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What is Options Trading?
Have you ever wondered how traders make a living out of stock markets? Investments are for the long term, but options trading has the potential to provide extraordinary returns in a short amount of time. Sounds interesting? Let’s see how we can make the best use of it.

Understanding Options Trading

Options trading is the process of buying and selling specific assets at a predetermined date and price. It requires an understanding of the options and various strategies. Options trading is tougher than stock or index trading as it requires knowledge of various factors like strike price, premium, expiry, option type, volatility, etc.

Options are mainly used as hedging instruments, as they protect against the downside. Along with that, it can also be used to generate income when the market conditions are not suitable for investing.

Options are derivative contracts and are classified into two types: Call and Put. A call or put option is a type of option contract that gives the buyer the right to buy or sell an asset at a predetermined price on a specific date but not the obligation to do so.

It is crucial for beginners to understand options trading in detail before investing real money. Let’s try to understand the basic concepts.

Read Also: Option Chain Analysis: A Detail Guide for Beginners

How to Trade Options?

1. Evaluate Financial Goals along with Risk & Return Profile

Starting trading in options is not as easy as it seems, as it requires a good understanding of options and how to use them in your favor, as options trading is more complex than trading in stocks. Also, in some cases, options trading may require significant amounts of capital (e.g. shorting the options).

First, one needs to assess financial goals and select suitable asset classes and instruments to use in the financial market. Then, if suitable, one should decide to trade options. We can follow the process listed below to assess whether options are suitable for investors.
- Investment objectives: This usually includes growth/income, capital preservation or speculation.
- Trading experience: This is important for your risk assessment.
- Financial position: How much liquid cash or investments an investor has, his annual income, expenditures, savings pattern and properties, etc.
- Option type: Calls, puts or strategies and spreads. And whether they are covered or naked. The seller or option writer is obligated to deliver the underlying stock if the option is exercised.
2. Understand the Type of Options

There are two styles of options, American and European; the difference between these two is the timing of exercising the option. Holders of an American option can exercise at any point up to the expiry date, whereas holders of European options can only exercise on the day of expiry. As American options offer more flexibility for the option buyer (and more risk for the option seller), they usually cost more than European options. Expiration dates can range from days to months. For long-term investors, monthly expiration is preferable. Longer expirations give the stock more time to move and time for your investment ideas to play out. As such, the longer the expiration period, the more expensive the option. A longer expiration is also useful because the option can retain time value.

3. Pick The Options To Buy Or Sell

A call option is a contract that gives the right, but not the obligation, to buy an asset at a predetermined price on a specific date. A put option gives the right, but not the obligation, to sell an asset at a stated price on a particular date.

Now, it depends upon your view and expectation on which direction you think the market or asset will move, and as per that, you will decide on the type of option and whether you will buy it or sell it. A few views are given for your reference.

If the view is that the asset price will move up: Buy a call option or sell a put option.

If the view is that the asset price will go down: Buy a put option or sell a call option.

If the view is that the asset price will stay in a range: Sell a call option or sell a put option.

4. Understanding and choosing the right option strike price

There are so many strike prices available that are quoted in the option chain; the increment between strike prices is standardized and based on the underlying. We can’t just choose any strike price. The choice of strike is so crucial that it can be the difference between profit and loss.

While buying, the trader should buy an option that the trader thinks will be in the money (ITM) at expiry in an amount greater than the premium paid. Call options are ITM when the strike price is lower than the market price of the underlying security. For example- If your view is that a specific company’s share price of Rs. 500 will increase to Rs. 550 by expiry, it is advisable to purchase a call option. Ensure that the call option you purchase has a strike price of less than Rs. 550. If the stock rises above the strike price, your option is likely to be in the money. In the same way, if you suspect that the share price of the company is falling to Rs. 450, it is best to purchase a put option with a strike price above this. In case of a stock price drop, your option is likely to be in the money.

5. Understanding the Option Premium

The price we pay for an option is called the option premium; it has two components: intrinsic value and time value. Intrinsic value is the difference between the strike price and the asset price. Time value is whatever is left; it factors in how volatile the asset is and compensates for the time left till expiry.

For call options, intrinsic value is calculated as

Intrinsic Value = Spot Price – Strike Price

For put options, intrinsic value is calculated as

Intrinsic Value = Strike Price – Spot Price

It is calculated as the difference between premium and intrinsic value.

Time Value = Premium-Intrinsic Value

The time value of the option premium is dependent on factors like the volatility of the underlying, the time to expiration, interest rate, dividend payments, etc.

For example, suppose you buy a call option with a strike price of 200 while the stock costs Rs 210. Let’s assume the option’s premium is Rs 15. The intrinsic value is Rs 10 (210 – 200), and the time value is Rs 5.

6. Understanding the Option Greeks

Option Greeks are the key factors that can influence option prices. They are the measure of the sensitivity of an option to changes in the price of the underlying stock, market volatility, and time to expiration. In the trading market, an underlying asset’s spot price, volatility, and time to expiration change simultaneously. Options Greeks help traders understand the impact of changes in these factors on their position.

There are five option Greeks:
- Delta: It measures the change in premium due to a change in the price of the underlying.
- Gamma: it is the rate of change in Delta.
- Vega: Change in the price of options due to change in volatility.
- Theta: It measures the impact of time loss on the price of the option.
- Rho: It measures changes in the option price due to changes in interest or risk-free rates.
7. Analyze The Time Frame Of The Option

There is an expiry date for every option contract. The expiry dates of Options may vary from weeks, months to even years. The timeframe of the option contract should be according to the timeframe considered in the trading strategy. The timeframe the trader thinks is required to witness the expected move must be consistent with the option expiry date.

Read Also: What Is an Option Contract?

Conclusion

Options trading is available to all market participants. For beginners, options trading can be a little bit difficult at first, but after understanding the concepts and practicing, they can trade in options with real money. One should have some knowledge of market direction; this can be done by leveraging the power of an option chain. This will evaluate the expiration date, strike price, volume, addition or unwinding, etc. Accordingly, one may decide to choose options to trade depending upon the view and direction. Options trading is not as easy as stock trading as it is a sophisticated derivative tool.

As a beginner, one should learn about options basics and different strategies like Protective Put, Covered Call, Straddle, Strangle, and different types of Spreads. There are various pros of options trading, such as high return potential, cost-effectiveness, availability of many strategies, etc., and cons are all the stocks or assets don’t have options available, or they may be less liquid, high commissions are involved also some strategies are sensitive to time decay etc. Traders should pay attention to these to make balanced decisions.

Frequently Asked Questions (FAQ’s)
1. Can anyone trade options?
  As it is a derivative instrument, some understanding is required, so beginners should learn the basics before entering an option trade to understand how it works.
2. How are Stock Options settled?
  Stock Options are settled either in cash settlement where the counterparties exchange cash flows or through physical delivery of assets, in the case of ITM derivative positions.
3. How are Index Options settled?
  Index Options are settled in cash one day after the execution, i.e. (T+1).
4. Does Options trading require a margin?
  An option only requires you to pay the premium, but no additional margin is required. However, selling options require a margin to cover potential losses. This is true for both calls and puts. Some option strategies, such as covered calls and covered puts, have no margin requirement because the underlying stock is used as collateral.
5. What’s the contract cycle for options in India?
  Options for equity in India have a monthly contract, while index options have weekly contracts.

June 26, 2024

What is Securities Transaction Tax (STT)?

Do you regularly trade in the stock market and worry about the many taxes that the Indian government has put in place and how they are reducing your return? Fear not—we’ve got you covered.

