per share post-consolidation leads to a better perception among the market participants about the company's prospects.
Mergers, acquisitions, and consolidations are corporate actions that result in a change in the ownership structure of the companies involved. In a merger, the acquirer buys up the shares of the target company and it is absorbed into the acquiring company and ceases to exist.
The assets and liabilities of the target company are taken over by the acquirer. In an acquisition or takeover, the acquiring company acquires all or a substantial portion of the stock of the target company. Both entities typically continue to exist after the acquisition. In a consolidation, companies combine to form a new company and the merged companies cease to exist.
Buy-back of shares can be done only out of the reserves and surplus available with the company. The shares bought back are extinguished by the company within a stipulated time frame and that leads to a reduction in its share capital.
To be eligible for a share buyback, a company should not have defaulted on its payment of interest or principal on debentures/fixed deposits/any other borrowings, the redemption of preference shares, or payment of the dividend declared.
Delisting of shares refers to the permanent removal of the shares of a company from being listed on a stock exchange. Delisting may be compulsory or voluntary. In a compulsory delisting, the shares are delisted on account of non-compliance to regulations and the clauses of the listing agreement by the company. In voluntary delisting, the company chooses to get the shares delisted and go private.
"We were not taught financial literacy in school. It takes a lot of work & time to change your thinking and to become financially literate" Robert Kiyosaki.
We all sent our children to school & colleges to learn new things which make them better as per today's scenario. But we never try to go through what they are learning; are they just mugging up with the book & notes or going through any new skills, will they be able to handle any situation which demands any special skill, in Indian we generally pamper our children while they are attending school till 12th standard and then, later on, we guide them to colleges there also we help them in every aspect, like pocket money, clothing, etc.
"A normal college graduate spent 16 years gaining skills that will help them command a higher salary; yet little or no time is spent helping them save, invest, and grow their money."
In the Indian educational system, we will find all kinds of course curriculum with lots of books and references, but we never found any sort of practical training for it as in the educational system we mainly focus on marks & grades, not on skills & talents.
One of the major things which we miss in the educational system is the knowledge of Financial Literacy, Basically, it is an ability to understand and effectively use various financial skills, including personal financial management, budgeting & investing. The lack of these skills is termed financial illiteracy.
The main benefit of financial literacy is that it empowers us to make smart financial decisions. It provides the knowledge and skills we need to manage money effectively budgeting, saving, borrowing, and investing. This means that we're better equipped to reach our financial goals and achieve financial stability.
Financial literacy is important because it equips us with the knowledge & skills we need to manage money effectively. Without it, our financial decisions and the actions we take- or don't take- lack a solid foundation for success.
In Indian families decisions regarding investments & savings are generally done by senior members of the family, who are actually following the same old pattern for the same, which is not suitable as per the current demands. This is one of the major reasons why much young age person lack starting there at the early age of their job.
Organizing financial literacy drives in colleges and schools with live practical case studies & situation analysis so that they actually learn and understand about it.
Making them understand about this will help them in the early days of the job, which actually tries to control their spent over earning habits. Organizing games & quiz contest which make them take real and practical decisions for the same.
SEBI notified the SEBI (Investment Advisers) Regulation, 2013 in January 2013 intending to regulate the activity of providing investment advisory services in various forms by independent financial advisors, distributors, banks, and other such entities. The regulations become effective from April 2013.
The relationship between the investment adviser and client is that of trust and the investment adviser while performing his role, should act in good faith in the best interests of the client. The Investment Adviser Regulations have cast upon investment advisers certain obligations and responsibilities while providing investment advisory services.
It is important that the investment adviser discloses all conflicts of interest to the client as and when they arise.
An investment adviser must not receive any remuneration from anyone except the client in respect of securities or investment products for which he has provided advice.
There must be segregation of other business activities from investment advisory activity of the investment advisor. A professional relationship must be maintained between investment advisory activity and such other activities. If a conflict of interest arises, the same shall be disclosed to the client.
