Rachana Ranade. ब्लॉग

After a long afternoon, you’ve finally finished your chores and got some time for yourself. You decide to put the radio on and enjoy some good music. After a few mainstream songs, you hear a song that you have never heard. It does not matter whether it’s an old song or a new one because you loved it. In fact, you loved that song so much that you add it to your daily playlist. You ask your friends about this great song that you discovered on the radio, but none of them have heard it. And that’s when you realize that you have stumbled upon a gem of an underrated song! Not just that, but the delight and the essence of this discovery makes it even more satisfying, isn’t it? I am sure we all have at least one such underrated song in our playlists. So how do you feel about discovering such an underrated stock or an undervalued stock as we call it in the markets and reaping the benefits out of it? Now an excited smart investor like you might say, “YASSS! But how do I find one?..” Well, you obviously won’t stumble upon it on the radio like you did with the song, so to find out “how?”... Keep reading ahead because you are about to learn it in the next 5-10 mins!

How to find an Undervalued Stock?

An Undervalued stock is the one whose market price is lower than its Intrinsic value and has promising growth potential. They might be undervalued for reasons like market crash, low recognition or sometimes because of bad press. Here are few metrics which we can look for, in order to identify these Gems in the stock market for Long term investing.

1) Price-to-Earnings Ratio (P/E)

P/E ratio is the most popular and favored metric amongst Value investors. This ratio tells us how much the market is willing to pay compared to a company’s earnings. It is calculated by dividing Market price per share (MPS) by Earning per share (EPS) of a company.

Formula:

P/E Ratio = Market Price per share/ Earnings per share

A high P/E indicates that the stock is expensive or overvalued whereas a low P/E indicates that the stock is low-priced or undervalued. It is important that you compare a stock with its industry peers to determine if it’s overvalued or undervalued
Let’s understand this with an example. Stock A has a market price of Rs. 50 and is earning Rs 40 per share. The P/E for Stock A would be 1.25 (50/40). Then, we have Stock B whose Market price is Rs. 20 and is earning Rs. 25 per share. Thus, the P/E for Stock B would be 0.8 (20/25). So, in our first case you are paying Rs 50 to earn profit of Rs 40 whereas in second case you are only paying Rs. 20 to earn profit of Rs. 25!...What does this tell us? Yes, you’re right. We need to look for lower P/E to identify an undervalued stock which is Stock B with 0.8 P/E from our example.

2) Price-Earnings to Growth Ratio (PEG)

PEG ratio takes P/E ratio little further by adding expected earnings growth rate in the equation. Hence, PEG is forward-looking. It is calculated by dividing P/E ratio by EPS Growth of a stock.

Formula:

PEG Ratio = P/E ratio / EPS Growth rate

Just like P/E, a high PEG indicates overvaluation and a low PEG indicates undervaluation. A company with low PEG ratio and strong earnings growth could prove to be promising. As a rule of thumb, a stock with PEG above 1 is considered to be overvalued and a stock with PEG below 1 is considered to be undervalued. Let’s take our previous example ahead to understand this. Stock A has a P/E ratio of 1.25 and Stock B has a P/E ratio of 0.8. Say Stock A has an EPS growth rate of 10% and Stock B has 12% EPS growth rate. The PEG for Stock A would be 0.125 (1.25/10) whereas that for Stock B would be 0.067 (0.8/12). Hence, Stock B wins again!

3) Price-to-Book Ratio (P/B)

The price-to-book ratio compares a company's market value to its book value. It is calculated by dividing Market price per share by Book value per share. It measures how much investors are willing to pay for each rupee of a company’s net value. Book value is the net asset value of a company which its shareholders would receive in case of liquidation. Book value per share is calculated by dividing Equity Share Capital less preferred stock by number of equity shareholders.

Formula:

P/B ratio = Market price per share/ Book value per share

Just like the previous 2 ratios, this ratio also reflects a high P/B ratio as overvaluation and low P/B as undervaluation.

Let’s continue with same example from before to understand this. Stock A has a Market price per share of Rs. 50 and let’s say its book value is Rs. 30. So, the P/B for stock A would be 1.67 (50/30). Stock B has a market price per share of Rs. 20 whereas its book value is Rs.22 per share. So, the P/B for stock B would be 0.9 (20/22) and here we have a winner.

4) Dividend Yield Ratio

If you’re looking for long term investment and wealth creation then obviously you would be interested in knowing how much dividends a company is paying to its shareholders. This is when Dividend yield ratio comes into picture. This ratio measures the amount paid by a company as Dividends to its shareholders compared to its Market price. It is calculated by dividing Dividend per share by Market price per share.

