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The Greater Fool Theory

What Everybody Ought to Know About- The Greater Fool Theory?

The Greater fool theory is one of the most popular theories in the investing world. Many people follow this theory un-knowingly.

In this post, we are going discuss what is the greater fool theory and how it affects your investment decisions.

What is The Greater Fool Theory?

This theory states that it is possible to make profits by purchasing assets (which may be over-priced) and selling it to another person (a bigger or greater fool) who is willing to pay even a higher price for that asset.

The greater fool theory supports the principle that there will always be a ‘greater fool’ in the market who will be ready to pay a higher price based some ‘un-justified’ valuation for an already over-valued asset. The new estimate might be based on a higher irrational multiple for the asset.

Here, the investors purchase the assets without any regard to the fundamental quality or underlying principle but only with irrational beliefs and expectations. They hope to sell it off at a higher price to another investor (the greater fool), who might also be hoping to do the same with someone else in future. The price of the assets is determined by what the buyer is willing to pay, ignoring the true worth of the asset.

Overall, here the investors are happy to pay too much for an asset just because they believe that a greater fool will be willing to pay more in future.

Where this theory ends…

Have you ever played the game of ‘Musical Chair’?

In the musical chair game, X number of chairs are arranged in a circle and (X+1) people moving around the circle while the music is playing.

When you run around the chairs, you might be happy thinking that there are enough number of chairs and all you need is just one. However, everything changes when the music stops and you might not be able to find even a single chair. Here, the irrational expectation that there are enough fools (chairs) may led you to lose the game.

The Greater fool ideology starts fuelling and causing the stock market bubble. Unfortunately, later this always ends up with a speculative bubble burst and eventually leading to rapid depreciation in the price due to the sell-off.

Nonetheless, there will be someone who will be left stuck with the investment when the speculative bubble finally bursts.

This is because when the end approaches, people begin to realize that the price attached to the investment is just un-realistically high and hence, they might not be willing to pay a greater price for that asset. However, the ones who have already purchased that asset at a high price might be stuck with it.

The key point here is to make sure that the greater fool isn’t you.

Also read: Investment vs Speculation: What you need to know?

DOT-COM Bubble burst was an example of how the greater fool theory ends. 

The greater fool theory can help to explain how speculative bubbles are formed in different assets.

During the dot-com bubble, the prices of every IT companies were highly inflated. The theory supported buying of over-valued stocks in a hot market (IT Sector) with an expectation that a greater fool will come along and buy it from you at a higher rate.

At that time, instead of focusing on trying to find the true/intrinsic value of the companies, people followed the ‘herd-mentality’ to invest in any and all IT Companies. They were purchasing the stock and simply trying to find a greater fool whom they can sell the stock at a higher price than they themselves paid.

However, the end of the DOT COM Bubble was not so happy, and many of the investors who planned to sell their over-priced stocks later turned out themselves to be ‘the greater fool’.

Also read: How Much Can a Share Price Rise or Fall in a Day?

How to avoid being a greater fool?

Now that you have understood this concept, it’s more important to avoid being the greater fool than just to know the theory.

Anyway, it’s quite simple to avoid being a greater fool. And here’s how you can do it- “Before making your investment in any assets, do your own study and research. Do not blindly follow the herd, paying higher and higher price without any reason.

Many people invest in some stocks just because it’s stock price is going higher and increasing too fast. Although they know that the price of that stock cannot be stable at that inflated price, still they are willing to enter the stock with the expectation to exit soon enough making some profits.

If you want to avoid being a greater fool, avoid purchasing a stock just because its price is increasing. Control your greed to make money by irrationally buying over-priced stocks just with an intuition that you can sell it off later at even a higher price.

That’s all. Stay away from being a greater fool. And I hope this post is useful to you.

Please comment below what you think about ‘The greater fool theory’ and how relevant this theory is with the present stock market scenario.

New to stocks? Confused where to learn how to invest in Indian stock market from scratch? Then, here is an amazing online course: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enrol now and start your share market journey today.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

Vijay Kedia’s Success Story

Ace Stock Investor- Vijay Kedia’s Success Story

Vijay Kedia’s Success Story:

“One must understand that stock market is a “high risk- high gain” business. It is a full-time business which has its own rules which need to be strictly followed. One has to fall in love with the market. The market rewards you as per your perception of it. If you treat it as a gambling den, it will prove a gamble for you.” -Vijay Kedia

Vijay Kedia is one of the most successful stock investors of the present time. His stock market journey is inspiring for many old and new investors.

Today, let’s re-visit his journey to learn how Vijay Kedia became one of the most triumphant stock investors of India.

Introduction

Vijay Kedia is an ace Indian stock investor based in Mumbai. He is the managing director of ‘Kedia Securities Pvt Ltd’ and his net worth is over 1,000 crores.

Mr. Kedia is involved in the stock market since an age of 19. He is also described as ‘market master’ by economic times.

Background

Vijay Kedia was born in a Marwari family of stockbrokers. His family has a background in the stock market for over decades.

He joined the family business of stock broking at an age of 19 after the death of his father. Since that early age, Vijay Kedia started working as a stockbroker. Nevertheless, just after few years of working in his family business, he left stockbroking to start his trading career.

During his initial days of trading, Vijay Kedia made a number of profitable trades from the market. However, he soon realized that even after making frequent profits, few big losses easily destroyed all his profits. Overall, he wasn’t earning much from his trading.

Therefore he started learning fundamental investment to start investing in the stock market instead of just trading. In the meanwhile, he also moved to Mumbai from Kolkata.

