SRTrades

Articles

Long form posts that are more towards educating readers about anything related to trading.

  • Risk Mangement Protects Mental Health

    Risk Mangement Protects Mental Health

    Risk management in trading is similar to wearing a seatbelt while driving. It’s about protecting yourself from potential accidents and staying safe on the road.

    How is risk management important for capital and mental health?
    By implementing risk management techniques, you can trade with more confidence, stay emotionally balanced, and increase your chances of long-term success in the financial markets.
    No doubt Risk Management helps in protecting and manging our capital. More importantly, it helps in protecting our mental health, keeping us in check.

    Risk management for Capital preservation:

    Imagine your trading account size is $1000. Without risk management, you might put half of your money into a single risky stock trade. If that trade goes wrong, you could lose a half chunk of your money, and it might be tough to recover. But with risk management, you would divide your money into smaller portions and trade in multiple trades. This way, if one trade goes south, you won’t lose everything, and your overall capital is protected.

    Risk Management For preserving Mental Health:

    Trading can be stressful, especially when you see your investments fluctuating. Without risk management and proper planning, when a trade goes wrong, you might lose big chunk of money, you might feel anxious and make impulsive decisions, like adding to a losing trade or not cutting the loss. This emotional rollercoaster can harm your mental well-being. However, with risk management, you set clear rules to limit potential losses and plan your trades accordingly. This gives you peace of mind and confidence in your trading plan, reducing stress and protecting your mental health.

    Simple Risk Management Techniques for Trading:

    Position Sizing: Just like you wouldn’t spend all your money on a single item, don’t risk all your capital on one trade. Limit how much of your money you will put in each trade, so even if one trade goes wrong, you won’t suffer significant losses. Small manageable position sizes relative to your trading account size will keep you calm and settled in a volatile market.

    Stop-Loss Orders: Think of stop-loss orders as emergency brakes. Set a price at which you’ll automatically square off your trade if it starts going opposite to your direction. This way, you can prevent big losses and protect your capital. Thus keeping your mind aware of the max possible loss and keep you from worrying of the uncertainty.

    Diversification: Don’t put all your faith in one trade. Keep your capital preserved for next trades or you can have 2 or more high probability trades running to save you from the anxiousness of one trade going wrong.

    Keep a positive Reward-Risk Ratio: Taking trades with positive reward-risk ratio keeps us confident of big possiblity of coming up profitable in a big sample size of trades, given the win rate is more than 50% (that is; you win more than 50% of the trades you take). For example, if you take trades that have Reward-risk ratio of atleast more than 1 (that means, you make more than 1 dollar for each 1 dollar you risk), you will be more likely to come profitable in the long run and this will keep you less anxious in your journey of trading.

    Education and Research: Just like studying for a test, learning about the markets and trading strategies can help you make informed decisions. Knowledge reduces uncertainty and boosts your confidence in your trading choices.

    Taking Breaks: Trading all the time can be overwhelming. Take breaks, do things you enjoy, and spend time with loved ones. This keeps you refreshed and better able to handle the ups and downs of trading. You dont have to be present every day in front of your computer, taking breaks is a crucial part in keeping us sane in the markets.

    Read More: Risk Management Techniques for Traders

    In conclusion, risk management is crucial for protecting both your money and your mental health in trading. By using risk management techniques, you ensure that you don’t bet too much on a single trade and avoid losing a lot of money if things go wrong. At the same time, you reduce the fear of losing, avoid making emotional decisions, and stay focused on long-term success.

    Open a demat + trading account here on Zerodha

  • Risk Management Techniques for Traders

    Risk Management Techniques for Traders

    Risk management is a critical component of successful trading. The ability to manage risk effectively can mean the difference between long-term profitability and significant losses. As a trader, you face a variety of risks, including market risk, credit risk, and operational risk, among others. Understanding and managing these risks is essential to protect your capital and achieve your trading goals.

    In this blog post, we’ll explore the topic of risk management for traders. We’ll start by defining risk in trading and explaining the difference between systematic and unsystematic risk. Then, we’ll dive into common risk management techniques, including stop loss orders, position sizing, diversification, and hedging. We’ll also cover advanced risk management techniques, such as risk/reward ratio, correlation analysis, and Monte Carlo simulation.

