Index: Stock Market Key Terms
Index: Stock Market Key Terms
Index: Stock Market Key Terms
Dividend Yield Let’s assume, ABC Inc is listed on National Stock Exchange
(NSE) and has a stock price of Rs 100.
Total number of shares issued by ABC Inc is 500.
Dividend yield is defined as the ratio of dividend per
share to price per share (commonly expressed as %).
Div. yield (%) = DPS / Price
Means that you need to pay more to buy a stock, than what
will accrue to you if the company decides to shut down its
business today.
Investors will buy at this price only if they believe that in
future, value of net assets will grow as company progresses.
Reverse can also be true that out of 100 times when stock
price of A decreases, stock price of B will decrease 80 times.
Correlation tells us what’s the probability of increase in
stock price of B, when stock price of A has increased or
what’s the probability of decrease in stock price of B, when
stock price of A has decreased.
Support and when we plot support and resistance by joining lows and
Resistance:
highs of a stock price and determine a trend.
we expect the stock price to move between these two
lines.
Investing Strategies
Growth Stocks of quality companies
Recording above industry average growth and are
expected to continue doing so in the future.
Because of the company’s future growth prospect,
market often assigns high value to such stocks resulting
in a high PE ratio
Primarily concerned with fast growing young
companies
Investors who buy growth stocks focus on earning
investment returns almost exclusively through capital
appreciation resulting from increasing stock price.
collection of companies-
experiencing earnings growth,
witnessing margin improvement
increasing return on capital, and
are still available at justifiable valuations
Coffee Can Portfolio selects companies whose revenue has grown by at least
10% every year for each of the last 10 years and ROCE
was at least 15% for each of the last 10 years.
strategy helps you rise above the market volatility and
noise by going for a long-time horizon of 10 years.
it also helps in saving transaction cost, as there is no
re-balancing done once bought
Value Stocks of companies which trade at a lower price
relative to its fundamentals are termed value stocks.
Mature companies with stable cash flows but
moderate growth rates usually trade at low levels.
Sometime, Negative perception about the industry or
company due to multitude of reasons might also result
in stock price of the company taking a beating resulting
in cheap valuation
Bargain Buys
Designed for a layman investor and consists of stocks
which boast of strong financial position, manageable
debt and stable earnings.
Weighting a 1. Equi-Weighted
2. Market-cap Weighted
Portfolio 3. Custom Weighted
Equi-Weighted
Market-Cap Weighted
Thus, market cap portfolio will be more exposed and sensitive to movement’s in
SBI stock price, compared to equal-weight. This is happening because majority
of your money is still concentrated in one particular stock and company
specific risk is very high in the absence of proper diversification.
Custom scheme
For example, you might believe that PNB is expected to perform better than
other stocks, then you can give a higher weight to PNB, compared to others.
Once weighting scheme is decided, rest of the steps are similar to market-cap
and equal-weight schemes.
By this formula, portfolio of banking stocks generate a return of 11.84%
(5927.92/50056.15).
Bank NIFTY is an index on National Stock Exchange of India comprising of the big
banks in India.
The index will also benefit from the recapitalization decision of government,
which formed the basis of us creating this PSU banks portfolio.
The index faces the same set of risks faced by all banking stocks--because the
risks like rising interest rates and low loan demand are same for stocks in our
portfolio, as well as stocks in Bank NIFTY.
But if we get to know that Bank NIFTY generated a return of 15%, in the same
time period, then what?
Means that our stock selection was not good, as the general sector (represented
by Bank NIFTY) outperformed our portfolio.
If our portfolio generates a return of 18%, then we can confidently say that our
stock selection was superior, as through our selection of banking stocks based on
some criteria, we outperformed the broader banking sector.
If our portfolio had IT stocks, then CNX NIFTY IT would be a better Benchmark.
If our portfolio comprises of stocks from different sectors, then we can use Nifty
as a benchmark. This would tell us whether we are able to beat the market
through our portfolio selection or not.
Similar to our portfolio, we can create a custom index for benchmark
also.
Index creation process is exactly same for the benchmark and the portfolio.
If we observe that on Day 9 the value of our portfolio is 57300.12 and the value
of the NIFTY is 7590.24, its very difficult to conclude anything.
