Notes from a stock market course I took in 2020. Supplement them with google.
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– Do not judge dividend by absolute value but by _Dividend yield% aka dividend amount/share price. _
– some crook companies pay dividend by debt. This is the way to shot up stock price as that owner can DUMP.
– avoid companies inconsistent in paying dividends. Check their histories when, when they have paid dividends.
– Check payout ratio
– payout ratio = dividend per share / EPS
– when it is >70% (for example $1 EPS and DPS 80 cents) this ratio is unsustainable. If it is over 100%, just wait for it to tank the dividend program.
Quantinsti has lot of free and paid resources to learn. Even their software, blueshift is very good as well.
Formulate the plan or algorithm. C or C++ in high frequency trading and Python, MATLAB used in other cases.
Backtest the strategy on historical data where your metrics could be -
Dollar P&L or %age of profitable trades.
Sharpe ratio ( a measure of risk-adjusted returns)
maximum drawdown - maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum drawdown is an indicator of downside risk over a specified time period.
If backtesting successful, then forward testing is done, if not you will optimize your strategy. Means you will test your strategy on current datat on a simulator. AKA Paper trading.
If successful then you will come to live execution. Here you have to manage certain things.
Since, it is a very competitive industry, your strategies will not last for long. Thus, you have to make a pipeline of feasible strategies.
Impact Cost - It is not the fixed txn costs but costs incurred due to liquidity issues in market. Example - You want to sell 1000 shares at Rs 100, best bid availble is 99 for that amount. Impact cost will be 1%.
Calculation of impact cost -:
Ideal Price = (Best Buy Price + Best Sell Price)/2
Impact Cost = (Actual Buy Price – Ideal Price)/ Ideal cost *100
Commodity price risk - aka raw material price risk. Those using will be +ve correlated, those not will be -ve correlated.
Headline risk
Rating risk - based on what rating agencies rate.
Obsolence risk - Therefore it is important to check the profit growth as well. If profit is declining, then the company may have peaked and now you should exit.
Detection risk
Legislative risk
Inflation risk - matters to company with high debt. So if there is huge inflation in the country then RBI will push up interest rate and company will have problem.
Book value market cap = Market cap/(share price/book value)
By the above formula, you will get an actual idea how much capital has been employed by the company. Then you go and check the returns.
Net profit/BVMC => This formula gives the %age money has earned.
When you have this calculation then you know how much above the book value you can afford to buy.
Eg. - when you do this calculation for ABcapital, that’s 7%. You are better off investing in kisan vikas patra. Just an example. Company might improve as well, KVP cannot.
most of the nifty ETFs, mimics the nifty return or their underlying index return. You just have to check, which ETF has lowest expense fee. It can go as low as 0.05%. NEVER invest in mutual funds, they charge very high. 2-3%. If 10% return is being averaged, you are getting only 7-8%. So be careful about expense charges.
Promoters pledge shares to raise money. If promoters are diluting their shares continuously, it is a red flag. Means they do not have trust in the company that’s why they are dumping ownership. Same is the problem with pledging shares. It is very much important they do something productive with the money received from pledging shares.
Go to ibef.org
– Let’s try to learn the hidden meaning of the data mentioned on the website.
In the IT industry section, it is mentioned that “Expanding the economy to propel growth in local demand”. Now let’s understand its meaning so that it will help you in your investments. We know that clients of IT industries are generally from western countries. You should know that Indian companies and organizations are also growing which means the Indian IT sector is in demand locally also, apart from western countries. Indian IT companies were mostly dependant on foreign revenue, as we know that many go abroad as the clientele of the IT companies is abroad.
Second-line is written that “Strong growth in demand for exports from new verticals”. It means that the IT industries main clients are BFSI segment because they took IT services in early-stage as they had a lot of transaction that is to be reported and stored in the database. So the very first sector that used the IT services was the BFSI sector(Banking and Financial Services Industry). Now IT services are required even in Retail. We even know that IT services are also needed in new vertical and existing industries.
This is one way to read and understand the terms mentioned. When you do this continuously you will start interpreting the sectors. For people who are new to this field, you need to put individual effort to understand the industry. This website will help you in Industry analysis. There are different sections in the Industry, and you must read and understand what this means. I cannot read the whole website for you. To understand the underlying meaning, you need consistency and practice.
