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Sunday, January 20, 2019

Low Price Penny Stocks

Many a times people keep searching for penny stocks to buy. Looking for stocks that have lost 90% from their tops and are quoting in single digits.

Just as low-priced food, apparel or cosmetics catch the eye of the price-conscious consumer, penny stocks or scrips that are quoting in single digits cast their spell on the investor. But before an investor has a shy at these penny stocks, it might be well worth his time to ponder over a few points.

Cheap can become cheaper

A stock that has corrected to Rs 10 from Rs 100 could possibly nosedive to Re 1. If you are not sure that at Rs 10, the scrip is undepriced, avoid it. Bad businesses can quote even below the current ‘low’ prices.


Don’t jump to buy one before you probe into the reasons behind such steep falls, for the stock could well test a new low.

Check the face value and valuations

A stock with a face value of Re 1 that quotes at Rs 15 is at the same price of a stock that quotes at Rs 150 with a face value of Rs 10, other things being constant.

The factors such as valuations and business prospects are next checkpoints, before you decide to invest.

Information

Most penny stocks suffer from lack of information. Unlike Nifty stocks, which enjoy adequate coverage by brokers and where most of the information is available in the public domain, there is a lot of uncertainty around penny stocks.

Investors have to be careful while putting money in penny stocks, especially ‘turnaround stories,’ as you may be the last person to know about the ‘story’. No wonder these stocks are viewed as an operator’s paradise. Gullible investors turn out to be the scapegoats as the stock is distributed mostly by the operators.

Liquidity

It is an issue with these counters. This ensures that the price moves in either direction quickly, and a couple of circuits, is ‘business as usual’ for such scrips. In other words, if you realise your ‘mistake’ a bit too late, an exit may not be possible at all, especially if you are stuck with a substantial lot.

Illusion of small: Many think that the penny stocks move quickly to double in price. But this is not the case.

Other things remaining constant, if a company can double its earnings, the stock has the potential to double irrespective of the price level.

Low risk?

Some look at stocks from a ‘low risk’ point of view. When a company sinks, the stock may not remain on the buy list of investors. In the worst case, the price can touch zero.

A stock that was bought at Rs 10 becomes a worthless piece of paper and the investor faces ‘loss of capital’ — the worst that can happen in equity markets.

Put simply, the penny nature of a stock is conducive neither from the risk perspective nor from the reward point of view.

Saturday, October 6, 2018

Look for Bargains during Recent Stock Market Correction

Dear Reader,

Following the crowd in the stock market can lead to disaster if you're not careful. Panic buying or selling can push stock prices beyond reason.

The crowd-following problem seems worse when the markets are down and the mood is pessimistic, people tend to sell even if there is no specific reason to let go of an individual stock.

This common trading mistake costs investors dearly. When the talking heads on television and the wags in print and online begin talk of doom, many investors dump their stocks in favor of cash or other "safe" investments.

Rushing In

As soon as the same crowd gets excited about the market again, the cash investors rush back to the market and buy stocks.

The problem with this approach is that the investor is frightened out of the market when prices are depressed and lured back in when prices have rebounded. In other words, sell low, buy high.

Your best defense against a market that slumps dramatically is to have a well-diversified portfolio that contains an appropriate amount of risk for your financial condition. This alone won't protect you when the whole market dives, however it will position you to ride out the slump and be in good position for when the market rebounds.

The thoughtful investor always asks why the price of a stock is moving before making a decision.

• Has something changed in the company?

• Has something changed in the company's primary market?

• Has there been a negative or positive regulatory or legal change?

• Is there an underlying change in the economy?

These are not all the questions you should ask, some will be specific to the industry or sector, but you get the idea. When you can find nothing in the answers to questions specific to the company, you look to the market.

Is this stock dropping (or rising) because the overall market is moving dramatically in that direction? It can work both ways, although a down market seems to depress overall prices more than an up market raises overall prices.

Shopping at Discounted Price

If you are looking to add to your portfolio, consider a down market a great shopping opportunity. A thoughtful investor is going to buy on the potential of a company and if he or she can pick the stock up at a discount so much the better.

