Share Market

For many new investors, the stock market can feel a lot like legalized gambling. As they see it as a short-term investment vehicle that either brings huge monetary gains or devastating losses. With that attitude, the stock market is as reliable a form of investment as a game of roulette. But the more you learn about stocks, and the more you understand the true nature of stock market investment, the better and smarter you’ll manage your money. The stock market can be intimidating, but a little information can help ease your fears.

Let’s start with some basic definitions.

A share of stock is literally a share in the ownership of a company. When you buy a share of stock, you’re entitled to a small fraction of the assets and earnings of that company. Assets include everything the company owns such as buildings, equipment, trademarks, and earnings are all of the money that the company brings in from selling its products and services.

The reason why a company wants to share its assets and earnings with the general public is because it needs the money. Companies only have two ways to raise money to cover start-up costs or expand the business: It can either borrow money, a process which is known as debt financing or sell stock which is also known as equity financing.

The stock market is driven solely by supply and demand. The number of shares of stock available for sale dictates the supply and the number of shares that investors want to buy dictates the demand. It’s important to understand that for every share that is purchased, there is someone on the other end selling that share (or vice versa). When people’s views the stock market or the individual stocks change (which is driven by different economic fundamentals such as consumer confidence in the stocks, fear of terrorism, or lack of confidence in the company’s earnings), makes the demand for the stock to changes. This also causes the prices to change. For example, if people in general believe that the economy is growing, they become more optimistic and want to own more stock. This increases the demand for stock. At the same time, since people are selling less stock, it also decreases the supply of stock for sale. Both of these factors cause the average stock price to rise.

In essence, the stock market is really just a big, automated superstore where everyone goes to buy and sell their stock. The main players in the stock market are the exchanges. Exchanges are where the sellers are matched with buyers to both facilitate trading and to help set the price of the shares. The primary exchanges are the NASDAQ, the New York Stock Exchange (NYSE), all of the ECNs (electronic communication networks) and a few other regional exchanges like the American Stock Exchange and the Pacific Stock Exchange.

The disadvantage of borrowing money is that the company has to pay back the loan with interest. By selling stock, however, the company gets money with fewer strings attached. There is no interest to pay and no requirement to even pay the money back at all. Even better, equity financing distributes the risk of doing business among a large pool of investors, such as the stockholders. If the company fails, the founders don’t lose all of their money; they lose several thousand smaller chunks of other people’s money.

Bombay Stock Exchange, also referred as BSE, was established in the year 1875 as ‘The Native Share & Stock Brokers’ Association.’ It was introduced by four Gujaratis and one Parsi stock broker under a tree in Mumbai’s Town Hall area.

It is the oldest stock exchange in Asia that has contributed significantly to the establishment and growth of the Indian capital market. Earlier it was known as Bombay Share Bazaar and The Stock Exchange, Bombay before taking the current name. As the name suggests, it is situated in Mumbai that is the financial hub of India.

BSE has the maximum number of listed companies in the world. As on June 2011, it has more than 5000 listed Indian companies and over 8000 scrips on its trading screens. It also ranks 5^th globally in terms of the maximum volume of transactions. It is also the first and second in the world to obtain ISO 9001:2000 certification for its quality trading operations. The BSE online- trading systems, commonly known as BOLT, ensures transparency and reliability in daily transactions. The systems also support algorithmic trading within different locations. Its stock market index, the SENSEX, is the most popular index in the country.

Despite of having almost equal market capitalization, BSE is next to NSE making it the second largest stock exchange in the country. However, both the stock exchanges share the maximum load of equity trading in India.

To widen the scope of trading, BSE introduced its websites in three languages, i.e. Gujarati, Hindi, and Marathi. It entered the Mutual Funds (MF) market in a big way by launching a trading platform that could easily be integrated within the existing infrastructure for trading in MF schemes. It also introduced AMFI Certification to equip MF advisors with the required expertise to transact in the market.

Besides attaining excellence in its operations, BSE has also taken up the function of corporate social responsibility (CSR) with utmost dedication. It has taken welfare initiatives in the area of education, health, and environment. It also got the Golden Peacock Global CSR Award, by the World Council of Corporate Governance, for its social efforts.

Like in other stock exchanges, the daily trading sessions at BSE are also five days a week. The stock exchange is closed on national holidays. Outside the BSE building, a ticker can be seen that shows the live movement in the prices of scrips during trading hours.