Investing Career

While in Kolkata, Vijay Kedia identified ‘Punjab Tractor’ at Rs 50 which multiplied 10 times in next 3 years. But his investment base was very low in that stock.

In 1992-93, he picked ACC at Rs 300 and sold at around Rs 3,000 within a year and a half. He bought his first house in Mumbai using that money. That gave a lot of encouragement to Vijay Kedia.

During 2004-05, he picked a number of multi-bagger stocks which gave him a return of over 1,000% in the next 10-12 years. Few of the stocks were Atul Auto, Aegis Logistics, and Cera sanitary ware.

For Aegis Logistics, he picked that stock at Rs 20 and bought 5% stake in the company for the very first time in his career. The share did not move much for next one year. However, the market realized the stock’s potential later and the share moved to Rs 300 in no time, giving Vijay Kedia a return of 15x.

In 2012, Vijay Kedia rightly predicted the beginning of the structural bull run in India when the others were bearish. (Source ‘Indian equities in the first phase of a bull market’: Kedia Securities (Economic times)).

Recent Investments: Few of the recent investments of Vijay Kedia in 2017 are Everest Industries, Caplin ltd (Indian stationary company) and Vaibhav global.

He purchased Vaibhav global at an average price of Rs 350 in 2017. Currently, the stock is trading at Rs 714.

Investment Ideology

Vijay believes that an investor must have three qualities: Knowledge, Courage, and Patience.

After his initial losses in trading, Vijay Kedia shifted to investing with an ideology to hold the stocks for long term. Here’s a quote regarding his investment strategy.

“Invest only for long term. Minimum time frame is five years: Rome was not built in a day. It takes time for a story to mature. I always invest in small caps that go on to become mid to large caps.Whenever I bought a small cap, people discouraged me. No one liked the stock. For two years the company went nowhere; after that it gave multi-bagger returns.”

Apart, Vijay Kedia also gives a lot of importance to the management of the company while selecting a stock to invest.  Here’s a quote by Vijay Kedia regarding the role of management in a company:

“Management, business growth and understanding the downside risk are the most important things that I look for before buying any shares in any company. I believe that best businesses can be ruined by bad management and bad businesses can be revived by the best management. If management is experienced, aggressive, transparent and dedicated to their business, they will protect your investment in order to protect their own wealth and reputation.”

Source: No academic degree can guarantee success in stock markets: Vijay Kedia

(Source: IIMB PGPEM Vijay Kedia 2016)

Vijay Kedia’s success story is motivating for all those investors in the Indian stock market who want to make a huge fortune from stocks.  Here’s a quote by Vijay Kedia to end this post:

“Be balanced in your approach. Don’t be very optimistic in an uptrend and very pessimistic in a downtrend. Also, never have regrets;”- Vijay Kedia

Also read: D-Mart Founder- RK Damani Success Story [Bio, Facts, Net worth & More]

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

7 Types of Risk Involved in Stocks that You Should Know

7 Types of Risk Involved in Stocks that You Should Know.

7 Types of Risk Involved in Stocks that You Should Know:

“Successful Investing is about managing risk, not avoiding it.”
-Benjamin Graham, Father of Value Investing

Let me be very honest with you. Investing in the stock market is risky. If you think that investing in stocks is as safe as cash or bank deposit, then you are completely wrong.

Although historically speaking, stock market investment has given the best returns compared to gold, bond, funds or other options. However, the return from the market is not guaranteed and you may even lose your entire money in stocks.

Now, I’m not trying to scare you. But I’m just highlighting the fact. Over 90% population lose money in the stock market.

Why? Because they do not understand the different types of risk involved in the stocks.

A beginner who starts swimming know that it’s dangerous if he goes in the deep water before proper training. He knows that he might even get drawn in the water. However, when it comes to stock market, people just ignore the different types of risks involved in stocks and are ready to dive in immediately.

Nevertheless, if you know the risk, the chances are that you can mitigate it or at least can have a back plan.

That’s why, in this post, I’m going to explain the 7 types of risk involved in the stocks that you should know. Further, please read the article till the end as there is a bonus in the last section.

7 Common Types of  Risk Involved in Stocks:

Here are 7 common types of risk involved in stocks that every stock investor should know:

1. Market risk

This is also called as systematic risk and is based on the day-to-day price fluctuation in the market.

The market index Sensex and Nifty goes up and down throughout the day. And many a time, it may affect the returns from a stock. For example, if the market is going down at a time, then it might pull down the prices of even some good stocks.

Moreover, in the short term, the market risks are higher compared to the long term.

Also read: How Much Can a Share Price Rise or Fall in a Day?

2. Business Risk

The second type of stock risk comes from the business. This risk can be escalated if the business is not doing well. Reasons like the failure of management, poor quarter-by-quarter results, or your misjudgment in picking a company come under business risk.

However, you can mitigate this risk by diversification. The chance of one business not performing well is ‘high’ compared to 5 such companies. Hence, if you are keeping 5 stocks in your portfolio, instead of one, you can reduce the business risk.

Also read: Investment vs Speculation: What you need to know?

3. Liquidity Risk

Before investing in a stock, you should definitely check how solvent the company is? Companies with high debts may find it hard to pay their bills. Many times, they might even cut the dividends or in the worst case, may go bankrupt. Liquidity risks are involved in all businesses.

4. Taxability Risk

The government changes taxes all the time and hence taxes may increase or decrease in the particular industry where you invested. The change in taxation can affect the stock price.

