Share Market

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.