In today’s blog, we will discuss one such tax, the “Securities Transaction Tax.”

Overview of Securities Transaction Tax (STT)

The Indian government levies this type of tax on the buying and selling of shares, mutual funds with an equity focus, and derivatives that are exchanged on the Indian stock exchange. This tax, which is levied on the transaction value and applies to both share buyers and sellers, increases the transaction cost. The Securities Transaction Tax Act (STT Act) regulates this type of direct taxation. Unlisted shares sold through an IPO or other offer for sale to the public are likewise subject to this tax.

History of Securities Transaction Tax

P. Chidambaram, a former finance minister, instituted this tax in 2004. It is levied based on the value of securities, as the name implies (excluding commodities and cash). After numerous brokers and trading members protested this charge, the government was compelled to lower the STT tax in 2013.

Meaning of Securities

The term “Securities” has been defined under the Securities Contracts (Regulation) Act and includes the following:

Shares, scripts, bonds, and other marketable securities.
Derivatives instruments.
Government securities of an equity nature.
Units of equity-oriented mutual funds.

Features of STT

The tax rate varies based on the type of security and the type of transaction. For instance, the tax rate differs for delivery-based and intraday transactions.
It is calculated as a fixed percentage of the transaction value.
STT is levied on both buy and sell transactions.
Depositories and exchanges collect it at the point of transaction and automatically deduct it during the settlement process.
STT is a source of revenue for governments.

Securities Transaction Tax Rate

The tax rates of STT for different types of transactions and securities are as follows-

Purchase of Shares – In the case of delivery-based purchases of equity shares, the rate of STT is 0.1% and is paid by the purchaser at a price on which equity shares are purchased.
Sale of Shares – In the case of the delivery-based sale of equity shares, there is a similar tax rate of 0.1%, but the seller pays it at a price at which equity shares are sold. On an intraday basis, the applicable tax rate is 0.025%.
Equity Mutual Funds – In this case, units of an equity-oriented mutual fund sold outside of the delivery or transfer on a recognised stock exchange, the tax rate is 0.025% and is paid by the seller at a price on which equity share or units is sold. In a delivery-based sale, the seller pays 0.0001% of the price at which the unit was sold.
Derivative Options – While selling option securities, 0.0625% of the value of option premium is to be paid as tax by the seller.
Derivative Futures – In the case of the sale of futures in securities, the applicable tax is 0.0125% of the price at which such futures contracts are traded.
Exchange Traded Funds – In the case of exchange-traded funds, the applicable tax rate is 0.001% and is paid by the seller at the price at which units are sold.
Unlisted Shares – When unlisted shares, such as IPOs, are sold and later listed on a stock exchange, the tax rate is 0.2%, and the seller must pay it at the price at which the units are sold.

Example of Securities Transaction Tax

Assume that a trader has purchased 500 shares for INR 20 apiece, for a total of INR 10,000 and on the same day (intraday), they sold the same for INR 30. Then, in that case, the applicable STT rate will be 0.025%.

So, the STT will be based on the average price of the intraday trades. Here, the average price comes out to be 25 (average of 20 and 30), and the STT is around 0.025%*25*500 = INR 3.125

The applicable STT rate for futures is 0.0125%. If a trader purchases five lots of Nifty futures at INR 23000 each and sells them for INR 23010, with the Nifty lot size being 25, the STT will be determined as follows:

STT for this transaction will be approximately 0.0125%*23010*25*5 = INR 359.35

Impact of Securities Transaction Tax on Investors

This tax has a significant impact on investors in India; let us understand how.

Transaction Cost – The applicable STT rate increases the cost of trading, eventually leading to a decline in investors’ returns, especially for those who trade frequently.
Liquidity – As the STT will increase the transaction cost and decrease the trader’s profit, some investors prefer to stay away from the market and look for some other investment option, which will impact the market volume.
Investment strategies – This can impact the investment strategy as market participants may shift to long-term investing rather than short-term trades.
Net Return – The net return earned by the investor will reduce because of STT.

Conclusion

In summary, the government charges a securities transaction tax on all transactions, including the purchase of stocks, mutual funds, derivatives, and other financial instruments on stock exchanges. Without a doubt, these taxes reduce your net return, but there is no getting around the fact that the Indian government depends heavily on them.

Frequently Asked Questions (FAQs)

Is the Securities Transaction Tax a direct tax or indirect tax?
The STT is a direct tax levied on the purchase and sale of equity and equity-related instruments listed on Indian Stock Exchanges.
Is there any way to avoid paying STT on transactions?
No, if you made any purchase or sale of equity shares or mutual fund units, it will automatically be deducted.
What is the difference between Capital gain tax and Securities Transaction Tax?
STT is a kind of direct tax applicable at the time of transaction made in securities, whereas capital gain tax is levied on the profit arising on the sale of assets.
In which year was the Securities Transaction Tax introduced in India?
STT was introduced in 2004 by former finance minister P. Chidambaram.
Is STT applicable on both buy and sell?
Yes, STT is applicable to both buying and selling securities listed on Indian Stock Exchanges.

June 26, 2024

What Is The Difference Between TDS and TCS?

Have you ever received any income from investments and realized it was slightly less than anticipated? Did you discover that a charge was added to your account while paying bills that needed clarification? If so, don’t worry; we’ll cover such hidden charges. Read the blog to learn the distinctions between Tax Deducted at Source (TDS) and Tax Collected at Source (TCS).

Overview of Tax Deducted at Source

TDS or Tax Deducted at Source is an indirect tax charged on the amount a recipient receives as income. In this method of collecting tax, the payer deducts a specific tax percentage on the income earned by the payee, and the deduction is made at the time of payment. The deducted amount is then paid to the government on behalf of the payee.

It applies to various incomes, such as salaries, interest, professional fees, rent, etc. The rate of TDS depends on the nature of income as the rate can differ for different types of income.

Features of TDS

It applies to various types of payments such as interest earned, salaries, dividends, etc.
The tax deductor provides a TDS certificate in which the details like income, and tax deducted are mentioned.
The deductor is required to file the return periodically, if the deductor is not able to file the return they will be liable to pay penalties.
The tax rate depends on various incomes; for example, the TDS rate for salary income can differ from the TDS rate on interest income.

Examples of TDS

Let’s say a company hires a professional freelancer and provides him with a monthly compensation of INR 1,00,000. The tax rate provided under the Income Tax Act under section 194J to deduct TDS on professional service is 10%. Hence, the TDS amount will be 10% of INR 1 Lakh, which comes to 10,000, and the final payment received by the professional will be 90,000 after the deduction of TDS.

In this case, the company must deposit INR 10,000 with the government authorities.

Overview of Tax Collected at Source

TCS is a method through which the seller collects a specific tax amount from the purchaser of goods at the point of sale, and the collected tax is then deposited with the income tax authorities. It comes under the goods listed under section 206C of the Income Tax Act 1961.

This tax exists on specific transactions like purchasing alcohol, selling motor vehicles above a particular value, selling overseas tour packages, etc. The tax rates depend upon the nature and type of goods and services. The collector of tax provides a TCS certificate to the buyer which has the details like the amount of tax collected and deposited with the government.

Features of TCS

This tax is collected by the seller from the buyer of goods and services.
It applies only to specific goods, not to all goods.
It generally charges a flat rate on the value of goods and the rate is fixed by the government.
The seller of the goods must deposit the tax to the concerned branches of the authorized banks.