The investment adviser must maintain strict confidentiality with respect to the information received from the client.
An investment advisor shall follow Know Your Client procedure as specified by SEBI from time to time.
An investment adviser must abide by the Code of Conduct as specified in the Third Schedule of the Investment Adviser Regulations.
The investment adviser must file periodic reports or information to SEBI as may be required from time to time and take prior approval from SEBI if there is a change in control of the investment adviser.
It shall be the responsibility of the Investment Adviser to ensure that its representatives and partners comply with the certification stipulated by the Investment Adviser Regulations at all times.
In India, RBI is the central bank of India which regulates all the major issues related to currency, foreign exchange reserves etc. In short, RBI is the bank responsible for securing the monetary stability in India.
The Reserve Bank of India Act, 1934 says, “An Act to constitute a Reserve Bank of India. Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of Banknotes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.
No one could deny the fact banks plays an important role in the economic stability. In case a bank crashes then it does not crash alone, it takes away the lifelong investment and savings of its entire account holders too.
This is not the only reason due to which corporate governance in the banking sector is needed. Corporate Governance is also needed for the bank to keep a check on money laundering, financing immoral and criminal acts and transaction of money to the terrorists.
RBI in India plays a leading role in formulating and implementing corporate governance.
It is the most important constituent of corporate governance. If the banks will not be disclosing their transactions to the RBI then they can vanish with the lifelong investments and savings of the people.
The RBI through the requirement of routine reporting of financial transactions of the bank keeps a tab on the activities being undertaken by the banks in India. Any failure to abide by the requirements set out by RBI may lead to heavy fines being imposed along with the cancellation of the license to operate as a bank.
RBI routinely performs an annual on-site inspection of the records of the banks. The main focus of the off-site surveillance is to monitor the financial health of banks between two on-site inspections, identifying banks which show financial deterioration and would be a source for supervisory concerns.
RBI has set important points, based on trigger points set by RBI, the banks have to follow. This will help to maintain a proper mechanism for there performance.
"If you need a financial advisor or counselor look for someone with the heart of a teacher".
Financial Planning is a key aspect in today's world of inflation every one wishes to maintain a healthy situation of wealth in his life. With regular earnings, one can maintain the household expenses & other necessities. But there are some other charges also which need to be met out of the same earning itself.
But there are some unexpected expenses like medical expenses any other casualty which requires a large sum of money and which is totally unplanned. How all this can be done? A small question arises in the mind of every salaried person because these all need to be planned with the current earning which can meet all the requirements.
Financial planning refers to the process of streamlining the income, expenses, assets & liabilities of a household to take care of both current & future needs for the funds. It is thus a process that enables better management of the personal financial situation of a household.
It works primarily through the identification of key goals and putting in place an action plan to realign the finances to meet those goals. It is a holistic approach that considers the existing financial position, evaluates the future needs, puts a process to fund the needs, and reviews the progress.
The main task of an advisor is to ascertain the needs of his clients to understand his requirements and link them to various financial products available. As we know everyone having a different approach towards life, so an advisor needs to plan all the factors & suggest them the instruments accordingly. An advisor is a person who understands the importance of all financial products on one hand & the needs of the client on the other side.
The following are the primary reasons why financial advisers are needed:
To maintain personal finance many people due to there busy schedule not having time to maintain there own finance due to lack of time & there other professional tasks, As financial planning requires time & attention, to meet the future needs. As many verities of asset classes are available a person needs to understand them first as per the future objective.
Estimating financial goals, finding suitable products, and arriving at suitable allocations to various assets require specific expertise and skills which may not be available in most households.
Asset allocation is a vast approach one should first understand the needs and requirements of the client then plan to manage it as per the requirement of the client. A professional adviser with capabilities to compare, evaluate, and analyze various products enables making efficient choices from competing products.
Financial planning is a dynamic process it requires proper attention, market situations kept on changing an advisor needs to reallocate the sum as per the situation demands.