But instead, if we are told that the index value of the portfolio is 114.79 and
index value for NIFTY is 104.75, we can quickly conclude following things
without any calculations:
Rebalancing a Portfolio
we invested Rs.50,000 in a portfolio of banking stocks. The total amount was
allocated amongst the 5 stocks in equal proportion.
Suppose we revisit the portfolio after a year, the market value of each security
within the portfolio will most likely be different, thereby affecting the weightage
of the security within the portfolio.
In the case of our imaginary portfolio both PNB and BOI saw exaggerated price
movements which resulted in drastic change in their weightage within the
portfolio.
One option that we have in this case is to ignore the change in weightage and
continue to hold the same number of shares.
This strategy will allow an investor to earn good returns only if BOI continues to
perform well and PNB continues to perform poorly.
Suppose the investor decides to retain the portfolio weights hoping that BOI
and PNB will continue to perform in line with their historical performance.
In case of the below example, share price of both BOI and PNB increased
during the year.
While share price increase is always good news, in this case the
portfolio was less affected by the 40% increase in price of PNB and
This was because of the respective weights of the scrip’s within the portfolio.
Assuming the investor chooses the smarter option of rebalancing at the end of
year 1, he will have to buy or sell the shares in this order to ensure that the
portfolio remains equal weighted.
As can be seen the investor bought 89 shares of PNB to make up for the lost
weightage and sold 39 shares of BOI to reduce its weightage within the
portfolio.
This is because he now has more exposure to PNB whose prices increased
significantly during the year and less exposure to BOI whose price moved by only
5%.
Nobody can predict with certainty the future returns of a security, past
performance is almost never an indication of future performance.
There are 3 basic strategies one can adopt to decide when to rebalance a
portfolio:
If at the time of rebalancing, the portfolio’s weights have deviated by less than
the predetermined margin the portfolio will not be rebalanced.
If the portfolio’s weights drifts by more than the minimum margin at an
intermediate time period, the portfolio will then not be rebalanced.
Record the total cost of each security and the total cost of the portfolio
So if the weights change by more than 10% during a quarter, the weights will be
rebalanced at the end of the quarter.
STEP 2: Compare the actual weight with the target weight after 3 months
At the end of 1st quarter no rebalancing action is required, though weights of
shares have moved, they are within the margin.
We can see that SBI and Allahabad Bank have breached the 10% margin and
hence the portfolio will have to be rebalanced.
Total net worth is the price of the portfolio or the numerator part of the PE
ratio.
If a portfolio has more companies growing at a fast pace, then PE ratio of the
portfolio can be high as these companies usually are expensive compared to
the rest of the market.
If the portfolio companies have had weak total earnings, the total PE ratio
could be inflated because of low denominator.
Hence one has to closely inspect the portfolio companies before drawing any
conclusion about portfolio PE ratio.
However one has to be careful before drawing broad conclusions about the
dividend yield of a portfolio.
Companies growing at a fast pace conserve cash and do not pay out dividends.
Companies making losses continuously might also not have spare cash to pay
dividends.
If the investor’s portfolio has a lot of fast growing companies or a lot of loss
making entities, dividend yield will be low.
However the first case is good for the investor because share prices of fast
growing companies also grow fast, thereby earning good return on investment.
Low dividend yield because the portfolio has a lot of loss making companies
At the same time company’s share prices might also drop resulting in loss on
investment.
If the beta of a stock is more than 1, it means stock moves along with the market
in the same direction and is more volatile than the market.
If the beta is less than 1, it means that stock is less volatile and not related to
the market
However market risk – risk that is not specific to any single company and affects
all the companies in the market – is not diversifiable.
If the beta of the portfolio is more than 1, it means that the portfolio moves in
the same direction as the market and at a faster pace than the market.
Similarly if beta is less than 1 it means portfolio does not move in tandem with
the market.
If the investor expects the market to go up over the next 1 year, then he can
add high beta companies to his portfolio to enhance portfolio returns.
On the contrary if the markets are expected to drop over the next 1 year, the
investor can load up his portfolio with low/ negative beta stocks thereby
protecting portfolio returns.