Everything You Need To Know About Call Options
When you first start investing, you'll quickly discover that the Indian share market is an ocean you'll need to master in order to avoid losses and maximise profits. Although a large number of financial instruments accessible for investment in the Indian market gives a wealth of profit-making chances, if you are unfamiliar with any of them, you may wind up losing money. When you're looking for high-return investing opportunities, the first thing you'll notice is an Options Contract. The value of an underlying asset, such as a stock or a security, is usually the basis for this financial contract between two parties. If you are looking for a seamless online trading platform your search ends here. As a share broker company we offer our customers endless opportunities and the best trading accounts to help them focus more on making profits. What Does the Term "Call Option" Mean? A call option is a contract between two parties in which one party has the right, but not the duty, to buy a specific underlying asset at a predetermined price and on a predetermined date in the future. You are not legally obligated to execute the options contract unless it is profitable to you because there is no duty on the need to make the purchase as indicated by the call options contract. Only if the previously decided amount is less than the underlying asset's current price on the date the options contract is exercised can the purchase be profitable. The strike price refers to the underlying asset's specified price. The call option will result in losses unless your strike price is lower than the underlying asset's price on the date of execution. Consider the following illustration. If you buy a Wipro’s Call option for Rs 25 with the strike price as 500, you have the option of buying Wipro’s stock at Rs. 500 on the call option's expiration date (before expiry). If the price of Wipro stock on settlement day is Rs. 480, however, exercising your call option would be a loss because you could have purchased the stock in the open market for a lower price. If the price of Wipro stock on settlement day is Rs. 520, on the other hand, you make a profit by exercising your call option. You paid a non-refundable fee of Rs. 25 to obtain this right to acquire the stock without any obligation to buy, which will be your maximum loss if you decide not to exercise the contract. Most investors prefer to buy call options rather than put options. There are a number of causes for this, which are stated below: 1. Investing in a Cost-Effective Way Investing in shares or other derivatives involves a significant amount of capital to make the investment sustainable and profitable. Buying a call option, on the other hand, is as simple as paying the premium, which is based on the underlying asset, making it more inexpensive to purchase. You can invest in a cost-effective manner by using a call option in this way. 2. Risks are less severe Investing in a call option is far less hazardous than investing in stock or other securities directly. Because call options are not particularly volatile, they can be an excellent risk management tool. The amount you spend as a premium for the privilege to acquire the call option is the full extent of your losses on a failed call option. 3. Covered Calls Can Help You Earn Premium Even after purchasing a call option, you can increase your profits by selling the contract on the secondary market. If the underlying asset you acquired a while ago has risen in value, you can receive a premium by writing a call option with the strike price equal to the current market value. In options jargon, this transaction is known as a covered call, and it allows investors to gain additional earnings. Your search for a seamless online trading platform ends here. As a share broker company we offer our customers endless opportunities and the best trading accounts to help them focus more on making profits.
May 16, 2022
The Market Participants Of Derivative Trading
Investing is one of the most effective methods to spend your money. When you first begin investing, however, it is always advisable to stick with investment methods that provide great security and assured returns. The majority of early investments are based on a low-risk profile. Their risk appetite increases as they obtain more investment expertise and understanding of the financial market. It helps investors to diversify their assets and invest in financial instruments with higher returns if they have a high risk profile. While investing can be one of the most effective methods to spend your money, there is a certain amount of risk involved - especially if you don’t use the right tools. At Zebu, a share broker company, we offer the best online trading platform for our investors, while also giving them an added advantage of lowest brokerage for intraday trading. What Exactly Is a Derivative? Derivatives are financial contracts between two or more parties that are based on an underlying asset like stocks, commodities, currencies, etc. The value of the derivative is based on the price or value changes of the underlying asset. You can use derivatives to protect a position, guess which way an underlying asset will move, or increase the value of your holdings. In order to trade derivatives, you must use an exchange or trade over the counter (OTC). Over-the-counter trade is conducted between two private parties without the involvement of a centralised authority. Furthermore, because the contract is signed by two private individuals, it is vulnerable to counterparty risk. The chance, or rather the danger, of one of the parties defaulting on the derivative contract, is referred to as this risk. The Benefits of Derivatives: 1. Hedging The greatest approach to protect yourself from a disastrous investment is to use a derivative contract. When you trade derivatives in the stock market, you're effectively betting on whether the price of a certain stock will rise or decline. As a result, if you suspect that the stocks in which you have invested are losing value, you could get into a derivative contract in which you precisely predict the stock's value decline. You can profit from your derivatives contract by hedging your stock market losses as the stock price begins to fall. 2. Arbitrage A commodity or asset is purchased at a low price in one market and then sold at a much higher price in another market in arbitrage trading. Derivatives trading provides an advantage in terms of arbitrage trading, allowing you to profit from price disparities between markets. 