This investing approach takes some courage and confidence in your ability to distinguish between a stock price depressed by a down market and a stock that is fundamentally flawed. You also must be prepared for further declines if the market continues to slide and consider it to add more of our favourite stock picks backed by strong fundamentals and reasonable valuations.

If you have at least three to five years before you will need to begin cashing in your holdings (at or near retirement), you may be able to ride out an extended economic downturn. However, if you do your homework, you'll find bargains in down markets that may reward you handsomely in the future.

Don't be frightened off a stock just because the overall market is sour. If the fundamentals of a company are solid, a down market may be a great time to do some discount shopping. A fundamentally sound company will likely be on the leading edge out of an economic downturn.

These days we can see news are floating on leading business TV channels and newspapers that stock market may repeat history of 2008 going through severe downfall in major indices in coming months. However, we do not agree with such views simply because valuations are not expensive like that of Jan 2008 levels and economic growth will maintain its momentum in coming quarters. Moreover, we expect overall economy to do well in 2nd half of this financial year with better corporate earnings. We continue to suggest our members to avoid timing the markets and look for bargains during ongoing market correction. 

Wish you happy & safe Investing. 

Regards, 
Team - Saral Gyan

Saturday, July 14, 2018

6 Steps to Explore Best Stocks for Investment

Below are the 6 Important Steps to Explore Best Stocks for Investment

Step-1: Find out how the company makes money
Step-2: Do a Sector Analysis of the Company
Step-3: Examine the recent & historical performance of the Stock
Step-4: Perform competitive analysis of the firm with its Competitors
Step-5: Read and evaluate company’s Financial statements
Step-6: Buy or Sell

Step-1: Find out how the company makes money

Before you decide to invest in a company’s stock, find out how the company makes money. This is probably the easiest of all the steps. Read company’s annual and quarterly reports, newspapers and business magazines to understand the various revenue streams of the firm. Stock price reflects the firm’s ability to generate consistent or above expectation profits/earnings from its ongoing/core operations. Any income from unrelated activities should not affect the stock price. Investors will pay for its earnings from its core operations, which is its strength and stable operation, and not from unrelated activities. Thus, you need to find out which operations of the firm are generating revenues and profits. If you do not know that you are bound to get a hit in future.

Warren Buffet once said that “if you do not understand how a company makes money, do not buy its stock- you will always end up loosing money”. He never invested even a single penny in technology stocks and yet made billions and billions of dollars both during tech bubble and bust.

Step-2: Do a Sector Analysis of the Company

First is to figure out which sector the stock is in. Then, figure out what all factors affect the performance of the sector. For example, Infosys is in IT services sector, NTPC is in Power sector and DLF is in Real Estate sector. Half of what a stock does is totally dependent on its sector. Simple rule-Good factors help stocks while bad factors hurt stocks.

Let’s take an example of airlines industry. The factors that affect it are fuel prices, growth in air traffic and competition. If fuel prices are high, tickets would be expensive and hence fewer people will fly. This will hurt the airlines sectors and firms equally. This would make the sector less attractive because there would be less scope for growth of the firms.

The idea is to find out the good and bad factors for the sectors and figure out how much they will affect the stock and how. What we are really looking at are reasons that will make stock price good or bad or a company look more or less valuable, even though nothing about the company changes. This will give you a broader view whether the stocks will do well or poorly in the future.

Step-3: Examine the recent & historical performance of the Stock

By performance we mean both operational and financial performance of the company. Take out some time to find out how the company has done in its business over the years. Were there issues with its operations such as labor strike, frequent breakdowns, higher attrition or lagging deadlines? If any company has a history of serious problems, it does not make a good buy because chances are high it may have similar problems again. History is a good predictor of future! It is also extremely important to find out the historical financial performance of the company – growth in revenues, profits (earnings), profit margins, stock price movements etc.

