Share Market

Stocks price changes due to market forces, i.e. buying and selling of the available stocks in the market. The following are the factors that affect or even predict the buying or selling of stock that ultimately affects stock prices of companies.

i. Market sentiment. The price of the stock of a company is affected most of the time by the general market direction during a session. In a bull market, the stock price of most companies will rise and in a bear market the stock price of most companies will fall. One can gauge the market sentiment by looking at stock indexes or its future price movement.

ii. The performance of the industry. The performance of the sector or industry that the company is in also plays in part in determining the stock price of the company. Most of the times, the stock price of the companies in the same industry will move in tandem with each other. This is because market conditions will generally affects the companies in the same industry the same way. Of course, there are exceptions to this. Sometimes, the stock price of a company will benefit from a piece of bad news in its competitor if the companies are competing for the same target market.

iii. The earning results and earning guidance. The main objective of a company is to make profit. Therefore, investors and traders always assess a company based on its Earning per Share (bottom line) and Revenue (top line) and its future earning potential. This is also closely monitored by investors and is an important factor that will affect the company stock price.

iv. Take-over or merger. In general, a company being taken-over is anticipated to get a stock price boost and the company taking over another company shall experience a drop in its share price. This is assuming that the company is being taken over at a premium, meaning it is being bought over at a higher price than its last traded stock price. Depends on the agreed term, a company can be bought over by cash or stock (of the acquirer) or a combination of the two. In some minority cases, the stock price of the acquirer may get a boost if it is perceived that the acquisition shall contribute to its earning or revenue in the near future.

v. New product introduction to markets or introduction of an existing product to new markets. The introduction of new product to market is seen as a revenue enhancer for a company. This also applies to an existing product that breaks into new markets. Sometimes, the prospect of a new product introduction suffices to improve the stock price of a company, this is often observed in surges in stock prices of pharmaceuticals companies after the announcement of successful clinical trials, or FDA approvals for new drugs.

vi. New major contracts or major Government Orders. A company that is able to obtain new major contracts or major government order is expected to see a bull run in its stock price. Those companies that fail in the contract bidding normally experience the fate of sell-off in its stocks.

vii. Share buy-back. The act of share buy-back by a company will reduce the number of share available in the open market. Due to the law of supply and demand, a reduction in share available for trading in this case will cause a drop in supply, this will normally help increase the share price. Also, the continuing buying back of share of a company will also acts as a support for the share price that helps to maintain or increase the share price. The investors may also see the share buy-back by company as a confidence booster for them in the company itself. Therefore, share buy-back is quite often used as a tool to deliver value to the investors.

viii. Dividend. The stock price may increase by an amount close to the dividend per share value. However, the stock price may drop on the ex-dividend date by the dividend per share amount. This is because anyone buying a stock on or after the ex-dividend date is not entitled to the corresponding dividend payment.

ix. Stock splits. Stock split in theory should not have an impact to the stock price. However, it is generally observed that whenever the stock price increases (after taking into account the increase in the number of share) after a stock split. Some attributed to the better affordability of the stock after stock split; some attributed this to the perception of cheap stock due to the lower stock price after the stock split. Some however believes that stock split has no real impact on the stock price (effective stock price, taking into account the change in number of shares), as the stock price will increase regardless of stock split.

x. Analyst upgrade / downgrades. Analyst upgrade and downgrade to a stock may have positive or negative impact to the stock prices. However, one needs to be wary of the fact that quite often analysts’ upgrades or downgrades happen “after” some important news about a company. For example following a extremely disappointing earning result, many analysts will likely to downgrade the company stock. So, it is very likely that by then the stock price of that company has already priced-in the poor earning result, and analyst downgrade may not have further impact to the stock price.

There are basic principles of investing which helps in making good and bad decisions, buying good-quality stocks whereby one needs to set goals and chase their performance and abandon or almost giving up after one grinding bear market, but most of all continue to learn more every step of the way, with the help of some principles which one needs to keep in mind while investing.

Lesson 1: Diversify. One needs to diversify in the stocks and bonds that one purchase.

Lesson 2: Start investing early. Compounding is your best friend. The longer you have your money working for you, the more you will gain.

