the best blog to describe indian market and equity
10.8.09
IPO: Offer price is not the only deciding factor
IT is said that Initial Public Offerings, popularly known as IPOs, can be a safe stepping stone for the first timers, who are entering the equity market. IPOs are supposed to be cheap and provide good upside potential to investors
if they hang around long enough.
For first time investors or those lacking enough experience, the trickiest part is to assess the fair value of the shares on offer in an IPO. This is important as it determines whether you should subscribe to the offer or instead bet your money on a related company already listed on the stock exchanges. But it is easier said than done. Most often prospective investors either get seduced or intimidated by the offer price.
This should not happen in an ideal world. After all an offer price or market price of a share is nothing but a company’s expected or total market value divided by the number of shares. This means that two companies with similar market value may trade at different prices simply due to difference in the number of shares
available for trading. But most of the new investors fail to determine this link between the market value and the share price.
This was clearly visible in the recent IPOs of the power sector companies. The investors have been baffled by the sheer variance in offer price of IPOs and the market price of their listed peers. For instance Adani Power was offered to the investors at Rs 100 per share. In comparison, Tata Power, which in the same line of business (i.e in thermal power) and of similar size (in terms of capacity), is right now trading in the range of Rs 1,200 per share.
On the other side of the spectrum is NHPC, which is being offered to the investors in the price band of Rs 30-36 per share. In comparison, another public sector power utility NTPC is trading at around Rs 210 per share. To a trained eye, there’s nothing unusual in the variation in the market price of various companies in a sector.
But for a retail investor, market price is the most visible and appealing information about the real worth of a company or business that is taken easily without much pondering.
Most retail investors and especially the first time investors in IPOs associate the offer price with the relative cheapness of the stock. To them, NHPC is so much cheaper than NTPC, while Adani Power IPO is a steal compared to Tata Power. They don’t care about the fact that at its lower price band NHPC is asking for around 30 times its earning per share (EPS) in FY09 while NTPC is available at a P/E multiple of just 20.
This brings us to the crux of the issue. How should retail investors with limited resources and experience assess the fair value of an IPO and compare it to related companies already listed on the bourses?
The starting point is to get hold of the company’s red herring prospectus (RHP), which contains all the relevant financial and operational details of the company . RHP as it’s called is freely available on SEBI’s website or the company’s portal.
The first item to look for in the RHP is the face value of the share. Next thing the investor should look for is the company’s capital structure represented by subscribed paid-up capital divided into certain number of shares. These two variables will help us to calculate the total number of shares that will be available for trade. This is important, as it is one of the key determinants of its offer price.
The other factor is earning per share, i.e., total profit divided by the total number of shares. Just to illustrate consider Adani Power IPO. Post IPO, Adani Power’s paid-up equity capital is around Rs 2,180 crore divided into 218 crore shares with face value of Rs 10 each. Now compare it to Tata Power’s capital structure.
At the end of June ’09 quarter, Tata Power’s paid-up equity capital is around Rs 222 crore represented by 22.2 crore equity shares with face value of Rs 10 each. Simply put, Adani Power has nearly ten times more equity shares than Tata Power. This means that for the same market value, Adani Power’s share price will be one-tenth that of Tata Power’s share price.
For instance at Rs 100 per share, Adani Power’s total market capitalisation will be Rs 21,800 crore (Rs 100 multiplied by 218 crore shares). If Tata Power gets the same market capitalisation, its share price would work out to be Rs 982 (Rs 21,800 crore divided by 22.2 crore shares).
But what determines company’s market valuation or market capitalisation? At the most simplest level, market cap is directly depended on company’s earnings or profitability in the preceding 12 months. Higher the net profit, higher will be its market value. Total net profit divided by the number of shares gives us earning per share. Now consider the case of NHPC and compare it to National Thermal Power Corporation (NTPC).
During the year ended March 2009, NHPC earned a net profit of Rs 1244 crore, which translates into a earning per share of Rs 1.01 per share (Rs 1244/1230). Post IPO NHPC paid-up equity capital will rise to Rs 12,300 crore represented by 1,230 crore shares with face value of Rs 10 each. In comparison, NTPC earned a net profit of Rs 8,201 crore during FY09, which works out to be Rs 9.95 per share.
