## How to consider booking value while making investment decisions?

#### Introduction

Determining whether a listed company is worth its market price is a complex task.

Many investors and market analysts use different methods to know the correct value of the company. Investing in a company without knowing its true value might cause a loss to the investor. The market price is affected by many external and internal factors and the demand for the company’s stock in the market.

Making investment decisions merely based on the market value of the company can be a bad investment decision.

Booking Value is the carrying value of the company in its books of accounts.

Let us dig a bit deeper into understanding booking value definition so that you could use it to make better investment decisions.

## What is Booking Value?

The Booking Value of a company is the value of the company’s equity value as reported in the financial statements of the company.

The Booking Value of the company is generally computed about the company’s stock value and calculated by adding all the assets of the company and subtracting the liabilities of the company.

Booking Value is generally equal to the cost of assets in the Balance sheet reduced by the intangible assets and the liabilities of the company.

In other words, it is the net asset value (NAV) of the company.

For the initial outlay of the investment, Booking Value may be net or gross of the expenses such as trading expenses, service tax, sales tax, Goods and service tax, service charges, and so on.

In other words, if you want to close the business, how much money will be left after you sell off all your assets at Booking Value and pay off all your liabilities at Booking Value. Also known as Shareholders Equity, Net Worth.

## The Formula of Booking Value

The formula for Booking Value is as follows:

Booking Value = Total assets (other than Intangible assets) – total outside liabilities.

### Examples of Booking Value

The examples of booking value are as follows:

1) Suppose a company has Current assets of Rs.10 lakhs, Non-current assets of Rs.20 lakhs, intangible assets of Rs.3 lakhs, current liabilities of Rs.5 lakhs, and non-current liabilities of Rs.10 lakhs.

Then,

Booking Value = Total assets – Total liabilities

= (Rs.10 lakhs + Rs.20 Lakhs – Rs.3 Lakhs) – (Rs.5 lakhs + Rs.10 lakhs)

= (Rs.27 lakhs) – (Rs.15 Lakhs)

= Rs.12 Lakhs.

2) Suppose a company has Current assets of Rs.25 lakhs, Non-current assets of Rs.30 lakhs, intangible assets of Rs.5 lakhs, current liabilities of Rs.12 lakhs, and non-current liabilities of Rs.20 lakhs.

Then,

Booking Value = Total assets – Total liabilities

= (Rs.25 lakhs + Rs.30 Lakhs – Rs.5 Lakhs) – (Rs.12 lakhs +Rs.20 lakhs)

= (Rs.50 lakhs) – (Rs.32 Lakhs)

= Rs.18 Lakhs.

## How to use Booking Value while making investment decisions?

Booking Value is not a district component that gives a lot of data to the investor for making decisions.

It does not give related information about the real value of the company and the potential returns that the company may earn in the future.

For example, a company having a higher Booking Value does not mean that it will perform better than the company having a lower Booking Value as Booking Value is an absolute unit and not a relative unit.

Thus, comparing two companies based on Booking Value may lead to bad investment decisions.

Booking Value of the companies can be used to compare the size of the companies, and the company’s potential excess of the value of assets after paying off all the debts and liabilities of the company.

For example:

Suppose company A has a Booking Value of Rs.50 lakhs and Company B has a Booking Value of Rs.20 lakhs this does not mean that company A will surely perform better than company B in the future.

The difference only indicates that company A will have access to money after paying off all the debts and the liabilities after selling all its assets compared to company B.

## Importance of Booking Value

Booking Value is considered a good measure as it represents a fair and accurate worth of the company. The Booking Value of the company is computed by using the past and historical data of the company.

Thus, it gives a reasonable idea of the company’s worth to investors and analysts. Booking Value shows exactly where the company stands in terms of the value of assets compared to its liabilities in the financial statements.

Investors who use a value investing strategy for making investment decisions primarily use Booking Value because it enables them to find Bargain deals on the stocks, especially when it is evident that the company is undervalued or is probable to grow in the upcoming future and the share is going to grow in future.

Shares that value in the market below the Booking Value are considered undervalued because they are probable to increase in the future.

An investor who can identify such stocks and invest in them can earn easily out of the price difference, thus Booking Value helps an investor in earning good returns if the investor can evaluate Booking Value reasonably.

## Drawbacks of Booking Value.

Apart from the merits, there is also a flip to booking value as a financial metric. The drawbacks of booking value are as follows:

Booking Value of the company considers the historical cost of the assets and liabilities of the company thus it does not take into consideration the impact of the market on the value of the company.

This may be misleading for investors depending only on the Booking Value while investing.

For example: Suppose Company A has a Booking Value of Rs.50 lakhs and a market value of Rs.100 lakhs and company B is having a Booking Value of Rs.75 lakhs but the market value of company B is Rs.30 lakhs as it is not performing well in the market.

Suppose an investor invests in company B as it has a higher Booking Value compared to Company A.

In that case, the investor may have to suffer losses in the future as the company has a lower market value.

### Intangible assets

Another drawback of considering Booking Value as a measure for decision making is that it does not take into consideration intangible assets like goodwill, patents, copyrights, etc.

Even if these assets are not tangible in the books of the company yet they offer a lot of value to the company’s business.

## Historical cost

Another drawback of Booking Value is that it uses historical cost for pricing the assets of the company that might have changed dramatically over the period.

Booking Value may not provide a correct valuation picture of the company when the company is using a method of depreciating the asset faster or slower than it should be.

## Other Booking Value Considerations

Booking value is effective for several considerations and they are as follows:

### Intangible assets

The Booking Value has a flaw that it does not take into consideration the intangible assets within the company.

Intangible assets are the assets that do not carry any physical form but are crucial for the business of the company. Examples are Goodwill, patents, copyrights, and trademarks.

These assets do not have any physical form but assist the company to generate revenues.

For example, suppose an investor is looking to invest in shares of a company working in the book printing business.

Because it is a company in the business of book printing, a major portion of the company’s value is rooted in the content it prints and sells and the right to print.

This company could be trading much higher in the market than its Booking Value as the market valuation takes into consideration the intangible assets of the company but the Booking Value does not.

The market value of the copyrights the company holds may be high and still be ignored by the Booking Value.

### Mark to market valuation

Using Booking Value as a parameter for making the financial decisions have certain limitations as seen above when mark to market valuation is not applied to the assets of the company that may experience an increase or decrease in their market value.

For example, land owned by the company may have a higher market value than the Booking Value due to market price appreciation while its old motorcar may have a lesser market value than its Booking Value due to outdated models and technological advancement.

In these cases, the historical values may mislead the valuation, given its fair market price.

### Price-to-Book ratio

Price-to-Book Ratio is a valuation multiple used for value comparison between similar companies within the same industry when they follow the same system of accounting and similar accounting methods for the valuation of assets and liabilities.

The ratio may not be useful for comparing two companies from different industries or following different valuation policies and accounting methods.

It may be noted that while some companies show their assets at historical costs, some companies may show their assets at the mark to market valuation.

Thus, we can conclude that a higher price-to-Book ratio does not necessarily mean a premium valuation and a lower Price-to-Book valuation does not necessarily mean a discounted valuation.

Further, it may be noted that a price-to-Book ratio of 1 indicates that the market price of a company is exactly equal to the Booking Value of the company.

An investor should invest in companies having a Price-to-Book ratio of 1 since the market price of the company generally carries some premium over the Booking Value.

## How is Market Value different from Booking Value?

Market value considers more factors than Booking Value yet determining the Booking Value of a company is more difficult than finding the market value, but it can be far more rewarding.

An investor can earn high returns and build a fortune by tracking the market value and the Booking Value of companies.

Investing in companies having lower market value than the Booking Value can generate higher returns for an investor.

The market value is derived from how much people are willing to pay for the company’s stock while the Booking Value is similar to the net asset value (NAV) of the company.

The Market value of the company jumps around much compared to the Booking Value of the Company.

Learning about the Booking Value can give an investor a more stable path to achieving their financial targets.

The Market Value and the Booking Value are very different and traders use both book and market values to make investment decisions. The difference between Market value and Booking Value may mean:

### Booking Value Greater than Market Value:

It is really rare for a company to trade at a market value lesser than the Booking Value.

It indicates that the market has lost confidence in the company, it may be due to a company facing business issues and problems, loss of a crucial lawsuit, or any other event having an impact on the operations of the company.

In other words, this means that the market does not believe that the company is worth its Booking Value.

Investors hunting for the values of companies may invest in such companies which are valued below their Booking Value.

They see these companies to be undervalued and speculate in the hope that the market price will increase in the future as it is undervalued currently.

### Market value Greater than Booking Value:

The market value of the company is usually higher than the Booking Value.

The market value of the company is higher because they have more earning capacity than its assets.

The investors in the market believe that these companies have a good future and the potential to earn profits and growth.

Profitable companies typically have market values higher than their Booking Values because the investors believe in these companies and are willing to pay higher than the Booking Value.

The investors hunting for growth may find these companies worth investing in because these companies have profits growing at a stable rate.

Sometimes higher market value may also mean that the stock is overvalued and trading at a higher price than what it should be.

### Booking Value Equals Market Value:

Sometimes, the Booking Value of the company may be equal to its Market value or are nearly equal to each other.

In these scenarios, the company is fairly valued in its books and the market has no reason to value it at any amount different than its Booking Value.

## Other Values that are affected by Booking Value

Booking Value as a parameter for making investment decisions have drawbacks as stated above and no investor would want to invest in any stocks until they have a firm knowledge of other aspects of the valuation of the company.

Following are a few other Values that an investor may use:

## 1) Earnings per Share (EPS)

Earnings per share, as the name suggests, are the net earnings that go to each share.

For calculating the EPS, Net profits attributable to shareholders are divided by the total number of outstanding shares of the company.

For Example, if a company has earnings of Rs.50 Lakhs and the number of outstanding shares is 25 lakhs then,

EPS = Rs. 50 Lakhs / 25 Lakh shares

= Rs. 2 Per share.

## 2) Price to Earnings ratio (P/E ratio)

P/E ratio measures how many times a company is priced as compared to its earnings. For calculating the P/E ratio, the Market price per share is divided by the EPS of the company.

For Example, if a company is quoted in the market at Rs. 50 and its EPS is Rs. 5 then,

P/E ratio = Rs. 50 / Rs. 5

= 10 Times.

#### Conclusion

Booking value is a financial factor that is widely used to determine a company’s value and determine whether the company’s stock is undervalued or overvalued. It is wise for investors and traders to pay close attention to booking value relative to market value.

However, the type of company and the assets of the company may be poorly represented in the booking value. The booking value sees the carrying value of the assets of the company.

Carrying value is often the historical value of the assets which might not show the current fair value of the company’s assets. Thus, booking value should be used along with other valuation metrics for making financial decisions.

## Beta Stocks: Meaning, Types, Formula and other essential insights for investors

#### Introduction

The market has never been easy.

Bargaining for what one wants at the lowest price has always been the game.

And no seller gets such naive buyers to get the maximum price.

Similarly, every investor wants to invest the least and get the most returns in a single stance.

So, ever felt the urge to learn more about it or explore how the world’s greatest investors make decisions in a second?

Well. We are here to quench your curiosity.

So, without any further delay, let us scroll down to interpret the fundamentals of beta stock meaning in share marketing and its business environment!

## What are beta stocks?

Beta stocks are referred to as highly sensitive and volatile securities susceptible to fluctuations regarding changes in the market environment.

It is usually applicable to every share type instrument; it is estimated against the potential risk and return on investment subjected to market risks and the working situation of the issuing company.

To put it in a sentence, beta stocks are the statistical indicator of how volatile prices can be in changing market conditions. Beta in the stock market is usually calculated with regression analysis.

A higher stock beta is suggestive of higher returns on investment, and a lower stock beta indicates a lower return on investment. The beta of a particular stock suggests to the investor how much the stock will add up to or subtract from the diversified portfolio.