Many investors will suggest you go through the fundamentals of a company before picking any stocks. This means that you are required to check the financial records of a company which tells you that the stocks are worth investing in or not.
To be frank, not everyone is a finance expert to know everything about a company’s fundamental elements.
Here, I am going to share with you the 5 financial ratios you should study before investing in stocks:
This is one of the crucial financial ratios investors have been using for a long time. P/E ratio is defined as the ratio of the current share price to the earning of the company per share. The ratio helps investors to determine whether the stock is undervalued or overvalued in the market.
For instance, if the company has overall earnings of Rs 1000 and has shares of 100 currently trading in the market. Therefore, it's earning per share is Rs 10. This means that you are paying Rs 10 to the company and in return, you get Rs 1 from the company’s earnings which is not good.
To be honest, there is no ideal price to identify P/E ratio of any stock. You cannot determine the exact P/E ratio as every industry has a different benchmark. If we compare the P/E ratio of two FMCG companies, let's say Hindustan Lever and Britannia, we will get to know that HUL is overvalued as compared to Britannia as the P/E of HUL is greater than 70 while the P/E ratio of Britannia is nearly 50.
The P/E ratio of JK Paper is 4 and if you compare this P/E ratio with HUL and Britannia, you will get an incorrect picture as the industries are very different. Hence it is suggested to know the industry benchmarks while analyzing the P/E of a company.
Return on equity depicts the rate of return on the stock of a company. It’s a way to know about the company’s return on stock investment. Return on equity ratio is defined as Net income to total shareholder’s equity. This is an important ratio as it helps investors to determine how well a company shares its profit with its shareholders.
For instance, if investors contributed Rs 100 in equity and the total equity of the company is Rs 100. With this equity, if a company generates Rs 20 then ROE is 20%. On the other hand, if another company with the same equity generates an income of Rs 40, then the ROE of that company will be 40%. The company that generates better ROE is considered as good to invest in.
Return on Equity is defined as Net income/ Average Stockholder’s equity.
Price to Book Ratio is calculated as Price per share divided by Book value per share. The ratio simply depicts the comparison of a company’s market capitalization to its book value.
Price to Book ratio gives investors an idea of how much shareholders willing to pay for the net asset of a company. Generally, a low P/B ratio is considered good. Do remember that the ratio should be compared within the same industry. For example, the P/B ratio of a manufacturing company should be compared with the P/B ratio of another manufacturing company.
The dividend yield ratio is calculated as the amount of dividend a company pays to its shareholders over the years to its current stock market price. For example, if the share price of a company is Rs 100 and it gives a dividend of Rs 10 then the dividend yield ratio will be 10%.
To get deeper into this, let's assume that an investor purchases a stock at a price of Rs 100. A year later, the stock price is still constant, i.e Rs 100. Is this a good investment? Of course not. You receive a zero per cent return from that company.
Needless to say, the Debt to Equity ratio depicts the amount of debt and equity of a company. This gives investors a clear idea of how much the company running on borrowed capital and owned funds.
Debt to Equity Ratio is defined as total liabilities/total shareholder equity.
Ideally, it is suggested to invest in a company which gives you high ROE for at least 3 years.
Fundamental analysis and technical analysis are the two skills that every investor should know for successful trading. Although they differ from each other yet they are equally important to learn as these indicators help stock market traders to get full insight into the stock.
Fundamental analysis is the study that directly affects a company’s potential value. This includes both macroeconomic and microeconomic factors as well as strategic planning, employee relations and supply chain.
Technical indicators also known as technical's are used to see the past trends of stock and to anticipate the future price of a stock. Technical indicators have nothing to do with the basics of a company such as earnings, revenue, profit margin. The examples of technical indicators are relative strength index, moving averages and stochastic oscillators.
A technical indicator’s objective is to financial forecast direction. This can be achieved by calculating by historic price, volume and open interest information. Technical indicators are basically used to plot a chart pattern which in turn is used to predict the trend of the stock market. Technical indicators help analysts to predict the future price of the stock by looking at its past performance.