There are various options like snapshots, showcase, reports, an infographic on opening a sector. The showcase option gives you the complete history of the company and the top 3 companies in that sector which can help a novice investor.
In similar ways, you can understand the Market size, Investment & development, Total revenue, Government initiatives, Achievements, Road Ahead, etc. about different sectors and act accordingly. If you want to know about any industry this website is enough to give you a good background of it.
Also, the trends section will show you about the recent happenings in the businesses. You can download the reports by creating your account. You can understand how subsidies are given by the government that impact businesses. So knowing the government plans about each sector is also equally important.
There are various e-books available on this platform ibef.org which is a pure gem. If you are so much interested in knowing the Indian economy, you must cultivate the habit of reading these e-books.
Apart from that, you will also get various case studies which will help you identify good sectors. A lot of reports are also available which is worth reading line by line as it gives a detailed understanding of sectors and helps in sector analysis. One can even go state-wise sector analysis which tells us which sector is dominant in which state of India. States have their GDP and they have different weightage to different sectors.
Porter’s five forces
Goal of PFF = to set up profitability expectations. Therefore competitive analysis is important as comp increases profit decreases.
Potential of new entrants into the industry.
Competition in the industry.
Threat of substitute products.
Power of suppliers like presence of few suppliers means profitability will take a hit at 1st jerk.
Bargaining power of customers means how easy for customers to go to other players if discount not given.
NOTE - Use NPV,IRR. It can be used almost anywhere.
SWOT
S = strength which separates from others.
W = areas where improvement is needed,
O = avenues for growth, horizontal as well as vertical. It can be due to external as well as internal factors.
T = where they can have existential crisis.
Don’t make assumptions based on your gut. There is enough data to find out, PLEASE use it.
Let us understand the business of Rajesh Export. The sales in December 2019 quarter have dropped as compared to September 2019 quarter. Also, December 2019 sales are lesser than December 2018 sales. This represents that sales have gone down in December 2019. However, we would be focusing on the Qualitative side. Even though the sales are going down their profits are increasing which is a great thing to see in a balance sheet.
They work on a very low margin and still showing a good profit. If we open the website of Rajesh Exports, we will see that they have world’s largest jewelry manufacturing unit in Bangalore, they have world’s largest gold refinery at Balerna, they have SHUBH Jewellers retails showroom at Bangalore, they manufacture LBMA accredited & globally accepted gold bars and they also manufacture world-class jewelry. They are the suppliers of big brands.
The main business that they own is the largest gold refinery. They must be having a lot of competitive advantage, but we need to understand the gold refining & manufacturing business. Most of you may not understand this or may not know about other gold manufacturing businesses. In qualitative analysis, we must have a qualitative understanding of such a business.
India is still a country where you have small retailers who have the maximum connection with the common people of India. Now those kinds of people look for a company like Rajesh exports who are manufacturing gold and can sell to them. Gold manufacturing is one business that can be visualized, and we can understand that with some little margin they are doing this for the smaller players.
When we know this, we must be able to visualize some threats and some opportunities here. Small jewelers’ numbers might get reduced and big jewelers may come into existence and their business may grow. The biggest threat may be slower consumption due to rising inflation. The final product of gold refine will be that they must come out with 24K Bar which will be further given to people who are going to use it for making jewelry.
The second business that can be visualized is manufacturing in which they might be giving supply to small jewelers. Now looking at the change in the shift from small gold jewelers to big gold jewelers they might see a slower demand. There exist Shubh jewelers that are going to compete with other brands like Tanishq and PC jewelers etc. They have planned to open around 3000 stores globally.
We must look at the Business Model to understand the company better. After combining all three things i.e. Gold mining, Manufacturing of Jewellery & Retail of Jewellery, we must look that where the market is going and how much this industry is going to increase keeping in mind that India is the largest consumer of Gold Jewellery.
Don’t take decisions based on gut feeling, instead go for exact numbers that are available easily over the Internet. Always look at Trend and try to analyze the trend. Focus on Sales number of the companies you want to invest in. Try to look at Consumer behavior before taking any investment decision.