    Additionally, we’ll discuss best practices for risk management, including the importance of discipline, regularly reviewing and adjusting your risk management strategy, and keeping detailed records of your trades and risk management decisions.

    By the end of this post, you’ll have a solid understanding of risk management techniques and how to implement them in your trading strategy.

    Understanding Risk in Trading

    Risk is an inherent part of trading. It refers to the possibility of losing money on a trade or investment. There are several types of risk that traders face, including market risk, credit risk, and operational risk.

    Market risk is the risk that the value of a security or investment will decline due to market factors beyond your control, such as changes in interest rates, economic conditions, or political events. Credit risk refers to the risk that a borrower will default on a loan or bond, resulting in a loss for the lender or investor. Operational risk is the risk of loss due to failures or errors in internal systems or processes, such as trading errors or technology failures.

    In addition to understanding the types of risks, it’s also important to differentiate between systematic and unsystematic risk. Systematic risk is risk that affects the entire market or a particular sector, such as a recession or a natural disaster. Unsystematic risk is risk that affects a specific company or industry, such as a product recall or a management scandal.

    It’s important to understand both the types of risk and the distinction between systematic and unsystematic risk in order to effectively manage risk in your trading strategy. By identifying and quantifying the types of risk you face, you can implement appropriate risk management techniques to mitigate those risks and protect your capital.

    Common Risk Management Techniques

    Effective risk management involves implementing techniques to minimize potential losses while still allowing for potential gains. Here are some of the most commonly used risk management techniques:

    Stop Loss Orders: A stop loss order is an instruction to sell a security if it reaches a certain price. This can help limit losses by automatically closing out a position if the price of the security falls below a certain level. This technique is particularly useful for traders who want to limit their losses on individual trades.

    Position Sizing: Position sizing is the process of determining the appropriate size of a position based on the amount of capital available and the level of risk tolerance. By using position sizing, traders can limit their exposure to individual trades and reduce the overall risk in their portfolio.

    Diversification: Diversification involves investing in a variety of securities or asset classes to spread risk across different investments. By diversifying their portfolio, traders can reduce the impact of any one investment on their overall portfolio and minimize the potential for losses.

    Hedging: Hedging involves taking a position in one security to offset the potential losses in another. For example, a trader may buy a put option on a stock they own to protect against a potential decline in the stock price. This can help limit losses while still allowing for potential gains.

    By implementing these common risk management techniques, traders can reduce their exposure to risk and minimize the potential for losses. It’s important to note that no risk management technique is foolproof, and traders should always be prepared to accept some level of risk in order to achieve potential gains.

    Advanced Risk Management Techniques

    In addition to the common risk management techniques we discussed earlier, there are also some more advanced techniques that traders can use to manage risk. These techniques require a deeper understanding of market behavior and analysis, but can be very effective in minimizing risk and maximizing returns. Here are a few examples:

    Risk/Reward Ratio: The risk/reward ratio is a calculation that compares the potential reward of a trade to the potential risk. By evaluating the risk/reward ratio, traders can determine whether a trade is worth taking and adjust their position size accordingly. For example, a trader may only take a trade if the potential reward is at least three times the potential risk.

    Correlation Analysis: Correlation analysis involves analyzing the relationship between two or more securities or asset classes. By understanding the correlation between different investments, traders can better diversify their portfolio and reduce the overall risk.

    Monte Carlo Simulation: Monte Carlo simulation involves using statistical methods to model potential outcomes of trades or investments. By running simulations based on various scenarios, traders can better understand the potential risks and rewards of their trading strategy and make more informed decisions.

    By incorporating these advanced risk management techniques into their trading strategy, traders can better manage risk and improve their chances of success. However, it’s important to note that these techniques require a deep understanding of market behavior and analysis, and should only be used by experienced traders.