Further, there are few industries which are taxed comparatively higher to other and hence, their net profit after tax may be less. Further, as taxation is controlled by the government, there is not much that the management or the investors can do.

For example, I’m holding the stock of ITC. During July of last year (2017), the stock price of the company fell over 15% in a day due to a news of an increase in taxation after GST in the cigarettes. A big chunk of my profit was gone that day and I couldn’t do much about it. I didn’t sell ITC because I bought it at an even cheaper price and am still bullish on this stock for long-run.

DISCLAIMER: THIS IS NOT A STOCK RECOMMENDATION, JUST MY PERSONAL OPINION.

However, before investing in this cigarette-giant company, I always knew this might happen and was willing to take the risk. Further, as a back plan, I had diversified my portfolio, which means that although ITC was down, however, other stocks in my portfolio were doing great. Therefore, the overall impact on my portfolio due to the poor performance of just one stock was quite small.

Also read: Long-Term Capital Gain Tax- Simplified [Budget 2018-19]

5. Interest Rate Risk: 

The open market or global market interest rates changes time to time. And this can positively or adversely affect the stocks depending on the direction in which the interest rate is moving. For example, when the interest rates are high, a company might find it difficult to borrow money (at high rates). Further, the bond market declines as the interest rate increases, which may also affect the corporate bonds.

6. Regulatory Risks:

There are a number of regulations imposed in the different industry which must also be termed as the risk involved in stocks. For example, Cigarettes, telecommunication, beverages, pharmaceutical and few other industries are highly regulated.

If a pharmaceutical company loses any of its drug manufacturing right/permission because of a regulatory effect, then it will definitely affect the company’s profit and hence, the stock price.

7. Inflationary Risk:

With an increase in inflation, the price of raw material will increase, which can affect the production cost. Many companies involved in commodities like oil, soya bean etc are affected a lot by inflationary risk.

Further, for few industries, the inflation rate is too high. For example, education and healthcare.

The tuition fee for schools and colleges are increasing at a very fast rate. Although, it might sound good in the short term as these industries will make money from the inflated price. However, for the long run, it might have an adverse effect on retention of the customers.

profit loss risk

Also read: Fundamental vs Technical Analysis of Stocks

Bonus: Few other risks

Beside the above mentioned 7 risk involved in stocks, here are few other risks that are worth mentioning.

  • Social and political risk: Many companies face problem due to social and political risks. For example, Tata Motors shifted its Tata-Nano plant from West-Bengal to Sanand- Gujarat because of political reason, which cost a lot of money to Tata.
  • Credit Risk: The risk that the company who issued the bond won’t be able to pay the interest or repay the principal at maturity and may find it hard to buy/sell goods.
  • FII/DII investments: The investment by big players can also be counted as the risk involved in stocks. If the foreign direct investment/ domestic investment decreases in a company, and they start selling their stocks, then it might adversely affect the share price of that company.
  • Currency and exchange rate risk: Many companies who deals across nations or the companies involved in import/export may face a problem with increased dollar price. Therefore, the currency and exchange rate fluctuations might increase risk in these companies.

Bottom line:

There are a number of risks involved in stocks. Nevertheless, if you understand the basic concept behind the risk involved in stocks, you can control the amount of risk you want to take.

Moreover, the risk is reduced over the long-term. A short-term fluctuation won’t hurt your portfolio in the long run. Further, most of the short-term market fluctuations, political, or social risks will be nullified while investing for a duration of 10-15 years.

Overall, yes!! There are a number of risks involved in the stock market. Nevertheless, risk takers are awarded in the stock market if you take ‘smart’ calculated risk.

That’s all. I hope this post is useful to you.

Please comment below which risk involved in stocks can hurt your portfolio the most.

If you are new to stocks and want to learn how to invest in Indian stock market from scratch, then here is an amazing online course: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your share market journey today.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

D-Mart Founder- RK Damani Success Story [Bio, Facts, Net worth & More]

RK Damani Success Story:

Age: 62
Net worth: $10 Billion
Occupation: Trader, Investor, Businessman

Radha Kishan Damani is a Mumbai based billionaire investor and businessman. The veteran investor Rakesh Jhunjhunwala considers RK Damani as his guru (mentor).

RK Damani is also the owner of mega-retail stores D-Mart.

According to Forbes, he’s the 12th richest person in India, with a net worth of over $10 Billion, which is equivalent to over Rs 64,000 Crores.

RK Damani Success Story:

Background:

RK Damani does not consider himself as a highly educated person. He dropped out of college while pursuing B Com from the University of Mumbai.

Before entering the stock market, RK Damani had a small ‘ball-bearing’ business.

However, after the death of his father, he started working as a stockbroker in his family business. He was 32 at that time.

Stock Market Career:

Although RK Damani started his career as a stockbroker, he soon understood that if he wants to make real money from the market, then he needed to trade his own money in the market, instead of being just a broker.

And soon he started trading in the Indian stock market.

RK Damani made a lot of profits from his trading in stocks. He was a very flexible trader and believed in making profits using the different market swings. For example, during the Harshad Mehta scam, he made a lot of money by ‘Short-selling’ the stocks, which was not common at that time.

Learn more about short-selling here.

However, after getting influenced by value investor Chandrakant Sampat, RK Damini changed his approach. He shifted to long-term value investing.

RK Damani made a lot of money by investing and holding multi-baggers stocks. Few best-performing stocks from his portfolio are VST Industries, Sundaram Finance, Indian Cement and Blue Dart.

Mr. Damani invested in VST Industries at an average of Rs 85 and it is currently trading at Rs 3,400. Further, India cement gave a return of +115%.