Formula:

Dividend Yield Ratio = (Dividend Per Share/Market Price Per Share) * 100

A dividend paying company is always in the good books of investors because these companies reflect good financial position enabling them to share their profits with us. Higher dividend yield is always favorable however, it is important to compare it with the industry average and its peers.

Let’s say Company A and B are both paying a dividend of Rs. 10 per share. But the market price for Company A is Rs. 50 whereas for Company B it’s Rs. 30 per share. Hence, the Dividend yield of Company A is 20% ([10/50] *100) and that of Company B is 33.34% ([10/30] *100). So, by paying only Rs 30 for a stock of Company B, I can get 33.34% dividend yield compared to the 20% dividend yield on paying Rs.50. This is the reason why investing in an undervalued stock can be fruitful in long run.

5) Debt-to-equity ratio (D/E)

This ratio is a simple measure of how much debt you use compared to your owned funds to run your business. It is calculated by dividing a company’s total liabilities by shareholders’ equity.

Formula:

D/E Ratio= Total Debt/ Shareholder’s Equity

If a company’s D/E ratio is too high, it may be a sign of financial distress and reliance on heavy debt to run your daily business activities. But if it’s too low, it’s a sign that your company is over-relying on equity to finance your business. Hence, it is important that a company manages to strike a good balance between the two whilst keeping its books intact. It would be reasonable to compare a company’s D/E ratio with its industry peers and industry average to know the overall scenario.

Let’s say, Company A has a Debt of Rs. 10 Lacs and shareholders’ equity of Rs. 4 Lacs. So, the D/E ratio would be 2.5 (10/4). On the other hand, Company B has a debt of Rs. 8 Lacs and shareholders’ equity of Rs. 10 Lacs then the D/E ratio would stand at 0.8 (8/10), which is much better than its peer- Company A.

6) Return on Equity (ROE)

Return on Equity ratio measures a company’s profitability with respect to its Equity. It tells us how efficiently a company is using its shareholder's equity fund to generate profits. It is calculated by dividing Net income by Shareholders Equity.

Formula:

ROE = (Net Income/ Shareholders Equity) * 100

ROE can differ from sector to sector because of different assets and debt requirements. Thus, it is best practice to compare a company’s ROE with the Industry ROE average. ROE above industry average is considered good. A company should be able to maintain a stable or rising ROE over the time. If a company's ROE is growing, its P/B ratio should be growing too. It is important to notice if the company’s high ROE is because of increasing profits or more debt, which is why D/E ratio is worth checking out.

Let’s look at an example. Say, Company A has a Net income of Rs. 100 Cr and Shareholders’ Equity of 1000 Cr, then ROE would be 10% ([100/1000] *100). Say, Company B has the same Net income of 100 Cr and Shareholders’ Equity of 500 Cr then ROE would be 20% ([100/500] *100). So, we can say that Company B is generating more profits more efficiently than Company A using its shareholder's equity fund.

There are many ratios and metrics you can look at beyond this list. What’s important is that they help you identify an undervalued stock at right time. You can use various platforms like Screener. in, Investing.com, Tradingview.com, etc. to filter stocks according to your favorite metrics and criterion

Look beyond numbers

Screening just the numbers isn’t enough. If you find such a company meeting your specified criterion, it is essential to study the business of that company too. For starters, go for a company whose business you understand,check whether that business is sustainable. Study their business model and various initiatives taken by them for conducting business seamlessly.

Look at the Shareholding pattern and the shareholding of the promoters in the company. That will tell you about the promoter’s interest and confidence in the company. A company having any kind of competitive advantage over its competitors is even more convincing. It is important to learn their future outlook, business strategy, and sectoral growth aspect before investing your hard-earned money.

Bottom line: Be patient!
All these factors combined together can re-assure your investment decision in a company. There are 5,500 stocks listed in India. Take it slow, find the metrics which suits your investment style best, and then make an informed investment decision. The aim here is to make the most out of the company with great potential. As per Dow theory, price always corrects itself to its fair value in the markets and when it does, guess who will be making money out of it? Yes! My friend. It’s you! I am sure you will find such underrated gems to add value to your portfolio.

टिप्पण्या ( d) तपशील

How to find an undervalued stock?

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Investing can be a great way to build wealth and achieve financial freedom. However, it can also be risky if you don't know what you're doing. To become a successful investor, you need to have an understanding of the markets and a strategy that works for you. Here are 10 tips to help you get started:

1. Set clear goals: Before you start investing, it's important to know what you want to achieve. Are you saving for retirement, a down payment on a house, or a child's education? Set specific goals and create a plan to achieve them. When you are planning for the goals make sure they are S.M.A.R.T. If you don’t know what are SMART Goals, I have made a separate video you can check out on YouTube.