    The Importance of Emotional Control in Risk Management

    Effective risk management not only involves implementing various techniques to minimize potential losses but also requires emotional control. Trading can be an emotional activity, and traders who let their emotions dictate their decisions are more likely to take on unnecessary risk and suffer losses. Here are some ways emotional control can impact risk management:

    Avoiding FOMO: FOMO (Fear of Missing Out) is a common emotion that can lead traders to take unnecessary risks. Traders may feel like they’re missing out on potential profits if they don’t take a certain trade or investment, even if the risk is high. By recognizing and avoiding FOMO, traders can make more rational decisions and reduce the potential for losses.

    Managing Fear and Greed: Fear and greed are two emotions that can lead to irrational trading decisions. Fear can lead traders to sell at the first sign of trouble, even if the investment has strong fundamentals, while greed can lead traders to hold onto an investment for too long, hoping for even greater gains. By managing fear and greed, traders can make more rational decisions and minimize the potential for losses.

    Developing a Trading Plan: Developing a trading plan that includes risk management techniques can help traders stick to their strategy and avoid emotional decisions. A trading plan should include entry and exit points, position sizing, and risk management techniques, all of which can help traders make rational decisions and manage risk effectively.

    By developing emotional control, traders can make more rational decisions and manage risk effectively. This requires discipline and a willingness to stick to a trading plan even in the face of emotional turmoil. Emotions are a natural part of trading, but they don’t have to dictate trading decisions if traders can learn to recognize and manage them effectively.

    The Importance of Consistency in Risk Management

    As a professional trader, I cannot stress enough the importance of consistency in risk management. Consistency means sticking to a trading plan and implementing risk management techniques consistently over time. Here are some reasons why consistency is crucial for effective risk management:

    Building Discipline: Consistently implementing risk management techniques can help traders build discipline and stick to their trading plan. By making risk management a habit, traders can avoid emotional decision-making and minimize potential losses.

    Reducing Risk: Consistency in risk management techniques such as stop-loss orders and position sizing can help reduce risk over time. Even if individual trades result in losses, consistent application of risk management techniques can help minimize overall losses and improve the chances of success.

    Ensuring Long-Term Success: Successful trading requires a long-term perspective, and consistency in risk management techniques is crucial for achieving long-term success. Consistently implementing risk management techniques can help traders weather short-term market fluctuations and improve their chances of long-term profitability.

    Inconsistency in risk management can lead to suboptimal results and unnecessary losses. Traders who do not implement risk management techniques consistently are more likely to make emotional decisions and take on unnecessary risk, leading to potential losses.

    By making risk management a consistent and integral part of their trading strategy, traders can build discipline, minimize potential losses, and improve their chances of long-term success. As a professional trader, I strongly recommend that all traders prioritize consistency in risk management techniques and make it an integral part of their trading plan.

    The Importance of Regularly Reviewing and Adjusting Risk Management Strategies

    As a professional trader, I know that the markets are constantly evolving, and risk management strategies must adapt accordingly. That’s why regularly reviewing and adjusting risk management strategies is crucial for effective risk management. Here are some reasons why:

    Adapting to Changing Market Conditions: The markets are constantly changing, and traders must adapt their risk management strategies accordingly. Regularly reviewing and adjusting risk management strategies can help traders identify areas that need improvement and make necessary changes.

    Evaluating the Effectiveness of Current Strategies: Regularly reviewing risk management strategies can also help traders evaluate the effectiveness of their current strategies. By analyzing past trades and outcomes, traders can identify areas where their risk management strategies are working well and where they need improvement.

    Staying Ahead of the Curve: Regularly reviewing and adjusting risk management strategies can also help traders stay ahead of the curve and remain competitive in the markets. By keeping up with changing market conditions and adapting their strategies accordingly, traders can improve their chances of success and profitability.

    However, it is important to note that adjusting risk management strategies should be done in a thoughtful and deliberate manner. Making changes too frequently or impulsively can lead to suboptimal results and unnecessary losses.

    By regularly reviewing and adjusting risk management strategies in a thoughtful and deliberate manner, traders can adapt to changing market conditions, evaluate the effectiveness of their current strategies, and stay ahead of the curve. As a professional trader, I strongly recommend that all traders make regular review and adjustment of their risk management strategies an integral part of their trading plan.