Step-4: Perform competitive analysis of the firm with its Competitors

This is most important step in analyzing a stock. Unfortunately, most of the retail investors do not bother to do this. It takes time to do this step but it worth trying if you don’t want to loose your money. Many investors buy a stock because they have heard about the company or used the products or think companies have excellent technologies. However, if you do not evaluate or compare those features of the company with other similar firms, how will you figure out whether the firm is utilizing them effectively or is better/worse than others? We also need to find out whether company is growing rapidly or slowly or has no growth. We would like to cover couple of financial ratios here in brief and explain how to use them to figure out a good stock.

P/E: Price-to-earnings ratio is the most widely used ratio in stock valuation. It means how much investors are paying more for each unit of income. It is calculated as Market Price of Stock / Earnings per share. A stock with a high P/E ratio suggests that investors are expecting higher earnings growth in the future compared to the overall market, as investors are paying more for today's earnings in anticipation of future earnings growth. Hence, as a generalization, stocks with this characteristic are considered to be growth stocks. However, P/E alone may not tell you the whole story as you see it varies from one company to another because of different growth rates. Hence, another ratio, PEG (P/E divided by Earnings Growth rate) gives a better comparative understanding of the stock.

PEG = Stocks P/E / Growth Rate
We do not want to go into the calculation part as values for P/E are available on internet for most of the companies.
A PEG of less than 1 makes an excellent buy if the company is fundamentally strong. If it is above 2, it is a sell. If PEG for all the stocks are not very different, one with lowest P/E value would be a great BUY.

Step-5: Read and evaluate company’s Financial statements

This is the most difficult part of this process. It is generally used by sophisticated finance professionals, mostly fund managers who can understand different financial statements. However, there are few things that even you should keep in mind. There are three different financial statement- balance sheet, income statement and cash flow statement. You should focus only on balance sheet and cash flow statement.

Balance Sheet: It summarizes a company’s assets, liabilities (debt) and shareholders’ equity at a specific point in time. A typical Indian firm’s balance sheet has following line items:

• Gross block
• Capital work in progress
• Investments
• Inventory
• Other current assets
• Equity Share capital
• Reserves
• Total debt

Gross block: Gross block is the sum total of all assets of the company valued at their cost of acquisition. This is inclusive of the depreciation that is to be charged on each asset.

Net block is the gross block less accumulated depreciation on assets. Net block is actually what the asset is worth to the company.

Capital work in progress: Capital work in progress sometimes at the end of the financial year, there is some construction or installation going on in the company, which is not complete, such installation is recorded in the books as capital work in progress because it is asset for the business.

Investments: If the company has made some investments out of its free cash, it is recorded under it.

Inventory: Inventory is the stock of goods that a company has at any point of time.

Receivables include the debtors of the company, i.e., it includes all those accounts which are to give money back to the company.

Other current assets: Other current assets include all the assets, which can be converted into cash within a very short period of time like cash in bank etc.

Equity Share capital: Equity Share capital is the owner\'s equity. It is the most permanent source of finance for the company.

Reserves: Reserves include the free reserves of the company which are built out of the genuine profits of the company. Together they are known as net worth of the company.

Total debt: Total debt includes the long term and the short debt of the company. Long term is for a longer duration, usually for a period more than 3 years like debentures. Short term debt is for a lesser duration, usually for less than a year like bank finance for working capital.

One need to ask-How much debt does the company have? How much debt does it have the current year? Find out debt to equity ratio. If this ratio is greater than 2, the company has a high risk of default on the interest payments. Also, find out whether the firm is generating enough cash to pay for its working capital or debt. If total liabilities are greater than total assets, sell the stock as the firm is heading for disaster. This debt to equity ratio is extremely important for a company to survive in bad economy. What is happening now-a-days should make this extremely important. Companies having higher debt ratio have got hammered in the stock market. Look at real estate companies- their stocks are down by almost 90% from all time highs made in 2007 - 2008. This is because they have high debt level which means higher interest payments. In case of liquidity crisis and global slowdown, it would be extremely difficult for such companies to survive. Remember, a weak balance sheet makes a company vulnerable to bankruptcy!