Now divide NHPC offer price with its EPS and its gives you price to earning multiple, commonly known as P/E multiple. In case of NHPC, it works out to be 30 at the lower price band and 36 at the upper price band. In contrast NTPC is trading
at around 21 times its EPS in FY09. Obviously, latter is cheaper than the former.
If we set aside other complex issues involved in valuations such as quality of management, earnings quality and growth prospects, a company with lower P/E is preferable. And in the end, it is always preferable to invest in a company whose business is up & running, rather than a company, which promises to use the proceeds to set-up a business that will generate profits and cash flows in future. As they say, there is many a slip between the cup and the lip!
if they hang around long enough.
For first time investors or those lacking enough experience, the trickiest part is to assess the fair value of the shares on offer in an IPO. This is important as it determines whether you should subscribe to the offer or instead bet your money on a related company already listed on the stock exchanges. But it is easier said than done. Most often prospective investors either get seduced or intimidated by the offer price.
This should not happen in an ideal world. After all an offer price or market price of a share is nothing but a company’s expected or total market value divided by the number of shares. This means that two companies with similar market value may trade at different prices simply due to difference in the number of shares
available for trading. But most of the new investors fail to determine this link between the market value and the share price.
This was clearly visible in the recent IPOs of the power sector companies. The investors have been baffled by the sheer variance in offer price of IPOs and the market price of their listed peers. For instance Adani Power was offered to the investors at Rs 100 per share. In comparison, Tata Power, which in the same line of business (i.e in thermal power) and of similar size (in terms of capacity), is right now trading in the range of Rs 1,200 per share.
On the other side of the spectrum is NHPC, which is being offered to the investors in the price band of Rs 30-36 per share. In comparison, another public sector power utility NTPC is trading at around Rs 210 per share. To a trained eye, there’s nothing unusual in the variation in the market price of various companies in a sector.
But for a retail investor, market price is the most visible and appealing information about the real worth of a company or business that is taken easily without much pondering.
Most retail investors and especially the first time investors in IPOs associate the offer price with the relative cheapness of the stock. To them, NHPC is so much cheaper than NTPC, while Adani Power IPO is a steal compared to Tata Power. They don’t care about the fact that at its lower price band NHPC is asking for around 30 times its earning per share (EPS) in FY09 while NTPC is available at a P/E multiple of just 20.
This brings us to the crux of the issue. How should retail investors with limited resources and experience assess the fair value of an IPO and compare it to related companies already listed on the bourses?
The starting point is to get hold of the company’s red herring prospectus (RHP), which contains all the relevant financial and operational details of the company . RHP as it’s called is freely available on SEBI’s website or the company’s portal.
The first item to look for in the RHP is the face value of the share. Next thing the investor should look for is the company’s capital structure represented by subscribed paid-up capital divided into certain number of shares. These two variables will help us to calculate the total number of shares that will be available for trade. This is important, as it is one of the key determinants of its offer price.
The other factor is earning per share, i.e., total profit divided by the total number of shares. Just to illustrate consider Adani Power IPO. Post IPO, Adani Power’s paid-up equity capital is around Rs 2,180 crore divided into 218 crore shares with face value of Rs 10 each. Now compare it to Tata Power’s capital structure.
At the end of June ’09 quarter, Tata Power’s paid-up equity capital is around Rs 222 crore represented by 22.2 crore equity shares with face value of Rs 10 each. Simply put, Adani Power has nearly ten times more equity shares than Tata Power. This means that for the same market value, Adani Power’s share price will be one-tenth that of Tata Power’s share price.
For instance at Rs 100 per share, Adani Power’s total market capitalisation will be Rs 21,800 crore (Rs 100 multiplied by 218 crore shares). If Tata Power gets the same market capitalisation, its share price would work out to be Rs 982 (Rs 21,800 crore divided by 22.2 crore shares).
But what determines company’s market valuation or market capitalisation? At the most simplest level, market cap is directly depended on company’s earnings or profitability in the preceding 12 months. Higher the net profit, higher will be its market value. Total net profit divided by the number of shares gives us earning per share. Now consider the case of NHPC and compare it to National Thermal Power Corporation (NTPC).
