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What is Price Action Trading & Price Action Strategy?
Did you know there is a simple yet powerful concept in trading that focuses solely on the movement of price over time to gauge market sentiments?

We are talking about Price Action Trading, which primarily focuses on trends, chart patterns, candlestick patterns, and major historical price movements to gauge market sentiments. Candlestick patterns help to identify the relationship between buyers and sellers over a period of time by analyzing the open, close, high, and low prices of the candlestick.

What is Price Action Trading?

Price action in trading analyses the price performance of a security, index, commodity, or currency to predict the future. If price action analysis tells us that the price is about to rise, one might want to take a long position, or if one believes that the price action is signaling a negative trend, one might choose to initiate a short trade.

Merits of Price Action Trading
- Simple to understand: This is its biggest advantage; candlestick patterns can be observed on the charts without the need for any complicated technical indicators. Candlesticks itself give the signal of trend change; it’s confirmation or buying and selling signals. Along with that, a few other chart patterns can be observed with a wider time frame, that candlesticks make to give mid to long-term signals like Double bottom, Rounding bottom, Head & Shoulders, etc.
- Easily accessible: Price Action uses only candlesticks which are easily accessible in charts as compared to complicated indicators.
- Without any Lag: All the technical indicators have some lag before generating signals, but Candlesticks move in sync with the price movement.
- Develop Independent thinking: As this method needs close observation and analysis, it engages traders’ analytical and critical thinking skills to make informed trading decisions.
- Universal Application: Traders can make use of price action across all asset classes such as equities, currencies, commodities, etc.
Limitations of Price Action Trading
- Not for all markets: Price action is not a perfect method in all market conditions.
- Time Consuming: Interpretation of candlesticks can be more time consuming as compared to technical indicators because it relies on traders understanding and skills to interpret the patterns accurately. This can impact the decision-making.
- No automation: In price action, most of the traders do manual execution as it is difficult to deploy fully automated price action strategies. This can lead to emotional bias, which eventually hampers the profitability.
Strategies Used in Price Action Trading

A pattern is formed by a group of candles over a certain period of time that creates a unique shape and carries a specific meaning. Such patterns help traders analyze the behavior of buyers and sellers during the formation of the pattern and predict the future direction of price movements.

There are various price patterns that traders should keep an eye on, including Double-bottom and Triple bottom patterns, head and shoulders patterns, cup and handle patterns, wedge patterns, pennants, triangle patterns, and more.

However, correctly identifying these patterns requires traders to have a good understanding of each pattern and observe price charts on different time frames.

Read Also: Price Action Analysis: An Easy Explainer

Best Price Action Trading Strategies

There are numerous Price Action strategies, but learning each one can be challenging. To simplify things, we’ve explained a few key strategies below for your convenience.

1. Hammer

The hammer candlestick pattern, which consists of a short body and a long wick, is found at the bottom of a downward trend.

The colour of the body can vary, but green hammers indicate a stronger bull market than red hammers. If the pin bar/hammer pattern has a long lower tail, this tells the trader that there has been a trend of lower prices being rejected, which implies that the price could rise from here. Generally, the next day is the confirmation day, and if the next day’s price crosses the high of Hammer, then a strong buy signal is generated. Stop loss is the low of Hammer, the entry point is a bullish breakout above Hammer’s high and can continue with the trend till it gets any reversal signal.

2. Bullish Engulfing

The bullish engulfing pattern is formed by using the two candlesticks. The first candle is a short red body which is completely engulfed by a larger green candle. That’s called bullish engulfing. It signals a potential trend change from down to up, so the next day, even if the price opens a little bit lower, it will be a buying opportunity as bulls are in control and will push the price higher eventually.

The reversal of Bullish engulfing is Bearish engulfing, which occurs after an uptrend.

3. Three White Soldiers

It is a very strong bullish signal that occurs after a downtrend. It’s a three-candle pattern and consists of consecutive long green candles with small wicks and long bodies, which open and close progressively higher than the previous day. The potential direction is up.

In contrast, the reversal of Three White Soldiers is Three Black Crows, which signals a strong bearish trend after an uptrend.

4. Hanging man

The hanging man is a bearish pattern and it’s the opposite of a hammer. It has the same shape as of a hammer but forms at the end of an uptrend, so, it’s a bearish signal. It indicates that there was a significant sell-off during the day. The large sell-off is often seen as an indication that the bulls are losing control of the market. The next day, a lower close confirms the downtrend. One can continue with the short trade till get any reversal.

5. Head and Shoulders Pattern

As the name suggests, the head and shoulders pattern is a market movement that looks a bit like the head and shoulders. The head and shoulders trade is one of the most popular price action trading strategies as it’s relatively easy to choose an entry point (generally near the neckline after the breaking of the shoulder) and set a stop loss around or above the left shoulder and set the target at the downside till the length of the head.

A similar pattern can be reversed, called reverse head and shoulder. It works as a bullish signal and gives upside targets.

How to Trade Using Price Action

Traders can follow below mentioned steps to trade using price action:
- Identify the asset class and market you want to trade.
- Analyze the patterns and trends.
- Decide whether to go long or short.
- Build a trading plan, for e.g., entry price, exit price, risk reward ratio, stop loss levels, etc.
- Execute the trade, monitor the position, and make a timely exit.
Conclusion

Price action trading is a powerful tool used by traders all around the world across different markets. It provides a systematic way to analyze the market and gives the direction to initiate a trade. Traders look out for price action signals for the emergence of a trend.

Unlike technical analysis, the Price Action focuses on the price itself and not on other indicators. The more expert a trader will be, the more likely repeated patterns of behavior from buyers and sellers can be found out and traded upon.

Following a set of price action trading rules is important to achieve consistent performance. Always be mindful of the risks involved in trading and make decisions accordingly. Further, for new traders, it is suggested to do paper trading at the initial stages; this will allow them to trade in a virtual environment until they get the confidence and clarity to go live.

Frequently Asked Questions
1. Is Price Action Trading Relevant?
  Yes, it’s relevant as it is used to understand the price action and involves looking at the patterns and identifying the key indicators.
2. What do you mean by Price Action Analysis?
  Price action is the process of analyzing historical price trends to forecast the direction of prices in the future. It is generally done by analysing the candlestick patterns, which show the relationship between buyers and sellers in a given time period.
3. Is Price Action Trading Good for Beginners?
  Yes, price action is suggested to beginners as it is a good starting point for understanding the market through historical trends and predicting future market movements based on that.
4. Are there any strategies involved in Price Action Trading?
  Yes, there are a number of different price action methods that traders use to predict market movements, like Head & Shoulder, Hanging Man, etc.
5. What are Candlesticks Patterns?
  Candlestick patterns help traders to identify the relationship between buyers and sellers over a period of time by analyzing the candlestick’s open, closed, high, and low prices.

June 17, 2024

Momentum Investing: Meaning, History, Types & Advantages

Have you ever seen an unexpected spike in the price of a stock? After seeing it, everyone seems to rush in like it’s a bar fight over the final slice of pie. That is an oversimplified idea of momentum investing.

Momentum investing is the practice of purchasing stocks experiencing an upward price trend and selling those experiencing a downward price trend. Making money off of current market trends is the aim. Utilizing the current trends in the industry is a part of the procedure. This strategy is based on the idea that stocks that have performed well historically will continue to do so going forward.