### Key glances

1. Beta is a stock evaluation instrument used to assess relative risk in investment against a standard benchmark according to market fluctuations.
2. It is a component of the Capital Asset Pricing Model (CAPM).
3. It is a statistical indicator, but high beta stocks do not always mean that returns are greater in the long run, i.e., the period/longevity of returns is uncertain.
4. Investors have to take a practical approach to get a complete understanding of the ROI and risks.
5. Beta is an important but not the only instrument responsible for arriving at investment decisions.

## Formula for calculation of beta in stocks

The formula for calculation of Beta in Stocks is as follows:

Beta coefficient (β) = Covariance of a stock / Variance.

where;

Covariance is the change in the stock’s returns in relation to a change in the market’s returns.

Variance is the dispersion of the focal data point from its mean value.

## Types of beta of Indian stock

The value of beta share price varies with respect to the securities and the benchmark index against which it is calculated.

### When (β)>1

A higher return on total investment is expected when the beta value is greater than 1.

This means that the corresponding stock has more responsiveness than the share market.

These usually comprise securities issued by small and mid-cap companies.

### When (β)<1

When the beta value is less than 1, it indicates that the price variations are relatively stable. The degree of responsiveness is not massively affected by market conditions.

### When (β)=1

This beta value has a parallel effect on share price with the returns and market fluctuations. Generally, large-cap companies stocks have a beta of 1. The prices are in parallel with the benchmark index.

### When (β)=0

When the value of beta is zero, it indicates that the share price has no alterations with respect to the benchmark index.

Generally, government bonds and securities have a beta value of zero. These securities do not respond to the market fluctuations and thus have no association with them.

### When (β)<0

When beta values are less than zero, securities having an inverse relation with the stock market are expected to hold negative beta coefficients.

In the time of a drastic fall in the share market price, investors usually create a pool of their money in anticipation to earn higher returns in future.

Generally, gold holds negative beta coefficients and its value is expected to rise over time, yielding higher returns.

## What is the difference between high-beta stocks and low-beta stocks?

There are several factors of difference between High beta stocks and low beta stocks. So, here is an all-encompassing comparison chart between them to ease your understanding of the concept.

 Serial No. Basis High beta stocks Low beta stocks 1. Definition High beta stocks are the stocks that perform in correlation with the market index but with greater magnitude.  These stocks tend to outperform severely during a bullish market but also underperform severely during a bearish market. Low beta stocks are stable stocks that do not depend on market index performance.  These stocks might not outperform or give substantial returns during a bullish market.  But, they also remain stable during a bearish market. 2. Category of stocks Usually, stocks of growth and cyclical companies are high beta stocks. Staple companies (consumer), pharma companies, and companies of utility have low-beta stocks. Most are value stocks and pay a high dividend. 3. Economic situation for allocation A strong economic situation is preferable for acquiring high beta stocks and allocating resources there. A sustained, stable or normalised economy  Is preferable for low beta stock allocation. 4. Risk appetite The ones who have a higher risk appetite should opt for high beta stocks to earn potentially greater returns. For the ones who have a lesser risk appetite, low beta stock allocation is recommended to them. 5. volatility High beta stocks are highly volatile. Low beta stocks are less volatile compared to high beta stocks. 6. Returns High beta stocks deliver larger returns. Low beta stocks deliver less returns compared to high beta stocks. 7. Market crisis High beta stocks tend to experience rapid degradation during market falls. They tend to fall even more than the index. Low beta stocks tend to fall less than the market index when the market is falling.

## What is the necessity of beta as a risk measure?

The necessity of beta as a risk measure are as follows:

• Beta calculation is an approximation of how much the market fluctuations would add to risk or return.
• The necessity of beta holds high as it is primarily used for the Capital Pricing Assessment Model and it is a systematic measure of stock responsiveness to the market as a whole.
• For a methodical approach, the stock should be related to a benchmark index to sharpen the analysis.
• Different beta values of stocks provide different returns and risk involvement. Thus, beta is by and large important for studying the stock and market.
• Beta of your portfolio is the weighted average beta of all the securities constituted in your portfolio. Thus you can manage your beta by portfolio rebalancing in such a way that your desired beta can be achieved for the portfolio depending on your risk appetite.
• Including risk free securities having low to zero beta (like, Government bonds.) in your portfolio to reduce your overall beta is one of the techniques to manage the risk and hedging the market position.

## How does beta operate?

In a statistical view, beta shows the slope of a line through regression points of data. Every data point on the line represents the individual stocks’ return against the market as a whole.

A security’s beta value is calculated by dividing the product of the covariance of the security’s returns and the market’s returns by the variance of the market’s returns over a particular period.

The beta calculation leads the investors to identify in which direction will the stock move concerning the rest of the market. It provides useful insights and saves the investors from a risk pool. However, the market that is used in relation to the benchmark should be related to the stock. Unless a dissimilar approach would lead to an unfavourable situation.

Beta in stocks is the main element of the Capital Asset Pricing Model (CAPM):

Beta in stocks is an integral part of the CAPITAL ASSET PRICING MODEL(CAPM). It helps the company to assess its returns on its basis, which is similar to alpha(another integral part of CAPM).

During the boom period, when the market is at its peak levels, high beta stocks are expected to generate manifold returns and on the other hand downswing in the market, shares can lead to substantial losses too.

## How is Theoretical Beta different from Practical Beta?

The statistical values of beta are well defined in theory showing normal distribution of returns and risk involved concerning the stock.

But, a market is prone to a large number of insecurities and problems.

When the theoretical beta is subjected to market conditions, the reality and applicability of beta change. Practically, returns are not always normally distributed, but unevenly.

When low beta values have a smaller price change, it is less volatile but the longevity of the downtrend might not be favourable to the investors. Though the volatility is low, the downtrend would add to the potential losses.

Thus, practically it would spoil a portfolio performance. Hence, a practical approach is also needed at the time of investment.

Similarly, high-value beta stocks would add to the gains and returns but simultaneously would increase risk on the part of investors.

## Merits of Beta stocks

The merits of Beta stocks are as follows:

• Beta stocks have tremendously boosted the analysis to invest and intake risk and return in a proportion.
• It has valued stocks over time with respect to market changes and has proved to be an efficient tool.
• Beta is an important element in the CAPITAL ASSET PRICING MODEL.

## Loopholes in Beta figure estimation

The drawbacks of using Beta figure estimation are as follows:

• Beta can be meaningful in assessing the returns of a stock investment but it has some limitations and restrictions too.
• Beta is useful to determine a short-term risk and analyse the volatility in the Capital Asset Pricing Model (CAPM). However, it is calculated on historical data points. Thus, its relatedness decreases to determine the future of the stocks’ returns based on past data.
• Beta is also less useful to long-term investments because the volatility of the stock can change diversely over a time period due to market factors and the growth of the company’s past performance. Thus, investors are provided with a rough figure of returns and an estimation can be made of the gains on the equity through the stipulated benchmark index.

#### Conclusion

In inference, beta stocks have widely given investment analysis and the stock market a good upthrust. With the help of instruments like beta and alpha stock investors would get into a mess.

It is fundamental to invest in the stock market where it serves as a reliable factor. High and low beta stocks with different ranges have divided the investors into their own zone of investment interest.

That is low-risk investors would look after the low beta stocks and high-risk investors would definitely hunt for greater returns with risk too, higher.

However, it is just a statistical estimated tool and is not a concrete instrument to arrive at important decisions because market conditions and fluctuations are always a surprise to investors and entrepreneurs.

## How does deferred tax affect corporate balance sheet?

#### Introduction

To understand the deferred tax, it needs to be noted that there are two separate financial reports that the organisation prepares every financial year at the outset in terms of accounting policies followed by companies.

Those two reports are:

Balance sheet and income statement as per the provisions of income tax.

The main motive for the creation of two different reports is the difference in the reporting requirements under the companies act and the income tax act.

In other words, as the company follows different reporting provisions for preparing financial statements as per the companies act and the income tax act, there are chances of difference. These differences lead to differences in tax. The methodology to inspect such differences and how to account for the taxation of such differences can only be understood by grasping the deferred tax meaning with clarity.

So, without any further ado, let us dive right in.

## What is deferred tax?

Let us start with the generic definition of deferred tax by understanding it with the help of examples.

### Generic Definition

IND AS-12 Income Taxes defines deferred tax as ‘A future tax that arises due to the future recovery of the carrying amount of assets or settlement of the carrying amount of the liabilities that are recognised in an entity’s balance sheet.’

The tax effect of scheduling variations is known as deferred tax.

Example:

A machine Costs Rs. 100 for tax purposes, depreciation of Rs. 30 has already been deducted in the current and prior periods. The remaining cost will be deductible in future periods, either as depreciation or through a deduction on disposal. In this case, the tax base of the machine is Rs. 70.

Trade receivables have a carrying value of Rs. 100. The related revenue has already been included in taxable profit. The tax base of the trade receivable is Rs. 100.

## Understanding in-depth the concept of deferred tax

Depreciation rates and methods differ between the income tax act and the companies act. Companies act to prepare a balance sheet as per the companies act while paying tax based on computation stated in the income tax act.

Thus, there are chances that there exists a difference between the book value and the carrying value as per the income tax act.

Deferred tax refers to an asset or liability entry in a company’s balance sheet which is either due or paid in excess due to temporary differences as per accounting and tax value. If an organisation has paid advance taxes or received a tax credit that can be used in the future, it will fall under assets.

Similarly, when an organisation is liable to pay additional taxes in the future, it will be considered a liability. Every business prepares two different financial reports for each financial year, i.e. an income statement and a tax statement.

Deferred tax arises when there is a gap between the two due to differences in guidelines regarding the preparation of both these statements.

## Types of Deferred tax

There are two types of deferred tax asset (DTA) and Deferred Tax Liability (DTL).

Deferred tax arises from timing differences, which cause tax obligations to accumulate and become due in different years. The differences between book tax and actual income tax lead to the creation of a deferred tax liability or asset.

Numerous transactions can result in temporary differences between pre-tax book income and taxable income, resulting in deferred tax assets or liabilities. Deferred tax liability or deferred tax asset is an important part of the year-end financial closure because it affects the company’s tax outflow.

Further, Deferred Tax is mainly classified into two types:

1)  Deferred Tax Asset.

2)  Deferred tax liability.

### Deferred tax asset

A deferred tax asset is created in the case of a company when the tax amount has been carried forward due to a discrepancy in an organisation’s income statement. Because of this, its corresponding tax statement has not been recognised in the company’s books of accounts and is recorded as deferred tax assets.

It also occurs when the company has paid additional tax to the department. Deferred tax assets are recorded as an asset on the balance sheet and offset the company’s future tax liabilities.

It is created due to timing differences between the company’s book profits and taxable profits. In cases when a company pays its tax liability in advance or for another period or is conducting its tax liability for a subsequent period in a particular, fiscal year.

### Deferred tax liability

Deferred tax liability is a tax disclosed in the balance sheet that is due in the current period but has yet to be paid. The liability is postponed due to a timing difference between when the tax was accrued and when it is due to be paid.

When there is a difference in numbers between an organisation’s income statement and tax statement, it requires that tax be accumulated in a specific year. Eventually, the company becomes liable to settle it in a subsequent fiscal year. This means that the tax will become due in the future.

If a business must pay tax on a financial transaction that has not yet been completed, the tax is deferred until the transaction is completed.

## What is the Timing difference?

The company calculates its taxable profit based on provisions as stated in the Income Tax Act and gets its book profits from financial statements prepared in respect of compliance with the Companies Act’s standards.

Because of the differences in tax accounting between financial statements and tax returns, there are permanent and temporary variances in tax expenses on the income statement.

The timing difference is the difference between the book and taxable income or expense, and it can be either of the following:

### Temporary difference

Differences between pre-tax book income and taxable income that will eventually reverse or be eliminated are known as temporary differences.

Transactions resulting in transitory differences are recorded in financial and tax accounting at different periods. Rent income is one example of a timing difference.