2. Diversify your portfolio: Don't put all your eggs in one basket. Spread your investments across different asset classes, sectors, and geographic regions. This can help reduce risk and increase returns over time. Understand that all the assets move in cycles, if one asset is in a negative cycle the other asset that has a lower correlation will set off the returns to avoid or minimize any possible underperformance.

3. Invest for the long-term: Investing is a marathon, not a sprint. Don't try to time the market or make short-term bets. Focus on your long-term goals and stick to your plan, even during market downturns. Have you seen a seed grow into a tree in a few days? No, it takes time. Similar is the case with investments.

4. Control your emotions: Investing can be emotional, but it's important to stay rational and avoid making impulsive decisions. Don't let fear or greed drive your investment decisions. Have you seen the image on our merchandise? It say’s “I Buy… Asa Kasa Kaay?”. Just after you buy, the stock falls and just after you sell the stock, the prices rally.

5. Do your research: Before you invest in a stock, bond, or mutual fund, do your due diligence. Research the company or fund's financials, management team, and industry trends. Make sure you understand the risks and potential rewards. If you need any help in the research of any stock, you can go through our YouTube channel and explore the knowledge bank.

6. Keep an eye on fees: Investing fees can eat into your returns over time. Look for low-cost index funds and ETFs, and be wary of high management fees and transaction costs.

7. Rebalance your portfolio regularly: Over time, your portfolio may become unbalanced as some investments outperform while others lag behind. Rebalancing can help keep your portfolio aligned with your goals and risk tolerance. Let me repeat the example of sowing a seed. It needs care and nourishment at regular intervals. You change the soil and add manure regularly to support the healthy growth of a plant. Similar is the case with investments.

8. Stay informed: Stay up-to-date on market news, economic indicators, and political events that could impact your investments. But don't let the news cycle distract you from your long-term goals.

9. Work with a professional: If you're new to investing or need help managing a large portfolio, consider working with a financial advisor. A good advisor can help you create a personalized plan, manage risk, and achieve your goals.

10. Learn from your mistakes: Investing involves trial and error. Don't be too afraid or be too hard on yourself when you make mistakes. I remember a quote by Theodore Roosevelt, 'The only person who never makes mistakes is the person who never does anything.' So, I will say just go out there, take risks, and learn from your experiences only then you will succeed. It's all part of the journey, accept and enjoy every bit of it!

In conclusion, investing can be a great way to build wealth over time, but it requires discipline, patience, and a solid strategy. By following these ten tips, you can become a successful investor and achieve your financial goals. Until next time!

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10 Investing tips to become a successful investor

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The stock market can be an attractive option for individuals looking to make a quick profit. With the rise of online trading platforms and increased accessibility, it has become easier than ever to trade stocks. However, the question of whether to quit your job to trade in the stock market is complicated and requires careful consideration. In this blog, we will explore the advantages and disadvantages of quitting your job to trade in the stock market.

Advantages of quitting your job to trade in the stock market

1. Flexibility: One of the biggest advantages of full-time trading in the stock market is its flexibility. You can set your own schedule, work from anywhere, and have the freedom to pursue other interests or hobbies.
2. Potential for higher earnings: Trading in the stock market has the potential for high returns, especially if you have a good understanding of the market and are willing to take risks.
3. Personal fulfillment: If you have a passion for investing and trading, pursuing it full-time can be personally fulfilling and rewarding.

Disadvantages of quitting your job to trade in the stock market

1. Risk: Trading in the stock market is inherently risky and can lead to significant losses. If you rely solely on trading to make a living, you run the risk of losing your entire income if the market goes against you.
2. No guaranteed income: Unlike a traditional job, trading in the stock market does not offer a steady income. Your earnings will depend entirely on your ability to make successful trades.
3. Limited benefits: When you quit your job, you will lose access to benefits such as health insurance, retirement plans, and paid time off.
4. Lack of experience: Trading in the stock market requires a high level of skill and experience. If you are new to the market, you may not have the knowledge or experience to make successful trades consistently.
5. Emotional toll: Trading in the stock market can be emotionally taxing, especially when you are risking your own money. The stress and pressure of constantly monitoring the market and making decisions can take a toll on your mental health.

So, should you quit your job to trade in the stock market?

The answer depends on your individual circumstances and goals. If you have significant savings, a solid understanding of the market, and a proven track record of successful trades, quitting your job to trade in the stock market may be a viable option.
However, if you are new to the market, have little experience, and rely on a steady income, quitting your job to trade in the stock market is not advisable. It is important to consider the risks, benefits, and your personal financial situation before making any decision.

