Dyanesh­war Pad­wal,

Dalal Street Investment Journal - - SPECIAL REPORT -

1. Val­u­a­tion Trap: It is of­ten seen that re­tail in­vestors se­lect stocks for in­vest­ment where they see price has eroded a lot in quick time and they view this as a per­fect value buy. For ex­am­ple, let us say if a stock was trad­ing last year at Rs 500 and presently it has been quot­ing at the level of Rs 150, they term it as a good value buy. How­ever, they fail to un­der­stand this is a val­u­a­tion trap when it comes to these com­pa­nies. A num­ber of such com­pa­nies are trad­ing at lower val­u­a­tion as a re­sult of a de­cline in their

Un­der pledg­ing, the bank or fi­nan­cial in­sti­tu­tion gives loan tak­ing the pro­moter shares as col­lat­eral. In a bull phase, pledg­ing does not cre­ate any is­sue be­cause pro­mot­ers can count on the ris­ing value of their shares. In­sti­tu­tions too do not mind lend­ing against shares as col­lat­eral be­cause of the ris­ing value of shares. The is­sue crops up when the mar­ket en­ters into a bear phase. At any point of time, if the prices of shares come down to a cer­tain level in the se­condary mar­ket, the pro­moter is re­quired to ei­ther make some pay­ment or pledge more shares. If the pro­moter fails to do ei­ther, the lender can ex­er­cise the right to sell the pledged shares in the mar­ket. The sud­den sup­ply of shares in the mar­ket by the lender can trig­ger fur­ther fall in the price of the share, which is a haz­ard for re­tail in­vestors and traders alike, who may have to sell their shares for a sig­nif­i­cant loss as there is panic sell­ing in the stock. There have been cases in the past where banks have so­licited of­fers for shares and sold them in the mar­ket as pro­mot­ers were un­able to pay up on time.

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