Adani Power ₹4,194 Cr Stake - Should You Buy or Hold in Your Portfolio?

The commodity market plays a crucial role in the global economy, including India's, by enabling the trading of essential raw materials like oil, gold, wheat, and more. It is a market where buyers and sellers meet to exchange commodities at a certain price, much like the stock market. Commodities form the backbone of the global economy, and the commodity market serves as a vital platform for their trade. In this blog, we will explore the importance and significance of the commodity market in simple terms.

1. What is a Commodity Market?

A commodity market is a place where raw materials or primary products, called commodities, are traded. These commodities are divided into two major categories:

• Hard Commodities: These are natural resources that are mined or extracted, such as crude oil, natural gas, gold, and metals.
• Soft Commodities: These are agricultural products that are grown, such as wheat, coffee, cotton, and sugar.

Commodity markets allow producers, traders, and investors to buy and sell these products, often through contracts known as futures, which we'll explore further in this blog.

2. Importance of the Commodity Market

a. Price Discovery

The commodity market is crucial for discovering the fair price of goods and services. Prices in the commodity market are determined by supply and demand. For example, if there’s a shortage of oil, its price goes up, and if there’s a surplus of wheat, its price may go down. This open and transparent pricing helps industries plan their production and helps consumers better understand market conditions.

b. Risk Management

Producers, traders, and investors use the commodity market to manage risk. Since commodity prices can be volatile (fluctuating based on various factors like weather, political events, or economic conditions), traders use futures contracts to lock in prices in advance.

• Futures Contracts: These are agreements to buy or sell a commodity at a predetermined price at a future date. This protects both buyers and sellers from the risk of fluctuating prices. For example, a farmer growing wheat can sell futures contracts to lock in a guaranteed price for their crop, even if market prices drop at harvest time.

c. Economic Stability

A well-functioning commodity market contributes to the overall stability of the economy. It helps balance supply and demand, ensuring that resources are efficiently allocated. In India, where agriculture is a key part of the economy, the commodity market helps farmers secure fair prices for their crops, leading to greater economic stability in rural areas.

3. Significance of the Commodity Market

a. Supports Economic Growth

The commodity market significantly impacts the economy by supporting industries that rely on raw materials. For instance, industries like manufacturing, energy, and agriculture rely on the smooth functioning of the commodity market. These industries contribute to GDP growth, create jobs, and drive economic progress.

b. Investment Opportunities

Apart from producers and buyers, the commodity market also attracts investors. People invest in commodities like gold, silver, or crude oil to diversify their portfolios and hedge against inflation. Commodities are seen as a safe investment, especially in times of economic uncertainty. Investing in commodities can provide stability when stock markets are volatile.

c. Global Trade and International Relations

Commodities are traded internationally, and the commodity market helps facilitate global trade. Countries rich in natural resources, like oil or metals, can export them to countries that need them. This fosters international relationships and creates a flow of goods, services, and capital between countries.

d. Influences Inflation

Commodity prices can have a direct impact on inflation. For example, if crude oil prices increase, the cost of transportation, manufacturing, and goods increases, which leads to inflation. Conversely, when commodity prices drop, inflation may decrease as the cost of goods goes down. Governments and central banks often monitor commodity prices to gauge inflationary trends in the economy.

4. Commodity Market in India

India has a long history of trading commodities, particularly agricultural goods. With a large population dependent on agriculture, the commodity market plays a significant role in stabilizing farmers' incomes and ensuring that consumers have access to essential products at fair prices.

• MCX (Multi Commodity Exchange) and NCDEX (National Commodity & Derivatives Exchange) are two leading commodity exchanges in India, where a wide range of commodities are traded. These exchanges provide a platform for the transparent and regulated trading of commodities.

a. Agricultural Commodities

India is one of the largest producers of agricultural products like wheat, rice, and cotton. The commodity market helps stabilize prices and allows farmers to manage risks by using futures contracts. This helps reduce uncertainty and ensures that farmers receive a fair price for their produce.

b. Precious Metals

Gold and silver are some of the most traded commodities in India. Gold is not only seen as a symbol of wealth but also as a hedge against inflation and economic instability. Indians often invest in gold during times of financial uncertainty.

c. Energy

India is a major importer of crude oil, and the energy sector heavily depends on commodity markets to manage price fluctuations. The prices of petrol, diesel, and electricity are directly influenced by crude oil prices in the global commodity market.