In conclusion, trading in the stock market can be a lucrative and fulfilling career, but it is not for everyone. Before making any decision, take the time to evaluate your financial situation, experience, and goals. Seek advice from professionals, and remember that there is no one-size-fits-all answer.
Ultimately, the decision to quit your job and trade in the stock market should be a well-informed and carefully considered one. I have also made a separate video on this topic on my YouTube channel you can watch it below. Until then…

टिप्पण्या ( d) तपशील

Should you quit your job to trade in Stock Market?

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We all have witnessed what happened in the past few days in the market. Hindenburg Research LLC an investment research firm with a focus on activist short-selling published a report on Adani Group stocks on 24^th January 2023 accusing the group of various allegations. This caused the Adani group stocks to jump down the aircraft without parachutes. This is not the first time someone is making allegations about the Adani group, so there was a minimal impact on the market. The report slowly spread like wildfire and it was reflected in the stock prices on 27^th January when almost all the group stocks declined by 15%-20%. This increased the overall volatility of the market.

What is Stock Market Volatility?

Stock market volatility refers to the fluctuation of stock prices in a short period of time. This can be caused by a variety of factors, including economic news, geopolitical events, changes in interest rates, market sentiment, etc. Volatility can have a significant impact on investors, as it can lead to both large gains and losses in a short period of time. This volatility is measured by Volatility Index also called India VIX. Let us see what the VIX looked like on 27^th January.

The VIX spiked by 18.18% on 27^th January. This volatility can be seen as both a positive and negative aspect of the stock market. On one hand, high volatility can lead to large gains for investors who are able to correctly anticipate market movements. On the other hand, it can also lead to significant losses for those who are caught off guard by sudden market changes.

Another factor that can contribute to stock market volatility is the actions of market participants, such as institutional investors and hedge funds. These large players have the ability to move the market with their buying and selling decisions, which can lead to rapid price changes. They usually buy or sell stocks in bulk. The problem here is not all bulk deals are known beforehand. You can see these bulk deals on the website of the Stock Exchange a day after these deals take place.

How to protect your investments from volatility?

One way to mitigate the negative effects of volatility is to adopt a long-term investment strategy. This means avoiding making knee-jerk reactions to short-term market movements and instead focusing on building a diversified portfolio that is well-suited to your risk tolerance and investment goals. Additionally, investors can also consider using tools such as stop-loss orders, which automatically sell a stock if it falls below a certain price, in order to limit potential losses.

Can we avoid volatility?

It is also important to keep in mind that stock market volatility is a natural part of the market cycle. In general, the stock market tends to be more volatile during times of economic uncertainty, such as recessions or economic downturns. However, over the long term, the stock market has historically produced positive returns, making it an attractive investment option for those who are willing to tolerate short-term volatility.

In conclusion, stock market volatility is a part of investing, and understanding its causes and effects is essential for making informed investment decisions. By adopting a long-term investment strategy, using tools to limit potential losses, and staying informed about market movements, investors can minimize the negative impact of volatility and maximize their chances of success in the stock market. How to learn and use those tools is a topic for another discussion, until then…

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What is Stock Market Volatility?

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As you might be aware, the normal heart rate for humans ranges from 60 to 100 beats per minute. A beat per minute (bpm) rate below or above this normal range may indicate an unhealthy heart and suggests medical attention. Now you might be like, why are we discussing this bpm here & what it has to do with the stock market? Okay, Let, me tell you that this has nothing to do with that open F&O position of yours, which sometimes gets your heart rushing.

We are Today going to talk about the VIX i.e. Volatility Index. The volatility index is like the heartbeat of the stock exchange. Similar to our heartbeat, when VIX is out of its normal range, it suggests lower or higher than normal volatility in the market. Let’s understand this VIX in a bit more detail.

What is VIX?

Being a measure of volatility, VIX is often called the “Fear Index” or “Fear Guage”. The Chicago Board of Options Exchange (CBOE) first launched the Volatility Index (VIX) for the US markets in the year 1993. VIX was launched in India in the year 2008 by the National Stock Exchange (NSE).

The Volatility Index is widely used to measure the expected market movement in the coming 30 days. Though VIX is an annualized rate, we first divide it by the square root of 12 (12 stands for 12 months). E.g.: - At the time of writing this blog, the India VIX is 13.4775 which means that the NIFTY Index is expected to move 13.4775% in the coming year. Thus, 3.89% (13.4775 / √12) gives us the expected monthly movement.

Though, VIX tells us the expected movement in the index, it does not indicate the direction of the movement. Therefore, though we can say that the expected movement is 3.89%, this movement can be 3.89% up or 3.89% down.

