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Category: Investing

  • Fibonacci Retracement: Complete Guide on How to Use and Strategy

    Fibonacci Retracement: Complete Guide on How to Use and Strategy

    The origin of the Fibonacci series can be traced back to the ancient Indian mathematic scripts. This series was first introduced by an Italian mathematician Leonardo of Pisa, who was also known as Fibonacci. He lived from the late 12th century to the 13th century. His seminal work, “Liber Abaci” (The Book of Calculation), which was published in 1202 helped him introduce the Fibonacci sequence to Europe. The Fibonacci sequence is a series of numbers in which each number is the sum of the two previous numbers, generally starting with 0 and 1. The Fibonacci series is a set of infinite numbers i.e., no matter how many numbers you add to the series, it never ends.  

    Fibonacci Retracement

    The Fibonacci series is as follows,

    (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377)

    In the above set of numbers if you divide any number by the previous number; the ratio is always around 1.618. The Golden Ratio, approximately 1.618, also called Phi is a mathematical constant derived from the Fibonacci sequence. It has many applications in nature, art, and science. Our readers need to keep in mind that 0.618, when expressed in percentage is 61.8%. A number divided by the next highest number comes near to .6180

    (13/21=.6190, 21/34=.6176, 34/55=.6181, 55/89=.6179). The estimate nears 0.6180 as the numbers increase. This forms the base for the 61.8% retracement. A number divided by another two places higher comes near to .3820

    (13/34=.382, 21/55=.3818, 34/89=.3820, 55/=144=3819). This is the base for the 38.2% retracement

    A number divided by another three places higher comes near to .2360

    (13/55=.2363, 21/89=.2359, 34/144=.2361, 55/233=.2361).  

    What is Fibonacci Retracement?

    fibonacci retracemnet

    Fibonacci retracement is an indicator of technical analysis that is used in the stock market. The purpose of this tool is to recognize potential support and resistance levels in a candlestick chart of different financial assets. It is constructed on the Fibonacci sequence and the Golden Ratio, and it is a well-known indicator among traders and technical analysts.

    Calculation Of Fibonacci Retracement

    Calculation Of Fibonacci Retracement

    The commonly used retracement levels by analysts are 23.6%, 38.2%, 50.0%, 61.8%, and 76.4%.

    Any trader needs to follow these steps to calculate the retracement levels of a particular stock.

    Step 1. You need to identify a significant price move on your chart. This move can be either an uptrend or a downtrend. The starting point that a trader marks on the chart after applying the indicator should be a significant swing high or swing low.

    Step 2. Determination of the Fibonacci Ratios

    23.6% (0.236): we calculate this level by taking 23.6% of the pre-decided price range and adding it to the low point of an uptrend or subtracting it from the high point for a downtrend.

    38.2% (0.382): To Calculate 38.2% of the price range the trader needs to follow the same addition or subtraction technique as above.

    61.8% (0.618): To Calculate 61.8% of the price range use the same addition or subtraction method as above.

    Other levels of the Fibonacci Retracements like 50% or 76.4% are also calculated similarly.

    Step 3. Once you are done with the calculation of retracement levels start drawing horizontal lines at the calculated Fibonacci retracement levels. These lines represent the support and resistance levels for future price action that is expected to happen.

    Now, start observing how the price of the asset reacts to these retracement levels. Any kind of bounce or reversal near these levels may provide buyers and sellers with some good trading opportunities.

    Example of Fibonacci Retracement:

    Let us understand Fibonacci Retracement with an easy and simplified example

    Suppose you have identified a swing low of Rs.1000 and a swing high of Rs.1500 in an uptrend of a stock.

    After determining these points, you need to calculate the price range by subtracting the swing low from the swing high

    which implies that the price range will be (Rs.1500 – Rs. 1000) which equals Rs. 500

    Having found the difference between the price ranges you can now calculate the retracement levels

    Firstly, calculate 23.6% of the price range and add it to the swing low i.e., 23.6%*500=118+1000=1118

    Then calculate 38.2% of the price range and add it to the swing low i.e., 38.2%*500=191+1000=1191

    Now for the retracement level of 50%, divide the price range by 2 and add it to the swing low i.e., 500/2=250+1000=1250.

    Similarly, calculate the 61.8% of the price range and add it to the swing low i.e., 61.8%*500=309+1000=1309

    The values so derived (1118, 1191, 1250 and 1250) are the expected retracement levels.

    Since we all know that Fibonacci retracement is a leading indicator as well as a widely used and famous tool in technical analysis applied by traders, it also has some advantages and limitations that traders should keep in mind before making any sort of trading decision.

    Advantages of Fibonacci Retracement

    Advantages of Fibonacci Retracement

    Traders commonly value the following advantages of Fibonacci retracement

    1. Fibonacci retracement can be applied to various financial markets, including stocks, commodities, forex, and cryptocurrencies, on different timeframes like hourly, daily, weekly, and monthly, making it a multipurpose indicator for technical analysts.
    2. Traders use Fibonacci retracement in combination with other technical analysis tools, such as trendlines, moving averages, or oscillators. When different indicators give the same indication, like Fibonacci, chances are that the stock will move in the desired direction.
    3. Fibonacci retracement is used by traders to identify stop-loss orders range as per their risk levels.
    4. Fibonacci retracement can be used to identify potential profit targets. Traders often use the levels as reference points for setting profit targets.
    5. Fibonacci retracement is particularly useful for swing traders who often look for short- to medium-term price movements to earn from the stock market.

    Disadvantages of Fibonacci Retracement

    Disadvantages of Fibonacci Retracement
    1. Selecting the starting and ending points for the Fibonacci retracement analysis can be a tough task. It depends from trader to trader on what point they are choosing, which can eventually lead to varying retracement levels and trading decisions. This can lead to unnecessary confusion.  
    2. Relying solely and completely on Fibonacci retracement may lead to false buy or sell signals or missed trading opportunities.
    3. Even though traders use this indicator widely, there is no assurance that the price will precisely bounce at the estimated Fibonacci retracement levels.
    4. Fibonacci retracement may be difficult for beginner traders to understand since it might be confusing for them to choose the swing high or swing low.  
    5. Different timeframes can yield different retracement levels. Traders may face variations in levels on daily, weekly, or intraday charts.

    Relation between Fibonacci Series and Fibonacci Retracement

    The Fibonacci series and the numbers derived from it, such as the Golden Ratio (1.618), are used in the construction of Fibonacci retracement levels.

    The important retracement levels in Fibonacci retracement are ratios that are derived from the Fibonacci series. For example, the 61.8% retracement level corresponds to the inverse of the Golden Ratio (1/1.618).

    Fibonacci retracement is a real-world application of the Fibonacci series in technical analysis. Traders use the Fibonacci series and its ratios to find levels of support and resistance in financial markets for making sound trading decisions.

    Read Also: 5 Must-Read Best Swing Trading Books for Trader

    Conclusion

    conclusion

    Remember that the effectiveness of Fibonacci retracement levels varies, and they should be used in combination with other technical analysis indicators and risk management strategies to make informed trading decisions. Additionally, the choice of starting and ending points can be somewhat subjective, so practice and experience are essential when applying Fibonacci retracement in real trading sessions.

    FAQs (Frequently Asked Questions)

    1. Which are the most popular Fibonacci retracement levels?

      The most popular Fibonacci levels are 0.236, 0.382, 0.618.

    2. Is Fibonacci a leading or lagging indicator?

      Fibonacci is a leading indicator.

    3. Can I use Fibonacci in intraday trades?

      Yes, Fibonacci can be used on various timeframes including intraday.

    4. Who discovered the Fibonacci series?

      Leonardo Pisano discovered the Fibonacci series in the 12th century.

    5. What is the Fibonacci Series?

      The Fibonacci sequence is a series of numbers in which each number is the sum of the two preceding ones, typically starting with 0 and 1.

  • What is ATR (Average True Range): Calculation, Advantages & Disadvantages Of ATR

    What is ATR (Average True Range): Calculation, Advantages & Disadvantages Of ATR

    In our previous blogs, we have discussed about stocks and technical analysis.

    For reference, here are some insights into technical analysis.  

    Technical Analysis

    Technical analysis is a method of analysing financial markets and making trading or investment decisions based on the historical price. It is primarily focused on studying past price movements and chart patterns to predict future price direction. Technical analysts identify support and resistance levels, which are price levels where an asset tends to find buying or selling pressure, respectively. Various technical indicators, including moving averages, Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), provide quantitative measures of price momentum. The average true range is one such technical indicator. Let us go through an in-depth analysis of ATR.

    What Is ATR (Average True Range)

    What is ATR?