Example of TCS

Let’s suppose a scrap dealer who is engaged in selling scraps to manufacturing companies sold scrap material for INR 1,00,000. The applicable TCS rate is 1% on the sale of scrap. Then the TCS amount will come to 1000, calculated as 1% of 1 Lakh. Therefore, the seller needs to collect a total of 1,01,000 from the manufacturing company and then deposit 1,000 to the government as the TCS amount.

Differences Between TDS and TCS

Particulars	TDS	TCS
Duration	TDS is collected when the payment is due or made.	TCS is collected at the time of sale.
Deducted By	Companies or Individuals making the payment.	Businesses or individuals selling the goods and services.
Section	It is governed by Sections 192 to 196D of the Income Tax Act 1961.	It is covered under section 206 C of the Income Tax Act 1961.
Applicability	Applies to incomes such as salaries, interest, commissions, etc.	It applies to the sale of certain specified goods.
Forms for filing returns	The returns are filed quarterly on forms 24Q and 26Q.	It is filled on form 27EQ.
Date of Payment of Tax to Government	The due date for depositing TDS is the 7^th of every month and returns are to be submitted quarterly.	TCS should be deposited within 10 days from the end of the month of supply to the government credit.

Consequences of Not Depositing TDS or TCS

The deductor or the collector of the taxes will face legal consequences if they fail to deposit TDS or TCS collected on time. The Income Tax Act makes it mandatory to pay an interest of 1.5% per month in case of non-deduction of TDS or late payment of TDS, and for TCS, the penalty rate is 1%.

Conclusion

On a concluding note, understanding the concept of TDS and TCS is essential for individuals and business houses, as it is suggested that you track all your taxes. If any excess taxes have been deducted from your income, you can get a refund while filing an income tax return. On the other hand, if you have collected the TCS amount, you must deposit the tax with the concerned authorities. Also, you should consult with your tax advisor or consultant when filing income tax returns.

Frequently Asked Questions (FAQs)

What is the time limit for a TDS refund?
Generally, the TDS will be refunded within 3 to 6 months. It also depends on whether you have completed e-verification or not.
When are TDS and TCS applicable?
TDS is applicable to different incomes such as salary, interest, rent commission, etc., whereas TCS is applicable to the sale of goods such as scrap, tendu leaves, timber, etc.
What is the due date for depositing Tax Deducted at Source (TDS)?
The due date for depositing TDS is the 7th of next month, in which the TDS is deducted, and the March due date is April 30th.
How do I verify the deducted TDS on my behalf?
To verify the details of TDS, you can visit the e-filling portal of income tax, and there, you can find Form 26AS, which has all the relevant details.
What are the consequences for not deducting TDS or not collecting TCS?
Any failure to deduct or collect TDS or TCS will lead to penalties and even prosecution in a few cases.

June 26, 2024

Allied Blenders and Distillers IPO: IPO Key Details & Financial Statements

On the weekends, you hang out and drink beer in a club with your buddies. Do you know you can invest in businesses that produce and sell alcohol? Indeed, a corporation is planning an initial public offering (IPO) to list on exchanges. The company is referred to as “Allied Blenders and Distillers.”

In today’s blog, we will introduce you to Allied Blenders and Distillers, a new company planning to go public.

Allied Blenders Company Overview

One of the biggest companies in the alcoholic beverage sector is Allied Blenders and Distillers (ABD). Kishore Chhabria, formerly employed by Shaw Wallace, another Indian liquor producer, founded the business in 1988. The company initially aims to give Indians access to reasonably priced spirits. Launched in 1988, Officer’s Choice whiskey was the company’s initial product, and from 2016 to 2019, it was among the world’s best-selling whiskies in terms of yearly sales volume. As of December 2021, the company exported its goods to 22 nations, including North and South America, Africa, Asia, Europe, and the Middle East.

The company owns a distillery that is 25,000 square feet in build-up size and spans 74.95 acres in the Telangana district of Rangpur. Thirty two bottling facilities are essential to the manufacturing industry; some are run by them directly, while others are contracted. The company’s headquarters are located in Mumbai.

Product Portfolio

The company has a wide range of product portfolios, a description of which is mentioned below-

Whiskey – It features names like Srishti Premium Whiskey, Officers Choice, and famous white whiskey, among others.
Brandy – The has a wide selection of brandy, including Sterling Reserve Premium Cellar Brandy and Kyron Premium Brandy.
Rum – Jolly Roger rum is the product offered by the company.
Vodka – It also offers various vodkas.

Promotors

Kishore Rajaram Chhabria and Bina Kishore Chhabria are the company’s promoters, and they own roughly 52.2% of the company’s shares. Resham Chhabria and Jeetenda Hemdev are the company’s other two largest shareholders, owning about 24.05% of the business.

Details of Allied Blenders IPO Issue

An initial public offering (IPO) by Allied Blenders and Distillers Limited would comprise a 500 crore offer for sale and a new 1000 crore issuance. The minimum lot size determined by the company is 53 shares, and the price range of the issuance is INR 267 to 281.

Allied Blenders IPO Key Details

Face Value of Share	INR 2
Price Band	INR 267 to INR 281
Employee Discount	INR 26 per share
Lot Size	53 Shares
Total Fresh Issue Size	1000 Crores.
Total offer for sale	500 Crores.

Allied Blenders IPO Timeline

IPO Open Date	25^th June 2024
IPO Close Date	27^th June 2024
Basis of Allotment	28^th June 2024
Initiation of Refund & Credit of shares into Demat account	1^st July 2024
Listing Date	2^nd July 2024

Allied Blenders Allotment Size

Applicant	Market Lot	Share	Amount (INR)
Retail (Min)	1	53	INR 14,893
Retail (Max)	13	689	INR 193,609
High Net Worth Individual (Min)	14	742	INR 208,502
High Net Worth Individual (Max)	67	3,551	INR 997,831

Allied Blenders IPO Objectives

The issue’s proceeds will be used for both general corporate operations and the repayment of loans that the company has obtained.

Allied Blenders IPO Reservation

Investor Category	Shares Offered
QIB Shares Offered	Maximum 50%
NII Shares	Minimum 15%
Retail Shares Offered	Minimum 35%

Allied Blenders Financial Statements

Allied Blenders Balance Sheet

Metric	31^st March 2023	31^st March 2022	31^st March 2021
Current Asset	1,798	1,457	1,410
Non-Current Asset	688	790	887
Current Liabilities	1916	1629	1685
Non-Current Liabilities	165	214	231
Total Equity	406	404	381

(All above figures are in INR Crore unless stated otherwise)

We may deduce from the above table that while non-current assets have been steadily declining over the last three financial years, current assets for the company are on the rise.

Allied Blenders Income Statement

Metric	31^st March 2023	31^st March 2022	31^st March 2021
Total Income	7,116	7,208	6,397
Total Expenses	6,920	7,000	6,184
Profit before tax	5.9	3.8	12.7
Profit after tax	1.6	1.4	2.5

(All above figures are in INR Crore unless stated otherwise)

The company’s total income is increasing each year while the expenses have reduced in 2023 as compared to 2022. Even though total income is increasing, but due to increase in expenses, there are hardly any profits.

Allied Blenders Cash Flow Statement

Metric	31^st March 2023	31^st March 2022	31^st March 2021
CFO	229	178	246
CFI	(18.3)	32.13	(59.3)
CFF	(202.8)	(255.7)	(216)

(All above figures are in INR Crore unless stated otherwise)

According to the above table, the company’s cash flow from operations has increased over the past fiscal year. Cash inflow due to investing activities has turned negative in 2023 and decrease in cash outflow was observed in financing activities in 2023 as compared to 2022.