I am sure that you are wondering how is this VIX value calculated. Well, there is a mathematical formula behind the calculation of VIX, but honestly, there is no need to understand this formula as VIX is readily available on google or any other trading platforms. The interpretation of VIX is more important rather than its calculation. We will understand it in the next part of the blog, till then do visit my YouTube channel CA Rachana Phadke Ranade and for all the Marathi folks out there also visit my Marathi YouTube channel CA Rachana Ranade (Marathi).

Interpretation of VIX

As we said, the VIX indicates the expected movement in the market. It helps us know the expected performance in the market for a definite period say 1 month, 1 year, etc. Volatility implies the tendency to change. Hence, when the markets are highly volatile (high VIX), they tend to move steeply up or down. But, what do we exactly mean when we say that the VIX is high? Generally, the following categorizations are followed:

VIX below 11: - Very Low.

VIX within the range of 11-20: - Stable.

VIX above 20: - Very High.

VIX in the “Very Low” category and “Very High” category indicates unusual volatility in the market. But again, we cannot predict the direction. Hence, if say the VIX is high, the market can be very bullish or very bearish in this phase. On the other hand, a VIX in the “Stable” category indicates a stable or gradual movement in the market.

The VIX is a very good indicator of the mood of the market. But it is not a sole indicator and hence needs to be used in combination with other indicators like the open interest, put-call ratio, etc. But what are the other indicators and how to calculate them? Don’t worry! I have covered all these indicators and many more interesting concepts in my course on Futures and Options. Until next time!

टिप्पण्या ( d) तपशील

What is Volatility Index?

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If you have watched Pokémon, you might know how all the Pokémon’s used to evolve when they reached a certain level. Pikachu would evolve into Raichu, Charmander would evolve into Charmeleon, etc. After their evolution, they turn into an advanced version of themselves with new looks, moves and, even skills. So, why not take inspiration from our favourite childhood show and advance ourselves in this journey of learning about the stock market. Till now, we have learned so many basic concepts about the stock market in the most simplified manner through my YouTube channel, course, and blogs. But now the question remains on how do we go ahead from here and what should be the next step. This is exactly what we are going to discuss in this blog.

KYS- Know yourself

You are at a stage where you know about financial markets and how they work, nifty, corporate actions, IPO terminologies, etc. but do you know yourself enough to step into the stock market? It is crucial to find out how much risk you can take. You may check out this video to understand how to check your risk profile. Other important points include understanding your investment horizon, capital and keeping your short-term liquidity intact with an emergency fund.

But wait, what factors could you consider in deciding all of this? Factors like your monthly income expenses, the number of dependents in your family, your/family’s medical expenses, your age, and your other financial goals will help you find out the answers you need before jumping into the market. Another important question to ask yourself is whether you possess the required skills to make well-informed investment decisions ahead. There are 2 branches in equity analysis namely- Fundamental analysis (FA) and Technical analysis (TA) and I think understanding both works the best to make good investment decisions. Let’s find out more about them as you read ahead.

Why learning Fundamental analysis is important?

FA helps us understand the actual value or the intrinsic value of a company based on its financials, economic environment, competitive position, and other qualitative factors. More focus is given to finding stocks that are undervalued i.e., stocks available at a cheaper price than their fair value. Investors believe that as the company is performing better, it will be recognized soon by the market, leading to a rise in its price because of the increased demand. This will help investors grow their wealth exponentially with not the only capital appreciation but also dividends and compounding. Hence, FA will help you pick financially strong and well-positioned stocks at a better price to gain the best out of the investments.

So, how to start learning about Fundamental Analysis. To find an undervalued stock, first, you must understand how to perform a financial analysis of a company. You can find out all about it in my "Fundamental analysis" course. After gaining confidence in FA, you can level up a little to learn more about the “Art of value Investing” which will help you fetch undervalued stocks.

Why learning Technical analysis is important?

To put it simply for you, Technical analysis involves observing past price movement and patterns of a financial asset to predict future price direction. TA will help you understand the current market trend. This is possible by studying various candlesticks, charts, and indicators. Investors and traders both need to learn TA. Now, you might be wondering, “For traders, it’s understood, but why do investors need to learn TA?” The answer is simple. After performing an extensive FA of a company, don’t you wish to get the stock at the best possible price available in the market? Of course, you do! Hence, you must learn TA to know the best time and best price to enter/exit a stock. Now the big question is how do you know what is the best time & price to enter/exit stocks. I got you covered. I have designed a course on “Technical analysis” which will help you understand TA in the most systematic, simplified, and practical way.