Step-6: Buy or Sell

Follow all the steps from 1 to 5 religiously. It will take time but worth doing it. If you do it, you won’t have to see a situation where you loose more than 50% of stock value in a week! Buying or selling will depend on how your stock(s) perform on the above analysis.

Wish you happy & safe Investing. 

Regards, 
Team - Saral Gyan

Thursday, November 9, 2017

ASBA Full Form & How It Works While Applying For IPOs?

What is ASBA?

ASBA full form and its process in IPO
Do you know ASBA full form is Application Supported by Blocked Amount, ASBA is a new investor-friendly way to apply for initial public offerings (IPOs). It is an interface for banks to participate in the process of IPO payments as proposed by the capital markets regulator, the Securities and Exchange Board of India (SEBI). The objective of introducing ASBA is to ensure an investor's funds leave his bank account only on allotment of shares in public issues.

The ASBA process also ensures that only the required amount of funds is debited to the investor's bank account on allotment of shares. In this mechanism, the need for refunds is completely obviated. The banks participating in an IPO process can upload the bids with respect to their customers into the electronic books of BSE and NSE. The interface facilitates not only the controlling branch but also the designated branches of the banks to directly upload the bids into the electronic books.

Also Read: Potential Multibagger Stock 2019 Report - Free Download

ASBA provides an alternative mode of payment in issues whereby the application money remains in the investor's account till finalisation of basis of allotment in the issue. The process facilitates individual investors bidding at cut-off, with single option, to apply through self-certified syndicate banks (SCSBs), in which the investors have accounts. SCSBs are banks that meet the conditions laid down by SEBI.

Role of SCSB
  • Accept application
  • Verify application
  • Block funds to the extent of bid payment amount
  • Upload the details on the web-based bidding system of the exchange
  • Unblock once the basis of allotment is finalised
  • Transfer the amount for allotted shares to the issuer
This will co-exist with the current procedure of investors applying through sub-syndicate and syndicate members, with a cheque as a payment instrument. The ASBA is an application containing an authorisation to block the application money in the bank account to subscribe to an issue. If an investor is applying through ASBA, his application money will be debited from the bank account only if his application is selected for allotment after the basis of allotment is finalised, or the issue is withdrawn.

Under the ASBA facility, investors can apply to any public or rights issues by using their bank account. Investor have to submit the ASBA form (available at the designated branches of banks acting as SCSB) after filling in details such as name, PAN number, demat account number, bid quantity, bid price and other relevant details to the branch with an instruction to block the amount in their account. In turn, the bank will upload the details of the application in the bidding platform. The investor should ensure the details that are filled in the ASBA form are correct. Otherwise, the form is liable to be rejected.

In case if you applied in IPO of recently listed Coal India through ICICI direct or any other SCSBs, you might experienced that applied amount was always visible in your available balance but was not available to withdraw (blocked amount)because it could not be used by you untill the IPO allotment process is over. This is possible only because of ASBA facility.

Advantages of applying through ASBA facility

1. No need for cheque payment: The investor need not pay the application money through a cheque. He has to submit the ASBA which accompanies an authorisation to block the amount in the bank account - to the extent of the application money.

2. Refunds don't arise: The investor does not have to bother about refund, as in ASBA only that much money - to the extent required for allotment of securities - is taken from the bank account, only when his application is selected for allotment after the basis of allotment is finalised.

3. Interest ensured: The investor continues to earn interest on the application money as it remains in the bank account, which is not the case in other modes of payment.

4. Simple form: The application form is simpler. The investor deals with a known intermediary - his own bank. An investor who is eligible for ASBA has the option of making an application through the ASBA, or through the existing facility of applying with a cheque.

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Frequently Asked Questions on ASBA (Source: NSE)

1. What is “ASBA”?

ASBA means “Application Supported by Blocked Amount”. ASBA is an application containing an authorization to block the application money in the bank account, for subscribing to an issue. If an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized, or the issue is withdrawn/failed.

