How Do Bears Make Money in the Stock Market: The “buy and hold” strategy has been one of the oldest and most successful strategies helping investors across all categories to make money.
That means investors are required to stay invested for the long haul if they want to capture the best profits. However, did you know that you can make returns even when the share price goes up and also when the share price goes down?
Investors who believe that particular stock or the market is headed downward and may attempt to profit from a decline in stock prices are called a bear.
However, it is important to know exactly how bears make money in the stock market as there have been several stock market crashes in the past couple of years.
While everyone can generate returns when markets rise, it is important to look for money-making opportunities when markets fall. This article will focus on how to make money when markets fall drastically.
Read on to find out How Do Bears Make Money in the Stock Market.
Bear Market – What is it?
To know how bears make money in the stock market, it is important to have a basic understanding of the bear market. The tag of a bear market is given when there is a 20% drop from recent highs.
The term is most commonly used to refer to the performance of NIFTY50, which is considered a benchmark indicator of the entire stock market.
However, the term “bear market” can be used when referring to any stock index, or even to refer to an individual stock that has fallen by 20% or more from its recent highs.
For example, when the company reports poor earnings or when it recalls its new product, there is a possibility that the stock price might plunge by more than 20% from the recent high.
In a situation like this, we can say that its price has fallen into the bear market territory. More often than not, the terms bear market and stock market correction have been used interchangeably. However, these terms point to 2 different magnitudes of negative performance.
Correction in the stock market takes place when stocks fall by 10% or more from the highs made recently, and this correction can be upgraded to a bear market once a threshold of 20% is met.
How Do Bears Make Money in the Stock Market?
Now that we know what the bear market is, it is time to discuss the money-making strategies which are used by bears in the stock market.
1. Shorting the Positions
The most popular method used by bears to make money in the stock market is shorting, also known as short selling. In this strategy, traders borrow the shares and sell them in anticipation that they will fall more in the future.
When the share price falls, traders buy those shares at the prevailing price (which is lower) to cover short positions. Therefore, the difference is the profit.
2. Put Options
Another way the bears can make money in the market is by buying a put option. A put option is bought when the price of the underlying asset is expected to fall down.
In a put option, the premium on an option contract increases when the price of the underlying asset decreases. Here the bears are the buyers of put options and they make money when the price of the underlying asset falls down.
3. Inverse ETFs
Individuals can choose to invest in inverse ETFs to safeguard their portfolios. By their very nature, inverse ETFs tend to work by changing values in the opposite direction of their benchmark index.
4. Buying Dividend Stocks
When the markets turn bear, investments in dividend stocks can be beneficial. During such times, it is important to choose companies paying high dividends. Dividends help in generating a steady income.
Bears are traders who have a pessimistic view of the market, asset, or financial instrument. They believe that the instruments are heading toward a downward trajectory. Hence, Bears make profits when the market heads in a downward direction.
To Sum Up
More often than not, bear markets do not last forever. Therefore, investors are required to be patient with their investments. Panic selling will only impact the returns of the portfolio.
It is of utmost importance to monitor the growth of the companies. Most of the time bears make money by shorting stocks. However, thorough research is required before applying the shorting technique.
That’s all for the article on How Do Bears Make Money in the Stock Market, We hope you enjoyed reading it. Happy Investing!
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Is 1 crore enough to retire in India: Retirement planning refers to the preparation of finances or financial planning for the period after an individual retires or when he/she stops working.
Of course, some people in their early or mid-20s believe that retirement planning can be done later in life. They keep on delaying their planning for retirement.
Actually, retirement planning should start from the day an individual gets his/her first salary. This is because of inflation. It can erode the value of your money over time.
Therefore, individuals are required to invest their money in financial instruments which offer returns higher than inflation over a certain period of time. All these investments and plans will help an individual to live an independent and quality life.
Retirement planning includes the estimation of expenses, determination of the time horizon for retirement, risk appetite, tax efficiency, and several other factors.
Investors are required to stay invested in this money for the long term if they want to benefit from the compounding effect. However, how much money does someone require for retirement? Is 1 crore enough to retire in India?
Or do you need more than that? That is something debatable as investment corpus varies from individual to individual. Apart from this, several other factors come into the picture including life expectancy, death rates, etc.
In this article, we will focus on some factors which an individual should consider before the calculation of a retirement corpus. Is 1 crore enough to retire in India? Especially, if life expectancy is on the rise and inflation continues to reach higher levels. Read on to find out!