What is Momentum Investing?

When you trade based on momentum, the idea is “buy high, sell higher”. It comes from the idea that assets that have done well in the past will continue to do well in the coming future. People often use this approach because they’ve seen that stocks that have done well in the last three to twelve months tend to keep doing well, and stocks that have been doing poorly tend to continue doing poorly.

History of Momentum Investing

The concept of momentum investing is not new. Its origins can be traced back to the 19th century. Richard Driehaus is known to have modernized the strategy, emphasizing the concept of “buy high, sell higher.” Momentum investing was empirically validated by academic studies, including those conducted by Jegadeesh and Titman in the 1990s, illustrating that stocks with robust recent performance are more likely to maintain their performance.

Momentum Investing Key Concepts

There are a few key concepts of momentum investing. They are explained in detail below:

A. Price Momentum

This investment strategy is founded on the principle of price momentum. It entails identifying assets with either upward or downward price trends over a specific period. Investors typically screen for securities with the most robust price performance in the past six to twelve months.

B. Strength in Relationship

Another fundamental principle of momentum investing is relative strength. It entails comparing a security’s performance to a pertinent benchmark, such as a sector or index. Under this strategy, stocks with greater relative strength than their counterparts are considered appealing investments.

C. Following Trends

Momentum investors frequently follow market trends to capitalize on existing price fluctuations. This involves identifying and investing in assets that are trending in a specific direction, such as an uptrend in an optimistic market.

Momentum Investing Strategies

There are many momentum strategies that are used by traders to generate above-average returns. Some of them are mentioned below.

1. Relative Strength Strategy

It involves ordering securities based on their past performance record, most often for a specific duration such as three, six, or twelve months. Investors subsequently select the best-performing securities and sell off the worst.

2. 52-Week High/Low Strategy

A stock is bought when it is close to its highest level over the past 52 weeks. Otherwise, it is sold or shorted when it is near its lowest over the same period. This strategy believes that securities approaching new peaks are more likely to continue rising due to upbeat investors’ attitudes and sustained buying pressure.

3. Momentum Oscillators

Technical indicators such as the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Rate of Change (ROC) are used to identify momentum of stocks. These indicators can signal overbought or oversold conditions and potential trend reversals, guiding buy or sell decisions for traders.

4. Earnings Momentum

This strategy focuses on shares of companies that have consistently exceeded earnings expectations. Investors buy stocks of companies that have recently reported positive earnings surprises and strong earnings growth, anticipating that the momentum will continue.

5. Sector Rotation

This involves moving investments from one sector to another based on the relative momentum of different sectors. Investors shift their portfolios into sectors showing high performance and away from those showing low performance.

6. Price and Volume Trends

Investors analyze price trends and trading volumes to confirm momentum. A high volume of upward price movement indicates strong buying interest and can signal to buy, while a high volume of downward price movement can signal to sell.

Advantages of Momentum Investing

Opportunity to earn higher returns: Momentum buying can yield big gains, especially when the market is moving strongly. By riding the current wave of progress, buyers may be able to make money as prices continue to rise in certain assets.
Spreading out: Momentum investing can help more if you spread your investments across different assets that have strong momentum. This may lower risk and increase the overall return-to-risk ratio.
Rules and ease of use : Many buyers like momentum trading because it is easy to understand and is based on clear rules. It gives you a structured way to earn profit from current market trends.

Disadvantages of Momentum Investing

Risk and Volatility: Due to the stock market’s extreme volatility, momentum investing can result in substantial losses during market trend reversals. The strategy may put investors at greater risk since it depends heavily on short-term price fluctuations, particularly during volatile times.
High Charges for Transactions: Frequent trading may impact the total profits of momentum investing due to increased transaction expenses. For smaller investors, the strategy’s profitability may be weakened by the accumulation of trading costs.

Conclusion

By taking advantage of current market movements, momentum investing is a dynamic and fascinating technique that has attracted attention due to its potential to generate substantial profits. But it comes with its own set of difficulties. Success in investing based on momentum requires careful planning, risk management, and a long-term outlook, just like any other technique. Ultimately, an investor’s risk tolerance, financial objectives, and market forecast determine whether or not they choose to use momentum investing in their investing journey.

In summary, momentum investing is an effective strategy for navigating the financial markets. It allows investors to increase returns by giving them a framework for recognizing and taking advantage of current price trends. However, before incorporating momentum investing into your portfolio, you must thoroughly assess the risks involved and consider your unique investment goals.

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4	Option Chain Analysis: A Detail Guide for Beginners
5	What Is The Gap Up And Gap Down Strategy?

Frequently Asked Questions (FAQs)

What is investing with momentum?
Investing based on momentum involves performing transactions based on market trends; for example, one might buy equities that have shown an upward trend in price with the expectation that the price will climb further.
How can I tell which stocks are momentum-rich?
Use price charts, RSI, and averages to identify steady-rising patterns.
When should you purchase and sell based on momentum investing?
Based on momentum investing, you should invest in stocks while they are increasing in value but are yet to reach their peak and sell them when they start to fall in value or experience a trend reversal.
How should you diversify your portfolio?
It is advised to have a mix of bonds, index funds, and blue-chip stocks in your portfolio, so that during economic downturns, your investments remain safe.
What kind of risks are involved in momentum investing?
Momentum investing comes with its own set of risks, such as reduced returns due to high transaction costs, market reversals, and increased volatility.

June 15, 2024

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

Do you want to invest in stocks but need help choosing which ones to include? Selecting stocks can be a risky gamble. However, there’s an option that lets you invest in the top 50 companies simultaneously in India. This is possible through the Nifty BeES exchange-traded fund (ETF).

This blog will discuss the advantages of investing in the Nifty BeES fund and how it operates.

Understanding Nifty BeES ETF Meaning

Nippon India Nifty BeES ETF, more commonly known as just Nifty BeES ETF, was launched in 2001 with the objective of following the Nifty 50 Index. Its name was chosen so that Nifty stood for the index it monitors, and BeES stood for the abbreviation of the Benchmark Exchange-Traded Scheme.

Features of Nifty BeES

Like any other ETF, this is the most straightforward type of investment vehicle that allows for easy trading and investment.
Returns are aligned with the Nifty 50 index, thus allowing investors to earn a return similar to the top 50 stocks of the exchange.
Nifty BeES has a lower expense ratio than actively managed mutual funds.
The invested capital stays spread throughout 50 large-cap firms, reducing risk through diversification.

Advantages of Nifty BeES

The ETF has high liquidity, thus allowing you to quickly liquidate your money whenever you want.
Given the extremely low expense ratios, they are typically considered cost-effective investment options.
The fund allows the investors to gain exposure to India’s top 50 large-cap firms by investing in Nifty BeES.
Unlike other investment options, investing in Nifty BeES gives transparency because the investor already knows where their money will go.
During market hours, investors can buy and sell the units in real time.

How Does Nifty BeEs Work?

The Nifty BeES are funds that are managed passively. The money is invested in stocks that are part of the Nifty 50 index, and the fund aims to produce returns comparable to the index. However, it is important to know that though they invest in the Nifty 50 index, there is no assurance or guarantee that the fund will achieve its goal completely due to the presence of tracking errors.

How to Invest in Nifty BeES?