### Permanent difference

The permanent difference is the difference between book and tax income that are unable to be reversed in a subsequent time.

In other words, the difference between tax expense and tax payable is caused by an item that does not reverse over time.

A company incurring a fine is an example of a permanent distinction.

## When is deferred tax recorded? Or, How is deferred tax asset/liability created?

Deferred tax is recorded in an organisation’s books if chances of reduced or increased tax liability in the future are more likely to occur than not.

There are different occasions when Deferred Tax asset or liability is recorded in the books of accounts:

## Different Methods to Calculate Depreciation

Deferred tax is created when there is a difference between the depreciation calculated as per the Companies Act ’13 and the provisions prescribed in the Income-tax Act, 1961.

This can be understood better with an example:

Company X calculates depreciation on a Straight-line basis, whereas Income tax follows the Written Down Value Method.

The cost of machinery is Rs. 1,00,000. The estimated life of the machinery is five years as per the Companies Act.

The depreciation shall be 20,000 for each year as per the Companies Act and 25,000 as per Income Tax Rules.

Since depreciation is higher as per IT rules, the tax liability for that year will be less. But the depreciation will be adjusted for subsequent years, eliminating any difference between the two depreciation figures by the end of 5 years.

This difference creates a future liability for the company, thereby creating a deferred tax liability.

## Different Rates of Depreciation

If there is a difference in the rate of depreciation as per the Companies Act and as per the IT rules, such a situation leads to the creation of a Deferred tax Asset or Deferred tax Liability.

For instance, If a company has assets worth Rs. 1,00,000 on which depreciation is calculated at 10%, whereas the rate is 15% as per Income tax rules.

The Income-tax rate is assumed to be 30%. The company will record depreciation as Rs. 10,000 in its income statement and Rs. 15,000 in its tax statement.

This will lead to the creation of a temporary difference of Rs. 5,000, and the company will create deferred tax assets in its books for Rs. 1,500 (5000*30%).

## Gross Loss

When an entity realises a loss for a financial year, it allows the entity to carry forward such loss and set it off with any subsequent profits.

Thus, allowing it to reduce the tax liability for subsequent periods. This leads to the creation of deferred tax assets.

## How to calculate deferred tax?

Deferred tax is the difference between the gross profit of the Income statement and the tax statement.  It can be calculated as:

 Particulars As per Income Statement (Rs.) As per Tax Statement (Rs.) Gross Profit 1,00,000 1,00,000 Depreciation 20,000 25,000 Gross Profit after depreciation 80,000 75,000

The tax liability as per the Tax statement will be 30% on Rs. 75,000, i.e., Rs. 22,500 and as per Income statement will be 30% on Rs. 80,000 i.e., Rs 24,000.

This will create a deferred tax liability of Rs. 1500.

## What is the accounting treatment for deferred tax?

The accounting treatment for deferred tax is quite simple; we need to recognise the deferred tax asset or liability in the balance sheet through the statement of profit and loss.

In doing so, we need to create a deferred tax asset or liability as to the case by debiting the profit and loss statement in case of deferred tax liability and crediting the account of profit and loss in case of deferred tax assets.

Let us understand the accounting treatments by an example:

Suppose a company has computed a Deferred tax asset of Rs. 50, then accounting entries will be;

Deferred Tax Asset A/C.                             Dr. Rs.  50

To P&L A/C.                                            –    Rs. 50

And, if the company has computed a Deferred tax liability of Rs. 50, then accounting entries will be;

P&L A/C.                                                            Dr. Rs. 50

To Deferred tax Liability A/C.              –        Rs. 50

It should be noted that both the deferred tax asset and deferred tax liability are created due to the temporary difference between the book carrying value and the tax base.

These temporary differences are temporary.  Thus, the impact of such differences is eliminated over some time. Ind As 12, “Income taxes”, amounts of deferred tax asset or deferred tax liability are not required to be discounted to their present value.

While doing deferred tax calculation, the time value of money is ignored and thus, the timing difference gets reversed.

Let us understand the above accounting with the help of a complex example:

HIMATSINGKA CO. Private Limited posted a profit of Rs 7500 including the provision for bad debts amounting to Rs. 200.

For income tax, bad debts are allowed in the year when it is written off.

Hence the taxable income of HIMATSINGKA CO. Private Limited would be Rs 7700 (7500 + 200) resulting in a tax liability of Rs. 2310, assuming a tax rate of 30%.

If bad debts would have been allowed as a deduction for tax purposes, the tax would have been (7500 – 200) * 30 % i.e., Rs. 2190.

Hence the company will recognise a tax asset of Rs. 120 (2310-2190) and would pass the below entry in their books of accounts:

Deferred tax asset a/c Dr……               Rs. 120

To Profit & amp; Loss account a/c ……. Rs. 120

## How is Deferred Tax Asset different from Deferred Tax Liability?

The deferred tax asset differs from deferred tax liabilities on several factors. To ease the understanding of such factors, here is an all-encompassing comparison chart provided for the same.

 Serial No. Parameter Deferred Tax Asset Deferred Tax Liability 1. Requirement When the profit as per books of accounts is less than the profit as per income tax provisions, a deferred tax asset is required to be created. When the profit as per books of accounts is more than the profit as per income tax provisions, the deferred tax liability is required to be created. 2. Basis The creation of a deferred tax asset is subject to the principles of prudence. The Creation of deferred tax liability is subject to the provisions of Minimum alternate tax (MAT). 3. Journal Entry Deferred Tax Asset A/C. Dr.                             To P&L A/C P&L A/C. Dr. To Deferred Tax Liability A/C. 4. Disclosure It is disclosed under the head of non-current assets in the Balance sheet. It is disclosed under the head of non-current liabilities in the Balance sheet.
##### Conclusion

The company may owe or have a balance with the tax authority which arises due to the reporting differences. Deferred tax is an important balance sheet item that helps investors to gain knowledge about the tax position of the company.

Deferred tax represents the negative or positive tax balances of the Company.

Deferred income taxes affect the Company’s future cash flows, that is, if it is an asset, the future cash outflow of tax will be less, and if it is a liability, there will be more future cash outflow.

## How shares and holdings are different

#### Introduction

It is easy to confuse these two commonly used terms if you are a beginner in trading in the stock market. However, it is important to know the difference and meaning to plan your transactions without any issues. One such confusing term is shares and holdings. They are often used together but mean different.

A share represents a unit of stock. A company may either choose to issue preferred shares or common stock to investors. A company also issues equity shares in return for capital to investors. There are two kinds of shares, a) preference and b) common shares.

Holdings are the entirety of stocks or shares that an individual holds in his investment portfolio, such as pension fund, mutual fund, exchange-traded funds (ETFs), futures, options, and bonds.

## Stock Overview

Let’s discuss a little about stock market holding

Stocks are a type of financial securities that give stockholders part-ownership in a company. When you buy a company’s stock, you become a stockholder. A stockholder has a claim on the part of the company’s assets and earnings. The stock certificate is proof of ownership and states the number of shares you hold.

You can buy stocks of either a single company or multiple companies. There is no limit to the number of stocks you can hold in your investment portfolio.

Investors buy those stocks of companies that will likely increase in value in the future. When stock price increases, the stockholder sells the stocks and earns a profit. However, a stockholder can also receive a dividend, a part of the company’s retained earnings, either quarterly or annually. Buying and selling stocks is thus a profitable way to make money.  Moreover, it reduces market inflation impact over a period.

## Shares Overview

A share represents a unit of stock. Shareholders are entitled to the company’s retained earnings in the form of dividends. If you are a shareholder of a company, you get the voting right at the shareholders’ meeting and hold some ownership of the company in proportion to the shares you have bought.

There are two types of shares, equity & preferred shares. Let’s briefly discuss these two shares.

## Equity Shares

To raise capital, a company issues equity shares at the cost of diluting its ownership. The value of an equity share is the book value or face value. When more people buy shares, the share price rises, and the share price falls when more people sell shares. As on a stock exchange, the share price is governed by demand and supply.

Most well-established, large-cap companies pay bonuses and dividends to their shareholders. Equity shareholders get a fraction of ownership of the company. They benefit from dividends and capital appreciation. They also enjoy voting rights in the critical matters of the company. Although, the main motive for issuing equity shares is to raise funds for expansion and growth. A company issues equity shares through Initial Public Offering (IPO) to the general public. You can easily trade stocks on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in India with the help of registered brokers.

## Types of Equity Shares

 Ordinary Preference Bonus Rights Sweat Equity ESOP Ordinary shares are issued by a company that wants to raise funds so that it can meet its long-term expenses.  An ordinary shareholder will get part ownership of the firm and have voting rights. Preference shareholders receive dividends before equity shareholders.  Preference shareholders do not enjoy a common shareholder’s membership and voting rights. Bonus shares are the additional shares given to its existing shareholders by the company on the basis of the shares owned by them.  It is issued without any additional cost. These shares are issued only for specific premium investors.  They are issued at a discounted price.  The purpose of issuing these shares is to raise money to meet financial requirements. Employees and directors of a company get sweat equity.  They receive these shares at a discounted price for the excellent work of adding value to the company, providing intellectual property, etc. Employee Stock Options are offered to employees as a retention strategy and incentive.  Employees purchase these shares at a predetermined price at a future date.

### Preference shares

Preference shareholders receive dividends before equity shareholders. They are the first to receive payouts from the company. At the time of liquidation, the last payments are made to the preferred shareholders.

## Types of preference shares

 Convertible Non-convertible Redeemable Non-redeemable Participating Non-participating Cumulative Non-cumulative Adjustable These shares can be easily converted to equity shares. These shares cannot be converted to equity shares. These shares can be redeemed or repurchased by issuing company at a fixed date and rate.  These shares provide a cushion to the company at the time of inflation. These shares cannot be redeemed or repurchased by issuing company at a fixed date.  These shares are a lifesaver at the time of inflation. These shareholders can demand a part of the company’s extra profit at the time of its liquidation when the dividends have been paid to other shareholders. They receive fixed dividends, but these shareholders do not get the additional option of earning dividends from the extra profit earned by the company. These shareholders enjoy a cumulative dividend payout even if the company is not making any profit.  These dividends will become arrears when the company is not making a profit and, therefore, will be paid on a cumulative basis when the business generates profits. These shareholders will not receive dividends when the company makes no profit. They cannot claim dividends in future profits or years. Here, the dividend rate is influenced by market rates and therefore is not fixed.

## Difference between stocks and shares

 The basis for comparison Stocks Shares Meaning Stocks are a type of financial securities that give stockholders part-ownership in a company. A share represents a unit of stock. Denomination Two different stocks of the company may or may not have an equal value. Two different shares of the company may have the same or equal value. Nominal Value There is no such value associated with stocks. There is some nominal value associated with the share Original Issue Yes No Paid-up Value Stocks are fully paid up. Shares are either partially paid up or fully paid up. Numeric Value The stock has no numeric value. A share has a distinctive number.

### Holdings

An individual has an investment portfolio where he holds many stocks and shares. These stocks and shares are called holdings. In the stock market, holdings are present in an investor’s Demat Account.

For instance, holdings present in the Demat account reflect units held by an individual and their availability to trade on a given trading day. But it will not show any profit or loss from the given securities or stocks that are held.

## Difference between holdings and shares for sale

When stock market investors place a sell order during trading hours, they can discover in their Demat account that the shares that are “available to sell” do not correspond to the shares that they are already holding in their portfolio. The following factors may be primarily responsible for this phenomenon:

 Basis What does it mean? Open sell order on BSE/NSE A sell order on NSE or BSE might still be open but may not be executed yet. Since the order is in progress, account holders cannot duplicate it. Bought on BSE today If you have bought stocks on BSE today, you cannot sell them on NSE the same day. It can only be done the next day. Bought on NSE today Similarly, if you have bought stocks on a particular day on NSE, you cannot sell them on BSE the same day. It can be sold the next day onwards. Pledge for Margin If someone pledges their shares and avail extra margin against the same, then until the investor unpledged them, it cannot be sold further. T2T stock, bought today T2T stocks, if bought today cannot be sold on the same day. However, it can be sold only after it is delivered to the Demat account of the investor as per the T+2 settlement. Lock-in Period Shares that are locked for some reason can only be sold when the lock-in period ends or lifts. Therefore, Investors need to watch out for any announcements for lock-in information from the issuing company.