Retirement Planning – How To Start?
One primary element of financial planning is focusing on the retirement stage. Once you finish your working years, it is of utmost importance to outline the plan to cope with the time when regular income will not be available.
Investments in financial products should be made only after calculating the retirement amount. The first step in retirement planning is estimating the timeline.
If an individual plans to retire at the age of 60, it is important to estimate how much time is left until then. Nowadays, there are individuals who plan to retire sooner, and in such a case, that should be the age limit to go by.
The cost of living tends to rise every year. The value of the rupee today will not be the same a few years later. Inflation is considered a silent killer and is an important factor to consider at the time of estimating retirement corpus.
Inflation tends to impact expenses and returns on the investment. Research suggests that inflation of ~7%-8% is required to be considered for calculating retirement corpus.
Inflation – Why Is It The Silent Killer?
Before answering “Is 1 crore enough to retire in India,” it is important to understand what inflation is and how it can impact the return on investments.
In the economy, prices for goods and services change. For some goods and services, prices might rise, while for others, there can be a decline.
Inflation takes place when, on average, there is an increase in the prices of goods and services, not just of individual items. Therefore, an individual can purchase less than Rs. 1 today than he/she could yesterday.
Simply put, inflation reduces the value of the currency over time. This means that the value of INR1,00,000 saved with you today as idle money will fall in value in some years.
If we take an inflation rate of 7% per annum (just as an example), its value tends to decrease by ~86.86% in 30 years. As a result, there will be a reduction in returns realized from the investments made.
While there are individuals who believe that they have realized extraordinary returns, when inflation is considered, most investments including fixed income and gold are not able to create wealth.
Real return refers to the difference between nominal return and inflation. Inflation erodes pricing power and this is why it is considered the consumer’s greatest enemy.
Most investors tend to get lured in by the nominal rate of return, and they ignore the real rate of return.
Is 1 Crore Enough?
Not only inflation, but several other factors play an important role in estimating a retirement corpus. These factors include a pattern of expenses (basic living expenses, health expenses, gifts, vacations, etc.), expected life expectancy, any liabilities, other responsibilities, etc.
Well, assuming a hypothetical big number as a retirement corpus can give you mental satisfaction. But the real question will be “Is 1 crore enough to retire in India to cover all the retirement expenses?” Let us understand this with the help of an example.
Let us consider an individual’s age of 40. While the retirement age he has in mind is 60 years, inflation has been assumed to be ~7%. Life expectancy has been assumed to be 85 years and after-tax retirement portfolio return is ~8.5%.
If we consider the monthly expenses of Rs. 50,000, this individual will require Rs. 6,00,000 yearly. Doing the math and calculating the future value will help us in arriving at a figure of Rs. 23.2 lakhs which will be needed for the first year of retirement.
Now, if we calculate the present value, the retirement corpus required comes out to be ~Rs. 4.9 crores. This simply means that the hypothetical figure of INR1 crore is just not enough to meet the expenses after retirement.
Therefore, investments in such asset classes should be made which can provide inflation-proof returns in the long run.
Since we have now answered the question “Is 1 crore enough to retire in India,” we will now see the first step that investors should take when they think of saving for retirement.
Delay in making investments can impact the final return from that asset. This is because the benefits of compounding get compromised.
More often than not, equity is considered an asset class that can help provide inflation-proof returns. However, by their very nature, markets are volatile. Therefore, a delay in the investment will cause a loss of opportunities to purchase more at lower prices.
Creation of a budget, enabling automatic transfers to SIPs or other investments, payment of a debt, etc. are some measures individuals should adopt when they think about retirement planning.
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A company is only as good as its people. And that is reflected in the management analysis of a company. More often than not, the way a company is led into the future affects its performance as well as its profits. Similar to how studying the financial performance of a company is vital to understanding its future, so is its management analysis.
The Purpose Of Management
When you’re investing in a publicly listed company, understanding the management helps you get insights into how it’ll fare in the near future. The stock price alone cannot reflect the quality of management, as seen in companies like Satyam Computers.
Efficient management is one of the pillars of success for any company. Employees are also key to its performance, but management makes all the decisions that strategize the company for the future.
Their vision is brought to life through employees and how successful they are, is directly reflected in the income statements. Quite simply, think of a company as a vehicle, and the top management is the driver behind the wheel.