    Best Practices for Risk Management

    Effective risk management requires a disciplined approach and adherence to best practices. Here are some best practices for risk management that I recommend all traders follow:

    Set Realistic Risk Tolerance: Before placing any trades, traders should determine their risk tolerance and set realistic risk limits. This involves assessing their financial situation, trading goals, and overall risk appetite. Traders should aim to manage risk within their limits and avoid taking on more risk than they can afford.

    Use Stop-Loss Orders: Stop-loss orders are a key risk management tool that allows traders to limit potential losses. Traders can set stop-loss orders at a predetermined price level, and if the market moves against them, the order will be triggered, and the trade will be closed out at a predetermined loss level.

    Diversify Portfolio: Diversification is another important risk management strategy that involves spreading out investments across multiple assets and markets. This helps to minimize the impact of market volatility on a trader’s portfolio and reduce overall risk.

    Regularly Monitor Positions: Traders should regularly monitor their positions to identify potential risks and opportunities. This includes monitoring market news, economic reports, and technical indicators to identify potential market movements that could impact their trades.

    Keep Emotions in Check: Trading can be an emotional rollercoaster, and emotions can cloud judgment and lead to irrational decision-making. Traders should strive to keep emotions in check and make decisions based on logic and strategy rather than fear or greed.

    Continuously Learn and Improve: Finally, effective risk management requires a commitment to continuous learning and improvement. Traders should regularly review their strategies, analyze past trades and outcomes, and seek out new education and training opportunities to enhance their skills and knowledge.

    By following these best practices for risk management, traders can minimize potential losses, reduce overall risk, and improve their chances of success and profitability. As a professional trader, I strongly recommend that all traders make these best practices an integral part of their risk management strategies.

    The Bottom Line

    Effective risk management is essential for successful trading. By following the risk management techniques and best practices outlined in this blog post, traders can minimize potential losses, reduce overall risk, and improve their chances of success and profitability.

    Remember, trading involves a level of risk, and there are no guarantees of success. However, by taking a disciplined and strategic approach to risk management, traders can improve their chances of achieving their trading goals while managing risk within their limits.

    As a professional trader, I strongly recommend that all traders prioritize risk management and make it an integral part of their trading strategies. By doing so, traders can protect their capital, manage risk effectively, and ultimately achieve their trading goals.

  • Investing vs Trading in Stock Market

    Investing vs Trading in Stock Market

    If you are new to the world of the stock market, you might be wondering about this: What’s the difference between trading and investing? and, Which one of those two should I be doing?

    Well, in this article I will be sharing with you the difference between Investing and Trading and which one you should be doing.

    featured image - investing vs Trading | comparison | Explanation

    Investing vs Trading

    Investing and trading are two different things and it’s important to understand the difference between them before you make any decisions about your finances.

    Okay so, What is Investing? Investing is when you buy shares of a particular company and hold them with the expectation of generating profit or income when the price of the underlying stock goes up, in a long period of time.

    Investing is usually done for a long period of time, usually for few years to decades.

    Trading, on the other hand, is buying and selling shares in a short period of time thus keeping the difference as a profit.

    Traders take advantage of fluctuations in markets to enter and exit positions faster, thus resulting in more frequent profits.

    Let’s dive deeper…

    Investing

    Investing’s goal is to consistently generate wealth over time by acquiring and maintaining a portfolio of stocks, mutual funds, and other investment instruments.

    Investing is a way to make sure your money doesn’t sit around, but rather works for you, and you may reap the benefit of compounding over years.

    There are varieties of investments options in stock markets:

    • Stocks
    • Mutual Funds
    • Index Funds
    • ETFs (Exchange Traded Funds)

    Investing doesn’t require any knowledge of Technical Analysis. Rather an investor looks into the fundamentals of the company he is investing in. Usually, Investments are done based on one of these two factors or both: Growth potential and/or current value of the company.

    One may invest in a stock without even looking at the price chart, solely based on if he/she thinks the company has growth potential, or if the company is undervalued based on the Fundamentals of the company.

    Trading

    The main goal of trading is to generate profit with the movement in the price of a stock or any other financial instruments.

    Traders get in and out of their positions much frequently. They close their position as soon as they make a profit or their position starts to go in the opposite direction. Traders cut their losses as soon as their analysis is proven wrong.

