Experimenting with Equity Markets

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The democratization of investing is beautiful—anyone with ₹500 can now own a piece of India’s best companies. But this accessibility is a double-edged sword. The same app that lets you buy blue-chips in seconds also makes it dangerously easy to YOLO your savings into penny stocks at 3 AM. The tools have evolved, but the fundamentals haven’t: know what you own, understand why you own it, and have the patience to let quality compound.

For sure ways to lose money in stock markets

  1. Buying stocks at the wrong time.

  2. Buy high and sell low.

  • Always mix investment with insurance and purchase protection plans like ULIPs, Term Insurance, etc.

Attribution

Before we start, I want to make sure you I am not a SEBI certified analyst or so called ‘expert’ in the stock market from a finance background. I am a software engineer, trying to figure out the stock market, so I don’t have to rely on the mercy of Mutual Fund Houses and other financial institutions. All that I have learned is from my own research(from various sources) and experience(good and bad). Here is a list of resources and tools that I found useful out of all the garbage and scamster.

  • Sources:
  • Tools:

Table of Contents

Basics

Market Session Structure

Daily Trading Schedule:

1. Pre-Opening Session (9:00 AM - 9:15 AM)

  • 9:00 - 9:07: Order Placement Phase - Place your orders
  • 9:08 - 9:11: Order Matching Phase - System matches buy/sell orders
  • 9:12 - 9:15: Buffer Period - Final price stabilization

2. Regular Trading Hours (9:15 AM - 3:30 PM)

  • Main trading window for retail investors
  • All buying and selling happens during this time

3. Post-Market Session (3:30 PM - 4:00 PM)

  • Primarily for brokers to settle trades
  • Limited retail participation

4. After Market Orders - AMO (4:00 PM - 9:00 AM next day)

  • Place orders when markets are closed
  • These orders get queued and execute at 9:15 AM next morning

Note: This 15-minute window absorbs overnight news and prevents wild price swings at market open. It’s like a pressure valve that establishes fair opening prices.

Imagine if markets opened directly at 9:00 AM. Overnight, major news breaks:

  • Company announces fantastic results at 11 PM
  • Or global markets crash while we’re sleeping
  • Or RBI announces surprise rate cut on a weekend/holiday

Without pre-opening, big institutional traders (who monitor news 24/7) place orders instantly at 9:00 AM, while regular retail investors (you and me) are still processing the news. This results in stock opening at extreme price (very high or very low), and by the time you react, the opportunity is gone and you end up buying/selling at unfair prices.

How Pre-Opening saves retail investors

Phase 1: Order Collection (9:00-9:07 AM) Everyone places orders - institutions, retail traders, everyone. No trades execute yet, just orders collected. You have 7 minutes to process overnight news and place your order.

Phase 2: Order Matching (9:08-9:11 AM) System runs an algorithm to find equilibrium price. Calculates: “At what price can maximum shares be traded?” All buy and sell orders are matched at this SINGLE price.

Phase 3: Buffer Period (9:12-9:15 AM) Opening price is displayed but frozen. No new orders can be placed/modified. Everyone can see where market will open.

Outcome: Level playing field - your 9:02 AM order has same priority as institutional order. No one gets advantage, everyone gets same opening price.

Note: Pre-opening is like a “democracy vote” for opening price instead of a “fastest finger first” game. It protects small investors from being at a disadvantage against institutional players with faster systems and 24/7 news monitoring.

Trading Days & Holidays

Markets are OPEN:

  • Monday to Friday (9:15 AM - 3:30 PM)
  • Special Session - Muhurat Trading: Diwali evening (1 hour, around 6-7 PM).
  • Orders placed on weekends/holidays queue as AMO and execute next working day at 9:15 AM.

Markets are CLOSED:

  • Weekends (Saturday & Sunday)
  • National holidays and major festivals (Republic Day, Independence Day, Holi, Diwali, Christmas, etc.)

Settlement Cycle

Indian equity markets operate on a T+1 settlement cycle, where trades execute immediately but settlement occurs one working day later.

Settlement Examples:

  • The “T” stands for Trade date, “+1” means add 1 working day
  • Trade on Monday → Settlement on Tuesday
  • Trade on Friday → Settlement on Monday (skips weekend)

Note: India moved from T+2 to T+1 settlement(and T+0 for select stocks) in January 2023, making it one of the fastest settlement cycles globally. Read more.

Types of Markets

Feature Primary Market Secondary Market
Purpose To raise fresh capital To trade existing securities
Type of Offering IPO (first-time) or FPO (additional capital) Already-listed shares
Transaction Between Company ↔ Investor Investor ↔ Investor
Price Discovery Book-building process Market forces (demand & supply)

Example:

  • Primary Market: Zomato IPO (2021) - Company raised ₹9,375 Cr directly from investors
  • Secondary Market: You buying Zomato shares today on NSE - Money goes to the seller (and not Zomato)

Types of Orders

Order Type What It Is Execution Example When to Use Risk/Note
Market Order Executes immediately at current market price Instant execution, price may vary Reliance at ₹2,500 → Order executes at ₹2,499-₹2,501 Need to enter/exit quickly, can’t miss opportunity Slippage - actual price may differ from screen price in volatile markets
Limit Order You set maximum buy price or minimum sell price Executes ONLY at your price or better TCS at ₹3,500, you place limit at ₹3,450 → Executes only if TCS drops to ₹3,450 or below Patient, want specific price point, not urgent May never execute if price doesn’t reach your limit
Stop Loss Market Safety net - auto sells if price falls to trigger Triggers at set price, sells at current market price Buy at ₹1,600, trigger at ₹1,520 → Hits ₹1,520 → Sells immediately at market Protect from bigger losses, guaranteed exit Execution guaranteed but final price uncertain (could be ₹1,520 or ₹1,515)
Stop Loss Limit Safety net with price range control Triggers at set price, sells only within your price range Trigger ₹95, Limit ₹93 → Hits ₹95 → Sells only between ₹95-₹93 Want loss protection + price control If price crashes past your limit instantly (₹95→₹92), order won’t execute
IOC (Immediate or Cancel) Execute now or cancel completely Executes immediately whatever is available, cancels rest Want to buy 1,000 shares, only 300 available → Gets 300, cancels 700 Don’t want partial fills sitting in order book All-or-nothing execution at current moment
GTC (Good Till Cancelled) Order stays active until filled or manually cancelled Remains in system for days/weeks Place limit order on Monday → Stays active till Friday or until you cancel Long-term price targets, patient investing Remember to cancel manually or it stays indefinitely
Disclosed Quantity Large order showing only small portion to market Shows small quantity, auto-refills as it executes Want 10,000 shares but show only 500 at a time Large orders without moving market price Prevents tipping off other traders about your big position

Price Movements

Gap Opening

Markets rarely open exactly where they closed. After-market orders accumulate overnight, creating supply-demand imbalances.

Gap Up Opening - Opening price exceeds previous close, indicating positive overnight sentiment.

Gap Down Opening - Opening price falls below previous close, signaling negative overnight news.

Circuit Breakers

Price band limits preventing extreme single-day volatility, typically set at 5%, 10%, or 20% bands.

Common Circuit Limits:

  • 5% circuit - Large-cap stocks
  • 10% circuit - Mid-cap stocks
  • 20% circuit - Small-cap and volatile stocks

Market-Wide Circuit Breakers (Index Level)

Beyond individual stocks, NSE and BSE have market-wide circuit breakers that halt ALL trading when indices fall/rise sharply:

Index Circuit Breaker Levels:

Change ffrom Previous Close Action Trading Halt Duration
10% change 🟡 Level 1 Circuit 45 minutes
15% change 🟠 Level 2 Circuit 1 hour 45 minutes
20% change 🔴 Level 3 Circuit Rest of the day

Time-Based Rules:

  • If 10% circuit hit before 1:00 PM → 45-minute halt
  • If 10% circuit hit after 2:30 PM → No halt

Instances when market circuit breakers were hit

2009 Lok Sabha Election Results

  • Impact: SENSEX locked at 14,272.62(+17.24%), NIFTY locked at 4,308.05(+17.33%).
  • Reason: UPA II returned to power with better majority, no longer dependent on the Left.

COVID-19 Crash (March 2020)

  • Impact: SENSEX crashed 13.15%, NIFTY down 12.98%. Level 2 (15%) circuit breaker triggered
  • Reason: Global pandemic panic, nationwide lockdown announced

Harshad Mehta Scam (1992)

  • Impact: SENSEX plunged 12.77%
  • Reason: Securities scam exposure, massive manipulation uncovered

Global Financial Crisis (2008)

  • Impact: 10%+ crashes on multiple days
  • Reason: Lehman Brothers collapse, sub-prime mortgage crisis

Note: Circuit breakers protect the entire market from panic selling or euphoria. They give investors time to think rationally rather than selling/buying in fear. Sharp rallies are often followed by profit-booking by big players at the expense of retail investors.