During the year ended March 2009, NHPC earned a net profit of Rs 1244 crore, which translates into a earning per share of Rs 1.01 per share (Rs 1244/1230). Post IPO NHPC paid-up equity capital will rise to Rs 12,300 crore represented by 1,230 crore shares with face value of Rs 10 each. In comparison, NTPC earned a net profit of Rs 8,201 crore during FY09, which works out to be Rs 9.95 per share.
Now divide NHPC offer price with its EPS and its gives you price to earning multiple, commonly known as P/E multiple. In case of NHPC, it works out to be 30 at the lower price band and 36 at the upper price band. In contrast NTPC is trading
at around 21 times its EPS in FY09. Obviously, latter is cheaper than the former.
If we set aside other complex issues involved in valuations such as quality of management, earnings quality and growth prospects, a company with lower P/E is preferable. And in the end, it is always preferable to invest in a company whose business is up & running, rather than a company, which promises to use the proceeds to set-up a business that will generate profits and cash flows in future. As they say, there is many a slip between the cup and the lip!
3.8.09
Buy atlanta limited
TARGET : 300
CMP : 104
PERIOD : 12 MONTHS
FUNDAMENTALS
COMPANY PROFILE
The Company was incorporated under the name of 'Atlanta Construction Company (India) Private Limited' pursuant to a Certificate of Incorporation No. 11-031852 of 1984 dated January 17, 1984 issued by the Additional Registrar of Companies, Maharashtra. The name was changed to 'Atlanta Construction Company (India) Limited' April 5, 1991 on being deemed a public company under Section 43A (1A) of the Companies Act, 1956. The name changed to 'Atlanta Infrastructure Limited' on February 2, 1997 and to 'Atlanta Limited' on December 16, 2004
HISTORY AND MAJOR EVENTS
Year Event
October 17, 1995
Completed widening and strengthening of National Highway No. 45 from Km. 67/0 to Km. 160/2 Package V & VI valued at Rs. 395.56 for National Highways of Authority of India, Chengalpattu Tamil Nadu.
March 28, 1998
Completed construction of Udaipur Bypass Road Phase-II on B.O.T. Basis valued at Rs. 244.50 million for Public Works Department, Udaipur.
December 31, 2001
Completion of improvement of arterial and sub arterial roads in Bangalore valued at Rs. 652.22 million for Bangalore Mahanagar Palike.
2002-03
Completed extraction and transfer of Coal/Coal Measure Strata in deploying "surface miners" on hire basis at Belpahar OCP valued at Rs. 40.91 million for Mahanadi Coal Fields.
April 15, 2004
Completion of periodic renewal of Vapi-Ambethi (link to pient) and Vapi Daman road valued at Rs. 128.38 million for National Highways Authority of India.
February 15, 2006
Letter of recommendation for certification under ISO 9001:2000
NFRASTRUCTURE DEVELOPMENT
From executing India's first greenfield BOT project on National Highways - Udaipur Bypass and successfully participating in toll-based PPP infrastructure development projects to building roads, highways, bridges, runways, docks, ports, canals, water courses, irrigation, embankment, reservoirs and executing several EPC projects, Atlanta is at the forefront of developing India's infrastructure.
The company has serviced some of the biggest players in the industry such as National Highway Authority of India (NHAI), Ministry of Road Transport and Highways, Public Works Department, Municipal Corporation of Greater Mumbai and Airports Authority of India to name a few.
Atlanta has established an enviable reputation in the infrastructure development and EPC space due to its ability to harness technology to match the momentum of tomorrow. The company owns and employs modern, specialised and critical fleet of equipment to successfully execute large and complex projects.
Atlanta's EPC division is the oldest and the largest business division of the company and its key activities comprise the actual execution of theinfrastructure projects. This key in-house EPC capability helps the company deliver quality projects on time, amply demonstrated by the successful completion of the Udaipur Bypass project in less than half of the allocated time.
Projects under execution The company is currently executing two toll-based BOT projects: Mumbra Bypass (which is nearing completion) and Nagpur-Kondhali along with several other EPC projects.