    Traders are in the market for short-term profits and take advantage of fluctuations in the markets.

    Based on how frequently one trader jumps in and out of stocks or other financial markets, traders are classified into 3 categories:

    1. Day Trader : Holds positions ranging from a few minutes to hours. Closes positions before the market session overs.
    2. Swing Trader : Holds positions ranging from few days to weeks. Carries forward positions overnight.
    3. Scalp Trader : Holds positions ranging from few seconds to few minutes.

    Account size, available trading time, level of trading skill, personality, and risk tolerance are all factors that traders consider when choosing a trading strategy.

    InvestingTrading
    Holding PeriodLong termShort term
    ObjectiveWealth creationProfit generation
    AnalysisFundamental AnalysisTechnical Analysis
    RiskRelatively Less RiskyRelatively Riskier
    SkillsNo skills requiredSkills required
    TimingTiming not crucialTiming is very crucial
    ProfitabilityRelatively less profitableRelatively more profitable
    Key differences between Investing and Trading

    What is more profitable?

    Trading is usually more profitable than Investing. Investors aim to earn around a 10-20% profit on capital per year, on the other hand, a trader seeks to gain around 10% on his capital in a month. Thus, even if a trader earns 5% a month, his capital gain could be 60% a year.

    What is riskier?

    You might have gauged by now, but let me tell you: Trading is riskier than Investing. Of course, what is more profitable comes with more risk. In order to gain those big percentage profits, a trader risks a certain percentage of his capital on every trade he enters. Thus, a trader needs to be well skilled and must have a good risk appetite too in order to reap those big rewards.

    On the other hand, an investor rides out his short-term losses by holding his position and lets it ride for the long term, which usually results in a profitable investment. That also means that an Investor is usually at more ease of mind than a trader.

    Which one is best for you?

    It depends on few factors. If you are willing to learn technical analysis, spend time analyzing charts and you have a risk appetite to earn good profits, trading is for you.

    While, if you are just looking to reduce risk and your main goal is to grow your capital slow and steady, Investing is your path to take. Investing is good for those who want to put money to work and see it grow over time.

    That being said, a combination of these two can be very rewarding. One can be a trader and an investor simultaneously. Most traders invest more than half of their monthly or yearly gains to safeguard their capital and let their money grow.

    I hope this was helpful in understanding what is Investing and trading, and what are the differences between the two. If you have got any more questions, let us discuss them below in the comments section. Have a good one. Cheers!

  • What is IPO?

    What is IPO?

    In this era of Bumper listing IPO frenzies and crazy capital gains through IPOs of unicorn startups, it’s obvious to wonder what’s an IPO and how it exactly works.

    The objective of this post is just that; to explain everything you need to know about Initial Public Offering, aka IPO.

    featured image - What is IPO? | Initial Public Offering Explained

    What’s an IPO?

    IPO is a way for a Private company to offer its shares to the general public in exchange for their investment in the company, thus, turning a Private company into a Public Company.

    Thus, the full form of IPO is Initial Public Offering.

    In other words, once a privately owned company goes through an IPO, it is no longer a private company. Now the public shareholders also have a say in the company and the company has to share its earning reports, profits, and other relevant news with the public.

    Before the IPO, a private company has only a few shareholders including initial investors like family & friends, angel investors, VCs, Private Equity Firms. Once a company goes for an IPO, the general public and other institutional investors can directly buy shares from the company through its Initial Public Offering.

    Why do companies go Public?

    There can be several reasons for a company’s decision to go Public. Companies usually go public after already raising money from other kinds of private investors like Angel Investors, Venture Capital firms (VC), Private Equity Firms (PEFs), and Banks.

    Companies, in essence, go public to avoid debt and raise investment without the need to pay finance charges which often means better profitability.

    When a company goes public it is effectively spreading its risks among a large public (investors).  