Bottom line

“Safar khoobsurat hai manzil se bhi..” I am sure you would totally relate to this line from the song - Ae Dil Hai Mushkil, while you are on this amazing journey of learning about the stock market and investing. But the question that remains is what sequence you should follow while watching the courses. First, get your basics in place by completing the Basics of Stock Market course. Then you can go ahead with Fundamental Analysis, Art of value investing and lastly Technical Analysis to reach on that advanced level manzil you all wished for. I have designed these courses in the most simplified manner such that a person from a non-finance background, housemaker, student, retired, everyone, will understand it.

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Going beyond the basics of stock market

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The Stock market is intriguing if you can dedicate your time and devotion to learning and applying it practically. It is rightly said that “Practice makes you perfect”, and that is exactly what we need to apply here as well. Even Spider-Man had to learn how to use his power and figure out the best possible way to apply it while fighting the bad guys. So, what makes us any different when it comes to learning about the stock market?

People have different opinions on how one should initiate this journey. However, I am sharing the top 5 things you can do as a beginner to learn about Stock Market below. Let us find out, without further ado.

1. The first step is to track news related to the stock market daily. You can watch news channels like CNBC, Zee Business before 9 am and/or after 3.30 pm wherein you can watch shows parting knowledge on the subject. If you watch these channels between 9 am to 3.30 pm (which is market hours) you might get overwhelmed with all the information being telecasted about the market throughout the day. So, remember one day at a time. You can also download media apps like Economic Times, Livemint, moneycontrol, etc. which will further add to your knowledge basket.

2. For my reader folks, you can subscribe to market-related magazines like Dalal Street Investment Journal, Money life, Business Today, Outlook Money, etc. Apart from this, you can also read books related to investments and trading to understand the market in depth. You can check out my book suggestions here.

3.You can also use your Google skills to read about the market via various websites available on the internet. Blogs on Investopedia, Groww, Zerodha Varsity provide good content which a beginner can easily comprehend. You can also check out my Blogs here for easy reference.

4. If you are not a reader, no worries, I got you covered. There are so many YouTube channels that can help you understand basic concepts in the stock market. You can check out my YouTube channel where I have explained numerous concepts right from the ‘Basics of the Stock market’ in the most simplified manner that even a non-finance person can understand, that too ‘FOR FREE!’

5. If you are keen on learning about the market in a detailed and structured format, you can check out my readily available courses here. I have designed all of my courses from beginner level with ‘Basics of Stock Market’, ‘Basics of Technical Analysis’, ‘Magic of Mutual Funds’ to advance level with ‘Art of Value Investing’. I am sure you won’t be disappointed.

Now you are all geared up and eager to invest. But wait, to participate in the market, you need to open a Demat A/c with a SEBI registered broker. This process is very simple and completely online. Click on the image below to know more.

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How to start learning stock market in India?

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If you are from a typical Indian household, you might have hated your results day during your school days. The reason obviously was being compared to, “Sharmaji ka beta” a class topper. This Sharmaji ka beta was a perfect representation of how an ideal kid should be at that age. Well, in stock market terms we have a market index called “NIFTY50” that depicts similar things as this “Sharmaji ka beta” did in our school. Nifty is used by many investors and fund managers as a means to measure the performance of the Indian capital markets and our economy at large. Read ahead to understand more interesting things about Nifty50.

What is Nifty 50?

Nifty or Nifty50, is a flagship index by National Stock Exchange (NSE), representing the top 50 companies being traded on NSE from 13 major sectors. This index gives investors a bird’ eye view of the market sentiments and performance. Hence, it is known to be a true reflection of the Indian stock market and economy at large. Due to this, many consider the performance of this index as a benchmark against their portfolios’ performance over a period.

It was launched on April 22nd, 1996, which means it turned 25 this year! What an amazing journey it has seen from 1,107 on April 22nd, 1996 to a new record high of 15,901.60 on 15th June 2021.

Who manages Nifty?

All Nifty indices are managed and owned by NSE Indices LTD (formerly known as India Index Services & Products Limited-IISL). It is an NSE group company that was set up in May 1998 to develop, construct and maintain indices on Indian equities. NSE Indices Ltd came up with 14 broad market indices that represent large, mid, and small-cap segments listed on NSE efficiently. Below is the structure of the same.

What are the inclusion and exclusion/replacement criteria for Nifty?

Nifty is reviewed semi-annually based on the data for six months ending January and July every year. The exchange will give us a notice about the same four weeks before the date of the change.

To be included in the 50 stocks index, the following criteria must be met:

The company must be domiciled (based) in India and traded on NSE.
It should form a part of the Nifty 100 Index and be available for trading in NSE’s F&O segment.
It should have traded at an average impact cost of 0.50% or less during the last 6 months for 90% of the observations (trades) for a portfolio of Rs. 10 Crores. To put it simply, impact cost is the percentage change in buying/selling price for the desired quantity compared to its ideal price (calculated as [best buy + best sell]/2)
Its average free-float market capitalization is at least 1.5 times the average free-float market capitalization of the smallest constituent in the index.
Its trading frequency should be 100% for the past six months.
For a company that has recently launched its IPO the period for fulfilling the above criteria is reduced to 3 months instead of 6 months.