5. Challenges in the Commodity Market

Despite its importance, the commodity market faces several challenges:

• Price Volatility: Commodity prices can be highly volatile due to factors like weather conditions, political instability, and global economic trends. This volatility can lead to uncertainty for producers and consumers.
• Speculation: Speculators, who trade in commodities to make profits rather than for actual production or consumption, can sometimes cause large price swings, which may negatively affect the market.
• Lack of Awareness: In India, many small-scale farmers and producers may not be fully aware of the benefits of using commodity markets to manage risks, limiting their participation.

6. Future of the Commodity Market

The commodity market is expected to grow as more people become aware of its importance and potential. As India continues to modernize, the demand for commodities will increase, making it even more essential for producers and investors to utilize this market for price discovery, risk management, and economic stability.

Additionally, technological advancements such as digital trading platforms are making it easier for more participants to join the market. This is likely to improve market efficiency and accessibility.

Conclusion

The commodity market is an essential part of the economy, helping to balance supply and demand, manage price risks, and provide investment opportunities. It supports key industries like agriculture, manufacturing, and energy, while also influencing inflation and global trade. In India, the commodity market plays a critical role in stabilizing prices and promoting economic growth. Understanding how the commodity market works can help producers, investors, and consumers make more smart decisions, ultimately contributing to a more stable and prosperous economy.

‍

It was a truncated week but it was full of action where we saw a strong tussle between bulls and bears. Nifty and Sensex started Monday with new highs of 13777/47055 respectively but on the same day we have seen a sharp fall on the back of worries of a new strain of Covid19 from the UK where Nifty has fallen more than 600 points and Sensex has fallen more than 2000 points at one point of time but then as Stock Market observed that this issue is not so serious which made Bulls comeback aggressively where market rallied for three consecutive days.

At the end of the week, Nifty and Sensex ended on a flat note whereas Sensex continues its 8th-week winning streak while Nifty ends with a minor loss of 0.08%.

What is Stored in the data?

If we talk about cash market data then Foreign Institutional Investors are continuing their buying momentum where they bought around 2591 cr, though momentum has slowed down because generally FIIs’ flow remains muted around the Christmas and New Year holiday and we are expecting tepid flow in next week as well. DIIs are still in a selling mode where they sold around 3400Cr.

In the F&O market, FIIs’ long exposure in the cash market stands at 68% which is a comfortable level whereas PCR stands at 1.75 mark which is a little overbought level.

What do the Technical Charts say?

As we discussed last week that 13770-13820 is a critical supply area for the Nifty where we have seen a sharp fall from there but Nifty respected its 20-DMA and then witnessed smart pullback but it is still stock trading below the 13770-13820 zone where if it manages to cross 13820 levels then we can expect a strong rally and Nifty can easily cross 14000 marks. On the downside, 13550 is an immediate support level while 13415 is 20-DMA which remains critical support on a closing basis.

If we talk about Banknifty then 30800-31000 is a critical supply zone but if it manages to take out this zone then we can expect a strong rally towards the 31500/32000 level or even it can head towards its all-time high. On the downside, 30000 is an immediate and strong support level while 29000 is critical support on the downside.

Cues for Next Week:

F&O expiry: The market can remain volatile due to the December month F&O expiry.

• Monthly Auto Sales Numbers: We will have a December month auto sales number which will have an impact on auto stocks and the overall market.
• Covid-19 cases and Vaccine related news: Covid-19 cases and Vaccine related news will continue to impact our market.

The most important clue for the Next week will be that we are going to say bye-bye to the most uncertain year 2020 and we are going to welcome 2021 full of positive energy. So wishing you all on behalf of the Swastika family: “A very Happy, Healthy, Peaceful and a Prosperous New Year.”