Here, we are outlining the top 5 technical indicators every stock market investor should know:
The relative strength indicator helps analysts to identify momentum, market conditions and warning signals for risky price movements. RSI is classified as a momentum oscillator which tells a figure between 0 to 100. Here, momentum is the rate of the rise or fall of a stock price. An asset which is around 60-70 level is considered as overbought whereas an asset near 30 is considered as oversold.
Research analysts said that RSI is one of the most reliable indicators to ascertain accumulation and distribution phase. Also, it is helpful to measure the strength of the ongoing trend of stocks.
Moving Averages or Simple Moving Average is one of the oldest and widely used technical indicators that is used to identify the direction of the current price trend without interrupting the short term price strike.
The formula of Moving Averages is the combined price points of a financial instrument over a specific period divided by the number of data points to present a single trend line. There are three types of Moving Averages: Simple moving average (SMA), exponential moving average (EMA) and weighted moving average (WMA).
Generally, common periods for moving averages are 10 days, 21 days, 50 days, 100 days and 200 days.
The indicator aims at providing a range within which the price of an asset generally trades. Also, Bollinger bands clearly reflect the volatility by increasing and decreasing the band.
Bollinger bands consist of a set of three band curves drawn that are expected to tell the security prices.
The primary function of the indicator is to provide a relative definition of high and low. As per the definition, the prices are high at the upper band and low at the lower band. The narrower the bands with each other, the lower the perceived volatility of the financial instrument. Conversely, the wider the bands, the higher the perceived volatility.
Bollinger Bands are useful for recognizing an asset, for instance, when an asset is trading outside the upper parameters of the band, it can be overbought or vice versa.
MACD is one of the widely used technical indicators to date. It detects the momentum of a stock by comparing two moving averages. It assists traders to identify buy and sell opportunities around resistance and support levels.
When two moving averages come together, it is known as Convergence, on the other hand, if they are moving away from each other, it is known as divergence.
The MACD line is used to compare the short term and long term momentum of stock so that analysts can identify its future direction. When the short term momentum line crosses the long term line, it clearly gives a sign of future stock activity. When the short term line crosses and surpasses the long term line, the stock will trade higher.
ADX is used to measure the trend strength as it helps investors to quantify the strongest zone and increases the opportunity of building aggressive positions.
It works on a scale of 0 to 100, where a reading of increasing ADX value above 25 is considered as a strong trend while a value above 50 indicates exhaustion of a move where a number below 25 is considered a drift.
Analysts use this information in order to collect the data on whether the trend is going upward or downward.
The foremost thing to remember to use trading indicators is that you should never use too many indicators at once nor in isolation. For better results, it is advisable to use a few indicators as they are best suited to what you are trying to achieve.
It is important to clearly monitor a signal for the best stock’s performance. For instance, if you are receiving a buy signal from an indicator and sell a signal from another indicator, then you have to use different indicators until your signals are confirmed.
Financials of a company are always complex terms which are not easily understandable. They are the actual report card of a company that represents the performance every year. Sometimes results are good sometimes results are bad. For an individual, it is very essential to under these complex figures because the future growth depends on these current numbers only, just like our marks define our progress. Every year this report card shows different results, sometimes good, bad average, or below average.
Every business faces various situations throughout the year and tries to adopt the changes for its survival. But how a common individual understands this as they only understand what a company shows. For example, a company in its quarterly results declares a growth of 10% but still has a loss in revenue. For an individual, growth attracts but still concerns about the revenue. Which makes it complex for him to understand should he invest in the company or not.
A common person with zero knowledge of analyzing the financial statements only looks at the growth factor.
Nowadays many financial websites are available which helps to make this complexity easier, but still one should look deep into it Because this financial data can be easily manipulated. So, one should look into some common points to check the company's health just to make sure it is worth putting money into it or not.