    ATR Average true range

    The Average True Range (ATR) is a technical indicator used in the analysis of stocks, primarily for estimating the volatility and price range of an asset. Developed by J. Welles Wilder in his book “New Concepts in Technical Trading Systems.” ATR is a valuable instrument for traders and investors to measure market conditions and manage risk.

    Here are the key points about the Average True Range:

    1. The ATR is designed to measure the volatility of an asset, representing the average range between the daily high and low prices. A higher ATR value indicates greater volatility, while a lower value indicates lower volatility.
    2. The ATR is derived from the True Range, which is the greatest of the following three values:
    • The current day’s high minus the current day’s low.
    • The absolute value of the current day’s high minus the previous day’s close
    • The absolute value of the current day’s low minus the previous day’s close.
    1. To calculate the Average True Range, a moving average is taken of the True Range values over a specified period. The most commonly used period is 14 days, but traders can adjust this period as per their preferences.
    2. Higher ATR values imply that the asset is going through greater price fluctuations, which can be understood as increased uncertainty or risk. Lower ATR values indicate relatively stable or less volatile market conditions.
    3. A rising ATR can confirm the strength of a trend, especially when in combination with other technical indicators. It suggests that the market is experiencing strong price movement.
    4. The choice of the ATR’s look-back period depends on the trader’s goals and time period. Shorter periods provide more responsive values, while longer periods offer a smoother, more stable measure of volatility.

    The Average True Range is a multipurpose tool of technical analysis that when used in combination with other indicators and strategies can help in making informed trading decisions. It helps traders better analyse and manage the risks linked with market volatility, allowing for more precise stop-loss and position sizing.

    Read Also: Best Options Trading Chart Patterns

    Calculation of ATR.

    calcualtion of ATR

    The Average True Range (ATR) is calculated by following a specific formula. It involves several steps and the use of True Range values for a selected number of periods.

    Here’s the formula and a step-by-step explanation of how to calculate the ATR:

    Step 1:

    Calculate True Range (TR)

    True Range represents the greatest of the following three values for a given trading period.

    1. The difference between the current day’s high and the current day’s low.
      (Current Day’s High – Current Day’s Low)
    2. The absolute value of the difference between the current day’s high and the previous day’s close
      (Current Day’s High – Previous Close)
    3. The absolute value of the difference between the current day’s low and the previous day’s close. (Current Day’s Low – Previous Day’s Close)

    Step 2:

    Calculate the Average True Range (ATR)

    The ATR is calculated as a moving average of True Range values over a specified number of periods (usually 14 days is the default period).

    Here’s how to do it:

    1.   Select the number of periods (e.g., 14).

    2.   For the first True Range value (TR1), simply take the TR of the first period.

    3.  For the next ATR calculations, use the following formula:

    • ATR = [(Prior ATR x 13) + Current TR] / 14
    • Where “Prior ATR” is the ATR value calculated for the previous period, “Current TR” is the True Range value for the current period, and “14” represents the selected number of periods.

    The process is repetitive for each subsequent period. Then continue to calculate the ATR by using the prior ATR and the current True Range.

     Here’s an example to illustrate the calculation of the ATR:

    Let’s say we want to calculate the 14-day ATR of a stock:

    Day 1:

    ATR1 = 2 (True Range for the first day)

    Day 2:

    ATR2 = [(2 x 13) + 4] / 14 = 2.07

    Day 3:

    ATR3 = [(2.07 x 13) + 3] / 14 = 2.01

    Day 4:

    ATR4 = [(2.01 x 13) + 6] / 14 = 2.06

    The ATR value provides an indication of the average price range and volatility over the selected number of periods. Traders use it to assess the level of price volatility, set stop-loss levels, and determine position sizes based on their risk tolerance.

    Advantages & Disadvantages Of ATR

    Pros and cons ofusing ATR

    The Average True Range (ATR) is a widely used technical indicator in trading and investing. Like most tools, it comes with its own set of advantages and limitations.  

     Here are the advantages and disadvantages of using the ATR:

    Advantages of ATR:

    • ATR is a purely mathematical indicator, which means it provides objective data. It’s not influenced by subjective opinions or emotions, making it a reliable tool for risk management.
    • Traders can adjust the look-back period for the ATR to match their specific trading strategies and time horizons. Common periods include 14 days, but you can choose longer or shorter periods based on your needs.
    • A rising ATR often indicates increased price volatility, which can confirm the strength of a trend. This is especially useful for trend-following traders.

    Disadvantages of ATR:

    • ATR is based on historical price data, and it doesn’t predict future price movements. It provides information about past volatility, which may not always reflect current or future market conditions.
    • Like many technical indicators, the ATR is a lagging indicator, which means it reacts to price movements that have already occurred. This lag may limit its effectiveness in rapidly changing or highly volatile markets.
    • ATR can generate false signals, especially in choppy or sideways markets. Traders need to use it in conjunction with other indicators or tools to minimize false signals.
    • For beginners, the concept of ATR and its calculations can be complex. Understanding how to use ATR effectively may require some time and practice.
    • ATR provides information on volatility but doesn’t offer insights into other important factors like trend direction, market sentiment, or the potential impact of news events.

    Conclusion

    CONCLUSION

    To conclude, the ATR is a valuable tool for traders and investors looking to measure and manage volatility and risk. However, it’s essential to use it in combination with other indicators and analyse it carefully to create a comprehensive trading or investment strategy. Additionally, identifying its limitations can help the investor to use it effectively and in a much better way.

    Read Also: Rising Window Candlestick Pattern

    FAQs (Frequently Asked Questions)

    1. What is the full form of ATR?

      ATR stands for Average True Range.

    2. What is prior ATR?

      Prior ATR” is the ATR value calculated for the previous period.

    3. Who developed ATR?

       ATR was Developed by J. Welles Wilder in his book “New Concepts in Technical Trading Systems”.

    4. What is the default period of true range for calculating ATR?

      The default period of the true range for calculating ATR is 14 days.

    5. Is ATR a leading or lagging indicator?

      ATR is a lagging indicator.

  • Why It Is Essential To Teach Your Children About Saving And Investing

    Why It Is Essential To Teach Your Children About Saving And Investing

    According to the Pew Analyzed Census Bureau data, only 24% of adults are financially independent before age 22, to that of 32% in 1980. Most adults today complain that they were, never taught about financial independence in schools or at home. It is because of this reason, they struggled with their finances in the later years of life. Financial knowledge is not something that you can learn in one day, month or year. It takes years of discipline and hard work to be financially independent. Parents must teach their kids the basics of financial literacy, like saving and investing, from a young age. 

    Addressing the above problem. Today, we will discuss about the importance of teaching your children about saving and investing.

    Why Do We Need To Teach Financial Literacy To Our Kids?

    quick summary of the Need To Teach Financial Literacy To Our Kids

    Have you ever seen the construction of a building? Laying a strong foundation for the building is important, to make it last for years. Similarly, to achieve financial independence, it is necessary to give financial literacy to children from a young age. 

    But, what exactly is financial literacy?

    Financial literacy

    financial literacy

    Financial literacy is understanding the behaviour and working of money to make sound financial decisions like budgeting, asset building, loan financing and debt repayment. Having financial knowledge helps a person to feel empowered. Moreover, people with better financial education are less likely to be financially vulnerable in future. According to research in India, only 27% of the people are financially literate. It means only 1 out of 5 Indians are capable of making their crucial money decisions by themselves. The numbers are bizarre because dealing with money is one of the most customary aspects of human well-being. 

    Thus, it is the responsibility of the parents to instil this basic human understanding in their children. 

    Why Build a Strong Financial Foundation?

    • To build a strong financial foundation, children should be made familiar with basic concepts like saving and investing from a young age. 
    • Saving is that part of your income that is left, after spending upon your consumption. Any person who has just started earning spends a prominent chunk of their income on consumption and saves little to no amount. 
    • But, as they grow professionally, they start saving more for their future & the people dependent on them. Saving helps to build a cushion to rely on during uncertain times.
    • Investing is putting your money to work. Heard this famous quote, “Rich doesn’t work for Money, Money works for them” Weird right? But true.
    •  By putting your money into Assets, you can make your money work for you even when you are not working. For example, investing in real estate could earn you a rental income and give you capital appreciation in the long run.

    Parents should focus on securing their children’s future financially but also focus on building and developing their characters. So that, in case of future uncertainties, they can fight through. 

    Preparing for Future Financial Challenges

    The majority of the people feel anxious when asked about their financial situations. As we grew, we realised that we weren’t ever, taught about financial education in our schools or colleges on which we’re supposed to make real-life decisions. How many of you have learned about finances in your schools or colleges? 

    I could confidently say that none. Our educational curriculum was never designed in a way to help us with our day-to-day problems. Most adults even today, don’t even know that there are options other than FD and mutual funds to invest in the markets. 