Face Value vs Market Value

Face Value - Nominal value printed on share certificate, used for dividend calculations and corporate actions.

Market Value - Current trading price determined by supply-demand dynamics.

Example: MRF face value = ₹10, market value = ₹1,55,000+

Corporate Actions

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Historical data of Infosys

The chart above shows Infosys stock price growing from ₹95 to ₹1,500 over 30 years—a 15x return on paper. However, this only reflects price appreciation and ignores the massive impact of corporate actions like stock splits and bonus issues that multiplied shareholders’ actual holdings.

Dividends

It is the distribution of profits to shareholders based on face value (not market value). You can assume this as ‘interest’ earned on your long term investment.

Important Dates:

  • Announcement Date: Corporate action declared
  • Record Date: Shareholders on this date receive benefits
  • Ex-Date: Trades after this date don’t qualify for announced benefits

Stock Split

When the company divides its shares into a larger number of shares, which increases the number of outstanding shares and reduces the price per share. For example, if you have 100 shares of a company @ Rs 50 per share and it splits 1:2. You will now have 200 shares @ Rs 25 per share. This is usually done to make the stock more affordable and attractive to small/retail investors.

Note: Not all companies choose to split shares. MRF, for instance, hasn’t split its stock since 1975—resulting in a current price of ₹1,55,000 per share. This deliberately high price acts as a barrier to speculative trading, attracting only experienced, long-term investors, who aren’t affected by short-term market volatility. This strategy maintains price stability and cultivates an exclusivity around the stock.

Bonus Share

When a company issues additional shares to existing shareholders drawn from accumulated reserves or profits. For example, if you own 100 shares of a company and it declares a 1:1 bonus, you’ll receive 100 additional shares—doubling your holding to 200 shares at no cost. This is typically done to reward loyal shareholders, improve liquidity, and signal strong financial health without affecting the company’s overall market capitalization.

Note: Unlike dividends, bonus shares are tax-free when received(only taxed upon sale). Companies with strong reserves often prefer bonus issues over cash dividends. Indian IT giants like Infosys, TCS, and Wipro have consistently issued bonus shares over decades, significantly multiplying early investors’ holdings.

Effects on dividends

Bonus shares and stock splits multiply the number of shares you own. While individual dividend per share may reduce proportionally, your total dividend income remains the same initially. However, when companies raise dividends in the future, you benefit from a much larger shareholding—turning long term investments into substantial passive income streams over decades.

Now, coming back to the question, how much you would have earned if you had invested ₹4,750 in Infosys at IPO in 1993?

Date Event Ratio Shares Owned
1993 IPO - ₹95/share - 50
1994 Bonus Issue 1:1 100
1997 Bonus Issue 1:1 200
1999 Bonus Issue 1:1 400
1999 Stock Split 2:1 800
2004 Bonus Issue 3:1 3,200
2006 Bonus Issue 1:1 6,400
2014 Bonus Issue 1:1 12,800
2015 Bonus Issue 1:1 25,600
2018 Bonus Issue 1:1 51,200

It would have grown to ₹7.64 Crores - a CAGR of 26% over 32 years. Through 8 bonus issues and 1 stock split, your original 50 shares would have multiplied 1,024 times to 51,200 shares. Beyond capital appreciation, these shares would generate ₹23 Lakhs annually in dividends alone at 2025’s dividend rate of ₹45 per share.

We will cover this in more detail in the next section. But still want to give a reality check - none of us would have the patience to hold on to the stock for 30 years. During the dot-com bubble burst (2000-2002), Infosys crashed to ₹10 along with every other IT stock. Your ₹4,750 investment would’ve been worth barely ₹500. At that moment, watching 90% of your capital evaporate, most of us (myself included) would’ve panicked and exited—booking heavy losses. And then, in classic retail investor fashion, tried to “recover” our capital through intraday trading or F&O, likely losing even more. The 1,024x return looks beautiful in hindsight, but living through those drawdowns? That’s the real test legends pass and most of us fail.

Peter Lynch managed billions for Fidelity with a simple philosophy: invest in what you know. He bought Dunkin’ Donuts because his kids loved it, studied Taco Bell because he noticed long queues. Rakesh Jhunjhunwala (Big Bull of India) bought Titan at ₹3 in 2002-2003 when everyone thought watches were dead (mobile phones showed time). He saw Indians’ love for jewelry and believed in Tanishq’s potential. Held through multiple corrections. Ramdeo Agrawal (Motilal Oswal) identified PI Industries in early 2000s when it was a ₹20 stock. Studied the agrochemicals space, understood the export opportunity, and watched management execution year after year.

Investor Categories

Category Full Form Threshold/Definition Examples
RII Retail Individual Investors Investment < ₹2 lakhs in IPOs You, me, salaried professionals, small traders
HNI High Net Worth Individuals Investment > ₹2 lakhs in IPOs Business owners, wealthy individuals, family offices
DII Domestic Institutional Investors Indian institutions managing pooled money SBI Mutual Fund, LIC, HDFC AMC, ICICI Prudential, UTI
FII/FPI Foreign Institutional/Portfolio Investors International investors bringing foreign capital Government of Singapore, Europacific Growth Fund

Market Capitalization Segments

Market Cap Formula:

Market Capitalization = Total Outstanding Shares × Current Market Price

Classification:

  • Large Caps: Market cap > ₹10,000 crores (Blue-chip companies)
  • Mid Caps: Market cap between ₹500 - ₹10,000 crores
  • Small Caps: Market cap < ₹500 crores

Market Indices

NIFTY (NSE) - Top 50 companies across sectors (National Fifty)

SENSEX (BSE) - Top 30 companies (Sensitivity Index)

SX40 (MSE) - Top 40 companies (Securities Exchange 40)

Free Float Market Cap calculation excludes promoter holdings:

Understanding Free Float Market Cap:

Component Value Explanation
Total Shares 1,00,00,000 All shares issued by company
Promoter Holding 60% Locked with founders/promoters
Public Holding 40% Available for trading
Freely Floating Shares 40,00,000 Only these count
Market Price ₹500 Current trading price
Free Float Market Cap ₹200 Crores 40,00,000 × ₹500

Why it matters:

  • Index calculations use free float, not total market cap
  • More accurate representation of tradable value
  • Promoter shares aren’t available for buying/selling
  • Higher free float = Better liquidity

Short Selling Mechanics

Short selling enables profit from falling prices by selling borrowed shares.

How Short Selling Works:

The Process:

  1. Morning 9:30 AM - You think HDFC Bank (currently ₹1,600) will fall today
  2. You sell first - Sell 1000 shares at ₹1,600 (you don’t own them yet!)
  3. Market falls - Price drops to ₹1,550 by afternoon
  4. You buy back - Buy 1000 shares at ₹1,550
  5. You profit - Sell high (₹1,600), buy low (₹1,550) = ₹50 profit per share(₹50,000 total profit)

Critical Rules:

  • Must square off same day - Buy back before 3:30 PM
  • If you forget - Shares go to auction market (3:30-4:00 PM)
  • Auction consequences:
    • Any loss = You pay
    • Any profit = Goes to IEPF, not you!

When to short sell:

  • You’re bearish (expect market/stock to fall)
  • Only for intraday trading
  • Good for volatile falling markets

Warning: Short selling is risky - losses can be unlimited if stock rises sharply. Don’t try it unless you’re sure about what you’re doing.

Tax Implications

Type Holding Period Tax Rate
LTCG > 1 year 12.5%
STCG ≤ 1 year 20%
Dividend Any Added to income, taxed at slab rate

Analysis Framework

Fundamental Analysis answers: “WHAT to buy?”

What it is: Studying the business, its financials, management, and industry to determine if the company is worth owning.

What it uses:

  • Annual reports and financial statements
  • Balance sheet, P&L, cash flow analysis
  • Financial ratios (Current Ratio, Debt/Equity, ROCE, P/E, P/B, EPS, etc.)
  • Management quality assessment
  • Industry and economy trends

What it determines:

  • Intrinsic value - The true worth of the business
  • Is the company profitable and growing?
  • Is management honest and capable?
  • Does the business have competitive advantages?

When to use:

  • Screening stocks - Finding quality companies worth investing in
  • Finding undervalued gems - Identifying stocks trading below their true value
  • Long-term investing - Building a portfolio for years
  • Wealth creation - Compounding returns over time

Technical Analysis answers: “WHEN to buy?”