The Indian capital market is divided into two broad categories, the primary market and the secondary market. Primary market is the market for new shares that are generally introduced via the initial public offer route. Secondary market is the one where trading between the shares already issued in the primary market takes place.

Stock exchanges provide a platform to facilitate trading in these secondary shares. However, the shares have to be first listed on a stock exchange. In India, National Stock Exchange, commonly known as NSE, is the largest stock exchange of the country. It ranks third in the world in terms of volume of transactions. The head office of NSE is located in Mumbai. It is also known as Rashtriya Share Bazaar in Hindi.

NSE was initially established as a tax-paying company by the leading financial institutions of the country and later on acquired the status of a stock exchange in 1993. It was recognized under the Securities Contracts (Regulation) Act, 1956.

NSE commenced its operations in the wholesale debt market. Gradually, its entry into the capital market was a major breakthrough for companies who enlisted themselves on the stock exchange to create a vast pool of equity funds to finance their expansion plans. Moreover, the investor segment also got aware of the number of companies in the country thereby allowing them to diversify their investment. Today NSE provides trading services in new instruments like derivatives and mutual funds.

NSE provides a fully computerized screen-based trading system that has automated operations. This eliminated the role of brokers significantly, which in turn, erased the brokerage fees and thus lowered the cost of trading multifold. The system also gave an opportunity to small investors to trade in the market. Now, trading has become a part-time profession for many people, including housewives. The technology behind the trading system has added mobility into the system and so investors simply log on to their trading account, study the market movement real-time, and trade accordingly from any place.

NSE has a large network across the country for trading in all types of securities. It follows shorter settlement cycles and book entry settlements. It also has an online portal that provides exhaustive information on its listed companies, market trends, market movements in other stock exchanges, latest regulatory changes affecting the financial market, and many such details relevant for trading decisions. For a novice, it also has a dedicated link providing conceptual information about the market.

The process of buying and selling stock in one day is called day trading. Day traders look for profit by leveraging money to gain from the small price movements in the stocks or indices. Two properties of a stock are checked in day trading:

1. Liquidity: for entry and exit at a favored price.

2. Volatility: a price range measure.

For successful day trading it is advisory to apply practical and as well as mental rules. It requires knowledge, experience and dedication to provide fruitful results. Market reading and analysis is very essential to make a profit in day trading. Market sentiments drive the stock movements, so if you want to gain from day trading then go with the flow. Move to the direction the market is going. Usage of tools which indicates stocks for day trading purpose is very effective. If the stock price is increases then you can buy and sell and short selling is used when the stock price is decreasing.

One of the mantras of day trading is doing specific and selected trades. It is recommended that one should choose a share and then notice its activity in the market. When you get a fair idea of its behavior, then you may start day trading of those shares. Never be greedy and fearful in day trading. Set your personal targets of profiting from the day trading. One way of doing this is buying the shares at lower prices and keeping it till the prices are high enough to generate a profit. Over trading is never a good option. The general play is, invest half the money and keep half the money as backup in case the market fluctuates.

The traders generally have two ways to raise capital for the purchase of the shares:

1. Margin account: the money is borrowed from the brokerage firms using the margin account. Using this account a trader can borrow up-to half of the purchase price of a stock. But there is a risk, when the value in the account falls below limit, then the broker can sell the securities until the maintenance margin is attained.

2. Short selling: in this, the trader borrows a security and then sells it hoping that their rates will become cheaper in the future and then he will buy the shares later on.

It is followed that there is always an entry and exit strategy for day trading.

1. Entry strategies: after checking on the stocks which are to be brought, next is to identify the possible entry points. It could either be done by experience or there are tools to perform this task like:

2. Intraday candlestick charts: candlestick patterns, trend-lines, triangles etc.

3. ECN

4. News

5. Develop the price target: scalping, fading, daily pivots or momentum.

6. Stop loss: this is an order placed to a broker from a trader to sell a security when it reaches a certain price. It is used to put a limit to the trader’s loss.

The bottom line is once you get an intake of how the day trading is done, the doubt is mitigated and if the above said steps are undertaken, one can greatly improve his chances n the share market.