    Providing your children with early financial knowledge could help them to have a better future. 

    Introducing Financial Concepts to Children As They Grow

    First, introduce them to the notion of money at a young age. Its importance, how it works, why it is necessary & other things related to it

    • Rewarding- Reward them every time they progress in their work, like for every book they read. Give them a certain amount of money as a reward or when they complete their homework on time.
    Rewarding
    • Budgeting- Give them a monthly or weekly allowance and tell them to manage their expenses in that fixed amount. Explain how they should allocate their money towards their needs, wants and savings. 
    Budgeting
    • Savings- explain to your kids why saving is important and how it can help them. Encourage them to Save a portion of their allowances or paychecks (when they start working). 
    savings
    • Taxes- When they grew a little old and started doing part-time work. Teach them how taxes work and how employer deducts taxes from their paycheck. 
    taxes
    • Investing- When they start to work, teach them about investing and financial markets. Explain to them how they should build assets. 
    investing
    • Compounding- Teach them about compounding and the significance of early investing in life. Financial literacy is something that everyone should learn about. No matter your profession or field of interest, money is something that we all deal with daily. 
    compounding

    Therefore, every person needs to be financially independent & financially literate in life because life is very uncertain. 

    Conclusion 

    If you are a parent or a guardian to any child, now you know why you must teach them about finances. No parent wants to see their child. Therefore, they must teach kids about money, which they were never taught about by their parents. It is easy to instil good habits in children at a young age as they are growing. Apart from just giving financial learning, parents should also start to save and invest early to give their children a more secure future. 

    FAQs (Frequently Asked Questions)

    1. Why financial literacy is necessary?

      Financial literacy is necessary to make sound financial decisions in life. Money is something that we all deal with on a day-to-day basis.

    2. How to improve financial literacy?

      To improve financial literacy you can read finance books like ‘Rich Dad, Poor Dad, ‘Think and Grow Rich’, ‘And Intelligent Investor’ to learn about the stock market. 

    3. Why financial literacy is essential for students?

      Financial literacy is essential for students as it helps them understand how to make real-life money-related decisions once they start earning.

    4. Is it necessary for children to learn how to wisely spend their money?

      Yes, children need to learn to wisely spend their money.

    5. How to explain investing to a beginner?

      You can learn investing by understanding the basic technical jargon like return, risk, portfolio etc. After that, you consume content from different sources like books, online platforms & courses. 

  • Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

    Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

    In the last 10 years, the mutual fund industry in India has experienced a growth of ₹ 40,00,000 crore in the value of AUM (Assets Under Management). It implies that India is unleashing the full potential of mutual funds to grow their money. Investing directly in the stock market can be an overwhelming task. Thus, investing in mutual funds offers a more straightforward way to create long-term wealth.

    quick summary of mutual funds

    Understanding What are Mutual Funds

    As stated earlier, mutual funds pool the money from small investors and invest them in the securities of other companies listed on the stock exchange. Investment holders share the income earned through these investments of interest and dividends with the capital gains benefits. Thus, a  mutual fund is the most suitable form of investment for the common man, as it allows them to diversify and invest in a more professionally managed security basket, without them being actively involved.

    Mutual Funds as a concept first originated in Britain in the 19th century but developed in the U.S. in the late 19th and early 20th century at the principal money centres of the North-East. These funds were primarily close-ended and used to finance growth in the U.S.A. after the Civil War. However, the crash of stock markets in 1929 led to the demise of these close-ended funds. In 1940, the U.S. had about 68 funds; currently, there are several thousands of schemes. More significantly, in the year 1965 only 2 to 3% of U.S. households, owned fund shares. Nearly one-fourth of all U.S. households invest today in Mutual Funds.

    The Indian mutual fund industry began with the formation of Unit Trust of India (UTI) in 1963 with the introduction of its first biggest scheme ‘Unit Scheme ’64’. The UTI then introduced several schemes for different sections of people. The public sector monolith operated under monopoly conditions and in an over-regulated economy till the mid-eighties. In 1987, commercial banks and insurance companies were also permitted to launch schemes.

    Read Also: Types of Mutual Funds in India

    Features of Mutual Funds

    Professional management

    Mutual funds are managed by professional experts, who are experienced in their respective fields. It gives the investor a sense of satisfaction that their hard-earned money is in good hands. These professionals are highly skilled and know when to enter and exit the market and accordingly churn the portfolio depending on the market dynamics.

    Diversification

    Mutual Funds let you invest in a more diversified portfolio without setting in much time. The main idea behind diversification is the simple reason given by the investor Mr. Warren Buffet, that never put all your eggs in one basket. Diversification helps to lower the risk of the investor. Diversification in mutual funds is done based on the objectives of the investors.

    Liquidity

    The liquidity of any asset shows how quickly it can be converted into cash. Assets that take less time to convert are highly liquid and the assets which take more time to convert into cash are less liquid. Mutual funds allow the investors to withdraw their money anytime until there are some restrictions by selling them at the current NPV.

    Time-Saving

    People who want to grow their money but do not have time to be actively indulged in the financial markets invest in mutual funds. Since mutual funds are managed by professionals investors do not have to spend their time researching every single company they want to invest in.

    Types of Mutual Funds

    There are various types of mutual funds present in the market. A person can invest in diverse mutual funds depending upon their needs. Mutual Funds could be differentiated based on their structure, choice of asset class and financial goals. Let’s try to understand each one of them one by one.

    Based on the choice of the asset class

    1. Equity Mutual Funds

    Equity Mutual Funds are the one wherein the pooled money of the investors are invested in different companies listed on the stock exchange. They are expected to yield more returns as compared to debt and hybrid funds. Therefore, the risk associated with them is also higher. The investment holders earn through dividends and capital gains in Equity mutual funds.

    2. Debt Mutual Funds

    When the pooled money of the investors is invested in the debt securities of the company they are called debt mutual funds. Debt mutual funds are suitable for investors who do not want to bear high risk and want consistent returns. Investors earn an interest income on them and also capital gains.

    3. Hybrid Mutual Funds

    Hybrid mutual funds are a mix of both debt and equity funds. The money of the investors is invested in such a way that they could earn higher returns compared to debt funds & the risk involved is less than the equity funds.

    Based on the Financial Goal 

    1. Growth Mutual Funds

    When the majority amount of the investor’s money is invested in growth companies or equity funds, they are called growth mutual funds. The investor should have a high-risk tolerance to invest in growth mutual funds.

    2. Income Mutual Funds

    People who want a consistent stream of passive income generally invest in Income mutual funds. Funds that fall under this category generally invest in securities like bonds, corporate debentures and Government securities. 

    3. Balance Mutual Funds

    Investing in balanced mutual funds provides the best of both worlds. The basic objective of the portfolio manager handling balanced Mutual funds is to provide the investors with a steady income flow along with growth. 

    Based on their structure

    1. Open-ended Mutual funds

    Open-ended mutual funds do not have any kind of restrictions over them. Restrictions could be the number of units sold, or having a maturity date. Open-ended funds are very flexible and allow the investors to exit anytime at the given NPV. 

    2. Close-ended Mutual Funds

    Close-ended mutual funds have some restrictions over them like no repurchase facility and a pre-defined maturity period. With all the restrictions they have lost their significance among the investors and now are hardly in any use.

    Benefits of investing in Mutual Funds

    Convenience

    Mutual funds are a convenient form of investing. You can start investing in mutual funds with as little as Rs.500 per month through an SIP investment. You can invest in mutual funds depending upon your convenience. Investing in mutual funds can be done through either SIP or lumpsum investment. 

    Financial discipline

    It is very important to have financial discipline nowadays. Because today life is more unpredictable than ever before. Everyone wants to give a secure future to their loved ones and investing in mutual funds is one way of doing it. Doing early financial planning not only helps oneself but also ensures a secure future for the people who are dependent on you.

    Low-cost

    Since so many investors pool their money to invest in mutual funds, therefore, the cost of mutual funds per investor comes out to be less. The expense ratio of managing mutual funds is also less as compared to when an investor invests his money directly into the markets.

    Reliability

    Mutual funds are very reliable as they are watched by the regulatory body SEBI (Security Exchange Board of India). There are various mutual funds present in the market like the ICICI prudential mutual fund, SBI mutual fund, HDFC mutual fund etc. 

    How do Mutual Funds work?

    • First, many small investors come together who share a common financial objective. The objective could be, investing in growth funds or having a regular source of passive income.
    • Then, these small investors pool their funds together.
    • After that, these funds are transferred to the portfolio manager who will manage these funds.
    • He will then invest these funds in various financial securities depending upon the financial expectations of the investors.
    • After investing, the portfolio manager analyses how the investments are performing and accordingly sells and buys the new and existing mutual fund units.
    • Then, the returns generated on investments are returned to the investors.
    • Bonus tip mutual fund units are deposited in the investor’s Demat account. Open your Demat account today with Pocketful.

