"Today a reader, Tomorrow a leader."

May 03, 2024

Hey Everyone,

A few years ago, I came across a wise saying in Peter Lynch’s Book:

A low P/E ratio is a valuable tool for stock selection, but it's not the Holy Grail.

Let me explain.

Investors often use something called the Price-to-Earnings (PE) ratio to decide if a company's stock is worth buying. It shows how much investors are willing to pay for each rupee the company earns.

However, relying only on the PE ratio can be tricky.

That's because the PE ratio doesn't tell us if the company is using its money wisely to grow. That's where the PEG ratio comes in.

It looks at both the PE ratio and how fast the company is growing. This helps investors see if a company's growth justifies its price.

For example,
let's say there's a company called XYZ Ltd.
People loved its stock because it was growing quickly.

But if investors only looked at its high PE ratio without considering how fast it grew, they might have made a risky investment.

Peter Lynch explains to us that just because a company is growing doesn't mean it's making good money for investors.
We need to look at more than just the PE ratio to make smart investment choices.

Want to learn about this in detail?

I have explained about the PEG ratio in detail in my recent LinkedIn post,
(Click on the attached photo below to understand the PEG ratio in depth.)

Market Kya Keh Raha hai, Sir?

The big news from this week was that SEBI had asked BSE(Bombay Stock Exchange) and MCX (Multi Commodity Exchange) to pay the differential between Notional and Premium turnover retrospectively as a mandatory regulatory fee, with 15% interest on the unpaid portion.

Because of this, the stock fell Around 10% since the notice!

But Sir yeh Premium aur Notional value me difference kya hai?

let's use a hypothetical scenario with an Indian company, let's call it "XYZ ltd."

Premium Value: Imagine XYZ's stock is currently trading at ₹100 per share. You believe it will rise in the next month, so you decide to buy a call option for 100 shares with a strike price of ₹110.
The premium value of this option is ₹5 per share. So, the total premium value would be ₹5 * 100 = ₹500.
Notional Value: Now, the notional value would be the total amount of money you would need if you were to exercise the option.
This includes the strike price plus the premium. So, if the strike price is ₹110 per share and you want to buy options for 100 shares, the notional value would be (₹110 + ₹5) * 100 = ₹115 * 100 = ₹11,500.

So, in this scenario:

Premium Value: ₹500 (the amount you pay upfront for the option)
Notional Value: ₹11,500 (the total value of the shares you could potentially buy if you exercise the option)

This means the premium value of ₹500 is only about 4.35% (₹500 / ₹11,500 * 100) of the notional value of ₹11,500.

Sebi is asking exchanges to pay a regulatory fee based on the "Notional value" of options contracts traded instead of the "Premium value."

But Why?

The notional value is significantly higher than the premium value.

Sebi's new fee based on notional value means a much larger bill for the exchanges compared to using the premium value.

This unexpected cost increase has impacted stock prices, with the BSE experiencing its biggest single-day fall since its listing.

MEME OF THE WEEK:

IMPACT ON TRADERS:

The immediate impact for traders might be minimal. However, the exchanges may need to adjust their fee structures to cover the increased regulatory costs.

This could potentially lead to higher transaction fees for options trading in the future.

Effect

Experts suggest that exchanges might raise option prices slightly to minimize the impact of the new fee structure.

This, however, could make options trading a little less attractive compared to other instruments.

Recommendations:

This week I want you all to watch this very insightful conversation of Jamie Dimon, CEO of JPMorgan Chase with the students of Standford university.

He talked about stuff like why having too many rules can be a problem, whether Bitcoin is real money, and He also shared some tips on how to be a good leader, which I think are worth paying attention to and learning from.

Moving forward,
Watch this epic short story called The Egg by Andy Weir.
It's a quick but mind-bending story that makes you rethink life and how we're all connected.

It's a must-watch for anyone seeking a thought-provoking exploration of the human experience.

Last but not least I read this tweet a few days ago and I was surprised at how reading just 1 book a week will let you in the top 1% of readers in the world.

If you're aiming for a career in finance, developing a habit of reading is essential.

For newcomers to the market, I highly recommend starting your journey with this amazing book! It's a valuable resource that provides foundational knowledge and insights into the Indian Stock Market.

This book is a simple guide to the stock market! Written by Santosh Nair, it breaks down complex finance so anyone can understand.
Whether you're new to investing or already know a bit, this book helps you make sense of it all.

That's all for this weekend.

I hope you liked this newsletter and found the talk useful. If you learned something new, felt motivated, or just had fun reading, don't forget to give it a like and comment down your thoughts!

Thank you for being a part of this community, and until next time, keep exploring, keep learning, and keep discovering the wonders that life has to offer.

This is Parth Verma,
Signing Off.