Few other companies in his portfolio are Century textiles, Trent, VB Holdings, 3M India, TV Today Network, Jubilant foodworks etc.

Career as a Businessman:

RK Damani has been very interested in consumer retails for a long time. That’s why he opened D-mart in 2002. Nevertheless, being a value investor, this was a very planned move by him.

As of 2017, D-Mart has over 140 stores spread across Maharashtra, Andhra Pradesh, Telangana, Gujarat, Madhya Pradesh, Chhattisgarh, Rajasthan, National Capital Region, Tamil Nadu, Karnataka, Daman and Diu and Punjab.

d mart

In March 2017, D-Mart went public by offering its IPO, under the name of the parent company- ‘Avenue Supermarts’. The IPO was a big hit. Avenue supermart offered its shares to the public at a  price of Rs 299 and got listed at Rs 604 after over-subscription. Currently, the shares of Avenue Supermarts are trading at Rs 1185.

Other Facts:

RK Damani considers himself as both a trader and an Investor. He trades in market swing and invests when he’s getting long-term value.

Further, Mr. Damani lives a very simple life. He is also known as ‘Mr. White and White’ because most of the times he wears a white shirt and white trousers. Moreover, he avoids media and public gatherings.

Also read: 10 secrets behind the stunning success of D-Mart’s Radhakishan Damani

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

Rakesh Jhunjhunwala success story

Rakesh Jhunjhunwala Success Story- Rs 5,000 to Rs 19,000 Crores!!

Rakesh Jhunjhunwala success story- Rs 5,000 to Rs 19,000 Crores!!

According to the latest updates on Forbes (14 Feb 2018), the net worth of Rakesh Jhunjhunwala is $3.1 Billion, which is equivalent to over Rs 19,000 Crores.

So, how did a regular guy from Mumbai with just Rs 5,000 became one of the most successful stock investors in Indian history? In this post, we are going to walk through the journey of Rakesh Jhunjhunwala in the Indian stock market.

Rakesh Jhunjhunwala success story:

Childhood:

Rakesh Jhunjhunwala, also known as the ‘big bull’ or ‘Indian Warren Buffett’ was born on 5th July 1960 in Mumbai.

His father was an Income tax officer.

Rakesh Jhunjhunwala consistently used to hear his father discussing stock market with his friends. As he was very curious about stocks, so once he asked his father that why stock price fluctuates daily? His father suggested him to read newspapers as its the news that makes the price of stocks to fluctuate.

Rakesh Jhunjhunwala also expressed his wish to pursue a career in the stock market. However, his father suggested him to first get a graduate degree from a college.

Rakesh Jhunjhunwala graduated from Sydenham college in 1985 as a chartered accountant.

After graduation, he again discussed his career goal as a stock market investor with his father. To this, his father replied that he is permitted to pursue any career. However, he also added that he’s not going to give him any money, nor he can ask the initial capital from any of his father’s friends.

Entering the stock market world:

Mr. Rakesh Jhunjhunwala entered the stock market with just Rs 5,000 in 1985. At that time, Sensex was at 150 points (currently Sensex is hovering at 35,000 points).

Nevertheless, soon Rakesh Jhunjhunwala was able to take an amount of Rs 2.5 lakhs from one of his brother’s client by promising to give higher returns compared to the fixed deposits.

Rakesh Jhunjhunwala’s first big profit was Rs 0.5 million in 1986. He bought 5,000 shares of Tata Tea at Rs 43 and within 3 months it was trading at Rs 143. He made a profit of over 3 times by selling the stocks of Tata tea.

In the next few years. Rakesh Jhunjhunwala made a number of good profits from stocks. Between 1986-89, he earned Rs 20-25 lakhs.

His next big investment was Sesa Goa, which he initially bought at Rs 28 and then increased his investment at Rs 35. Soon, the stock rallied to Rs 65.

Multi-baggers stocks in Rakesh Jhunjhunwala’s Portfolio:

Rakesh Jhunjhunwala manages a privately owned stock trading firm called ‘RARE Enterprises’. The name is derived from the first two initials of his name and his wife Mrs. Rekha Jhunjhunwala’s name.

During his long career in the stock market, Rakesh Jhunjhunwala invested in a number of multi-bagger stocks.

In 2002-03, Rakesh Jhunjhunwala bought ‘Titan Company Limited’ at an average price of Rs 3 and currently it is trading at a price of Rs 817. He is holding over 7.5 crore shares of titan company. He has an ‘overall’ holding of 8.45% in the company.

In 2006, he invested in LUPIN and his average purchase price was Rs 150. Today, LUPIN is trading at Rs 822.20

Few other multi-baggers in Rakesh Jhunjhunwala’s portfolio are CRISIL, PRAJ IND, Aurobindo Pharma, NCC etc.

Also read: How to find where the Big Players are Investing in the Market?

Philosophy:

Rakesh Jhunjhunwala considers himself as both trader and a long-term investor.

Here’s a quote from his interview with Economic times:

“Short-term trading is for short-term gain. Long-term trading is for long-term capital formation. Trading is what gives you the capital to invest. My trading also helps my investing in the sense I use a lot of technical analysis for trading at times.

If the stock is overpriced, I should sell but my trading skills tell me that the stock can remain overvalued or get more overvalued. Hence, I hold on to my investments.

So, I think they complement each other in many ways but they are two distinct compartments totally.“

Source: Economic Times- The journey of Rakesh Jhunjhunwala 

Further, Rakesh Jhunjhunwala is bullish towards the growth of India.

