How Budgets affect Stock Markets

How Budgets affect Stock Markets

The budget has traditionally been an important part of the financial year, with the government announcing exactly what it wants to do for the next year, and how it has succeeded grandly at what it said it wanted to do last year.

All throughout February, the budget concerns managed to shake up the Indian stock market, and it was more-or-less much volatile. However, a bit of consolidation was seen by the time the end of February rolled in. While the Rail Budget did not have much of an impact, the Union Budget was responsible for many upheavals.

A Budget is the government's statement of policy for the next financial year. Yes, budget announcements do affect the stock prices of those companies who will be impacted favorably or otherwise by the proposed changes in the policies. You will see lot of volatility in stock prices in the run up to the budget. I would advise investors to be patient. Understand the budget’s implication and then make your investments.

Well, at least that is what it seemed like, but now people are worried about the impacts of the latest Budget on inflation and an economy coming out of the recession. While it is true that the recession never hit India that hard to begin with, some serious impacts on jobs and other economic data cannot be denied.

It's going to be one of those years where we will at times fall a lot and we are going to go through that particular period for the next few months and then if one or two things go right, it should fairly easily pick up from there and ride about 50-60% from the bottomed. Add the budgetary impacts to that, and things do not seem to be very promising.

Part of the budget is an economic survey that gives you lots of figures on government spending and income, and the remaining part is the budget speech which tells you what they intend to do in the coming year.

Before 2000, budgets were presented at 5PM - a hangover from the British era when the Indian budget was presented to coincide with the markets in England. Yashwant Sinha changed this and our markets have been blessed with massive budget moves ever since.

Since 2000, the average budget day move is -1.22% in the last 10 years,with the wildest swing being 5% either side. Only on two occasions have there been moves of less than 1%.

The roll from the budget day to one week after is an indication that what people have finally digested information and there are clarifications issued - are interesting. While the average and median moves are small, that is because the swings are wild in either direction - in effect moves are more than 1% every single time, and bar 2004, more than 2%.

In 2002, when the swings were really wild, Yashwant Sinha had rolled back five proposals. The budget day saw a 4% fall, and the subsequent week, a 10% rise in the index.

Stock markets tend to react violently around the budget. Listed companies, either directly or indirectly gets benefit or get hurt by provisions of the budget. Following is a bar graph showing how stock markets on budget day itself moves violently - the change from the previous day to the next:

Another way to look at markets are to see where markets go from one month before the budget to after.

At times near a budget, it seems like there isn't a trade, that markets don't trend or revert, around half of the graphs show a trend, the rest don't. But as an options traders, one can take on a straddle, strangle or butterfly (buying/selling both put and call options). But you will note that these options get really expensive near the budget, because people like me have done the analysis of the past and pushed up options prices through buying. One can make an analysis out of the India VIX (Volatility Index), which has a "normal range” of 16%-20%, the VIX tends to shoot up before important announcements such as the budget, or election results. Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term.

As India is increasing its spending on Infrastructure, Infra companies are going to get benefited from it.Government spending impacts infrastructure, so stocks of companies belonging to sectors such as Reality, Transportation, Communication, Warehousing, Power Generation etc. & will react as the government tries to steady FDI in a year that it seems to have slows down. Better financial visibility will be a huge positive.

Stock markets react differently to budgets even on an individual sector basis. For instance, the budget has never been kind to tobacco industry, so there is bound to be some under-performance in ITC. The Tech sector benefits from anything that involves lower direct taxes, subsidies to semi-govt companies etc. and we saw a massive rise in these stocks through the early part of the last few years, just after the budget, as taxes were slashed and flattened.

3G auctions gave a big fillip to revenues this year, and so did public sector IPOs. But the next year may not yield that much in terms of benefit - most of the IPOs sold are today quoting below their IPO prices, with the extreme example of NHPC being about 30% lesser. With a few FPOs being lined up to raise funds such as ONGC, PFC etc, the budget may prove to be a big plus for the Infra stocks.