    Read Also: Debt Mutual Funds: Meaning, Types and Features

    Conclusion

    Thus, after reading the above article, you must be clear that investing in mutual funds is a simple and easy way to invest your money in the stock market. Investing in mutual funds lets you experience the massive potential of the stock market without devoting much time to it. But one thing that you should keep in mind is that investing in mutual funds is subject to market risk so invest accordingly. As stock market is highly volatile and reacts aggressively to market news. 

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1Types of Demat Accounts in India
    2Features and Benefits of Demat Account
    3Can I Have Multiple Demat Accounts in India?
    4How to Open a Demat Account Online?
    5Small-Cap ETFs to Invest in India
    6Best Sip Apps in India for Investment

    FAQs (Frequently Asked Questions)

    1. How to invest in mutual funds?

      To invest in a mutual fund, you need to have a demat account. Open your Demat account today using Pocketful.

    2. What is NAV in mutual funds?

      NAV stands for Net Asset Value in mutual funds. It tells about the performance of the mutual funds.

    3. What is SIP in Mutual Fund?

      SIP in mutual funds is a way of investing in mutual funds. Wherein you invest a small amount regularly in mutual funds.

    4. Can I invest Rs. 2000 in mutual funds?

      Yes, you can invest Rs.2000 in mutual funds using SIP.

    5. What are Tax-saving mutual funds?

      ELSS is an example of a Tax-saving mutual fund. Tax saving mutual fund is like any other regular mutual fund with added tax advantage.

  • What are ETFs? Are ETFs good for beginner investors?

    What are ETFs? Are ETFs good for beginner investors?

    Recently, Exchange Traded Funds abbreviated as ETFs have gained popularity among investors. For the various benefits they offer. ETFs are a good investment option for beginner investors as they offer a collection of stocks with similar characteristics in one place. Investing in ETFs enables investors to have a diversified portfolio without doing research for individual stocks. ETF helps to minimise the risk of the investor & maximise his return on his portfolio.
    By the time you finish reading this article. You will have a clear idea of whether you should invest in ETFs or not.

    quick summary of ETF

    What are ETFs or Exchange- Traded Funds?

    In simpler words understand like, that it is a box filled with many pebbles,& these pebbles are individual stocks or bonds with similar characteristics. An interesting fact is that specific ETFs track the movement of indices like NIFTY50, SENSEX, etc. So, you expect the same returns on your investment as the index’s annual CAGR.

    Exchnage Traded Funds

    Looking into the history of ETFs in India, we see that. The first ETF in India was launched in 2002 by Nippon India Mutual Fund (erstwhile Benchmark Asset Management Company Ltd). Listed on January 8th 2002, it witnessed a trading of 1.30 crores on the first day. The journey to listing of the 100th ETF on NSE took more than 19 years. The last one-year period has seen a lot of activity in the ETF space, with 21 ETFs getting listed on the NSE. The assets under management of ETFs in India are now at Rs. 3.16 lakh crores (end of May 2021), witnessing more than 13.8 times increase in five years,  compared to Rs. 23,000 crores (end of April 2016).

    ETFs offer the best of both worlds, like Mutual Funds, ETFs represent professionally managed collections or baskets of stocks or bonds. And just like individual stocks, they trade on the stock exchanges, which means you can buy and sell them like individual stocks.

    Types of ETFs in India

    There are different types of exchange-traded funds (ETFs) available in India, offering investors a variety of options to choose from according to their financial goals and risk tolerance.

    • Equity ETFs : Equity ETFs track stock market indices such as Nifty 50, Sensex, or Nifty Next 50. They provide investors with broad market exposure and are suitable for the long term. 
    • Debt ETFs : Debt ETFs invest in government or corporate bonds, such as Bharat Bond ETFs. These are known for stable income and low risk and are suitable for retirement or capital preservation. Investments in them can generate regular interest income.
    • Gold ETFs : Gold ETFs track gold prices and give investors an opportunity to invest in gold without buying physical gold. They are suitable for inflation protection and portfolio diversification.
    • International ETFs : International ETFs track stocks or indexes from foreign markets such as the US, China, etc. They offer global diversification and the opportunity to invest in foreign markets but also carry certain risks.
    • Smart Beta ETFs : Smart Beta ETFs move away from traditional index tracking and focus on tracking smart beta indices focused on value, growth, etc. They provide investors with an opportunity to earn better risk-adjusted returns.

    Investors should consider their investment goals, risk tolerance, and time horizon when choosing among these different types of ETFs. Choosing the right ETF can improve portfolio performance and help achieve financial goals.

    What are the pros of investing in ETF?

    Investing in ETF has several benefits, some of which are listed below.

    1. Diversification:

    ETFs enable the investor to diversify their portfolio without the hassle of individually picking out each stock. Investors seeking to invest in a specific type of sector or industry. ETFs are a go-to option for people who do not want to spend their time researching each company individually. They cover most of the asset classes and sectors for the most part.

    2. Low expense ratio:

    The expense ratio is the operating expense of the Security, divided by the value of that security. In other words, it is the expense that the investor has to bear for the Security. An expense ratio below 1 is good. And ETFs offer an expense ratio below 1.

    3. Easily tradeable:

    Investors can trade ETFs just like individual stocks, which makes them highly liquid, meaning you can sell and buy them anytime during market hours.

    4. Tax-efficiency:

    Due to its low turnover, ETF offers tax relief to investors. The investors are charged 15% on short-term equity gains. And 10% on long-term equity hains after the exemption of the first 1 lakh rupees.

    5. Transparency:

    ETFs typically have the same securities as the index or the benchmark they track. Some ETFs disclose their holdings regularly, while others disclose them on a monthly, or quarterly basis.

    What are the cons of investing in ETFs?

    Investing in ETF has several disadvantages, some of which are listed below.

    1. Low trading volumes:

    Even though ETFs have become popular lately, their trading volume is considerably low compared to the other securities listed. Volume is the total buying and selling of a specific security over the trading exchange.

    2. Lack of liquidity:

    Due to low trading volume, sometimes it becomes hard to sell the ETFs because there is no one willing in the market to buy them at the price you are offering at that time. Therefore, ETFs are not the most liquid asset to hold.

    3. Composition risk:

    Since ETFs are already tailored-made investment options. Sometimes, they may have some securities in the group that you do not want to hold. Therefore, you do not have a choice for customisation.

    4. Issue of control:

    ETFs offer less control as the investor does not choose the securities in the ETF by his own will. Also, the portfolio manager swaps or churns the portfolio depending on his expertise.

    ETFs vs. Stocks vs. Mutual Funds: Which is Better?

    Before starting to invest, it’s important to understand the difference between ETFs, stocks, and mutual funds and which option is suitable for whom.

    FeatureETF (Exchange Traded Fund)StocksMutual Funds
    RiskModerate (Diversified portfolio)High (Investment in a single company)Low to High (Depends on type of fund)
    ReturnsIndex-based, relatively stableCan be very high or very lowDepends on fund manager’s performance
    CostLow (Lower expense ratio)Brokerage chargesSlightly higher (Includes fund management fee)
    LiquidityHigh (Traded throughout the day)HighLower (Redeemed at NAV, once daily)
    DiversificationYes (Index-based spread across many stocks)No (Single stock exposure)Yes (Diversified portfolio by fund manager)
    ManagementPassive (Tracks an index, no active manager)Self-managed (Investor makes decisions)Actively managed (By professional managers)
    OwnershipIndirect (Holds a basket of underlying assets)Direct (Ownership of shares in a company)Indirect (Units of pooled fund investments)
    • ETFs are a better choice for those who want low costs and good diversification and are comfortable trading on their own.
    • Stocks are suitable for active traders and high risk takers. 
    • Mutual funds are for investors who like the convenience of professional management and prefer regular SIPs.

    Points to keep in mind before investing in ETFs

    • First, determine the assets, in which you want to invest. Choose the best possible ETF according to your risk appetite and availability of funds.
    • Go for those ETFs that offer a low expense ratio. So, you can save on your operating costs.
    • Invest in ETFs with high liquidity so you can sell them without any hassle whenever you want. Otherwise, it would be a hectic task.
    • Check the ETF disclosure reports to ensure that your financial goals align with the objectives of that particular ETF.
    • Lastly, regularly check the performance of the ETFs and take the required measures according.

    Read Also: What is Nifty BeES ETF? Features, Benefits & How to Invest?

    Conclusion

    From the above article, we can conclude that, as a beginner investor, ETFs could be an adequate option to start your investing journey. Keep in mind that everything has pros and cons & the same applies to ETFs. Keeping a check on a few things and investing with patience and discipline can yield lofty returns for investors.