#### Conclusion

The main difference between shares and holdings is that a share represents a unit of stock and holdings are the entirety of stocks that an individual holds in his investment portfolio. Shares and stocks are generally used interchangeably. They are financial equities that denote ownership in a public company. Their minor distinction is usually overlooked. To invest in stocks or shares, you need a brokerage account. The major difference between the two is that stock is used to describe a fraction of ownership of one or more companies.

## Sensex: Key Points that You Need To Know

#### Introduction

Indexes are numerical representations of a stock market’s performance, and the index’s value fluctuates along with the stock prices. To compare the performance of investments to a relevant market index, it is necessary to use an index.

One such index is the Bombay Stock Exchange’s Benchmark index, known as the Sensex. As an amalgamation of the words ‘sensitive’ and ‘index’, Sensex is operated by Standard & Poor’s (S&P) and is also India’s oldest stock index. Investors and analysts use it to track the economic cycles in India and the rise and fall of specific sectors.

## What Is Sensex?

A one-word answer towhat is Sensex?” is that it is a market index.

A market index indicates the overall performance of all publicly traded firms. In the stock market, it is a measurement of numerous elements such as market performance, price fluctuations, etc.

The Sensex, commonly known as the S&P BSE Sensex, is one of India’s oldest market indexes. The Sensex represents the Stock Exchange Sensitivity Index, and it includes the top 30 businesses listed for trading on the Bombay Stock Exchange.

## A Brief History of Sensex

Since India’s economic liberalisation in 1991, Sensex has enjoyed substantial development. In the 21st century, the population increased from 5,000 in early 2000 to over 42,000 in January 2020. This is primarily due to India’s booming economy, which has risen at one of the fastest rates in the world for years.

On April 18, 1992, the BSE Sensex fell 12.7%, its most significant drop ever, after the exposure of a scheme in which a renowned broker diverted funds from the public banking sector to invest in stocks.

The expansion of India’s economy and Sensex is mainly attributed to the increase of the country’s middle class and vice versa. It is estimated that by 2030, over 80% of Indian families will have a median income, up from around 50% in 2019. The middle class is a significant force in driving consumer demand.

In 2019, India’s economic growth reached its lowest point in a decade. The onset of the worldwide coronavirus pandemic at the beginning of 2020 has further slowed the economy, thus also the growth of Sensex and placed a shadow on future gains.

So How does Sensex Work?

The Sensex is computed using the free-float market capitalisation technique, which reflects the performance of thirty Sensex companies. The free-float market capitalisation technique reveals the percentage of a company’s marketable shares issued to the general public.

Many people often confuse the Sensex with the Nifty Index, even though they have significant differences.

Nifty is the abbreviation for National Stock Exchange Fifty, the index of the National Stock Exchange. Nifty is managed by the NSE subsidiary NSE Indices Ltd. Sensex, on the other hand, is governed by BSE. Sensex’s base index value is 100, whereas Nifty’s base index value is 1000.

Sensex comprises 30 well-established corporations, while Nifty is formed of 50 leading companies listed for exchange on BSE and NSE, respectively. So, you might be curious about the Sensex companies which are included in the index.

## Companies In The Sensex Index

The Bombay stock exchange Sensex has 30 companies listed, representing the market’s overall state. The Sensex companies included in the index are mentioned below.

 Sr. No. Company Name 1 INFOSYS LTD. 2 TATA CONSULTANCY SERVICES LTD. 3 RELIANCE INDUSTRIES LTD. 4 ICICI BANK LTD. 5 HDFC BANK LTD. 6 HCL TECHNOLOGIES LTD. 7 BHARTI AIRTEL LTD. 8 INDUSIND BANK LTD. 9 STATE BANK OF INDIA 10 LARSEN & TOUBRO LTD. 11 TECH MAHINDRA LTD. 12 AXIS BANK LTD. 13 ITC LTD. 14 BAJAJ AUTO LTD. 15 OIL AND NATURAL GAS CORPORATION LTD. 16 TATA STEEL LTD. 17 NTPC LTD. 18 MAHINDRA & MAHINDRA LTD. 19 ASIAN PAINTS LTD. 20 POWER GRID CORPORATION OF INDIA LTD. 21 BAJAJ FINSERV LTD. 22 TITAN COMPANY LTD. 23 NESTLE INDIA LTD. 24 ULTRATECH CEMENT LTD. 25 SUN PHARMACEUTICAL INDUSTRIES LTD. 26 BAJAJ FINANCE LTD. 27 MARUTI SUZUKI INDIA LTD. 28 HOUSING DEVELOPMENT FINANCE CORP. LTD. 29 HINDUSTAN UNILEVER LTD. 30 KOTAK MAHINDRA BANK LTD.

The list mentioned above consists of the 30 companies listed in the BSE, which make up the Bombay stock exchange Sensex. These companies are chosen from a multitude of sectors to represent the market condition over all industries combined equally.

Now that you know which companies are present in the BSE Sensex, you might be curious about how the Sensex is calculated?

## How Is The Sensex Index Calculated?

The Sensex calculation was first done using the market capitalisation or “Full Market Capitalisation” technique but later switched to the “Free-float Market Capitalisation” approach on September 1, 2003. All significant index providers, including MSCI and FTSE, use this procedure for their index calculation.

Free float is the fraction of a company’s total issued shares easily accessible for public trade.

It does not account for promoters’ holdings, government holdings, or other stocks that will not be offered for trade in the normal run of events.

Market Capitalisation x Free Float Factor = Free-Float Market Capitalisation

The “market capitalisation” is the company’s value, and it can be calculated by multiplying the share price by the number of shares issued.

For example, suppose that Company A has 100 shares, and 70 of these 100 are open to the general population, while 30 are government-owned. Therefore, 70% of the shares are ‘free-floating,’ and the free float fraction is 70%.

Therefore, to do the Sensex calculation:

• The total base market capitalisations of each of the index’s 30 constituent companies are determined.
• The free-float market capitalisation of the 30 sensex companies is determined.
• The Free Float market capitalisations of all companies summed up into a total. Then calculated using the following:

Sensex Value = (total free-float market capitalisation/base market capitalisation) * Base index value.

This calculation method helps achieve the value of the Sensex stock market and governs the current state of the stock exchange. Subsequently, there are numerous advantages of the Sensex as well.

The Sensex Stock market brings substantial advantages to investors other than just reflecting the state of the market.

Here are some of the noticeable features of Sensex, which prove to be a considerable advantage for investors:

• ### High Liquidity

Sensex gives investors more liquidity since the average daily volume traded is substantial. This liquidity makes it easier for any investor to purchase or sell their stocks on the BSE.

• ### Portfolio Diversification

The Bombay stock exchange Sensex provides investment in various sectors through a single index, which offers investors an extensive selection of investment options. In addition to giving investment options, this is also advantageous for limiting the inherent risks of stock investing by allowing portfolio diversification.

• ### Security & Reliability

The Stock Exchange Board of India (SEBI) administers the Sensex stock market. The SEBI is responsible for regulating stock exchanges, fostering their growth, and safeguarding investor rights. This indicates that a regulatory framework adequately protects investors’ interests when investing in the BSE Sensex. This considerably reduces the dangers associated with unscrupulous business practices.

• ### Convenience

The Sensex also provides the convenience of investing in numerous companies of substantial sizes and a proven track record, all at once, without the hassle of investing in each of them individually. This is one of the features of Sensex, for which it is well-reputed among investors.

These are just a few of the most considerable benefits of the BSE Sensex. But, with advantages comes disadvantages as well, and here are the cons or the limitations of the Sensex.

## Limitations Of Sensex

The Sensex stock market, like any other index, has its limitations.

Even though these reasons might not be that big of a deal for regular investors, industry veterans might avoid investing the majority of their portfolio in indexes due to the following reasons:

Over Long-term, the stock market has shown to be an excellent investment, but it has had its share of ups and downs throughout the years. Investing in an index fund, such as the Sensex, can provide upside potential when the market is doing well, but leaves you entirely exposed to market declines.

Investors with substantial exposure to stock index funds may choose to hedge their exposure to the index by shorting Sensex futures contracts or purchasing a put option against the index. However, because these instruments move in the exact opposite direction of one another, combining them would defeat the purpose of investing.

Thus, you consider these limitations when investing in the Sensex stock market. In the long term, such restrictions do not affect Sensex’s performance but are still worth noting.

SEBI’s role in the Sensex Stock Market

The Securities and Exchange Board of India (SEBI) is one of the chief governing authorities in India that monitors and effectively regulates the Indian Capital Markets, such as the BSE Sensex.

SEBI is responsible for formulating structured policy development of securities markets. Specifically, this division strives to protect the interests of traders and investors on the Indian stock exchanges such as Sensex.

#### Bottom line

Having an explicit knowledge about the workings of the Sensex and its effects on the Bombay Stock Exchange is essential for any investor, regardless of their experience.

Before investing in the index, you must have a comprehensive understanding of the Sensex calculation, its characteristics, and its limitations. Hopefully, the above article has helped you gather a thorough knowledge of Sensex.

## What are the different aspects of margin Trading?

Introduction

Margin trading is lending money from the broker to buy a stock from the share market. The investor is eligible to buy more stocks than he can currently afford. This procedure allows the investors to purchase shares at the marginal value compared to their actual value. The brokers provide such a trading margin in the stock market that offers customers cash to buy stocks. This margin offered can be settled at a later stage when the investors of the share market square off their position.

On the other hand, margin funding is a short-term loan facility that the investors acquire at a fixed rate of interest to fill the gap they face while trading in options and futures and while buying stocks. The investors who take the fund pay an interest amount to the lender for purchasing shares or trades. An investor can communicate with the relationship manager of the security account or the brokerage where he has a Demat account and provide him with the shortfall fund. Also, he can select this mode of funding from where he is trading while placing an order for the shares.

This trading model allows investors to improve their market results as they can earn a higher profit for every successful trade. Also, every investor must remember that margin funding is a risky investment mode. It is because, in margin funding, you can earn a profit only when your total profit from purchasing the shares is higher than the margin amount. Though this mode is available easily, you must learn all the rules and guidelines before investing through the margin funding mode of investment in the stock market. Well, in this article, we are going to know more about what margin funding is and its other functionalities.

Margin Trading is a method where you need to pay a marginal value of the actual value of the stocks to buy them. This margin for the stocks is paid either in cash or in the form of shares as a security. Your account broker is responsible for funding the margin trading transactions. This mode of trading is a do-or-die situation. Either you can make a good profit from the trades, or you will cause a loss.

For margin trading, you will need a margin account in the securities. This account is separate from the cash balance account, which the customers mostly open when they appear in the trading field. All the securities in your margin account, be it bonds or stocks, are considered collateral for a margin loan. If you fail to meet the requirements of your margin call by depositing added assets, your bank lender might sell some of your shares or all of your investments unless the required equity ratio is fulfilled.

The maintenance requirement of the shares in margin trade funding varies from broker to broker. It is the ratio between the amount of money you accept from the lender and your holdings’ equity. In short, it is the sum of money you can borrow from the broker for every dollar you deposit in your margin account. The rate of interest your broker charges on the margin loans can also vary from time to time, depending on your broker or the bank where you have your Demat and margin account. When availing margin funding facilities, make sure to assess all its pros and cons.

To avail margin trading facility, you must have a margin account with your broker. This margin varies from broker to broker. You need to pay a certain amount of money while opening your margin trading fund account. You are required to maintain this minimum balance every time. Your traded shares are squared off if you cannot support the minimum balance. The squaring-off position is compulsory after every trading session. Before opening a margin trading account, you must also know how to use margin trading.