Overall, this isn't meant to be a great budget in terms of announcements: it's mid-term, there aren't too many elections, the main contenders of income and indirect taxes are being handled separately, and the budget is increasingly unimportant to even policy nowadays. Yet, there will be something or the other that will impact the stock you know, and with the recent drop in markets, it may be useful to position yourself in sectors that the government is likely to favour. For a long term value investor, the budget may throw up juicy opportunities to buy excellent stocks, especially if there is a negative bias. For the traders, the market volatility will go up even further, and if you can handle the butterflies in the stomach, there's never been a better time to be in the markets.

But then there are other experts who believe that the Sensex might just manage to pull through, although they have doubts about the impending price rises that could result from the hike in prices of petrol and diesel.

Irrespective of the proposals, the operate rs try to crash the market. The real impact can be seen after going through the budget proposals thoroughly and after the reaction of the business houses and chambers of commerce. But the proposals of budget would show no impact on the stocks of information technology. To some extent, FMCG sector may get affected.

Let's wait and watch and keep our fingers crossed, all the while praying for a better market than last year at least.

Scope of NCFM Examination

Clearing an NCFM Exam is a critical element of the financial sector reforms is the development of a pool of human resources having right skills and expertise in each segment of the industry to provide quality intermediation to market participants.

Once you pass the exam, you can make an entry into the stock market as a trainee. After gaining experience, one can get involved in four main fields involved with stock exchange proceedings depending on your interest
1. Jobber - These are the market's wholesale dealers who buy and sell stocks and shares in their own account to make a profit.
2. Dealer/Relationship Manager - Buys and sells securities to market makers on behalf of investors. They may also advise investors how to get the best out of their investments.Brokers give preference to the employees who have cleared the NCFM Exams.
3. Investment Analysts - Provide investors and stockbrokers with information to help them decide which securities to invest in. The work tends to fall into two categories, stock broking analysts and institutional analysts. It includes analysing individual companies and look at broad sectors of the economy, making recommendations as to which sector or industry to invest in rather than which company. These analysts work for stock broking firms, institutional investors such as banks and pension funds etc.
4. The Stock Exchange - Itself as a central administrative and regulatory body, employs staff with these certifications.

For more information on NCFM Exam Preparations,
mail at : shubhneet.sethi@gmail.com

NCFM Examinations

I am writing this post to enlighten beginners about NCFM Certifications. NSE’s certification in financial markets commonly known as NCFM (NSE's Certifications in Financial Markets) is the first step towards the ladder of financial world. The purpose of these certifications is to create awareness among the finance professionals about Indian Financial Markets. There is no specific requirements as to who can pursue these certifications, but one has to be atleast a High School Passed out & 18 years of age.


Currently there are 24 separate modules in NCFM, most of which are fairly easy to clear with a nominal amount of preparation and that's why few people call them kinder garden certifications. But remember the old quote that, if you want to reach the top of a ladder, you need to start from the lower step. Clearing these certifications not only increases your knowledge about financial world but also shows your commitment to build career in financial markets.

Please Note that, Clearing these exams doesn't guarantee you a job but do make your Job application stronger than other candidates. Following is the list of most sort after NCFM Certification by the employers in the Financial Industry.

A beginner can start his campaign in the following order as per me.
1. Financial Market  Beginners Module
2. Securities Market Basic Module
3. Commercial Banking in India
4. Capital Market Dealers Module
5. Derivative Market Dealers Module
6. NISM Series-I: Currency Derivatives Certification Examination
7. Commodities Market Module
8. NSDL - Depository Operations Module
9. Investment Analysis & Portfolio Management
10. Compliance Officers Corporate Module
11. Equity Research Module
12. NISM Series-VA : Mutual Funds Distributors Module
13. Option Trading Strategies Modules

Among all the modules I think NSDL Module needs serious preparation. That’s because it deals with many new concepts like stock lending and borrowing, intermediary account, back end processes, dematerialization and Re-materialization, Pledge & Hypothecation etc. More importantly NSDL Module deals with the process flows during different transactions.