Quick Fact: Apart from being in the board of directors of big companies like Prime Focus Ltd, Geojit BNP Paribas financial services, Praj Industries, Concord Biotech etc, Rakesh Jhunjhunwala is also a movie producer. He has produced movies like ‘English-Vinglish’, ‘Shamitabh’, ‘Ki and Ka’. He is the chairman of Hungama Digital media entertainment Pvt Ltd.

Overall, Rakesh Jhunjhunwala success story is really inspiring for the new and old investors. In the end, here’s an amazing quote by Rakesh Jhunjhunwala:

Passionate investors always make money in stock markets. You will never fail in any work if you do it with passion.

#HappyInvesting

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

what are mergers and acquisitions

What are Mergers and Acquisitions (M&A)?

What are Mergers and Acquisitions?

In 2014, Facebook acquired WhatsApp by investing $19 Billion.

At the time of the announcement of the acquisition, WhatsApp had over 450 million users, which was the fastest growth compared to any other social media platform in the world. Moreover, the engagement rate (how much users are actually interacting with the app) was over 72%, whereas the other similar apps were struggling with an industry average of 10-20%.

Definitely, it turned out to be a good call by the Facebook Founder, Mark Zuckerberg to acquire WhatsApp. It killed the competition, and further also led to increased volume, user-base etc for Facebook. (Quick fact: Facebook also acquired Instagram earlier in April 2012 by paying $1 Billion).

Another successful acquisition that you might have heard of was the acquisition of ‘Youtube’ by Google in November 2006.

An example of famous ‘merger’ is when JP Morgan merged with Chase group to make a new entity ‘JP Morgan Chase’.

Even if you consider Indian market, there were a number of famous merger and acquisitions.

For example, Tata Motors acquired Jaguar and Land Rover (JLR) in 2008 at a cost of $2.3 Billion. It was one of the most successful acquisitions for a 1-lakh-rupee car making company owning the British ‘luxury’ car manufacturing companies.

tata motors jaguar landrover

Another example is the Hindalco Novelis merger. It was one of the biggest mergers in the aluminum industry.

But, What are Mergers and Acquisitions?

Reading the above facts might have confused you a little about what is the actual difference between merger and acquisition. As both merger and acquisition require two companies, it might be a little difficult to understand the basic difference between them.

However, mergers and acquisition are quite simple to understand. Let’s learn what are mergers and acquisitions, one-by-one:

1. Merger:

hpcl ongc merger

A merger occurs when two separate entities combine together to form a new joint organization. You can consider merger as a corporate ‘marriage’.

During a merger, the formation of a new entity takes place. However, one of the parents may emerge as a dominant management. Nevertheless, the size of the companies in a merger is almost ‘similar’.

For example, HPCL-ONGC Merger, IDFC Bank-Capital First Merger etc

2. Acquisition

When a company takes over another company and establishes itself as a new owner, then this action is called acquisition.

However, the bigger company might let the target company retain its brand and the individual company’s identity might be preserved. For example, the acquisition of Myntra by Flipkart in 2014.

Please note that unlike the merger, there is no formation of a new entity. The bigger company just ‘takeover’ the target company.

During an acquisition, the size of the acquiring company is bigger than the size of the acquired/target company.

Reasons for Merger and acquisitions:

Here are few of the top reasons for merger and acquisitions:

  1. To Increase market share
  2. Decrease the competition
  3. Creating Synergy
  4. Reducing the production cost
  5. Consolidation of activities
  6. To enter a new market (Diversification)

Types of mergers and acquisitions:

In general, there are three types of mergers and acquisition:

  1. Horizontal (When both the companies are in same Industry and somewhat similar stages): For example Flipkart acquisition of Myntra.
  2. Vertical (Buyers and sellers merging, at different production stages and value chain): The Best example is Zara, a Spanish clothing, and accessory company. The secret of Zara’s success is vertical integration – from design to manufacturing to retail. Unlike other clothing companies, Zara makes most of its own, by acquiring them. A similar example can be if an automobile company acquires one of its suppliers like tyre company or window-manufacturing company.
  3. Conglomerate: When the acquiring company and target company are unrelated to business. Usually conglomerate helps in diversification. Ex-Sun Pharma acquiring stakes in Suzlon Energy

In addition, sometimes acquisition can also serve as an exit route for the founders and investors. Here, the new management takes over the company and the founders of the ‘acquired’ company can exit to start their new venture or hobby.

Further, there are few cases, where a privately held company acquires a public company (Reverse merger). It helps the private company to enter the stock market and bypassing the lengthy & complex process of going public.

Also read: What is the Process of IPO Share Allotment to Retail Investors?

Strategies for Mergers and Acquisition:

There are two common strategies for merger and acquisition:

  1. Friendly: This is the most common approach of M&A. Here, both the companies negotiate on the term to create a best possible scenario for each-other.
  2. Hostile: This is forceful acquisition and somewhat rare because the ‘target’ company may have different strategies to avoid this situation like Poison Pill, White Knight, Golden Parachute etc. We will discuss these strategies in another blog post (Nevertheless, you can read a detailed explanation of these here).

How mergers and acquisition take place:

There are different approaches to the merger and acquisition:

  1. Cash: The acquiring company may purchase the target company entirely by cash.
  2. Shares: The company A may give its share to the ‘target company’ based on their valuation. During this approach, an exchange ratio is first decided, that is how much shares of the acquiring company will be given per share of the target company. For example, during IDFC-Capital First merger, Capital First shareholders will be getting 139 IDFC Bank shares for every 10 shares held.

