The ‘A’ to ‘Z’ of stocks

The BSE classifies stocks under six headers. Read the ‘beware’ or ‘buy’ tag accordingly and invest wisely.

BL 1/11/09

Did you know that in as many as 985 stocks in the BSE you cannot carry out intraday trades? The exchange doesn’t allow that and in case you try to square off a day’s buy in such stocks, it will be considered short selling! Not to mention the forced delivery of such stocks that you would have to take in the next two trading days.

What’s more, there are even stocks that come with a ‘beware’ tag of sorts, in terms of their poor score in redressing investor complaints. Worried? Well, don’t be. There is one simple way to sift out these stocks when you pick one for yourself. The Bombay Stock Exchange classifies stocks under six grades — A, B, T, S, TS and Z — that scores stocks on the basis of their size, liquidity and exchange compliance and, in some cases, also the speculative interest in them. You can look up any stock’s grade in the ‘Stock Reach’ page in the BSE Web site, under the head ‘Group’. Alternately, you can also follow the link:

Read on as we discuss what factors influence a stock’s grades and what a particular grade implies.

‘A’ grade: Highly liquid

These are the most liquid counters among the whole lot of stocks listed in the BSE. Companies whose stocks are so rated generally carry a history of good disclosures and are transparent in dealings with investors. Volumes are high and trades are settled under the normal rolling settlement (i.e. to say intraday buy-sell deals are netted out). These are best fit for a novice investor’s portfolio considering that information about them is extensively available. For instance, all the 30 stocks in Sensex are ‘A’ grade stocks.

‘T’ grade: Trade-to-trade

The stocks that fall under the trade-to-trade settlement system of the exchange come under this category. Each trade here is seen as a separate transaction and there’s no netting-out of trades as in the normal rolling system. The trader needs to pay to take delivery for his/her buys and deliver shares for his/her sells, both on the second day following the trade day (T+2). For example, assume you bought 100 shares of a ‘T’ grade scrip, say Autoline Industries, and sold another 100 of it on the same day. Then, for the shares you have bought, you would have to pay the exchange in two days. As for the other bunch that you sold, you should deliver the shares by T+2 days, for the exchange to deliver it to the one who bought it. Failure to produce delivery shares against the sale made would be considered as short sales. The exchange will, in that case, on the T+3rd day, debit an amount that is 20 per cent higher than the scrip’s closing price that day. This means unless the scrip’s price falls more than 20 per cent from the price of your sale transaction, you would have to pay a penalty for the short sale so made. Even so, there will be no credit made to you in the case of substantial fall in the share price. The exchange will, instead, credit the gain to its investor fund.

Stocks are regularly moved in and out of trade-to-trade settlement depending on the speculative interest that governs them. Some stocks that are presently under the ‘T’ category are Raj Television Network, Mysore Paper Mills, CNI Research and Heritage Foods India.

‘S’ grade: Small & Medium

These are scrips that fall under the BSE’s Indonext segment. The BSE Indonext comprises small and medium companies that are listed in the regional stock exchanges (RSE). This segment was created with the intention of helping small companies to access more funds from the capital markets and also help them discover better prices for their scrips.

‘S’ grade companies are small and typically ones with turnover of Rs 5 crore and assets (tangible) of Rs 3 crore. Some also have low free-float capital with the promoter holding as high as 75 per cent. Besides their smaller size, the other risk that comes with investing in them is low liquidity. Owing to lower volumes, these stocks may also see frenzied price movements. Some stocks that fall under ‘S’ grade are ABC Bearings, Sagar Cement, Emami Ltd and Madhucon Projects.

‘TS’ grade: A mix

Stocks under this category are but the ‘S’ grade scrips that are settled on a trade-to-trade basis owing to surveillance requirements. This essentially means that these counters may not come with an easy exit option, as liquidity will be low and intraday netting of buy-sell trades isn’t allowed either. Example: Timex Group, Orient Ceramics & Industries and Bajaj Hindusthan Sugar & Industries.

‘Z’ grade: Caution

Stocks marked ‘Z’ grade are companies that have either not complied with the exchange’s listing requirements or ones that have failed to redress investor complaints. This grade also includes stocks of companies that have dematerialisation arrangement with only one of the two depositories, CDSL and NSDL. These stocks may perhaps be the riskiest in terms of various grades accorded. For one, not much information would be available in the public domain on these companies, making it tough to track them. Second, the low media coverage that keeps them relatively hidden from public scrutiny also makes them more vulnerable to insider trading. Third, since the companies already have a poor score in redressing investor complaints, in all likelihood they may not lend their ears to your grumbles, if any, as well. The following are a few of the ‘Z’ grade stocks: Emergy Phaarma and P.A.Mills.

‘B’ grade: Left behind

This category comprises stocks that don’t fall in any of the other groups. These counters see normal volumes and are settled under the rolling system. In all respects these stocks resemble their counterparts in ‘A’ but for their size. Typically, stocks of mid- and small market capitalisation come under this grade. Example: ABG Shipyard, C&C Construction and Eicher Motors

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