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Well traded stocks and Liquidity factors
In yesterdays class, we discussed about three key ratios - PE, P/BV and OPM
1. PE can be used to determine if the share is better or worse than the industry to which it belongs
2. P/BV helps to decide if the shares is trading cheap or expensive
3. Operating Profit Margin or OPM helps if one share has better margins over another share in the same industry.
I hope you understood the concepts.
Are you having any questions from the topics we discussed so far?
I gave two assignments yesterday. Hope you completed them.
It was so nice of you that some of you submitted the work yesterday night itself.
Some past midnight and few more in early morning.
I appreciate the good work that you have done.
Practice and patience are key in learning, more so when it comes to investing.
Some of you have already started investing and trading. Right?
Avoid following or depending on tips or paid market call providers.
I heard of several friends who followed such tips and fell into traps.
This is our Rule #1 but yet many people are still depending on tips.
Some fixious companies have smart ladies with sweet voice to lure you.
Only to steal your money in one form or the other.
Instead on depending on tips, spend 1 hr a day at your comfortable part of the day to improve your skills.
Avoid following or depending on tips or paid market call providers.
This is a very important point!
Now, back to the lesson. Let us make some more new rules today.
Read this point:
Invest in companies that are well traded and are liquid.
Well Traded = Shares that have reasonably good traded volumes
This means that there will be several number of people who are interested both in buying or selling of the company share at any point of the market.
Liquid shares = There will good volumes on buy side and sell side at all times allowing you to buy or sell as required.
There is no specific number as to how many buyers or sellers should be there.
If the number of buyers and sellers or the volumes are high enough to allow you to make transactions, that is sufficient.
If you buy shares where there are low daily traded volumes, or too low buyers or sellers, such companies are risky for new investors like us.
Why is this an important factor?
Assume you bought a small share whose traded volumes are just few hundred shares.
You might have observed that even after few days, the volumes are not moving upwards.
Now, one day when you want to see, how to have wait patiently for sellers to come.
Some times it becomes so worse that though the share current market price is high, you have to sell (with great difficulty, the share at a very low just because the buyer only wants to buy the share at a very low price.
If you have high quantity of a low volume share, you might have to spend hours and days in offloading the share.
Might not be.
Largecaps are highly liquid because only good market cap stocks make it to the largecap list.
At any given point of time, you can notice that there will be hundreds of buyers and sellers showing interest in such stocks.
If you are new to stock market, or if you are not having high risk appetite, better to start your investment journey with large cap stocks.
Do not invest in any share whose daily traded volumes are less than 5 digits.
Where to check this type of information?
Google Finance is a great place for finding daily traded volumes and historical volumes of companies.
Check volumes of your shares constantly
.. because a sudden increase in volume could mean a big investor entering or exiting the stock.
Let us take an example to understand this better.
I will take the example of a share called AMD Industries.
We shall determine if it is good to invest or not.
Now, look at this chart of the stock in this page:
Zoom to 1D (1 Day)
Can u locate the "1D" link inside the chart?
Observe the blue line inside the chart.
if u see the chart on the google finance webpage, u will notice up and down lines denoting the price moment of the stock during the day.
You will also notice some sleeping lines (flat sideward moving lines) between and up tick or a down tick line. right?
The sleeping line indicates, no trades happened during that time interval during the day.
Now, observe SBI Chart
You can see that the blue line is going up or down at all times.
Can you notice any flat sleeping line in the chart?
So, it is well traded.
- Rule #15: Invest only in shares that are traded with good volumes every minute through out the day.*
In the daily chart in Google Finance, you can see upward standing bar chart. Right?
That indicates volume. i.e The number of shares traded in that period.
So, SBI has both price moment and good volumes and is trading in almost all minutes of a day.
This means, SBI is a liquid stock.
Does the volume has to be distributed through out the day or it can be after certain intervals as shown in the fig, taken into account for both total no transacted is same
Better if is spread across the day.
Delivery percentage also to consider??
Well delivery percentage would give us price specific information. For long term investors, this might not be a deciding factor but for short term investors, it is important.
Now let us go to the next rule.
- Rule #16: Check Historical Data before beginning to invest*
Now let us check the historical data of Power Mech Projects Ltd
Notice the column named *Volume*
On none of the dates, it traded beyond or even close to 1 lakh shares.
Further, the traded volumes are not consistent and not showing any gradual trend.
You can see that on Sep 16, there are 26,831 traded.
A week earlier, on Sep 6, there are 4,261 shares traded.
On Aug 17, there are a mere 652 shares traded!
Such volumes are very low.
Avoid investing in such companies. They are potential traps
You can deal with such shares when u get sufficient experience in the markets. i.e when u urself becomes experts
Low volumes shares could be a potential trap and are the playground for stock operators.
SBI on the other hand is well traded, is very liquid. Lets see its historical volumes
You can observe that on almost all days, SBI historical volume is 8 digits and that too the numbers are almost consistent.
When you are dealing with smaller and less traded companies, you could buy such shares
.. but there might be a case where you cannot sell them
.. even when the share price is up .. because no one is interested to buy in the company
PowerMech Projects, AMD Industries etc. has very less liquidity and hence should be avoided.
Now, compare the volumes with this share http://www.google.com/finance/historical?q=NSE%3AASHOKLEY
On Aug 4, 130 lakh shares are traded.
On Aug 3, 2016 there are 160 lakh shares are traded.
Oopsss indeed v high volume
So better always go for well traded shares. Usually, 5 digit volumes are minimum for new investors.
Just because volumes are there doesn't mean it is a good company.
It is one indicator with which we can avoid falling into a pit.
A well traded share is liquid and allows us to easy enter and exit.
It is a safeguard for us.
The answer to this depends on your risk appetite.
Shares that are not well traded and illiquid or having less liquidity are risk for new investors, those investors with limited budgets and low risk taking investors.
If you are a dare devil investor, one love can take extra risk for a bit extra return etc., you may go for it.
This is a precautionary factor.
What is Delivery Percentage?
Shares are traded on the stock exchange every day. Some are for intra day and others for delivery.
The Delivery Percentage of the stock will tell us how much of the daily traded volume is taken as delivery by the investors.
This data is available on the stock page of NSEIndia and BSEIndia
Sir from delivery percentage can we find. The price will rise or go down
For Short term, it might rise. Because we study in Technical analysis that stocks with increasing price with increasing volume go up. But if fundamentals do not support, the stock might come back to the same levels. Example: Check Trident in recent times.
- Sales Growth of Company
- Debt-free / Low-debt / Virtually-debt free companies (Rule 10)
- High Beta Stocks (Rule 24)
- Understanding liabilities of company (Rule 27)
- Working capital of a company
- Introduction to Financial Ratios used in Stock Analysis
- Nifty and Sensex PEGetPaidIndia.com