Lesson 3: Invest in things you know. As how Peter Lynch said it best when he said, “Never invest in an idea you can’t illustrate with a crayon.”

Lesson 4: Avoid fads. Past performance of a stock is a rotten predictor of future results. If everyone is talking about hot stocks, like the conglomerates back then, like internet stocks in 2000, or like nano-technology today, you’re too late.

Lesson 5: Don’t let a market slump change your long-term investment plan. One needs to be optimistic and look beyond the market rates to make spectacular gains of the market, even when the market is in slumps, so that one can gain from the market rebound

Lesson 6: Don’t check the price of a stock (or mutual fund) after you’ve sold it. After you’ve made a decision, stick with it. Look ahead, not behind; remember, today is the first day in the rest of your life. The “what-if game” (What if I bought this? What if I hadn’t sold that?) only leads to recriminations and beating yourself up over something you can’t do anything about.

Lesson 7: Don’t panic. One should not panic when the market is shaky but have a close and careful look at the market and continue to trust one’s instinct of the market bounce ability.

Lesson 8: Pay attention to what’s going on with your investments. No stock is safe forever. Even the bluest blue chip can turn into a cow chip. The old maxim of “buy and hold forever” doesn’t work very well in an economy as vibrant as exists in the world today.

Lesson 9: Hold onto your winners and sell your losers. If you wouldn’t buy more of a stock today on which you have a loss, sell it. Don’t wait to “get even.” Chances are there are better ways to invest your money. No well-managed store keeps obsolete goods in inventory; neither should you keep losers in your investment portfolio.

Lesson 10: Take your losses quickly and your profits slowly. Every 50% loss begins with a 10% loss. Better to take the loss sooner, not later.

Forecasting the stock markets is one of the most interesting topics which have intrigued many investors both small and big alike. As anyone who could forecast the stock market could make a life’s bumper savings and one who could not could lose one’s lifetime savings. How will the change in the stock prices be and what will it reflects is what will help in defining and forecasting the stock market.

The changes in the stock prices largely reflect human opinions, valuations as well as expectations. Many soft ware as well as experts has seek to help in forecasting the stock markets. One of the software device programs is the Pattern Recognition Program which helps in forecasting stock markets can be done through the help of a cycle data. This use of artificial intelligence reduces the effect of personal bias and allows the simultaneous cycle analysis of many input variables. It is easy to read and easy to understand. Whether you are a seasoned investor looking for the additional edge provided by cycle analysis or a beginner, these charts require no prior technical skills to take full advantage of their projected targets.

A study by mathematical psychologist Vladimir Lefebvre has demonstrated that humans exhibit both positive as well as negative evaluations and these opinions hold in a ratio that approaches phi, with 61.8% positive and 38.2% negative. Both Phi and Fibonacci are used to predict stocks. The valuation of the Phi has been used as 1.618 and is called as the Golden Mean while the numbers of the Fibonacci series (0,1,1,2,3,5,8….) have been used with great success to analyse and predict stock market moves.

Ermanometry Research shows that for markets to be perfectly patterned, humans as a part of the nature creates perfect geometric relationships in their behavior, unlike a spider which spin geometric relationships in their behavior. Ermanometry applies the logarithm spirals that are found in the sea shells with dynamic ratios in 3D to relate one market to others.

Phi, of Golden Ratio patterns often declines the timing of highs and lows and price resistance points, which add the tool to technical analysis and illustrate the Golden Mean Gauge and Phi Based analysis software, can be used to identify key turning points. The golden ratio or phi appears frequently enough in the timing of highs and lows and price resistance points that add to the tool to technical analysis of the market that may help to identify key points.

Profit from falling stock is one of the most common strategies to make money in the stock market. Here you buy the stock when the price is low and sell them at a high price when it rises. It is known as stock trading. From the behavioral observations, as well as a result of fundamental logic and profiting off single stock failures has historically provided more return potential than the upside. With every bearish period a number of investors and put option writers tend to take large draw downs or devastating blow outs. Remarkably, the downside biased traders have survived bullish times, and made fortunes as the general optimistic public took overwhelming losses.