3. Managing Market Volatility You can insulate yourself from the volatility of other asset classes by investing in derivatives. You can, for example, invest in stocks and then get into a derivatives contract with the same underlying asset. It can protect the health of your portfolio because either of the assets can offset the losses of the other. 4. Excellent investment opportunity While most traders enter the derivatives market to speculate and profit, it is also an excellent place to put any extra money. Without affecting any of your existing underlying equities, your funds will earn additional returns. Derivatives Market Participants 1. Hedgers They are the creators, manufacturers, and distributors of the underlying asset, and they typically sign into a derivative contract to reduce their risk. Simply defined, hedgers guarantee that they will receive a preset price for their assets and will not lose money if values fall in the future. For example, if you own shares in a company that is currently trading at Rs. 1000 and plan to sell them in three months, you don't want a drop in market prices to depreciate the value of your investment. You also don't want to miss out on profits if the market increases in value. You can assure that you are profitable regardless of whether the stock price falls or rises by taking a hedging position and paying a small premium. 2. Speculators These are real traders that try to forecast the future price of commodities based on a variety of criteria and keep track of their prices on a regular basis. If they believe the price of a certain item will rise, they will purchase a derivatives contract for that asset and sell it at expiration to profit. A speculator, for example, will wager that the stock price will not fall in the above example when you got into a derivatives contract to protect yourself against the stock price decreasing. The speculator will earn if the stock price does not decline during the specified period. 3. Margin Traders Margin traders are investors that trade on a daily basis and make profits and losses solely based on market moves that day. The margin refers to the minimum amount paid by the investor to the broker in order to participate in the derivatives market. These traders don't purchase and sell with their own money; instead, they borrow the money from a stockbroker as a margin. 4. Arbitrage Traders Arbitrageurs are traders who acquire securities at a cheaper price in one market and then sell them at a higher price in another. They can essentially profit from pricing differences because they are low-risk. Conclusion Investing in derivatives, like all other investment tools, demands a thorough grasp of the market and the ability to make decisions only after gaining sufficient knowledge. You can make good money using derivatives if you invest based on knowledge. As we mentioned earlier, tools are critical for your investment to go smoothly. At Zebu, a share broker company, we offer the best online trading platform for our investors, while also giving them an added advantage of lowest brokerage for intraday trading.
May 15, 2022
How To Make Sense Of A Company’s Earnings Report
When you look at a company's financial report, the words "earnings" and "profit" jump out at you. Which profit should you look at when judging a business? Why do we need so many ways to measure profit? How do analysts figure out the ratios they keep talking about? Here is a quick breakdown of the important terms of an earnings report. Before getting to understand a company’s earnings report, we would like to inform you that at Zebu, an online stock broker company we offer lowest brokerage for intraday trading and the best online trading platforms. 1. Gross profit What it is: Sales minus the cost of making those sales. To figure out the cost of goods sold, you add the purchases made during the period to the net stock. The meaning: Not the company's total income because it doesn't count "other income" like rent. 2. EBITDA What it is: Earnings before interest, taxes, depreciation, and amortisation. To figure out net profit, take gross profit and subtract operating, general, administrative, and selling costs. The meaning: Not a true picture of how profitable a company is because it includes taxes and interest payments, which can be very high for some companies. 3. EBIT What it is: Income before interest and taxes are taken out. Operating profit is another name for it. Depreciation and amortisation costs are subtracted from EBITDA to get this number. The meaning: This shows how much money the company makes from its main business. 4. EBT What it means: Income before taxes. Interest costs are subtracted from EBIT to get this number. What it means is that tax deductions are different for each company. EBT makes it easy to compare how companies use loans to increase their return per share because it includes taxes but not interest. 5. NET PROFIT How it works: Calculated by taking the tax out of the EBT. Also called net profit (PAT). The meaning: Since all payments have been made, it shows how much the company made in the end. PAT is used to figure out the dividends. 6. EPS This is the earnings per share. This number is found by dividing PAT by the number of shares in circulation. The meaning: It shows how much each share of a company is making. When calculating EPS, dividends on preference shares are not taken into account. 7. P/E How it works: Divide the current share price on the market by the earnings per share to get this number. The meaning: This shows how much an investor is willing to pay for one rupee of a company's earnings. Analysts use it to figure out if a company is undervalued or overvalued. 8. Operating ratio It is figured out by dividing operating costs by net sales (revenue). It shows how much of the income goes toward operating costs. The lower the ratio is, the better the company is. This shows that the company has enough cash on hand to grow and pay interest. 9. Net profit ratio It's PAT divided by net sales. This shows how much money a company makes on every Rs 100 sale. If the ratio is high, it means that the company is making a lot of money. 10. Debt-equity ratio It shows how financially stable a company is and is found by dividing debt by equity. If the ratio is less than one, the company is using more of its own money and less debt. If the ratio is more than one, the company is using more debt than its own money. Since interest costs are fixed, a company with earnings that change a lot can take a risk by having a lot of debt. Companies that make a lot of money can increase the returns for equity shareholders by taking on a lot of debt. These are the key terms that you should keep in mind while analysing a company’s performance. At Zebu, an online stock broker company we offer lowest brokerage for intraday trading and the best online trading platforms.