What it is: Studying price charts, patterns, and trading volume to identify the right time to enter or exit positions.

What it uses:

  • Price charts (candlesticks, patterns, trends)
  • Technical indicators (SMA, EMA, MACD, RSI)
  • Volume analysis
  • Support and resistance levels

What it determines:

  • Market sentiment - Are buyers or sellers in control right now?
  • Is the stock in uptrend, downtrend, or sideways?
  • Where are the key support/resistance levels?
  • What’s the optimal entry and exit price?

When to use:

  • Timing your entry/exit - Getting the best price for buying/selling
  • Riding momentum - Catching stocks in strong trends
  • Risk management - Setting precise stop loss levels
  • Short-term trading - Intraday or swing trading strategies

The Power of Technical Analysis:

Advantage #1: Works on ANY Stock

  • Don’t need to understand the business deeply
  • Can trade sectors you’re not expert in
  • Even works on stocks with no fundamentals (penny stocks, momentum plays)

Advantage #2: Faster Decisions

  • Fundamental analysis takes hours/days (reading annual reports, calculating ratios)
  • Technical analysis takes minutes (check chart, indicators, volume)
  • Perfect for part-time investors with day jobs

Advantage #3: Clear Entry/Exit Rules

  • Fundamentals say “TCS is a good company” but don’t tell you when to buy
  • Technicals say “Buy TCS at ₹3,450 support, sell at ₹3,650 resistance” - Specific!

Advantage #4: Risk Management

  • Fundamentals can’t tell you where to place stop loss
  • Technicals give you exact levels based on support zones

Advantage #5: Works in Bear Markets Too

  • Fundamental investors struggle when everything falls
  • Technical traders can short sell and profit from falling prices

The BEST Approach: Combine Both!

Step Use Reason
Step 1 Fundamental Analysis Find 10-15 quality stocks worth owning
Step 2 Technical Analysis From those 10-15, pick ones showing bullish chart patterns
Step 3 Buy with technical entry Get best price using support levels
Step 4 Hold with fundamental confidence Don’t panic on small dips, business is strong

Real Example:

Asian Paints Analysis:

  • ✅ Fundamental Check: ROCE 35%, debt-free, consistent profit growth → Quality stock
  • ⚠️ Current Price: ₹3,200
  • 📉 Technical Check: Stock in downtrend, 5 EMA below 13 EMA, breaking support
  • Decision: Good company, WRONG time. Wait for uptrend reversal.
  • Action: Add to watchlist, buy when chart turns bullish (maybe at ₹2,900 support)

The Mistake Most Investors Make:

  • Buying fundamentally strong stocks at technically wrong levels
  • Result: Stuck in losses for months even though company is great
  • Solution: Use fundamentals to pick stocks, technicals to time entries

Fundamental Analysis: Understanding Business Value

1. Quantitative Analysis (Number-driven)

  • Economy Analysis - Is the overall economy growing?
  • Industry Analysis - Is the sector doing well?
  • Company Analysis - Are the company’s numbers strong?

2. Qualitative Analysis (Quality-driven)

  • Management Analysis - Is the leadership honest and capable?

Financial Statements Deep Dive

Annual reports contain comprehensive business information through standardized financial statements:

1. Balance Sheet Structure

The Balance Sheet Equation: Assets = Liabilities + Equity

Left Side - What the Company OWNS (Assets):

Non-Current Assets (Long-term, can’t convert to cash quickly)

  • Fixed Assets: Land, buildings, machinery
  • Intangible Assets: Patents, trademarks, goodwill
  • Long-term Investments: Shares in other companies

Current Assets (Short-term, can convert to cash within a year)

  • Inventories: Goods ready to sell
  • Trade Receivables: Money customers owe you
  • Cash & Cash Equivalents: Bank balance
  • Short-term Investments: FDs, liquid funds

Right Side - What the Company OWES + OWNS (Liabilities + Equity):

Shareholder’s Funds (Owner’s money)

  • Share Capital: Initial investment by shareholders
  • Reserves & Surplus: Accumulated retained profits

Non-Current Liabilities (Long-term debt, payable after 1 year)

  • Long-term loans, debentures, bonds

Current Liabilities (Short-term debt, payable within 1 year)

  • Trade Payables: Money you owe suppliers
  • Short-term loans and dues

Key Balance Sheet Terms:

Shareholder’s Funds (Equity) - Owners’ capital investment forming the foundation.

Reserves & Surplus - Retained profits reinvested rather than distributed, including:

  • General Reserves
  • Retained Earnings
  • Securities Premium

Non-Current Liabilities - Debt payable beyond one year (debentures, long-term loans).

Critical Warning: If loan funds significantly exceed equity, extreme caution required. Historical disasters: Jet Airways, Suzlon, Reliance Communications.

2. Profit & Loss Statement

The P&L Waterfall (Example with ₹100 Crores revenue):

Step Description Amount (₹ Cr)
Sales/Revenue Total money earned 100
Less: Operating Costs Raw materials, salaries, rent -60
= EBITDA Operating profit before interest, tax, depreciation 40
Less: Depreciation & Amortization Asset value reduction -10
= EBIT Earnings before interest and tax 30
Less: Interest Expense Loan interest payments -10
= PBT Profit before tax 20
Less: Tax (30%) Government’s share -6
= PAT (Net Profit) Final profit shareholders get 14

Key Terms Explained:

  • EBITDA - Core business profitability (most important for operations)
  • EBIT - Operating profit after accounting for asset depreciation
  • PBT - Profit before paying taxes
  • PAT - The bottom line - actual profit available to shareholders

3. Cash Flow Statement Components

Operating Activities - Cash from core business operations

  • Negative = Core business burning cash (danger signal)
  • Positive = Healthy operational cash generation

Investing Activities - Capital expenditure and asset sales

  • Negative = More investments than divestments (often positive signal)
  • Positive = Asset liquidation (context-dependent)

Financing Activities - Debt, equity, and dividend transactions

  • Negative = Debt repayment or dividend distribution
  • Positive = Fresh borrowing or equity raising

Important Financial Ratios

1. Current Ratio - Liquidity Assessment

Formula: Current Ratio = Current Assets ÷ Current Liabilities

What it measures: Can the company pay its short-term bills?

Example Calculation:

Item Amount (₹ Cr)
Current Assets (cash, inventory, receivables) 200
Current Liabilities (short-term dues) 100
Current Ratio 2.0

Interpretation Guide:

Ratio Status Meaning
≥ 2.0 ✅ Excellent ₹2 of assets for every ₹1 liability - Very healthy
1.0-2.0 ⚠️ Adequate Can pay bills but monitor closely
< 1.0 ❌ Danger Not enough assets to pay liabilities - Red flag!

Real-world example:

  • Company has ₹200 Cr in current assets
  • Owes ₹100 Cr in short-term liabilities
  • Current Ratio = 200/100 = 2.0 ✅
  • Interpretation: Company can comfortably pay all short-term dues

Why 2:1 is ideal: Provides safety buffer. Even if assets lose 50% value, company can still pay all bills.

2. Debt to Equity Ratio - Leverage Analysis

Formula: Debt to Equity = Long-term Debt ÷ (Share Capital + Reserves)

What it measures: How much the company relies on borrowed money vs owner’s money

Example Calculation:

Component Amount (₹ Cr)
Long-term Debt 150
Share Capital 100
Reserves & Surplus 400
Total Equity 500
Debt to Equity Ratio 0.30 (or 0.3:1)

Interpretation Guide:

Ratio Status Meaning
0 ⭐ Best Completely debt-free - No financial stress
< 1 ✅ Good Conservative - More equity than debt
1-2 ⚠️ Caution Moderate leverage - Monitor carefully
> 2 ❌ Danger High risk - Debt is 2x the equity!

Why it matters:

  • High debt = High interest payments
  • Economic slowdown → Can’t pay loans → Bankruptcy risk
  • Remember: Jet Airways, Suzlon had debt/equity > 3!

Sector exceptions: Banks and NBFCs naturally have high debt (it’s their business model), so ignore this ratio for financial companies.

3. Return on Capital Employed (ROCE)

Formula: ROCE = (EBIT ÷ Capital Employed) × 100

Capital Employed = Share Capital + Reserves + Long-term Debt

What it measures: How efficiently is the company using its capital to generate profits?