Once you open a margin trade funding account with your lender, your broker will release the funds you can utilise to buy shares of your choice in your desired quantities. The amount disbursed by the broker is a loan offered against cash collateral or the purchased securities. For example, you, an investor, want to purchase shares worth rupees 100,000, but you do not possess the entire amount.

However, you can have a portion of the entire amount for purchasing the shares. This amount used for buying a portion of the shares is called margin. Suppose the margin, in this case, was 20% of the total amount. Then, you will have to pay 20,000 to your broker before purchasing the shares, while the lender will provide the rest of the 80,000 rupees. The investor will also have to pay the interest designated by the bank to the lender for acquiring the margin amount.

However, you should not always opt for using margin trading every time. Just like the method of purchasing shares is profitable, it is also very risky. If you cannot profit from the number of shares you buy, you will incur a heavy loss. Try to meet the margin call whenever you are utilising the margin trading mode for buying shares. For long-term share purchases, go for standard methods. If you are willing to gain short-term profits, then you can choose this method of buying shares.

## Types of margin

There are different types of margins in the stock market, including Initial/Daily margin, gross exposure margin, market-to-market margin, extraordinary margin, Ad hoc margin, and volatility margin. Let us know more about each of them. Also, there are some margin requirements that you must know before investing in margin trading.

### Gross Exposure margin

The gross exposure margin is payable on the regular outstanding script-wise place. The exchange from where you trade asks the lender to have some securities in the account available in cash, shares or bank guarantee to safeguard against any payment default for the positions acquired on a particular day. Gross exposure margins are usually paid in advance before the transactions are done.

### Initial or daily margin

At the last of each trading day, the lenders are required to gather the margins to be paid against the open positions either on the sell-side or on the buy-side from its customers. The securities collect the daily margins to protect their eventualities that might take place between two trading days.

In the derivative field, both the seller and the buyer have to place an initial margin before opening the day of financial transactions. The margin is calculated after considering all the changes in the index’s daily price over a period, be it a year or more.

### Special Margin

Special margins are imposed on the shares that show abnormal movements in volume or price. It is a recorded measure to measure the speculative activity in a specified script. At the BSE, the margin levels range from 25% to 40%. This particularly depends on the sharpness of the share volume or price movement.

### Market to market margin

Market-to-market margin is the deposit additional amount that the seller or the buyer has to pay when the market price of a share falls below the transaction price or vice versa. The margin for the share is calculated on the particular day’s closing price and the previous day’s closing price. This margin mode is primarily applicable in the futures and options segment.

### Volatility Margin

A volatility margin is imposed on the shares to check abnormal movement on intraday transactions for a specified share or scrip. The objective is to ensure the sellers and buyers respect their commitments even if there are huge swings in the stock prices.

This margin mode is calculated by determining the difference between the highest and lowest prices over a 45-day transaction cycle and comparing it with the lowest price during that time. The margin is paid in the form of Demat shares or cash.

Ad hoc margin is prescribed by SEBI levied on the brokers with overall high positions or some illiquid stocks.

It is constantly prescribed to check the maintenance margin when investing in stocks through the margin mode of transaction.

Other uses of margins

Other products apart from the stocks can also be purchased on margin. The maintenance and initial margins will vary with other financial products. Regulatory bodies and the exchanges set minimum margin requirements. Although, there are lenders who can increase this margin requirement. Therefore, it means that the margin can vary with brokers. The initial margin required for the products is much less than that of the stocks. While the stock investors give 50% of the trade value, future traders must provide 10% of the trade value or less.

In the case of the standard mode of trading; you can buy a limited number of stocks if you have a fixed credit. In margin trading, you can buy more shares with more money. Although there are risks involved, you will have a heavy sum of money for investment. The lender will offer you more money, and with it, you can buy more of the required shares of your choice.

Since you will have enough money to trade in the market, you can diversify your portfolio according to your requirements and add more shares of your choice. All you need is to pay a portion of money at the beginning and later pay interest for that sum of money to the broker. But before doing so, remember to assess all the risks involved in margin trading. Because, in the margin, you might make a profit or incur a loss too.

### Participate in advanced options strategies

If your options trading account and margin account is approved; you can also place advance options through the securities and exchange where you have a Demat account. It includes uncovered options on equities, butterflies, ETFs, indexes and spreads.

### Short-term profit generation

If you are investing in the market in the form of margin trading, you can expect short-term profit generation. You need to invest in volatile stocks that show better fluctuations than those designed for the long term. But before that, you need to determine the stocks for investing through margin in the stock market.

Moreover, you can also go for mutual funds if you choose margin funding because, at that time, you will have enough funds in your hand for investing.

Several points justify why investors should choose margin trading for investing in the stock markets.

### Leveraging funds

Margin funding in the stock market is a mode of investment that will allow you to leverage assets and funds. Shares purchased through margin trading can improve your returns due to leverage. Depending on the size and the quantity of the securities you possess, the return on investments can be maximised with proper investment and planning.

### Gain profit from the declines

Margin trading in the share market can also gain profits from a decline. Investors can use the margin trading method to gain profits by leveraging the short-selling approach. If the investors feel that there is a decline in the price of a share on a particular day, they can short sell the shares of a company through the margin trade funding process at a higher price.

Also, they can place an order to purchase those scripts when it hits a lower price on the same day. The difference observed between the buying and selling prices is the profit gained, and the leverage mode can multiply your return on investments.

### Trade-in assets at any time

The most advantageous thing in a margin funding facility is you can trade on the assets at any point in time without thinking about additional documentation and forms. Since the regulations have been removed to provide shares on securities, the margin trading facility allows the investors to leverage lone shares in their portfolio as collateral and make huge profits from them. The mode of using securities for obtaining additional margin can be performed online.

While margin trading is attractive and lucrative for the investors due to the leverage offered, you must remember that the chances of making a loss are equally higher than the chances of making profits. During adverse price movements of shares, you can also lose funds along with shares or assets. It is advised to gather relevant information regarding how to use margin trading before investing in the share market through the margin funding procedure.

#### Final Words

The mode of margin funding is a viable process for improving and enhancing the return on investments due to the advantage of leverage. However, every share market investor must remember that a stock market is highly volatile and that leverage positions can make things riskier. Therefore, it is essential to gather appropriate knowledge and understanding before venturing into futures, options trading, and other products.

It increases the purchasing power of an investor. Due to uncalculated investments, investing in margin trading can also lead to magnified losses if things are not in your favour. Know about the margin requirement before investing in a margin trading facility.

## How does India Volatility Index (VIX) affect your investment decisions?

#### Introduction

If you are a relatively new investor to the market and are still familiarising yourself with the various terms you come across in the marketing world, you would surely have come across the term India VIX. Like any other marketing term, India VIX is important to understand for any investor in the market. So what does the term India VIX really mean and why is it so important to know? A short form of India Volatile Index, India VIX, indicates the volatility and swings in the market, which is important to know for investors and buyers. So, to understand the importance of this term, let’s go through it in a little more detail.

## What does Volatility Index (VIX) mean, and how is it calculated?

The volatility index (VIX) is a measure of market volatility, which is why it is called that. The Volatility Index represents the market’s expectation of near-term volatility. The market often moves quickly up or down during periods of market volatility, and the volatility index tends to rise.

As volatility decreases, the volatility index decreases as well. The Volatility Index differs from a price index such as the NIFTY. The price index is generated by considering the underlying stocks’ price movement. The Volatility Index is calculated as an annualised percentage using the order book of the underlying index options.

## History of Volatility Index (VIX)

To grasp the concept of a Volatility Index, one must first travel back to the 1970s, when there was no reliable technique for assessing investor confidence.

The markets were frequently based on guesswork, making identifying the ‘fair price’ of stock extremely complex.

Three economists, Fischer Black, Robert Merton, and Myron Scholes, devised a model in 1973 that revolutionised the option pricing process.

The ‘Black Scholes Model’ is now widely used to assess market volatility worldwide.

In 1997, the three were awarded the Nobel Prize in Economics for their groundbreaking work. Merton, though, had died before that year, and the model is named after the survivors.

The model is represented as follows –

C = StN(d1) − Ke − rtN(d2)

When: d1 = σs tlnKSt+(r+2σv2) t

plus: d2 = d1− σs t

In this model, the legends mean the following –

C= Call option price

S= Current stock price; another underlying price (s) may be considered

r= Interest rate (risk-free)

K= Strike price

N= an ordinary/normal distribution

t= time to maturity

## What is India VIX?

Now that we have understood the concepts of VIX, let us take you through the basics of VIX India. The NSE’s order book of NIFTY options is used to construct a volatility indicator, which is the basis of India VIX meaning

This is done using the best bid-ask quotes of near and next-month NIFTY options contracts traded on the NSE’s F&O sector.

The India Volatility Index (VIX) index indicates investors’ expectations for market volatility in the short term, i.e., over the next 30 calendar days.

The higher the India Volatility Index (VIX) figure, the more volatile the market is expected to be, and vice versa.

### Computation Methodology

India Volatility Index (VIX) uses the CBOE’s calculation technique, with changes to fit the NIFTY options order book, such as cubic splines and so on.

In order to calculate the India Volatility Index (VIX), the following factors are considered:

### Time to Expiry

The time to expiry is estimated in minutes rather than days to reach the level of precision expected by experienced traders.

### Interest Rate

The risk-free interest rate for the different expiry months of the NIFTY option contracts is the relevant tenure rate for 30 to 90 days.

### Forward Index Level

Out-of-the-money option contracts are used to calculate the Volatility Index (VIX). The forward index level is used to identify it.

The forward index level aids in determining the at-the-money strike, which aids in selecting the options contract to be utilised in the computation.

The most recent accessible price of the NIFTY future contract for the respective expiry is used to calculate the forward index level.

The ATM strike is the strike price of a NIFTY option contract that is available at a price slightly lower than the forward index level.

Option NIFTY and call arrangements with strike prices more significant than the ATM strike are both viable options.

Out-of-the-money options are contracts with a strike price less than the ATM strike, and the India Volatility Index (VIX) is calculated using the best bid and ask prices for such option contracts.

Values are computed by interpolation using a statistical approach known as the “Natural Cubic Spline” in the event of strikes for which appropriate quotations are unavailable.

Following quotation identification, the variance (volatility squared) for near and mid-month expiry is calculated independently.

## Uses of Volatility Index (VIX)

Some of the uses of the volatility index are as follows:

1) For equities traders, the Volatility Index (VIX) is an effective and reliable indication of market risk.

Intraday and short-term traders might use it to see if market volatility is increasing or decreasing.

As a result, they will be able to fine-tune their strategy. Intraday traders are at risk of stop losses being triggered prematurely when volatility is projected to surge significantly.

As a result, they can either reduce their leverage or increase their stop losses.

2) For long-term investors, the Volatility Index (VIX) is also a good indicator, and short-term volatility is usually unimportant to long-term investors.

Institutional investors and proprietary desks, on the other hand, are subject to risk and MTM loss limitations.

They may increase their hedges in the form of puts to play the market both ways if the Volatility Index (VIX) signals that volatility is rising.

3) The Volatility Index (VIX) is also a helpful indicator for options traders.

Typically, volatility determines whether to buy or sell an option.

When volatility is projected to increase, options become more appealing, and buyers are more likely to profit.

When the Volatility Index (VIX) drops, there will be more squandering of time value, which will benefit option sellers.

4) It is also possible to trade volatility with it.

If you think the markets will become more volatile, you might buy straddles or strangles.

These, on the other hand, become prohibitively expensive when volatility is predicted to rise.

A better strategy would be to buy Volatility Index (VIX) index futures, allowing you to profit from volatility without worrying about market direction.

5) The Volatility Index (VIX) index can benefit portfolio managers and mutual fund managers.

They can try to raise their exposure to high beta stocks when the Volatility Index (VIX) has peaked, and they can try to increase their exposure to low beta equities when the Volatility Index (VIX) has bottomed.