Mutual Fund as the name suggests is an investment scheme that is shared among many investors and Institutions. Investments include stocks, commodities, bonds, or a mix thereof. There are various advantages to mutual funds. First, it alleviates the investor of having knowhow of the financial and corporate World in that the stocks, dealers etc. are selected by financial institution issuing the NFO. The traders at these institutions, who are all experienced and well learned, take decisions as to how many stocks to buy from which companies and so on. Other reasons for security are: the investment is divided among many companies. This is a distinct advantage for leisurely investors as individually they may not have sufficient amount to meet minimum buying conditions of all companies, however when the money invested by thousands of customers is huge and allows the financial institutions to diversify their investments thus providing an element of safety. Before investing in mutual funds, one should know about the performance of the mutual fund company.

People who are professional stock market traders take on direct stock investing. Stock investing needs technical knowledge of stocks, their charts and also skill to predict the future prices. Stock investments and stock trading can give more monetary benefits than mutual funds if done in an organized manner. This need total involvement of the trader throughout the exchanges and trading. If the company in which investment is done makes profit, the person having a stock gets a dividend. In direct stock trading diversification comes at a very high price. The buy and sell is done using a demat account. But, huge risk is involved here as you are totally dependent on the performance of the company.

The returns on Mutual Funds are, however, low compared to Stock Trading as the financial institution itself has a layer of profit. The diversification has a negative side as well. The poorly performing companies will drive the value of investment low, whereas if an investor finds one good company to invest in, he faces no loss.

Stocks are:

· Lesser charges

· More opportunity

· Fast entry and exit

· Self-dependent

· Greater involvement

Mutual funds are:

· Less capital needed

· Diversified

· Managed by professionals

· Less involvement

Thus it can be said that mutual funds are a safer form of investment especially for those who have limited trading knowledge. It is more of a beginners and a failsafe investment strategy. When a person gains sufficient experience and instinct, he should consider stock investments as they inevitably yield higher results when they succeed.

Hence, whether to buy stock or mutual fund totally depends on the investor. If one has faith in his knowledge and experience and wants to be more involved, he could go for stock trading. But for the rookies and the people who have lesser time to be involved mutual funds is the perfect choice.

Stock Trading and commodity trading are two sides of the commercial trading. The former deals with corporeal items such as Gold, Silver, and Potatoes etc. whereas the latter deals with partial ownership of companies or stocks.

The values of stocks increases at a higher rate than commodities but can also decrease unlike value of commodities which increase at a much slower pace. Investment in commodities is hence safer. The price of a commodity rarely, if ever falls while as proven in the 2008 recession, price of stocks varies can drastically fall due to global economic conditions. Commodities are considered to be stores of wealth.

To illustrate this point, let us compare the growth of an ounce of Gold compared to a stock of Google from 2005 to 2010.

On Dec 1, 2005 the value of an ounce of Gold was around 500$, while the value of a share of Google was $405. On January 4, 2008, it was reported that Gold outpaced Google by 30% closing at $859.19 an ounce compared to Google’s $657. On January 24, 2008, the gold price broke the $900 mark per ounce for the first time. The price of gold topped $1,000 an ounce for the first time ever on March 13, 2008.

Thus the value of gold is stable as compared to stocks as commodities are not as prone to economic disasters as stocks which are directly impacted by them. However this steady increase is also slow and is not immune to inflation. Commodity market is going to be in a boom for many decades in the 21st century. The population has increased. The demand for commodities is at an all-time high while the supply is limited. So, opportunity lies everywhere whether it is stock or commodity.

To quote directly from the book “Basic Economics” by Thomas Sowell

A dollar invested in bonds in 1801 would be worth nearly a thousand dollars by 1998, a dollar invested in stocks that same year would be worth more than half a million dollars. All this is in real terms, taking inflation into account. Meanwhile, a dollar invested in gold in 1801 would by 1998 be worth just 78 cents.

At the end of the day, commodities are just two ways to invest money in and both have associated risks, advantages and disadvantages. It is better to personally analyze them and invest a certain amount in both to get security and returns both.

An order to buy or sell a security when the price of the security goes above or below a specified price is called a stop order. It is a mechanism that entitles the trader to stop the sale of his securities when the price of a stock goes above or below a specified price. This is used to limit the loss of a trader. Once the stop price for a security is reached then the stop order is entered as a market order. This order is executed automatically when the stop price is reached.

Types of stop loss order:

1) Stop loss limit order: this is to buy at no more or sell at less than a specified limit price. This is to control the price at which the trade is executed. They are two types:

a) Stop loss buy limit order: is executed at the limit price or lower.

b) Stop loss sell limit order: is executed at the limit price or higher.