May 14, 2022
How Exactly Does Inflation Affect The Market?
Most of the time, we think of inflation as a bad thing for stock markets. It's not hard to figure out why. When inflation is high, the cost of living goes up and people have less money to spend. When inflation goes up, people earn less in real terms, and when inflation is taken into account, this means that their returns are lower. Second, when inflation goes up, interest rates go up, which also raises the cost of equity. There are also times when the effect of inflation on the stock market is seen as a good thing. So, what does inflation mean for the Indian stock market? Does inflation have anything to do with investments? When inflation goes up, do people tend to invest more or less? Most importantly, how does inflation affect the indices of the stock market, especially the Nifty and the Sensex? Let's look in more depth at each of these points. As one of the biggest share broker companies Zebu has a huge team working to make your trading and investment journey as seamless as possible in our efforts to do that we offer the best trading accounts with lowest brokerage for every trade you make. 1. How inflation affects the amount of money investors can spend What does it mean for prices to go up? Inflation is when the prices of goods and services go up over and over again. In India, the CPI inflation and the WPI inflation are used to measure both retail inflation and producer inflation. Usually, the CPI is a better way to measure consumer inflation because it is more accurate and has more to do with buying power. As inflation goes up, the value of the money you will get in the future goes down. That's what the "present value" of money means. When inflation is 5%, your Rs.100 receivable from a year from now is worth Rs.95 today. When inflation is 10%, your Rs.100 receivable from a year from now is only worth Rs.90 today. With the same amount of money, you can buy less when your purchasing power goes down. This is usually bad for consumer-driven stocks like FMCG and consumer durables because people's ability to pay goes down. This means that these companies will have to lower prices and make less money. 2. Inflation affects interest rates, which in turn affects prices. What happens to bonds and stocks when the inflation rate goes up? Let's start with bonds. When the rate of inflation goes up, so do interest rates or bond yields. We've seen this happen in the last six months, when inflation expectations have gone up and bond yields have gone up sharply by 125 basis points. So that the Yield To Maturity or total rate of return of these bonds stays about the same, when bond yields go up, bond prices will go down. When the price of a bond goes down, people who own bonds, like banks and people with mutual funds, lose money. This is why banks tend to lose money when interest rates go up. How about stocks? When both inflation and interest rates go up, the cost of capital goes up as well. The cost of capital is the sum of the costs of equity and debt. And when bond yields go up, the cost of running a business goes up. This means that the company's future cash flows will be worth less. We know that future cash flows are taken into account when figuring out how much a stock is worth. When the rate of discounting goes up, it makes sense that the value of an equity will go down. In a strange way, higher inflation is good for stocks in the medium to long term. Even though inflation may be bad for bonds and stocks in theory, we can't forget that it also has a good side. Usually, rising inflation means that GDP growth is getting better. Even in the US and Japan, the big economic battle is all about getting inflation back to the 2% level. That is thought to be the level where growth will start to happen. In fact, if you look at the growth of the world and even India over the last 20 years, the GDP has never grown significantly when inflation was low. Even though ridiculously high inflation can make it hard to buy things, a certain level of inflation is needed to encourage businesses and producers. So the real problem is inflation which gets too high. At Zebu, we have a huge team working to make your trading and investment journey as seamless as possible in our efforts to do that, we offer the best trading accounts with lowest brokerage for every trade you make.
May 13, 2022
Key Monetary Policy Terms That Every Investor Should Know - Part 2
In the previous article, we learned about 4 key monetary policy terms like LAF, CRR, Repo rate and reverse repo rate. Here are a few more important terms that you should know to understand MPC policies. Want to track your trades and investments smoothly? Then Zebu’s online trading platform is the answer to it. As the best Indian stock broker company we not only have the best technology but also have the lowest brokerage for intraday trading. 5. Statutory Liquidity Ratio (SLR) The statutory liquidity ratio is the amount of money that banks must keep in liquid assets at all times. But banks can't keep these funds in cash. Instead, they need to keep them in government securities, bonds, or precious metals. The CRR and the SLR both affect how much money commercial banks can lend to people who want to borrow it. If the RBI keeps these two rates too high for too long, banks will be less likely to lend money. It would be hard for people who want to borrow money and are in this situation. 6. Base Rate This is the lowest interest rate that a bank will charge a customer when they lend them money. It is up to the bank's management, and RBI has no say in the matter. But banks don't usually lend money at that interest rate to people who want to borrow money. When lending money, banks usually charge an extra amount on top of this base rate. 7. Long-Term Repo Operations (LTRO) In 2020, RBI took a revolutionary step by putting the LTRO tool on the market to control the repo operations. In LTRO, RBI lends money to banks for a set period of time, usually between 1 and 3 years, at the current Repo Rate. In return, banks offer Government Securities with the same or longer maturity period. In 2019, RBI's six monetary policies have lowered rates by almost 135 basis points (bps), but banks haven't even given customers half of the benefit. In the LTRO system, the RBI thinks that giving banks stable, longer-term cash at the repo rate can help them lower the rates they charge for loans to consumers and businesses while keeping their margins. LTRO is used to add money to the market and make sure that credit keeps flowing to the economy. 8. Targeted Long-Term Repo Operations (TLTRO) This is the same as LTRO, but the main difference is that TLTRO uses the money borrowed from RBI to buy investment-grade corporate bonds, commercial paper, and non-convertible debentures. 9. Marginal Standing Facility (MSF) Marginal Standing Facility is a Liquidity Adjustment Facility (LAF) window that RBI opened in May 2011. It is the rate at which banks can borrow money from the RBI for one night in exchange for approved government securities. The question is: If banks can already borrow from the RBI through the Repo Rate, why do they need MSF? This window was made so that commercial banks could borrow money from the RBI in times of emergency, like when inter-bank liquidity runs out and overnight interest rates change a lot. So, the main goal of the MSF is to keep the overnight inter-bank rates from being too unstable. Now that you have a deep understanding of these MPC terms, the next time the RBI releases an update, you can see how the stock market is affected with some extra context. Zebu’s online trading platform is the answer to all your bad tech problems. As the best Indian stock broker company we not only have the best technology but also have the lowest brokerage for intraday trading.