First check about the company, promoters their business then jump to the numbers.
Check profit posted by companies on their net worth, so as to get a clear picture of their growth.
Options Trading
INDIA VIX is the volatility index of NSE. It means how many total %age change could be there in a year. (If value is 30, it means NSE nifty could go up till 30% more and drop to 30% less). The average vix for use is 20.It is important to know volatility of the market to make decisions.
If you want to become a trader, try to become fast, sharp, and practice a lot.
“1000 hour golden rule”- if you keep doing something for 1000 hours you become good at it.
I failed miserably in the beginning years and it is very painful when you lose in the market. I started identifying what are the things, which make me emotionally weak and what are those things where I am more into the skin of the trader. I identified a few things, which will explain why and how I made returns on these trades. I identified about one thing that even after understanding the charts well, every time I tried to get the direction of any instrument. There is a very high probability the trading strategies are screwed up even after predicting the direction of the market. I simply cut down the part of the prediction of the market. It means that I will not predict the market and stay always neutral. I will create only market neutral strategies.
Rule 1: Even I know 10 strategies, I picked one strategy and mastered over it.
Rule 2: I defined the life of the trade
Before that, I was an Options trader who would believe in decay in pricing for the right options and wait for that day. I cut that part from my strategy and concluded that the market behaves differently in four different sessions. So, I divided my trade into 4 sessions and accordingly place the trade
**Rule 3: I will book my losses ** If my trade has gone wrong from a certain degree. Simply I will book my losses and wait for the next trade that would help me in cutting my losses to a limited amount Rule 4: I would never try to squeeze out more than the expected profit If I wait for more profit and in such a scenario, there is a high probability my profit will turn into losses. I will predefine my overall profit. Last and not the least thing is the selection of the instruments. I would trade into one instrument and it could be nifty, bank nifty, stock options, etc for that day.
This is my experience in trading as an options trader and wanted to share with you as a friend that what are the hidden secrets. On a very bad day, as a trader, you would also face losses. The only suggestion I would advise that until the time you come into the skin of the game do not lose money in the market. If you are planning to become a professional trader, the moment you start losing money in the market you will leave the market. If you want to stay in the market for a very long time, make sure that you are trading only in the excel sheet or on a piece of paper and not by applying your money for initial days.
Strategies work when instructions are followed with discipline.. If you want to experiment, you must be comfortable with the loss.
Covered call - In which an investor selling call options will also own the stocks. So if price appreciates and he books loss in options, he gains through stock appreciation. And if nothing dramatic happens then a steady stream of income by premiums.
Married Put - When you buy at the money put option for your stock. This is bullish but trader wants to protect himself against sharp decline.
Bull call spread - Used only when you are extremely certain about the bull rally but try to limit the loss if things go wrong.
Bear put spread - Same as bull call but here you are bearish so you deal with put.
Protective Collar - It is used when you expect a little profit but worried about the loss due to fall in stock price.
Long straddle - when you have no idea to either be bull or bear, then this is used.
Short Straddle - You sell when you think market is going to be stable. It comprises of selling both a call option and a put option with the same strike price and expiration date.
Long strangle - same as long straddle but you are sure of the volatility thus you will but OTM call and put. So, it will be cheaper than straddle to implement.
Short strangle - When you sell call and put as you believe market is going to be stable during the life of the option.
Iron Condor - It is to minimise loss which can happen due to short strangle so that your options are not open ended.
Iron butterfly - The Iron Butterfly Option strategy, also called Ironfly, is a combination of four different kinds of option contracts, which together make one bull Call spread and bear Put spread. Together these spreads make a range to earn some profit with limited loss.
Open Interest means total no. of contracts done. If option contract settles, open interest will decrease. In simple words just the interested parties for that option with active contracts.
PCR or Put call ratio = Open interest of put options/ OI of call options.
Here, I am writing different patterns and strategies used. If you want to use those learn it from other sources. You have to test your strategies by backtesting your decisions. These patters come with a warning - they are correct at best 65-75%
7-day, 21-day moving average and crossover in excel.
Candle stick charts
MACD
RSI
Bollinger Bands
That is why systemizing decisions are so important because these biases can kill you in the market.
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