Allied Blenders Key Performance Indicators

Particulars	31^st March 2023	31^st March 2022	31^st March 2021
Return on Equity (%)	0.39	0.37	0.66
Current Ratio (x)	0.94	0.89	0.84
Inventory Turnover Ratio (Days)	45.13	42.09	53.63
Net Profit Ratio (%)	0.05	0.05	0.11
Debt to Equity Ratio (x)	1.92	2.10	2.50
Basic Earnings Per Share (EPS)	0.07	0.06	0.10

(Source – Company’s DRHP)

Strengths of Allied Blenders

Future growth in the Indian alcohol market is expected to be substantial due to rising disposable income levels among citizens.
When comparing the fiscal year 2023 to the fiscal year 2022, the company’s earnings after taxes grew.
The company can easily compete with the consumer because of its excellent brand recognition.
It provides a large selection of products to meet the needs of different customers.

Weaknesses of Allied Blenders

Businesses may see a decline in market share due to increased competition from domestic and foreign competitors.
Any economic downturn or a shift in consumer purchasing patterns could negatively impact sales and income.
Since the alcohol beverage industry is heavily regulated, any significant changes to government regulations could hurt business performance.
Consumer preferences may alter due to shifting health and lifestyle trends, which lowers the demand for alcoholic beverages.

Read Also: What is the IPO Allotment Process?

Conclusion

Allied Distillers and Blenders offer a fantastic chance to be involved in the expanding alcohol industry. They have declared a profit for the last three fiscal years yet their cash flow from financing and investing activities is negative. The company’s broad selection of alcoholic beverages contributes to the growth of its brand value. However, as we usually advise, consult your financial advisor before making any investment.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
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2	Case Study on Apple Marketing Strategy
3	Reliance Power Case Study
4	Burger King Case Study
5	D Mart Case Study

Frequently Asked Questions (FAQs)

When will Allied Blenders and Distillers IPO open?
The IPO for Allied Blenders and Distillers will be open for applications from June 25 to June 27, 2024. Investors can apply within this time frame.
When were allied blenders and distillers established?
The company was founded in 1988.
Is Allied Blenders and Distillers a profit-making company?
The business did report a profit for the preceding three years. It declared a profit of INR 1.601 crore for FY 2023, a YoY increase.
What is the minimum lot size that retail investors can subscribe to?
Retail investors must subscribe for at least 1 lot, or 53 shares, for 14893 INR.
What is the name of the company that offers Officer Choice Whisky?
The Mumbai-based Indian-made international liquor corporation Allied Blenders and Distillers owns Officers Choice, also referred to as OC.

June 25, 2024

What is Insider Trading?

Have you ever wondered how certain investors consistently seem to have insight into the optimal timing for buying or selling stocks? The answer could lie within a practice known as insider trading. The word may seem intricate initially, but it revolves around a single concept: exploiting undisclosed information to gain an unfair advantage in the market.

In today’s blog, we will explore the basics of insider trading, SEBI’s regulation to curb it, and several Indian instances of Insider Trading.

What is Insider Trading?

Insider Trading involves buying or selling stocks or other financial instruments based on non-public material information that could significantly impact the stock price.

For instance, imagine a company’s CEO who knows they are about to announce a new product that will be a massive success.

If the CEO buys the company’s stock using this information before the announcement, it would be considered insider trading.

Insider trading is illegal because it enables some individuals to benefit from the market unfairly. It disrupts fair competition between investors.

SEBI Regulations for Insider Trading

Earlier, there were no specific regulations for insider trading. The Sachar Committee (1979) found the need to create rules to prevent insider trading.

Later, after establishing the SEBI, it introduced the (Prohibition of Insider Trading) Regulations, 1992, which defined insiders and UPSI (Unpublished Price Sensitive Information) and set restrictions on insider trading activities.

SEBI regulations were amended multiple times throughout the decades for various reasons.

Currently, Insider trading rules in India are explained in the SEBI (prohibition of insider trading) regulations, 2015.

According to regulations, an insider refers to someone who is either a connected person or has possession of or access to UPSI, regardless of how one came in possession of or had access to such information

*UPSI stands for Unpublished Price Sensitive Information, which means any information that is not yet public but could significantly impact a company’s stock price. For example, mergers that will happen in the future, the release of new products, financial results, dividends, change in key managerial personnel, etc.

Restrictions on communication and trading by insiders are as follows,

Insiders cannot share confidential information about a company’s financial details with others unless necessary for their job or legal requirements.
An individual cannot obtain or request insider information about a company or its securities unless it is for valid reasons or legal obligations.

Additionally, it is suggested that the company’s board of directors create a policy to determine ‘legitimate purposes’ as a part of the ‘Codes of Fair Disclosure and Conduct’ under regulation 8.

Insiders cannot trade securities listed or planned to be listed on a stock exchange if they have unpublished price-sensitive information unless and until they can prove their innocence by showing that they were involved in a private trade with another insider who had the same secret information and that they did not break any rules. Both parties must have made a deliberate trade decision, and trade should be reported to the company within two days. Companies must inform the stock exchanges where their securities are listed within two days of receiving the information.

Insiders can create a trading plan and submit it to the compliance officer for approval and public disclosure. They can then trade on that plan. The trading plan can be executed six months after its public disclosure.

Furthermore, trading is not allowed between the 20^th trading day before the last day of a financial period and the second trading day after disclosing the financial results.

Companies should establish a code of conduct that clearly states the rules against insider trading for employees and designate a compliance officer to administer the code of conduct.

Indian Examples

1. Acclaim Industries

Abhishek Mehta, the director of Acclaim Industries and a company insider, sold his shares before a planned merger was called off. He engaged in insider trading by selling his shares before the public disclosure of the decision, which SEBI considers illegal. The SEBI fined him INR 42 lakhs for breaching insider trading regulations.

2. Rajat Gupta Case

Rajat Gupta, a former top McKinsey executive and Goldman Sachs member, was involved in a high-profile case. In 2012, he was convicted in the U.S. for sharing private company information with hedge fund founder Raj Rajaratnam and using the information for illegal trading.

3. Infosys Case

Infosys employees were accused of insider trading during the company’s financial results announcement in July 2020. The SEBI suspected that some Infosys employees traded the company’s stock while accessing UPSI (Unpublished Price price-sensitive information) about the company’s financial results.

Conclusion

To sum it up, insider trading is a serious issue in the Indian stock market, and SEBI has established clear regulations to prevent it. The high-profile cases and strict rules show that the market’s integrity and investor interests are protected. Both companies and investors must understand insider trading regulations to keep the financial markets fair.

FAQs (Frequently Asked Questions)

Who is an Insider?
Anyone with access to UPSI due to work, position, or association with a company’s management or board.
Can insiders trade?
Yes, insiders can trade, but with restrictions. They cannot trade while possessing UPSI and must follow pre-approved trading plans.
How can companies prevent insider trading?
Companies can establish a code of conduct, recognize insiders, and monitor trading activities for suspicious patterns.
Why is Insider Trading bad?
Insider trading is considered bad because it creates an unfair advantage for some investors and undermines trust in the market.
Is insider trading illegal?
Yes, it can lead to hefty fines, imprisonment, and trading restrictions.