6) The Volatility Index (VIX) is a very reliable and accurate predictor of index volatility.

If you plot the Volatility Index (VIX) and the Nifty’s movement over the last nine years, you will discover a clear negative correlation.

When the Volatility Index (VIX) is at its lowest, markets often top, and when the Volatility Index (VIX) is at its highest, markets typically bottom.

This is a crucial component of index trading.

## How are Indian Markets affected?

The ways in which India Volatility Index (VIX) affects the Indian market are as follows:

### Market volatility and India’s Volatility Index (VIX) have similar trajectories.

If the Volatility Index (VIX) is very high, investors can therefore reasonably expect some crucial announcements or developments in the NIFTY.

To put it another way, a higher Volatility Index (VIX) suggests increased market volatility. Because the NIFTY 50 is a benchmark index, any change might significantly influence the economy as a whole.

To summarise, investors should keep an eye on recent Volatility Index (VIX) movements because they can predict future events. If the index is low, no significant changes are foreseen.

## India Volatility Index (VIX) and NIFTY have a malicious link

For example if India’s Volatility Index is high, NIFTY’s benchmark index will fall. This benchmark will be much higher if the Volatility Index (VIX) is low.

When one considers the subprime loan crisis of 2008-09 and the following bankruptcy of Lehman Brothers (an investing and financial services behemoth founded in 1847), it is clear that the NIFTY index was in a funk.

The Volatility Index meaning has changed worldwide anytime there has been a massive influence on the global economy owing to unrelated occurrences.

After each event, the formula for calculating this index (seen below) has been tweaked slightly.

Volatility Index (VIX) reached all-time highs in 2001, just after the September 11th hijackings and attacks on the Twin World Trade Centre Towers and the Pentagon.

### Helps investors measure market sentiment

One of the most significant functions of a Volatility Index is to assist any investor, whether retail or institutional, in determining market sentiment. One can use the Volatility Index (VIX) to determine whether buying or selling certain stocks at current pricing is better.

A good example was an epidemic in 2020. Markets plummeted when the nationwide shutdown was announced in March. Indian equities have lost about 40% of their value, a severe economic shock that will take years to recover.

Most indicators took this as a hint that they should ‘dump’ their stocks at whatever prices they were getting; there was concern that most equities would lose all value in months.

Because companies’ market capitalisations were fast eroding, all trading was temporarily halted.

The financial markets began to rise again around November, resulting in a decrease in the Volatility Index. It also shows that investors believe India’s economy is resilient and strong enough to weather the storm and will rebound shortly.

Low India Volatility Index (VIX) levels in November also suggest that India’s economy is unlikely to enter recession, formally defined as a contraction for three months in a row.

The US economy has already entered a recession, raising fears that its ramifications could dampen all optimistic market emotions in other key global economies.

Before investing considerable sums of money in the market, new or inexperienced investors should exercise caution. It is best to look at a market’s Volatility Index for at least the past 2-3 months before taking action.

The Volatility Index (VIX) in India has taken on even more relevance as the country’s central government intervenes to bolster the economy’s sagging sectors.

#### Conclusion

In a nutshell, we can conclude that India VIX is a volatility index that is used as a measure to ascertain the volatility expectations of the market.

This volatility index also plays a crucial role in the determination of premium amounts and derivative contract prices.

The past has witnessed a substantial shift in share prices and indices due to high VIX values.

## Zero Coupon Bonds: Interesting insights for investors

Introduction

Historically, corporations raised capital from investors based on a written guarantee, and this written assurance is referred to as a bond. At regular intervals, coupon bonds deliver coupons or interest payments. So, what are zero coupon bonds? As their name implies, Zero-Coupon Bonds do not pay coupons or interest throughout the term but instead return the face value at maturity.

Zero coupon bonds are bonds that don’t produce any interest during the duration of the issue. Instead, investors purchase zero coupon bonds at a substantial discount from the total price of zero coupon bonds, which is the amount they would get when the bond “reaches maturity” or “comes due.”

Numerous zero coupon bonds have maturities of various tenures such as ten, fifteen, or even twenty years. These long-term maturities enable investors to prepare for a long-term objective, like funding a child’s college tuition. With the steep discount, an investor may invest a little money that will rise over a long period.

On the secondary markets, investors may acquire several types of zero coupon bonds issued by various organisations, including the government treasury, companies, and state and local governments.

Because zero coupon bonds do not pay interest until maturity, their values on the secondary market vary more than those of other bonds.

Moreover, investors may still be required to pay federal, state, and local income tax on the “phantom” or imputed interest that accrues annually on zero coupon bonds, even if no payments are made until maturity.

Some investors avoid paying tax on imputed interest by acquiring municipal zero coupon bonds (assuming they reside in the state where the bond was issued) or the rare tax-exempt corporate zero-coupon bonds.

To gain an in-depth understanding of zero-coupon bonds, continue reading below.

## What is a zero coupon bond?

The Zero Coupon Bond, commonly known as the discount bond, is acquired at a discount and does not pay fundholders coupons or periodic interest.

During the term, money invested in zero coupon bonds does not accrue interest. At maturity, the yearly returns on the principal amount are included in the face value and given to the investor. Therefore, investors get a lump payment after the term.

Corporate zero coupon bonds and government zero coupon bonds are the two forms of zero coupon bonds.

Let us understand how bonds and zero coupon bonds work.

A bond is a means through which a corporation or government entity raises funds. When bonds are issued, they are purchased by investors, who serve as lenders to the issuing organisation. The investors get a return in the form of semiannual or annual coupon payments for the duration of the bond’s existence. At maturity, the bondholder receives a return equal to the face value of the bond. Investors can acquire a corporate bond for less than its face value when issued at a discount.

Other bonds become zero-coupon once a financial institution removes them from their coupons and reissues them. Because they give the complete payment at maturity, the price of zero coupon bonds fluctuates much more than that of coupon bonds.

For instance, an investor who acquires a bond at a discount of Rs. 920 would get Rs.1000. The investor’s profits or return for keeping the bond is the Rs.80 return + coupon payments received. Not all bonds, however, have coupon payments, and those without coupons are known as zero-coupon bonds. These bonds are issued at a substantial discount and pay back the face amount at maturity. The gap between the sales price and par value indicates the return on investment for the investor. The payout the investor receives equals the capital invested plus the accrued interest earned, compounded semiannually at a set rate.

The rate of return on a zero-coupon bond is attributed, meaning that it is an estimated rate of interest rather than a fixed rate. For instance, a bond with a face value of Rs.20,000 matures in 20 years, and a yield of 5.5% may be acquired for around Rs.6,855. After twenty years, the investor will get 20,000 rupees. The difference between Rs. 20,000 and Rs. 6,855, that is, Rs. 13,145 represents the bond’s compounding interest until maturity. Sometimes, imputed interest is also called “phantom interest.”

Zero Coupon Bonds are ideal for long-term investors who are prepared to get their return in a single sum.

Individuals investing for a particular future event, such as a child’s education or a company, should use zero-coupon funds. This fund is appropriate for investors who want to continue investing without worrying about market fluctuations or trends. In addition, investors seeking portfolio diversification at a low-risk level may purchase a Zero Coupon bond. It will diversify the portfolio and provide a lump amount at a certain period.

The lack of a consistent income makes Zero Coupon Bond funds unattractive to many investors.

Others, however, find it suited for achieving long-term investing goals. It enables investors to receive risk-free interest over an extended period. When the interest rate is high, purchasing Zero-Coupon Bonds might be quite advantageous. Buying tax-free municipal Zero-Coupons is an excellent strategy to avoid paying taxes. This only applies to investors who reside in the state where the bond was issued.

Now that you have an idea about the zero coupon bond, you might be wondering what advantages buying a zero coupon bond brings to the investor.

Zero coupon bonds have quite a few benefits to the investors, making them a viable investment option.

Before choosing a Zero Coupon bond as an investment, it is essential to comprehend the advantages of zero coupon bonds

The advantages of Zero-coupon bonds are listed below:

• ### No reinvestment risk.

Other coupon bonds do not let investors get a bond’s cash flow at the same pace as the necessary rate of return on the investment. However, zero coupon bonds eliminate the risk of reinvestment. Zero-coupon bonds do not permit periodic coupon payments; hence, the zero coupon rate of interest is guaranteed to be stable.

• ### Fixed yields.

Bonds with no coupon payments are an excellent option for investors that favour long-term investments and desire a lump-sum payout. This is due to the guarantee of a set return, provided the investment is held until maturity.

• ### Long-term perspective.

The Zero Coupon bond’s lengthy-time horizon substantially benefits long-term investors. A long-term investment may obtain a set sum without concern about market volatility.

These are some of the most prominent advantages of zero coupon bonds investment, and knowing them would help you judge whether zero coupon bonds are a fit investment for you or not. Along with benefits, there are a few drawbacks that you should be aware of if you plan to invest in zero-coupon bonds.

## Drawbacks of zero-coupon bonds

No investment can be perfect, but even if there is no risk involved, zero-coupon bonds still have drawbacks.

Despite its numerous advantages, the zero coupon bond has a few drawbacks, which are discussed below.

• ### No regular income.

Therefore, the zero-coupon bond prevents a regular cash flow, and this bond will not benefit investors who need steady cash flow.

• ### Interest Rate Danger

Zero coupon rate of interest may drop over time owing to market fluctuations. Therefore, investors will constantly be exposed to interest rate risk if they sell before maturity.

Due to the secondary market’s lack of liquidity, the value of this bond has a negative connection with the increase in the interest rate. An increase in the interest rate signifies a fall in the secondary market value of the fund.

• ### Duration Risk.

Duration risk is a bond’s price sensitivity to a one percentage point fluctuation in the interest rate. The longer the term, the greater its sensitivity to interest rate fluctuations.

These are some of the noticeable drawbacks of investing in zero coupon bonds. Keeping these factors in mind helps investors gain insight into the kind of returns they may expect from such investments.

To calculate the capital gains from investment in zero coupon bonds, it is essential to know how zero coupon bonds are priced.

## Pricing of zero coupon bond

You might be wondering how the price of a zero coupon bond is calculated. Here are the details based on the zero coupon bonds calculation of price is done:

Zero Coupon Bond Price = M / (1+r)n,

Where M is the bond’s maturity value or face value, r is the needed interest rate, and n is the number of years before maturity.

The formula mentioned above is used to set the pricing of zero coupon bonds and subsequently calculate its face value and other factors surrounding it. Let us look into an example to gain more insight into how this works.

If an investor wants a 6% return on a bond with a par value of Rs.25,000 and a maturity date of three years, they will be willing to pay the following price: Rs.25,000/(1+0.06) = Rs.20,991. If the debtor accepts this price offer, the bond will be issued to the investor for a price of Rs.20,991/Rs25,000 = 84% of its face value.

At maturity, the investor earns Rs.25,000 – Rs.20,991 = Rs.4,009, which corresponds to an annual yield of 6%. The longer the period before the bond matures, the lower the price the investor pays, and vice versa. The first maturities of zero-coupon bonds are typically at least ten years.

These long-term maturities allow investors to plan for long-term objectives like investing in a child’s college education. Due to the bond’s steep discount, an investor may invest a small sum that will rise over time.

Zero-coupon bonds may be issued by the government treasury, state and local governments, and companies, among others. The majority of zero-coupon bonds are traded on the main markets.

## How is it different from normal bonds?

Interest payments, or coupons, are the primary distinction between zero-coupon and ordinary bonds. Regular bonds, commonly known as coupon bonds, pay interest during the bond’s life and return the principal at maturity.

Even though a zero-coupon bond does not pay interest but trades at a substantial discount, allowing the investor to realise a profit upon redeeming the bond at maturity for its total face value.

To get a clear understanding of the disparity between these two financial instruments, let us go into further details:

The payment of interest, often known as coupons, differentiates a common bond from a zero-coupon bond.