The Equity holders eventually liquidate positions to take profit or limit loss, and vice versa for short sellers. The initiated sell orders lower liquidity which causes negative price impact; and the original sellers may never repurchase the same stock(s). The next wave of sellers must then lower prices further to attract new willing buyers. At any point in time, the amount of equity holders outnumbers short sellers, this leads to an edge for negative bias.

While corporate accounting has become known to tweak numbers and make performance appear fantastic, they have much less incentive to feign failure. The Enron or WorldCom types of shenanigans become completely mitigated in this approach. With the negative partiality, horrible performance points to great trading profit potential.

In order that one makes profit from falling stock one needs to make a good survey from the market to know how to make a good returns from the market and prevent the chances of losing cash in the market. One should never panic when it comes to losing your money in the stock market. The news is one place where one needs to keep up to date of the sensex of the different companies and that will help is deciding which companies one can invest in their stocks.

There are ways of how to ease Financial Statement Research through the following techniques which are mentioned in brief:

1) Short Selling – This is the most straightforward position to exploit equity price drops.

2) Long Put Option positions – A long position with a put option provides more potential return than short selling as it provides leverage and increase in value along with volatility which often accompanies underlying price declines.

3) Option Synthetic Position – A long put option and a short call option at the same strike price. The change in value of the underlying will become equivalent in this option spread.

Volatility is one of the best phenomenon without which stock markets will lose its charms. The volatility of the stock market is the tendency of the market fluctuation, which is indicated through it’s the indices over a period of time. The higher the indices, the higher are the volatility. In fact, it is the ups and downs of the stock prices which add spice to the market behavior. The ups and downs of the stock market add spice to the market behavior.

The volatility of the market has its own implications as prudent investors can take advantage of buying on dips and sell on highs for profit booking. The disadvantage is that the greater volatility lowers the confidence of the investor in the market which prompt them to transfer their investment in less risky options due to unexpected market behavior.

From the past events, one can realize the root cause of the “unanticipated” volatility in the market through the recent examples such as the time when the govt announced the buying of shares/ bonds of the Indian companies through participatory notes (PN), the hike of the repo rates and CRR by RBI, the fiasco caused by Satyam, the introduction of stringent IPO regulations as well as the fear of US recessions on Jan 21, 2008 saw the biggest ever fall of 1408 points.

The volatility of the stock market has a deep influence in the market which can be seen in the following explanations:

The investment made by the Foreign Investor Institute (FIIs) has a major influence on the movement of the SENSEX which came into limelight during the general elections of 2004.The fear of reforms by the new government has led to a continued selling of pressure, which led to a sharp decline in the index. Later on when the news regarding the reforms stabilized, FIIs started buying back the shares that thy sold earlier, which indicated the aim of profit booking and balancing the portfolio. Had the policies of the Indian govt not been in their favour, they would have withdrawn their investments from Indian markets and invest in some other market which could have resulted in a crash in the index.

Volatility is also a sign of healthy markets as it leads to correction, if there is any over valuation of prices. At the same time there is a huge risk associated with it. The crux of the issue is that one could loose everything due to the volatility of the market, so it is advisable to keep a margin which could bear the volatility risk and not put all the money in the same market as a basic rule of a portfolio management.

Trading in the stock market can be either very profitable of painfully unprofitable. Many professional traders can make a few hundred thousand dollars a year-depending on the competence of the traders. The trading of options hold a special attraction for many traders due to the leverage they provide because they usually trade at only a fraction of the price of the underlying stock. And options can significantly boost profits on winning stocks.

Trading Options are considered by many to be a high-risk market activity so for that reason alone, unless one is well informed, it will pay to learn a little more about how to actually trade them. The general belief held by most professional traders is that the vast number of retail traders, lose money when they trade options. But that should not necessarily deter if effective strategies can be applied properly.

In reality, options were originally created to reduce risk by providing a method to acquire an asset of greater value at a fixed price within some specified time in the future without a commitment is being made to actually complete the acquisition by the specified time. In which case, the fee paid for the option is the only real cost involved in the transaction.