Swastika Investmart is known for its analysis and proficiency in identifying the right company valuation and help startups and SMEs to go public with the right company valuation. With the state of the art methodologies and 29 years of unmatched market expertise in business valuation services, Swastika helps the associated patrons, stakeholders, promoters and potential investors in getting the best company valuation when businesses are struggling to perform, thereby providing a fair business valuation to the company and thereby strengthening investor’s confidence.

Swastika’s company valuation pedagogy includes:

Strengthening the company’s valuation

Providing Financial advice for SMEs

Merchant Loan Syndication

Apart from that, Swastika has successfully launched various IPO’s including Sharika enterprises, Zodiac energy limited, Innovana Thinklabs ltd and more.

Top Reasons Why Companies Issues IPO

Whenever a company decides to grow, it realizes IPO to raise its capital. With raising capital, they may be able to purchase additional property, equipment, R&D.

Besides, they can generate new potential customers who are ready to invest in their company. Swastika’s IPO valuation services will give you a clear picture of the IPO.

For instance, the company assists you in selecting the right IPO valuation methods, how the value of IPO share prices are determined in the stock market, Pre IPO valuation and more.

Need for Business Valuation

Business valuation is the dire need of any business, whether it is small, medium or large. Without having a proper assessment, you can't determine the value of a business.

It is recommended that every business owner should have its company valuation as it allows you to get a real understanding of your company. It can be performed with the help of asset’s values, a company’s cash flows.

Measuring the business valuation of a company can tell you about the present growth of your company.

Swastika’s business value services give you complete support regarding business valuation services. It will give you a clear assessment of your company’s value. Besides, you can plan your business growth in future as well.

The Purpose of Company Valuation

One of the main purposes of company valuation is to sell the product of the business and increase its brand awareness. Other purposes are negotiation and improving business performance, assisting founders in evaluating companies.

At Swastika, you will get quality business valuation services at minimum prices. Besides, you will get a complete analysis of company valuation along with the past and present reports.

A detailed analysis will help you get a thorough knowledge of business valuation with the valuation of capital investments, the value of capitalization, the value of capital investments and more.

Investment Valuation for a Company

Valuation of a business is the first step in securing capital. If you are borrowing a good amount of capital for your business, the lender, on the other hand, definitely wants to know about the existing leverages in your company. With the aid of Swastika’s company valuation services, you will get genuine tips regarding company valuation, capital investments and securing capital for your business.

Benefits of obtaining a Company Valuation

1. A better understanding of a company’s assets

For a business owner, it is important to find out the detailed assessment of the business assets because, with financial figures, you will get a clear understanding of how much you can reinvest into the company.

2. Obtaining accurate company value

Obtaining a company value is important because it helps you to know about the preservation of money, growth, the future value of the business, and future development of businesses.

Conclusion

Company valuation is important for any business as it helps to determine the company’s financial worth. Other benefits of assessing a company's valuation include market capitalization, fundraise, analysis of asset’s value, reverse cash flows and more.

"If we want our regulators to do better, we have to embrace a simple idea: regulation isn't an obstacle to thriving free markets; it's a vital part of them." ~ James Surowiecki

To control the smooth functioning of any department there should be one controller who will look after its performance. They prepare the rule which needs to be followed and make necessary amendments when they see any loophole in it. It is necessary to regulate the capital market to make it's functioning smooth and hassle-free, a major reason for capital market regulation is to make it's functioning more fair and transparent.

Some of the Major Regulators are:

Ministry of Finance: This is the topmost office in the country as far as financial matters in the country are concerned and overlooks all the Financial Participants in the Country.

Following are the major law under this segment which regulates the Indian Capital Market.

• Depositories Act,1996
• Securities Contract (Regulations) Act 1956,
• Securities exchange board of India Act, 1992
• Reserve Bank of India: Reserve Bank of India mainly controls the Banking and monetary systems in the Country making Monetary Policies, and looking after the working of Banks. It is governed under the RBI Act 1934.