Looking forward Atlanta being a forward thinking company, besides identifying traditional infrastructure development projects plans to foray into two new emerging segments: building and maintaining car parking plazas and airport management.
The company, is confident of success in both these segments due to its inherent construction expertise, flawless execution skills, technological know-how which will be backed by alliances with established foreign players in these field.
MINING
Atlanta is active in the high margin limestone and coal mining business with over a decades experience in contract mining, having gained valuable experience at a time when the captive mining business was not even on the radar of competitors.
Prominent features that make Atlanta the obvious contract mining partner of choice competent and best suited to take on the sector's specific needs and challenges include:
1. SURFACE MINING TECHNOLOGY
Atlanta is the first player in the country to have prudently invested in superior surface mining technology: a technology imported from Wirtgen, Germany and Volvo, Sweden that eliminates conventional operations like drilling, blasting and crushing. Surface mining technology enables controlled excavation, is not labour-intensive nor is it risky like the conventional mining process.
2. CAPACITY
Atlanta has the capacity to extract (limestone / coal) over 25000 tones per day, significantly higher than industry peers.
3. CREDIBLE PRESENCE
Atlanta’s distinguished clients include: Mahanadi Coal Fields Ltd. (a subsidiary of Coal India Ltd), Reliance Petroleum Ltd, The Associated Cement Companies Ltd, Narmada Cement Company Ltd, Tata Chemicals Ltd, amongst others.
REALTY
Having anticipated the market trends in the realty sector, Atlanta increased its preparedness to leverage the opportunities by prudently investing in land sites with clear land titles and concurrently demonstrated success and expertise across diverse formats by executing commercial projects and residential projects in prime and emerging locations in Mumbai.
With a longstanding sectoral presence in constructing and executing large projects, Atlanta is now on its way to build attractive properties in and around Mumbai and plans to develop innovative structures across all realty segments in emerging Tier II and Tier III cities across the country.
RESULTS
Quarterly Results (Rs. in Crores)
June2009
[1 Quarter] March2009
[4 Quarter] June2008
[1 Quarter]
CMP : 104
PERIOD : 12 MONTHS
FUNDAMENTALS
COMPANY PROFILE
The Company was incorporated under the name of 'Atlanta Construction Company (India) Private Limited' pursuant to a Certificate of Incorporation No. 11-031852 of 1984 dated January 17, 1984 issued by the Additional Registrar of Companies, Maharashtra. The name was changed to 'Atlanta Construction Company (India) Limited' April 5, 1991 on being deemed a public company under Section 43A (1A) of the Companies Act, 1956. The name changed to 'Atlanta Infrastructure Limited' on February 2, 1997 and to 'Atlanta Limited' on December 16, 2004
HISTORY AND MAJOR EVENTS
Year Event
October 17, 1995
Completed widening and strengthening of National Highway No. 45 from Km. 67/0 to Km. 160/2 Package V & VI valued at Rs. 395.56 for National Highways of Authority of India, Chengalpattu Tamil Nadu.
March 28, 1998
Completed construction of Udaipur Bypass Road Phase-II on B.O.T. Basis valued at Rs. 244.50 million for Public Works Department, Udaipur.
December 31, 2001
Completion of improvement of arterial and sub arterial roads in Bangalore valued at Rs. 652.22 million for Bangalore Mahanagar Palike.
2002-03
Completed extraction and transfer of Coal/Coal Measure Strata in deploying "surface miners" on hire basis at Belpahar OCP valued at Rs. 40.91 million for Mahanadi Coal Fields.
April 15, 2004
Completion of periodic renewal of Vapi-Ambethi (link to pient) and Vapi Daman road valued at Rs. 128.38 million for National Highways Authority of India.
February 15, 2006
Letter of recommendation for certification under ISO 9001:2000
NFRASTRUCTURE DEVELOPMENT
From executing India's first greenfield BOT project on National Highways - Udaipur Bypass and successfully participating in toll-based PPP infrastructure development projects to building roads, highways, bridges, runways, docks, ports, canals, water courses, irrigation, embankment, reservoirs and executing several EPC projects, Atlanta is at the forefront of developing India's infrastructure.