The fees of most of the modules vary from Rs 1000 to Rs 2000 and validity of the certificates varies from 3 years to 5 years. The exam date can be taken through NSE Website and the process is quite easy. Most of the modules need preparation of 8 to 14 hours. Once you register for the exam, the study material is sent to you at the prescribed address. Alternatives you can download study material from NSE Website. The Study Material online is exactly the same you will get via post. You can also call NCFM Helpline (011-23344313-27) for further enquries.


I hope this post will help guys planing to take NCFM certifications in future. In case of any queries you can write to me at shubhneet.sethi@gmail.com and I will be happy to answer them.

Introduction to Fundamental Analysis - Part II

Putting fundamental analysis to work

It’s easy to get consumed with the fast-money trading aspects of stocks. Exciting TV reports about stocks on the move and companies that have new products practically turn investing into a sporting event. In fact, if you listen to some traders talk, they rattle off companies’ ticker symbols in rapid-fire delivery just as sports fans talk about teams. Flashing arrows and rapid trading can become an addiction for people who get into it. And it’s exactly the headache and insanity fundamental analysis is trying to help you avoid. After all, stocks rise and fall each minute, day, and week based on a random flow of news. The constant ups and downs of stocks can sometimes confound logic and reason. Trying to profit from these short-term swings is a game for gamblers and speculators. It’s futile on a long-term basis. But that’s not to say investing is gambling. Remember that those stock symbols you see flashing red and green aren’t dice, horses, or cards. They’re more than just the two, three, or four letters of their ticker symbol. When you buy a stock, you’re buying a piece of ownership in companies that make and sell products and services. You’re buying a claim to the companies’ future profits. Owning a piece of a real business over time isn’t gambling, it’s capitalism. Fundamental analysis forces you to focus on investing in businesses, not stocks. You’re not buying a lottery ticket, but a piece of ownership in a company. If jumping in and out of stocks at the right time isn’t the way to riches, then what is the trick to successful investing? The answer is to stop thinking of stocks as just symbols that gyrate each day. The goal of fundamental analysis is to help you step away from the short-term trading and gambling of stocks. Instead, you approach investing as if you’re buying a business, not rolling the dice. Fundamental analysis ideally helps you identify businesses that sell goods and services for more than what they paid to produce them. Fundamental analysis is your tool to evaluate how good a company is at turning raw materials into profits. Certainly, famed investor Warren Buffett is one of the best-known users of fundamental analysis. No matter how you choose investments currently, you can likely apply fundamental analysis. Even if you’re the kind of investor who likes to buy diversified mutual funds and hold onto them forever, called a passive investor, it can be helpful to understand basic financial characteristics of the companies.

Knowing what fundamentals to look for

Knowing what makes a company tick isn’t as convoluted as it may sound. Companies are so regulated and scrutinized; all the things you need to pay attention to are usually listed and published for all to see. Generally, when you hear about a company’s fundamentals, the key elements to be concerned with fall into several categories including:

✓ Financial performance: Here you’re looking at how much a company collects from customers who buy its products or services, and how much it keeps in profit. Terms you probably hear quite a bit about, such as earnings and revenue, are examples of ways fundamental analysts evaluate a company’s financial performance.

✓ Financial resources: It’s not enough for a company to sell goods and services. It’s not even enough to turn a profit. Companies must also have the resources to invest themselves and keep their businesses going and growing. Aspects of a business, such as its assets and liabilities, are ways to measure a company’s resources.

✓ Management team: When you invest in a company, you’re entrusting your money with the CEO and other managers to put your cash to work. Fundamental analysis helps you separate the good managers from the bad.

✓ Valuation: It’s not enough to identify which companies are the best. What’s a “good” company anyway? Definitions of “good” can run the gamut. You also need to consider how much you’re paying to own a piece of a company. If you overpay for the best company on the planet, it’s still likely you’ll end up losing money on the investment.