June 25, 2024

Stanley Lifestyles IPO: Key Details, Financials & Business Model Case Study

Are you ready to see the latest innovative designs and invest in the future of design? Stanley Lifestyles, a leading name in super-premium and luxury furniture in India is about to make its highly-anticipated debut on the Indian stock exchanges. With its rich heritage spanning over three decades, the company is captivating discerning customers with its exquisite craftsmanship and timeless designs. As the company opens its doors to the investors, let us explore the key details of the IPO to learn the opportunities it will present.

Stanley Lifestyles Limited Company Overview

Stanley Lifestyles Limited is a top luxury furniture brand in India, known for its large-scale manufacturing and retail. Sunil Suresh and Shubha Sunil founded a partnership firm called ‘Stanley Seating’ in the year 2007. The company ranks fourth in home furniture revenue in India and uniquely covers super-premium, luxury, and ultra-luxury segments.

‘Stanley Seating’ was converted from a partnership firm to a public limited company in the name of ‘Stanley Lifestyles Limited’ in 2008.

The company initially offered leather upholstery services for top car brands worldwide.

Stanley Lifestyles IPO Details

IPO Date	June 21, 2024 to June 25, 2024
Listing Date	Friday, June 28, 2024
Price Band	INR 351 to INR 369 per share
Lot Size	40 Shares
Total Issue Size	14,553,508 shares
Issue Type	Book Built Issue IPO
Basis of Allotment	Wednesday, June 26, 2024
Initiation of Refunds	Thursday, June 27, 2024

The company offers to utilize the Net Proceeds towards the funding of the following objects:

Expenditure for opening new stores under the formats of “Stanley Level Next”, “Stanley Boutique” and “Sofas & More by Stanley” (“New Stores”);
Expenditure for opening anchor stores (“Anchor Stores”);
Expenditure for the renovation of existing stores under the formats of “Stanley Level Next”, “Stanley Boutique” and “Sofas & More by Stanley” (“Existing Stores”);
Funding the capital expenditure requirements for purchasing new machinery and equipment by the company and Material Subsidiary, SOSL; and
General corporate purposes.

Stanley Lifestyles Business Model

The company makes and sells its products in our stores across India. The company holds 38 Company-owned and company-operated (COCO) and operates them in Bengaluru, Chennai, New Delhi, Mumbai, and Hyderabad. These stores are located in major cities. It also holds 24 ‘Franchise-Owned and Franchisee Operated (FOFO) stores that are owned and operated by franchisees in 21 cities spanning nine states and Union Territories in India. Product sales is the primary source of revenue.

Stanley Lifestyles has three different types of stores to meet the preferences of premium customers.

Stanley Level Next, which is for customers looking for ultra-luxury home furnishings.
Stanley Boutique caters to the luxury furniture category.
Sofas & More by Stanley focuses on attracting customers who are interested in high-quality furniture.

The company product categories include:-

Seating: Stanley designs, produces, and sells customisable seating products like four-seater or three-seater sofas with different leg and upholstery options including Scandinavia Max, Euro Nappa / Tuscana Nova Cashmere / Poach Molba.

Cased goods: These are made with a strong outer case, usually wood, which provides durability and beauty, offering storage solutions and a touch of elegance.

Products under cased goods are coffee tables, dining tables, end tables, and consoles.

Kitchen & Cabinetry: These include a wide range of materials, finishes, and styles for our kitchen and cabinetry products. These options are versatile and can accommodate various design preferences and lifestyle needs.

The products include kitchens, wardrobes, laundry & utility, bar units, shoe racks, prayer units, and bedside tables.

Mattresses and Beds: The company makes and sells beds and mattresses. Further, it also sells bedding and bedroom accessories like pillows

Automotive and Others: Stanley designs and manufactures customisable footwear in different sizes, including half sizes, to meet customer needs and provide car seat upholstery services for top automotive brands worldwide.

Additionally, the company imports and sells lighting and switches from other companies using their brand and sells carpets that are outsourced from other local manufacturers under private labels.

Stanley Lifestyles Consolidated Financial Statements

Stanley Lifestyles Balance Sheet

Key Metrics	FY 2023	FY 2022	FY 2021
Total current assets	227	229	209
Total non-current assets	231	192	137
Total current liabilities	104	102	76
Total non-current liabilities	130	113	82
Total equity	223	205	187

(All values are in INR Crore)

Stanley Lifestyles Income Statement

Key Metrics	FY 2023	FY 2022	FY 2021
Total Revenue	425	297	201
Total Expenses	379	265	195
Profit for the year	34	23	1.9

(All values are in INR Crore)

Stanley Lifestyles Cash Flow Statement

Key Metrics	FY 2023	FY 2022	FY 2021
Net cash flow from operating activities	67	28	32
Net cash used in investing activities	(27)	(11)	(3)
Net cash used in financing activities	(41)	(18)	(23)
Cash and cash equivalents at the end of the year	9	10	12

(All values are in INR Crore)

Stanley Lifestyles Key Performance Indicators

KPIs	FY 2023	FY 2022	FY 2021
EBITDA Margin (%)	19.74	20.19	15.21
PAT Margin (%)	8.35	7.95	0.98
Return on Equity (%)	16.29	11.81	1.03
Return on Capital Employed (%)	16.63	12.90	5.52

Competitive Strengths

The brand is the largest and fastest growing in the luxury furniture market.
It offers a wide range of home solutions at different prices.
The company has stores all over India which focuses on innovative designs and manufactures its products.
The company has a successful business model and an experienced management team.

Risks Involved

The company does not own the brand name ‘Stanley’, and is registered in the name of one of its promoters, Sunil Suresh. Although Stanley has already entered into the assignment deeds with Sunil Suresh, the trademarks have yet to be registered in our name.
Not having the necessary approvals, licenses, or permits for the business could harm the company’s financial performance.
Any shortage of leather and wood, which the company needs to make its products, could affect the cash flows of the business since Stanley depends on limited suppliers for the supply of leather, one of its primary raw materials.
The company’s growth strategy involves opening new stores, new stores but managing a large retail network can be complex and may cause issues with store location, staffing, or marketing, impacting profitability.

Conclusion

To sum it up, Stanley Lifestyles Limited has established itself as a leader in the Indian furniture market. A vertically integrated model enables them to have full control over the design, production, and quality of super-premium, luxury, and ultra-luxury furniture. The company’s future relies on managing risks, leveraging strengths, and establishing itself as a top luxury furniture brand in India.

Frequently Asked Questions (FAQs)

What does Stanley Lifestyles do?
Designs, manufactures, and retails super-premium, luxury furniture for homes in India.
Do they only sell goods associated with their brand?
No, Standley also sells products sourced locally from the manufacturers.
Is Stanley Lifestyles a good investment?
This depends on your investment goals and risk tolerance. Carefully consider the company’s financials and the risks, before making a decision.
How much amount do I need to apply for the IPO?
If you are a retail investor, the minimum amount is INR 14,760 for 1 lot and a maximum of INR 191,880 for 13 lots.
What is the expected listing date for Stanley Lifestyle?
The listing date for the company is June 28, 2024.

June 24, 2024

What is Put-Call Ratio?

Are you confused about the market sentiment? Want to increase the probability of success in identifying market trends? Learn about the Put Call ratio and begin your journey toward being a profitable trader. So, let’s dive in.

Definition of the Put Call Ratio

A Put Call Ratio is a derivative indicator and is also known as PCR. It effectively determines the bullish or bearish sentiments in the market using the options data. This ratio is computed either by using the open interest data for that particular stock or indices for a given period of time or based on the volume data of options trading.