The company has serviced some of the biggest players in the industry such as National Highway Authority of India (NHAI), Ministry of Road Transport and Highways, Public Works Department, Municipal Corporation of Greater Mumbai and Airports Authority of India to name a few.
Atlanta has established an enviable reputation in the infrastructure development and EPC space due to its ability to harness technology to match the momentum of tomorrow. The company owns and employs modern, specialised and critical fleet of equipment to successfully execute large and complex projects.
Atlanta's EPC division is the oldest and the largest business division of the company and its key activities comprise the actual execution of theinfrastructure projects. This key in-house EPC capability helps the company deliver quality projects on time, amply demonstrated by the successful completion of the Udaipur Bypass project in less than half of the allocated time.
Projects under execution The company is currently executing two toll-based BOT projects: Mumbra Bypass (which is nearing completion) and Nagpur-Kondhali along with several other EPC projects.
Looking forward Atlanta being a forward thinking company, besides identifying traditional infrastructure development projects plans to foray into two new emerging segments: building and maintaining car parking plazas and airport management.
The company, is confident of success in both these segments due to its inherent construction expertise, flawless execution skills, technological know-how which will be backed by alliances with established foreign players in these field.
MINING
Atlanta is active in the high margin limestone and coal mining business with over a decades experience in contract mining, having gained valuable experience at a time when the captive mining business was not even on the radar of competitors.
Prominent features that make Atlanta the obvious contract mining partner of choice competent and best suited to take on the sector's specific needs and challenges include:
1. SURFACE MINING TECHNOLOGY
Atlanta is the first player in the country to have prudently invested in superior surface mining technology: a technology imported from Wirtgen, Germany and Volvo, Sweden that eliminates conventional operations like drilling, blasting and crushing. Surface mining technology enables controlled excavation, is not labour-intensive nor is it risky like the conventional mining process.
2. CAPACITY
Atlanta has the capacity to extract (limestone / coal) over 25000 tones per day, significantly higher than industry peers.
3. CREDIBLE PRESENCE
Atlanta’s distinguished clients include: Mahanadi Coal Fields Ltd. (a subsidiary of Coal India Ltd), Reliance Petroleum Ltd, The Associated Cement Companies Ltd, Narmada Cement Company Ltd, Tata Chemicals Ltd, amongst others.
REALTY
Having anticipated the market trends in the realty sector, Atlanta increased its preparedness to leverage the opportunities by prudently investing in land sites with clear land titles and concurrently demonstrated success and expertise across diverse formats by executing commercial projects and residential projects in prime and emerging locations in Mumbai.
With a longstanding sectoral presence in constructing and executing large projects, Atlanta is now on its way to build attractive properties in and around Mumbai and plans to develop innovative structures across all realty segments in emerging Tier II and Tier III cities across the country.
RESULTS
Quarterly Results (Rs. in Crores)
June2009
[1 Quarter] March2009
[4 Quarter] June2008
[1 Quarter]
29.5.09
New RIL gas find may put India among top 15
Reliance Industries’ (RIL) new gas finds in the Krishna Godavari (KG) basin, if validated by Indian regulators, may place India among the
top 15 gas producers in the world.
RIL’s joint venture partner UK-based Hardy Oil and Gas on Wednesday had announced the discovery of 9.5 trillion cubic feet (tcf) of gas in the D-3 block of the KG basin and another find of 10.8 tcf in another block called D-9.
Neither of these finds has been certified yet by the Indian upstream regulator, but could potentially raise India’s proven reserves of natural gas to a significant extent. Blocks refer to areas, running into thousands of square kilometre, where companies have been allowed to search for oil and gas.
India had proven gas reserves of over 37 trillion cubic feet (tcf) at the end of 2007 according to British Petroleum’s 2008 Statistical review. If another 20 tcf of gas reserves is added, it will place India in the ranks of the top 15 gas producers in the world.
With 57 tcf, India will overtake countries like Azerbaijan, Netherlands
and Libya. India’s gas reserves will, if these finds are endorsed by the regulator, then figure just below Canada.
Based upon the gas find, brokerage CLSA has upgraded RIL to “outperform” in the near future.