Example: let there is a customer who is short but he does not want to pay more than 50 Rs. for the stock, then, the investor can place a stop loss buy limit to buy the stock at any price above up Rs. 50

The customer gain is that the customer has total control of the stop loss limit. The disadvantage is that, that at the limit price the stop order will not be executed if there are no buyers.

2) A stop loss market order: is an order to buy or sell a security once the price of a security has climbed above or dropped below a specified price. There are two types of stop order:

a) Sell stop market order: order to sell at the best price after the stock goes below the short price.

b) Buy stop market order: happens always when the buy stop price is above the current market price. A disadvantage of a stop order is that the trader has no control over the price of the transaction.

The stop loss does not cost anything to implement. After the stock is sold only then the commission is charged. It minimizes the ‘total loss factor’ to considerable extent. A stop loss is a very useful tool to lock in profits or prevent excess losses. To any investor, the advice is, use stop loss as much as you can. Stop loss depends on two things i.e. how much the trader is ready to lose and the price movements for that particular day.

Example:

Let us say that a trader asked the broker to put a stop loss at 333. This means that the broker placed and order for selling the stock at one condition -if it breaches a trigger price. Hence, for a stop loss sell order for 333 the trigger will be slightly higher. Let us assume that the stock is quoting at 335. You place a stop loss sell order at 333 with a trigger price of say 333.25. When the price reaches 333.25 or below the stop loss sell order get activated or triggered. The order will be placed as a sell order for 333. But if the price starts moving up say from 333.10 to 334 the order won’t be executed.

Stock diversification is a risk reduction strategy by combining variety of investments like bonds, securities and stocks. The idea behind the phenomenon of stock diversification is that, that it is very unlikely that the market elements like the stocks for different domain companies (real estate, petroleum etc.) or the bonds of the countries, all behave similarly i.e. they all move in the same direction. Hence, it limits the volatility of the stock. The logic comes from the understanding that the different kinds of investments will provide a low risk – high return result than any individual investment. Therefore, the negative performance of some investment is neutralized by the positive performance of other investments.

Types of risks:

Un-diversifiable: aka systematic or market risk. This is a type of risk which cannot be removed or eliminated through diversification, like, inflation rates, exchange rates, war, political instability etc. these are the risks which the investors have to embrace.

Diversifiable: aka unsystematic risk is for a company, economy etc. It is specific to a particular entity. This could be business or financial risk.

Let’s say that a person invests Rs. 10000 in one stock and Rs. 10,000 in another, he would have more risk not less. Diversification will come into play when a person will invest Rs. 5000 from the Rs. 10,000 to another stock. Then it is lesser risk.

Now there are two elements which come to play here, mutual funds and stocks. When talking about diversification, a mutual fund is the arena to trade. Mutual funds fundamental concept comes from the diversification phenomenon. More diversified the investment is, the lesser risk it is.

Things don’t always turn favorable. If a company is doing really well for a couple of days, it can get tanked in a couple of hours. Owning several stocks will help you diversify yourself and also reduce the risks undertaken. But there is one point to consider that more the diversification, lesser is the gain. Hence, stock diversification is for the people who are happy with lesser returns and want to play safe. Direct stock investment incurs higher returns but they are also of greater risk.

According to Warren Buffett: “wide diversification is only required when investors do not understand what they are doing”. In other words, if you diversify too much, you might not lose much, but you won’t gain much either.

Most of the light-signals present in the world would mean that there is a certain action or reaction to be followed after the signal. In the world of stock marketing, there are signals present. But most of the people are either unaware of it or are oblivious to it.

Now there are signals for S & P trend investing and market timing. They are:

1. Month end trend signal

This is calculated at the end of each month. It is based on the pattern of last six month ends. It shows five different statuses:

a) Up: trend is up

b) Up + warning: trend is up but there could be a possible correction

c) Down: trend is down

d) Unclear: month end closing price does not indicate a clear trend.

e) Unclear + warning: month-end trend does not indicate a clear up or down.

This is a custom made signal. Hence, it could be different in different organizations.