One should check the earnings of the company comparing it with its last quarter earnings and then based on year on year, maybe one can find some quarters are good some are bad but on a yearly basis, the company would reflect a true picture. Earnings should be from its main business not from any other operations.
When a person is analyzing earnings, one should monitor the expenses too Because in business expenses are also an important part, If a company is earning more than it's expenses then that's a favorable condition, But if even after earnings are improving still expenses are more than it’s not a favorable situation for the company.
A businessman for expansion of his business took some long-term loans just to make availability of funds would go in the flow. And the most important part is that one should manage that ratio in an ideal manner if the debts of the company are constantly rising against its earnings and most of the part of earning are indulge in paying its debt then one should stay away from that kind of companies.
A most important point to check out what a company is doing with its profit, which means are they reinvesting it back into the business which makes a company rich in assets & low in the cash balance, low cash balance shows the business is not sustainable. A company requires a healthy amount of cash balance in its bank if in case anything uncertain happens the company should be in a position to face it.
"Yes I got a job now I'll soon settle and fulfill all my dreams. First of all, I'll buy a car, then a house, later on, we'll go for a long vacation. Do you think it's all easy? Maybe if we go for proper planning for our future goals then it's achievable, But wait what to do for achieving this. Again a question arises "My salary is only a piece of cake and my goals is a full apple pie" Yeah it is a tough job to accomplish them all in a short span of time, But yes this all can be done over a period of time, As of now I am only 26 will focus to get them done by the time I get settled in my life."
This may be the story of every young boy or girl who got a new job and started planning to get the thing done as soon as possible.
A famous quote of Warren Buffet:-
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful"
An average earning person spends almost 35 years approx by the age he/she retires by the age of 60 till the time he faces many obstacles while in his/her earning span. And at the phase of time, we always plan to allocate our sum in that manner from where we get a good return for our whole life.
As Warren Buffet said "Never depend on one earning" so we should focus on various sources from which we can get an additional earning.
For creating an additional source, one should make sure about the future outlook, what is the major objective and yes how it can be achieved, That's the time when everyone starts saving for their future.
Let's assume the monthly earning of Mr X is Rs 50000/- an individual (age 26) going to get settled after 2 years so how he decided his ideal portfolio where he decided to park approx 30% of his monthly salary in various instruments.
So let's have a look:
The first and the most common instrument one selects is SIP, yes Systematic Investment Plan, An individual can park a handsome sum in a simple installment manner where his pocket won't feel the pressure. One can plan to have 4 to 5 Sip's for his/ her financial goal, this will always be beneficial in long run. And even the most important benefit you get is the rupee cost averaging.
The Second important instrument is an equity investment, one of the most favorable instruments for "High risk & High return" at a young age the risk capacity is more so investment made inequities can be done for a better return. What all we earn is always less as compared to our needs & wants. With the help of equity investment, one can achieve them, though the risk is higher in this instrument.
Life is full of uncertainties. We often face many situations where we need extra monetary support for all such things one should take an Insurance Policy, to secure ourselves and even our family members. Insurance can be any maybe Health Insurance, General Insurance etc., this can't be compared as an investment instrument but yes it's an important part of our portfolio for the future benefits.
Last but not least it's not necessary we get a good return from equity, Debt instruments should be on our list so that at the time we can have a fixed return in our pocket too. Sometimes when risk-taking capacity declines, we may switch our savings in those instruments where returns are fixed so that in the time of crisis or any pandemic situation we will not be affected by it.
An ideal investment portfolio is a basic need of every person, But the most important thing is proper asset allocation as per the requirement of financial goals, the ability to take a risk. Which means our portfolio should try to attain the requirement of our future needs and will give you ease and stress-free life after retirement.
Practically, no one can achieve this without proper investment strategies and an approach to future requirements. One should be very clear with his future goals and objective because it takes ample time to create wealth as there is a famous saying "Rome was not built in a day". yes, that's truly saying no one can become a millionaire overnight. For achieving this one should follow some basic steps.