No matter how advanced the car is, it’s ultimately the driver’s responsibility to operate the vehicle well. Before diving into learning more about the management analysis of a company, you need to understand that it is more of a qualitative study.
Importance Of Good Quality Management
Most retail investors like ourselves study a company from a financial point of view – studying ratios such as Price To Earnings and sales growth. Naturally, most new investors turn a blind eye to studying its management. What they don’t realize is that their investment is dependent on how the board drives the company into the future.
Making things more difficult is the fact that studying a company’s management is not the same as going through balance sheets and income statements. In fact, there is no fixed approach to judging top management. There are a few ways to understand where the company is headed.
The promoters of the company are the founding members who were involved before taking it public. Generally, they hold a majority stake in the company. Under this section, we must take a look at several factors surrounding said promoters. They are –
The holdings of the promoters represent how much of the company is owned by them. Generally, promoters who hold a majority stake in their company are a positive sign – It means that they believe in the company and its future prospects, so they wish to hold onto their stake.
A negative sign would be consistent selling of stakes and low promoter holdings. When the promoters themselves have trimmed their holdings in the company, then it is usually represented as a bad sign. However, in some circumstances, promoters tend to sell their holdings to raise more capital as well.
Promoter’s background check helps assess their capacity to take the company to the next level. This can be studied by knowing their experience, other associations, previous projects, and the overall culture of the company.
A quick search online or through the use of a stock screener platform can reveal the promoter’s background, including previous business experience, known affiliations, and an overall track record.
Promoters can create a company culture as per their management style. It could be flexible and open to change or rigid and conservative. Either way, it affects the way employees perform within the company, along with its reputation in the industry.
As a thumb rule, management with good experience and successful projects is better.
Here, tenure could be interpreted in two ways –
The overall experience of management and,
The duration of tenure at the company.
Leadership roles require a certain level of experience, which give the company a better advantage over its competitors. This advantage is directly seen in the company’s historical performance data.
Promoters as well as top-level management usually reward themselves with performance-based incentives and salaries. It’s important to understand why salaries should be studied.
If a company is having bad years where it is making losses consistently yet the management is paying themselves high salaries, then it is advisable to proceed with caution.
Salaries cannot specifically be compared and estimated to be high or low but taking a look at the industry overview would give a general idea.
2. Capital Allocation
As discussed above, the management of the company makes key strategic decisions. These decisions have a direct impact on the company.
Capital allocation is when a company invests the excess cash generated by the business. This is where the ROCE (Return On Capital Employed) factor comes into the picture. ROCE tells you how well the company is managing its capital in generating returns to shareholders.
3. Company Transactions With Third Parties
Promoters have complete access to the company’s capital, and they are free to use these funds however they feel right. Herein lies the issue where promoters have been known to siphon off funds for personal purposes.
In sections of the annual report, you can observe the transactions conducted by the company with outside parties. Optimistically, the transactions could be business related. Some of the key transactions to look for are –
Transaction between promoters and the company
Buy/Sell Transactions between the company and promoter/promoter’s entity.
Funding Other Ventures.
4. Acquisitions And Investments
If a company is doing quite well, it may decide to acquire other businesses. From a strategic point of view, this is suitable in the long run, instead of competing with smaller companies. This is seen with companies in relevant businesses. For example – The acquisition of BlinkIt by Zomato.
In other situations, it may invest in other companies as a stakeholder.
The focus should be on the fact that the company is not deviating from its primary business.
5. Debt Obligations
When looking at the debt position of the company, one must keep two terms in mind – Management and Debt.
Good management knows how to restructure debt, run the company, and create shareholder wealth. Bad management is letting debt pile up and sinks the company altogether. High leverage is a red flag, as it suggests that the company has taken on huge amounts of debt.
In the long term, they will end up paying high amounts of interest on debt and that could potentially hinder growth.
6. Stock Buyback
Companies sometimes buy back the company shares in the market, which is taken as a positive sign. It implies that the promoters are aware of information that is not available to the public.
This increases the value for the shareholders, as –
The company has some future goals that are not yet made public, and
There are fewer shares in the market for potential investors.
7. Strategy And Goals
Every company has a vision for the future. Going through the investors’ report and statements, you will come across statements from the CEO and board of directors regarding where they plan to take the company, be it into new industries or tackling competition from rival companies.