Example Calculation:

Component Amount (₹ Cr)
EBIT (Operating Profit) 300
Share Capital 200
Reserves & Surplus 800
Long-term Debt 500
Capital Employed 1,500
ROCE 20%

Interpretation Guide:

ROCE Rating Meaning
≥ 20% ⭐ Excellent Every ₹100 invested generates ₹20+ profit
15-20% ✅ Good Strong performance, competitive advantage
10-15% ⚠️ Average Okay but nothing special
< 10% ❌ Poor Inefficient capital use - Look elsewhere

Why it matters:

  • Compares profit generation across different capital structures
  • Higher ROCE = Better management efficiency
  • Always compare with industry average and competitors
  • Asian Paints has ROCE ~35%, cement companies ~15-18%

4. Free Cash Flow - Cash Generation Power

Formula: Free Cash Flow = Operating Cash Flow - Net Capital Expenditure

What it measures: Real cash left after running and maintaining the business

Example Calculation:

Component Amount (₹ Cr)
Operating Cash Flow 500
Capital Expenditure (purchases) 350
Sale of Assets 50
Net CapEx 300
Free Cash Flow 200 ✅

Multi-Year Trend Analysis:

Year FCF (₹ Cr) Status
2020 -100 Negative
2021 -50 Negative
2022 -80 Negative ❌
2023 20 Positive
2024 150 Positive

Interpretation:

  • 3+ consecutive negative years = ❌ DANGER - Business burning cash
  • 1-2 negative years = ⚠️ CAUTION - Monitor closely
  • Consistently positive = ✅ Healthy cash generation

Why FCF matters:

  • Profit can be manipulated, but cash flow doesn’t lie
  • Negative FCF = Company needs external funding to survive
  • Positive FCF = Can pay dividends, reduce debt, or expand
  • Growth companies may have negative FCF temporarily (expansion phase)

5. Inventory Turnover Ratio

Formula: Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

What it measures: How many times inventory is sold and replaced in a year

Example Calculation:

Component Amount (₹ Cr)
Cost of Goods Sold (Annual) 800
Average Inventory 100
Inventory Turnover 8 times/year
Days to Sell Inventory 45 days

What it means: The company sells and replaces its entire inventory 8 times in a year, or every 45 days.

Sector Benchmarks:

Industry Typical Turnover Why?
FMCG 12-20 times Fast-moving, perishable goods
Retail 8-12 times Regular stock rotation
Automobile 6-10 times Moderate turnover
Heavy Equipment 2-4 times Slow-moving, expensive items

Interpretation:

  • Higher turnover = Goods sell quickly, less capital stuck
  • Lower turnover = Inventory piling up, potential obsolescence risk
  • Compare ONLY within same sector
  • Increasing trend over years = ✅ Good
  • Declining trend = ⚠️ Demand issues or poor management

6. Reserves & Surplus Growth

What it measures: Is the company consistently retaining and growing profits year-over-year?

Formula: Track absolute reserves value over 5+ years

5-Year Trend Example:

Year Reserves (₹ Cr) Year-on-Year Growth
2020 1,000 -
2021 1,180 +18%
2022 1,350 +14.4%
2023 1,550 +14.8%
2024 1,780 +14.8%
Average Growth   15.5% ✅

Interpretation Guide:

Average Growth Status Meaning
> 15% ⭐ Excellent Strong profit retention and reinvestment
5-15% ✅ Good Steady growth, healthy business
0-5% ⚠️ Moderate Slow growth, investigate why
Negative ❌ Concern Losses or excessive dividends

Why it matters:

  • Growing reserves = Company keeping profits for expansion
  • Declining reserves = Warning sign - losses or cash distribution
  • Consistent growth over 5+ years = Quality compounding business
  • Compare trend, not absolute value

Red flag: If reserves decline while profit is positive, where’s the money going?

7. Price to Earnings (P/E) Ratio

Formula: P/E Ratio = Market Price per Share ÷ Earnings Per Share (EPS)

What it measures: How much you’re paying for each rupee of company earnings

Example Calculation:

Component Value
Market Price per Share ₹1,500
Earnings Per Share (EPS) ₹100
P/E Ratio 15

What it means: You’re paying ₹15 for every ₹1 of annual earnings

Comparative Analysis (Example: IT Sector):

Company P/E Industry Avg Verdict
Company A 15 22 Cheaper than industry
Company B 28 22 Expensive vs industry
Company C 12 22 Very cheap - WHY?

CRITICAL: Always Compare with Industry, Not Absolute Numbers

Interpretation Framework:

Scenario 1: Low P/E + Strong Fundamentals (all 7 ratios good)

  • Verdict: ✅ OPPORTUNITY - Undervalued gem

Scenario 2: Low P/E + Weak Fundamentals (poor ratios)

  • Verdict: ❌ VALUE TRAP - Cheap for a reason

Scenario 3: High P/E + Strong Fundamentals

  • Verdict: ⚠️ Fairly valued or expensive - Market expects growth

Why P/E is the LAST ratio to check:

  • First verify business quality (ratios 1-6)
  • Then check if price is reasonable (P/E)
  • Low P/E alone means NOTHING without context

8. Earnings Per Share (EPS)

Formula: EPS = Profit After Tax (PAT) ÷ Total Outstanding Shares

What it measures: Company’s profit allocated to each share

Example Calculation:

Component Value
Profit After Tax (PAT) ₹1,400 Cr
Total Outstanding Shares 140 Cr shares
EPS ₹10 per share

5-Year EPS Growth Tracking:

Year EPS (₹) Growth %
2020 50 -
2021 58 +16%
2022 65 +12%
2023 75 +15%
2024 87 +16%
CAGR   14.8% ✅

Interpretation Guide:

EPS Trend Status Meaning
Consistently growing ⭐ Excellent Quality business, increasing profits
Stable/flat ⚠️ Moderate No growth, mature business
Declining ❌ Red Flag Falling profitability
Volatile ⚠️ Caution Inconsistent, risky business

Why EPS matters:

  • Direct indicator of per-share profitability
  • Growing EPS → Stock price usually follows up
  • Declining EPS → Even if cheap, avoid!
  • Check 5-year trend, not just one year

Watch out for: EPS can increase artificially through share buybacks (reducing denominator). Check if PAT is also growing!

Stock Valuation: EV/EBITDA Method

Enterprise Value to EBITDA is a popular valuation method used to calculate fair value of stocks.

Step-by-Step Valuation Process:

Step 1: Gather Historical Data (Go to MoneyControl → Ratios → Valuation)

Year EV (₹ Cr) EV/EBITDA EBITDA (Calc) Growth %
2020 50,000 18.5 2,703 -
2021 58,000 19.2 3,021 +11.8%
2022 65,000 18.8 3,457 +14.4%
2023 72,000 19.0 3,789 +9.6%
2024 80,000 18.5 4,324 +14.1%

Step 2: Calculate EBITDA for each year

  • Formula: EBITDA = EV ÷ EV/EBITDA ratio
  • Example 2024: 80,000 ÷ 18.5 = 4,324

Step 3: Determine Average EBITDA Growth

  • Average of growth rates = (11.8 + 14.4 + 9.6 + 14.1) ÷ 4 = 12.5% average growth

Step 4: Forecast Next Year EBITDA

  • Expected EBITDA (2025) = 4,324 × (1 + 0.125) = 4,865 Cr

Step 5: Calculate Forecasted Enterprise Value

  • Forecasted EV = Expected EBITDA × Current EV/EBITDA
  • Forecasted EV = 4,865 × 18.5 = 90,000 Cr

Step 6: Adjust for Debt to Get Equity Value

  • Equity Value = Forecasted EV - Total Debt
  • Equity Value = 90,000 - 15,000 = 75,000 Cr

Step 7: Calculate Target Price

  • Target Price = Equity Value ÷ Outstanding Shares
  • Target Price = 75,000 Cr ÷ 10 Cr shares = ₹750 per share

Step 8: Entry Price with Margin of Safety (30% discount)

  • Recommended Entry = Target Price × 0.70
  • Recommended Entry = 750 × 0.70 = ₹525

Final Verdict:

  • Target Price: ₹750
  • Buy if below: ₹525 (30% margin of safety)
  • Current Price: ₹600 → BUY (below ₹750, room for upside)

Sector-Specific Analysis

Different industries require tailored analytical approaches:

Banks & NBFCs

Standard ratios DON’T apply to banks - Don’t check Debt:Equity ratio or operating cash flows. Instead focus on:

Banking-Specific Metrics:

1. CASA Ratio (Current Account + Savings Account)

Metric Formula Good Value Why It Matters
CASA Ratio (CA + SA) ÷ Total Deposits × 100 > 40% Low-cost deposits = Higher profit margins

Example: HDFC Bank CASA ~45% (Excellent), Small bank CASA ~25% (Poor)

2. NIM (Net Interest Margin)

Metric Formula Good Value Meaning
NIM (Interest Income - Interest Expense) ÷ Earning Assets × 100 > 3% Spread between lending and borrowing rates

Higher NIM = Bank earns more on each rupee lent

3. NPA Ratio (Non-Performing Assets)

NPA Level Ratio Status Action
Excellent < 2% ✅ Strong asset quality
Acceptable 2-3% ⚠️ Monitor trend
Poor 3-5% ❌ High risk
Dangerous > 5% 🚫 Avoid

NPA = Loans not being repaid → Lower profits → Avoid banks with rising NPAs

FMCG Companies

Focus on inventory turnover - fast-moving goods should have high turnover ratios (8x+ annually).