A technical evaluation report commissioned by Hardy Oil on the potential of the company’s D3 and D9 exploration licences stated that the “best estimate resources for the D3 Block was estimated at 9.5 trillion cubic feet of natural gas and the gross risked best estimate prospective resources in Block D9 is estimated at 10.8 tcf of natural gas and 143 million barrels of oil.”
The technical evaluation of both the blocks were carried out by international consultants Gaffney, Cline & Associates (GCA). The report is on the company’s website.
Commenting on the report, Sastry Karra, chief executive of Hardy in a statement said: “The report confirms the significant hydrocarbon potential of our exploration assets in the emerging world class petroleum system of the KG basin in India. The two discoveries on D3 in conjunction with the acquisition of risk mitigating technologies and geotechnical studies have resulted in the upward revision of the perceived geological chance of success on both of our KG basin blocks.” Hardy Oil has 10% in a special purpose vehicle (SPV) which is exploring these blocks. RIL has the remaining 90%.
When asked for comments a RIL spokesperson declined to do so as Indian upstream regulator the Directorate General of Hydrocarbons (DGH) has banned announcing any new find without its approval. V K Sibal, director general, DGH could not be reached for his comments.
Besides RIL’s latest discovery of 20 tcf, GSPC, a company owned by the Gujarat state government and ONGC have also claimed discoveries of 20 tcf of gas each in the same basin.
These were reported by the media in 2005 and 2006 but are also yet to be certified by the regulator. The DGH has asked both the firms to drill more wells before these claims are validated. Given this track record, it could be some time before Hardy Oil’s claims are confirmed, if indeed that happens.
The KG basin, off India’s eastern seaboard, was relatively unexplored territory till the last years of the 20th century. It is now proving to be potentially India’s equivalent of North Sea or Gulf of Mexico.
top 15 gas producers in the world.
RIL’s joint venture partner UK-based Hardy Oil and Gas on Wednesday had announced the discovery of 9.5 trillion cubic feet (tcf) of gas in the D-3 block of the KG basin and another find of 10.8 tcf in another block called D-9.
Neither of these finds has been certified yet by the Indian upstream regulator, but could potentially raise India’s proven reserves of natural gas to a significant extent. Blocks refer to areas, running into thousands of square kilometre, where companies have been allowed to search for oil and gas.
India had proven gas reserves of over 37 trillion cubic feet (tcf) at the end of 2007 according to British Petroleum’s 2008 Statistical review. If another 20 tcf of gas reserves is added, it will place India in the ranks of the top 15 gas producers in the world.
With 57 tcf, India will overtake countries like Azerbaijan, Netherlands
and Libya. India’s gas reserves will, if these finds are endorsed by the regulator, then figure just below Canada.
Based upon the gas find, brokerage CLSA has upgraded RIL to “outperform” in the near future.
A technical evaluation report commissioned by Hardy Oil on the potential of the company’s D3 and D9 exploration licences stated that the “best estimate resources for the D3 Block was estimated at 9.5 trillion cubic feet of natural gas and the gross risked best estimate prospective resources in Block D9 is estimated at 10.8 tcf of natural gas and 143 million barrels of oil.”
The technical evaluation of both the blocks were carried out by international consultants Gaffney, Cline & Associates (GCA). The report is on the company’s website.
Commenting on the report, Sastry Karra, chief executive of Hardy in a statement said: “The report confirms the significant hydrocarbon potential of our exploration assets in the emerging world class petroleum system of the KG basin in India. The two discoveries on D3 in conjunction with the acquisition of risk mitigating technologies and geotechnical studies have resulted in the upward revision of the perceived geological chance of success on both of our KG basin blocks.” Hardy Oil has 10% in a special purpose vehicle (SPV) which is exploring these blocks. RIL has the remaining 90%.
When asked for comments a RIL spokesperson declined to do so as Indian upstream regulator the Directorate General of Hydrocarbons (DGH) has banned announcing any new find without its approval. V K Sibal, director general, DGH could not be reached for his comments.
Besides RIL’s latest discovery of 20 tcf, GSPC, a company owned by the Gujarat state government and ONGC have also claimed discoveries of 20 tcf of gas each in the same basin.
These were reported by the media in 2005 and 2006 but are also yet to be certified by the regulator. The DGH has asked both the firms to drill more wells before these claims are validated. Given this track record, it could be some time before Hardy Oil’s claims are confirmed, if indeed that happens.