May 12, 2022
Key Monetary Policy Terms That Every Investor Should Know - Part 1
The Reserve Bank of India sets the rules for how the economy works as a whole. It is the demand-side economic policy used by the government of a country to reach macroeconomic goals like inflation, consumption, growth, and liquidity. It involves managing the amount of money in circulation and the interest rate. In India, the Reserve Bank of India's monetary policy is meant to control the amount of money in order to meet the needs of different parts of the economy and speed up the rate of economic growth. The RBI uses open market operations, the bank rate policy, the reserve system, the credit control policy, moral persuasion, and many other tools to carry out the monetary policy. If any of these are used, the interest rate or the amount of money in the economy will change. Monetary policy can either make the economy grow or shrink. An expansionary policy involves making more money available and lowering interest rates. A monetary policy that makes money tighter is the opposite of this. For example, for an economy to grow, liquidity is important. The RBI depends on the monetary policy to keep enough cash on hand. By buying bonds on the open market, the RBI adds money to the economy and brings down the interest rate. Here are some important terms you should know if you want to understand how monetary policies work. Before we get on to understanding monetary policies there is one of the few things such as — technology that plays a huge part in investments. As an online trading company we offer the best trading accounts and the best stock trading platform to make your investment journey smooth. 1. The Liquidity Adjustment Facility (LAF) It is a tool used by the Reserve Bank of India (RBI) to manage liquidity and keep the economy stable. LAF covers both Repo and Reverse Repo Operations. It was made by RBI after the Narasimham Committee on Banking Sector Reforms suggested it (1998). It helps keep inflation from getting out of hand. 2. Repo Rate Repo Rate is the rate at which commercial banks borrow money from the Reserve Bank of India (RBI), usually against Government Securities. So, to keep things simple, if the RBI wants more money to flow into the economy, it lowers the Repo Rate, and vice versa. So, when banks borrow money at a lower rate of interest, they also lend money at a lower rate, and the opposite is true when RBI raises the Repo Rate. For example, if RBI lowers the Repo Rate by 25 bps, which stands for "25 basis points," this means that RBI has lowered the rate by 0.25 percent. So, 1 bps = 0.01 percent . In most Repo operations, banks borrow money from RBI for one day at a time. Most believe that banks haven't cut interest rates by the same amount that the RBI has done for banks. So, the answer is that the banks don't have to all cut by the same bps. Even so, it's up to the banks to decide whether or not to lower them, and if they do, by how much bps. The reason for this is that banks take into account different factors, such as their interest rate on other sources of funding, their NPAs (Non-Performing Assets) for the same period, their operational cost, and their cost of customer acquisition, the target segment they are lending to, etc. 3. Reverse Repo Rate The Reverse Repo Rate is the rate at which RBI borrows money from banks for a short time and pays interest to banks for the same. When banks have more cash on hand than they need, they sometimes leave it with the RBI so they can earn interest on it. So, when the RBI wants to slow the flow of money through the system, it raises the Reverse Repo Rate. This makes it more profitable for banks to invest in Government-backed securities instead of lending money to risky market borrowers. The equation basically says that if the Reverse Repo Rate goes up, the interest rate on all loans goes up, and if the Reverse Repo Rate goes down, the interest rate on most loans goes down. 4. Cash Reserve Ratio (CRR) Banks have to put a certain percentage of their Net Demand and Time Liabilities (NDTL) in the form of cash with RBI. This is called the Cash Reserve Ratio. This CRR has to be kept up-to-date with RBI every day. If it isn't, the banks at that time will have to pay a fine and interest. RBI requires banks to keep this ratio in order to control the flow of credit in the market. By lowering the CRR, RBI makes more money flow into the economy. If it wants to stop the flow of money, it lowers the CRR. The interest rate that banks charge on loans has nothing to do with whether or not the CRR rate goes up or down. But if CRR goes up, the flow of money in the market goes down, and if the demand for credit doesn't go down at the same rate, interest rates will have to go up. These are a few of the important terms that you should know about during MPC meetings. In the next article, we will share a few more of the MPS terms for your reference. As we all know, technology plays a huge part in investments. As an online trading company we offer the best trading accounts and the best stock trading platform to make your investment journey smooth.