Telecom Sector

Key Metric: ARPU (Average Revenue Per User)

Formula: ARPU = Total Revenue ÷ Total Subscribers

Example Calculation:

Metric Value
Monthly Revenue ₹10,000 Crores
Active Subscribers 35 Crore users
ARPU ₹286/month/user

Why ARPU Matters:

  • Rising ARPU = Company increasing prices OR customers using more services
  • Falling ARPU = Price war OR customers downgrading plans
  • Compare quarter-over-quarter trends

Real Example:

  • Jio ARPU: ₹175/month (rising trend = good)
  • Airtel ARPU: ₹200/month (rising trend = excellent)

Infrastructure Companies

Key Metric: Order Book Analysis

Order book = Confirmed future projects/orders yet to be executed

Formula: Order Book to Revenue Ratio = Current Order Book ÷ Annual Revenue

Example:

Metric Amount (₹ Cr)
Current Order Book 60,000
Annual Revenue 20,000
Ratio 3.0

Interpretation:

Ratio Status Meaning
≥ 3 ⭐ Excellent 3+ years of revenue visibility
2-3 ✅ Good 2-3 years secured orders
1-2 ⚠️ Moderate Limited visibility, needs new orders
< 1 ❌ Poor Less than 1 year work, risky

Why it matters:

  • Infrastructure projects take years to complete
  • Higher order book = Predictable future revenue
  • L&T typically maintains 2.5-3x order book

Industry & Economy Analysis

Economic Indicators Impact

GDP Growth - Aggregate economic output affecting overall market sentiment.

Repo Rate - RBI’s lending rate to banks influencing borrowing costs.

The Domino Effect of Repo Rate Increase:

  1. RBI increases Repo Rate (e.g., from 6% to 6.5%) ↓
  2. Banks increase lending rates (home loans, business loans become expensive) ↓
  3. Companies borrow less (expansion plans delayed) ↓
  4. Production decreases (less capacity addition) ↓
  5. GDP growth slows (economy cools down) ↓
  6. Stock market falls (negative sentiment)

Impact: Repo rate hike = Generally negative for stock markets Exception: Banking stocks may benefit (higher lending margins)

CRR (Cash Reserve Ratio) - Percentage of deposits banks must maintain with RBI.

SLR (Statutory Liquidity Ratio) - Percentage banks must keep in liquid assets.

Monetary Policy Impact on Markets:

Factors Tightening Impact Level Market Sentiment Action
2-3 factors (CRR + SLR + Repo) Strong ❌ Negative Be cautious, book profits
1 factor Moderate ⚠️ Neutral Sector-specific impact
0 factors (cuts instead) Accommodative ✅ Positive Good time to invest

Balance of Payments (BoP)

Formula: BoP = Exports - Imports

Scenario Analysis:

Surplus BoP (Exports > Imports):

  • Status: ✅ Trade Surplus
  • Forex Impact: Rising foreign currency reserves
  • Currency: Rupee strengthens
  • Market Sentiment: Bullish for equity markets
  • Example: India exports $50B, imports $45B → $5B surplus

Deficit BoP (Imports > Exports):

  • Status: ❌ Trade Deficit
  • Forex Impact: Depleting reserves
  • Currency: Rupee weakens
  • Market Sentiment: Cautious, potential FII outflows
  • Example: India exports $40B, imports $55B → $15B deficit

Why it matters: Sustained deficits lead to rupee depreciation → Higher inflation → RBI forced to raise rates → Negative for markets

Cyclical Industries

Industries performing strongly during economic booms but struggling in recessions:

  • Automobiles
  • Real Estate
  • Infrastructure
  • Consumer Durables

Investment Strategy: Buy during recession lows, sell during boom peaks.

Management Quality Assessment

Quantitative metrics alone insufficient - qualitative management analysis critical:

Due Diligence Checklist:

1. Background Verification

  • Google search: “[Company Name] + fraud” or “+ scam” or “+ cases”
  • Check LinkedIn profiles of CEO, CFO, MD
  • Verify educational credentials and past experience
  • Research track record at previous companies
  • Any past failures or regulatory issues?

2. Annual Report Deep Dive

  • Read Management Discussion & Analysis (MD&A) section
  • Understand future projects and strategic vision
  • Check for penalties and regulatory actions disclosed
  • Scrutinize Related Party Transactions (RPTs)
    • High RPTs = Red flag (promoters doing self-dealing)

3. Auditor’s Report (First 3 pages of Annual Report)

  • Look for phrase “True and Fair View” = Clean report
  • Read Key Audit Matters (KAM) - Areas of concern
  • Check for “Going Concern” issues
  • Any Qualified Opinion = Major red flag, avoid!

4. Shareholding Pattern

  • Promoter holding trends:
    • Increasing = Good (confidence in business)
    • Decreasing = Warning (promoters exiting?)
  • Pledged shares:
    • < 10% = Acceptable
    • 20-50% = Caution

    • 50% = Danger (promoters need cash badly)

  • Check for insider trading charges
  • Monitor bulk deals by promoters (selling or buying?)

5. Investor Communications

  • Read quarterly earnings call transcripts
  • How does management respond to tough questions?
  • Do they provide clear guidance or dodge questions?
  • Compare past promises vs actual delivery

Management Red Flags Checklist:

Red Flag Threshold Severity What It Means
Promoter selling heavily > 5% reduction/year 🚩 High Loss of confidence in business
High pledged shares > 50% pledged 🚩 High Desperate for cash, bankruptcy risk
Frequent auditor changes > 1 change in 5 years 🚩 Medium Trying to hide something?
Qualified audit opinion Any qualification 🚩 Critical AVOID immediately!
Insider trading cases Any cases 🚩 High Unethical management
High Related Party Transactions > 20% of revenue 🚩 Medium Self-dealing, siphoning money
Excessive mgmt compensation > 10% of profits 🚩 Medium Enriching themselves

Decision Matrix:

Red Flags Count Verdict Action
3 or more ❌ AVOID Don’t invest, too risky
1-2 flags ⚠️ INVESTIGATE Dig deeper, understand context
0 flags ✅ CLEAN Green signal for management quality

Real Examples:

  • Yes Bank: Multiple red flags ignored → Collapsed
  • Satyam: Qualified audit opinion → Massive fraud
  • Jet Airways: High debt + pledged shares → Bankruptcy

Consolidated vs Standalone Financials

Standalone Financial Statements - Parent company only (head office + domestic/international branches)

Consolidated Financial Statements - Includes:

  • Parent company
  • Subsidiary companies (>50% ownership)
  • Associate companies (20-50% ownership)
  • Joint ventures

Analysis Tip: Always analyze consolidated statements for complete business picture, especially for holding companies with significant subsidiaries.

Technical Analysis: Timing Your Entries

While fundamental analysis answers “What to buy?”, technical analysis answers “When to buy?”

Core Principles:

  1. Price Discounts Everything - All information reflected in price
  2. History Repeats Itself - Patterns recur due to human psychology
  3. Trends Exist - Prices move in identifiable directions

Candlestick Charting

Modern technical analysis relies on candlestick charts visualizing four key price points:

Candlestick Anatomy:

        │ ← Upper Shadow (High rejection)
        │
    ┌───────┐
    │       │ ← Body (Open to Close)
    │ BODY  │  
    │       │
    └───────┘
        │
        │ ← Lower Shadow (Low rejection)

Four Key Prices:

  1. Open - Price at market open (9:15 AM)
  2. High - Highest price during the day
  3. Low - Lowest price during the day
  4. Close - Price at market close (3:30 PM)

Green/White Candle (Bullish):

  • Close > Open
  • Indicates buying pressure
  • Bulls dominated the session

Red/Black Candle (Bearish):

  • Open > Close
  • Indicates selling pressure
  • Bears dominated the session

Reading Candlesticks:

Candle Type Condition Color Meaning
Bullish Close > Open 🟢 Green Buyers dominated, price rose
Bearish Open > Close 🔴 Red Sellers dominated, price fell
Doji Close = Open ⚪ Neutral Indecision, equal buyers/sellers

Example Analysis:

Strong Bullish Candle:

