MENTORING - Session 3 - Fundamentals - Fundamentals of stocks ((21a)…
MENTORING - Session 3 - Fundamentals - Fundamentals of stocks
(4) A company and a stock are two different aspects. A company is a legal entity, but a stock is a certificate and a future/option is a contract.
(6) A company's fundamentals means its financials, financial statements, its markets, management, its economic backdrop and other attributes.
(5) A stock or a future or an option contract are driven by the company's fundamentals +
some other attributes that are important to understand while we are trading.
(7) A company is driven by various factors as discussed so far. But a stock is driven by the company's factors and some others (which are stock fundamentals).
(18) A good company does not mean that its stock is also good to trade 'always'.
(17) For example, Nestle India's company fundamentals are damn good. But are its stocks/futures/options good to trade "all the time"? Not necessary.
(16) Why? Because a stock or a future or an option's drivers are more in number than a company's. Apart from company fundamentals, a stock's drivers are important to understand before we start trading aggressively.
(22) We need to look at certain key attributes of stocks/futures/options before we trade them. What are they? These are the ones we have discussed so far - the five attributes.
(1) A stock/future/option are primarily determined by their
. The more liquid a stock (future and option also) is, the easily it can be traded. This is the first attribute we will look at before including something in our trading watch list. Why? Because we want to avoid trading/execution risk.
(15) We should trade in stocks only when liquidity is plush. That means my entry and exit are as good as cutting a butter slice with knife.
(19) Liquidity in a stock is determined by more than just fundamentals. Because we have various kinds of players getting into a particular stock. That is why
will alter the equation of liquidity in a stock.
(2) Liquidity is determined by how many buyers and sellers are there on each side and how good an agreement they are into!
(21a) Liquidity is determined by volume and also the number of traders on both buy and sell side. This shows how well the stock is sought after or sold into.
(21b) Along with that, we need to see how well buyers and sellers are agreeing at a price to trade. This is the most important concept in trading. This is called the bid-ask spread. We will discuss more about this in order flow. But here we will do an assignment. The more the bid-ask spread, the less liquid a stock is. The less the bid-ask spread, the more liquid a stock is. For example, Nifty futures are the most-liquid contracts in the Indian market.
(8b) Bid-ask spread. The difference in price between the highest bid and lowest ask is called the bid-ask spread. Bid-ask spread = Lowest ask - highest bid. The wider this difference is the riskier to trade, the smaller the spread is the easier and safer it is to trade.
(9b) A stock's tick is also important to learn. That means by how much of a minimum increment a stock moves matters a lot. For example, all futures, options and stocks in cash in India move in increments of 0.05. This has made our live easier.
(9c) The tick size is always mentioned by the exchange in its contract specification. Why we need to understand this? This mentions how much risk you are assuming while trading on every move up or down.
(9a) Tick size is the next important variable. A tick happens whenever a trade happens. The size of a tick is usually set by the exchange by default. In our country, it is 0.05.
(10) The third fundamental attribute of a stock or future or option is the lot size. The higher the lot size, the more riskier it is generally. It is the number of contracts that a trader has to trade compulsorily trade in futures and options.
Our five key fundamental attributes of a stock/future/option are: (1) Bid-ask spread (liquidity); (2) Tick size; (3) Lot size; (4) Tick value (most important); (5) Value at risk.
(12) Value at risk is the amount at risk when the stock moves over the bid-ask spread.
ASSIGMENT: Please work on stock fundamentals for all Nifty 50 futures.
(14) A good company does not mean its stock is also good "to trade".
(13) The link between a company and a trader/investor is the stock/instrument.
(20) For a trading market to survive (speculative market, not long term oriented market), it needs a good information flow!!!!! Very important!!!!!
(8a) A bid-ask spread is the difference between the lowest seller, by price, and the highest buyer, by price, in an order book. The wider the spread, the riskier the stock is. The narrower the spread, the safer the stock is for trading.
(11) Tick value. It is nothing but the product of tick size and lot size.