May 11, 2022
What Is A Stock Buyback And How Does It Affect A Stock’s Price
Over the last few years, a number of companies have said they will buy back their own shares. Before we get into the details of buybacks in India, let's look at how they work around the world. There are two ways for a company to buy back its own shares around the world. First, you can buy back the shares and keep them as "treasury stock" on the company's balance sheet. The company uses this for treasury operations. Second, you can buy back the shares and get rid of them, which will reduce the number of shares that are still outstanding by that amount. In India, the first way isn't allowed. Instead, shares can only be brought back to get rid of them. So, why do companies buy back their own shares? Why does a company buy back its own shares? One needs to know what the benefits are for the company and the shareholders. The most important question is what shareholders can get out of buying back their own shares. As a stock trading company we are inclined to recommend you the best tools for you to trade seamlessly. Our online trading platform is best for both first-time and regular traders and to top it off we also give the lowest brokerage for intraday trading. 1. Have a lot of money but not many projects to invest in This is one of the main reasons why companies want to buy back their own shares. Indian IT companies like Infosys, TCS, Wipro, and HCL Tech had billions of dollars in cash on hand most of the time. Now, keeping money in the bank costs money, so it's better to give it back to shareholders. A company like Reliance Industries may have billions of dollars in cash, but it also has huge investments in the telecom industry. Most IT companies use business models that have been around for a while, and there aren't a lot of new projects to work on. One of the main reasons for buying back shares is that there is too much cash on the books and not enough investment opportunities. 2. Buybacks are a better way to reward shareholders because they save on taxes This advantage became clearer in India after the 2016 Union Budget, when the government said that shareholders would have to pay a 10% tax if their annual dividends were more than Rs. 10 lakhs. Now, companies are taxed almost three times on the dividends they pay out. First, dividends are paid out after taxes have been taken out. Second, there is a dividend distribution tax (DDT) of 15% when the company pays out the dividend. Third, shareholders pay a 10% tax. Most of the 10 percent tax went to promoters and big shareholders. Even with the 10% tax on long-term capital gains that was added in the 2018 budget, buybacks are still a good tax deal. 3. In theory, buybacks tend to raise the value of a company When a company buys back its own shares, the number of shares out in the market and the capital base go down. In this way, it makes the company's EPS and ROE better. If the P/E stays the same, when the EPS goes up, the stock price should also go up. But in real life, it doesn't happen very often. When a company buys back its own shares, it is seen as a business with few chances to grow and invest in the future. Since P/E ratios are usually based on growth, these companies tend to have lower P/E ratios. So, even though EPS goes up, the effect on valuation is usually about the same because P/E goes down. 4. The company can send a message that the stock price is too low This may be the most important message that companies want to send when they buy back their own shares. The fact that the company is sure enough of itself to use its reserves to buy back its own shares suggests that the company's leaders think it is undervalued. This is more important for stocks that have dropped sharply but don't seem to have any major problems. In this situation, it might be a good idea for the company to buy back the shares to show that prices have hit rock bottom. Even though the stock may not rise sharply, it usually helps the stock find a bottom. 6. It can help the company's founders get a bigger share of the business There are times when the people who started a business may worry that their stake in it will fall below a certain level. A buyback is an offer, and it's up to the shareholders to decide if they want to take it. If the promoters agree to the buyback, it keeps their stake in the business and gives them cash. On the other hand, if they don't take the buyback, they can increase their stake in the company. This is very important if the company is afraid that another company will try to take it over. In India, the only way to buy back shares is to get rid of them. Even though the effect on stock prices is still up for debate, there is no doubt that buybacks are a tax-efficient way to give cash back to shareholders. As previously informed as a stock trading company we have the best tools for you to trade seamlessly. Our online trading platform is best for both first-time and regular traders and to top it off we also give the lowest brokerage for intraday trading.