This is also evident from the investments made by the company into new ventures and proprietary assets such as patents, trademarks, and copyrights.
While this information is not always publicly available, you can study the annual reports to get a better understanding of the goals that management has for the company.
The fact that directors and CEOs make the big bucks in the company is no trade secret. In fact, their salaries are made public through income statements. And their pay is justified when you take into account the scale at which they have grown the profits of the company during their tenure.
In the compensation section, you must look out for the breakdown of their package. Usually, if they hold a stake in the company, then they are more likely to perform better as it directly benefits them, and in effect the company and its shareholders.
Another important factor to consider is every industry pays differently to its management. For example, the IT industry in India is one of the most rewarding industries, with packages going all the way up to 71 crores (Infosys CEO Salil Parekh, FY 2021-22).
So if you’re studying a company’s management, make sure that their compensation is similar to that of the industry.
Management analysis of a company is not dependent on any one factor. Looking back at the success stories of major companies, it shows how management has played an important role in turning the tide.
Reading the income statement and quarterly reports alone does not tell the full story.
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Stock Market Average Returns Over The Past 10 Years: The performance of the stock market serves as a barometer for the growth of the overall economy.
The performance of an economy can be easily understood by analyzing and monitoring the performance of the stock market. Several investors enter the stock market in the hope to build wealth and meet financial goals.
They have all the reasons to do this as equity is that asset class that can help beat inflation. In the long run, stock markets have flourished and several investors have made returns.
Stock market average returns can help us provide a fair idea of how the Indian economy has fared in the past. In this article, the focus will be on the average returns delivered by the stock market in the past 10 years. Read on!
Stock Market Average Returns Over The Past 10 Years
In the past 10 years (i.e., between Aug 30, 2012- Aug 30, 2022), NIFTY50 has delivered an average return of ~14.1%. The NIFTY 50 index is a well-diversified index comprising 50 companies that exhibits overall market conditions.
This index is computed with the help of the free float market capitalization method. NIFTY50 is used for several purposes including benchmarking fund portfolios, launching index funds, etc.
Over the past 5 years to Aug 30, 2022, NIFTY50 has delivered a price return of ~12.36%. The index is made up of several sectors. The financial services sector represents the highest weightage of 36.96%, while the IT sector occupies the second spot at ~14.2%.
Therefore, the performance of NIFTY50 can majorly be influenced by the performance of the financial services sector.
Movement Of Stock Markets – What Causes It?
Before we discuss stock market average returns, it is important to know how prices change and how the share markets move. We will also understand the factors behind the fluctuations in the stock markets.
The stock market is an easy and quick way to multiply one’s wealth. While some people are afraid to enter the stock market, there are some individuals who have seen multibagger returns.
People try to avoid stock market investments because of constant fluctuations in the market. The main goal of trading is to purchase stocks and then sell them at a profit.
Prices in the stock market are affected by demand-supply economics. When a stock’s demand exceeds its supply, there will be an upward movement in stock price.
Therefore, the more drastic this demand-supply gap, the higher the price. When several traders try to buy stock X, its price tends to go up and vice-versa. Stock prices are also affected by the upgrades or downgrades given by renowned analysts.
Factors Affecting Share Prices
There are several factors that affect share prices. The following are some of them:
1. Company Earnings
Investors prefer long-term investment in a company that makes consistent profits. Therefore, the number of buyers is more for such companies, resulting in their share prices rising.
Companies that are listed on stock exchanges are required to declare earnings every quarter and annually. Therefore, investors can visit the company’s website and check its earnings report whether has met or exceeded projections.
A company that reports solid growth per share will see higher demand. Therefore, stock prices tend to fluctuate whenever a particular company comes out with its earnings.
Stocks are expected to show significant movements whenever there is some news related to that company. If the company reports that it has acquired another company which can be beneficial in the long run, the stock price will shoot up.
Similarly, if any news piece exhibits that it is financially struggling, then the price tends to significantly fall. People will sell such stocks because they fear that the company might close down its operations.
Changes in government support and other financial events like the annual budget can also affect stock prices.
Stock market average returns tend to be affected by factors including confidence in the economy, government support, inflows and outflows by foreign institutional investors/ domestic institutional investors, etc.
The more confident an investor is about a company’s future, the more likely he/she is willing to buy the stock. Getting to know the factors which push stock prices up or down is of utmost importance to get a fair idea about the stock market.
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