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  1. Crucial checklist to minimise investment risk: Do these 6 checks before selecting a stock

Crucial checklist to minimise investment risk: Do these 6 checks before selecting a stock

As far as Indian share market is concerned, still there are huge numbers of people who pick up stocks on anonymous tips. We take a look at six crucial checks which can minimise investment risk before selecting a stock.

By: | Updated: June 3, 2018 10:15 AM
sensex, nifty, narendra modi, markets, stock markets, economy Investors should not proceed with big quantities in a share if there isn’t relative trading in that scrip. (Reuters)

Money-making has been on one of the top priorities for everyone and now masses are indulging more and more towards diversifying their earnings sources. As far as Indian share market is concerned, still there are huge numbers of people who pick up stocks on the basis of anonymous tips without even knowing the operations of the company. While selecting stocks from the pool of thousands of available scrips on Indian bourses, investors often tend to think of maximising the gains only. Investors should rather focus more on minimising the risk avenues versus the lucrative profits, reason being: returns on equities can’t be static for a given period of time but some of the risk associated to a particular stock can be mitigated by knowing about the scrip well.

We take a look at six crucial checks which can minimise investment risk before selecting a stock

Liquidity

Before taking any sizeable position in any stock, investors should always examine how frequently the stock is being traded on the exchange. By studying the historical trading volume of a stock, an suggestive the number of readily available buyers and sellers can be anticipated. Investors should not proceed with big quantities in a share if there isn’t relative trading in that scrip.

Circuit limits

Circuit limits should always be taken care off as it indicates the maximum gains and losses in a particular stock. On Indian stock exchanges there are four price bands — 2%, 5%, 10% and 20% — for maximum upside and downside. The respective price bands are subjective to the volatility in the scrip while, on the other hand, there are no price bands on shares on which derivative products are available. For example, shares of Infosys, PNB, RIL, HDFC Bank, ICICI Bank don’t have any price band on them as these stocks have F&O products based on them. No price band signifies that these scrips can rise or fall up to any extent in the day.

Shareholding pattern

Shareholding pattern of a stock showcases the demand of that scrip among the institutional investors, mutual fund houses, foreign portfolio investors and the relative holding of the promoter. A significant rise or fall in the shareholding pattern of a stock by mutual fund houses or institutional investors illustrates bullishness or bearishness over that share.

Applicable margin on stocks

Investors should always know about the margin requirements of the respective exchange on a particular stock before executing a trade. Margins are demanded by the brokerage firms in advance from the investors on the behalf of exchanges in order to minimise the default risk by the market participants. Margins are calculated on the basis of variation in the share price of a scrip over a certain period and the volatility. For example, to execute a trade in shares of HEG, NSE demands 100% of the order value as the margin while to proceed with an order in shares of TCS or RIL, only 12.5% of the total order value is required as margin before executing a trade. Higher the margin, higher risk of abnormal price variation in the stock.

Groups

BSE has categorised all the listed shares into several groups, namely, A, B, E, IF, IT, M, MT, P, SS, ST, T, X, XT, Z and ZP. Stocks falling in different groups have their own specifications and limitations. For example, shares which trade 98% in the preceding quarter fall under ‘A’ group while ‘T’ group shares can only settled on a trade-to-trade basis. For example, shares of RCom are classified in ‘A’ group while Gitanjali Gems is under ‘T’ group on BSE.

Surveillance check

Investors should rigorously check for any surveillance action on the stock before trading as exchanges place various securities under scrutiny from time to time. BSE puts addition surveillance measure or graded surveillance measure on stocks over alleged price-volume manipulations, price rigging and insider trading.

Also Read | BSE puts Bombay Dyeing, Rain Industries, 35 others under ‘additional surveillance measure’; check full list

Disclaimer: No stock has been recommended to buy, sell, hold or avoid in this report. Stock examples given on certain scrips are based on present situation according to data available with the exchanges. Please consult a certified financial advisor before taking any decision to invest in stock market.

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