    Some of the other advantages for a company to go Public are:

    • Raising capital. This can be for many purposes including, expansion of the business, product range expansion, debt repayment, cash flow etc.
    • Provide an strategic exit opportunity for its initial private investors. IPO is a great profitable opportunity for long term invested initial investors in the company. IPO provides opportunity for these investors to exit with good premium price on it’s debut on the exchange.
      Once the company is listed and SEBI’s required lock-in period (6 moths as of Aug 2021) is over, these initial investors can decide to stay invested, sell partial holdings or sell all of their holdings.
    • Opportunity to gain more eyeballs on the company. The companies that apply for an IPO usually get a lots of eyeballs and become a subject of talk among investors and general public. This creates greater interest among public and thus have a positive impact on the company’s growth.
    • A public company can raise more funds in the future via secondary offerings because it is already listed on the public markets.

    IPO Timeline

    To be eligible to offer a company’s shares to the public, a private company has to meet several requirements and go through various strict steps laid by SEBI (Securities and Exchange Board of India).

    • Selecting a Merchant Banker or Investment Bank
      Investment Banks basically take care of all the IPO documentations and formalities ranging from ensuring legal compliances, representing the company, Drafting Red Herring Prospectus, underwriting shares, book building to road shows.

      I realize some of these terms might be new to you, I’ll explain these terms later under Key IPO terms. Keep reading.
    • Getting approval from SEBI. The merchant banker(s) submit a registration request to SEBI with all relevant information and objective for the IPO.
      After going through this statement, SEBI takes the approval decision about the IPO.
    • Creating a Red Herring Prospectus.
      Red Herring Prospectus is a document which provides detailed information about the IPO including:
      • Important dates
      • Estimated size of the IPO, how many shares are being offered, and expected share price range
      • Fund utilization timeline explaining how the company plans to utilize the raised capital
      • Business details including expenses, revenue model and risks involved in the business
      • Financial records
      • Future prospects and plans for the company growth
      • Details about the management and related contact information.
    • Stock Exchange Approval.
      Stock Exchanges have a listing department which makes sure the company applying for listing follows exchange’s listing criteria. These listing criteria include: minimum issue size, minimum market cap etc. These criteria are dependant on which Stock Exchange the company is applying for listing.
    • Subscription phase
      Once all the above formalities are done, the company can offer its share to the investors.
      The investors can bid for the IPO on the dates specified on the Red Herring Prospectus. One can apply for the IPO through their trading broker terminal. The bidding amount is blocked on Investor’s bank account as mandate till the allotment process gets completed.
    • Allotment of shares
      Once the bids are collected and matched in the books, the shares are allotted to the investors based on the demand and price quoted in their IPO applications.
      Most of the IPOs get oversubscribed, meaning there are more bids than the amount of shares offered by the company. In this case, the shares are allotted fairly by computer program that picks investors randomly and allots shares in a fair manner. Thus, in case of oversubscribed IPO, investors might get partial quantity allotted to them and some investor might not get any allotment. The allotted quantity of shares are credited to investor’s Demat Account. In case of partial or no allotment, the bid amount gets refunded to their bank account.
    • Listing day
      The last step in an IPO is listing of the company on the Stock Exchange. Once the above mentioned steps are successfully done, the company gets listed generally within 7 days once the shares are allotted.
      Once the company gets listed, its shares can be traded everyday among investors and new investors can buy shares from old investors.

    Note: An individual investor can apply for a maximum of ₹2 lakhs in a particular IPO. A single lot of IPO shares costs between ₹10k and ₹15k.

    How to invest in an IPO?

    There are two things you will need to invest in an IPO: A Demat Account – to store your shares, and a Trading account – to trade (buy/sell) shares.
    You can invest in an IPO via a Broker or via your Bank Account that supports ASBA (Application Supported by Blocked Amount).

    ASBA (Application Supported by Blocked Amount) is a mandatory requirement by SEBI. When you apply for an IPO the total bidding amount is blocked on your Bank account for the IPO. The majority of Banks support ASBA, but not all.

    To apply for the IPO, log in to your Bank Account or Broker terminal and go to the IPO section.
    Click on the company name whose IPO you are applying for.
    Fill the IPO application form with details including personal details, Demat Account details, your Bid amount, quantity, and UPI id/Bank Account number.
    Submit the application form.

    For a complete guide check out: How to apply for an IPO | Step by step guide.

    Open a Demat + Trading Account here on Zerodha.

