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The Sensex is an "index". What is an index? An index is
basically an indicator. It gives you a general idea about whether most of the
stocks have gone up or most of the stocks have gone down.
The Sensex is an indicator of all the major companies of the BSE.
The Nifty is an indicator of all the major companies of the NSE.
If the Sensex goes up, it means that the prices of the stocks of most of the
major companies on the BSE have gone up. If the Sensex goes down, this tells
you that the stock price of most of the major stocks on the BSE have gone down.
Just like the Sensex represents the top stocks of the BSE, the Nifty represents
the top stocks of the NSE.
Just in case you are confused, the BSE, is the Bombay Stock Exchange and the
NSE is the National Stock Exchange. The BSE is situated at Bombay and the NSE is situated at Delhi. These are the
major stock exchanges in the country. There are other stock exchanges like the
Calcutta Stock Exchange etc. but they are not as popular as the BSE and the
NSE.Most of the stock trading in the country is done though the BSE & the
NSE.
Besides Sensex and the Nifty there are many other indexes. There is an index
that gives you an idea about whether the mid-cap stocks go up and down. This is
called the “BSE Mid-cap Index”. There are many other types of indexes.
There is an index for the metal stocks. There is an index for the FMCG stocks.
There is an index for the automobile stocks etc. If you are interested in
knowing how the SENSEX is actually calculated...you must check-out our "How to
calculate BSE SENSEX?" article!
But, before we go ahead and try to understand "How to make money in the stock market?" you MUST
This article is a COMPLETE guide to the basics of making money in the stock market! If you are considering investing in the stock market, you MUST read this article! We have explained all the concepts and talked about all the "myths" that people have about the stock market!
Plain and simple, a “stock” is a share in the ownership of a company.
A stock represents a claim on the company's assets and earnings. As you acquire
more stocks, your ownership stake in the company becomes greater.
Note: Some times different words like shares, equity, stocks etc. are used. All
these words mean the same thing.
Holding a company's stock means that you are one of the many owners
(shareholders) of a company and, as such, you have a claim to everything the
company owns.
This means that technically you own a tiny little piece of all the furniture,
every trademark, and every contract of the company. As an owner, you are
entitled to your share of the company's earnings as well.
These earnings will be given to you. These earnings are called “dividends” and
are given to the shareholders from time to time.
A stock is represented by a "stock certificate". This is a piece of
paper that is proof of your ownership. However, now-a-days you could also have
a “demat” account. This means that there will be no “stock certificates”.
Everything will be done though the computer electronically. Selling and buying
stocks can be done just by a few clicks.
Being a shareholder of a public company does not mean you have a say in the
day-to-day running of the business. Instead, “one vote per share” to elect the
board of directors of the company at annual meetings is all you can do. For
instance, being a Microsoft shareholder doesn't mean you can call up Bill Gates
and tell him how you think the company should be run.
The management of the company is supposed to increase the value of the firm for
shareholders. If this doesn't happen, the shareholders can vote to have the
management removed. In reality, individual investors like you and I don't own
enough shares to have a material influence on the company. It's really the big
boys like large institutional investors and billionaire entrepreneurs who make
the decisions.
For ordinary shareholders, not being able to manage the company isn't such a
big deal. After all, the idea is that you don't want to have to work to make
money, right? The importance of being a shareholder is that you are entitled to
a portion of the company’s profits and have a claim on assets.
Profits are sometimes paid out in the form of dividends as mentioned earlier.
The more shares you own, the larger the portion of the profits you get. Your
claim on assets is only relevant if a company goes bankrupt. In case of
liquidation, you'll receive what's left after all the creditors have been paid.
Another extremely important feature of stock is "limited liability",
which means that, as an owner of a stock, you are "not personally
liable" if the company is not able to pay its debts.
In other legal structures such as partnerships, if the partnership firm goes
bankrupt the creditors can come after the partners “personally” and sell off
their house, car, furniture, etc. To understand all this in more detail you
could read our “How
to incorporate?” article.
Owning stock means that, no matter what happens to the company, the maximum
value you can lose is the value of your stocks. Even if a company of which you
are a shareholder goes bankrupt, you can never lose your personal assets.
Why would the founders share the profits with thousands of people when they could keep profits to themselves? This is the obvious question that comes up next. This what the next section is all about!
Why would the founders share the profits with thousands of people when
they could keep profits to themselves? The reason is that at some point every
company needs to "raise money". To do this, companies can either
borrow it from somebody or raise it by selling part of the company, which is
known as issuing stock.
A company can borrow by taking a loan from a bank or by issuing bonds. Both
methods come under "debt financing". On the other hand, issuing stock
is called “equity financing”. Issuing stock is advantageous for the company
because it does not require the company to pay back the money or make interest
payments along the way.
All that the shareholders get in return for their money is the hope that the
shares will someday be worth more than what they paid for them. The first sale
of a stock, which is issued by the private company itself, is called the
initial public offering (IPO).
It is important that you understand the distinction between a company financing
through debt and financing through equity. When you buy a debt investment such
as a bond, you are guaranteed the return of your money (the principal) along
with promised interest payments.