Replacements, if any, takes place from the last trading day of March, June, September, and December with four weeks prior notice. Stock/s will be excluded/replaced from Nifty if:

It's undergoing demerger, spinoff, delisting, etc.
It’s withdrawn from trading in the F&O segment
It’s suspended from trading in Capital markets

How is it calculated?

Since June 26th, 2009, Nifty has been calculated using the Free-float Market Capitalization weighted method. Before that, it was calculated using the full market capitalization-weighted method. So, what brought this change? For that, we first need to understand what free float mcap means. It’s quite simple, free float mcap will include public holding in the company only. This means that the promoter and promoter group holding and any other strategic investments by entities/ promoters (Government, FDI, Employee trust, ADR/GDRs, etc.) are excluded from the total mcap of the company. By excluding these holdings, the index can reflect the true market sentiment better for the 50 stocks and ultimately overall capital market. Hence, the index calculation method was changed to Free-float Market Capitalization weighted method.
Now, let’s have a look at how Nifty is calculated in 3 simple steps :
Formula:
Index value = (Current Market Value (CMV)/Base Market Capital) * Base value
Step 1: Calculation of CMVCMV is nothing but the sum of all 50 stocks’ free-float weighted mcap.
Step 2: Divide CMV by Base market capital
For Nifty50, the base date is November 3rd, 1995. Hence, the base capital is the closing mcap of the index as of this date which was Rs.2.06 trillion. This divisor is adjusted from time to time considering the corporate actions of the constituents as they take place.
Step 3: The result is then multiplied by the Base value.
The base value is the closing price of Nifty as on the base date - November 3rd, 1995, which was 1000. Hence, the result will be multiplied by 1000 to derive the Nifty value.
Nifty is calculated on a real-time basis as the market price of the constituents keeps changing. The closing price of the index is calculated by taking a weighted average of the closing prices of its constituents during the last 30 mins of the trading session.

Why is rebalancing Nifty important?

Over the past 3 decades, India has shifted from manufacturing to services. With the rise of the private sector along with the IT revolution, our market index needed to adapt accordingly and replicate what’s happening in our economy. If you check the table given below for sectoral representation in Nifty50, you will observe that there was no weightage for the IT and telecom sector during its inception. However, now that India has become more technologically evolved with adequate government measures, the IT sector has earned 16.16% weightage whereas the telecom sector enjoys 1.92% weightage in the index as of May 2021. Financial services still have the highest weightage in the index, almost twice as during inception.
Interestingly, 13 stocks namely- HDFC Bank, RIL, HDFC, ITC, HUL, L&T, SBI, Tata Motors, Dr. Reddy’s Labs, Tata Steel, Grasim, Hero, and Hindalco have been a part of the index’s journey since its inception (Source: CNBCTV18) Back in 1996, the State Bank of India (SBI) had the highest weightage at nearly 8.6%, followed by Tata Motors at 6.9%. As of May 2021, RIL (10.36%), HDFC Bank (9.79%), and Infosys (7.66%) held the highest weightage in Nifty50.
As a part of its semi-annual review, stocks that have fallen in terms of market cap criteria would be replaced with emerging stocks fitting into eligibility criteria mentioned above thereby increasing the exposure of the index to emerging stocks and sectors. This way Nifty has reflected the changing trends in the equity market with increasing/ introducing representation of emerging sectors in the economy.

Bottom line:

The Nifty 50 index covering 13 sectors, represents 66.8% of the free-float market capitalization of the stocks listed on NSE as of March 29, 2019. The total traded value of NIFTY 50 index constituents for the last six months ending March 2019 was approximately 53.4% of the traded value of all stocks on the NSE. No wonder why it represents our capital markets worldwide. If you want to know the daily movement in nifty and its constituents, just click here and if you want to know about the current constituents and their weightage in the index, click here.
I hope you enjoyed this extensive yet unique blog on Nifty 50. If you wish to level up a little, you can check out my course on “Basics of Stock Market” wherein I have explained everything you need to know before starting your investment journey. Click on the link to know more. Until next time!

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What is NIFTY50?

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Welcome Aboard on the journey of Stock Markets.

Ladies and gentlemen, welcome onboard flight- Basics of Stock Markets with service from level newbie investor to a smart investor. Please fasten your seatbelts and keep your devices, notebook, and pen handy. Tips/calls are prohibited for the duration of the flight. Thank you for choosing team CARR. Happy learning!