May 10, 2022
The What And Why Of Rights Entitlement
If a shareholder wants to take advantage of a rights offer, they will have to pay the rights price for the number of eligible shares. If a shareholder doesn't want to buy more shares of the same company, they can either give up their rights or transfer them to someone else. It's easy: I have the right to buy more shares, but I give up that right in your name. This means that you, who may not even be a shareholder, can buy the shares at the rights issue price. I might charge you a fee for this "renunciation." If the rights issue price is 500 and the company is trading at 700, I will charge 200 per right entitlement to give it to someone else. What does "Rights Entitlement" mean? This is a fairly new thing on the Indian stock market, where the rights themselves are traded. When a company does a rights issue, it gives its shareholders Rights Entitlement (RE). As part of the rights issue, the same number of REs are given to each shareholder as of the record date. Using the same example as before, a person who owns 14 shares of Bharti Airtel will get RE for every 1 share they own. Reliance Industries was the first company to give its shareholders their rights directly to their Demat accounts so they could trade them on the exchange platform. When you sell a RE, you give up your rights and give them to someone else. The person who buys the RE is given the option to buy the shares. If you have RE shares, that doesn't mean you also have the rights shares. An investor needs to fill out an application for rights shares based on separate entitlements. RE lets rights holders who don't want to buy more shares of the same company sell their RE shares on a trading window on exchanges to other willing investors for a price. Shareholders who didn't want to apply in the past had to let their RE expire. The renunciation process was complicated, and both the buyer and seller had to sign paper forms. But when the process is handled by the exchange, it's much easier. All you have to do is click on your broker's platform, and it's sold. By giving out RE shares, investors can get some value from their RE shares. Setting the price of RE The difference between the stock's market price at the time and the price at which the rights issue is being sold is used to figure out the price of the rights entitlements. Once the base price is set, price changes depend on how the market feels and how much demand and supply there is for the RE. For example, Airtel's rights shares were being sold for 535, but at the time, each share of Airtel was worth about 681 on the market. So, RE's base price, or what it was really worth, was 146. But on the first day, it went up by 40 percent and closed at around 205. Why would someone pay more than 146 for an Airtel share? The answer is in the actual issue, which is not for regular shares but for partially paid shares. The money for these shares doesn't have to be paid all at once. Instead, it will be paid in parts over time. This adds a layer of "optionality," which is why the RE is worth more ( 205) than the "intrinsic" difference of 146. Paid in part When a company gets money from shareholders, it gives them shares that show how much of the company they own. You can pay for these shares in full or in part. When a share is fully paid, the company gets the whole amount at once. When a share is only partially paid, the company gets the money over time. If a business goes the second route, it doesn't have to raise all of the money at once. Also, it gives shareholders more time to pay for their shares. Investors can buy a company's stock at a lower price if some of the shares have already been paid for. But they have to pay the rest of the payments when they are due. Once all the payments are made on these shares, they are turned into fully paid shares and traded at the same price. (These shares don't come with as many voting rights or dividends.) For example, each share of RIL's rights issue costed Rs 1257. But the company was supposed to get the money in three parts from the shareholders – 314.25 at the time of allotment, 314.25 by May 31, 2021, and 628.5 in November 2021 for the last payment. Tata Steel was the first company to list its partially paid shares on the bourses. Price of shares that are "partially paid" Like fully paid shares, these partly paid shares can be bought and sold on stock exchanges. Their price depends on how much the company's fully paid-up stock is worth, how much of the instalment has been paid, how much time is left to pay the rest, how volatile the stock is, and, of course, how much people want to buy them. The issuance price or base price is the part of the amount paid for a partially paid share. For example, on June 15, 2020, RIL partially paid shares were listed. On the day the shares were put on the market, they were listed at Rs. 698, which was more than double the base price of 314.25. The difference comes from the fact that: There was still about Rs 943 to be paid. The price of a fully paid share of Reliance was Rs. 1615. The price of the PP (partially paid) share should have been 672, which is the difference between Rs. 1,615 and Rs. 943. But it was sold for Rs 698. The slightly higher price takes into account how volatile the money is and how much it will be worth in about 1.5 years when Reliance was expected to get the remaining money. Since then, Reliance has paid 314.25 for the second call, bringing the total amount paid to 628.5. The PP trades at 1,944 in October 2021, which looks like a return of more than 200 percent. However, this is mostly because the partly paid share has built-in leverage that makes it act like an option contract.