  • Open: ₹1,000
  • High: ₹1,100
  • Low: ₹990
  • Close: ₹1,095
  • Body: ₹95 (large green body)
  • Upper Shadow: ₹5 (small rejection at top)
  • Lower Shadow: ₹10 (buyers stepped in quickly)
  • Interpretation: Strong buying pressure, bulls in control

Body Strength:

  • Large body (>70% of range) = Strong conviction
  • Medium body (40-70%) = Moderate movement
  • Small body (<40%) = Weak, indecisive

Trend Identification

Uptrend - Series of higher highs and higher lows

Price going UP ↗
         H3 (Higher High)
        /
   H2  /
   /  /
  / L2 (Higher Low)
 /  
H1  
L1

Visual: Each peak is higher than the previous, each valley is higher than the previous

Downtrend - Series of lower highs and lower lows

Price going DOWN ↘
H1
 \  
  H2 (Lower High)
   \ 
   L1
    \
     H3
      \
       L2 (Lower Low)

Visual: Each peak is lower than the previous, each valley is lower than the previous

Sideways/Ranging - Horizontal price movement within bounds

Resistance ────────────────
         ↕️ Range
Support  ────────────────

Visual: Price bounces between support and resistance, no clear direction

How to Identify Trends:

Check Last 5-10 Candles:

Pattern Observed Trend Trading Action
Higher highs + Higher lows ✅ UPTREND Buy on dips to support
Lower highs + Lower lows ❌ DOWNTREND Avoid or short sell
Highs & lows in same range ⚠️ SIDEWAYS Wait for breakout

Example:

Last 5 Days Data:

Day High Low Assessment
Day 1 ₹100 ₹95 Starting point
Day 2 ₹105 ₹98 Higher high, higher low ✓
Day 3 ₹108 ₹102 Higher high, higher low ✓
Day 4 ₹112 ₹105 Higher high, higher low ✓
Day 5 ₹115 ₹108 Higher high, higher low ✓

Verdict: Clear UPTREND → Consider buying on dips

Trading Rules:

  • Never sell in an uptrend
  • Never buy in a downtrend
  • Never trade in sideways trend - wait for breakout

Support and Resistance Levels

Support - Price level where buying interest prevents further decline

Resistance - Price level where selling pressure prevents further rise

How to Find Support & Resistance:

Step 1: Look for Reversals

  • Support = Price bounces UP from a level multiple times
  • Resistance = Price bounces DOWN from a level multiple times

Visual Example:

₹550 ──────  Resistance (price can't break above)
     ↓ ↓ ↓
₹500 ─────── Current Price
     ↑ ↑ ↑
₹450 ──────  Support (price bounces up from here)

Finding Levels on Chart:

Price Level Touches Type Strength
₹1,200 3 times, bounced down Resistance Strong
₹1,100 5 times, bounced up Support Very Strong
₹1,050 2 times, bounced up Support Moderate

More touches = Stronger level

Breakout Analysis:

Event Volume Signal Action
Price crosses resistance UP High volume ✅ Breakout Confirmed Buy signal
Price crosses resistance UP Low volume ⚠️ False breakout likely Wait
Price crosses support DOWN High volume ❌ Breakdown Confirmed Sell/Exit
Price crosses support DOWN Low volume ⚠️ False breakdown Monitor

Role Reversal:

  • Broken resistance becomes new support
  • Broken support becomes new resistance

Example: Stock at ₹100 resistance, breaks to ₹110. Now ₹100 acts as support!

Multi-Timeframe Analysis

The Father-Son-Grandson Analogy:

  • Monthly Chart = Grandfather (long-term direction)
  • Weekly Chart = Father (medium-term trend)
  • Daily Chart = Son (entry/exit timing)

Strategy Decision Matrix:

Monthly Weekly Daily Signal Action
UP UP UP ⭐ STRONG BUY All timeframes aligned - Highest probability
DOWN DOWN DOWN ❌ STRONG SELL All bearish - Stay away
UP UP DOWN ✅ BUY ON DIP Short-term pullback in uptrend - Good entry
UP DOWN DOWN ⚠️ WAIT Monthly positive but weakness appearing
DOWN UP UP ⚠️ RISKY Dead cat bounce? Be cautious
Mixed Mixed Mixed 🚫 NO TRADE Conflicting signals - Stay out

Example Scenario:

Stock: TCS

  • Monthly Chart: Clear uptrend (higher highs, higher lows)
  • Weekly Chart: Uptrend continuing
  • Daily Chart: Small correction/dip

Verdict: BUY ON DIP - Use daily dip as entry point in strong long-term uptrend

Why it works: Aligning timeframes increases probability - you’re buying in the direction of the bigger trend.

Bullish Candlestick Patterns

1. Bullish Engulfing

Day 1: Small Red Candle
Day 2: Large Green Candle completely engulfing Day 1

     ┌────┐
     │    │  ← Green candle
  ┌──┤    │
  │  │    │
  └──┤    │
     └────┘

Most powerful at downtrend bottom signaling reversal.

2. Morning Star

Three-candle pattern at downtrend bottom:

Day 1: Large Red Candle
Day 2: Small Doji (indecision)
Day 3: Large Green Candle

  ┌──┐
  │  │          ┌────┐
  │  │   ──     │    │
  │  │          │    │
  └──┘          └────┘

3. Hammer

Long lower shadow (2-3x body length)
Little/no upper shadow
Forms at downtrend bottom

     ┌─┐
     └─┘
      │
      │  ← Long shadow
      │

Hammer Identification:

Requirements:

  1. Lower shadow = 2-3x the body length
  2. Little to no upper shadow
  3. Color doesn’t matter
  4. Must appear at BOTTOM of downtrend

Example:

  • Body (Open to Close): ₹20 range
  • Lower Shadow: ₹60 range (3x body) ✓
  • Upper Shadow: ₹2 (negligible) ✓
  • Location: Bottom of downtrend ✓
  • Next candle: Green confirmation ✓

Verdict: Valid HAMMER → Bullish reversal signal

Important Distinction:

Pattern Location Signal
Hammer Bottom of downtrend Bullish reversal
Hanging Man Top of uptrend Bearish reversal

Same shape, different meaning based on location!

4. Inverted Hammer

Long upper shadow (2-3x body)
Little/no lower shadow
At downtrend bottom

      │
      │  ← Long upper shadow
      │
     ┌─┐
     └─┘

Bearish Candlestick Patterns

1. Bearish Engulfing

Large red candle completely engulfing previous green candle, most powerful at uptrend peaks.

2. Evening Star

Three-candle pattern at uptrend top:

Day 1: Large Green Candle
Day 2: Small Doji (indecision)
Day 3: Large Red Candle

3. Shooting Star

Inverted Hammer at uptrend top = Bearish reversal

      │  ← Rejection of higher prices
      │
     ┌─┐
     └─┘

Technical Indicators

Moving Averages

Moving Averages - Smooth price data to identify trends

Two Types:

1. SMA (Simple Moving Average)

  • Gives equal weight to all prices in the period
  • Smoother but slower to react to price changes
  • Good for identifying long-term trends

2. EMA (Exponential Moving Average)

  • Gives more weight to recent prices
  • Reacts faster to price changes
  • Better for short-term trading signals

Standard EMA Periods:

Timeframe Short EMA Medium EMA Long EMA
Daily Chart 5 days 13 days 26 days
Weekly Chart 5 weeks 13 weeks 26 weeks
Monthly Chart 5 months 13 months 26 months

Trading Signals:

EMA Position Signal Type Action
5 EMA crosses above 13 EMA 🟡 Anticipatory BUY Early buy signal
5 EMA above both 13 & 26 EMA ✅ Confirmation BUY Strong buy signal
5 EMA crosses below 13 EMA 🟡 Anticipatory SELL Early sell signal
5 EMA below both 13 & 26 EMA ❌ Confirmation SELL Strong sell signal
EMAs tangled/mixed ⚠️ NO SIGNAL Stay out, wait for clarity

Visual Example:

Price Chart:
     /  ← 5 EMA (fastest, hugs price closely)
    / /  ← 13 EMA (medium speed)
   / /   
  / / /  ← 26 EMA (slowest, smooth)
 / / /

When 5 EMA crosses above 13 EMA = Bulls taking control → Buy signal When 5 EMA crosses below 13 EMA = Bears taking control → Sell signal

Note: Moving averages are lagging indicators - they confirm trends after they’ve started, not predict them.