In the above explanation, the option is a derivative, meaning its existence is derived as a byproduct of the original asset, whether that is a stock or other type of asset. All forms of trading and speculating are accompanied by risk but in the case of trading options it is perhaps somewhat of an advantage for the option buyer to be able to set the maximum dollar amount that can be lost when a trade is made. That maximum amount at stake being the cost of the option, and that would only become a reality when the option expires.

When an option trade occurs, the transaction identifies:

• The name of the stock, usually called the underlying stock.

• The price at which the underlying stock will be bought or sold if the option holder chooses to exercise the option, this is called the “strike price”.

• The expiration date, the latest date that the option can be exercised.

The option can be exercised at any time up to and including that date but after that date it no longer exists. As mentioned above most options expire in this way. The unexpired time span is referred to as the term of the option.

It is important to know how to deal with brokers as they are the middlemen from the investor with the stock market, as the stock market is a virtual place where there is no direct contact between buyer and seller. Unlike the normal market, where we get a wide range of goods and services displayed in front of us, in the share markets securities are traded in these markets. The security mentioned here refers to the different shares, stock, bonds, debentures, etc of companies. In fact, we use the term invest to signify the purchase of any securities as we do not buy or purchase the securities like shares and stocks rather we invest in it. Every transaction in the stock exchange is carried out through licensed members called brokers. That is where the importance of how to deal with the brokers comes in.

The brokers being the middlemen are the person who carries out certain functions on behalf of his clients. Thus, it is important that you learn how to deal with your broker and sub broker. The Securities and Exchange Board of India has laid down certain Guidelines of the Do’s and the Don’ts for Dealing with Brokers & Sub-brokers.

Among the list of the Do’s includes the need to deal with only the SEBI-registered brokers/sub-brokers. Besides, ensuring that the broker/sub-broker one deals with has a valid SEBI registration certificate and is permitted to transact in the market. One must also state clearly to the broker/sub-broker who will be placing orders on your behalf and enter into an agreement with your broker/sub-broker, by setting out the terms and conditions clearly.

There are also the don’ts which SEBI has cautioned on dealing with the brokers such not to deal with the unregistered broker/sub-broker and pay more than the approved brokerage to the intermediary. Never to undertake deals on behalf of others and not to neglect to set out in writing orders for higher value given earlier over the phone and never sign blank delivery instruction slip(s) while meeting security pay-in obligation. One should also not accept unsigned/duplicate contract note/confirmation memo and accept contract note/confirmation memo signed by any unauthorized person.

To also ensure that the payment/deliveries of securities to the broker/ sub-broker be paid in time and never get carried away by luring advertisements and be mislead by market rumors and stay away from transactions, which looks shady and is not transparent.

There are certain rules which need to be followed while investing. The first rule is to have a clear cut objective of why the investment is being made and the plan of how to achieve it. In other words, you need to know the reason why these investment is being made, as you need to priorities’ the objectives of making an investment so that you can visualize them coming into reality. Besides, when making an investment, one should also take into considerations the risk involved. An investment which has a higher risk tends to bring in more heavy returns and vice versa, if done successfully. This means that one must know one’s capabilities regarding one’s income. For eg, a retired couple living on a fixed income, with limited capital assets, should not purchase the same investments as a young, single, highly-paid person with secure employment and significant assets.

The other consideration which needs to be taken is the time factor, of how long one can afford to invest as this will decide the investment vehicles. Suppose, if one is investing for less than a five-year period than one should probably not invest in the stock market at all, as one might need to sell when the stock market is depressed. In that case, investing in money market funds or short-term bond funds will be more beneficial. On the other hand, if you are young and can invest fairly small sums of money on a regular basis, you can win the money game quite easily. The power of compounding is on your side.

The next important rule is to not invest in the products which one finds it to be too complicated or which you don’t fully understand. Doing one’s own research and reading the prospectus is very important as this is what leads to success. Most of all, be objective; carefully study the choices, and don’t buy anything just because someone is trying to sell it to you.

Being objective in making investment is very important as emotions can make you take hasty decisions, which can be costly in terms of making a mistake. That is why, it is important to always step back and control emotions especially of greed and fear from influencing one’s decisions in investment.

While making investment, it is very important to understand the long term impact of taxes and inflation as these combined effects will create a seepage in the profits made in the investment plan.