Formula of Put Call Ratio (PCR)

The Put Call Ratio (PCR) is a derivative indicator used in the stock market to gauge investor sentiment about the future direction of a stock or Indices. It’s calculated by dividing the number of traded put options by the number of traded call options over a specific period of time. The PCR can be calculated in two ways:

Based on open interests: PCR (OI) = Put (Open Interest)/( Call Open Interest)
Based on the volume: PCR (Volume) = (Put Trading Volume)/(Call Trading Volume)

A high PCR indicates bearish sentiment, and a low PCR indicates bullish sentiment.

For example, if the total number of puts traded is 1500 and the total number of call options traded is 1000, then the PCR ratio is 1500/1000. A PCR above 1 indicates that the put volume has exceeded the call volume, which indicates bearish sentiment in the market.

Interpretation of the Put Call Ratio (PCR)

PCR = 1 is considered balanced
PCR >1 is considered bearish
PCR = 0.70 is considered Neutral
PCR approaching above 0.70 is also considered bearish
PCR falling below 0.70 and approaching 0.50 is considered bullish.
Extremely low PCR (e.g., 0.5 or 0.3) = very bullish
Extremely high PCR (e.g., 1.5 – 2.0) = Very bearish

Put Call Ratio (A Contrarian Indicator)

Traders generally use the Put Call Ratio (PCR) as a contrarian indicator when the values go extremely high. A high Put Call ratio, say 1.5, is considered a great buying opportunity because they believe that the market sentiment is extremely bearish and will soon adjust. In India, Nifty’s PCR ratio follows a trend and oscillates between 0.8 to 1.3.

Combining PCR with Implied Volatility (IV)

We can also use Implied Volatility along with PCR for more insight. It is an excellent way of interpreting market sentiment. Implied Volatility is the expected price changes in a security’s price over a period of time, and it reflects the risk perception in the market.

If the PCR increases with an increase in IV, then it indicates that the put activity is increasing and risk is also rising. It is a bearish signal.

If the PCR increases with a decrease in IV, it indicates that put activity is increasing with falling risk levels. It indicates more writing of puts, which is a bullish signal.

If the PCR decreases with a decrease in IV, it indicates the unwinding of Puts and can be interpreted as a signal that markets may be bottoming out.

If the PCR decreases with an increase in IV, it means that puts are being covered, and the markets will fall again after short covering.

Uses of Put Call Ratio

The uses of PCR are given below –

It is an efficient tool that helps determine the market sentiment of a particular stock or the overall market.
PCR is helpful in analyzing the overall trading behavior of the market participants.
PCR can be combined with other option data to make trading decisions.
It is a contrarian indicator that helps traders escape the herd mentality and think contrary to the current mass view of the market.

Example of Put Call Ratio

For example, a Nifty trader plans to use PCR to gauge market sentiments. The puts and calls initiated are as follows –

Type of Option and their respective number of contracts:

Puts initiated = 128000

Calls initiated = 167450

PCR = Total put open interest/ Total call open interest

= 128000/167450

= 0.7644

As per put-call ratio analysis, this indicates normal to slightly bearish market sentiment.

Limitations of PCR

One of the most significant flaws of PCR is that it does not always represent the market sentiments, as it can also be a contrarian indication.
Many stocks aren’t active in the options segment, making it impossible to compute the PCR for such stocks.
PCR is meaningful when the contract is liquid for an extended period of time. Calculating PCR based on sudden jumps in volumes can be misleading and lead to wrong decisions.
There is no specific value that indicates that the market has created a bottom or a top, but traders generally analyze this by looking for extreme values.
Investors must also use other indicators and data before betting on market sentiments and direction.
Investors must know how to read the PCR chart correctly; a slight misunderstanding will defeat the entire purpose of the analysis.

Conclusion

It’s a derivative tool to gauge market sentiment. It is a contrarian indicator and uses derivative data like call and put open interest or their volumes to get market direction. This derivative indicator has its share of drawbacks as well. Investors must understand its limitations in detail to use it properly. The PCR should be analyzed over different time frames, such as daily, weekly, or monthly. It is also essential to consider the PCR with other technical and fundamental analysis tools for a more comprehensive view of market conditions.

Frequently Asked Questions (FAQs)

What is the Put Call Ratio?
It is used as an indicator to gauge overall bullish or bearish market sentiments.
Is PCR a good study?
Yes, it’s a reasonable basis for evaluating sentiments.
If PCR is more than 1, what does it indicate?
When PCR is greater than 1, it suggests that there are more open put contracts than call contracts, indicating a bearish sentiment.
How to read PCR?
PCR = 1 is considered balancedPCR >1 is considered bearishPCR <1 is considered bullish
Is PCR suitable for beginners?
PCR is used in option analysis, which is unsuitable for beginners as it is extremely risky.

June 24, 2024

What is Scalping Trading Strategy?

Have you ever wondered what is Scalping? and how is it different from other trading methods? Let’s discover.
The scalping trading strategy is a short-term trading strategy that involves buying and selling stocks quickly, generally on the same day and within a few minutes or even seconds. It aims to profit from small price changes and large volumes. Scalping strategy can be used with stocks, currencies, and even cryptocurrencies.

Scalping Trading Strategies

Scalping is a short-term and low-risk strategy. Most professional traders use scalping as it requires them to be quick in their actions and decision-making. It is low risk because the positions are closed on the same day (intraday). A new trader can also use it, but with some practice, because the risk is lower as no overnight risk is involved.

In the Scalping strategy, one can keep risk to a minimum by using stop loss and exiting the position if the market moves against the view.

A Scalp trader can make money by buying low and selling high or vice versa. One way to book profits is to set a profit target amount per trade. This profit target should be relative to the security price and can range between some percentage like 0.10% – 0.30%, etc. Another method is to track stocks breaking out above the intraday highs or below the intraday lows and utilize this to capture as much profit as possible. This method requires an enormous amount of concentration and proficient order execution. Lastly, some scalp traders may follow the news and trade upcoming or current events that can cause increased volatility in a stock.

We can discuss a few strategies by using some Indicators and Oscillators.

1. Moving Average Pullbacks

Here, we will discuss a pullback towards the moving average, for example, the 20-day moving average. It is a scalping strategy focused on entering a trend in either direction by entering into a trade as the stock price pulls back to a moving average.

The major points to follow this strategy successfully are as follows:

There should be a clear trend
There should be strong momentum in either direction
Light pullbacks toward the moving average
Ability to enter near-moving average
Resuming a prior more significant trend

Here is an example of what this might look like with the stock name Bajaj Finserv Ltd. The symbol is Bajajfinsv.

As you can see, the stock is following the 20-day moving average the entire time in the 5-minute time frame. It first broke out around 1520 price levels and made a top around 1580. Profits can be taken along the way as you buy and sell around a core position in scalping.

2. Scalping with Oscillators

The oscillators are technical analysis tools that help traders identify price reversals. Leading oscillators help gauge future trends in advance, but they should be used with other technical tools as they also generate false signals. It has a 50-50% probability of going right if used alone. The stochastic consists of a lower and an upper level. The area below the lower level is the oversold area, and the area above the upper level is the overbought area. When the two lines of the indicator cross upwards from the lower level, a long signal is triggered. When the two lines of the indicator cross downwards from the upper level, a short signal is generated.

The image below illustrates these trade signals.

The image above is a 5-minute chart of Bajaj Finserv. At the bottom of the chart, we see the stochastic oscillator. The circles on the indicator represent the trade signals. In the chart, the middle three signals were false, so oscillators, along with other indicators, were used to get a confirmation.