The most important point is to identify our future requirements, this can't be described in a single line, because everyone is having a different mindset and objectives, Some of us want to go for a long vacation, some wants to open a new business or anything. For all this, our allocation of sum should be proper and should be in that manner where all the financial needs would be fulfilled.
As it's mentioned earlier " Rome was not built in a day" actually means whatever objective we have takes time to achieve, For example, if require a sum of Rs 10000 after 2 months it just takes a small cut in our expenses if my salary is enough. But if your goal is higher education for your children then you must know how much time will it take to achieve that goal. And you must identify the asset class which will help you to achieve the same.
Once you are clear with the goals & time, The next step you need to take is parking the sum in the proper asset class. This actually depends on the approach of an individual. The major fact is that how much you are ready to allocate, will actually depend upon the risk tolerance capacity.
The most important thing is the capacity of taking the risk to achieve our goal which means if our approach is aggressive then we will be more focused on equities or equity-related instruments. But if it is conservative then We must focus more on Debt instruments where the return are fixed in nature. As time passes out we turned out to be more of conservative nature the aggressive because with the span of time responsibilities increase our approach towards the goals should be safer and secure.
Just like trading in the spot market trading in futures is also possible in the Indian stock market, but before moving ahead let's clear some concept about it. Trading in futures is categorized under the head of Derivative trading.
The term Derivative means " Derive from others" i.e A derivative is a product or contract which actually derives its value from its underlying asset.
Common derivative contracts available are Forwards, Futures, Options, & Swaps, Here we will look into a Futures contract.
Futures is a contract between two parties to buy & sell an asset at a certain time in the future at a certain price.
The derivatives trading started on 12 June 2000, NSE started its first derivative contract in Index Future, later on, option started on June 4 2001, in NSE. Currently, more than 160 plus companies are trading under derivative contracts along with Index contracts.
Spot Price: Price at which underlying asset available in the spot market.
Future Price: Price at which future contract available in the future market.
Contract Cycle: It is defined as a time period for which a contract trades in the future market, Future contract is available in 3 months contract cycle period.
Lot Size: Defined as a standardized quantity of assets available for delivery at future date.
Expiry: Final day of settlement of a contract i.e. last Thursday of the month.
Initial Margin: Amount which is required to deposit to purchase any future contract.
Trading in futures is as similar as trading in the cash market, the only difference is that in cash a trader needs to pay the full amount to purchase quantity & whereas in the future you need to deposit only a margin amount to purchase the same.
A trader then can hold the given quantity of futures up to expiry or can roll over for the next month, Once can rollover the contract up to 3 months
A trader is more beneficial in future trading as the initial investment requirement is less and returns are more.
For example, A trader who wish to purchase 1000 shares of XYZ ltd @price of 200 where the requirement is Rs 200,000 (1000*200) while in futures you need to deposit only a margin of Rs 25000/-
(Initial Margin 12.5% of the total value of the contract i.e. 1000*200).
Low investment cost: In future trading, a trader needs to deposit only the margin amount required to be deposited with the broker.
More suitable for Speculators: Traders require fast money future contract is more suitable for them.
Possible to carry short position: One of the most important benefits of futures trading is that a trader can carry a short position, In cash short trading can be done only for intra-day, while in futures one can carry a short position up to expiry.
Once a person hears the word dividend he simply understands it to be a profit or a reward, but why a company does profit sharing with its customers. Here are the answers:
A dividend is cash or reward which is given, for delivering returns to the equity shareholders, on the capital invested by them in the business. It is often a part of the profit that the company shares with its shareholders.
A company uses dividend policy to structure its dividend payout to the shareholders. Dividend decisions refer to the decision-making mechanism of the management to declare the dividends.
These are the major reasons as to why do we need dividend policy.
1. Maximize the shareholder’s wealth
The company’s ultimate objective is to maximize the shareholder’s wealth. The shareholders invest in the company and the company should pay them in such a manner that they further continue to invest.
2. Fulfilling the financial needs of the company
If the shareholders continue to invest in the company, the company would have enough money to sustain in the competitive market.