Securities Exchange Board of India: Securities and Exchange Board of India is the main head of the Financial Markets and the main regulator in the Capital Markets. It performs various functions to maintain the smooth flow of financial markets.

Major functions are:

• Regulation of business at the stock market
• To control unfair means & practices of trading in the market
• Controlling Insider Trading in the securities
• Investor Awareness campaign to make investor awareness about the regulation of the market.

AMFI: Association of Mutual Funds India an authorized regulatory body headed by Mr C.V.R Rajendran, regulates the whole mutual fund industry in India, It regulates licenses work for the betterment of the industry and aims to develop the mutual fund market in India.

Many investors will suggest you go through the fundamentals of a company before picking any stocks. This means that you are required to check the financial records of a company which tells you that the stocks are worth investing in or not.

To be frank, not everyone is a finance expert to know everything about a company’s fundamental elements.

Financial Ratios to Study When Investing in Stocks

Here, I am going to share with you the 5 financial ratios you should study before investing in stocks:

1) Price to Earnings Ratio (P/E)

This is one of the crucial financial ratios investors have been using for a long time. P/E ratio is defined as the ratio of the current share price to the earning of the company per share. The ratio helps investors to determine whether the stock is undervalued or overvalued in the market.

For instance, if the company has overall earnings of Rs 1000 and has shares of 100 currently trading in the market. Therefore, it's earning per share is Rs 10. This means that you are paying Rs 10 to the company and in return, you get Rs 1 from the company’s earnings which is not good.

The Ideal Price to Earnings Ratio you can Invest in:

To be honest, there is no ideal price to identify P/E ratio of any stock. You cannot determine the exact P/E ratio as every industry has a different benchmark. If we compare the P/E ratio of two FMCG companies, let's say Hindustan Lever and Britannia, we will get to know that HUL is overvalued as compared to Britannia as the P/E of HUL is greater than 70 while the P/E ratio of Britannia is nearly 50.

The P/E ratio of JK Paper is 4 and if you compare this P/E ratio with HUL and Britannia, you will get an incorrect picture as the industries are very different. Hence it is suggested to know the industry benchmarks while analyzing the P/E of a company.

2) Return On Equity Ratio

Return on equity depicts the rate of return on the stock of a company. It’s a way to know about the company’s return on stock investment. Return on equity ratio is defined as Net income to total shareholder’s equity. This is an important ratio as it helps investors to determine how well a company shares its profit with its shareholders.

For instance, if investors contributed Rs 100 in equity and the total equity of the company is Rs 100. With this equity, if a company generates Rs 20 then ROE is 20%. On the other hand, if another company with the same equity generates an income of Rs 40, then the ROE of that company will be 40%. The company that generates better ROE is considered as good to invest in.

Return on Equity is defined as Net income/ Average Stockholder’s equity.

3) Price To Book (P/B) Ratio

Price to Book Ratio is calculated as Price per share divided by Book value per share. The ratio simply depicts the comparison of a company’s market capitalization to its book value.

Price to Book ratio gives investors an idea of how much shareholders willing to pay for the net asset of a company. Generally, a low P/B ratio is considered good. Do remember that the ratio should be compared within the same industry. For example, the P/B ratio of a manufacturing company should be compared with the P/B ratio of another manufacturing company.

4) Dividend Yield Ratio

The dividend yield ratio is calculated as the amount of dividend a company pays to its shareholders over the years to its current stock market price. For example, if the share price of a company is Rs 100 and it gives a dividend of Rs 10 then the dividend yield ratio will be 10%.

To get deeper into this, let's assume that an investor purchases a stock at a price of Rs 100. A year later, the stock price is still constant, i.e Rs 100. Is this a good investment? Of course not. You receive a zero per cent return from that company.

5) Debt to Equity Ratio

Needless to say, the Debt to Equity ratio depicts the amount of debt and equity of a company. This gives investors a clear idea of how much the company running on borrowed capital and owned funds.

Debt to Equity Ratio is defined as total liabilities/total shareholder equity.

Ideally, it is suggested to invest in a company which gives you high ROE for at least 3 years.

Predicting a stock market trend is not an easy task; some say, the stock market runs on investors’ sentiments while some traders deny the fact. However, this is not the case. Of course, investors’ sentiments affect the stock market to a greater extent but some economic factors play a crucial role in identifying the prediction of the stock market.

To begin with, economic news may heavily impact the stock market as the economy goes up, and so too grows the stock’s profitability. Top companies whose shares are currently trending at the top in the stock market mostly rely on a strong economic environment. As the economy grows, many investors look forward to buying products and services, which in turn increases stock prices.

On the contrary, when the economy struggles, people start to avoid spending on products that may heavily impact a company’s stock and as a result, the stock market experiences a strong decline.

Fundamental analysis of stocks helps investors to identify the real worth of stock, technical analysis, on the other hand, provides a detailed insight into stock and tries to capture the market’s psychology.

Some of the economic factors are inflation, the country's GDP, unemployment, retail sales and more. The majority of these factors affect the stock's performance. If investors are completely aware of these factors, they can upgrade their portfolio to minimize their losses.

Economic Factors that Influence Stock Market Growth

Let’s look at the economic factors that directly influence stock market growth:

1. Gross Domestic Product or GDP

This is one of the biggest economic factors which directly impacts the country’s economy. Gross domestic product is the final value of goods and services produced in a country during a specific period of time. It tells the overall economic performance of a country. Usually, GDP is calculated on an annual basis while sometimes it is measured quarterly.

In many countries such as the US, the government yearly releases GDP reports along with the annualized GDP for each fiscal quarter. In simple terms, GDP is a measure of economic growth which tells the overall health of the country.

If the GDP of any country performs well, investors buy shares hoping that the stocks will provide them outstanding returns. However, if the GDP is contracting, the profitability of the companies tend to decrease as the investors start to avoid purchasing stocks which in turn cause a significant drop in the stock market.

The upliftment of GDP encourages investors to purchase more stocks as they are optimistic about the earnings of the stock market.

2. Unemployment

Wages gives a clear report on the economy. For instance, consumer spending automatically drops whenever the unemployment rate is high. As the funds are limited, people show less interest in buying; they spend less amount on secondary items and allocate funds only to needy items.

This may reduce the earning capacity of the companies which highly affects the stock market prices.

Conversely, if the employment rates are rising and vice versa, then the market condition forces investors to buy more stocks which makes a positive impact on the stock market.

3. Inflation Rate

GDP and inflation are the two factors that affect the stock market as it impacts overall consumer spending. Inflation, in general terms, is defined as the rising price of goods and services within a particular economy. It means the price of goods and services is continuously rising which decreases the purchasing power of consumers.

Rising costs may heavily impact business and their profits as no investors are ready to purchase the stocks of these companies which suffer businesses a lot. Hence, when the inflation rate rises, the stock market falls very badly.

Rising inflation makes investors hedge their portfolio as rising inflation increases the volatility of the stock market.

4. Interest Rates

Needless to say, high-interest rates negatively affect the stock market as rising interest rates limit the borrowing capital for the businesses which in turn hamper the growth of the business. This can heavily impact business growth, potential earnings and stock prices.

Rising interest rates also form a great impact on consumers. This is because rising interest rates affect the mortgage interest payments which decrease the purchasing power of the consumers.

5. Exchange Rates

Exchange rates are also an important factor that influences the US stock market. A weak exchange rate signifies cheaper export rates internationally. This is good for those companies who regularly export goods and services. A high exchange rate is directly related to cheaper imports, hence it is apt for companies who use imported goods such as manufacturing goods.

Takeaway

Understanding the macroeconomic indicators and setting your portfolio according to them is the hallmark of any investor. It is seen that many investors get easily influenced by so-called analytical reports without going through it. For a successful investor, it is important to invest some time in understanding the microeconomic factors of a country before investing.