    Benefits of investing in an IPO

    • Listing gains. When the company gets listed, the price of the stock can drastically move up or down depending on the market’s enthusiasm for the company. When the trading price on the listing day is higher than the allotment price, this gain is known as Listing gain.
      Usually the investors looking for quick profit are most excited about listing gains. They usually sell their shares when they get good enough listing gain.
    • High Returns. Most long term investors see it as an opportunity to earn high returns. When you are investing in an IPO of a strong company with a potential to grow, you stand a good chance of earning high return in long term when the company grows.
    • Benefit of being first. When applying for IPO of a reputed company, you are essentially getting a chance own its shares at a lower price. That’s because usually when these reputed companies get listed on the secondary market, the price may soar sharply.

    Okay, so we have learned so far what actually is an IPO, how it works, why and how to apply for an IPO. In case few terms didn’t make sense while reading, here is a glossary of few key IPO terms.

    Key IPO terms

    Issuer. The company or the firm that wants to issue its share to the public through the IPO is referred to as an Issuer

    Issue Price. Also known as Offering Price, is the price at which the shares will be issued to investors before the company gets listed and starts trading on the Stock Exchange.

    Lot size. The smallest number of shares you can bid for an IPO is called the Lot size. The number of shares you bid for must be in multiples of the lot size decided by the company.

    Underwriter. The Underwriter is essentially the investment bank or merchant banker that manages the offering for the issuer. The underwriter is responsible for the whole IPO from determining the issue price to the allotment of the shares. The underwriter also commits that they will subscribe to the remaining shares after the final allotment of the shares to the public (in case of under-subscription).
    Depending on the size and needs of the company, an issuer can appoint more than one underwriter.

    Oversubscribed & Undersubscribed. An IPO is called oversubscribed if the number of Bids received is more than the number of shares on offer.
    On the contrary, if the Bids received are less than the number of shares on offer, it is called an undersubscribed IPO.

    Greenshoe option. Also known as the overallotment option, allows the issuing company to issue more shares (typically 15%) in case of oversubscription to the IPO.

    Red Herring Prospectus. It’s a document that is published by the IPO company and drafted by the underwriters appointed by the company. This document shares with the readers/investors all the information about the company, which includes the company’s business model, financial statements, earnings report, business risks, dates related to IPO, info about the management and underwriters, and contact info.

    Price band & Cut-off price. The price range, comprising of minimum and maximum price, in which the investors are allowed to bid for the IPO is called the price band. This price band is decided by the company and its underwriter(s).
    The price at which the shares are issued to the investors is called the cut-off price.

    Flipping. The practice of reselling the issued shares in the first few days of the listing on the secondary market is known as Flipping. Flipping is practiced by investors for earning quick profit and is usually done when the stock is discounted and the price soars on the listing day.

    Primary market & Secondary market. The company is said to be trading on the primary market when it is in the IPO phase (bidding and issuing). Once the company gets listed and starts trading publicly on the stock exchange, it is said to be trading on the secondary market.

    Conclusion

    IPO is usually a win-win event for both the issuing company and the investors. The company gets the investment and all the press around its IPO. The investors get the chance to earn a good return in the long run, given that they chose a fundamentally strong company after doing due diligence on their side. Most investors try to apply for every IPO but, in my opinion, it makes more sense to apply for the ones which make more sense to you based on your analysis of the IPO company.

    That being said, good luck with your IPO investments. Hopefully, the entire article was helpful to you.
    Let me know in the comments which IPOs you are applying for.

  • Short selling Explained

    Short selling Explained

    Many beginners get confused when they first get to know about short-selling. They ask with a confused voice “how can you sell something that you don’t have/possess?” Well, that’s what I am going to attempt to explain in this post.
    We are going to learn what short selling is and how it works, and I will attempt to answer more frequent queries related to short selling.

    So, first thing first…

    Featured image - Short Selling Explained

    What’s Short selling?

    Short Selling (or going short) is a technique used by traders to profit on a falling stock price by selling borrowed shares when the fall is happening and buying back at a lower price.

    In other words, short selling is the exact opposite of buying low and selling high, i.e., you first sell at a high price and then buy back at a lower price.