2. Detailed procedure of applying in IPO through ASBA.

Under ASBA facility, investors can apply in any public/ rights issues by using their bank account. Investor submits the ASBA form (available at the designated branches of the banks acting as SCSB) after filling the details like name of the applicant, PAN number, demat account number, bid quantity, bid price and other relevant details, to their banking branch by giving an instruction to block the amount in their account. In turn, the bank will upload the details of the application in the bidding platform. Investors shall ensure that the details that are filled in the ASBA form are correct otherwise the form is liable to be rejected.

3. Who can apply through ASBA facility?

SEBI has been specifying the investors who can apply through ASBA. In public issues w.e.f. May 1, 2010 all the investors can apply through ASBA. In rights issues, all shareholders of the company as on record date are permitted to use ASBA for making applications provided he/she/it: _ is holding shares in dematerialized form and has applied for entitlements or additional shares in the issue in dematerialised form; _ has not renounced its entitlements in full or in part; _ is not a renouncee; _ who is applying through blocking of funds in a bank account with the SCSB

4. Where can the investors get the ASBA forms for any issue?

The investor can generate e-form from NSE website for any issue. The same link is also available on BRLM’s (Book running lead manager) website also.

5. What advantage an investor has in applying through ASBA?

Applying through ASBA facility has the following advantages: (i) The investor continues to earn interest on the application money as the same remains in the bank account. (ii) The investor does not have to bother about refunds, as in ASBA only that much money to the extent required for allotment of securities, is taken from the bank account only when his application is selected for allotment after the basis of allotment is finalized.

6. Is it mandatory to apply through ASBA only? 

It is mandatory for all public issues opening on or after January 01, 2016.

7. Where should I submit my Application Supported by Blocked Amount (ASBA)? 

Investor may submit application form to his trading member or to a SCSB.List of Self Certified Syndicate Banks (SCSBs) and their designed branches i.e. branches where ASBA application form can be submitted, is available on the NSE website and on the website of SEBI (www.sebi.gov.in). The list of SCSB would also be given in the ASBA application form.

8. What is Self certified Syndicate Bank (SCSB)? 

SCSB is a bank which is recognized as a bank capable of providing ASBA services to its customers. Names of such banks would appear in the list available on the website of SEBI and the same is also available on NSE website.

9. Can I submit ASBA in any of the banks specified in the list of SCSBs? 

No, ASBA can be submitted to the SCSB with which the investor is holding the bank account.

10. How many applications can be made from a bank account? 

Five (5) applications can be made from a bank account per issue.

11. Am I required to submit ASBA only physically?

No, you can either fill up the physical form and submit the same to the SCSB/Trading member or apply electronically/online through the internet banking facility/online facility (if provided by your SCSB/Trading member).

12. Who should I approach if I find that I had given all correct details in the ASBA form, but application has been rejected stating wrong data?

You have to approach the concerned SCSB for any complaints regarding your ASBA applications. SCSB is required to give reply within 15 days. In case, you are not satisfied, you may write to SEBI thereafter at the following address:
Investor Grievance Cell, Office of Investor Assistance and Education,
Securities and Exchange Board of India
Plot No.C4‐A,'G' Block, Bandra Kurla Complex, Bandra(East), Mumbai: 400051
Tel: +91‐22‐26449000 / 40459000 Fax: +91‐22‐26449016‐20 / 40459016‐20

13. Whether my bank account will be blocked or only the amount to the extent of application money is blocked? 

No. the entire bank account will not be blocked. Only the amount to the extent of application money authorized in the ASBA will be blocked in the bank account. The balance money, if any, in the account can still be used for other purposes.

14. If I withdraw my bid made through ASBA, will the bank account be unblocked immediately?

If the withdrawal is made during the bidding period, the SCSB deletes the bid and unblocks the application money in the bank account. If the withdrawal is made after the bid closure date, the SCSB will unblock the application money only after getting appropriate instruction from the Registrar, which is after the finalization of basis of allotment in the issue.

15. Do I necessarily need to have a DP account with the SCSB where I intend to submit the ASBA application?

No. Investors need not necessarily have their DP account with the SCSB, where they are submitting the form.