May 09, 2022
What Is A Rights Issue? Everything You Need To Know
In a rights issue, a company gets more money by giving more shares to people who already own shares. That is, if you own a share, you have the "right" to buy more shares at a certain ratio and price. For example, a 10:1 issue means that for every TEN shares you own, you can buy ONE more. Rights are only given to shareholders whose names are on the company's register of shareholders on a "record date." This date is usually a few days after shareholders approve the plan to sell rights to raise money. Why Does It Matter? If a company wants to raise money through a Follow-on public offer, it has to go through a long process that includes getting merchant bankers to price the issue, SEBI approving the offer document, etc. There are also a lot of fees that have to be paid. The rights issue is the fastest and least expensive way for the company to get money. The company saves a lot of money on costs like underwriting fees, advertising costs, and so on that it would have had to pay for if it had used another way to raise money. Why is the rights regulator not as strict? The reason for this is that an existing shareholder already knows a fair amount about the company, so she doesn't need as much scrutiny and information as when selling shares to new shareholders. Also, in a rights issue, the promoter's share of the company doesn't go down, which doesn't happen in any other way of raising money through equity. Most of the time, promoters agree to buy all of their rights and the rights that were not bought. Pricing and ratio of rights Most of the time, the price of a rights offer is lower than the market price, and allotment is guaranteed. If the rights are sold for about what they are worth on the market, existing shareholders may not be too interested. A company decides how many rights shares to offer based on how much money it wants to raise and at what price. For example, Bharti Airtel decided to raise 21,000 crore at 535 by giving its current shareholders one more share for every 14 they already owned on the record date. This means that a shareholder with 14 shares will be able to buy another 1 share for Rs. 535. At the time, the market price was much higher, around 680 per share. The ratio says for sure how many shares each person will get. But one can also try to get more shares. Also, these Rights can be traded on their own for a limited time, so shareholders can sell them to other investors on the stock exchange. For example, the recent Bharti Airtel Rights were traded on the exchanges under the name "AIRTEL-RE-BE" for a short time. The price of this script was 203. This means that a person with Airtel Rights could buy an Airtel share for 203 + 535, which is 738. At that time, one share of Airtel costed 687. Factor of Shareholding When a company issues more shares, its Return on Equity and EPS (Earnings per Share) will go down. But if the rights offer is fully taken advantage of, an investor's share of the company doesn't change. For example, if a shareholder-owned 5% of a company before rights, he would still own 5% of the company after rights if he bought his rights shares. If the shareholder doesn't take advantage of the rights offer, his share of the company would go down (since others will buy and their shareholding goes up). If you apply for more shares than your rights allow, you can buy more if a few investors don't subscribe.
May 08, 2022
Understanding Stock Splits And Its Impact On The Share Price
Every investor looks to the stock market for shares that will make him money. But sometimes investors can't buy shares of a popular company. The reason is that the share price is so high. Companies decide to split their shares when this happens. Stock split, as the name suggests, is when the face value of a stock goes down and the number of outstanding shares goes up at the same time. The main goal of a stock split is to make the stock easier to buy and sell, so that investors can buy more of it. Companies do stock splits when they realise that the price of their shares is too high or is higher than the prices of their peers. For example, if a company does a 1:10 stock split, a stock with a face value of INR 1000 is split into 10 shares with a face value of INR 100. But keep in mind that the company's share capital doesn't change. This means that a stock split is nothing more than a cosmetic change, and that the news of a stock split won't affect the price of the stock in a way that will lead to unusually high returns. Even if there is information in the announcement, it is most likely to show up as unusual returns on the day of the announcement, which is called the record date. There are some ideas about why companies split their stocks: Signaling: a stock split is a sign that the company will grow in the future. This is because real-world studies of stock splits in developed economies have shown that the day after the announcement of a stock split, returns are often unusual. Optimal trading range: On every stock market, stocks tend to trade in a certain range. As we've already said, stock splits are done to get the price of the stock back into the normal trading range. This lets more investors buy shares. According to this theory, the goal of bringing the stock price back to the usual trading range is to improve liquidity, which will lead to investors making more money. This is a way for small or ignored firms to get the attention of the market. This is done by a company that feels it has been undervalued in the market because market participants haven't shown much interest. So, companies use stock splits to get more attention and make sure that more investors can get information about the company. This is more important for small businesses than for big businesses. What do investors get out of a stock split? In a stock split, the number of shares goes up, but the value of each share goes down. This makes it easier for new investors to get interested in the company's stock and buy some. In other words, the number of shareholders could grow if more investors bought at lower prices. It looks like investors who bought the split share at a lower price may not benefit from the stock split. But if the share price goes up, it could be because of a stock split. This tells the market that the share price of the company has been going up before the split, so investors think that the growth will continue in the future. So, after a stock split, should you buy a share? Before 1999, SEBI only let INR 10 and INR 100 be used as face values. Today, the split ratio can be 2:1, 10:1, 5:1, or any other number. A few reports suggest that the trading range theory is wrong because most stock splits are announced for stocks that were already trading at low prices. So, market experts have seen that the price of a share after a stock split depends on how the market is doing and how well the company is doing. Before investing in a share after a stock split, make sure you keep the above two points in mind. There's no need to say that the market will always have mixed feelings about stock splits. Also, one last thing: don't confuse a bonus with a stock split. Bonus shares only change the company's issued share capital. A stock split, on the other hand, changes the company's authorised share capital.
May 07, 2022
How Exactly Do Dividends Work?
