Analyzing why the stocks fell on Tuesday: How to profit from them

Stocks

oi-Shoaib MD

By Shoaib Md

Published: Wednesday, June 22, 2011, 15:16 [IST]

Every time the market is in a correction phase, the bear get the advantage of betting against companies without any counter move by the bulls. The bull operators are generally backed by the promoters.

But on Tuesday, the bears went after the companies whose promoters had placed a chunk of their shares with lenders.

Prominent losers included

Orchid Chemicals (down 11%, percentage of promoters shares pledged 79.90%)
Unitech (down 4%, percentage of promoters shares pledged 68.06)
India Cements (down 2.5%, percentage of promoters shares pledged 73.68%)
Suzlon Energy (down 3.2%, percentage of promoters shares pledged 62.63%)
Pipavav Shipyard (down 1.4%, percentage of promoters shares pledged 99.60%)
United Spirits (down 2.6%, percentage of promoters shares pledged 87.52%)

Therefore, stocks where the promoter have pledged majority of their share holdings got vulnerable. Though this time the derivative positions is not as huge as the 2007-08, but because of high borrowing by the promoters, the bears had an advantage.

It all begins when traders short sell a stock at futures. As the differential between the cash and futures price is usually between 0.5% and 1%, the short sell affects the real price as well. If the futures price of the stock falls, the cash market price will fall proportionately.

By hammering the futures prices, bear investors get the chance to drive down the stock price. The moment, stock price falls below the specified price, the lenders will send for margin calls to the promoters. Promoters then have to either repay a part of the loan or deposit more shares with the lender to guarantee the collateral.

If the promoters are able to do neither, the lenders will dump the shares on the stock market in order to recover their money. As the prices collapse, they will buy at the low prices and book a profit on their positions.

Investor angle: Profiting from the move can be done even while following different investing styles. Without a doubt these are high risk investments and hence not advisable for the faint heart.

For people who buy with fundamentals should buy in the stock when these stocks go below their intrinsic value. And technical analysts should look at high volumes after a major downfall, the next day after high volumes (at least two or three times the average of the last three days) are registered will also provide good investing opportunities.

OneIndia Money DISCLAIMER: OneIndia Money provides you with information covering shares, futures and options based on broker's reports as stated on various media. Investors are, however, warned that they should NOT take any buy or sell decision based on these views expressed in the article. Investors should consult their own financial and share advisors before taking purchase or sale decisions. OneIndia Money does not take any responsibility for any losses incurred by investors who take their cues from the above article.