This isn't the case with an equity investment. By becoming an owner, you assume
the risk of the company not being successful - just as a small business owner
isn't guaranteed a return, neither is a shareholder. Shareholders earn a lot if
a company is successful, but they also stand to lose their entire investment if
the company isn't successful.
Note that: There are no guarantees when it comes to individual stocks. Some
companies pay out dividends, but many others do not. And there is no obligation
to pay out dividends. Without dividends, an investor can make money on a stock
only through its appreciation of the stock price in the open market.
On the downside, any stock may go bankrupt, in which case your investment is
worth nothing.
Having understood this, we now want to know what makes stock prices rise and fall? If we know this, we will know which stocks to buy. In the next section we will try to understand what makes stock prices go up and down.
Stock prices change every day because of market forces. By this we
mean that stock prices change because of “supply and demand”. If more people
want to buy a stock (demand) than sell it (supply), then the price moves up!
Conversely, if more people wanted to sell a stock than buy it, there would be
greater supply than demand, and the price would fall. (Basics of economics!)
Understanding supply and demand is easy. What is difficult to understand is
what makes people like a particular stock and dislike another stock. If you
understand this, you will know what people are buying and what people are
selling. If you know this you will know what prices go up and what prices go
down!
To figure out the likes and dislikes of people, you have to figure out what
news is positive for a company and what news is negative and how any news about
a company will be interpreted by the people.
The most important factor that affects the value of a company is its earnings.
Earnings are the profit a company makes, and in the long run no company can
survive without them. It makes sense when you think about it. If a company
never makes money, it isn't going to stay in business. Public companies are
required to report their earnings four times a year (once each quarter).
Dalal Street
watches with great attention at these times, which are referred to as earnings
seasons. The reason behind this is that analysts base their future value of a
company on their earnings projection.
If a company's results are better than expected, the price jumps up. If
a company's results disappoint and are worse than expected, then the
price will fall.
Of course, it's not just earnings that can change the feeling people have about
a stock. It would be a rather simple world if this were the case! During the
“dotcom bubble”, for example, the stock price of dozens of internet companies
rose without ever making even the smallest profit. As we all know, these high
stock prices did not hold, and most internet companies saw their values shrink
to a fraction of their highs. Still, this fact demonstrates that there are
factors other than current earnings that influence stocks.
So, what are "all the factors" that affect the stocks price? The best
answer is that nobody really knows for sure. Some believe that it isn't
possible to predict how stock prices will change, while others think that by
drawing charts and looking at past price movements, you can determine when to
buy and sell. The only thing we do know is that stocks are volatile and can
change in price very very rapidly.
Just remember this: At the most fundamental level, supply and demand in the
market determines stock price.
There are many types of techniques and methods that investors use to figure out
whether a stock price will go up or down! We will try to give you an
introduction to these techniques in this article.
But before we go into the concepts of stocks picking, and the techiques of analysis, let us understand one last basic thing....
You need to KNOW some “unforgettable basics” before you enter the
world of investing in stocks. The stock market is a field dominated by savvy
investors who know the ins-and-outs of the market. For people who are not “on
the inside”, the stock market can be a VERY dangerous place. :
Don't even consider "tips" that tell you about "hot
stocks". Consider the source: There are many people in the market who
put in all their time and effort in promoting certain stocks. They do this
because they have their money invested in those stocks. If they can get enough
people to buy the stock and they can get the stock price to rise, they will
sell the stock for a huge price, the stock price will crash and they will walk
off to promote another stock.
Always use your own brain: It's extremely important. You must always use
your own brain. Relying on the advice of others, no matter how well intentioned
it may be, is almost always a complete disaster. Make sure you dig in and
really examine the "facts about the companies" before you invest.
Ignore press releases which have very little substance, and rely on
"hype" to tell the company's story.
And finally the most important tip!!!
Only invest money you can afford to lose!! Sure this is a basic point, but many
many people miss it. You should only invest money that you can honestly afford to
lose!! Everyone enters into investments with the idea of earning big
profits, but in many cases, this never works. (Especially if you are new to
investing in the stock market!)
Please understand that the above tips are tips for beginners. Once you really
get into the stock market you do not need to follow these rules anymore. But if
you are a new investor, you MUST follow these rules. They are for your own
safety.
But then again, nothing comes free. Everything has a price. You will have to
loose some money, make some bad decisions and then only will you really
understand the market. You cannot understand the market by just looking at it
from far. By following these rules, you will basically not loose too much!
Having understood all the basics of the stock market and the risk
involved, now we will go into stock picking and how to pick the right stock.
Before picking the right stock you need to do some analysis.
There are two major types of analysis:
1. Fundamental Analysis
2. Technical Analysis
Fundamental analysis is the analysis of a stock on the basis of core
financial and economic analysis to predict the movement of stocks price.
On the other hand, technical analysis is the study of prices and volume, for
forecasting of future stock price or financial price movements.
Simply put, fundamental analysis looks at the actual company and tries to
figure out what the company price is going to be like in the future. On the
other hand technical analysis look at the stocks chart, peoples buying behavior
etc. to try and figure out what the stock price is going to be like in the
future.
