The terms notional value and market value might be perplexing. These concepts are closely related and are frequently used interchangeably by both rookie and experienced investors. However, it is critical to recognize that notional and market values are distinct notions. They serve fundamentally distinct functions in the stock and derivative markets. Understanding their distinctions and importance will allow you to use them more effectively. Continue reading to learn more. 

What is the notional value?

The notional value is a statistic used to describe an asset’s overall worth. It covers both the money invested and the asset’s market value. It is the difference between the market price paid for an asset and the total investment connected with the transaction. The notional value is computed by multiplying the contract’s units by the current spot price.

When investing in futures, equities, Exchange-Traded Funds (ETFs), foreign currency exchange, total return swaps, interest rate swaps, and foreign currency derivatives, the notional value can be used. It is an important statistic for analyzing and managing risk while examining various financial instruments.

What is the market value?

Market value is the agreed-upon price of a security in the market. It is decided between buyers and sellers and is calculated based on the demand and supply of the security. It is a comprehensive measure that represents the current sentiments and desires of all market participants. A security’s market value can be a good measure of investor opinion toward a company’s business prospects.

Here’s an example to help you understand how these two values work:

Suppose you decide to invest in an XYZ Index futures contract. This particular futures contract consists of 200 units, each priced at Rs. 4000 in the market. Therefore, the market value of a single unit is Rs. 4000. Now, if we calculate the notional value of the XYZ Index futures contract, it would be Rs. 4000 multiplied by 200 units, resulting in a notional value of Rs. 8,00,000.

So, in this scenario:

• Market value per unit = Rs. 4000
• Number of units per contract = 200
• Notional value = Rs. 4000 x 200 = Rs. 8,00,000

Differences between the notional and market value of a security 

Here are some differences between notional and market value to help you understand their distinctions in detail:

• The market value represents a derivative contract’s underlying worth in relation to its market value. It is determined based on demand and supply and serves as a reference point for the total value of the contract. The notional value, on the other hand, represents the current market price for a security or financial instrument. It indicates the pricing agreement reached by buyers and sellers. 
• The market value is determined by the price of a single security unit. It is the market price for obtaining this unit. In contrast, the notional value includes the total worth of a financial asset. It provides a comprehensive perspective of the security’s complete worth based on contract terms.
• The market value is the actual amount paid in the market for a given security. It reflects the market’s current supply and demand dynamics. The notional value, on the other hand, represents the overall value of the financial security’s position. It provides more information about an asset’s total value.
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• Also read :- Difference Between Shooting Star And Inverted Hammer Candlestick Patterns

• The market value represents the current market view of the security’s value. It is, nevertheless, prone to variations that are influenced by market conditions. The notional value simply emphasizes a financial security’s overall position. It serves as a reference point for comprehending the derivative contract’s greater financial commitment.

To sum it up

While the market value represents the immediate cost of purchasing a security, the notional value provides a more comprehensive view of the whole value of a financial asset’s position. Based on your financial aspirations, goals, and risk tolerance, both values can help you determine if the item is a viable investment.

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Profitability screeners

You can use this screener to screen and short list stocks depending on their profitability. For this screening, you can use a range of profitability metrics. You can, for example, screen based on operating profits or even net profits. You can use screeners such as Return on Equity and Return on Capital Employed to examine the stock in terms of return on capital. In reality, you can utilize the following combinations of profitability screeners:

Screen for =>=> NPM > 10% .and. OPM > 20%

Screen for =>=> ROCE > ROE .and. OPM > 25%

Efficiency screeners

Aside from profitability screeners, another key set of screeners concerns efficiency, or asset turnover as it is more commonly called. Efficiency screeners assess how efficiently assets are passed over in relation to the volume of sales. For example, if sales are three times the size of the assets, the asset turnover ratio is three (indicating a reasonable level of asset efficiency). Screeners can also be created based on fixed asset efficiency, core capital efficiency, working capital efficiency, and so on. These screeners can be tailored to the specific needs of the investor.

Solvency screeners

The incorporation of debt into the capital structure is a two-edged sword. On the one hand, it lowers the cost of money, but it also increases your financial risk. This is due to the fact that, unlike equity, debt must be serviced in terms of interest and principal repayments. As a result, solvency screeners play an important role in determining whether or not to invest in a stock. Solvency screeners for debt equity ratios, total leverage ratios, interest coverage ratios, debt service coverage ratios, and so on can be built. Solvency cut-off factors can be predefined and combined with the results of profitability screeners to produce the optimum outcomes.