3. Scalping with Bollinger Bands and Stochastic Oscillators

In this strategy, one can combine the stochastic oscillator with Bollinger bands. We will enter the market only when the stochastic generates a proper overbought or oversold signal, which is confirmed by the Bollinger bands. In order to receive adequate confirmation from the Bollinger Band indicator, we need the price to close below the lower level to interpret an oversold market, and a close above the upper level indicates an overbought market. Traders can stay in the trade until the price touches the opposite Bollinger band level.

Above is the same 5-minute chart of BajajFinserv. This time, we have included the Bollinger bands and Stochastic oscillator simultaneously on the chart, and in this way, we can avoid false signals.

Advantages of Scalping

Scalp trading involves a number of small trades. Traders can enter and exit multiple times in a day.
These trades are exclusively for smaller time frames, like a few minutes or even seconds.
As traders trade multiple times to catch swift price moves, the volume is high; hence, they make a profit even with smaller moves.
With proper risk management and a good win-loss ratio, even with such smaller trades, there is potential to generate good profit.
This is also called high-frequency trading because many trading opportunities are available.
There is less potential long-term risk, as it’s an intra-day trading strategy.

Disadvantages of Scalping

The risk involved: Though it is an intra-day trading strategy still, there is risk involved as the market can move against view and give strong movement based on news, data release, or because of some important event.
Risk management: One should adhere to proper risk management for any kind of adverse price movement.
Discipline: A disciplined approach is required to continuously remain profitable in a number of small trades.
Focused approach: As it involves uncovering small mispricing in the stocks, it requires a lot of focus to achieve.
Charting knowledge is required: Some charting knowledge is required as it involves strategies using trends, indicators, and oscillators.

Conclusion

Scalping is a specific type of intraday trading strategy that may not be suitable for all traders. It requires lots of flexibility and discipline to profit from small price movements on large orders. Generally, experienced and professional traders use scalping to enter and exit several times to capture mispricing in securities in a day and get small profits with large volumes. As it requires quick decision-making and swift action, one should be a proficient trader or at least practice before putting in real money.

Frequently Asked Questions (FAQs)

What is Scalping?
It is a trading strategy that aims to profit from small mispricing in stock price.
Is Scalping only for professional traders?
Generally, professional traders use it as it requires quick decision-making, but even a new trader can use it as it is low risk.
Is it an intraday strategy?
Yes, it is an intra-day trading strategy and can be closed within a few minutes or seconds.
Is risk involved in this strategy?
Yes, risk is involved in any strategy that is directly or indirectly involved with the stock market. But here, risk levels are low as traders close the trade intraday.
Is Scalping Illegal?
No, Scalp trading isn’t illegal.

June 24, 2024

What Is the Pennant Chart Pattern?

Do you also feel lost in the swings of the stock market? Want to catch the next wave but need help determining when to jump in? Technical analysis can be of great use for a chartist.

Today’s blog will discuss a powerful technical tool, Pennant chart patterns.

Pennant Chart Pattern Meaning

The Pennant chart pattern is a technical analysis tool widely used by traders to identify prospective short-term continuations or reversals in the price of a security. The pattern resembles a flag with a tall pole and a triangular flag (pennant). These pennants can signal explosive stock price moves and help you recognize trends.

A rapid price movement, either up or down, is called the flagpole. A pennant is formed when converging trend lines create a consolidation period.

The consolidation suggests a temporary pause in the market before a potential continuation of the original trend. Traders often employ pennant formations to predict breakout points, which occur when the price decisively moves above or below the trendlines of the pennant.

Types of Pennants Pattern

There are two main types of pennant patterns.

Bullish Pennant
It is formed during uptrends and suggests a continuation of the upward trend after a period of consolidation.
Bearish Pennant
It forms during a downtrend and signals a likely continuation of the downtrend after a period of consolidation.

Uses of Pennant Chart Patterns

The primary objective of pennant chart patterns is to recognize the continuation of the prevailing trend in a security’s price.

Identification of Breakout Points

After a significant price movement, the pennant showcases a period of consolidation. Traders watch for a clear break above (below) the trendline for the bullish (bearish) pennant, to indicate a continuation of the initial trend.

Estimating Price Targets

The height of the flagpole can be used to estimate the price target after the breakout. The price is expected to move by a similar amount after the consolidation period.

Furthermore, pennant patterns are used to predict short-term price movements, but they do not guarantee future price movements because the pennant shows uncertainty among buyers and sellers. Although a breakout may indicate a resolution, the price can always abruptly change direction.

Traders use pennant patterns along with other technical indicators like volume or moving averages to better understand the market and breakouts.

Advantages of Pennant Chart Pattern

Pennant patterns are easily recognizable on charts compared to other technical indicators. This feature makes it easy for both new and experienced traders to access.
These patterns can be helpful for traders who want to take advantage of a trend’s momentum but are still determining the precise timing for entry and exit points.
The flagpole can provide a basis for estimating the price targets after a breakout.

Disadvantages of Pennant Chart Pattern

Traders may interpret the tightness of the pennant’s trendlines and the definition of a breakout differently which can cause disagreements about the signal’s validity.
Pennant’s breakouts may not always suggest a continuation of a trend. Sometimes, the price breaks through the trendline but then quickly changes direction, creating a false breakout that can confuse traders.
Pennants may not be effective for long-term trends or significant market shifts.
They only consider price changes and do not consider other important factors like news, economic data, and company fundamentals. Relying solely on the pennants can create a blind spot for these influences.

Example of a Pennant

We have an example of Reliance Industries on technical charts showcasing bullish and bearish pennant patterns.

Bullish Pennant

In the above image, the asset price witnessed a sharp increase. This initial upward move is the flagpole of the bullish pennant pattern.

Following the sharp rise, the price enters a consolidation phase and forms a triangle with converging trendlines, similar to a flag known as a pennant.

If the price breaks above the upper trendline of the pennant, it is usually seen as a bullish sign.

Bearish Pennant

On the other hand, the asset price witnessed a sharp decline in the image above. This initial downward move is the flagpole of the pennant pattern.

Following the sharp fall, the price enters its consolidation phase and forms a triangle with converging trendlines, similar to a flag known as a pennant.

If the price breaks below the lower trendline of the pennant, it is usually seen as a bearish sign.

Conclusion

To sum it up, pennant patterns are helpful for analysts in identifying trend continuations. They are relatively simple and can estimate price targets after a breakout. However, interpretations can be subjective, prone to false signals, and have limited application in long-term forecasting abilities. Using pennants in combination with other indicators while maintaining a prudent level of scepticism enables traders to make more informed decisions to enhance their technical analysis and profits.

Frequently Asked Questions (FAQs)

What is a pennant chart pattern?
A pennant chart pattern is a technical indicator used to spot possible short-term continuations of a price trend after a period of consolidation.
Are there different types of pennants?
Yes, bullish pennants are formed during uptrends and bearish pennants are formed during downtrends.
How are price targets estimated?
The flagpole height can be a rough estimate for the price target after a breakout.
Are pennants always accurate?
No, pennants are not foolproof indicators. The market can be unpredictable, and false breakouts can occur.
Are pennants good for beginners?
Pennants can be a good starting point, but they need practice and should only be used for actual trades once you are comfortable identifying them.

June 24, 2024

What is the Flag and Pole Pattern?

There are plenty of technical patterns in the stock market, but it can be challenging for traders to recognize a trustworthy chart pattern that can help them make the best decisions and increase their profits.