Corporate actions are measures that a company does that change the value of its stock. There are different kinds of corporate actions that a company can take. If you understand these corporate actions well, you can get a clear picture of the company's financial health and decide if you want to buy or sell a certain stock. Dividends and How They Affect Price A company gives dividends to the people who own shares in it. Dividends are a way for a company to share the money it made during the year. Dividends are paid out based on each share. Consider the face value of a company to be Rs 10. If it declares dividends of Rs 40 per share. This means that the dividend payout is 400%. Please keep in mind that dividends are not necessarily paid out every year. If the company thinks that instead of giving dividends to shareholders, it would be better to use that money to fund a new project that will help the company in the long run, it can do that. Also, dividends don't have to be paid out of profits alone. If the company lost money during the year but has a healthy cash reserve, it can still pay dividends out of the cash reserve. During the financial year, dividends can be paid at any time. If it is paid during the financial year, it is called an interim dividend and if the payout is at the end of the FY, it is a "final dividend." Sometimes giving out dividends could be the best thing for the company to do. When the company has no more ways to grow and has extra cash, it would make sense for the company to reward its shareholders. This would be a way for the company to repay the trust that its shareholders have in the company. At the Annual General Meeting (AGM), where the company's directors meet, the decision to pay a dividend is made. Dividends are not paid out as soon as they are announced. This is because the shares are traded throughout the year, and it would be hard to tell who gets the dividend and who doesn't. Here are the important dates you should know. Date of Dividend Declaration: This is when the Annual General Meeting (AGM) takes place and the board of directors of the company approves the dividend issue. This is the date that the company decides to look at the list of shareholders to see who is eligible for the dividend. Most of the time, there are 30 days between the dividend announcement date and the record date. Ex-Date/Ex-Dividend Date: The ex-dividend date is usually set two business days before the record date. The dividend is only given to shareholders who owned the shares before the ex-dividend date. This is because normal settlement time in India is T+2. So, if you want to get a dividend, you should buy the shares before the ex-dividend date. Date of Dividend Payout: This is the date when dividends are given to shareholders who are listed in the company's register. Cum Dividend: Shared are considered cum dividend will the ex-dividend date, which means that the dividends are about to be paid. When a stock goes ex-dividend, its price usually goes down by the amount of dividends paid. For instance, if Reliance is currently trading at Rs. 2,800 and has announced a dividend of Rs. 100, on the ex-date, the price of the stock will go down by the amount of the dividend paid. In this case, the price of Reliance will go down to Rs. 2,700. The price falls because the company no longer owns the money that was paid out.
May 06, 2022
Are You In Your 20s or 30s? Consider These High-Risk Investments
As the name suggests, high-risk investment plans are best for people who want their money to grow over the long term. Most high-risk investment plans, on the other hand, tend to have big risks, but they also offer chances to make big returns in the long run. Plans like these are examples of high-risk investments: High-risk investment opportunities require a good online trading platform and at Zebu, that’s what we offer. As a highly experienced share broker company, we try to support our customers with the lowest brokerage on everyday transactions. 1. Direct equities Investors who are willing to take risks can use stocks to reach their financial goals. Even though every asset is important in its own way, stocks have a better track record than other assets over the long term. So, in an equity investment, you can buy a piece of a company's ownership, which gives you a say in the business's profits and losses. 2. Unit-linked insurance plans Most people in India think that ULIPs, or unit-linked insurance plans, are one of the best ways to invest because they offer both life insurance and investment returns. Not only that, but you can also move your money between high-risk, medium-risk, and low-risk investments. This is because it lets you put your money in a variety of different funds. Part of your money is put into different funds based on your investment goals and risk tolerance, and the rest is used to give you the much-needed insurance coverage. Overall, ULIPs are basically life insurance plans that let you invest your money in different money-market linked assets based on your goals. So, ULIPs are another way to invest in a portfolio of stocks or bonds that is managed by a professional. The benefit of investing in a bond fund through a ULIP is that, according to the current tax laws, you may be able to get a tax break under section 80C if you meet certain conditions. ULIPs make it easy to see where you stand in terms of risk, so you can choose a higher-risk fund for your long-term goals. As your investment nears its end, you can gradually switch to investments with less risk. 3. Mutual Funds A mutual fund is made up of money from different investors that is put into the stocks or bonds of a company. Most of the time, thousands of investors share a mutual fund, and a fund manager works to get the best returns possible. A professional fund manager is in charge of running the mutual fund. Mutual funds offer a way to invest in multiple asset classes with a smaller amount of money. For example, you can invest in a fund that only buys stocks, a fund that only buys bonds, or a fund that buys both stocks and bonds. Mutual funds might have different types of risky funds based on the stocks or bonds they invest in. Index funds are thought to be the safest type of equity fund, while Gilt funds are thought to be the safest type of debt fund. Medium-Risk Investment Medium or moderate risk investments are, as the name suggests, plans for investments that are diversified or well-balanced. Plans for investments with a moderate risk profile offer the chance for growth and the ability to deal with a certain amount of market volatility. Most medium-risk investment plans help you diversify your portfolio by including both equity and debt instruments. This way, you can get stable returns without taking huge risks. As mentioned earlier high-risk investment opportunities require a good online trading platform. And being a highly experienced share broker company, we try to support our customers with the lowest brokerage on everyday transactions.
May 05, 2022