    In the case of short selling, the investor/trader profits from the decline in stock price. The difference between the buying price and the selling price is the profit.

    Understanding short-selling | Example

    Let’s suppose your analysis of a stock named Z indicates that Z might fall now after a good upward swing. A conventional trader might just wait for the downward swing to end so that he can enter again for a long trade and make a profit when the price goes up again. But what if you could make money in a falling market too!?

    By short selling, you can profit when the price is falling. Let me explain with an example how this works.
    When you are shorting (short selling) a stock, you basically borrow shares from your broker and sell them in the market and buy back when the price falls even more.

    Let’s suppose Z is trading at ₹50 and you speculate that the price of Z is going down from here. In this case, you place a Sell order for 100 quantities of Z in your trading platform for a total of ₹50 x 100 = ₹5000.
    Now suppose, by the end of the trading session, the price of Z reached ₹45 and you bought back 100 quantities of Z at this price for a total of ₹45 x 100 = ₹4500.
    Thus you make a profit of ₹500. Profit = Selling Price – Buying Price.

    Just the only difference was that you sold first and bought later, the exact opposite of the conventional way of buying first and selling later.

    You might ask, what if the price went up instead of going down after I short sell? Well, in that case, you make a loss. Suppose, in the previous example, if the price reached ₹55 and we close our position at this price by buying back 100 quantity, our loss will be ₹5000-₹5500 = -₹500 (Selling Price – Buying Price).

    short selling example

    How risky is Short-selling?

    Theoretically, the risk is amplified when you are short-selling compared to buying a stock.

    When you buy a stock, you make a loss if the price goes downwards. In this case, theoretically, there is a limit to how much it can go down. It can go down to zero, so there is a limit to your losses in this case. In the worst case, the stock price will come to Zero and you lose the total value of the stock as your loss.

    On contrary, when you short-sell a stock, you make a loss when the price goes up. In the case of buying there was a floor for your loss at zero, but in this case of short selling the price can go up and up and there is virtually no limit to it. Thus your loss has no ceiling to cap it. So technically, short-selling comes with the possibility of infinite loss.

    That’s why it is not advisable to short-sell or take any kind of trade without placing a Stop-loss order. In practical situations, you can minimize your risk and cap your losses by placing a Stop Loss order whenever you’re short-selling.

    Do i have to pay any interest when borrowing shares for short selling?

    That depends on where you are located. In most countries, there is an interest you need to pay to your broker for borrowing shares depending on the time you take to cover your position.
    In India, there are no additional charges when you are short-selling a stock. You don’t need to pay any interest to your broker for borrowing shares.

    For how long can I short a stock?

    Again, that depends on where you are located. Stock exchanges in a few countries allow you to carry your short position overnight for days. In India, you need to square off your short positions by the end of the same-day trading session. Indian exchanges do not allow short positions to be carried overnight. Delivery-based short selling is not allowed in India, you can short sell only in Intraday sessions.

    If you want to short any security for more than one day, you need to short through different instruments like Futures and Options. More on Futures and Options in coming blog posts.

    When does short-selling make sense?

    Short-selling makes more sense when we are in a sideways range-bound market or a downtrend market. As a trader, you do not want to be just sitting around when the market is in a downtrend. We, as a trader, can make a profit even in a downtrend falling market by short-selling. Of course, you should have a conviction on the trade through your analysis of the stock before taking a short trade.

    How do I borrow the shares for short-selling?

    You don’t have to be doing any additional steps to borrow shares for short selling. This borrowing from your Broker happens instantly on the backend when you place a sell order on your trading platform. This is a seamless process with no additional step on your side, similar to a Buy order.

    Key Takeaways

    Short selling is a great way to earn profit in a range-bound or down-trending stock. It also carries, theoretically, an infinite loss possibility. Short selling is well suited for day and swing traders for making a profit in the short term falling markets.

    If you still don’t have a Trading/Demat account, let me recommend Zerodha for opening a Demat + Trading account. I personally use Zerodha for trading, their services are fast and their trading platform is user-friendly, being light and snappy at the same time. Click here to open your Zerodha Trading account today.