We have extensively covered about the type of stocks to buy, the kind of patterns to trade, and when to trade the stocks. We have also looked at the indicators to use for trend and momentum. This is a different type of discussion. Here, we look at 7 categories of stocks to completely avoid. If the stock you are looking at is under any one of these categories, then it is wise to avoid the stock.

The 7 categories of Stocks

1. NSE GSM list

2. NSE ASM list

3. High debt companies

4. No or limited institutional holding

5. Penny stocks

6. Low liquidity stocks

7. High promoter pledging

1. NSE GSM list

GSM stands for Graded Surveillance Measures. These are surveillance methods developed by the SEBI and Exchanges in order to safeguard investors interest and to protect the integrity of the markets. As per the NSE website, the main objective of these measures is to:

• Alert and advice investors to be extra cautious while dealing in these securities.

• Advice market participants to carry out necessary due diligence while dealing in these securities.

There are various criteria that, if met, will put a company’s name in the list. The list of companies and the criteria are available on the NSE website.

2. NSE ASM list

ASM stands for Additional Surveillance Measure. This list is an addition to the GSM list. The shortlisting of securities for placing in ASM list is based on objective criteria based on objective parameters of price variation, volatility etc.

The parameters are:

1.     High-low price variation

2.     Client concentration

3.     Close to close price variation

4.     Market capitalization

5.     Volume variation

6.     Delivery percentage

7.     Price to Earning ratio

8.     Number of unique PANs

3. High Debt companies

Companies with high debt have high leverage. Leverage tends to have a magnifying effect. This means that even a small change in revenue of a company can result in big change in its net profit. High debt companies are also more prone to bankruptcy and sometimes solvency when “things go bad”. Equity holders of high debt companies are also the last priority when it comes to bankruptcy proceedings. When the news of bankruptcy comes out, it is often difficult to exit positions because no one is willing to buy the stock. The only exceptions here are the companies that are capital intensive. On the other hand, if the company is taking on debt for its day to day activities, it is questionable.

4. No or limited institutional holdings

Institutions refer to Hedge funds, Private equities and Mutual fund companies. These are the smart money with vast amounts of resources and data at their disposal. This allows them to take out in-depth analysis and due diligence. Therefore, it is important to look at the pattern of holding by these market players. If institutions are limiting their holding or are avoiding investing in specific stocks, it can sometimes be smart to avoid them as retail investors and traders. More than 10% institutional holding is preferred while trading or investing in stocks.

5. Penny Stocks

Penny stocks are stocks of small publicly traded companies listed on the exchange. If the company’s Market Capitalization is less than 10 crore INR then they can be categorized as penny stocks. These stocks trade at very low prices. Penny stocks are usually below the radar of the Exchanges and can be vulnerable to stock manipulation. It is advisable to limit the trading universe to the companies in the Exchange created indices.

6. Low Liquidity stocks

Low liquidity stocks are not traded very often. This creates a gap in the demand and supply equation. Low liquidity is a problem when buying and selling the stocks. When buying, it is difficult to find sellers at desired price and when selling, it is difficult to find buyers at the desired price. Low liquidity stocks are especially risky when trying to exit positions when market is correcting.

7. High promoter pledging

Promoters are the early investors and the founders of a company. Even after a company goes public, the promoters still have stake in the company. When a promoter holds a large percentage of the company’s stock, it is seen as a positive sign. This stake also reflects the confidence of promoters in the company’s future prospects. But a trader and investor must be alert when the promoters start pledging their share of ownership to take on debt. High promoter pledging may indicate towards cash crunch or liquidity issues.

There are thousands of stocks that can be traded in the stock market. Filtering these stocks can be difficult to do manually. Thanks to various software, we can scan these stocks and exclude them from our trading universe. In my YouTube video, I have shown how to build a scanner to filter these stocks.

👇🏻👇🏻👇🏻👇🏻