There does not exist a single dividend decision factor that can work for every organization.
Cash dividend
A dividend which is paid out in cash. It will reduce the cash reserves of a company.
Bonus shares
Bonus shares are the shares in the company which are distributed to shareholders at no cost. It is not done in the place of cash dividend but in addition to a cash dividend.
Well, there are two approaches to the same:
Stable Dividend Policy
The company decides to pay periodically a fixed amount of dividend to the shareholders. Even when the company incurs loss or generates high profit, there is no change in the dividend paid.
Regular Dividend Policy
A certain percentage of the company’s profit is allowed as dividends to the shareholders. When the gain is high, the shareholders’ earnings will also rise and vice-versa.
Irregular Dividend Policy
The company may or may not pay dividends to the shareholders. As per their priorities, the top management i.e., the board of directors solely take all dividend decisions.
No Dividend Policy
The company has no intention of declaring any dividends to its shareholders. The company always retain its profits to fund further projects.
When the company is at the initial stage and it earns little profit, then it should give lower dividends to the shareholders.
When the company is growing it should provide a dividend to the shareholders in a proportionate manner.
When the company can survive in the market, it should provide a stable dividend to its shareholders.
If the company is paying dividends regularly, there is a pressure for maintaining the stability in the dividend payout. If it does not pay dividends even for one year and retains the funds for capital investment then it may prove hazardous for the company.
In cases of the company which has no stability in dividend policies, when the company does declare a dividend, the share prices will rise before the ex-dividend date. On dividend declaration more and more people invest by buying its shares, these shares are then sold. This is then followed by a fall in the share prices. It would result in great volatility.
A company’s dividend decisions and policy depict its future and financial well-being. Dividend payout policies are considered to be a bridge between the company and shareholders for profit-sharing. It would be difficult for investors to know the intentions of the management if the management does not have a sound dividend policy.
The dividend policies of an organization also result in a significant bearing on the market value of stocks, it also impacts the valuation of the company. Hence, it needs to be systematically framed and implemented.
Equity investment is one of the most important investment avenues for investors as it always gives multiple returns in a long duration. But yes the major question is how can we select that stock, just by hearing the name only, Is that enough? Probably not, but you try to understand the basic structure of the company can surely benefit.
Every investor tries to invest in those companies which are having a long record of performance along with high trust value. Because it's business it may run long or can collapse soon. So while investing in equities there lies a risk of investment also, which actually makes Indian investors stay away from the equity asset class. And Investors shift themself towards other instruments like FD, Bonds Gold, etc which are having criteria of fixed return which many investors enjoy.
It's been always a big question to identify a good stock as there are more than 6000+ companies listed on the exchange and it's not easy to track each company from an investment perspective. As all it takes a long time just to understand about the company better one should the basic approach to understand it.
Before proceeding towards investment in any stock we should first select the sector in which we want to invest, Selection of the sector actually depends upon the understanding of the business model of the company so that investor should relate it with the current market condition. In the stock market, it's better to go with the flow instead of going against the flow.
Once the sector selection process is done. We must look into the business of a selected company, what kind of business the company is doing will it be suitable for the long-term, how its revenue generated, the impact of government policy etc, these all things actually play a vital role while selecting any stock.
Warren Buffett Quoted once – "I look for integrity, energy, and intelligence in management."
Management is considered as the backbone of the company, A fair management always gives a clear outlook of the business as well as present a fair image of the company. One should look at what kind of management is in the company is it Professional management or Family management. Professional management is more favorable while selecting any stock.
Investment is actually a game of numbers along with facts & figures, Companies showing consistent growth with positive returns are always considered more favorable, Though the business is not the same all-time some times its profit some times its loss, So investors actually show faith in those companies who are consistent in the market from a long run.
With the help of certain financial statements like P&L, Balance Sheet one can actually look into the company performance, though it's not easy for everyone to read the financial statements one can take the help of certain financial websites available for it.
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