Working capital screeners

Most industrial organizations have significant difficulties in managing working cash. Managing short-term assets like as debtors, inventories, and cash balances, as well as short-term obligations such as creditors, WC loans, and so on, provides a significant difficulty. The concept of working capital screeners is two-fold. First, it assesses if the company in question has a comfortable working capital situation. That is, the corporation should have liquid assets adequate to cover its short-term liabilities. This can be quantified using screeners such as the current ratio, quick ratio, and net working capital. The second aim of this screener is to determine whether working capital is being spent productively. Extremely low working capital ratios can be harmful, whereas extreme high working capital levels scream inefficiency.

Valuation screeners

After the fundamental screeners have been completed, this is usually the final level ratio screener. After you’ve shortlisted stocks based on your profitability, turnover, solvency, and working capital screeners, the final step is to validate your findings using the valuation screeners. There are several techniques to valuing screeners. Screeners are available depending on the P/E ratio, past price performance, P/BV for specific industries, dividend yield, and so forth. These measures assist you in shortlisting companies that provide the investor with valuation comfort. You don’t only need a stock with a price lower than its actual value. The stock must also provide a decent margin of safety.

 Also read :- What we need to know about dealing in Trade 2 Trade stocks

Combining the various screeners..

Combining the multiple screeners adds significant value to the investor. You can accomplish this by configuring numerous conditions at the same time. Typically, these ratios are not screened as discrete variables. They are always screened as combinations. Consider the following examples:

Screen for =>=> NPM > 20% .or. ROE > 15% and P/E Ratio < 15X

Screen for =>=> Asset Turnover > 2 .or. Fixed asset turnover > 3 .and. Interest coverage > 1.5

Screen for =>=> Current Ratio >2 .and. Interest coverage > 1.25 .and. PBV < 2

The examples above show how you can combine different ratio screeners to shortlist companies. The ratio screener can make your task lot easier if you have a completely populated business data base. This could be your initial move before focusing on stocks.

The post How to use ratio screeners to shortlist stocks to buy? appeared first on Republic Aeon.

1.  Substituting cash long position with long futures

Here, let’s look at a rather basic example. One lot of Reliance futures is equal to one thousand shares of Reliance Industries, thus if you’re holding a thousand shares of Reliance Industries in the cash market, you can lower the amount of money locked up by acquiring this lot. You can free up your cash on hand by purchasing futures on a margin basis. However, in the event that the price movement works against you, you must additionally account for MTM margins. For this reason, you can invest the remaining amount by allocating 20% to liquid assets and 80% to debt. We have factored in a 6% yearly return on liquid assets and a 10% yearly return on debt. You will have liquidity when you need it if you do this. First, we’ll compare them under a bullish market scenario.

ParticularsBuy RIL in cash marketBuy RIL in Futures20% balance in liquid fund80% balance in debt fundsBuy DateJan 01st 2018Jan 01st 2018Jan 01st 2018Jan 01st 2018Buy PriceRs.920Rs.920

No. of Shares10001 Lot (1000)

Buy ValueRs.9,20,000Rs.9,20,000

Margin PaidRs.9,20,000Rs.1,20,000

Balance Invest

Rs.1,60,000Rs.6,40,000Sell DateMarch 31st 2018March 31st 2018March 31st 2018March 31st 2018Sell PriceRs.990Rs.990

Sell ValueRs.9,90,000Rs.9,90,000Rs.1,62,400Rs.6,56,000Profit bookedRs.70,000Rs.70,000Rs.2,400Rs.16,000Total ProfitRs.70,000Rs.88,400

3-Month Returns7.61%9.61%

The trader’s 3-month returns would have been 7.61% if he had gone the cash buying approach, as shown in the above chart. In just three months, he could have made 9.61% had he gone with a mix of debt funds and futures. Futures provide that kind of leverage. Here, we’re going to purchase a 3-month future on the off chance that the holding term is only three months. However, what if you plan to keep the stock for a year? In such a situation, the idea of roll-over cost becomes useful. Consider a holding that lasts a year through futures with the roll-over cost factored into the futures price.

2.  Investing for the long term by rolling over futures

Is the futures method an option if our investing horizon is one year? One potential stumbling block is that liquid futures are sometimes only accessible for the first two months. Because of this, we will need to roll over the futures every two months. In a year, that amounts to six rollovers. What is the final tally for the aforementioned scenario?

ParticularsAmountParticularsAmountReliance May FuturesRs.938.85Roll cost (4.65/938.85)0.495%Reliance July FuturesRs.943.50Annualized Roll Cost3.01%2-month SpreadRs.4.65

We can compare the futures investment profitability to that of a cash investment with this yearly roll cost of 3.01%.