MACD (Moving Average Convergence Divergence)

MACD Components:

1. MACD Line (Blue) = 12-day EMA minus 26-day EMA 2. Signal Line (Orange) = 9-day EMA of MACD line 3. Histogram (Bars) = Difference between MACD and Signal line

How to Read MACD:

Event Meaning Signal
MACD crosses above Signal line Bullish momentum building BUY
MACD crosses below Signal line Bearish momentum building SELL
MACD > 0 + Histogram growing Strong bullish momentum Hold/Buy more
MACD < 0 + Histogram shrinking Strong bearish momentum Sell/Avoid
Histogram near zero Low momentum, indecision Wait

MACD Interpretation Guide:

MACD Reading Histogram Meaning Action
MACD > 0 Increasing Strong bullish momentum Hold/Buy
MACD > 0 Decreasing Weakening but still positive Be alert
MACD < 0 Decreasing Strong bearish momentum Avoid/Sell
MACD < 0 Increasing Weakness reducing Possible reversal soon

Divergence Signals (Advanced):

Bearish Divergence:

  • Price makes new HIGH
  • MACD makes lower HIGH
  • Signal: Momentum weakening → Sell warning

Bullish Divergence:

  • Price makes new LOW
  • MACD makes higher LOW
  • Signal: Momentum strengthening → Buy potential

Real Example:

  • Stock rises from ₹100 → ₹120 → ₹130
  • MACD: 2.5 → 2.0 → 1.5 (decreasing despite price rising)
  • Warning: Price up but momentum down → Reversal coming!

Volume Analysis

Volume confirms or denies price movements - Never trade without checking volume!

The Volume Confirmation Matrix:

Price Movement Volume Signal Interpretation Action
⬆️ Rising 📊 High (>50% above 5-day avg) ✅ STRONG BUY Smart money accumulating Buy confidently
⬆️ Rising 📉 Low (below average) ⚠️ WEAK RALLY Suspect move, may reverse Be cautious
⬇️ Falling 📊 High (>50% above avg) ❌ STRONG SELL Smart money distributing Exit positions
⬇️ Falling 📉 Low (below average) ⚠️ WEAK DECLINE May reverse soon Don’t panic sell
Flat Normal 🟰 NEUTRAL No clear signal Wait and watch

How to Check Volume:

  1. Look at volume bars below price chart
  2. Compare today’s volume with previous 5-day average
  3. Volume surge = Today’s volume > 1.5x average (50% higher)

Example:

  • Last 5 days average volume: 10 lakh shares/day
  • Today’s volume: 18 lakh shares (1.8x average) ✓ Volume surge!
  • Price: Rose 3%
  • Verdict: Strong buy signal - Institutions accumulating

Remember: Price can be manipulated, volume harder to fake. Trust moves with volume!

Practical Trading Framework

Combining ALL Indicators for Best Results:

Step-by-Step Analysis Checklist:

1. ✅ Identify Trend

  • Check last 5-10 candles
  • Determine: Uptrend / Downtrend / Sideways

2. ✅ Mark Support & Resistance

  • Find levels where price bounced multiple times
  • Note breakout/breakdown points

3. ✅ Check EMA Signals

  • Is 5 EMA above or below 13 & 26 EMA?
  • Any crossovers recently?

4. ✅ Analyze MACD

  • MACD above or below signal line?
  • Histogram increasing or decreasing?

5. ✅ Confirm with Volume

  • Is volume above 5-day average?
  • High volume on up move = Good
  • High volume on down move = Bad

6. ✅ Check Candlestick Pattern

  • Any reversal patterns (Hammer, Engulfing)?
  • Strong body or weak/indecisive?

Signal Scoring System:

Buy Signals Sell Signals Trend Final Decision
2+ signals 0 signals Uptrend ⭐ STRONG BUY
1 signal 0 signals Not downtrend ✅ MODERATE BUY
0 signals 2+ signals Downtrend ❌ STRONG SELL
0 signals 1 signal Not uptrend ⚠️ MODERATE SELL
Mixed Mixed Any 🟰 HOLD - Wait for clarity

Example Analysis:

Stock: Infosys

  • ✅ Trend: Uptrend (higher highs, higher lows)
  • ✅ EMA: 5 EMA crossed above 13 EMA (+1 buy)
  • ✅ MACD: Positive and rising (+1 buy)
  • ✅ Volume: 150% of average (+1 buy)
  • ✅ Candle: Green bullish candle
  • ❌ Sell signals: 0

Result: 3 buy signals, 0 sell signals, uptrend → STRONG BUY

Putting It All Together: Holistic Investment Framework

The Complete Analysis Workflow

Your 4-Step Investment Process:

Step 1: Fundamental Screening ✅ or ❌

  • Run all 8 Golden Ratios analysis
  • Check 5-year trends (Reserves, FCF, EPS growing?)
  • Verify sector-specific metrics
  • Assess management quality (red flags?)

Decision:

  • ✅ Passed → Proceed to Step 2
  • ❌ Failed → REJECT - Move to next stock

Step 2: Valuation Analysis 💰

  • Calculate intrinsic value using EV/EBITDA method
  • Compare company P/E with industry average
  • Check Price-to-Book ratio
  • Determine target price with 30% margin of safety

Decision:

  • ✅ Undervalued (current price < target) → Proceed to Step 3
  • ⚠️ Overvalued → WATCHLIST - Wait for price correction

Step 3: Economy & Industry Check 🌍

  • GDP growth trajectory (expanding or slowing?)
  • Interest rate environment (rates rising/falling?)
  • Industry lifecycle stage (growth/maturity/decline?)
  • Regulatory environment (favorable/unfavorable?)

Decision:

  • ✅ Favorable macro → Proceed to Step 4
  • ❌ Unfavorable → DEFER - Wrong timing, wait

Step 4: Technical Entry Timing 📈

  • Identify trend (buy only in UPTREND or consolidation)
  • Mark support and resistance levels
  • Wait for EMA crossover (5 EMA crossing 13/26)
  • Confirm with MACD and volume surge
  • Use candlestick patterns for precise entry point
  • Set STOP LOSS before buying

Decision: ✅ Execute trade with predefined stop loss

Summary: All 4 steps must align for investment. Skip any step = Higher risk!

Risk Management Rules

The Golden Rules:

Rule Limit Why It Matters
Max Risk Per Trade 2% of portfolio One bad trade won’t destroy your capital
Max Position Size 10% per stock Diversification, one stock can’t sink you
Risk-Reward Ratio Minimum 1:2 For every ₹1 risked, target ₹2 profit

Position Sizing Example:

Your Portfolio: ₹10,00,000

Trade Details:

  • Entry Price: ₹500
  • Stop Loss: ₹475 (5% below entry)
  • Risk per share: ₹25

Calculation:

Step Calculation Result
Max risk allowed ₹10,00,000 × 2% ₹20,000
Shares by risk ₹20,000 ÷ ₹25 800 shares
Max position value ₹10,00,000 × 10% ₹1,00,000
Shares by position limit ₹1,00,000 ÷ ₹500 200 shares
ACTUAL shares to buy Take LOWER of above 200 shares
Investment 200 × ₹500 ₹1,00,000
Max loss if SL hit 200 × ₹25 ₹5,000 (0.5% of portfolio) ✅

Stop Loss Strategies:

Strategy Method Example (Entry ₹500)
Technical Below support level Support at ₹480 → SL at ₹475
Percentage Fixed % (5-7%) 7% below → SL at ₹465
ATR-based Based on volatility High volatility → Wider SL

Risk-Reward Calculation:

Given:

  • Entry: ₹500
  • Stop Loss: ₹475
  • Risk: ₹25 per share

Targets:

Target Calculation Price Reward Risk:Reward
Target 1 Entry + (Risk × 2) ₹550 ₹50 1:2 ✅
Target 2 Entry + (Risk × 3) ₹575 ₹75 1:3 ⭐

Visual:

₹575 ──── Target 2 (+₹75 profit, 1:3)
₹550 ──── Target 1 (+₹50 profit, 1:2)
₹500 ──── Entry Price
₹475 ──── Stop Loss (-₹25 loss)

Rule: Never take a trade where potential loss exceeds potential gain!

Portfolio Construction Principles

Diversification by Market Cap:

Risk Profile Large Cap Mid Cap Small Cap Suitable For
Conservative 70% 20% 10% Retirees, low risk tolerance
Moderate 50% 35% 15% Most investors, balanced approach
Aggressive 30% 40% 30% Young investors, high risk appetite

Example Portfolio: ₹10 Lakhs (Moderate Profile)

Category Allocation Amount Example Stocks
Large Cap 50% ₹5,00,000 HDFC Bank, Reliance, TCS, Infosys
Mid Cap 35% ₹3,50,000 L&T Technology, Mphasis, Persistent
Small Cap 15% ₹1,50,000 High growth smallcaps (2-3 stocks max)

Portfolio Guidelines:

Parameter Recommended Value Why
Number of stocks 10-15 stocks Optimal diversification without over-diversification
Max per stock 10% of portfolio No single stock risk
Max per sector 25% of portfolio Sector risk mitigation
Review frequency Quarterly Track performance, rebalance if needed

Sector Diversification Example (₹10L Portfolio):

Sector Allocation Max Amount
Banking/Finance 25% ₹2,50,000
IT/Technology 20% ₹2,00,000
FMCG 15% ₹1,50,000
Pharma 15% ₹1,50,000
Auto/Manufacturing 15% ₹1,50,000
Others 10% ₹1,00,000

Remember: Don’t put all eggs in one basket. Diversify, but don’t over-diversify!