✓ Macro trends: No company operates in a vacuum. A company’s performance is highly influenced by actions of competitors or the condition of the economy. These broad factors need to be incorporated into fundamental analysis,

Knowing what you need

One of the great things about running as a hobby is all you need is a pair of decent shoes. And basketball? Just grab a ball and find a hoop. No fancy equipment is required. The same goes with fundamental analysis. Much of the data you need is provided free by companies and can be accessed in seconds from any computer connected to the Internet. Fundamental analysis can get pretty involved. But at its most basic form, there are just a few basic ideas behind fundamental analysis, including:

✓ Awareness of the benefits of fundamental analysis: Since fundamental analysis takes some know-how and time spent learning a bit, you’ll want to know ahead of time why you’re going to the trouble. Even if you’re a passive investor, or one who simply buys a basket of stocks and holds on, there are reasons why fundamental analysis might be worth your while.

✓ Retrieval of financial data: Getting all the key data you need to apply fundamental analysis is easy, if you know where to look. You can quickly round up all the data you need.

✓ Basic math: There it is: The M word. There’s no way around the fact there will be some number crunching involved in some aspects of fundamental analysis. Don’t worry, I’ll guide you to help keep the math as painless as possible. One of the key tools you’ll need is for trend analysis.

Knowing the Tools of the Fundamental Analysis Trade

You can read all sorts of books on home repair and even take a trip to your hardware store and buy lots of screws, nails and glue. But none of that effort will benefit you unless you have a tool-belt of hammers and the knowledge of how to get started and put your plan into reality. The same importance of execution is part of fundamental analysis. You may appreciate the importance of fundamental analysis and may even be able to download fundamental data from Web sites or from a company’s annual report. But you need to have the tools to analyze the fundamentals to get any real value from them.

Staying focused on the bottom line

If there’s one thing investors may agree is of upmost importance, it’s the company’s profitability. When it comes down to it, when you invest in a stock you’re buying a piece of the company’s profitability. Knowing how to read and understand how much profit a company is making is very important when it comes to knowing whether or not to invest. The income statement, when you’re trying to determine how profitable a company is. What might also surprise you is that the income statement can tell you a great deal about a company, in addition to just how much income it brings in.

Sizing up what a company has to its name

During times of intense financial stress, investors often make a very important mental shift. They’re not so concerned about making money as they are about just getting their money back. Similarly, when things get tough in the economy, investors are less interested in how profitable a company is and are more mindful of whether a company will survive. When you’re trying to understand the lasting power of a company, fundamental analysis is of great value. By reading the company’s balance sheet, you can get a rundown of what a company has — its assets — and what is owes — its liabilities. Monitoring these items give you a very good picture of how much dry powder a company has to endure a tough period.

Financial ratios: Your friend in making sense of a company

As you flip through the book and jump around to different topics that interest you, you might be a bit bewildered by just how many pieces of data fundamental analysts must deal with. You’ve got the financial statements that measure just about every aspect of the company. It can be intimidating to decide what numbers matter most and which ones can be ignored. Financial ratios will be a great help here. These ratios draw all sorts of fundamental data from different sources and put them into perspective. Financial ratios are also important because they form the vocabulary of fundamental analysts. If you’re ever at a cocktail party where analysts are talking about gross margins and accounts receivable turnover, I want you to be prepared. By the way, that sounds like a pretty boring party. Financial ratios are the favorites used by many fundamental analysts. You’ll soon be using seemingly unrelated pieces of financial data about a company to glean some very important conclusions about the company.

Making Fundamental Analysis Work for You

Imagine a young child who memorized an entire dictionary, but can’t use a single word in a sentence. That’s a basic analogy of some investors’ fundamental analysis knowledge. You might, too, know some things about the income statement and balance sheet and have a great knowledge of what’s contained in the statements. But when it comes to applying your know-how, which can be a bit trickier. Putting fundamental analysis in action requires taking everything you know about a company and mixing in some estimates and best guesses about the future to arrive at a decent expectation of whether or not to invest in a company.

