Why Quality Stock are Important ?

Quality Prevails

In any form of work, quality is the most important aspect. So, when it comes to stock market, same is applicable. Stock prices in the long run are a reflection of how the businesses are doing. In the short term they might be affected by mood and momentum. But for stock markets as well quality rules. We have seen over the years how good companies with good business and management have performed over the years. In market data parlance these stocks have a high market capitalization, good volumes and decent delivery marking.

The idea behind introduction of derivatives was to provide a hedging tool for such quality stocks. The selection criteria for that reason have been made in such a way that only good quality stocks enter this list. The enhanced selection criteria have factors like market cap, volumes and delivery. However, we many a times see contrary things happening. One important reason behind this are the bull markets. When the tide goes up everything moves up. The prices move up so market capitalization; volumes move up and so do deliveries. Hence, the criteria which are created for normal market situation tend to fall short of curbing not so good stocks entering the derivatives list during such unusual times.

But when the tide turns down, we are able separate the men from the boys. Stock prices plummet, volumes dry out and so do delivery markings. So, within a couple of quarters, stock losses its eligibility and has to step out of the derivatives universe. This time it was slightly different, as the correction was across mid cap and small cap stocks, the number of stocks that lost their eligibility was higher. 34 stocks moved out of derivatives list at the end of June series.

However, the stocks had been under pressure since the announcement in April end. Over these two months this list of 34 stocks lost on average 12%. Of these 4 stocks lost more than 40%, 9 stocks lost more than 20% and 18 stocks lost more than 10%. Only 9 stocks gained a bit of which 3 stocks gained more than 10%.

These stocks lost on 71% of the positions during this time, indicating large part of these positions were speculative in nature. Clearly, the positions would have reduced as they were moving out of the derivatives world, but this number clearly indicates that the holders were holding it from speculative perspective only.

After this reduction the derivatives universe looks more credible. Markets has its own way to push out low quality stocks from the system. In this way quality stocks come out stronger and effectively capital gets channelized to those stocks. Holding on to such low quality names may give a thrill but clearly it is misplaced and some or the other time it is create trouble. So, whenever you decide to trade a stock consistently do check whether it’s a quality name.

Happy Trading.

Cheers!!!