The third approach is cash and share combination, where the acquiring company will pay a part by Cash and remaining by giving the shares of the parent company.

Few recent example of Mergers and Acquisition:

Vodafone-Idea merger: This is one of the most ‘high profiled’ mergers. The reason for this merger was to create the largest telecommunication service provider (worth greater than 23Billion) in the country with 35% customer market share, and 41% revenue market share.

Vodafone and idea being the 2nd and 3rd largest entity in the industry will dislodge Bharti Airtel from Rank 1. After the merger, the different stakes will be- Vodafone (45.1%), Idea (26%) and other shareholders (28.9%). The combined entity will be led by Kumar Mangalam Birla as chairman.

ONGC-HPCL Merger: The recent mega-merger, where ONGC acquired 51.11% stake in HPCL. According to Shashi Shanker, CMD ONGC, ONGC-HPCL merger will help them beat cyclical nature of the business and will bring stability.

Flipkart acquisition of eBay India:  In April 2017, Flipkart acquired the Indian wing of eBay. This acquisition was targeted to increase the global presence of the Flipkart in the e-commerce industry, along with to survive the competition against Amazon.

Resources:
The 10 Biggest Ever Merger & Acquisition Deals In India
Mergers and acquisition deals in India- IIFL
List of Mergers & Acquisitions (Jan – March 2017)
Vertical and Acquisition- Amit bachhawat

Conclusion:

Mergers and acquisition are getting a lot of popularity in recent time, because of its principle of “2 + 2 = 5”.

As the completion is regularly increasing in the market, merger and acquisition have become a survival strategy.

The point to note in M&A is that although there are mutual benefits/corporation during this corporate action, however, there will always be one company who will get more benefits. Therefore, during these actions, make sure to understand which company will really be benefitting and by how much.

That all. I hope this post on ‘What are Mergers and Acquisitions?’ is useful to the readers. #HappyInvesting.

New to stocks? Want to learn how to select good stocks for long-term investment? Check out my amazing online course: HOW TO PICK WINNING PICKS? The course is currently available at a discount.

Tags: What are Mergers and Acquisitions, Mergers and Acquisition difference, What are Mergers and Acquisitions of companies, Mergers and Acquisition meaning

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

How IPOs performed in 2017? A Quick Analysis.

A quick analysis on how IPOs performed in 2017:

2017 was a big year for IPOs. There were a number of mega-buster IPO’s that launched in 2017 like BSE, CDSL, Avenue Supermarket, SBI Life Insurance etc.

Here is the quick summary of the IPOs that got listed in 2017:

Total No of IPO’s in 2017 = 38
Total amount raised = 75,475.37 crores

The number of IPOs listed in 2017 was highest compared to the last 5 years, in which none of the previous 5 years crossed over 30 IPOs in a year (please refer the below chart).

Although it might be a little early to decide the performance of IPOs who got listed in the year 2018, as many of them who got listed on/after August or September, aren’t even six months old in the market.

And from the long-term investor’s point of view, it might be too early to evaluate their true potential.

However, the last year 2017 was amazing for the equity. Even the benchmark Index Sensex and nifty gave over 27% returns (to be exact, nifty gave a return of 28.6%). And even if in that bull run, some IPOs got beaten up badly, then it might be worth ‘re-considering’ for the long-term investment.

Also read: Is it worth investing in IPOs?

How IPOs performed in 2017?

Before you look at the list of the IPOs, there are two points worth noting:

  1. The change is compared to the listing price (not the offered price).
  2. Different IPOs got listed at the different time of the year. So, we cannot compare their returns (as different listing date). For example, if an IPO got listed in January, it returns will be totally different than that of the another that got listed in November or December.

Here is the list of top performers of the IPOs that got listed last year.

ipo performance top performers 2017

And here is the list of the bottom performers in 2017:

ipo performance bottom performers 2017

(Source: IndiaInfoLine)

Conclusion:

Out of 38 IPOs listed last year, only 10 IPOs gave a return of over 20%. Nevertheless, as discussed above, the majority of this IPOs are not even a year old and hence, it’s too soon to comment on their returns since listing.

Moreover, some of the IPO’s that got listed in the year 2017 has given over 100% return within a year. For example: Apex frozen (+287.13%), Shankara Build (+225.4%), Avenue Supermarket- Dmart (+96.29%) etc.

On the other hand, there were few ‘big IPOs‘ which failed miserably last year, even when the market gave a return of over 27%. For example: S Chand & Company (-33.52%), Bharat Road -13.13, SBI Life Insurance (-6.01), Khadim India (-3.58%) etc.

Overall, if you are planning to invest in the IPOs the key point is still the same. Focus more on ‘quality’ over the ‘hype created by the media’.

If the listing price seems to be ‘over-valued’, then wait for it to correct. It’s not necessary to buy the stock only at the IPO, you can even buy the stock after it enters the market.

Also read: Top upcoming IPOs of 2018: NSE, ReNew Power, HAL and more

I hope this post is useful to the readers. #HappyInvesting.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

How to find where the Big Players are Investing in the Market

How to find where the big players are investing in the market?

There are many investors who keep an eagle-eye on where the big players are investing in the market their stock portfolio.

It makes complete sense to track where the big players are investing in the market as these players have already proved their expertise in stock picking through their success in the share market and created huge wealth for themselves.  Moreover, a common investor cannot match the mastery, opportunity, resources, and expertise available to these investors.

Therefore, a retail investor can avail the maximum benefit of their expertise by keeping an eye on where the big players are investing in the market.