ParticularsBuy RIL in cash marketBuy RIL in Futures20% balance in liquid fund80% balance in debt fundsBuy DateJan 01st 2018Jan 01st 2018Jan 01st 2018Jan 01st 2018Buy ValueRs.9,20,000Rs.9,20,000

Margin PaidRs.9,20,000Rs.1,20,000

Balance Invest

Rs.1,60,000Rs.6,40,000Sell DateDec 31st 2018Dec 31st 2018Dec 31st 2018Dec 31st 2018Sell PriceRs.1,150Rs.1,150

Sell ValueRs.11,50,000Rs.11,50,000Rs.1,69,600Rs.7,04,000Profit bookedRs.2,30,000Rs.2,30,000Rs.9,600Rs.64,000Total ProfitRs.2,30,000Rs.3,03,600

3-Month Returns25.00%33.00%

Roll Cost
-3.01%

Net Returns25.00%29.99%

If the trader chooses to purchase in the futures market instead of the cash market and keeps the remaining funds in a combination of debt funds and liquid funds, he would still come out ahead by approximately 500 basis points. As an investing tool for the long term, that is the benefit of futures.

 Also read :- How to use ratio screeners to shortlist stocks to buy?

Using futures as a tool of reverse arbitrage

This is an intriguing method that you might employ during times of severe volatility. If you are holding a stock and the futures are quoted at a significant discount to the cash market price (without dividend effect), you can profit by selling your cash position and buying futures instead. For example, if you establish a reverse arbitrage at -1.3% and then cancel the reverse arbitrage at +0.6%, you can gain 1.9% in a very short amount of time. These are market-specific opportunities that will only be available for a limited time.

The moral of the story is that futures can be used as an alternative to cash markets for higher yields. Of course, you should consider the tax ramifications of this decision!

The post How to use stock futures for long term investing in stocks appeared first on Republic Aeon.

Investing in and owning stocks is one of the finest methods to build money over time. For example, from 1975 to 2022, the S&P 500 recorded yearly losses in only 11 of the 47 years, illustrating that the stock market creates returns far more often than it does not.

Better Long-Term Returns

The word asset class refers to a certain type of investment. They have similar traits and qualities to fixed-income assets (bonds) or equities, which are generally referred to as stocks. The asset class that is ideal for you is determined by various criteria, including your age, risk profile and tolerance, investment goals, and available capital. But what are the best asset classes for long-term investors?

When we examine asset class returns over several decades, we find that stocks have outperformed almost all other asset classes. Between 1928 and 2021, the S&P 500 returned an average of 11.82% every year. This compares well to the three-month Treasury bill (T-bill) return of 3.33% and the 10-year Treasury note return of 5.11%.

Emerging markets have some of the largest potential returns in the equity markets, but they also have the highest level of risk. This class has historically produced strong average yearly returns, but short-term volatility has hampered their performance. As of April 29, 2022, the 10-year annualized return of the MSCI Emerging Markets Index was 2.89%.

Small and large caps have also outperformed the market. For example, the Russell 2000 index, which measures the performance of 2,000 small businesses, returned 10.15% over a 10-year period.

 As of May 3, 2022, the large-cap Russell 1000 index has a 10-year average return of 13.57%.

 Riskier equities classes have generally outperformed their more conservative equivalents.

Ride Out Highs and Lows

Stocks are seen as long-term investments. This is due, in part, to the fact that it is not uncommon for stocks to lose 10% to 20% or more of their value in a short period of time. Investors can ride out some of these highs and lows over many years or even decades in order to achieve a higher long-term return.

Individuals have rarely lost money investing in the S&P 500 over a 20-year period, according to stock market returns since the 1920s. Even after accounting for setbacks such as the Great Depression, Black Monday, the IT boom, and the financial crisis, investors would have made money if they had invested in the S&P 500 and held it for 20 years.

While previous performance is no guarantee of future results, it does imply that long-term stock investing often produces positive benefits when given enough time.

Investors Are Poor Market Timers

Let’s face it: we’re not as calm and sensible as we claim to be. In fact, one of the inherent weaknesses in investor behavior is the tendency to be emotional. Many people profess to be long-term investors until the stock market begins to collapse, at which point they tend to withdraw their funds to avoid further losses.

When the market recovers, many investors abandon their stock holdings. In fact, they usually return only after the majority of the gains have been made. This type of purchase high, sell low conduct tends to stifle investment gains.