You might be wondering that why is ma’am making this announcement. Well, learning about the stock market is no less than a flight. When you start learning about the stock market, you take off in the market, you might even face some turbulence during the journey and ultimately you land well only if you have learned the secrets to successful and efficient investing. If you wish to board on this fun flight you have arrived at the right airport, my friend. We will make sure that you understand all the concepts, right from the basic to the advanced level in the stock market, in the most simplified manner.
Are you ready? Let’s get started!

Why should one invest in the Stock Market?

Because I said so? Absolutely no! We all have dreams and aspirations in our lives which we are passionate about. For some people, it might be getting a nice car, for some, it might be going on a fancy vacation or some might wish to build their dream home. Irrespective of what the dreams are, they become achievable when the finances are in the right place. So, let’s understand how investing in the stock market can help us in our financial life.

1. Start with a small amount :

Believe me or not, but investing in the market could cost as low as a pizza! Yes, you read that correctly. On average, we spend between Rs. 500 - 1000 on pizza. There are several quality stocks within this price range to invest in. We can even invest with a minimum of Rs. 500 regularly in stocks or mutual funds. This proves that investing in the stock market doesn’t burn a hole in the pocket. Just imagine how well your wealth and health can improve only by redirecting your pizza money into the market.

2. Enjoy the magical power of compounding :

We all have learned about compound interest in our schools. What we did not know then was how it is rightly called the 8th wonder of the world. It is simply a way of earning more interest on the already earned interest. Let’s understand this with an example. Let’s say you invest Rs. 1000 every month for 25 years expecting 10% return p.a. Your total investment amount of Rs. 3 Lacs would have grown to approximately Rs. 13 Lacs. And that, my friend, is the power of compounding!

It’s like your money is earning more money for you, isn’t it? The compounding effect would be more if you stay invested for a longer period. Hence, it is correctly said that “Time is money” and one must start investing as early as possible.

3. Victory over inflation:

Inflation is like a hanging sword over our necks. It is reducing the purchasing power of our money. As per the trading economics, the average rate of inflation between 2012 to 2021 was around 6.01 percent in India. The bad news is that inflation is here to stay and we can’t do much about it. The good news is that the stock markets can help us generate inflation-beating returns of around 10-12% if invested efficiently.

This is possible because India is a developing country. Hence, our industries grow in tandem with our economic growth and have the potential to reflect and generate returns by outperforming the inflation rate.

4. Higher returns than traditional investment avenues:

FDs have been a popular choice for investment amongst Gen X (born before the 1980s) and Gen Y (Born between 1980-95). They are considered to be a safe and secure option. Currently, FD rates range between ~4.50% to 6.00% percent for tenures between 1 and 10 years. Now, have a look at the Nifty chart below. The Nifty50 index has grown ~150% in the last 10 years! I agree stocks can be volatile however, the risk gets averaged out over a longer investment term. Investing in sound and proven companies can help you generate stable and better returns than FDs

5. Additional income source:

It is always wise to have more than one source of income. If at all you face any difficulties in your professional or personal life and are forced to discontinue your job then you might experience financial distress after a while. Hence, having an additional source of income comes in handy and the stock market can be of help in this case. You can earn through value appreciation and dividends from your investments providing steady income apart from your paycheck.

6. It is not rocket science:

You do not need any fancy degree or qualifications to understand investing in the market. No matter what your educational background or age is. If you approach it in the right way, you can perform the required analysis and research all by yourself.

Bottom Line:

The stock market has its ups and downs but a learned investor will know how to glide through it all. It is always advised to learn about the market before jumping into it. An investor must be aware of his risk appetite, expected returns, and investment horizon. And the investment decision must be based on extensive research only.

There are several exciting concepts to learn like- the structure of the Indian financial market, what is Nifty, the basics of IPO, different types of corporate actions, Dividends, Stock splits , Block deals, and many more!.

Click the following image to know how to start learning about the stock market.

After understanding all of this, if you want to level up a little, you can check out my course on “Basics of Stock Market” wherein I have explained everything you need to know before starting your investment journey. Click on the link to know more. Until next time!

टिप्पण्या ( d) तपशील

Why you should invest in the stock market?

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ब्लॉग

How to find an Undervalued Stock?

KYS- Know yourself

Why learning Fundamental analysis is important?

Why learning Technical analysis is important?

Bottom line

What is Nifty 50?

Who manages Nifty?

What are the inclusion and exclusion/replacement criteria for Nifty?

How is it calculated?

Why is rebalancing Nifty important?

Bottom line:

Welcome Aboard on the journey of Stock Markets.

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