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1Mutual Fund vs ETF. Are They Same Or Different?
    2Best ETFs in India to Invest
    3ETF vs Stock – Which One is the Better Investment Option?
    4Gold ETF vs Gold Mutual Fund: Differences and Similarities
    5ETF vs Index Fund: Key Differences You Must Know

    FAQs (Frequently Asked Questions)

    1. What are ETFs in the stock market?

      ETFs or exchange-traded funds are financial securities that resemble the characteristics of both Mutual Funds and Stocks. In simpler words, a collection of different stocks to track the performance of a specified index.

    2. How do ETFs work?

      ETFs are like common stocks on the stock exchanges. They track the movement of the underlying asset and perform accordingly.

    3. What are the types of ETFs?

      Different types of ETFs are present in the market like index ETFs, sector ETFs, and commodity ETFs.

    4. Which are the best-performing ETFs in India?

      Kotak PSU Bank ETF, CPSE Exchange Traded Fund, UTI S&P BSE Sensex ETFETF are the top-performing ETF funds for the past year.

    5. What are CPSE ETFs?

      CPSE ETF (Central Public Sector Enterprises Exchange-Traded Fund). An investment instrument that allows you to invest in Central Government public sector enterprise.

  • How to use technical analysis on charts

    How to use technical analysis on charts

    If you are active in the stock market, you must have heard the term technical analysis quite often. Technical analysis is analysing the market movement and catching the trend. Technical analysis is used for short-term trading or investment. Wherein you gain by capturing the small price difference within a short period.

    quick summary of technical analysis

    What is technical analysis?

    Technical analysis is analysing the market based on historical data, price & volume primarily. The Main objective of technical analysis is to predict future trends & price movements. This objective goes against the past established theories. Like never trying to predict the markets, focusing on the long term, doing fundamental analysis and more, because for all these reasons Relevance of technical analysis gets questioned.

    What is technical analysis

    Technical analysis follows the ideology of history repeating itself. Following this principle, various techniques have been developed over the years. Like trading using price action, indicators, chart patterns and more. Patterns get identified using the past historical data of the companies and the indices present. To draw inferences for making the entry-exit decisions in a trade.

    Read Also: Best Options Trading Chart Patterns

    How to do technical analysis?

    There are a few things you should understand before starting to do a technical analysis which are:

    1. Trend:

    The direction in which the market moves is called a trend. In the stock market Trends can be of three types. Upward, Downward and Sideways. Let’s understand each one of them:

    market trend
    • Upward trend-
      The market is in an upward trend when it keeps making new higher highs. And when the market is in an upward trend we say that the market is bullish.
    • Downward trend- 
      The market is in a downward trend when it keeps making lower lows. When the market is in a downward trend and keeps falling we call it a bearish sentiment.
    • Sideways trend–
      When the market moves in a fixed range for some duration it is said to be sideways. We often say that the market is consolidating when it moves like this.

    2. Price action:

    If you are active in the Stock Market you must have heard the term Price Action. So Price Action is the process of analysing the price movement of a security or asset and determining potential entry and exit points for a trade. While trading with Price Action, the main task is correctly identifying the support and resistance levels on the chart.

    price action

    Let’s  briefly understand what support and resistance levels are:

    • Support –
      Support is that level on the chart from where the price is likely to increase or reverse its trend. Support shows the minimum willingness of the buyers to buy the security. To make a support line on a chart you look for a common point from where the price is bouncing back. Support levels on the chart help to identify breakouts.
    • Resistance-
      Resistance is the price level zone on the chart from where the price is likely to decrease or change its trend. Mark the points on the chart, from where the price is reversing. This way, You will see the resistance levels on the chart.

    3. Chart patterns:

    Chart patterns are the Figures and patterns that form on the chart of an asset. These patterns have been developed over a while, using historical data from the past 100 years. Chart patterns show or predict the price movements considering how the price has redacted in the past. Broadly chart patterns fall into three main categories that are listed below:

    chart pattern
    • A continuous pattern indicates that a trend will continue for some time.
    • A reversal pattern indicates that the price may change its movement & there will be a price reversal.
    • A bilateral pattern may show that the market is highly volatile & the price could go either way.

    4. Candlesticks:

    Candlesticks are a type of price chart used in technical analysis. It is the most popular type of charts used by traders. It shows the High, Low, Open and Close prices.

    candlestick pattern
    • A green candlestick depicts that the price is moving in an upward direction. The wick shows the maximum price level it had touched in that period. The upper part of the green body shows the closing. The lower part of the green body shows the opening of the price.
    • A red candlestick depicts that the price is moving in a downward direction. The wick shows the highs and lows it had made. The upper body part of the red candle indicates the price opening & the lower body part shows the closing price.

    5. Indicators:

    Indicators in the stock market are mathematical tools developed using advanced algorithms and historical data to predict price movements. Different charting platforms provide their users with several indicators to use. Some famous indicators are listed below:

    indicator
    • RSI (Relative Strenght Index):
      RSI is one of the most popular indicators among traders. It helps in identifying the overbought and oversold stocks. After reaching a saturation point potential exits and entries are forming in the trade.
    • MACD (Moving average divergence Convergence):
      MACD was developed by ‘Gerald Appel’ in the late 1970s. It was designed to reveal changes in the strength, direction, momentum, and duration of a trend in a stock’s price.
    • VWAP ( Volume Weighted Average Price):
      Vwap is a technical indicator that indicates the price movement based on the volume of the security. Volume is the total buying and selling of the financial asset. In case of high buying volume, the price falls. On the other hand higher buying volume, the price increases. 

    After understanding all these terms like Trend, Price Action, Indicators, and Chart patterns, it depends on the personal preference of the trader and which tools they use for technical analysis.

    Five simple steps of technical analysis for any beginner or a seasoned trader

    1. Identify the trend:

    The first thing in doing technical analysis is to identify the trend in the market. You can use trendlines to identify the Trend. To draw a Trendline join the higher highs or, the lower lows of the candles. Another way of identifying the trend in the market is by using indicators. Many indicators help to capture the Trend. Analyse if the market is in a downtrend. Up trend or sideways.

    2. Make support and resistance levels:

    After identifying the Trend in the market, make support and resistance levels. Look for the points from where the price is reversing its movement. Again, you can identify the support and resistance level by yourself or with indicators.

    3. Look for breakouts:

    A breakout indicates a trend movement in the price after breaking the support or the resistance levels. For example, if the resistance breaks, the price may move in a bullish trend for some time. However, if the support breaks, the price may move in a Downward Trend.

    4. Identify entry and exit points:

    After identifying a Breakout it’s important to determine your entry & exit prices. Sometimes, the markets are so volatile that you can’t get an entry in the trade at the desired price. In that case, you should not run after the Trade but look for another entry.

    5. Pre-determining targets and stop loss:

    The last and most crucial step is to pre-define your targets and stop loss even before entering the trade. When you enter a Trade & it’s going in your desired direction. It makes you overwhelmed and without a definitive target. You keep on trailing the trade and end up making a loss.

    Read Also: Chart Patterns All Traders Should Know

    Conclusion

    Thus, summarising the above read, we can conclude that Technical Analysis is also an important branch of investing. It helps us to invest and trade in the market in the short-term and medium-term. Doing technical analysis requires precision, perseverance and practice. While investing or trading one must keep their emotions under control to be successful in the market.

    FAQs (Frequently Asked Questions)

    1. What is technical analysis in the stock market?
      Technical analysis in the stock market is the process of identifying the trends and predicting the price direction.
    1. What are the best books for technical analysis?
      There are so many good books in the market for technical analysis. Example Encyclopedia of Chart Patterns, Technical Analysis of the Financial Markets: and many more.
    2. What is the difference between fundamental analysis and technical analysis?
      Fundamental analysis assesses the financial health of the company. Technical analysis analyses the share price movement.
    1. What is the Dow Theory of technical analysis?
      Dow’s theory was taken from the editorials of Charles H. Dow. According to this theory, a shift in the bullish or bearish trend is confirmed by multiple indices.
  • 5 points to be considered before buying or selling any stocks

    5 points to be considered before buying or selling any stocks

    Choosing the right stock to invest in is a very grinding task and selecting the right Stock at the time is even more gruelling. So many Investors find it hard to decide when to Buy and Sell a stock. Even after doing a thorough analysis of a company or an industry if you fail to enter the investment at the right time, all the research goes in vain. Similarly, not exiting from the Stock at the right time can also result in losses. So, what to do in that case?

    5 Points to Consider Before Buying and Selling

    Below We have mentioned five such points that could help you to make Buying and Selling decisions timely. So that you could invest in the stock market with ease.