16. Can I submit my ASBA application to a broker?

Yes. You can submit the ASBA application to your broker.

17. Who is responsible for errors in the data uploaded in the electronic bidding system in case of public issue?

In case there is an error in the data furnished in the application form submitted by investor, the investor shall be responsible. In case there is an error by SCSB/Trading member in entering the data in the electronic bidding system of the stock exchanges, the SCSB/Trading member shall be responsible.

18. Will I get the acknowledgement of receipt for applications submitted through ASBA?

Yes. The SCSB/Trading member shall give a counterfoil as an acknowledgement at the time of submission of ASBA and also the order number, generated at the time of uploading the application details, if sought by the investors in case of need.

19. What happens when the issue fails/is withdrawn?

In case the issue fails/withdrawn the SCSB shall unblock the application money from the bank accounts upon receiving instructions from the Registrar.

20. In case of any complaints regarding ASBA application whom can I approach?

In case of any complaints the investor shall approach the bank, where the application form was submitted or the Registrars to the issue.

21. In case a person is having bank account with a branch, for example, at Kolkata can he submit IPO application through ASBA at a branch of the bank in Guwahati.

Yes, this can be done provided that your bank have core banking facility and the ASBA form is submitted at a branch which is identified as designated branch by the bank.

Saturday, October 28, 2017

Look at High Debt while Evaluating Stocks

Dear Reader,
Should you invest in companies that carry large amounts of debt? That is a question every investor should ask when evaluating stocks.

Unfortunately, the answer isn’t as easy as “yes or no.” The correct answer is “it depends.” The problem is that some industries typically require more debt than others do.

For these industries, a higher debt load is normal. For example, utilities often borrow large sums of money when building new power plants. It may take several years to build the plant, which means no revenue and lots of debt.

Cash Cow

However, the useful life of power plants spans many years and when the debt on the plant is repaid the facility can become a real cash cow for the utility.

For other industries, a large debt load may signal something seriously wrong. Of course, any company might pickup a big note if it just bought a building or a competitor.

There are several tools you can use to determine whether a company is exposing itself to too much debt.

The first is the Debt to Equity Ratio. This ratio tells you what portion of debt and equity is used to finance a company’s assets.

Formula

The formula is: Total Liabilities / Shareholder Equity = Debt to Equity Ratio.

A ratio of 1 or more indicates the company is using more debt than equity to finance assets. A high number (when compared to peers in the same industry) may mean the company is at risk in a market where interest rates are on the rise.

If a company has debt, it has interest expenses. There is a metric called Interest Coverage that will give you a good idea if a company is having trouble paying the interest charges on its debt.

The formula is: EBITDA / Interest Expense = Interest Coverage.

EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization and measures the operating performance of a company before accounting conventions and non-operational charges (such as taxes and interest).

Ratio

The resulting ratio tells you whether a company is having trouble producing enough cash to meet its interest expense. A ratio of 1.5 or higher is where companies want to be. A lower ratio may indicate that the company has trouble covering interest expenses as well as other costs.

Debt is not a bad thing when used responsibly. It can help businesses grow and expand. However, misuse of debt can result in a burden that drags down a company’s earnings. 

We learnt from the great crisis of 2011 that companies with high debt on their books simply get slaughtered. While debt per se is not bad (if the company is able to borrow at a lower rate and deploy it in its business at a higher rate, the operating leverage works in its favour), excessive debt with high interest and repayment obligations can crunch the stock in times of downturn. So, as a long-term investment philosophy, it is best to steer clear of high-debt companies. 

Avoid Investing in Companies with High Capex Requirement 

We know the demerits of investing in stocks like Suzlon & GMR which have an insatiable appetite for more and more capital. To feed their perennial hunger, these companies dilute their equity by making FPOs, GDRs & FCCBs resulting in total destruction of shareholders wealth. Companies should be lean and mean requiring minimal capital but generating huge returns there from.

Do write to us in case of any queries, we will be delighted to assist you.

Wish you happy & safe Investing!


Regards,

Team - Saral Gyan