NOTE: Tracking the portfolio of successful investors is a good idea. However, investing blindly in the stocks where these big players are investing, might get you in a trouble. Please do a proper study of the stocks before investing. After all, even these big players are humans and are capable of making mistakes.

How to track where the big players are investing in the market?

There are a few ways by which you can find the name of the big players of the stock market in any share and understand where they are investing:

1. Check the block/bulk deals list: This list of block and bulk deals are publicly disclosed on NSE/BSE website daily.

In a block deal, either the minimum number of 5 lakh shares or an investment amount of Rs 5 crores should be executed. On the other hand, a bulk deal happens when the total quantity of shares bought or sold is greater than 0.5% of the total number of shares of a listed company. Read more here.

You can use this list to find the names of the big players in any stock. Here’s the link for the bulk/block deal on BSE website: Bulk Deals / Block Deals

bse website bulk and block deal

Source: Bulk Deals / Block Deals

2. Check the shareholding pattern of the company on NSE/BSE Website: Every company discloses the names of those investors who are holding 1% or greater of the total number of shares. You can check the shareholding pattern to find the name of big players in any stock.

You can find the shareholding pattern of a company on the company’s website, NSE/BSE website or financial websites like money control, investing etc.

For example, here’s the publicly available shareholding pattern for TITAN COMPANY. We all know who holds a large chunk of this stock (RAKESH JHUNJHUNWALA)!!

titan company rakesh jhunjhunwala

Source: Shareholding Pattern Public ShareHolder

3. Besides, there are many financial websites which track the latest portfolio of these big players.

For example TRENDLYNE- Superstar Large Shareholder Portfolios. You can follow these financial websites to get the names of the big players in any stock.

trendlyne superstars

Here are links to the portfolio of few of the most successful investors in the Indian stock market:

Also read: Is Copycat Investing Hurting Your Portfolio?

That’s all. I hope this post is useful to the readers. Happy Investing.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

Long-Term Capital Gain Tax- Simplified [Budget 2018-19]

Long-term capital gain tax- Simplified [Budget 2018-19]:

For the last couple of days, I was on a long family vacation for my birthday which is on 2nd February. I received a number of gifts. However, there are few major ones that are worth discussing here.

First, just a day before my bday (1st Feb), I got a huge gift from our finance minister Mr Arun Jaitely. It was the re-introduction of the long-term capital gain (LTCG) tax @10% after 14 long years through the union budget 2018-19.

Second, on my bday (2nd Feb), the market gave another amazing gift. The Sensex declined by over 800 points due to the announcement of LTCG tax. It was the first big dip of the year after an immense bull rally in January’18.

Overall, my birthday turned out to be quite happening with lots of news to discuss.

Nevertheless, enough talk about me. Now, let’s discuss one of the biggest topic which every Indian investor is talking right now- the Long-term capital gain tax on equity. And how to calculate it?

Long-term capital Gain tax:

As you all might already know that the long-term capital gain tax is now applicable in Indian stock market, which means that even if you sell the stock after holding it for over 1 year, you have to pay tax for the capital gains.

Earlier, the LTCG tax was NIL. Investors need not pay any tax on the capital gains if they hold the share for more than 1 years.

Here are few of the top points that you need to know regarding the Long-term capital gain tax discussed in the union budget 2018-19:

  • Up to Rs 1 lakhs, the long-term capital gain is exempted from taxation.
  • The LTCG tax on the sale of shares listed on the stock exchange after long-term holding is taxable at 10% of the capital gain (exceeding Rs 1 lakh).
  • The long-term capital gain tax will be applicable only when you sell the long-term capital asset on/after 1st April 2018. All the equity assets sold before 1st April 2018 will be exempted from the long-term capital gain tax.

In the budget 2018 speech, the FM stated that any notational long-term gains until January 31st, 2018 will be grandfathered (exempted from taxation).

‘Grandfather’ simply means ‘exempted from tax’.

However, according to the newly released Frequently Asked Questions (FAQs) regarding taxation of long-term capital gains proposed in finance bill, the long-term capital gain tax will be applicable on the shares sold only on or after 1st April 2018.

This means that even if you sell the stock between 1st Feb’2018 to 1st April’2018, you won’t have to pay any tax on the long-term capital gains.

Source: http://www.incometaxindia.gov.in/Lists/Latest%20News/Attachments/216/FAQ-on-LTCG.pdf

Further, the new cost of holding of shares i.e. purchase price can be (in general) considered as the highest price on January 31st, 2018. This clause has been introduced in order to safeguard the capital gains of the past loyal long-term investors in the Indian market.

In short, this means that you do not need to worry about the huge long-term capital gain tax if you have bought a stock 10 years back at a very cheap price. Your cost of acquisition will not be considered same as the purchase price (10 years back) while calculating the long-term capital gains.  The gains will be calculated only after 31st January 2018.

For example, let’s say you bought a stock XYZ 10 years back at Rs 15. On January 31st, 2018 its price was Rs 1000. Then this capital gain of Rs 1000- Rs 15 = Rs 985 is exempted from the LTCG tax. Further, if you sell this stock after 1st April 2018 at Rs 1080, then the capital gain will be considered only as Rs 1080- Rs 1000= Rs 80. Rest gain is ‘Grandfathered’.

In addition, do not forget the tax exemption on Rs 1 lakh on the long-term capital gain that every long-term investor is getting.

Also read: Different Charges on Share Trading Explained- Brokerage, STT & More

Calculation of long-term capital gain:

The calculation of the long-term capital gain depends on new acquisition cost (i.e. revised purchase price) for the shares.