    QUICK SUMMARY of 5 Points to Consider Before Buying and Selling

    1. Invest in the industry of your interest:

    • The first step for anybody, when they start investing in the stock market, is choosing the right industry. Choosing the right industry, sector or business is the core foundation for building a strong portfolio.
    • Legends like Warren Buffet always suggest investing in companies in which you have an interest or you are familiar with their business. It encourages you to regularly update yourself on the company’s performance. 
    • To make an appropriate Buy or Sell decision it is very important to be updated with the company’s performance. When you are familiar with a company, or industry and know how the price reacts to market dynamics, it becomes simple to ignore unnecessary news and stick to your target.
      Therefore, it is always suggested to invest in companies that you know well. Who’s business model excites you and you are willing to hold the stock for a longer period?

    2. Understanding the Market sentiment:

    For example,

    We have seen that during COVID-19 the markets were affected badly because of fear among the people. At that time the market had a bearish sentiment, the stocks of so many companies were at a price lower than their actual value. Which was a very good buying opportunity in certain specific sectors like FMCG, Healthcare, etc. 

    3. Evaluating the financial reports:

    Understanding and interpreting the company’s financial reports helps you to have a clear viewpoint on Buying and Selling decisions. The financial reports of the company consist of the balance sheet, profit and loss statement and the cash flow statement.

    • A Balance Sheet is a concise summary of the company’s current market standing. Showing what all the company’s assets and liabilities are and how are they financing their operations.
    • The Profit and Loss Statement depicts the performance of the company during a financial year. It shows how effectively the company is using their resources to generate revenue and how much expense they are incurring.
    • Cash is considered to be the lifeline of any business. Having a positive cash flow is a big green flag for any company. The Cash Flow Statement shows the net flow of cash in the business during a financial year, from the operating, financing and investing activities of the business.
      Being able to read and understand the financial reports of the company helps the individual to make optimum buying and selling decisions.

      Financial reports provide you with insight into the sales growth, gross and net margins, and profitability of the company which helps you to determine whether the company is making any progress or not.

    4. Determining the fair value of the stock:

    Evaluating the fair price of the share is very important before buying or selling it. Many financial ratios help you assess that if the share is fairly valued or not, on the stock exchange.

    Three Important ratios that you can look at

    • P/E Ratio
    • Debt to Equity Ratio
    • Intrinsic value

    Let’s briefly understand each one of them-

    • P/E Ratio:
      The P/E ratio shows the relation between the stock price and the company’s earnings. It is calculated by dividing the current market price of the stock by the earnings per share.
    • Debt to Equity Ratio:
      The debt-to-equity ratio is a financial ratio that is used to assess how much proportion of debt to equity a company is using to finance its assets.
      Debt is the creditor or debt holders’ money that is invested in the company against which they receive a payment in the form of interest regularly. 
    • Intrinsic value:
      Intrinsic value is the anticipated value of any stock. Based on specific parameters the IV of any stock is calculated. Taking into consideration both tangible and intangible factors. 

    Intrinsic value = Future cash flows(1+ discount rate)#of periods

    5. Investment goal

    While investing in the stock market or building your portfolio it is very important to set your financial investment goals. Some Goals are short-term, and some are long-term. It is very important for an individual to correctly pre-define them to make the buy and sell decision at the right time.
    Various factors determine one’s investment goals like the need for money in the coming years. A person who might not need his money for a decade can invest in more riskier assets. On the other hand, a person who might need his money in the coming years will invest in more liquid assets. 

    Read Also: What is a good rule for investing in stocks?

    Conclusion

    Summarising the above article We can conclude that while making a Buying and Selling decision we should always consider the market dynamics at the given point. Always try to invest in the industry or sector you are familiar with or are interested in. We have also seen that even at Rs.1000 a stock could be undervalued. Whereas, a stock trading at Rs.50 could be overpriced for what the company is offering.  

    And remember at the end of the day, investing in the stock market is a very whelming experience and you should always have control over your emotions. Often people get carried away with their emotions and end up making rash decisions and having to bear the consequences over the years. 

    FAQs (Frequently Asked Questions)

    1. How to start buying and selling stocks?

      To start buying and selling stocks, you first need to have a Demat account. There are several brokers present online, so it becomes complicated to choose the right one. Now. you can open a Demat account using Pocketful’s app within a few seconds.

    2. Which are the best apps for buying and selling stocks?

      There are many applications present online which facilitate the buying and selling of stocks. It depends on the use case and preference of the customer. Pocketful offers a trading platform for both your investing and trading needs. Simple interface combined with modern technology to make your finance journey smooth.

    3. What are the buying and selling of stocks?

      When you buy a stock you are not buying it with the company but the shareholder. Similarly, when you sell a stock the company is not buying it but some other investor.

    4. What points should one consider before buying and selling stocks?

      In the above article, five key points are mentioned that you should consider before buying and selling stocks. Never buy a stock in a company or industry, you do not know about. Analyze what the market dynamics are and how other investors are reacting.

  • How to invest like Warren Buffett and Charlie Munger?

    How to invest like Warren Buffett and Charlie Munger?

    Investing in the stock market can be a daunting task. People who do not understand investing or the stock markets associate investing in the stock market with gambling. But having the insights of legends like Warren Buffet and Charlie Munger could be a relief. Warren Buffet and Charlie Munger are the iconic duo behind the success of Berkshire Hathway. Both are famous for their unique yet simple style of investing which has resulted in remarkable success.
    So we have listed down seven tips or the ideologies followed by these legendary investors.

    quick summary of How to invest like Warren Buffett and Charlie Munger

    1. Having a long-term vision:

    Warren Buffet always used to say that never invest in companies whose business you do not understand. There is this famous quote that goes like, “Invest in a wonderful company at a fair price than in a fair company at a wonderful price”.
    It means that you should not buy the stock of a company just because you are getting it for cheap. Rather invest in a company that you believe in, understand its business, and has strong fundamentals with competitive management.
    They say that think like a business owner and not a stakeholder. This mindset encourages you to focus on long-term value creation, aligning your interest with the company’s success. It also discourages short-term trading which often results in losses.

    2. Competitive advantage:

    The Buffet and Munger duo stresses investing in companies that have a competitive advantage in the market. Identify the company that stands out of the crowd. It could be anything, be it their business model, marketing strategies or technological proprietary. A company with a durable competitive advantage often results in consistent profits, making it an attractive investment opportunity.

    Let’s try to understand this with the help of a real-world example. The differentiating factor for the retail giant Walmart is the lowest possible prices of the products they offer, which they have achieved through economies of scale. This is the competitive advantage in the case of Walmart that sets it aside from its competitors in the retail and wholesale business segments.

    3. Know your business:

    Warren Buffet always used to say that never invest in companies whose business you do not understand. There is this famous quote that goes like, “Invest in a wonderful company at a fair price than in a fair company at a wonderful price”.
    It means that you should not buy the stock of a company just because you are getting it for cheap. Rather invest in a company that you believe in, understand its business, and has strong fundamentals with competitive management.
    They say that think like a business owner and not a stakeholder. This mindset encourages you to focus on long-term value creation, aligning your interest with the company’s success. It also discourages short-term trading which often results in losses.

    4. Patience is the key:

    Patience is the most important ingredient in the recipe for investing. Trust me there is nothing called as overnight success or the get-quick-rich scheme. To see exceptional results in the stock market you need to have patience because great things are not built in one night. 
    Legendary investors like Warren Buffet and Charlie Munger are known for their patience and waiting for the right investment opportunities.

    5. Value Investing:

    Value investing refers to investing in the stock market when others are leaving. Buying the stocks of Underappreciated companies with strong fundamentals, and a simple enough business model for you to understand. The same strategy that helped Warren Buffet accumulate such great wealth. 
    Always try to invest in businesses and companies in your competence circle. Investing in companies whose business you do not understand or you are unfamiliar with can result in horrendous decision-making.

    6. Margin of Safety:

    This is a principle of investing wherein an investor purchases securities only when their market price is significantly below their intrinsic value. Intrinsic value is the anticipated value of any stock. Based on certain parameters the IV of any stock is computed. Taking into consideration both tangible and intangible factors. 

    Intrinsic value= Future cash flows(1+ discount rate)#of periods

    It is very complicated to calculate the intrinsic value of any stock manually, and individuals can use the stock screeners available online to get the correct IV for any stock.

    • If IV>current market price then the share is considered to be undervalued.
    • If IV<current market price then the share is considered to be overvalued.
    • If IV is almost equal to the market price of the share then we can say that the stock is fairly valued.

    Remember, the market swings wildly from day to day and presents large changes in valuation over periods of euphoria and pessimism.