2. Moving averages trend investing signal (MATI)

MATI is based on the patterns between the moving averages. When this is UP, it means buy and when it’s DOWN, it means sell. The general signal lights include:

a) Green: SMA (200)

b) Yellow: SMA(50)

c) Black: SMA(20)

3. Moving averages 200/50 signal (MA200/50)

This makes a comparison between 200 MA and the 50 MA. When the 50 day MA is above the 200 day MA, it means UP or BUY. This is called the Golden Cross. When the 50 MA is below the 200 MA, it means SELL or DOWN. This is also called the Death Cross. This is also a custom build so the light or the colors would be different for each.

4. Moving averages 250/100 signal (MA 250/100): this compares the 250 day MA with the 100 day MA. This is used lesser than the MA 200. When the 100 day MA is 1% above the 250 day MA, it means UP or BUY. When the 100 MA is 1% below the 250 MA, it means SELL or DOWN.

5. The CBS or coppock buy signal is designed to be used on a monthly basis. It gives only a buy or a sell signal.

The most general trend is GREEN is for UP (BUY) and RED is for DOWN (SELL). On an S & P 500 MA signal chart. The representations of the signals are given by:

· Blue: S & P 500 MATI

· Red: S&P 500 MA200/50

· Green: S&P 500 MA250/100

· Grey Cross: COPPOCK

Hence, signaling is a great way to make the investors aware of what the trend is like and what it is going to be.

Mistakes in stock trading are all around. There could be a hundred explanations of what led to the failure in stock market? The most common mistakes could be the following:

· Lack of knowledge is the biggest issue which leads to mistakes in stock trading. People simply indulge themselves into something which they are unaware of.

· Lack of a strategy about the investment to be made is big issue. There should always be research done with regards to the alternatives for the investment and also the backup plan.

· One common mistake is trading in just one direction. For example, a person will always trade long and eliminates short trading – even in instances when short trading would be financially beneficially to them.

· Lack of money management. This along with planning is most vital and most of the mistakes are made due of the lack of these factors.

· Stop loss not defined. One great way of losing money when a decision goes wrong is not defining the stop loss. Stop loss restricts the loss by stopping when a specified point is reached.

· Unnecessary changing the strategy: It is normal for markets to go high and low. Don’t get paranoid if the things don’t go according to your plan. . Barring some very visible signs that warrant change, the key lies in planning the trading strategy before the market opens and adhering to it religiously irrespective of crests and troughs. 

· Emotions: in stock trading there is no place for emotions like greed, hope, and fear etc. everything is totally calculative. It is all about how well you understand the market.

· Overtrading: Day trading, of course, is the epitome of overtrading. Most people just are not equipped, emotionally, intellectually, or mechanically, to day trade and statistics tell us that most are not successful at it.

· Picking a favorite: there should be no favoritism while picking up stocks. This could lead to uncalculated buying of the stocks which may result in losses. Picking a favorite is a mistake.

· Increasing share size to make up loses

· Not Calculating a Stock’s Risk-Reward Ratio. This ratio should be calculated before investing.

· Improper Timing: timing mistakes are very common among the traders. A sense of proper timing is very essential.

There could be numerous ways in which stock trading could be done efficiently. There could be multiple options for the secrets of stock trading by different sources, but the actual answer would come from your own experience and learning. Stock trading secrets here could only help you as a guide.

The stocks that are more volatile in nature, could give you more profit, but then again you have to be very thorough with your decision as this may lead to heavy losses too. For the day traders, a detail of the company in which investment is done is very important. Overlooking even a couple of point could prove to be fatal. Stock trading is very profitable and very risky too. Hence, for the people who are reluctant to take risks, diversification is the key. Using stock diversification, one can minimize risks. And there is always the fundamental law: buy at the bottom and sell at the top.

People who are not able to involve much in trading could invest in mutual funds or forex. Forex is popular due to the software on the market which could easily indicate the market trends at that point.

For a proper organized stock trading you could follow Frank Soler’s stock trading secrets:

• A well-developed trading system that has proven itself to profitably work over and over again in real-life trading
• Knowing which trading strategies work best in which markets
• The role of the Market Makers and how they use their influence to control the market and how you can use this to your advantage
• What trading indicators are actually reliable
• Which trading patterns are worth using, and when
• Proper Money Management techniques, Money Management, and Money Management (note the emphasis here)
• How to take advantage of margin

To conclude I would like to state that there is no hard and fast rule or secret in stock trading. Everything comes with experience and knowledge. More knowledge you have, easier the stock trading would go.