Using fundamentals as signals to buy or sell

Buying a stock at the right time is very difficult. But knowing when to sell it is even tougher. And while fundamental analysis won’t tell you the exact best time and day to buy or sell, it can at least give you a better understanding of things to look out for when it comes to making decisions. If you’re a passive investor and buy large diversified baskets of dozens of stocks, you can afford to buy and hold stocks. Even if one company runs into big-time trouble, it’s just one holding in a large basket of stocks. However, if you choose to invest in individual stocks, monitoring the fundamentals is critical. If you start noticing a company’s trend deteriorating, you don’t want to be the last investor to get out.

Introduction to Fundamental Analysis - Part I

How Fundamental Are the Fundamentals?

Basic, obvious, plain, simple—all of these words describe fundamental in some way. But in practice it is difficult to decide which stocks to buy, how long to hold onto them, and when or if to sell. The very concept of value is itself complex. So when it comes to the market, the “fundamentals” are not always basic, obvious, plain, or simple. Indeed, they are far from it. Nevertheless, there are a small but important number of guidelines that you can follow to manage your investment decisions and to reduce and control risk. The fundamentals come in many forms, some complex and some simple. The best-known historical information is still found on a company’s financial statements. The summary of what a company owns and owes and its net worth, and the year’s operating results are, of course, very revealing because they provide you with the basic (fundamental) view of how all corporate results are measured: by the numbers. The numbers are never the whole story, only a starting point. Recognizing the complexity of accounting decisions made by a company and its auditors, the timing of when transactions are put into the books, and the internal valuation of assets a corporation uses, all affect the value of a corporation and of its stock. When you look at one company next to another, however, you do not know whether their financial statements were prepared using the same or similar accounting assumptions.

This presents every investor with a serious problem. If one corporation is conservative in the way it prepares its financial reports, but another is aggressive, then you cannot make a meaningful comparison. In this respect, the fundamentals are far from fundamental. The basis for comparison may not even exist, which is why you need to employ specific tools designed to test the numbers. Ratios and trend analyses are among the tools that fundamental analysts use every day. You do not need an accounting education to make informed judgments about the numbers and the trends they represent. The fundamentals contain far more than just the numbers. For example, most stock market experts would agree that nonfinancial aspects fall within the range of fundamental information. Matters such as management, industry competitive stance, reputation, dividend rate and payment history, and regulatory record, all affect what investors think about companies, even though these data are not strictly financial in nature. In addition to the fundamentals in a range of information types, investors look at technical information, trends related specifically to market price. It is a mistake to use only one form of analysis to the exclusion of other forms. Both fundamental and technical information are related to one another. That is why using a combination of fundamental and technical indicators is sensible and provides you with valuable information. Most investors recognize the importance and value of fundamental analysis but are not sure that they can master its use. Anyone who does not have an accounting education has a sense that fundamental analysis may be too complex. This is not true. Accounting and the reports that are derived from fiscal analysis are complex documents, but you will see in using this book that you do not require an accounting background to benefit from this range of analytical tools. The sense that it is simply too complex comes from the unfortunate fact that many information sources—such as the Internet, books, magazine articles—either present information in an overly complex format or oversimplify and present the same ratios without giving you any realistic, practical applications. Fundamental analysis does not have to be so difficult that you cannot grasp the information and put it to work to manage risks and make informed decisions. Here the information is kept simple and presented with illustrations, examples, checklists, key points, and definitions in context. This helps you move through the chapters, even when simply looking up a concept or to read a section, and then understand how the information is useful to you.