A conventional bond pays bondholders interest, but a zero-coupon bond does not. Instead, bondholders of zero-coupon bonds get just the face value of the bond at maturity. Regular bonds, commonly known as coupon bonds, pay interest during the bond’s life and return the principal at maturity.

## Difference From Investor’s Perspective

Investors in long-term zero-coupon bonds profit from the difference between the purchase price and the amount received at maturity.

This sum might be significant because zero-coupon bonds are generally acquired at substantial discounts to face value, and this discount typically results in greater long-term returns.

Due to the form of the yield curve, a zero-coupon bond will often provide better returns than a conventional bond of the same duration. Long-term bonds have greater yields than short-term bonds under a regular yield curve. The interest payments for common coupon bonds are due before the maturity date, and thus these payments are comparable to those on smaller, earlier-maturing zero-coupon bonds. Interest payments decrease both the waiting period and the risk, lowering predicted profits.

### Variation From Speculator’s Perspective

Zero-coupon bonds are more volatile than regular bonds. Therefore speculators may earn more from projected short-term price fluctuations by investing in them.

When interest rates fall, everything else being equal, the price of a zero-coupon bond will climb more than that of a standard coupon bond. Because the values of government treasury bonds react substantially to changes in interest rates, zero-coupon treasuries are favoured for interest rate speculation.

Additionally, zero-coupon corporate bond prices may be utilised to speculate on the health of the issuing business. Assume that a bankrupt corporation previously issued zero-coupon and coupon bonds maturing in five years. The market value of both bonds would have collapsed, resulting in coupon bonds that pay very high-interest rates compared to their initial price. This establishes a buffer in case the firm goes bankrupt before maturity. The zero-coupon bond lacks this protection, carries a greater risk, and yields more profits if the issuer survives.

### Taxation Differences

Zero-coupon bonds may also appeal to investors who want to leave their descendants a substantial inheritance. If an Rs.2,000 bond is received as a gift, only Rs.2,000 of the annual gift tax exclusion is used. However, once the bond matures, the receiver finally gets a significant amount of more than Rs.2,000. Unfortunately for holders of zero-coupon bonds, some taxes may diminish the efficacy of this method.

Even though they do not pay periodic interest, zero-coupon bonds entail a tax obligation for interest payments in certain countries.

This presents an issue of phantom revenue for bondholders. Finding the funds necessary to pay taxes on unearned income might be challenging. As a result, it is often prudent to store zero-coupon bonds in a tax-deferred retirement account to avoid paying taxes on future income.

All interest on these municipal bonds, including attributed interest on zero-coupon bonds, is exempt from federal taxations, and municipal bonds are often exempt from state and municipal taxes.

#### Conclusion

Zero-coupon bonds have both benefits and drawbacks. However, various investors may react differently to the characteristics.

This bond is suited for investors with long-term investment objectives, although investors with short-term investment objectives may disagree. Accordingly, investors must determine whether or not to purchase zero-coupon bonds based on their investment objectives.

The above information has hopefully given you a thorough understanding of Zero-Coupon Bonds and their function.

## Short Term Stocks: Interesting insights you need to know!

#### Introduction

Veterans of the stock market will nearly always invest in enterprises whose stocks are anticipated to be long-term winners. These stocks may be purchased over a long time, through price declines, and accumulated until they eventually become profitable. The same experienced traders will also agree that short-term stocks play an essential role in certain investments.

Financial equities that are often purchased and traded within a short period are termed short-term stocks.

For example, investors may acquire a short-term stock to profit from its rise on the stock market and then sell it within a limited time frame.

Short-term stock investments are typically kept for less than a year, and the gains made from such trades of short-term stocks are termed “short-term capital gains”.

Let us explore further into the concept of Short term Stocks and discover everything related to it.

## What are Short term stocks?

To get into the specifics of this topic, it is essential to answer “what are short-term stocks.

As mentioned previously, short-term stocks are investments, especially in equities held for a short period and traded with the intent of gaining a quick profit. Profits generated from short-term stocks trading are regarded as short-term capital gains.

Due to the sometimes turbulent nature of the stock market, dealing with short-term stock investments may be dangerous and unexpected. Within the span of a day and a week, several events may significantly impact the price of a stock. The stock price may be affected positively or negatively by company news, reports, and consumer opinions.

Day traders, swing traders, and the like are terms used to describe investors that specialise in trading equities for the short term rather than the long term. A wide range of financial instruments may be considered for short term stock trading, including market-linked financial options.

Dealing with Short Term Stock Investment is quite different from long-term trading, and it is better to have a clear idea about how these two differ. On the other hand, long-term securities are best for investors who are willing to retain their assets for a lengthy period to generate enough returns.

Skills needed to invest in short-term stocks

Any investor can trade with short-term stocks, but they must have a few essential skills to minimise their losses and maximise their capital gains.

Here is a brief idea of what these skills are:

### Risk Management

Risk management is one of the most essential parts of effective trading. Risk is inherent in short-term trading, and thus it is necessary to reduce risk and maximise gain.

### Technical Evaluation

Technical analysis is a method for analysing stocks or markets based on past prices and patterns to anticipate future events. When trading with short-term shares, this is an essential tool for understanding how to benefit while others are uncertain.

Dealing with short-term financial instruments employs various profitable strategies and tools. It would be best to educate yourself on how to utilise the means to attain success.

As you learn about dealing with short-term stocks, you will find yourself gravitating toward one investment before deciding on the optimal combination for your individual proclivities and risk tolerance. The objective of every trading strategy is to minimise losses and maximise profits, and short-term stock investment is no exception.

## Types of Short-Term Stocks and Shares

Since you know what short-term stocks are, you must clearly understand the types of short-term stocks and investments and how they are different from each other. Even though short-term investments share a similar nature, they are inherently different from each other.

Here are the various types of short-term stock investments you should know about:

• ### Equity Shares

Equity Shares can also be referred to as short term shares. Contrary to the popular notion of holding equities for an extended period, short-term shares are more focused on financial gains in a shorter time frame.

In short-term stock trading, this financial instrument bears the most significant degree of risk.

It is issued mainly by three sorts of businesses:

• Large-Cap Companies
• Mid-Cap Companies
• Small-Cap Companies.

The equity shares issued by mid-cap and small-cap corporations have a strong potential for significant returns, but they are also more susceptible to market swings. Most of these short-term shares are issued on the primary and secondary markets, and investors with idle capital are always looking for shares to invest in for short-term gains.

These are some of the most well-known Short Term stock investments, which are popular among investors. Regardless of their small duration, these short-term stocks can provide substantial gains making them a wise investment option. But there are more advantages to short-term shares and stocks than you might expect.

After knowing what short-term stocks are, you might be wondering about the benefits because of which one might invest in short-term shares. Short Term Stock brings quite a few noticeable advantages, and Here’s what they are:

• ### Liquidity

Individuals can make returns or profits from their excess cash by investing in short-term equities. At the same time, they can ensure that they will be able to fulfil any financial obligations that may arise in the not too distant future.

When you invest money in the stock markets with a view toward the short term, you can withdraw your money whenever you choose, in the event that you have an unexpected expense.

When it comes to the majority of other types of investments, there is a possibility that you will be required to mention a lock-in period or that you will miss out on sure profits if you decide to withdraw your money before the investment reaches maturity.

• ### Significant Capital Gains

Investing wisely in equities shares for a short period and similar short-term stock investments bring considerable short-term capital gains to investors, making it a much more lucrative option for investors to consider.

Although the spectrum of the gains depends on the type of investment, Government-backed short-term stocks provide security and guaranteed returns, while short-term shares from the stock market offer greater returns and higher risks.

Investors who seek a quick boost in their capital like investing in short-term equities solely for their ROI.

• ### Low-Risk Factor

The level of risk associated with any short-term stocks or fixed-income financial product at times is somewhere from minor to nonexistent.

This provides security to the investors, which is a big plus in any investment.

These are some of the advantages of investing in short-term stocks. Now that you know investing in these financial products can help you, you should also know about the limitations of short-term stock investment.

## Limitations of short-term stocks

Short Term stocks and investments bring a lot to the table, but they also come with their own set of limitations. Like any investment, short-term stocks might seem very profitable, but they might not have the gains and might not have the intended margin you expected. Here are some of the limitations of short-term stocks:

• ### Comparatively Low Income

When investing in most short-term stocks, the profit margins are not as significant as you might expect.

The only kind of short-term stock which can provide more significant profit margins can be small-cap equity shares, but they also carry a substantial amount of risk. That brings us to our following limitation.

• ### High-Risk

Investors can opt for government-backed short-term bonds, but the gains from those stocks are not as much as they’d like. This often leads to them investing in short-term shares and equities.

This process of short-term trading bears a considerable amount of risk and is often frowned upon by veteran stock market investors.

Most traders engage in short-term stock trading to generate quick profits. However, if things are not executed properly, they do not cut their losses short and end up enduring them indefinitely. The losses might be substantial. The secret to successful trading is knowing “when to exit the deal.”

• ### Less Time To Make Decisions Properly

The short-term stock investment provides less time for decision making.

Short-term stock trading affords you less time to respond, and as a result, you may make poor investing judgments. Additionally, it is exceedingly difficult to keep ’emotions’ out of financial choices when they must be made quickly.

Some traders may assert that short-term stock trading and investment may be profitable. However, keep in mind that these so-called successful traders may adhere to their stop-loss orders. However, most ordinary investors who want quick profits continue to ride out losses instead of registering marginal losses and exiting the transaction. But for the majority of investors, a long-term perspective is the only viable option.

Is Short-Term Stock Investment Better Than Long-Term?

There is no apparent victor since both options offer advantages and disadvantages.

Investing in the short term helps you attain your financial objectives in a shorter time frame and with high risk.

It is wise to choose short-term investments if you want capital preservation and are OK with modest returns in some instances. However, if you wish for more significant profits, you should invest in long-term opportunities.

Bottom line

Dealing in investments may be a complex undertaking, and every investor must have a thorough understanding of the many types of investments and stocks.

Short-term stocks are also a kind of investment in which every investor should have profound knowledge. This kind of investment can provide constant returns in a short period with high risk to investors.

As a means of mitigating risk, novice investors should also consider fixed-income short-term debt instruments. On the other hand, individuals with extensive experience can invest in short-term shares to increase the scale of their surplus income.

Market analysis and the information you’ve received from this article will assist you in making wiser financial choices.

## What are non-current assets? Meaning, types, FAQ, and more

#### Introduction

A company cannot function without its assets. They are the resources that are needed to run and progress a business. A company has current assets and non-current assets. Current assets are generally short-term assets as they can be easily converted into cash within a year, for example, raw materials, cash & cash equivalents, account receivables, etc. While non-current assets are long-term assets that cannot be converted into cash within a year. For example, intangible assets like goodwill and fixed assets like plants, machinery, building, land, etc., all benefit a company for several years.

When we talk about the day-to-day workings of a company, we generally think about current assets as they are the company’s highly liquid assets. They fund daily business operations as well as pay operating expenses like bills and loans.

However, a company also invests in long-term assets called non-current assets, which tell about the company’s investing activities. Unlike current assets, they provide benefits to a company for more than a year. Non-current assets support the core operations of a business. They are further classified into two types, tangible and intangible assets. Let’s discuss non-current assets in detail.

## What is a non-current asset?

A non-current asset is a long-term asset. A company can either invest in a non-current asset or can acquire it through mergers or acquisitions. A non-current asset is a low-liquid asset that cannot be converted into cash within a year. They appear on the balance sheet under the heading Property, Plant, and Equipment (PP&E), which helps investors understand the company’s capability to use resources and generate revenues. These assets can either be depleted, amortised, or depreciated. There are three types of non-current assets which are tangible, intangible, and natural resources. Let’s examine each in more detail.