Investors can invest in Nifty BeES like other stocks through a trading and demat account. It has an ISIN (International Securities Identification Number) assigned to it. Unlike mutual funds, which can be traded only at the end of the day, the Nifty BeES ETF is listed on the National Stock Exchange. An investor can buy and sell the units of the Nifty BeES ETF at any time during market hours. The dynamics of supply and demand determine the price of Nifty BeES.

You can hold these securities in your demat account. Investors and authorized participants can participate through units. The minimum denomination of units that can be purchased or redeemed from the AMC is 50,000 units. Investors can buy as little as one unit at a time and at the prevailing market price.

Taxation of Nifty BeES

The tax treatment of the Nifty BeES is the same as that of any other stock index fund, as they are treated like equity mutual funds. The Nifty BeES units are subject to a 15% tax on profit (Short-Term Capital Gains) if sold within a year and a 10% tax on profit (Long-Term Capital Gains) if sold after a year and with more than one lakh in profit.

Who Should Invest in Nifty BeES?

If you are new to investing and lack sufficient understanding of the range of investment items on the market, you should consider investing in the Nifty BeES. The fund is known to provide the benefit of diversification as it spreads your capital among the top 50 companies listed on the exchange.

Additionally, an investor may want to think about this alternative if they want to invest in the equities market and are willing to pay a minor charge in expense ratios. Overall, it’s a good option for those investors who wish to gain exposure to the Nifty 50 index without going through the hassle of manually picking stocks.

Nifty BeES Performance

Scheme Name	1 Week	1 Month	3 Months	6 Months	1 Year	3 Years	5 Years
Nippon India Nifty 50 BeES ETF	1.89	1.63	2.14	14.26	24.89	15.95	15.79
Nifty 50 TRI	2.06	2.5	2.31	14.47	25.48	15.59	15.93

(As of 25th May 2024)

From the return table above, the fund has provided a slightly lower return than the Nifty 50 Index. This is probably due to the presence of tracking errors.

Conclusion

Nifty BeES is an exchange-traded fund that invests in the top 50 Indian firms. It provides investors with the benefits of diversification while providing a hassle-free solution to the problem of manually picking stocks. The fund is also known to provide immense liquidity, thus making it more beneficial for investors to choose. Those looking to begin their investment path may find Nifty BeES to be a suitable solution.

However, equity markets have drawbacks, such as high volatility and no guaranteed return. Therefore, it’s important to analyze all the pros and cons before investing thoroughly.

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Frequently Asked Questions (FAQs)

Is there any disadvantage to investing in Nifty BeES?
A drawback to investing in Nifty BeES is that it is a passively managed fund and, hence, cannot earn more than the benchmark.
Is there any lock-in period for Nifty BeES?
Nifty BeES has no maturity dates or lock-in periods since anyone can withdraw from this plan when markets are open.
Can I get a dividend while investing in Nifty BeES?
Indeed, the fund declares dividends. Upon the announcement of dividends by the holding companies, investors are given the choice to reinvest the income or receive it in their demat account.
Can I hold Nifty BeES for a longer period?
Yes, you can hold Nifty BeES in your demat account as long as you want.
What is the full form of Nifty BeES?
BeES stands for “benchmark exchange traded scheme,” whereas Nifty refers to the index it tracks, which is the Nifty 50.

June 15, 2024

What is the 151515 Rule of Mutual Fund Investing?

Investing is known around the world as a difficult venture, but if done correctly, it can lead to multifold capital growth. An example of a trick to achieve this is the “15*15*15 rule of mutual fund”. Today, we’ll explain this trick in detail.

What is the 151515 Rule in Mutual Funds?

This principle of mutual funds can help you achieve your dream if you save a particular amount over time. According to this rule, if you invest 15000 per month for a period of 15 years and your investment fetches a return of 15%, you will accumulate 1.01 crores, whereas your total investment will be only 27 lakhs.

Power of Compounding

Compounding is essentially the exponential growth of your investment over a long period. This occurs when the profits earned on investments are reinvested, producing further profits.

Let’s understand the magic of compounding through an example-

Assume that you have invested INR 1,00,000 in mutual fund schemes. You make 12,000 on it in the first year, assuming a return of 12%. Hence, the corpus at the end of the first year becomes INR 1,12,000 instead of INR 1,00,000. Furthermore, assuming a return of 12% in the 2nd year, the corpus would also become INR 1,25,440, earning a return of INR 13,440.

You can now understand that even earning a consistent return every year would lead to higher growth in investment due to the concept of compound interest.

Components of the 151515 Rule in Mutual Funds

There are 3 components of the 15*15*15 rules in mutual funds.

Period – This rule’s primary element is the investment horizon, often known as the time horizon. Since compounding has long-term benefits, it is appropriate for long-term investors.
Return—The 15% annualized return projected under this approach is typically offered in the equity asset class. Over an extended period, several mutual funds have reported similar results.
Investment – Since consistency in investment is a key component of this guideline, the investor must consistently invest 15,000 INR per month without being concerned about market volatility.

Benefits of the 151515 Rule in Mutual Funds

The major advantages of the 15*15*15 rule are as follows-

This investment principle encourages you to optimize the benefits of compounding by emphasizing long-term investing.
The systematic approach to investing aids in the formation of a consistent saving habit in the investor.
Mutual funds are an inexpensive and easily evaluable asset that is accessible to anyone. Thus, allowing high liquidity.

Limitation of the 151515 Rule in Mutual Funds

The limitations of the 15*15*15 rule are mentioned below-

Higher Returns – The 15% annualized return is regarded as extremely optimistic, and it is challenging for funds to regularly generate this return over an extended period of time.
Economic Downturn – The returns could decrease if the economy is expanding more slowly or if there are significant market crashes.
Investment – This investment principle assumes that the investor can make consistent investments throughout a 15-year period. However, there are a number of financial circumstances, such as unemployment or unexpected medical expenses, that may prevent an investor from making these kinds of investments.

Important Points to Remember for the 151515 Rule

An investor should take into account a number of factors before following the mutual fund 15:15:15 guideline.

To invest in mutual funds and build a corpus over an extended period of time, one must be aware of their level of risk tolerance.
It is necessary for an investor to confirm that they have the financial means to invest INR 15,000 each month for a duration of 15 years.
When you begin investing, select the best strategy allocation and periodically assess your portfolio to see how well it is going.

Conclusion

Compounding is beneficial if you keep your investment for a long time. Mutual funds have several advantages, including returns that beat inflation and tax advantages, but the compounding effect is much more valuable. The sooner you begin investing and the longer you stay involved, the better the return. The mutual fund industry’s 15*15*15 rule operates in this manner. However, you should assess your risk tolerance by speaking with an investment counselor prior to making any investments.

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Frequently Asked Questions (FAQs)

What is the 15*15*15 rule of mutual fund investing?
According to the 15*15*15 rule, if you invest in mutual funds using a monthly SIP of INR 15,000 for 15 years and your investment yields an annualized return of 15%, you will have accumulated INR 1.01 crore.
What is compounding in finance?
In the world of finance, compounding is the process by which returns on an asset are reinvested in the same asset class to produce further returns.
How can I earn 1 crore in 15 years by investing in mutual funds?
By investing just 15,000 INR every month, you can make 1 crore if you earn 15% p.a.
Which category of mutual fund can provide returns of up to 15%?
Investing in the equity category of mutual funds can yield profits of up to 15% annually.
Should I change the fund during the investment tenure of 15 years in the 15*15*15 rule?
A regular review of your portfolio is important to ensure a 15% annualized return such that the corpus of 1 crore can be achieved in 15 years time.