A problem every investor faces in deciding how to analyze stocks are not enough choices. The problem is that there are too many choices. There are many viable stocks to choose from, well-managed corporations with subtle shades of investment potential. How do you select a handful from among all of them? How do you achieve true diversification? How can the fundamentals help you to cut through the volumes of available information and simplify the decision? These are some of the questions this book is designed to answer. The tools of fundamental analysis can and should help you to narrow down your list of choices to a few important indicators. No one can reasonably be expected to study dozens of indicators and to then be able to make a sound selection. The key to making the decision is based on your personal risk standards and identification of a few key but revealing indicators. It is designed to help you put those tools to work in identifying risk levels, making valid and reliable comparisons, and ultimately in picking stocks for your portfolio. It is this activity—deciding which stocks to buy, how long to hold them and when to sell—that lies at the center of every investment program. Even if you pick the stock of well-managed, financially sound companies, if your timing is off, your profits will not be at the pace you would hope and expect. Fundamental analysis helps you to quantify value and financial strength; of equal importance, it helps you to time your decisions to maximize the potential for profits in your stock selection. With this in mind, you need the numbers as a starting point, the information you find in corporate audited financial statements and their footnotes, which includes quarterly filing papers and annual statements. Beyond these sources, you need to know how to read financial news and apply new information to a stock’s value; how to anticipate economic changes in the broad market; and how those changes are likely to affect stocks; and how to identify a company’s position within its industry and sector. This book provides basic information on the complex topic of fundamental analysis in a way intended to help anyone go through the concepts and definitions without trouble. The combined visual and learning tools—the many practical examples, definitions in context, key points, checklists, and graphics—take vague concepts and put them into real-world action in a way that relates to the same decisions you face as an investor every day.

Why Bother with Fundamental Analysis?

You might wonder why you need to hassle with fundamental analysis. After all, at every family picnic there’s undoubtedly the loudmouthed relative who’s filled with all sorts of can’t-go-wrong stock tips. Why bother with technical things like net income or discounted cash flow analysis when you can just turn on the TV, write down a couple of stock symbols, buy the stocks and hope for the best?

Similarly, you might figure learning how companies operate is just needless information. After all, you don’t need to know about fuel injection systems, suspensions, and car battery technology to drive a car. And you don’t need to know what’s going on behind the curtain to enjoy a play. Some investors figure they can just pick a couple of hot stocks, buy them, and drive off to riches. If the vicious bear market that began in 2007 taught investors anything, it’s that blindly buying stocks just because you might “like” a company or its products was hardly a sound way to tune up a portfolio. Chasing hunches and personal opinion about stocks is often not a great way to invest.

Some of the real values of fundamental analysis

Ever notice how there’s always a new wonder diet promising to make you skinny, and a new pill to make you healthier? More times than not, though, it seems these things never work. Getting healthy comes back to the basics — a balanced diet and exercise.

The same goes with investing. Believe it or not, investing can be somewhat full of fads. There’s always a new investment pundit or economist with a new way to pick winning stocks. And just as an hour on the treadmill will do you better than a bottle full of miracle pills, successfully choosing stocks often comes back to fundamental analysis. Fundamental analysis is the classic way to examine companies and investments for a variety of reasons, including the fact it is:

✓ Based on fact, not opinion: It’s easy to get caught up in general enthusiasm about what a company is doing or the products it’s selling. But fundamental analysis blinds you to this investment hype and gets you focused on cold-hard business realities. It doesn’t matter if all the kids in your neighborhood are buying a company’s products, if the company isn’t making any money at selling them.

✓ Good at pinpointing shifts in the business’ health: If a company’s success is starting to fade, you’ll see it show up on the fundamentals. No, there won’t be a giant sign saying “Sell this stock.” But there are clues if you know how to look, as you’ll discover. Companies are required to disclose key aspects of their business, so if there’s a problem, a fundamental analyst will often be early at spotting some trouble.

✓ All about execution: Companies’ CEOs are usually good at getting investors focused on the future and how things are going to get better next quarter. But the fundamentals are based in reality. Just think of children who say how hard they’re working at school. The report card is still the tangible evidence of how things are actually going.

✓ A way to put price tags on companies: What’s a painting worth? What’s a used car worth? Just as with anything else with subjective value, the price is generally what someone is willing to pay for it. The stock market, an auction of buyers and sellers, does a good job putting price tags on companies. But fundamental analysis gives you another way to see just how much investors, by buying or selling stock, are paying for a stock.