Data update on:
One questions that pops up in investors and traders mind every now and then without discrimination and bias is: Which stock is better for investment or trading? Let's try to figure out the answer to this question in common sense way. By common sense way, we mean steps which are simple, elegant and backed by data. To reach a conclusion, we will use a simple parameter i.e. Security Wise Delivery Percentage of stocks traded on NSE. We believe, most of you are already familiar with this parameter, however to be fair with unaware, let me give a brief description of what it is:
Security Wise Delivery Percentage is the ratio of total delivered quantity to total traded quantity for a particular stock on a given trading day.
Generally speaking, if more people are interested in taking the delivery of a particular stock while the prices are rising, it's indicator of strength (high demand). Similarly, if the delivery percentage of stock is high while the price is falling, it indicates weakness (high supply). Having said that, if the delivery percentage of a particular stock has historically been on lower side (say less than 20%), it falls into the category of speculative stock (short term trading interest).
Speculation intuitively is more risky, meaning chances of losing capital in short and long term is high.
To better differentiate between investment grade and speculative stocks, lets plot the average security wise delivery percentage for last one year of all NSE stocks. The chart below gives you a high level overview of the distribution of Security wise delivery percentage which ranges from less than 10% to up to 100% for some stocks. No doubt, the data is overwhelming as the plot covers more than 1500 stocks trading on NSE.
So how to draw some meaningful inference? Let's decrease the basket size and plot the average security wise delivery percentage for last one year of all FnO stocks traded on NSE. Again generally speaking, stocks which trade in FnO have relatively lower delivery percentage as compared to other stocks as by very nature of it, FnO stocks leave a huge scope for speculation and intraday trading. In this backdrop, first focus on the names appearing in the left side of the chart (Stocks with delivery percentage less than 20%) and then focus on the right side i.e. stocks consistently having delivery percentage > 50%. I am sure you can very well identify some famous wealth destroyers and wealth creators of recent past appearing in these two areas.
If you are an Index only guy and only Nifty 50 stocks fascinate you, here is the yearly delivery percentage average plot of all Nifty 50 stocks. As expected, on the top right you can spot the investment grade stocks with long profitability and growth history spanning multiple bull and bear cycles. Similarly, at the left bottom lies the speculator favorites with relatively dimmer return history.
If you want to further reduce the basket size, you can analyse sectoral index stocks. For example, we have plotted the delivery percentage stats for Banknifty stocks below. To plot data for any other sector, please use the filter available at the top of this page.
Conclusion: Separate wheat from chaff
So can we differentiate between good and bad stocks based on Security wise delivery percentage analysis. Before concluding, remember the famous Charlie Munger quote:
“All I want to know is where I’m going to die so I’ll never go there.”
For us, the analysis definitely tells us where not to go. We can see that trashy stocks tend to have lower delivery percentage most of the time. So when you are thinking about building a long term portfolio, do include security wise delivery percentage history in the list of your filter criteria. Talking from short term trading perspective too, if you have limited capital, its best to avoid trading in stocks with low delivery percentage - too much volatility plus high chances of manipulation. Few relatively simple and effective thumb rules to follow could be:
- Do not invest in stocks whose average delivery percentage for last one year is less than than 20%.
- Avoid naked selling of calls and puts in low delivery percentage stock. Take exposure through credit or debit spreads.
- Look for opportunities to be on sell side in low delivery percentage stocks and on buy side in high delivery percentage stocks.