Trading cost has been defined as the cost of making a transaction which includes the commission as well as the bidding and the asking price. Anytime an investor goes to the market to buy or sell securities (whether shares or debentures), he has to pay a certain fees to the investment adviser or broker for brokerage fees, stamp duty, etc, which is called as Trading Cost. Economists also call them as transactions costs.

Transactions costs are like a tax, on trading. Every time you trade, whether you earn profits or not, you pay these transactions costs. If you have a forecast that a certain price is going to go up, then you suffer transactions costs twice: once on entry, and once on exit. For trading to be profitable, the price change that you forecast has to be larger than this “round-trip transactions cost”.

The trading costs have five parts which include the following:

1. Explicit costs such as the commissions, fees and taxes. In other words, the commission that the investor pay to the broker

2. Market maker spread-difference between the bid and ask price that the specialist set for a stock, the specialist keeps the difference as compensation for providing immediacy. The lesser the liquid stocks, the specialist has the greater exposure to adverse price movements and will make the spread larger. It is also called as the “counterparty risk”. This is the risk that your counterparty reneges on the deal. This can happen at the level of one broker, or sometimes an entire exchange can collapse in a payments crisis.

The counterparty risk is hard to quantify. As of the middle of 1993, the remaining costs added up to roughly 5%. This was an extremely large number. To buy Rs.100,000 of shares, you would normally suffer Rs.5000 of transactions costs, plus some counterparty risk. In speculation, if you forecasted that a price would go up, then it would have to go up by at least 10% for your transactions to be profitable (you used to lose 5% on entry, and 5% on exit).

3. “Market impact” results when the high volume trade influences the market price. The buy price will always be a bit high, and the sell price will always be a bit low. E.g. if a security trades at Rs.200 or so, then if the buy price turns out to be Rs.204, then we say that the impact cost is 2%.In fact, the market impact can be divided into two components-the temporary and the permanent. The temporary is due to the need to fill the order. The permanent impact is due to the change in the market’s perception of the security as a result of the block trade.

4. The fourth cost is the paperwork involved in signing transfer form, courier, etc.

5. Finally, the fifth cost is the risk of stolen or counterfeit certificates.

The total trading cost of a buy transaction is calculated by taking the percentage increase of the average purchase price as compared to the price when the buy decision was made, and adding the commissions, fees, and taxes as a percentage of the price when the buy decision was made. In India in the last few years, some of the costs of trading have come down sharply. Earlier, gala was routine — today, with contract notes on the NSE, it is non-existent. Similarly, brokerage fees have come down sharply.

In order that the ‘Stock market’ is survived by the investors who are at the beginners stage, certain tips needs to be quantified, which would be of help to them. The stock markets tips are as follows:

1. Investing is not a hobby. To big merchant banks, it is a very competitive business. Therefore, you should also treat it as a business. That means understanding your own profit and loss as well as the companies in which investments are made.

2. Get some great investment management software. These days, a speedy internet connection and good money management and investment software costs virtually nothing. Why spend the time and effort trying to figure out the best ways to do things when solutions already exist.

3. Get an education. Warren Buffett has suggested in the past that every investor should be able to understand basic accountancy principles, an annual report and stock market history. You probably do not need to become an accountant, but being able to understand the scoring system of the game can only help.

4. Learn about money management. Every investor will have the occasional (at best) loser and it is vital that no individual holding can wipe out a portfolio. Understanding asset allocation is vital.

5. Read widely. Getting a wide ranging education in personal finance, corporate finance, taxation, economics and investment theories will help. However, finding areas of the world or business in which you can become relatively expert can help in the process of finding investments.

6. Find a good investment service to subscribe to. Many of the suggestions above can now be covered by joining just one stock market service. These services now aim to pick stocks, offer trading and portfolio management software and educational services too.

7. Practice makes perfect. In the investment business, paper trading is how we all start. Pick a couple of companies, make a note of their price, the date, the reason why you want to buy them and then start following the stock. This is an excellent learning experience and one that is vital to the long-term profitability of anyone in the stock market. To get the real experience, purchase some graph paper and chart the stock price movements each day by hand. Learn to compare this with the overall movements of the market and a whole new world of investment and money will begin to open up to you!