Key Principles Summary

Fundamental Analysis Commandments:

  1. Quality Over Quantity: Own 10-15 well-researched stocks, not 50 random picks
  2. Circle of Competence: Invest only in businesses you understand
  3. Management Matters: Honest management with skin in the game is non-negotiable
  4. Margin of Safety: Buy at significant discount to intrinsic value
  5. Long-term Horizon: Compounding requires patience - minimum 3-5 years

Technical Analysis Commandments:

  1. Trend is Friend: Only buy in uptrends, only short in downtrends
  2. Volume Confirms Price: Price movements without volume are suspect
  3. Support Becomes Resistance: Levels flip roles after breaks
  4. Multiple Timeframe Alignment: Higher probability when all timeframes agree
  5. Stop Losses Are Mandatory: Never trade without predefined exit

Risk Management Commandments:

  1. Never Risk More Than 2%: Per trade portfolio risk limit
  2. Position Sizing Discipline: No single stock above 10% of portfolio
  3. Cut Losses Quickly: Stop loss hit = Exit immediately, no hoping
  4. Let Winners Run: Trail stop losses on profitable positions
  5. Diversify Across Sectors: No sector above 25% portfolio weight

Advanced Concepts and Nuances

IPO Analysis Framework

Beyond regular fundamental analysis, IPOs need special scrutiny:

IPO Evaluation Checklist:

Parameter Green Flag ✅ Red Flag ❌ Why It Matters
OFS vs Fresh Issue Fresh Issue > 50% OFS > 50% Fresh = Growth capital, OFS = Promoters exiting
Grey Market Premium GMP > 20% above upper band GMP < 0 (discount) Indicates market demand
Retail Subscription RII > 3x subscribed RII < 1x Retail investor interest
QIB Subscription QIB > 1x QIB < 1x Institutional confidence
P/E vs Industry Company P/E < Industry P/E Company P/E > Industry P/E Valuation attractiveness
Min Subscription Total > 90% Total < 90% Will it list?

Scoring System:

Green Flags Red Flags Verdict Action
4-6 0-1 ⭐ STRONG Apply for maximum shares
2-3 1-2 ⚠️ MODERATE Small allocation, risky
0-1 3+ ❌ AVOID Don’t apply, too many concerns

Real Example: Zomato IPO

  • ✅ Fresh Issue: 60% (raising growth capital)
  • ✅ GMP: ₹50 premium (strong demand)
  • ✅ RII: 7.45x (retail crazy about it)
  • ✅ QIB: 51.79x (institutions love it)
  • ⚠️ P/E: Loss-making (no comparison possible)
  • ✅ Subscription: 38x overall

Score: 4-5 green flags → APPLY (and it listed at good premium!)

Book Value and Asset Plays

Book Value = What shareholders would get if company sold everything and paid all debts

Formula: Book Value = (Total Assets - External Liabilities) ÷ Total Shares

Calculation Example:

Component Amount (₹ Cr)
Current Assets 5,000
Non-Current Assets 15,000
Total Assets 20,000
Current Liabilities 3,000
Non-Current Liabilities 7,000
Total Liabilities 10,000
Book Value (Assets - Liabilities) 10,000
Total Outstanding Shares 100 Cr
Book Value per Share ₹100

Price to Book (P/B) Ratio:

P/B Ratio Market Price Interpretation
< 1 ₹80 (below ₹100 BV) Trading below book - Distressed or value opportunity
1-3 ₹150 (1.5x BV) Reasonable valuation for assets
> 3 ₹400 (4x BV) Premium - Growth/brand value priced in

When Book Value Matters:

  • Asset-heavy businesses: Real estate, manufacturing, infrastructure
  • Banks: P/B ratio more relevant than P/E
  • Distressed situations: Bankruptcy, asset sales

When Book Value Doesn’t Matter:

  • IT/Services: No physical assets, all intellectual property
  • Growth companies: Future potential > Current assets
  • Consumer brands: Brand value not on balance sheet

Example: Page Industries (Jockey brand) trades at 20+ P/B because brand value » physical assets!

Behavioral Pitfalls to Avoid

Your worst enemy in markets? YOUR OWN BRAIN! Here are common biases:

1. Recency Bias - Overweighting recent performance

Situation Bias Reality Check
Won 4 out of last 5 trades “I’m a genius! Can’t lose!” ⚠️ Overconfidence leads to bigger bets → Bigger losses
Lost last 3 trades “I’m terrible at this!” ⚠️ Small sample, doesn’t define skill

Action: Track 50+ trades before judging your skill. Stay disciplined regardless of recent results.

2. Loss Aversion - Holding losers too long, selling winners too early

Scenario Emotional Response Rational Action
Stock at ₹100, now ₹80 (20% loss) “Can’t sell at loss, will hold till breakeven” ❌ Exit at stop loss, capital can work elsewhere
Stock at ₹100, now ₹120 (20% profit) “Better book profit before it falls!” ✅ OK to book, but let winners run with trailing SL

Rule: Cut losses quickly, let profits run. Don’t marry your losers!

3. Herd Mentality (FOMO) - Buying because everyone else is

Red Flag What You See What You Should Do
Stock all over Twitter/WhatsApp “Everyone’s buying, I’ll miss out!” 🛑 STOP! Do independent analysis
“Hot tip” from 5 different people “Must be true if everyone says it” 🛑 Usually means you’re late
Social media mentions 3x normal Extreme hype 🛑 Often marks the top

Real Example: When your barber gives you stock tips, market top is near!

4. Anchoring - Fixating on past price levels

Anchor Point Biased Thinking Reality
Stock at ₹200 (52W high), now ₹100 “It’s cheap! Was ₹200!” ❌ Maybe business deteriorated, ₹100 is fair
Bought at ₹150, now ₹120 “Won’t sell till ₹150” ❌ Your buy price is irrelevant to market
IPO price ₹100, trading ₹80 “Will go back to ₹100” ❌ Market doesn’t care about IPO price

Truth: Analyze CURRENT fundamentals, not past prices. Market doesn’t remember your cost!

Self-Check Questions:

Before ANY trade, ask yourself:

  1. ❓ Am I buying because of analysis or emotions?
  2. ❓ Would I buy more if everyone was selling it?
  3. ❓ Would I sell some if everyone was selling it?
  4. ❓ Is my overconfidence from a few lucky wins?

Be honest. Your portfolio will thank you!

Continuous Learning Resources

The journey of mastering equity markets involves continuous learning and adaptation. Here are critical practices:

1. Daily Habits:

  • Read financial newspapers (Economic Times, Business Standard)
  • Track key indices and sector movements
  • Review your portfolio and update watchlists
  • Journal all trades with reasoning and emotions

2. Weekly Rituals:

  • Analyze quarterly results of portfolio companies
  • Screen for new investment opportunities
  • Review technical charts on weekly timeframe
  • Calculate portfolio returns and risk metrics

3. Monthly Discipline:

  • Read annual reports of target companies
  • Attend investor conference calls
  • Rebalance portfolio if needed
  • Review and learn from past mistakes

4. Continuous Education:

  • Follow quality content creators (as referenced in the fundamentals)
  • Study case studies of successful investors
  • Understand macroeconomic indicators deeply
  • Keep updating valuation models with new data

Final Thoughts: The Investing Mindset

This comprehensive exploration of equity markets provides the foundation for building wealth through equities. Key principles to internalize:

1. Analysis Over Emotion: Every investment decision must stem from rigorous analysis, not tips, FOMO, or greed.

2. Patience Compounds Wealth: The real money is made by holding quality businesses for years, not trading frequently.

3. Risk Management is Everything: Capital preservation comes before capital appreciation - you can’t compound if you blow up.

4. Continuous Learning: Markets evolve, businesses change, regulations shift - stay curious and adaptive.

5. Know What You Own: If you can’t explain why you own a stock, you shouldn’t own it.

6. Humility: The market is supreme. When proven wrong, accept it quickly and move on.

The difference between gambling and investing lies not in the assets themselves, but in your approach. Armed with fundamental analysis for selection, technical analysis for timing, you can expect to make money in the long run.

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