    7. Learn from your mistake:

    It is not like, that great investors like Warren Buffet and Charlie Munger do not lose money in the market. But the only thing that sets them apart from other investors is that they learn from their mistakes. They acknowledge their errors and view them as learning opportunities. Understand that learning is a continuous and never-ending process and there is no bigger fool than a person who thinks that they know it all.

    Read Also: How to invest in dividend stocks in India?

    Conclusion

    So, concluding the above article we can say that reciprocating the investing style of Warren Buffet and Charlie Munger requires great discipline and patience. Having a long-term vision, and investing in the companies whose business you understand within the circle of your competence can fetch you the same results that you want. 

    FAQs (Frequently Asked Questions)

    1. What is the stock market?

      The stock market also known as the equity or the financial markets is an aggregation of buyers and sellers of financial securities. A person putting his/her money in the stock market could be a trader or an investor. There is no hard and fast rule to distinguish between the two. An investor is a person who generally holds their holding for more than a period of six months, on the other hand, a trader is someone who does not hold the securities for long.

    2. How did Warren Buffet accumulate his wealth?

      Warren Buffet has made a massive fortune by investing in the stock market. He has told in one of his interviews that he started his investing journey at the age of 11. Also, Warren Buffet owns the company Berkshire Hathaway which is an American multinational conglomerate holding company.

    3. Are Warren Buffet and Charlie Munger related?

      Charles Thomas Munger is the vice chairman of the American conglomerate Berkshire Hathaway. Whereas, Buffet is the chairman of the company and also the largest stakeholder. Buffet has described Munger as one of his closest friends. 

  • How to invest in dividend stocks in India?

    How to invest in dividend stocks in India?

    We all desire to earn passive income, and investing in dividend stocks provides an excellent opportunity to achieve it. As the Indian markets outpace the returns of other stock exchanges, it becomes crucial to be part of this growth story and reap its benefits. Investing in dividend stocks in India offers a steady income stream & holds the potential for long-term growth. These stocks, often called “cash cows,” allocate a portion of their earnings as dividends to shareholders. 

    Investing in dividend stocks is as simple as your usual stock investments –

    quick summary of how to invest in dividend stocks.

    1. Select a Reliable Brokerage: Choose a reputable brokerage firm with the necessary tools and resources for stock trading.

    2. Open a Demat Account: Sign up for a trading and Demat account with the chosen brokerage. Provide the required documents and complete the account setup process.

    3. Research Dividend: Paying Companies: Identify companies listed on Indian stock exchanges that have a history of paying dividends consistently. Look for stable companies with good financial standing. We’ll be discussing this point in detail.

    4. Evaluate Dividend Yield: Review the dividend yield of potential stocks. It can be calculated by dividing the annual dividend per share by the current stock price. This helps gauge the potential income.

    5. Consider Qualified Dividends: Understand the concept of qualified dividends and their tax implications. Qualified dividends are usually subject to lower tax rates, making them a tax-efficient choice for investors.

    Read Also: What is a Dividend? 

    6. Place an Order: Once you’ve identified a suitable dividend stock, place an order through your brokerage’s trading platform. Choose between market orders (immediate execution) and limit orders (set a specific price).

    7. Monitor Dividend Payment Schedule: Keep track of the company’s dividend payment schedule. Dividends are often paid out quarterly, but the timing can vary. Stay informed to ensure you receive your dividend income.

    8. Reinvestment or Payout: Decide whether you want to reinvest your income or receive them as cash payouts. Reinvestment can lead to compounding returns over time.

    9. Stay Informed: Continuously monitor the performance and news related to the companies you’ve invested in. Stay informed about any changes in the company’s financial health or dividend policies.

    10. Long-Term Perspective: Approach dividend stock investing with a long-term perspective. The goal is to build a portfolio that generates a steady stream of income over time, while potentially benefiting from capital appreciation.

    11. Tax Considerations: Be aware of the tax implications of dividend income in India. Understand the applicable tax rates and reporting requirements for dividends received.

    12. Diversification: With any investment strategy, diversification is the key. Avoid putting all your funds into a single dividend stock; consider building a diversified portfolio across different sectors.

    Now, you’ll be all set to start your journey of investing in dividend stocks in India. The goal is to create a steady income stream and see your investments grow over the long haul.

    Read Also: 5 Highest Dividend Paying Stocks in India

    Factors to see for identifying dividend-paying companies –

    1. Financial Performance: Examine the company’s financial statements, including revenue growth, profitability, and cash flow. A strong financial foundation is essential for consistent dividend payments.

    2. Dividend History: Check the company’s track record of dividend payments. Look for a history of regular and stable dividends over several years.

    3. Dividend Yield: Evaluate the dividend yield, which is the ratio of annual dividends to the current stock price. Compare this yield with industry averages to gauge competitiveness.

    4. Payout Ratio: Calculate the payout ratio by dividing dividends per share by earnings. A sustainable payout ratio indicates the company can comfortably afford its dividend commitments.

    5. Earnings Growth: Assess the company’s earnings growth trajectory. Companies with steady and increasing earnings are more likely to maintain dividend payments.

    6. Debt Levels: Analyze the company’s debt levels and debt-to-equity ratio. Excessive debt could impact its ability to sustain dividend payments during economic downturns.

    7. Industry Trends: Consider the industry the company operates. Research industry trends and forecasts to ensure the company’s position is strong and its market share is sustainable.

    8. Management and Governance– Evaluate the quality of the company’s management team. Transparent governance practices and a history of shareholder-friendly policies are positive indicators.

    9. Competitive Landscape: Compare the company’s performance, dividends, and strategies with its competitors. A company that outperforms its peers is more likely to provide stable dividends.

    10. Market Capitalization: Consider the company’s market capitalization. Larger, well-established companies often have the resources to maintain consistent dividends.

    11. Future Prospects: Research the company’s growth potential and expansion plans. A company with a clear roadmap for growth is more likely to continue rewarding shareholders.

    12. Dividend Growth: Assess the company’s history of increasing dividends over time. Consistent dividend growth demonstrates management’s commitment to shareholders.

    13. Analyst Recommendations: Review recommendations from financial analysts and experts. While not definitive, these insights can offer valuable perspectives on the company’s prospects.

    14. Industry Regulations: Be aware of any industry-specific regulations that could impact the company’s ability to maintain dividends.

    15. News and Developments: Stay updated on recent news, events, and developments related to the company. Changes in leadership, acquisitions, or strategic shifts can influence dividend sustainability.

    By following these steps, you can navigate the world of dividend stocks with confidence and make informed investment decisions.

    Investment principles to swear by –

    1. Focus on Regular Payouts: Look for companies that give out dividends often. They’re like your paycheck but from your investments!

    2. Don’t Chase Just High Yields: Sure, big payouts are tempting, but make sure they’re sustainable. Sometimes a struggling company offers high yields, but that might not last.

    3. Stability Matters: Pick companies that are strong and steady. You want them to keep making money so they can keep giving you dividends.

    4. Diversify: Don’t put all your eggs in one basket. Invest in different companies and industries. If one isn’t doing well, others might make up for it.

    5. Long-Term Thinking: Dividend stocks are like slow-cooking investments. Think long-term. Over time, your money can grow nicely.

    6. Reinvest or Enjoy: Set your goals beforehand in terms of the yield you are targeting. Decide if you want to buy more shares with your dividends (like planting seeds) or just enjoy the extra cash.

    7. Keep Learning: Keep an eye on the news about the companies you invested in. If there are big changes, it could affect your dividends.

    8. Know the Tax Rules: Remember, dividends are taxed. Know how much you might need to give back to the government.

    9. Look at Dividend Growth: Companies that increase their dividends over time are a good sign. It means they’re getting better at making money.

    10. Stay Calm: Don’t freak out if the stock price goes up and down. Focus on the dividends and the company’s overall health.

    11. Patience Pays: Think of it like growing a garden. It takes time, but the rewards can be worth it. Hold on for the long haul.

    12. Expert Help: If you’re unsure, get advice from experts or professionals. They can guide you based on their experience.

    Remember, there’s no one-size-fits-all strategy. Your approach depends on your goals, risk tolerance, and how much you want to be involved. With the right strategy, dividend stocks can be a tasty addition to your investment plate!

    Read Also: Highest Dividend Paying Penny Stocks List

    How to research dividend-paying Companies?

    First off, identifying stocks that pay a good dividend yield is important. This means looking at how much dividend you’d get compared to the stock’s price. Companies that keep their dividend yield high are usually seen as pretty stable investments. The screener can be used for this purpose. When you’re picking these dividend-paying stocks, it’s smart to know about “qualified dividends.” These are dividends that meet certain tax criteria and are usually taxed at a lower rate, which is a good thing for your pocket.

    Now, when it comes to actually investing in these stocks, proper research needs to be undertaken. Look for companies that have a track record of sharing profits with their shareholders. They usually pay out dividends regularly, like every quarter. It’s a good idea to keep an eye on when they announce their dividend payouts.