This calculation of the acquisition cost for the purpose of the computing the capital gains requires three prices- actual purchase price, highest trading price as on 31st Jan 2018 and the actual selling price.

The acquisition cost will be the higher of the actual purchase price or the lower of maximum traded price on Jan 31st, 2018 and actual selling price.

Sounds complicated? Right? But, it isn’t.

Let’s understand this with an example.

Assume that you bought a stock at Rs 100. The highest trading price of that stock on 31st January 2018 is Rs 200. And the actual selling price (after 1st April 2018) for long-term holding is Rs 150.

Here, the cost of acquisition is higher of:

A. Actual cost (Rs 100)
B. Lower of

  1. Highest price on Jan 31st Jan 2018 (200)
  2. Actual selling price (Rs 150)

Let’s simplify the part B first.

Here, the lower value of {trading price on 31st Jan, 2008—> Rs 200} and {actual selling price—> Rs 150} is Rs 150.

Now the higher value of {part A (actual cost)—> Rs 100} and {part B—> Rs 150} is Rs 150.

Therefore, in this scenario, the cost of acquisition (purchase price) will be considered as Rs 150.

Further, the actual selling price is also Rs 150.

Overall, capital gain= Rs 150- Rs 150 = 0 (NIL).

Here are the four different scenarios to explain the situation of long-term assets and their capital gains (as described in Income tax departments latest release on LTCG tax)

In all the given scenarios,

Date of Purchase = 1st January 2017
Date of selling > 31st March, 2018 (holding period > 365 days)

S.No Purchase Price
(Rs)
Highest price on
31/1/2018 (Rs)
Selling Price
(After 31/3/2018) (Rs)
Capital Gain
(Rs)
Scenario 1 100 200 250 250-200 = 50
Scenario 2 100 200 150 NIL
Scenario 3 100 50 150 150-100 = 50
Scenario 4 100 200 50 Loss

Long-Term Capital Gain Tax - Simplified

 

Detailed explanation of the scenario:

Although the table given above explains the capital gain, however, here is a detailed explanation for the long-term capital gains tax:

1) Shares bought after 31st January, 2018:

Let the buyer bought 10,000 shares of a stock ABC
Purchase price of 1 share = Rs 100
Total purchase price = Rs 100 * 10,000 shares = Rs 10 lakh

For short term (holding period < 365 days)
Selling price of 1 share= Rs 140
Total selling price= Rs 140 * 10,000 share= 14 lakhs
Short term capital gain (STCG)= Rs 14 lakhs – 10 lakhs = 4 lakhs
STCG Tax = 15% of STCG = 15% of 4 lakhs= Rs 60,000

For long term (holding period > 365 days)
Selling price of 1 share = Rs 180
Total selling price= Rs 180 * 10,000 shares= 18 lakhs
Long term capital gain(LTCG) – Rs 18 lakhs- 10 lakhs= Rs 8 lakhs
Taxable LTCG= 8 lakhs- 1 lakhs= 7 lakhs
(Rs 1 lakh is exempted from long term capital gain tax)
LTCG Tax= 10% of Taxable LTCG= 10% of 7 lakhs= Rs 70,000

2) Shares bought before 31st January 2018:

Let the buyer bought 10,000 shares of a stock ABC
Purchase price of 1 share = Rs 100
Total purchase price = Rs 100 * 10,000 shares = Rs 10 lakh

For short term (holding period < 365 days);
Tax will be same as earlier i.e. 15% of short term gain.

For long term (holding period > 365 days)
Highest price on 31st January, 2018= Rs 150
Selling price of 1 share = Rs 180
Long term capital gain (LTCG) per share exempted from tax = Rs 150- Rs 100 = Rs 50
For computing taxes, LTCG per share = Rs 180- Rs 150= Rs 30
Total LTCG= Rs 30 * 10,000 shares= Rs 3 lakhs
Taxable LTCG= Rs 3 lakhs- Rs 1 lakhs = 2 lakhs
(Rs 1 lakh is exempted from long term capital gain tax)
Tax on LTCG= 10% of 2 lakhs= Rs 20,000

Also read: How Much Can a Share Price Rise or Fall in a Day?

Conclusion:

Here are the key takeaways from this post:

  • The Long-term capital gain tax will be applicable from 1st April 2018 for the financial year 2018-19.
  • Up to Rs 1 lakhs, the long-term capital gains are exempted from LTCG tax.
  • The capital gains exceeding Rs 1 lakhs will be taxed 10% as LTCG tax if you sell the stocks after 1st Ap l, 2017 for the long-term asset.

Further, although the long-term capital gain tax calculation seems complicated, however, it’s quite simple and you can easily calculate it within minutes.

Here is a quick summary of the LTCG Tax for different scenarios:

  1. Shares sold on or before 31st March 2018 —> NIL
  2. Shares purchased on/before 31st January 2018 hold for long-term (over 1 year) and sold after 31st March 2018:
    • Purchase (Buying) Price= Rs 200
    • Highest price on 31st Jan 2018 = Rs 250
    • Selling Price= Rs 280
    • Then taxable LTCG = (Rs 280 – Rs 250) = Rs 30

3. Share purchased after 31st January 2018 —> LTCG Tax@ 10% (when gain exceeds Rs 1 lakhs)

(Image source: CharlesNGO)

That’s all. I hope this post on the long-term capital gain tax is useful to the readers.

Also read: What are the capital gain taxes on share in India?

If you have any questions regards LTCG Tax, feel free to comment below. #HappyInvesting

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting