Conventional wisdom says one must buy shares when short-term rates (treasury bills) are low and sell when they are high. Studies suggest that while an insider may have many reasons to sell, the only reason for buying can be that he is bullish on the prospects of the company.Ĭhanges in interest rates impact companies. Information on insider trading is available on websites of stock exchanges and can be used to predict future prices. If the shareholding of an insider changes by more than Rs 5 lakh in value, 25,000 shares or 1 per cent of total shares or voting rights, it has to be brought to the notice of stock exchanges and the company. Insider trading based on unpublished price-sensitive information is illegal.Īn 'insider' can buy or sell shares provided they inform the stock exchanges on which the stock is listed if the transaction goes beyond a certain threshold. Rajeev Thakkar | CEO, Parag Parikh Financial Advisory Services Higher rates also hit demand in rate-sensitive sectors." "The corporate sector is a net borrower and an increase in interest rates is usually negative for it.
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According to Indian laws, an insider is a top official, director or shareholder who owns 10 per cent or more shares and has access to unpublished price-sensitive information about the company.ĮXPERT TIP: Tips to diversify commodities portfolio | How to deal with share market rumoursĪ member of the board, merchant banker, share transfer agent, debenture trustee, broker, portfolio manager, investment advisor, sub-broker or even a relative of any such individuals is also an insider. Though the name smells of something unlawful, not all insider trades are illegal. (The above calculation is purely based on assumptions) Hence, at its present value (5,263), the Nifty is overvalued and may fall in the immediate future. The present value of the index is the sum of the present value of dividend paid during the three years and the present value of the terminal index value The present value of the terminal value=4,206/1.125=3,739 The value of the index at the end of the 3rd year (Terminal Value)=105.15/(.125-0.1)=4,206 The expected dividend in the 4th year will be (105.15 x 1.1)=Rs 115.66
If analysts expect Nifty companies to increase their dividend payouts by 10 per cent every year for the next three years and investors expect at least a 4 percentage point premium (12.5 per cent) on equity returns over the risk-free 91-day Treasury bill rate, which is currently 8.5 per cent, then, The current dividend yield is Rs 79.ĮXPERT TIP: Stocks that held strong amid sell-off
On 2 November 2011, the Nifty closed at 5,263. According to the National Stock Exchange data, the average dividend yield of the Nifty in the last couple of months has been around 1.5 per cent.
Let's demonstrate it by a simple calculation. A low dividend yield indicates an overpriced market and vice versa. One can calculate the aggregate dividend yield of an index, compare it with past dividend yields and see if the current yield is low or high. This can be extended to a stock index too. It means the stock price is undervalued.ĮXPERT TIP: Invest in realty stocks with care This indicates a possible decline in the future.Ī high dividend yield, on the other hand, means subdued interest in the stock and that the company is trying to woo investors by paying higher dividends. If the dividend yield is low, the share price is relatively higher than the dividend paid and hence the stock may be overvalued.
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