According to Dalbar’s Quantitative Analysis of Investor Behavior study, the S&P 500 had an average yearly return of little over 6% over the 20-year period ending Dec. 31, 2019. During the same time period, the average investor earned an annual return of roughly 2.5%.

This occurs for a variety of reasons. Here are a few examples:

• Investors are afraid of being wrong. People frequently fail to trust their own judgment and instead follow the hype, especially when markets are down. People sometimes get into the trap of fearing that they would regret holding onto equities and lose a lot more money as they decline in value, so they sell them to alleviate that anxiety.
• A sense of pessimism when things change. During market rallies, optimism reigns supreme, but the inverse is true when things go wrong. Short-term surprise shocks, such as those related to the economy, can create market swings. However, it is crucial to realize that these upheavals are frequently transient, and things will most likely improve.

Investors who pay too much attention to the stock market reduce their chances of success by attempting to time the market too regularly. A simple long-term buy-and-hold strategy would have produced significantly better earnings.

Lower Capital Gains Tax Rate

Profits from the sale of any capital assets result in a capital gain. This includes personal possessions like furniture as well as investments like stocks, bonds, and real estate.

Any gains made by an investor who sells a security within one calendar year of purchasing it are taxed as regular income. These are known as short-term capital gains. This tax rate might be as high as 37% depending on the individual’s adjusted gross income (AGI).

Any securities that are sold after being held for more than a year result in long-term capital gains. Gains are only taxed at a maximum rate of 20%. Lower-income investors may potentially be eligible for a 0% long-term capital gains tax rate.

Less Costly

Money is one of the primary advantages of a long-term investment strategy. Keeping your stocks in your portfolio for a longer period of time is more cost-effective than buying and selling frequently since the longer you retain your investments, the fewer fees you must pay. But how much does all of this cost?

You save money on taxes, as we stated in the last section. The Internal Revenue Service (IRS) must be notified of any gains from stock sales. This increases your tax liability, resulting in more money out of your pocket. Remember that short-term capital gains can cost you more than long-term capital gains if you retain your assets for a longer period of time.

Then there are transaction or trading fees. The amount you pay is determined by the type of account you have and the investment firm in charge of your portfolio. You may be charged a commission or a markup, for example, where the former is subtracted when you purchase and sell through a broker and markups are levied when the sale is directed through their own inventory. When you trade equities, these fees are added to your account. This means that with each sell, your portfolio balance will decrease.

Firms frequently levy continuing costs, such as account maintenance fees, which can deplete your account balance. So, if you’re a regular trader with a short-term goal, your expenses will mount up even more when transaction fees are factored in.

Compounding With Dividend Stocks

Dividends are profits provided by companies that have a proven track record of profitability. These are typically blue chips or defensive equities. Defensive stocks are those that perform well regardless of how the economy or the stock market performs.

These companies pay regular dividends to qualifying shareholders on a quarterly basis, which means you get to partake in their success. While it may be tempting to cash them out, there is a compelling reason to reinvest your dividends in the firms that pay them.

If you hold bonds or mutual funds, you are already aware of how compound interest affects your investments. Compound interest is any interest computed on your stock portfolio’s principal balance plus any previous interest earned. This implies that any interest (or dividends) earned on your stock portfolio compound over time, increasing the value of your account in the long run.

Best Types of Stocks to Hold for the Long-Term

When it comes to purchasing stocks, there are various factors to consider. Consider your age, risk tolerance, and investment objectives, among other things. Having a firm grasp on all of this might assist you in determining the type of stock portfolio you need to fulfill your objectives. Here’s a general beginning point that you can modify to your specific situation:

• Choose index funds. These are ETFs that track certain indexes, such as the S&P 500 or the Russell 1000, and trade similarly to stocks. But, unlike stocks, these funds are less expensive, and you won’t have to pick and choose which firms to invest in. Index funds provide similar returns to the indices they track.
• Consider dividend-paying stocks. These companies can help add value to your portfolio, especially if dividends are reinvested.
• High-growth companies can help your portfolio. Growth stocks are associated with companies that can generate much higher revenue at a faster rate than others. They are also better prepared to deliver impressive profit reports. Keep in mind, however, that this amount of development comes with a larger level of risk, so you’ll need to be a little more savvy than inexperienced investors if you want to go this path.

Always consult with a financial advisor, especially if you’re new to the investment world.

The Bottom Line

Stock investors might benefit from a variety of trading tactics. Investors with more experience and a larger cash pool may be able to ride the market waves and profit from short-term trading tactics. However, this may not work for folks who are just starting out or cannot tolerate too much danger. Long-term stock holdings can help you ride market highs and lows, benefit from lower tax rates, and are less expensive.

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