The KG basin, off India’s eastern seaboard, was relatively unexplored territory till the last years of the 20th century. It is now proving to be potentially India’s equivalent of North Sea or Gulf of Mexico.
1.5.09
Don’t Want Risk then Avoid Margin Amount
If you don’t want to take high risk in day trading then you can avoid using margin amount and trade only using available amount in your trading account.
Generally it is risky (if you are new and not experienced) to do over trading by using margin amount or even requesting your broker to add more margins for a day.
What is margin trading?
Suppose if you have Rs 25000 in your trading account and if your broker provides 4 times margin then you can do day trading till Rs one lakh.
Note - Margin trading also depends on share category on which trading is done.
For example - “A” category shares get full margin while “B” category shares get less margin and this will go on decreasing as you move down.
Advantages of margin amount
Major advantage of margin amount is if you have less money then also you can buy more shares.
Some experienced traders make use of margin amount to do multiple trades taking very small profits.
Disadvantage of margin amount
Time restrictions - If you use margin amount then you have to square off your trades before 3:30 pm whether your trade is in profit or loss it doesn’t matter.
We have also the information that even some trading terminals square off your trades automatically at 3:00 pm if you use the margin amount.
So if you use the margin amount then you have the time restriction irrespective of whether your trade is in profit or loss you have to square off your trade because the margin amount is not your money its brokers money which is given to you only for a single day for trading.
If you forget to square off your trade then you have to pay heavy plenty or some brokers charge interest rates on the margin amount.
So the bottom line is if you use the margin amount for day trading then you have to square off your trades irrespective whether you are making profit or loss.
How to overcome this (time restriction) biggest disadvantage?
Answer - Avoid margin amount.
Suppose if you have Rs 25,000 in your trading account then trade only of rupees 25,000.
In other words buy and sell shares of rupees that is available with you and which is your money and not broker money so now there is no compulsion that you have to square off your trades before 3:30 pm.
If your trade is in profit then you can book your profit and if your trade is in loss then if you want you can take delivery of those shares and sell when the price goes up.
So if you avoid margin amount then you can avoid the major losses.
So there is no harm if you don’t use margin amount.
It is not compulsory to use margin amount it is just an additional amount given to you for day trading.
Generally it is risky (if you are new and not experienced) to do over trading by using margin amount or even requesting your broker to add more margins for a day.
What is margin trading?
Suppose if you have Rs 25000 in your trading account and if your broker provides 4 times margin then you can do day trading till Rs one lakh.
Note - Margin trading also depends on share category on which trading is done.
For example - “A” category shares get full margin while “B” category shares get less margin and this will go on decreasing as you move down.
Advantages of margin amount
Major advantage of margin amount is if you have less money then also you can buy more shares.
Some experienced traders make use of margin amount to do multiple trades taking very small profits.
Disadvantage of margin amount
Time restrictions - If you use margin amount then you have to square off your trades before 3:30 pm whether your trade is in profit or loss it doesn’t matter.
We have also the information that even some trading terminals square off your trades automatically at 3:00 pm if you use the margin amount.
So if you use the margin amount then you have the time restriction irrespective of whether your trade is in profit or loss you have to square off your trade because the margin amount is not your money its brokers money which is given to you only for a single day for trading.
If you forget to square off your trade then you have to pay heavy plenty or some brokers charge interest rates on the margin amount.
So the bottom line is if you use the margin amount for day trading then you have to square off your trades irrespective whether you are making profit or loss.
How to overcome this (time restriction) biggest disadvantage?
Answer - Avoid margin amount.
Suppose if you have Rs 25,000 in your trading account then trade only of rupees 25,000.
In other words buy and sell shares of rupees that is available with you and which is your money and not broker money so now there is no compulsion that you have to square off your trades before 3:30 pm.
If your trade is in profit then you can book your profit and if your trade is in loss then if you want you can take delivery of those shares and sell when the price goes up.
So if you avoid margin amount then you can avoid the major losses.
So there is no harm if you don’t use margin amount.
It is not compulsory to use margin amount it is just an additional amount given to you for day trading.
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