To make things easier, we will introduce the “Flag and Pole Pattern” to you in this blog.

Flag and Pole Pattern

The Flag and Pole pattern is a technical analysis pattern traders use to determine a stock’s trend. In general, this pattern resembles a flag flying from a pole. It denotes a notable shift in price in the pole phase followed by a consolidation phase forming a shape similar to a flag.

Features of Flag and Pole Pattern

The essential features of the flag and pole pattern are as follows-

The continuation pattern indicates a price movement in the direction of the one shown in the pole phase, whether upside or downside.
There will be a consolidation phase in the pattern observed in the flag part.
Traders generally use it for short-term trading.
This pattern provides you with valuable insight into market behaviors.

Read Also: What Is the Pennant Chart Pattern?

Pattern Formation by the Flag and Pole

There are majorly four qualities of the pattern formed by this technical analysis tool:

Prior Trend – The term “prior trend” describes a stage in which the security price exhibits a sudden movement before the consolidation period. It represents the initial stages of development of a flag and pole pattern.
Consolidation Phase – This chart pattern phase functions as a flag segment within the flag and pole pattern. It occurs following the stock price’s initial directional change.
Volume Shift—This pattern simultaneously witnesses an increase in volume at first, followed by a slight fall in volume in the flag phase, and then a significant jump in stock volume once the price breaks out of the consolidation period.
Breakout – Breakout is the pattern’s last section. It is possible to observe the breakout in either an upward or downward direction in bullish and bearish pole phases, respectively.

Types of Flag and Pole Patterns

There are two types of flag and pole pattern-

A. Bullish Flag

This pattern, sometimes called an aggressive flag and pole pattern, sees a rise in stock prices during the initial phase before entering the consolidation phase. A bullish flag pattern is formed when there is an upside breakout within the flag followed by a consolidation phase followed by a breakout above the upper trendline of the flag and rising further.

Bullish Flag and Pole Pattern Image

B. Bearish Flag

This happens following a downward price movement and consolidation. The price typically increases during the consolidation phase and forms an upward-sloping channel. The security’s price forms a bearish flag pattern before breaking the support level and heading lower.

Bearish Flag and Pole Pattern Image

Precautions Taken by Traders

Traders can utilize the flag and pole pattern after carefully examining the following facts:

To trade, one must be patient and wait for the pattern to finish. By doing this, the trader guarantees that the stock has completed the consolidation phase and is prepared for a breakout.
The investor should monitor the stock’s volume throughout the pattern; a drop in volume indicates a pattern weakness, while an increase in volume during the breakout confirms pattern completion.
Investors should evaluate the market’s overall state before trading. Any breakout may be misleading if the market does not support the trend.
A trader should review the support and resistance levels before the transaction.
Since these patterns are only beneficial in short-term trades, a proper stop loss should be established near the support level for the bullish flag and resistance level for the bearish flag, and regular profit booking should also be carried out.

How to Identify the Flag and Pole Pattern?

A flag pattern can be affirmed using a stock’s volume. In a bull flag, volume is often highest during the first part of the upswing, declines as the market consolidates and rises again when the breakout happens. Usually, these patterns develop during a protracted upward trend. The lack of volume increases the probability that the trend will resume, which indicates that the retracement is less strong than the first gain. The stock price might not retreat during the consolidation phase but instead stay flat. To validate a flag chart pattern, wait for the original trend to reappear before initiating your position.

What Is the Target for the Flag and Pole Pattern?

The height of the pattern’s pole is often measured and added to the pattern’s breakout point to determine the target for the flag and pole pattern. But before making any trades based on this pattern, one should think about a stop loss.

Conclusion

The flag and pole pattern is considered one of the most dependable tools in technical analysis. It is appropriate for traders to determine whether the stock price continues in a possible trend or not. However, even after correctly recognizing the pattern, trading profits are not a certainty. For this reason, as a trader, one must always have a stop loss on all transactions and combine this pattern with other patterns to reinforce the logic behind the trading decision.

Frequently Asked Questions (FAQs)

How can I identify the pole in the flag and pole pattern?
A flag and pole pattern’s pole can be distinguished by its vertical price movement, which often denotes a brief price increase or fall followed by a consolidation phase.
How can a trader choose to invest based on flag and pole pattern?
When the breakout from the flag phase happens, a trader can enter the transaction. Additionally, one should set a stop loss at the flag’s low (high) when the trend is upward (downward).
What are the different types of flag and pole patterns?
There are two types of flag and pole patterns: one is bearish, and the second one is bullish.
As a trader, can I rely on flag and pole patterns?
This pattern is considered dependable when the trader waits for the completion of the pattern and has a suitable stop loss in place.
How long does a flag and pole pattern continue?
The pattern typically lasts for no more than two to three weeks.

June 24, 2024

Blog

Understanding Options Trading

How to Trade Options?

1. Evaluate Financial Goals along with Risk & Return Profile

2. Understand the Type of Options

3. Pick The Options To Buy Or Sell

4. Understanding and choosing the right option strike price

5. Understanding the Option Premium

6. Understanding the Option Greeks

7. Analyze The Time Frame Of The Option

Conclusion

Frequently Asked Questions (FAQ’s)

Can anyone trade options?

How are Stock Options settled?

How are Index Options settled?

Does Options trading require a margin?

What’s the contract cycle for options in India?

Overview of Securities Transaction Tax (STT)

History of Securities Transaction Tax

Meaning of Securities

Features of STT

Securities Transaction Tax Rate

Example of Securities Transaction Tax

Impact of Securities Transaction Tax on Investors

Conclusion

Frequently Asked Questions (FAQs)

Is the Securities Transaction Tax a direct tax or indirect tax?

Is there any way to avoid paying STT on transactions?

What is the difference between Capital gain tax and Securities Transaction Tax?

In which year was the Securities Transaction Tax introduced in India?

Is STT applicable on both buy and sell?

Overview of Tax Deducted at Source

Features of TDS

Examples of TDS

Overview of Tax Collected at Source

Features of TCS

Example of TCS

Differences Between TDS and TCS

Consequences of Not Depositing TDS or TCS

Conclusion

Frequently Asked Questions (FAQs)

What is the time limit for a TDS refund?

When are TDS and TCS applicable?

What is the due date for depositing Tax Deducted at Source (TDS)?

How do I verify the deducted TDS on my behalf?

What are the consequences for not deducting TDS or not collecting TCS?

Allied Blenders Company Overview

Product Portfolio

Promotors

Details of Allied Blenders IPO Issue

Allied Blenders IPO Key Details

Allied Blenders IPO Timeline

Allied Blenders Allotment Size

Allied Blenders IPO Objectives

Allied Blenders IPO Reservation

Allied Blenders Financial Statements

Allied Blenders Balance Sheet

Allied Blenders Income Statement

Allied Blenders Cash Flow Statement

Allied Blenders Key Performance Indicators

Strengths of Allied Blenders

Weaknesses of Allied Blenders

Conclusion

Frequently Asked Questions (FAQs)

When will Allied Blenders and Distillers IPO open?

When were allied blenders and distillers established?

Is Allied Blenders and Distillers a profit-making company?

What is the minimum lot size that retail investors can subscribe to?

What is the name of the company that offers Officer Choice Whisky?

What is Insider Trading?

SEBI Regulations for Insider Trading

Indian Examples

1. Acclaim Industries

2. Rajat Gupta Case

3. Infosys Case

Conclusion

FAQs (Frequently Asked Questions)

Who is an Insider?

Can insiders trade?

How can companies prevent insider trading?