Definition: In the stock market, margin trading refers to the process whereby individual investors buy more stocks than they can afford to. Margin trading also refers to intraday trading in India and various stock brokers provide this service. Margin trading involves buying and selling of securities in one single session.
Over time, various brokerages have relaxed the approach on time duration. The process requires an investor to speculate or guess the stock movement in a particular session. Margin trading is an easy way of making a fast buck. With the advent of electronic stock exchanges, the once specialised field is now accessible to even small traders.
Description: The process is fairly simple. A margin account provides you the resources to buy more quantities of a stock than you can afford at any point of time. For this purpose, the broker would lend the money to buy shares and keep them as collateral.
In order to trade with a margin account, you are first required to place a request with your broker to open a margin account. This requires you to pay a certain amount of money upfront to the broker in cash, which is called the minimum margin. This would help the broker recover some money by squaring off, should the trader lose the bet and fail to recuperate the money.
Once the account is open, you are required to pay an initial margin (IM), which is a certain percentage of the total traded value pre-determined by the broker.
Before you start trading, you need to remember three important steps. First, you need to maintain the minimum margin (MM) through the session, because on a very volatile day, the stock price can fall more than one had anticipated.
For example, if a Tata Steel stock priced at Rs 400 falls 4.25 per cent and the IM and MM are 8 per cent and 4 per cent of the total value of the shares bought, respectively, then the trade-off 8%-4.25%=3.75% will be less than the MM. In this case, you will either have to give more money to the broker to maintain the margin or the trade will get squared off automatically by the broker.
Secondly, you need to square off your position at the end of every trading session. If you have bought shares, you have to sell them. And if you have sold shares, you will have to buy them at the end of the session.
Thirdly, convert it into a delivery order after trade, in which case you will have to keep the cash ready to buy all the shares you had bought during the session and to pay the broker’s fees and additional charges.
If even one of these steps is missed, the broker will automatically square off the position in the market.
Definition: Stocks that give returns that are several times their costs are called multibaggers. These are essentially stocks that are undervalued and have strong fundamentals, thus presenting themselves as great investment options. Multibagger stock companies are strong on corporate governance and have businesses that are scalable within a short span of time.
Description: A stock that doubles its price is called two-bagger while if the price grows 10-times, it would be called a 10-bagger. Thus, multibaggers are stocks whose prices have risen multiple times their initial investment values.
How to identify multibagger stocks?
1. Debt level of the company should be within reasonable limits: There are no defined levels per se for debt, as it will vary from industry to industry. However, as a ballpark measure, debt should not be more than 30 per cent of the equity value.
2. Check on previous quarter performance: Keep a check on the company’s revenue multiples on a quarter-on-quarter basis. If the multiples are low but the company is performing at the operational level, then that can be a hint that the company has significant upside potential.
3. Sources of earnings: Along with the revenue numbers, check the sources from which the company is making money. Is the primary revenue segment set to grow at the macro level? Are the operations of the company easily scalable? If yes, then the stock may have the potential to be a multibagger.
4. Earnings and price multiples: Calculate the trailing 12-month EPS and revenue to arrive at the current PE and price /sales ratios. If the PE level is growing faster than the stock price, then its chances of being a multibagger are bright.
5. Check out business model/capex/ structural/management changes: Be on the lookout for any major changes in the quarterly results/annual reports that could have significant impact on the company’s operations.
Definition of 'Moving Average Convergence Divergence'
Definition: Moving average convergence divergence, or MACD, is one of the most popular tools or momentum indicators used in technical analysis. This was developed by Gerald Appel towards the end of 1970s. This indicator is used to understand the momentum and its directional strength by calculating the difference between two time period intervals, which are a collection of historical time series. In MACD, ‘moving averages’ of two separate time intervals are used (most often done on historical closing prices of a security), and a momentum oscillator line is arrived at by taking the difference of the two moving averages, which is also denoted as ‘divergence’. The simple rule for taking the two moving average is that one should be of shorter time period and the other longer time period. Generally, exponential moving averages (EMA) are considered for this purpose.
Description: The main points for an MACD indicator are:
a) Time period or interval – which the user can define. Commonly used time periods are:
Short-term intervals – 3, 5, 7, 9, 11, 12, 14, 15-day intervals, but 9-day and 12-day durations are more popular
Long-term intervals – 21, 26, 30, 45, 50, 90, 200-day intervals; 26-day & 50-day intervals are more popular
b) Momentum oscillator line or divergence or MACD line – which can be simple plotting of ‘divergence’ or difference between two interval moving averages
c) Signal Line – which is exponential moving average of divergence data e.g. 9-day EMA
d) Normally a combination of 12-day and 26-day EMA of prices and 9-day EMA of divergence data is used, but these values can be changed depending on the trading goal and factors
e) The above data is then plotted on a chart, where the X- axis is for time and Y-axis is price, to get MACD line, signal line and histogram for the difference between the MACD and signal line, which is shown below the X-axis
Example:
Take the 12-day and 26-day exponential moving averages of closing prices of a security. To calculate the exponential moving average of closing prices, you need to take the weighted calculation of simple moving averages, where the weighing multiplier needs to be calculated. For calculation, refer to the exponential moving average concept. Then both the EMA data difference will be taken and used to draw an MACD line for the said duration and plotted as a line graph. This area is below the time axis and is divided by the 0 axis or called as centreline to show negative and positive. Then nine-day EMA will be calculated for MACD data in the same manner as above, which is called the ‘signal line’. Then a bar graph or histogram is drawn in the same area where the bar length shows movement variation in the MACD line and the signal line at single point. Here is a screenshot of the same, when plotted on the graph.