## Types of non-current assets

### Tangible Assets/Property, Plant, and Equipment (PP&E)

Tangible Assets or Fixed Assets have a physical form and a recorded monetary value. A company owns them for its core operations. You can derive the actual value of a tangible asset by subtracting the accumulated depreciation from the original acquisition cost of the asset. However, not all tangible assets depreciate. Some, for example, land appreciates in value over time.

It also helps in computing the company’s net worth. We can determine this by calculating the non-current asset to net worth ratio of a company. Net worth represents the true value of a company by subtracting liabilities from total assets. This ratio compares long-term assets with the part of assets that a company owns. A high non-current asset to net worth ratio simply means that a company has more non-current assets. Whereas if a company has a low ratio, it means that a company’s assets are in the form of debt, which means more financial trouble in its operations.

• Land
• Building
• Plant
• Equipment
• Machinery
• Property

### Intangible Assets

An intangible asset is an asset that lacks a physical form but has an economic value. They are either definite or indefinite.

• Definite- A patent has a limited life and stays for the duration of the agreement or contract with the company.
• Indefinite- Brand recognition stays for as long as the business stays afloat.

A company can either create an intangible asset or acquire one through purchases, for example, mergers & acquisitions.

Intangible assets are listed on the balance sheet as per the cost or revaluation model. However, goodwill is not amortised but checked for impairment annually. When the carrying value of an intangible non-current asset exceeds the fair value, then an impairment loss needs to be recognised.

• Patent
• Goodwill
• Reputation
• Branding

### Natural Resources

A company derives natural resources from the earth. They occur naturally and are readily available. They are also called exhaustible or wasting assets because they are used when they are extracted. For example, Natural Gas has to be pumped out of the earth to be used.

Natural assets list on the balance sheet at the cost of acquisition plus development and exploration costs and less accumulated depletion.

• Fossil Fuels
• Oil fields
• Minerals
• Wood

## Other Non-Current Assets Examples

### Long Term Investments

Long-term investments include assets such as equity which includes stocks, mutual funds, and bonds. When investors buy such securities in the financial market, they hope that these assets will appreciate and give a good return. These assets are also listed on the company’s balance sheet.

### Goodwill

When a company acquires another company, it buys assets and intangibles like a client base, quality of employees, brand name, or reputation. Therefore, it implies that the company pays the fair market value of the intangible assets. Goodwill is generally paid in excess of the acquired company’s net value (Assets – Liabilities). The difference between the total MV (market value) of liabilities and assets and the purchase price of an acquired company is the value of Goodwill. If the company is unable to assign this excess purchase price to any other intangible non-current asset, then it is set to Goodwill.

## How are non-current assets reported on the balance sheet?

There are two different methods to report non-current assets on the balance sheet, one is Cost Model, and the other is Revaluation Model. To know more, please go through the ensuing paragraphs.

### Cost Model

Under the cost model, the asset is recorded at the net book value, i.e., cost minus accumulated depreciation. Depreciation is the amount to record the reduction in the asset’s useful economic life. The depreciation charges are recorded in a separate account called the accumulated depreciation account. They help identify the net book value of a non-current asset at any time.

The cost model’s main advantage is that there will be no biases (unlike in the revaluation model) in valuation as a non-current asset cost is readily available. However, this does not provide a correct worth of a non-current asset since the prices of assets change with time. This is precisely right for non-current assets such as property, where prices constantly increase.

### Revaluation Model Approach

This model is known as the fair value method of asset valuation or mark-to-market approach. According to this method, a non-current asset is recorded at a revalued amount minus depreciation. To implement this method, the company needs to measure fair value reliably. If the company cannot derive a reliable, fair value, the asset should be valued using the cost model.

An increase arising as a result of a revaluation should be credited to the separate reserve named ‘revaluation surplus’ and recognised as an income. If revaluation results in a drop in value, it should be recognised as an expense. Revaluation surplus should be directly transferred to retained earnings. Non-current assets under both models undergo depreciation to allow for the reduction in the useful life.

The prime reason companies adopt a revaluation approach is that it provides a more accurate picture than the cost model. It ensures that non-current assets are shown at market value in financial statements. But this is an expensive exercise since revaluation must be carried out at regular intervals. Moreover, the management may sometimes get biased and assign an increased revalued amount to assets than the reasonable market value, thus leading to overestimation.

## Cost Model vs Revaluation Model

 Cost Model                                                                                                                        Revaluation model Assets are valued at the cost paid to acquire them. Assets are shown at fair value. Class of Assets Class is not affected. The entire class has to be revalued. Valuation Frequency Valuation is only carried out once. Valuations are carried out at regular intervals. Cost It is a less costly method. It is costly compared to Cost Model.

## Financial Ratios of Non-current assets

### Non-current Asset turnover ratio

This ratio determines how a company utilises its non-current assets and how optimally they are used to generate revenues. A low non-current turnover ratio implies that a company is not utilising its non-current assets optimally. And a high non-current asset turnover ratio suggests that a company is optimally using these assets.

Non-current Asset Turnover = Net Sales Revenue/Net Book Value of Non-Current Assets.

For example, if the company’s revenue for the period is £60 billion and non-current assets are £20 billion.

Then,

Non-current asset turnover = £60 bn / £20 bn = 3.

This ratio helps in the decision-making process by management; for example, if the management wishes to acquire a fixed asset, then it needs to calculate the fair cost price of the asset so that the ratio improves.

### Non-Current Asset to Net worth

This ratio measures the company’s investments in low liquid non-current assets. Non-current asset to net worth ratio is useful to evaluate shareholders’ equity amount that is used to finance a business operation. A high ratio suggests that the majority of a company’s long-term investments are in the form of debt. However, you need to analyse the balance sheet to see which non-current assets impact the calculation the most.

Non-current asset to Net worth = Non-current Assets/Net Worth.

For example, Let’s assume XYZ company’s balance sheet has total non-current assets (PP&E, intangible assets, advances, investments) worth \$9,090 million and the shareholder’s equity or net worth valued at \$ 2,770 million. Let’s apply this formula and find the ratio.

NCA/NW = 9090/2770 = 3.281

We can see that the non-current assets of XYZ company are at least three times more than its shareholders’ equity. Therefore, we can see that the majority of the company’s assets are liabilities. Generally, this would be concerning, but you also need to look at the competitors’ results from the same industry as well.

### Importance of Non-current assets

• Non-current assets are essential to conducting a detailed financial analysis of a company.
• The financial ratios of non-current assets help ascertain the revenues generated by a company in an accounting year.
• Business owners can analyse if they can generate income from such assets in their venture.
• Analysis of these assets assists in comparison between different companies.

## What is non-current liability?

It is easy to get confused between a non-current asset and non-current liability. A non-current liability is a long-term liability that appears under liabilities and shareholders’ equity on a balance sheet.

A non-current liability is a company’s financial obligation that is not expected to be paid within an accounting year. The financial ratios analyse non-current liabilities to determine the company’s debt-to-asset ratio, debt-to-capital ratio, leverage, etc. Analysts and creditors keep a watchful eye on the company’s non-current liabilities as it determines the level of leverage and stability of cash flows.

A stable cash flow means a company can bear a higher debt load without the risk of default. The inadequate non-current liabilities will make investors hesitant to invest in the company and keep creditors away from doing business with a company.

### Components of Non-current liabilities

• Long-term loans
• Bonds Payable
• Long-term lease
• Deferred Tax Liabilities
• Notes payable

## What are Current Assets?

This article will be lacking if we do not discuss current assets. Because both current and non-current assets are recorded in a company’s balance sheet, and together they show a company’s total assets.

Current Assets or current accounts are short-term assets that are expected to be consumed, exhausted, used, or sold within an accounting year. They are used for the company’s immediate needs, funding day-to-day expenses and operations. Current assets include accounts receivable, marketable securities, cash & cash equivalents, prepaid liabilities, stock inventories, and other liquid assets.

### Current Assets and their components

Current assets are highly liquid assets meaning they can be converted into cash within an accounting year. However, it relies on the nature of the business and the type of products it markets, for example, raw materials, inventory, crude oil, foreign currency, or fabricated goods. Generally, inventory comes under current assets, but it is tough to sell machinery or land, so it is excluded from current assets. But finished goods and raw materials are sold quickly; therefore, it falls under inventory.

### Inventory

Inventory is a current asset because the company plans to sell the products within a year. It includes raw materials (supplies that produce finished goods), work-in-progress (WIP), and finished goods (ready for sale). It appears as a buffer between manufacturing and sale. If an item in an inventory is sold, its cost is transferred to the Cost of Goods Sold (COGS). There are three methods to calculate inventory; First-in, first-out (FIFO), Last-in, first-out (LIFO), and weighted average method. If a business sells inventory faster than its competitors, it incurs low opportunity and holding costs. This helps to sell the goods efficiently.

For example, due to the fast sales turnover of the brand “Lifestyle,” another fashion retailer, “Max,” is constantly under pressure to quickly sell its inventory too. The production material and fabric to produce this apparel is considered raw material.

### Account Receivable

Account receivable is the company’s money for products or services used or delivered but is still unpaid by the consumers. As long as the consumers can pay within one year, they are considered current assets. A part of it might not make it under account receivable if they are long-term credits.

It is also likely that some accounts may never pay in full. They would be considered under “allowance for doubtful accounts” and subtracted from account receivable. There is also a chance that an account might never be collected. Then it is considered a “bad debt expense” and is, therefore, not regarded as current assets.

### Prepaid Expense

Prepaid expenses are advanced payments made by a firm for goods or services to be received in the future. These are current assets, but they cannot be converted into cash. However, they free up the capital for other uses like payments to contractors or insurance companies.

The highly liquid items are generally ranked higher and follow an order on the balance sheet.

• Cash (Checking accounts, currency, petty cash)
• Short-term investments (liquid marketable securities)
• Accounts Receivable
• Inventory
• Supplies
• Prepaid Expenses

## Significance of current assets

Apart from funding the business’s daily operations and paying daily expenses like loans and bills, current assets reflect the cash and liquidity position of a company. ​The investors and creditors keep a watchful eye on the company’s current assets to assess the risk in operations and the company’s value.

## Comparison- Current vs Non-current Assets

 Basis Current Assets Non-Current Assets Meaning Cash & Cash equivalents; are easily converted into cash within an accounting year. Low-Liquid assets; are not easily converted into cash and benefits for more than a year. Components Cash & Cash equivalents, inventories, short-term investments, account receivable and prepaid expenses. PP&E, long-term investments, accumulated depreciation, Goodwill, amortisation, long-term deferred tax Nature/Investment Short-term investment or resource of a company Long-term investment or resource of a company Types It doesn’t have a type Divided into two categories, tangible and intangible assets Valuation Appear on the balance sheet at market prices. For tangible assets, they appear on the balance sheet at acquisition cost less accumulated depreciation. For intangible assets, they appear at cost less depreciation. Revaluation Not subjected to revaluation except for inventories in some cases. Revaluation is necessary; a comparison needs to be made between market value and the book value of an asset. Tax Implication Sales of current assets result in trading profits. The sale of non-current assets results in capital gains; capital gain tax is applicable.

## Why is asset management important?

1. Companies take an active role in managing current and non-current assets because it helps keep track of all the company’s assets; where they are, how they are used, what changes are made to them, and if they require any improvements.
2. Regular maintenance of the assets helps to record depreciation and amortisation accurately in the balance sheet.
3. It’s easier to identify and manage risks if the assets are regularly monitored and maintained. It helps the company to protect its value and overcome any challenge.
4. An asset management plan helps the company make informed decisions as an accurate record is maintained about stolen, damaged, or lost assets in business books. This can enhance loss prevention.

#### Conclusion

Assets are essential to run a company and scale its business. Managing an asset is very important as it monitors, tracks, and manages assets to deliver optimal results from their disposal. Managing current and non-current assets enables a company to identify and handle the associated risks to protect their value better. The correct records of both the assets help improve the accuracy of the financial statements.

Non-current assets support a company’s core operations. They are long-term investments that accrue benefits for several years. Both tangible and intangible assets help in computing a company’s net worth.

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