    Here’s the deal though: this kind of investing is like the slow-cooking of investing strategies. You’ve got to be in it for the long haul. Even big shots like Warren Buffett say they like to hold onto stocks “forever.” It’s all about being patient and letting your money grow over time.

    Conclusion

    But hey, remember that dividends in India are taxed. The rate depends on how much you earn, so it’s good to know what you’re in for tax-wise. If you’re not super into picking stocks yourself, no worries. There are mutual funds that focus on these dividend-paying stocks. That way, the experts handle the hard work and you still get the benefits.
    The main goal here is to create a source of passive income. By choosing stocks that keep growing their dividends, you could have more cash coming in over the years. So there you go! Investing in dividend stocks in India is a smart way to get some cash flow going and let your investment bloom. Just remember to pick wisely, be patient, and let the magic of compounding do its thing.

    Calculate Dividend Yield – Dividend Yield Calculator

    FAQs (Frequently Asked Questions)

    1. What are dividend-paying stocks?

      The stocks of companies that pay a portion of their profits to their shareholders are called dividend-paying stocks. Investing in dividend-paying stocks acts as a passive source of income.

    2. Which are the best dividend-paying stocks in India?

      You can check out this link to find the top fundamentally strong stocks that dividend-paying in 2022 India. click here

    3. Is investing in dividend-paying stocks good?

      Yes, investing in dividend-paying stocks is good. Because it not only pays out dividends to its shareholders but the investor also benefits from capital appreciation.

  • How to find and identify undervalued stocks

    How to find and identify undervalued stocks

    Undervalued stocks are stocks that are trading at a lower price than their actual fair price. At times the stock price does not fairly represent the true worth of the company. Sometimes small companies get ignored by analysts who are experiencing increased sales and better profit margins and have undervalued share prices. Investors look forward to investing in undervalued stocks because the possibilities are very high that the price of these stocks will increase in future. But, the question that arises here is how to identify these undervalued stocks.

    10 parameters that one should consider to decide whether the stock is fairly priced or not –

    quick summary of 10 paramters that one should consider to decide whether the stock is fairly priced or not

    Read Also: Semiconductor Industry in India

    1. P/E ratio

    The P/E ratio shows the relation between the stock price and the company’s earnings. It is calculated by dividing the current market price of the stock by the earnings per share.

    The ratio can be used to determine whether the stock is undervalued, overvalued or fairly valued.

    • If the stock P/E is more than the industry P/E we can say that the stock is overvalued.
    • If the stock P/E is less than the industry P/E we can say that the stock is undervalued.

    And lastly, if the stock P/E is nearly equal to the industry P/E then the stock is fairly priced. The P/E ratio is important when determining the true worth of the company.

    2. P/B ratio

    The P/B ratio shows the relationship between the current stock price and its book value.

    There are 3 main steps for computing the P/B ratio of any company.

    • Step 1- Calculate the book value(company assets minus liabilities ) = assets – liability = book value.
    • Step 2- Calculate the book value per share = book value. of outstanding shares.
    • Step 3- Calculate the P/B ratio = current market of the share book value per share.

    Any value below 1 is considered desirable by value investors indicating that the stock is undervalued. And a value above 3 is considered that the share is overvalued.

    3. P/S Ratio

    The P/S ratio or price-to-sales ratio is a financial ratio that shows the relationship between the price of the share and the sales of the company.

    P/S ratio = market capitalisationnet annual sales

    • An ideal P/S ratio can vary from industry to industry or sector to sector. But still, a P/S ratio between 1-2 is considered a good ratio for value investors.
    • A high P/S ratio may indicate the inefficiency of the management in using the shareholder’s funds to drive more revenue.

    Whereas a lower P/S ratio as compared to the industry standards may indicate that the stock is undervalued.

    4. Debt-to-equity ratio

    The debt-to-equity ratio is a financial ratio that is used to assess how much proportion of debt to equity a company is using to finance its assets. Debt is the creditor or debt holders’ money that is invested in the company against which they receive a payment in the form of interest regularly. Whereas equity funds are the money of the shareholders that is invested in the business.

    Having a high debt-to-equity ratio can be a big red flag for any company if the free cash flow of the company is not good. Because then the company will not be able to meet its short debt financing obligations which is not good. This does not mean that having a high debt-to-equity ratio is a bad thing. It generally depends from sector to sector. A sector that requires heavy fixed assets (like automobile or construction) might have a high debt-to-equity ratio as compared to a company that does not require so many fixed assets (like the IT sector).

    5. The PEG ratio

    The PEG ratio is a financial ratio that shows the relationship between the price and the earnings to the growth of the company. It can be defined as an advanced version of the P/E ratio. Since the P/E ratio does not tell about the price of the stock being fairly valued taking into account only the current earnings of the company and not the forecasted future earnings.

    That’s where the PEG ratio comes to the rescue it tells whether the share is being fairly valued or not at the stock exchange taking into consideration the growth rate of the company.

    PEG ratio = price/EPS growth

    • A PEG ratio of more than 1 is considered that the stock may be overvalued and not considered for investing by value investors.
    • A PEG ratio of less than 1 indicates that the stock is undervalued than its true worth and might be a good option to invest in by value investors.

    6. Free cash flow 

    Free cash flow is the cash left with the company after paying for its operating expenses and capital expenditures. The formula for finding the free cash flow for any company is given below.

    Free cash flow cash flow from operations – (operating expenses + capital expenditure).

    Having a positive FCF is a major green flag for the company because a positive FCF indicates that earnings are expected to increase in future. Which is a good sign for any value investor. Showing that either the company is experiencing sales growth or better net profit margins and that the company is effectively using their resources.

    7. Dividend yield

    The dividend yield is a financial ratio that shows what percentage of the share price the company is giving out as dividends to its shareholders.

    Dividend yield =annual dividend paid/market price

    If a company is giving out high dividends it is a green flag for any value investor and might indicate that the company is undervalued. Because generally in a company with a high dividend payout the shareholders are not only benefited from the capital appreciation but also the dividend payments give them a good annual return on their investment.

    8. ROE

    Return on equity is a financial ratio expressed in percentage terms indicating a relationship between the company’s net earnings and the shareholder’s equity.

    ROE=(Net earnings/ shareholders equity)*100

    • A 15-20% ROE is considered very good for any company as it shows how effectively the company is using the shareholder’s funds to make more money. 
    • An ROE higher than 20% might indicate that the management is taking a high risk on shareholders’ money to get more business. 

    9. Intrinsic value 

    Intrinsic value is the anticipated value of any stock. Based on certain parameters the IV of any stock is calculated. Taking into consideration both tangible and intangible factors. 

    Intrinsic value = Future cash flows(1+ discount rate)^no. of periods

    It is very complicated to calculate the intrinsic value of any stock manually, and individuals can use the stock screeners available online to get the correct IV for any stock.

    • If IV>current market price then the share is considered to be undervalued.
    • If IV<current market price then the share is considered to be overvalued.
    • If IV is almost equal to the market price then we can say that the stock is fairly valued.

    10. Pitroski score

    Pitroski f- score is a no. between 0-9 which is used to assess the strength of the company’s financials. It is taken into account to decide whether the stock is suitable for investing or not with 9 being the best and 0 being the worst.

    The calculation of the Pitroski score is quite complicated if done by hand, there are many stock screeners available online that automatically calculate the Pitroski score for you.

    • A Pitroski score below 3 is not considered good.
    • A score between 3-6 is considered good.
    • And a score above 6 is excellent for investing.

    Conclusion

    Thus we can conclude that identifying undervalued stocks is not even that hard. You just need to keep a few points in mind before starting your research. 

    Investing in stocks that you can hold for the long term is a good way to build a strong portfolio. Also, it is important to regularly churn your portfolio on a regular basis so that you can maximize the returns and minimise the risk in your overall portfolio.

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1LTP in Stock Market: Meaning, Full Form, Strategy and Calculation
    2How to find and identify undervalued stocks
    3Types of ITR: Which One Should You Choose?
    4What is FIRE in Finance? Full Form, Features, Types, and Formula Explained
    5Best Places To Park Your Short Term Money

    FAQs (Frequently Asked Questions)

    1. What are undervalued stocks?

      Stocks are trading at a lower price in the stock exchanges as compared to their actual fair price. There are various accounting financial ratios that you can use to assess the true value of the stock.

    2. How to find undervalued stocks?

      There are different financial ratios you can consider to decide whether the stock is undervalued, overvalued or fairly valued.

    3. Fundamentally strong stocks that are undervalued in 2022 India.

      You can check out any stock screener to find the top fundamentally strong stocks that are undervalued in 2022 India.

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