The MACD and signal line move above and below the zero axis or centreline to signal a trend such as overbought and oversold conditions. When the EMA points are close to each other, that is called convergence, and when they are apart, it is called divergence. The shorter the moving average, the more the reaction of the MACD line. There are three ways to interpret the MACD:
Here are some of the indications of an MACD and what they mean:-
1) Signal Line crossovers: Signal line is EMA of the MACD line. So it trails the average line and helps spot the turns in the MACD. When the MACD crosses turn above the signal line, it shows bullishness and is called a bullish crossover. If it turns below the signal line, that’s called a bearish crossover.
2) Centreline crossovers: When the MACD crosses turn above the zero line, it shows bullishness and is called a bullish centreline crossover. If it turns below the zero line, it’s a bearish centreline crossover. A positive crossover happens when the shorter EMA of the underlying security moves above the longer EMA.
3) Divergence: This shows a point where the MACD deviates and does not follow price action. When the price touches a new low, but the MACD does not confirm the same by making a new low, that’s considered a bullish divergence. Whereas in a bearish divergence, the price touches a new high, but the MACD does not make a new high on its own. The divergence points can show subtle shifts in a security.
Some other important points:
· The MACD indicator should be used when there is a proper trend. It doesn’t work in a rangebound market.
· Long bars in a histogram show divergence while short bars show convergence of the moving averages
· MACD has a positive momentum when a shorter EMA moves above the longer one, but when it moves below the longer EMA, that signals negative momentum.
· When the MACD rises significantly and short EMA pulls from the longer one, that signals an overbought condition
· There can be fake signals from the MACD too. For instance, there can be a bullish signal line crossover but a steep decline in price of a security.
Similarly, there can be a negative crossover but a sharp rise in the price of the underlying. So an event needs to be looked at for a longer duration for confirmation.
Definition: In the stock market, margin trading refers to the process whereby individual investors buy more stocks than they can afford to. Margin trading also refers to intraday trading in India and various stock brokers provide this service. Margin trading involves buying and selling of securities in one single session.
Over time, various brokerages have relaxed the approach on time duration. The process requires an investor to speculate or guess the stock movement in a particular session. Margin trading is an easy way of making a fast buck. With the advent of electronic stock exchanges, the once specialised field is now accessible to even small traders.
Description: The process is fairly simple. A margin account provides you the resources to buy more quantities of a stock than you can afford at any point of time. For this purpose, the broker would lend the money to buy shares and keep them as collateral.
In order to trade with a margin account, you are first required to place a request with your broker to open a margin account. This requires you to pay a certain amount of money upfront to the broker in cash, which is called the minimum margin. This would help the broker recover some money by squaring off, should the trader lose the bet and fail to recuperate the money.
Once the account is open, you are required to pay an initial margin (IM), which is a certain percentage of the total traded value pre-determined by the broker.
Before you start trading, you need to remember three important steps. First, you need to maintain the minimum margin (MM) through the session, because on a very volatile day, the stock price can fall more than one had anticipated.
For example, if a Tata Steel stock priced at Rs 400 falls 4.25 per cent and the IM and MM are 8 per cent and 4 per cent of the total value of the shares bought, respectively, then the trade-off 8%-4.25%=3.75% will be less than the MM. In this case, you will either have to give more money to the broker to maintain the margin or the trade will get squared off automatically by the broker.
Secondly, you need to square off your position at the end of every trading session. If you have bought shares, you have to sell them. And if you have sold shares, you will have to buy them at the end of the session.
Thirdly, convert it into a delivery order after trade, in which case you will have to keep the cash ready to buy all the shares you had bought during the session and to pay the broker’s fees and additional charges.
If even one of these steps is missed, the broker will automatically square off the position in the market.
Definition: Stocks that give returns that are several times their costs are called multibaggers. These are essentially stocks that are undervalued and have strong fundamentals, thus presenting themselves as great investment options. Multibagger stock companies are strong on corporate governance and have businesses that are scalable within a short span of time.
Description: A stock that doubles its price is called two-bagger while if the price grows 10-times, it would be called a 10-bagger. Thus, multibaggers are stocks whose prices have risen multiple times their initial investment values.
How to identify multibagger stocks?
1. Debt level of the company should be within reasonable limits: There are no defined levels per se for debt, as it will vary from industry to industry. However, as a ballpark measure, debt should not be more than 30 per cent of the equity value.
2. Check on previous quarter performance: Keep a check on the company’s revenue multiples on a quarter-on-quarter basis. If the multiples are low but the company is performing at the operational level, then that can be a hint that the company has significant upside potential.
3. Sources of earnings: Along with the revenue numbers, check the sources from which the company is making money. Is the primary revenue segment set to grow at the macro level? Are the operations of the company easily scalable? If yes, then the stock may have the potential to be a multibagger.
4. Earnings and price multiples: Calculate the trailing 12-month EPS and revenue to arrive at the current PE and price /sales ratios. If the PE level is growing faster than the stock price, then its chances of being a multibagger are bright.
5. Check out business model/capex/ structural/management changes: Be on the lookout for any major changes in the quarterly results/annual reports that could have significant impact on the company’s operations.