June 14, 2024

Margin Pledge: Meaning, Risks, And Benefits

Do you sometimes feel that your current capital is holding you back from the bigger moves in your F&O trades? If you are looking to seize new opportunities and are short on cash, then a margin pledge can be the ultimate solution.

In this blog, we will explore margin pledge and how it affect futures and options trading. Additionally, we will also discuss the advantages and risks involved in margin pledge.

What is Margin Pledge?

Margin Pledge is a facility offered by brokers that allows you to use your existing securities as collateral to borrow margin for trading. With the pledged margin, traders can utilize it for Intraday equity trading, futures trading, and selling options.

You deposit your financial assets like stocks, mutual funds, or government securities with your broker. These deposited securities act as collateral. The broker then lends you a margin amount which is less than the value of the pledged securities because of Haircut.

Here is a breakdown of the key points:

Haircut

It simply means the difference in asset price given for collateral and amount provided by the lender as collateral.

Suppose, you pledged small cap stocks worth INR 10,000 with a haircut of 30%, then the available collateral margin would be INR 7,000.

It is because the brokers do not lend you the total value of your pledged securities. Instead, they apply a deduction to account for market volatility and price fluctuations. This deduction reduces the amount you receive as a collateral. Haircuts are generally represented as a percentage of the asset price. The riskier the asset, the higher the haircut.

Read Also: What is Pledging of Shares?

Example of How a Margin Pledge Works

You have shares worth INR 1 lakh in HDFC, but you need funds to trade the F&O contracts of the Nifty 50 Index.

Here, you will pledge your shares of HDFC with your broker. The broker will deduct a haircut from the total value of the shares, let’s take 20% haircut for simplicity, which is INR 20,000.

The remaining INR 80,000 will be your margin limit, which you can use to trade the F&O contracts of Nifty 50 Index. Keep in mind that with a pledged margin, you cannot buy option contracts of Nifty 50; it can only be utilized to buy / sell future contracts and short option contracts.

Cash vs. Non-Cash Component

The Securities and Exchange Board of India (SEBI) regulates the margin requirements for F&O trading. It has mandated a minimum margin for each F&O position, and the required margin can be achieved through a combination of cash and non-cash components in case of pledged margin.

The cash component refers to your own cash deposited with the broker, the amount invested in liquid funds, bank guarantees, government securities, etc. and the non-cash component includes the collateral margin obtained by pledging your holdings, such as stocks, ETFs, mutual funds apart from liquid funds, etc.

Importantly, SEBI mandates that at least 50% of the total margin requirement for overnight F&O positions must be in cash and cash equivalents. The remaining 50% can be non-cash collateral. In case of non-fulfilment of the cash component, your broker will levy interest charges.

Other factors that can be taken into account:

Not all assets in your portfolio are eligible for pledging. Brokers accept stocks, ETFs, and government securities like SGBs.
This regulation aims to ensure that traders have sufficient liquidity to meet their margin obligations and mitigate the risk of excessive leverage.
Margin trading carries the risk of margin calls if the market moves against your position and the value of your collateral or F&O contract drops. Failing to fulfil a margin call may result in the broker’s forced selling of your pledged holdings.

*Margin Call is a notification from the broker demanding additional cash or securities to maintain the minimum margin requirement for your positions.

Advantages of Margin Pledge

Amplified buying power: The most important benefit is increased purchasing power. By using your current holdings as collateral, you have the opportunity to access additional capital to take larger positions in F&O contracts, magnifying the profits.
Strategic use of existing Assets: Margin pledge enables the efficient deployment of one’s idle holdings for productive purposes. You can use stocks or bonds to generate additional trading opportunities.
Convenience and Efficiency: The traders do not need to sell existing holdings to free up cash. They can use it while their assets keep on increasing.

Risks Involved

While margin pledge offers an attractive way to boost your trading margin, it is essential to understand the inherent risks involved.

The increased buying power that comes with the margin pledge can also increase your losses. It is a double-edged sword; market fluctuations can cause a sharp decline in your positions.
If the value of your pledged securities or F&O positions falls, you might face margin calls from your broker, which will require you to deposit additional cash or securities to maintain the minimum margin needs. Failure to meet a margin call could result in the broker being forced to sell your pledged securities.
F&O trading itself is inherently volatile. A margin pledge further increases this volatility, causing sharper swings in trading positions.
The ease of taking larger positions with pledged margins might tempt you to make impulsive or emotional trades.

Conclusion

To sum it up, margin pledge can substantially amplify your purchasing capacity for intraday, futures, and options trading. However, it is essential to use it strategically and have a clear understanding of the risks involved in it.

Additionally, it is important to understand mechanics of intraday, futures, and options trading and risk management prior to utilising the pledged margins.

Frequently Asked Questions (FAQs)

What is a margin pledge?
In margin pledge, you use your existing securities as collateral to borrow money for further trading.
Can I buy call and put options from the pledged margin?
No, you cannot utilize the pledged margin for buying option contracts. It can only be used for intraday equity, buying or selling futures, and selling option contracts.
Do liquid funds considered as a cash component?
Yes, liquid funds are considered as a cash component.
Do brokers have the right to sell my pledged holdings?
Yes, in case of a short fall, the broker has the right to liquidate your pledged holdings.
Is the margin pledge safe?
Yes, it is safe. However, you should use margin pledge only if you understand the F&O risks, and have a well-defined trading strategy.

June 14, 2024

Debentures: Meaning, Features, Types, Benefits and Risks

A business may require loans to expand or carry out new projects. These loans can be taken from investors who wish to earn higher interest rates than ordinary fixed deposits. Such loans are called Debentures and are taken from investors in exchange for a pledge to repay their loan with interest.

In this blog, we will explore the meaning of debentures, its types, benefits, risks, and suitability.

What Is Debentures

Debentures are long-term financial instruments issued by a company, generally without any collateral, in order to borrow money from the public. It is an arrangement between the issuer and the holder. Instead of issuing new stock, businesses often use them to obtain medium to long-term capital without diluting ownership. When a company or a government issues debentures, investors receive interest payments at predetermined intervals until their maturity date, when the principal amount is repaid.

Types of Debentures

There are various classifications of debentures in the market. They are mentioned below:

1. Convertible (CDs) and Non-convertible debentures (NCDs): CDs are the debentures that can be converted into a specified number of equity shares after a predetermined period and NCDs are the securities that can not be converted into equity shares.

2. Redeemable and Irredeemable (Perpetual) debentures: Debentures that are issued with a fixed date on which the principal amount will be repaid are Redeemable debentures while debentures that have no fixed maturity date and carry on forever are Irredeemable debentures. In irredeemable securities, the issuer makes interest payment perpetually.

3. Callable and Puttable Debentures: Debentures where the issuer has the right to redeem the debentures are Callable Debentures and debentures where the holder has the right to sell their debentures back to the issuer before maturity are Puttable Debentures.

4. Zero coupon Debentures: These debentures are issued at a discount and redeemed at face value. The twist is that these debenture holders do not receive any interest payments.

Features of Debentures

Both issuers and investors find debentures appealing due to several important characteristics.

Fixed Interest Rates: Debentures have a fixed interest rate, which gives investors a steady source of income, typically semi-annually or annually.
Principal Repayment: Debentures generally have set maturity dates, which means issuers repay the principal amount to the debenture holder at the end of the maturity period, which could be anything from a few years to decades.
Credit Rating: Rating agencies often evaluate the creditworthiness of debentures to assist investors in determining the level of risk.
Liquidity: Debentures can be traded in the secondary market, allowing investors to liquidate their debentures.
No ownership dilution: Issuing debentures does not dilute the ownership of existing shareholders as they are debt instruments.

Benefits of Debentures

Debentures are issued because they offer a lot of advantages, some of them are mentioned below:

Regular Income: The interest payments made by debentures provide investors with a steady income stream.
Low Risk: As compared to equity investments, debentures are generally less hazardous as they offer fixed return and priority in case of liquidation.
Security: Debentures are regarded as more secure investments because of their stable reputation, which helps to protect the principal amount over time.
Capital Preservation: Debentures help in capital preservation as the principal amount is repaid at maturity.
No Dilution: Debentures do not cause any dilution in the company’s shareholding equity, thus preventing any major backlash from shareholders of the company.

Risks of Debentures

While debentures are a great way for the company to raise capital while preventing dilution, they do come with their set of risks. Some of the risks are mentioned below:

Credit Risk: There is always a chance that the issuer may stop making interest payments or won’t pay back the principal.
Lack of Control: Debenture holders usually lack voting rights, which reduces their ability to influence corporate choices.
Liquidity Risk: Some debentures lack liquidity, making it difficult to trade them in the secondary market.
Interest Rate Risks: Rising interest rates decrease the market value of existing debentures making them less appealing.

Suitability of Debentures

Debentures are an attractive investment choice for a wide range of investors. They offer a means of earning consistent returns with comparatively reduced risk for cautious investors. Due to their extra security, risk-averse investors tend to gravitate towards debentures.

Debentures are especially tempting to those seeking consistent income because they provide a steady income stream via fixed-interest payments. Investors aiming to support their financial objectives with steady cash flow can find this a reliable investment vehicle.

In summary, secured or highly rated debentures are desirable for investors who prioritize capital preservation above risk. These investors value stability and safety above bigger returns, making debentures a better option for achieving their investing goals.

Debentures are flexible investment instruments that can be tailored to meet a variety of risk profiles and financial objectives, thereby meeting investors’ diverse demands and preferences.

Conclusion

To summarize, debentures are an important financial tool that allows businesses to raise money and provide investors with a reliable source of income. By having a thorough understanding of these products’ kinds, features, rewards, and risks, investors can make wise selections that are in line with their financial objectives and risk tolerance. Debentures can be an essential addition to your portfolio in order to attain financial stability.

Frequently Asked Questions (FAQs)

How are debentures different from bonds?
While both are debt instruments, debentures are typically unsecured, while bonds are often secured by collateral or specific assets. Additionally, companies generally issue debentures, whereas the government and companies can issue bonds.
How can I buy Debentures?
When a company issues new debentures, you can purchase them through your broker. Debentures can also be bought in the secondary market as they are traded amongst investors.
What is the maturity date of a debenture?
The maturity date is when the issuer repays the principal amount to the debenture holder. The maturity date of a debenture can range from a few years to several decades.
How can I assess the risk of a debenture?
The risk of a debenture can be assessed by checking the credit rating, evaluating market conditions, considering the interest rate environment, and reading the terms and conditions of the debenture.
Can debentures trade on the secondary market?
Yes, Debenture can trade on a stock exchange or over-the-counter markets, providing liquidity to investors.

June 13, 2024

IXIGO IPO Case Study: Business Model, Key Details, and Financials

IXIGO, also known as Le Travenues Technology Limited, is an online travel company that started in 2007. It is a one-stop shop for travelers, providing many services. It currently sits as a major player in the Indian online travel market, offering various travel planning and booking services. Recently, IXIGO came out with an IPO.

In today’s blog post, we will learn more about the IXIGO IPO and understand its finances.

IXIGO IPO Overview

Rajnish Kumar and Aloke Bajpai, alums of the Indian Institute of Technology Kanpur (IIT-K), founded the company in 2007. It uses artificial intelligence and data science to improve users’ travel experiences. IXIGO focuses on Indian travellers’ needs, offering features such as cancellation protection for domestic flights.

Business Model of IXIGO

The company’s platform offers booking for train, flight, bus tickets, and hotels. It also provides travel tools and services developed using the company’s algorithms, including train PNR status and confirmation predictions, train seat availability alerts, train running status updates and delay predictions, alternate route or mode planning, flight status updates, automated web-check ins, instant fare alerts for flights, AI-based travel itinerary partner, and automated customer-based support services.

Some of IXIGO’s platforms are given below:

IXIGO Flights — This vertical was launched in 2007. The idea behind creating the website was to help travellers find the best flight deals and provide accurate travel information. They can then easily buy their tickets from third-party airlines and websites. The website also empowered travellers to conduct thorough research, compare prices effectively, and make informed bookings for their preferred flights at a cost-efficient rate.

IXIGO Trains — In 2013, the IXIGO Trains app was launched for Android to enhance the journey of Indian train travellers. This user-friendly app revolutionised train travel by enabling users to search for train-related information easily.

ConfirmTkt – It is another train-focused mobile app that predicts wait lists and helps with booking. It aims to ensure that users get a confirmed ticket.

AbhiBus – It sells bus tickets by partnering directly with operators or sourcing inventory from bus ticketing aggregators in the country to strengthen its foothold in the bus travel industry.

Hotels — In December 2023, the company launched a hotel booking section on its website and apps, allowing users to search, compare, and book hotels on platforms in India and worldwide. It offers properties in both domestic and international hotels, spanning budget, mid-range, and luxury price points.

Did you know?

IXIGO’s market share in India in the OTA (Online Travel Industry) rail market was 46.15% in FY 2023 and increased from 46.4% in the first half of FY 2023 to 52.4% in the first half of FY 2024.

Revenue Structure of IXIGO

IXIGO sells train tickets as a B2C ticketing agent and has partnered with IRCTC since November 2017. The company generates the majority of revenue from train tickets users buy through the platform. This revenue is received via agent service fees and payment gateway charges.

In addition, IXIGO makes money from ads and by promoting other services like IXIGO Assured Flex, which allows users to cancel train tickets for a small fee and get a full refund before the chart is prepared.

IRCTC charges IXIGO a maintenance fee for each ticket sold, as well as charges for using the enquiry API and promotional activities like showing advertisements, offering cashback, cross-selling, and free cancellation.

Furthermore, IXIGO’s revenue also comes from other bookings like the flight tickets. Flight tickets generate revenue via convenience fees, commission/net rates, rescheduling charges, cancellation charges, and incentives.

Revenue also comes from convenience fees, Abhi Assured fees, and commissions on bus ticket bookings that users book through our platforms.

Did you Know?

In July 2023, IXIGO became the first Online Travel Agency (OTA) in India to launch a generative AI-based travel planning tool.

IXIGO IPO Details

IPO Date	June 10, 2024 to June 12, 2024
Price Band	INR 88 to INR 93 per share
Lot Size	161 Shares
Total Issue Size	79,580,900 shares
Fresh Issue	12,903,226 shares
Offer for Sale	INR 66,677,674 shares
Issue Type	Book Built Issue IPO
IPO Type	Main-Board IPO
Basis of Allotment	Thursday, June 13, 2024
Initiation of Refunds	Friday, June 14, 2024
Listing Date	Tuesday, June 18, 2024

Objectives of the Issue

The company proposes to utilise the proceeds towards the following:

Partially funding working capital requirements of the company;
Investments in cloud infrastructure and technology; and
Funding inorganic growth through unidentified acquisitions, other strategic initiatives, and general corporate purposes.

Financial Statement Highlights

Balance Sheet

Key Metrics	FY 2023	FY 2022	FY 2021
Total non-current assets	336.64	305.55	114.62
Total current assets	249.26	232.91	70.45
Total equity	387.11	342.68	29.93
Total current liabilities	156.28	136.31	104.27
Total non-current liabilities	42.52	59.46	50.86

(In INR Crores)

Income Statement

Key Metrics	FY 2023	FY 2022	FY 2021
Total income	517.57	384.94	138.40
Total expenses	484.29	402.54	135.69
Profit / (Loss) for the year	23.39	(21.09)	7.53

(In INR Crores)

Cash Flow Statement

Key Metrics	FY 2023	FY 2022	FY 2021
Cash Flow from Operating activities	30.70	(34.34)	(15.18)
Cash Flow from Investing activities	22.01	(221.63)	(10.18)
Cash Flow from financing activities	(2.17)	257.88	13.53

(In INR Crores)

KPIs

Key Ratios	FY 2023	FY 2022	FY 2021
Return on Net Worth %	5.74%	(7.15%)	24.13%
EBITDA Margin	8.70%	(1.81%)	4.44%

Key Insights

IXIGO reportedly showcased high revenue growth from FY 2021 to FY 2023, with a CAGR exceeding 90%, which indicates rapid business expansion.

A net profit of INR 23 crores in FY 2023 suggests effective cost management, demonstrating the company’s ability to sustain growth.

Risks Involved

IXIGO depends on partnerships with travel service providers, especially IRCTC, for train bookings. Changes in partnerships or commission structures can affect revenue.
The company has less experience in certain hotel segments compared to established OTAs. This may limit their growth potential in those areas.
Economic downturns, pandemics, and other external factors can affect the travel industry, severely impacting IXIGO’s bookings and revenue.
The online travel market is highly competitive, with strong companies like MakeMyTrip and ClearTrip. IXIGO has to keep innovating and standing out to maintain its market share.
Despite becoming profitable recently, the company has experienced losses in the past. The key to future profitability is effectively managing costs and sustained revenue growth.

Conclusion

On a parting note, IXIGO has positioned itself as a leading player in Indian online travel, offering a user-friendly platform for travelers to easily search, compare, and book flights, trains, and hotels. Its unwavering focus on technology and meeting the specific needs of Indian travelers has been pivotal in driving its success.

Though the company has its merits, the issue does come with its set of risks. Therefore, it is important to analyse all points before investing in the company.

Frequently Asked Questions (FAQs)

What can I do on IXIGO?
You can search and compare travel options, book flights, trains, and buses, and use planning tools like fare alerts and curated itineraries.
Can I book train tickets on IXIGO?
It is known for its train booking features, including search, comparison and booking options for Indian railways.
What are IXIGO’s strengths?
High mobile user base, second largest online travel agency by revenue in India, strong presence in rail bookings, etc.
Should I invest in IXIGO’s IPO?
This depends on your financial goals. Carefully research company financials and risks before making any investment decisions.
What is the listing date of the IPO?
The expected listing date for the IPO is 18^th June 2024.

June 12, 2024

Mutual Fund Factsheet: Definition And Importance

Are you considering investing in mutual funds and browsing different websites to get information about a plan? Worry not—we’ve got you covered. A document known as a Mutual Fund Factsheet compiles all the information about a scheme in one convenient location.

Read our blog to see how it can assist you in making informed decisions.

What is Mutual Fund Factsheet

A mutual fund factsheet is a document that asset management companies release every month for all of their mutual funds. It includes all the vital details about a mutual fund scheme, like its goal, fund manager, performance, and portfolio. It is available for investors to download directly from their website.

The Securities Exchange Board of India (SEBI) has mandated that factsheets be issued every month as they convey fund specific information.

Key Elements of a Factsheet

The key elements of a factsheet can be divided into various categories –

Fund Details – The section dedicated to fund details includes the fund’s name and type—equity, debt, hybrid, etc.—as well as its inception date and main goals, such as growth or dividends.
Performance – This section provides a thorough study of the fund’s performance from its creation to the present day, spanning a period of one day to ten years. Additionally, it compares the results with the applicable benchmark index. You can also find the graphical representation of the performance.
Portfolio Composition – This statement outlines the fund manager’s investment breakdown by asset class, which includes stock, debt, and other investments made with your funds. The portfolio’s top holdings as well as the sector allocation are available here.
Fees and Expenses – It includes a list of the different fees and expenses that asset management firms charge. This is referred to as the “Expense Ratio,” and it is calculated as a percentage of the asset value of the fund.
Risk Factor – A fund’s risk and volatility are measured using a variety of metrics such as standard deviation, beta, and alpha. These calculations can be used to understand the risk factor.
Fund Manager Details – The factsheet also includes information about the fund manager overseeing your deposits, including their name, qualifications, and experience. The factsheet also discusses the fund management technique and style.
Investment Amount – The fund fact sheet provides information on the fund’s investments, including the minimum amount an investor can put in a systematic investment plan (SIP ), lump sum, dividend and capital gain distribution data, and the total assets managed by the fund.
Disclosures – The fact sheet is required to include several disclosures, including the ones that state that past performance does not guarantee future results.
Contact Details – The sheet also includes the head office address and contact information for asset management organizations.
Investment Style – The sheet also includes a grid that illustrates the fund’s investment style according to its category. For instance, the large-cap fund’s investment style displays a mix of large-cap growth-oriented equities.
Riskometer – Asset management firms are required by SEBI to display the fund’s riskometer on their factsheets. An investor can determine whether a fund is appropriate for their risk tolerance by using the riskometer.

Read Also: Types of Mutual Funds in India

Importance of Factsheet

The factsheet carries several important pieces of data that an investor must look at before making their investment decision. The investor can use the information to determine the fund’s suitability based on their risk tolerance and investment objectives. Some such uses are mentioned below:

An investor can examine the fund’s performance and compare it to their benchmark return by reading the factsheet.
Fund factsheets can be used to comprehend different risk indicators, such as beta, standard deviation, and sharpe ratio.
An investor can determine the risk of the fund by using additional qualitative metrics, such as the fund’s riskometer.
Exit load and expense ratio of the fund can be compared with competitors using data provided in factsheets.
The fund factsheet also includes fund management approaches and an objective so that investors can determine the fund’s purpose and match it to their investment goals.

Should an Investor read the Fact Sheet?

No matter how much knowledge an investor has about mutual funds, investing before examining vital information can prove fatal. The factsheet is written in a style that is easy for a layperson to comprehend. A thorough comprehension of the investment product you are about to invest your hard-earned money in is vital.

Conclusion

In summary, a factsheet is a crucial tool that investors may use to thoroughly understand a fund and make an informed selection. The factsheet lets you analyze the performance of the fund manager by comparing the fund’s returns with those of their peers using the information given. However, before making any investing decisions, you should analyse all the points thoroughly or consult your investment advisor.

Frequently Asked Questions (FAQs)

What is the purpose of a factsheet issued by Asset Management Companies?
The purpose of the factsheets is to give investors information about the funds that asset management businesses offer, including portfolio composition and fund performance.
What is the frequency of factsheets issued by the AMCs?
The factsheets are issued every month.
How can I use the information about the fund manager given in the factsheet before making any investment decision?
Before choosing a fund to invest in, we can research the fund manager’s qualifications, experience, and track record.
What does a mutual fund factsheet tell you about?
The mutual fund fact sheet provides an overview of the fund, including information on holdings, historical performance, and investing objectives.
Where can I find the factsheet of a mutual fund scheme?
Visit the asset management company’s website and navigate to the download section. From there, you can download the factsheet for any mutual fund scheme.

June 12, 2024

Explained | Why the 127-year-old Godrej Group is splitting

The Godrej Group operates in nearly every industry, from consumer products to aerospace. It is one of the largest conglomerates in India and is valued at a staggering INR 1.76 lakh crores.

However, recently, there has been much talk in the market regarding its separation.

This blog will cover everything from the rationale behind the split to the effects on shareholders.

Overview of Godrej Empire

Founded in 1897, the Godrej group was started by Ardeshir Godrej and his brother Pirojsha. They first established a modest lock manufacturing facility in Mumbai. As time went on, the company expanded into other industries, including consumer products, appliances, real estate, aerospace, and agriculture. As of 2024, the corporation employs about 28,000 people worldwide.

Group Companies

The Godrej group companies are mentioned below.

Godrej & Boyce – Engaged in the aerospace business.
Godrej Industries – Engaged in consumer goods, real estate, agriculture, chemicals, and financial services.
Godrej Properties – Provides infrastructure solutions to the public.
Godrej Agrovet – Caters to the food and agri vertical with specialization in animal feed, dairy, poultry, processed foods, and beverages.
Godrej Consumer Products – Engaged in manufacturing soaps, hair dyes, detergents etc.
Godrej Infotech – Provides IT solutions.
Godrej Koerber – Engaged in providing logistic automation solutions.
Godrej Capital – Provides various types of financing options such as home loans, loans against properties, business loans, etc.

Godrej Group Split

According to a recent filing, the Godrej family has decided to restructure its shareholding in the conglomerate to operate as two separate entities, Godrej Enterprises and Godrej Industries.

Godrej Industries Group (GIG), which mainly consists of Godrej’s listed entities, will be controlled by Adi Godrej and his immediate family, including his cousins Jamshyd and Smita. GIG has a history of 127 years.

Godrej Enterprises Group (GEG) operates in aerospace, defense, engines and motors, building material construction, IT software, and infrastructure solutions. The most prominent companies of this group are Godrej & Boyce and its subsidiary companies. Jamshyd Godrej will serve as the chairman and managing director of the group.

Objective of Split

The Godrej conglomerate made this decision to maximize strategic development and focus on generating long-term shareholder wealth. With this split, Jamshyd Godrej stated that they would be able to drive growth objectives with minimal complexity and concentrate on utilizing their core strengths.

Conversely, Nadir Godrej stated that the Godrej Group was established in 1897 to assist India’s transition to economic independence. They think that 125 years later, trusteeship and building stronger, better communities are still the organization’s cornerstones.

Both groups are dedicated to strengthening and expanding their history using the Godrej brand.

About Vikhroli Land Row

Adi Pirojsha’s grandfather had obtained 3000 acres of land in Mumbai from the British during World War II, and they later bought an additional 400 acres. Of which more than 3000 acres are in the Vikhroli region, with the rest being in Bhandup and Nahur.

This group of land exists in the country’s most expensive real estate markets. The 3000-acre land alone has a development potential of over 1 lakh crore INR. Hence, the split could significantly impact the company’s profitability if this land is segregated.

Godrej Properties and Boyce have a development agreement for the Vikhroli plot. According to reports, Godrej Properties would oversee the development and receive 10% of its overall income in exchange for its services. This agreement would stand as per their MOUs following the breakup.

Impact on Investor

In the CY (calendar year 2024), nearly all of the listed firms in the Godrej group have done quite well. Leading the pack is Godrej Properties, which reported a return of 32%, followed by Godrej Industries, which reported a return of 29%. Most market analysts claim that there have been several splits throughout history, the most dignified of which was the Godrej split, wherein all family members were consulted before becoming public.

The development has already been included in the stock price of listed companies; therefore, it has no immediate impact. The Godrej property will profit the most if they develop the land that Godrej and Boyce possess in Mumbai’s Vikhroli neighborhood.

The Godrej group firms’ valuations will rise due to the split because each will be able to function independently, improve its finances, and provide greater value to stakeholders — generally the reason for a split.

What should an Investor Do?

Investors who are interested in the company should consider its fundamentals, including revenues, profit margins, and financial statements. If they are invested in the company, they shouldn’t be alarmed by the split. Since every action the business takes is to benefit its stakeholders.

Read Also: Top Power Companies in India

Conclusion

In summary, group division is a calculated strategic decision. The effects of it will become apparent shortly, but all of the group companies have a very bright future ahead of them because they are run by renowned businessmen who are well-regarded for their business judgment. By dividing the work and concentrating on utilizing their core competencies, this division can help achieve their growth goals with less complexity. If you are interested in investing in this firm, you must stay informed about any announcements the company may make shortly and speak with your financial advisor.

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2	Global Financial Crisis 2007-08: Causes, Key Events, and Impact on Indian Stock Markets
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4	Explainer on Private Equity vs Venture Capital: Differences, Process, and Famous Firms
5	What is IEPF? Introduction, Reasons for Transfer, and Process of Claiming Explained

Frequently Asked Questions (FAQs)

Why is the Godrej group getting divided?
The 127-year-old Godrej group is getting split because of ownership realignment.
Who is the founder of the Godrej group?
The Godrej group was founded in the year 1897 by Ardeshir Godrej and his brother Pirojsha Bujori Godrej, an Indian Gujarati Parsi family.
How many group companies are there in Godrej?
There are around 8 companies of Godrej, out of which 4 are listed in the stock market.
What is the date of the split of the Godrej group?
On 30th April 2024, the Godrej group announced that there would be an ownership realignment of the shareholding within the company. The process will take time, and the group has not yet revealed the dates of events.
What will happen to my shares of Godrej Industries after the split?
There will not be any impact on your holding after the split, and you can trade the stocks as you did before.

June 12, 2024

What is Trading? History, Trading Styles, and Trading vs Investing

The main aim of trading and investment is to grow wealth. Although both participants’ strategies and tenure differ, they aim to increase their wealth. In this post, we will explain trading strategies and how they can be used to earn higher profits.

What is Trading?

Let’s understand it in this manner: when we buy something from a shop, we give them money for the product. This activity is exchanging goods and services. A similar thing happens in the financial market. We purchase and sell financial products, such as stocks, commodities, or currencies. We buy them when the price is low and sell them when the price rises, in turn earning a profit.

This purchasing and selling of financial products, such as stocks, commodities, or currencies, is called trading.

History of Trading

Humanity has used the barter system, the earliest form of trading and investment, for thousands of years. In 600 BCE, the Lydians are said to have invented coins, introduced money, and facilitated trade.

The oldest stock exchange was founded in the 16th and 17th centuries. In 1602, the Amsterdam Stock Exchange opened for business, which resulted in the purchase and sale of corporate shares by people. The New York Stock Exchange was founded in 1792 and has become a significant global trade center.

Humanity has since witnessed significant technological advancements, including computers, telegraphs, and telephones. All these sped up the stock trading business and led to an electronic trading platform. This has provided access to a lot more individuals who were earlier unable to enter the stock market.

In the 21st century, online trading has now become even more accessible because of mobile applications and discount brokers.

Trading Styles

There exist numerous trading styles, some of which are mentioned below.

Day Trading: Day trading is a fast-paced trading strategy. It involves buying and selling assets within a single trading day. The main objective is to profit from brief price fluctuations, which demands quick thinking and laser-like focus. To reduce the possibility of unfavorable overnight price changes, traders usually liquidate their positions before the market shuts.
Swing Trading: Here, traders keep their position for a few days or weeks. They examine charts and look for bigger price fluctuations and market patterns to deliver a strong profit. While doing swing trading, one needs to have an active attitude, but it also requires deeper knowledge. Because of the short-term nature of swing trading, traders rely heavily on technical analysis with the occasional use of fundamental analysis.
Positional Trading: Positional trading is an investing technique in which traders hold their position for months. Their approach is based purely on fundamental analysis.
Scalping: It is a high-frequency trading strategy in which traders make hundreds of trades daily to capture small price movements. It heavily relies on technical analysis and requires a deep understanding of market mechanisms.

How to start trading?

Educate yourself: Before diving into the trading world, it is essential to learn the basics. Read books, go through articles, take online classes, and follow market news to stay updated.
Create a trading account: Once you have a decent understanding of how the markets function, create a trading account with online brokers, such as Pocketful. This will allow you to use state-of-art infrastructure with an easy-to-use interface.
Choose your trading style: Decide which style suits your goals and risk tolerance.
Fund your account: Deposit cash into your account using your preferred payment method to begin trading. Remember to invest money that you can afford to take risks with.
Place your trade: Use the platform your broker provides to buy and sell the asset you choose.

Trading vs Investing

Basis	Trading	Investing
Time Horizon	Short-term (days, weeks, months)	Long-term (years, decades)
Goal	Capitalize on short-term price movements	Grow wealth over an extended period
Risk Tolerance Required	High	Moderate to Low
Research Focus	Technical analysis	Fundamental analysis
Activity	More frequent transactions.	Less frequent transactions.
Required Knowledge	Deep understanding of technical analysis and market mechanisms.	Understanding of markets and asset classes.
Pros	High potential rewards, quick returns, and fast-paced.	Lower risk, less time commitment, and less speculation.
Cons	High risk of losses, demands constant attention, and more speculation.	Lower earning potential in the short term.

Conclusion

Finance can be scary, but if you know what you’re doing, you can handle trading like a pro. This guide intends to teach you the basics of trading, from its history to the different trade styles you can use. Remember that trading is exciting but dangerous. So, think about your goals and how much risk you can take before you step into the ring of stock trading.

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Frequently Asked Questions (FAQs)

What is the difference between trading and investing?
While trading talks about making money from short-term changes in the price of stocks, currencies, and commodities, investing mentions the art of slow but consistent returns; it involves sticking with trades for a much longer time.
What are the different styles of trading?
There are several trading styles, each with its own strategy and time frame. They are Day Trading, Swing Trading, Positional Trading, and Scaling.
What are the risks associated with trading?
Trading is exciting but comes with its own set of risks. It is heavily dependent on speculation, requires a high amount of technical knowledge, and can lead to immense losses even in the short term.
How can I start trading?
You can start trading by signing up and creating a demat account with popular brokers like Pocketful. You can fund your account and start placing trades once your account is created.
What are the common mistakes to avoid while trading?
The most common trading mistakes include overtrading, which leads to higher transaction costs and increased risk, and ignoring risk management, such as not setting stop-loss orders and failing to diversify your portfolio, which can result in significant losses

June 10, 2024

Blog

What is Price Action Trading?

Merits of Price Action Trading

Limitations of Price Action Trading

Strategies Used in Price Action Trading

Best Price Action Trading Strategies

1. Hammer

2. Bullish Engulfing

3. Three White Soldiers

4. Hanging man

5. Head and Shoulders Pattern

How to Trade Using Price Action

Conclusion

Frequently Asked Questions

Is Price Action Trading Relevant?

What do you mean by Price Action Analysis?

Is Price Action Trading Good for Beginners?

Are there any strategies involved in Price Action Trading?

What are Candlesticks Patterns?

What is Momentum Investing?

History of Momentum Investing

Momentum Investing Key Concepts

A. Price Momentum

B. Strength in Relationship

C. Following Trends

Momentum Investing Strategies

1. Relative Strength Strategy

2. 52-Week High/Low Strategy

3. Momentum Oscillators

4. Earnings Momentum

5. Sector Rotation

6. Price and Volume Trends

Advantages of Momentum Investing

Disadvantages of Momentum Investing

Conclusion

Frequently Asked Questions (FAQs)

What is investing with momentum?

How can I tell which stocks are momentum-rich?

When should you purchase and sell based on momentum investing?

How should you diversify your portfolio?

What kind of risks are involved in momentum investing?

Understanding Nifty BeES ETF Meaning

Features of Nifty BeES

Advantages of Nifty BeES

How Does Nifty BeEs Work?

How to Invest in Nifty BeES?

Taxation of Nifty BeES

Who Should Invest in Nifty BeES?

Nifty BeES Performance

Conclusion

Frequently Asked Questions (FAQs)

Is there any disadvantage to investing in Nifty BeES?

Is there any lock-in period for Nifty BeES?

Can I get a dividend while investing in Nifty BeES?

Can I hold Nifty BeES for a longer period?

What is the full form of Nifty BeES?

What is the 15*15*15 Rule in Mutual Funds?

Power of Compounding

Components of the 15*15*15 Rule in Mutual Funds

Benefits of the 15*15*15 Rule in Mutual Funds

Limitation of the 15*15*15 Rule in Mutual Funds

Important Points to Remember for the 15*15*15 Rule

Conclusion

Frequently Asked Questions (FAQs)

What is the 15*15*15 rule of mutual fund investing?

What is compounding in finance?

How can I earn 1 crore in 15 years by investing in mutual funds?

Which category of mutual fund can provide returns of up to 15%?

Should I change the fund during the investment tenure of 15 years in the 15*15*15 rule?

What is Margin Pledge?

Haircut

Example of How a Margin Pledge Works

Cash vs. Non-Cash Component

Advantages of Margin Pledge

Risks Involved

Conclusion

Frequently Asked Questions (FAQs)

What is a margin pledge?

Can I buy call and put options from the pledged margin?

Do liquid funds considered as a cash component?

What is the 151515 Rule in Mutual Funds?

Components of the 151515 Rule in Mutual Funds

Benefits of the 151515 Rule in Mutual Funds

Limitation of the 151515 Rule in Mutual Funds

Important Points to Remember for the 151515 Rule

**What is the 151515 rule of mutual fund investing?**

**Should I change the fund during the investment tenure of 15 years in the 151515 rule?**