In this article we will go into the basics of “fundamental analysis”. Technical
analysis is a little more complicated. It is much more of an "art"
than a science. It depends more on experience and involves some statistics and
mathematics, so explaining technical analysis is out of the scope of this
article.
Fundamental analysis is a stock valuation
method that uses financial and economic analysis to predict the movement of
stock prices.
The fundamental information that is analyzed can include a company's financial
reports, and non-financial information such as estimates of the growth of
demand for products sold by the company, industry comparisons, and economy-wide
changes, changes in government policies etc..
To a fundamentalist, the market price of a stock tends to move towards it's
“real value” or “intrinsic value”. If the “intrinsic/real value” of a stock is
above the current market price, the investor would purchase the stock because
he knows that the stock price would rise and move towards its “intrinsic or real
value”
If the intrinsic value of a stock was below the market price, the investor
would sell the stock because he knows that the stock price is going to fall and
come closer to its intrinsic value.
All this seems simple. Now the next obvious question is how do you find out
what the intrinsic value of a company is? Once you know this, you will be able
to compare this price to the market price of the company and decide whether you
want to buy it (or sell it if you already own that stock).
To start finding out the intrinsic value, the fundamentalist analyzer makes an
examination of the current and future overall health of the economy as a whole.
After you analyzed the overall economy, you have to analyze firm you are
interested in. You should analyze factors that give the firm a competitive
advantage in it’s sector such as management experience, history of performance,
growth potential, low cost producer, brand name etc. Find out as much as
possible about the company and their products.
Do they have any “core competency” or “fundamental strength” that puts them
ahead of all the other competing firms?
What advantage do they have over their competing firms?
Do they have a strong market presence and market share?
Or do they constantly have to employ a large part of their profits and
resources in marketing and finding new customers and fighting for market share?
After you understand the company & what they do, how they relate to the
market and their customers, you will be in a much better position to decide
whether the price of the companies stock is going to go up or down.
Having understood the basics of fundamental analysis, let us go into some more
details.
When investing in the stocks, we want the price of our stock to rise. Not only
do we want our stock price to rise, we want it to rise FAST! So the challenge
is to figure out: which stock prices are going to rise fast?
Some stocks are cheap and some are costly. Some are worth Rs.500 and some are
even worth 50paise. But the price of the stock is not important. The price of
the stock does not make a stock good to buy. What is important is how much the
price of the stock is likely to rise.
If you invest Rs.500 in one stock of Rs.500 and the price goes up to Rs.540 you
will make Rs.40. However, if you invest Rs.500 in a 50paise stock, you will
have 1000 stocks. If the price of the stock goes up from 50paise to Rs.1, then
the Rs.500 you invested is now Rs.1000. You made a profit of Rs.500.
If you understand this, you can see that the price of the stock is not
important. What is important is the rise in the stock’s price. More
specifically the “percentage” rise in the stock price is important.
If the Rs.500 stock becomes worth Rs.540, then that is a 8% rise. This 8% rise
only makes us Rs.40. On the other hand when we invest the same Rs.500 in the
50paise stock and the stock price goes up to Rs.1, it is a 100% rise as the
stock price has doubled. This 100% rise makes us Rs.500.
The point is that when picking a company, we are interested in a company whose
stock price will rise by a large percentage.
Please note: Looking at the above paragraphs, it may seem like a good idea to
buy all the really cheap 50paise and Rs.1 stocks hoping that their price will
rise by 100% or more. This sounds good, but it can also be really really bad
some times! These really small stocks are very volatile and unless you know
what you are doing, do NOT get into them.
However, the point to be noted is that we are interested in stocks that will
have the highest % rise in the stock price. Now the question is, how do you
compare stocks. How do you compare a stock worth Rs.500 to a stock worth
50paise and figure out which one will have a higher percentage rise.
How do you compare two companies that are in different fields and
different industries? How do you know which one is fundamentally strong and
which one is week?
If you try to compare two companies in different industries and different
customers it is like comparing apples and elephants. There is no way to compare
them!
So fundamental analysts use different tools and ratios to compare all sorts
of companies no matter what business they are in or what they do!
Next let us get into the tools and ratios that tell us about the companies and
their comparison....
Even comparing the earnings of one company to another really doesn’t
make any sense, if you think about it. Earnings will tell you nothing about how
many shares the company has. Because you do not know how many shares a company
has, you do not know how many parts that companies earnings have to be divided
into. If the company has more shares, the earnings will be divided into more
parts.
For example, companies A and B both earn Rs.100, but company A has 10 shares
outstanding, so each share holder has in effect earned Rs.10.
On the other hand, if company B has 50 shares outstanding and they too have
earned Rs.100 then each shareholder has earned Rs.2. So you see it is important
to know what is the total number of outstanding shares are as well as the
earnings.
Thus it makes more sense to look at earnings per share (EPS), as a comparison
tool. You calculate earnings per share by taking the net earnings and divide by
the outstanding shares.
EPS = Net Earnings / Outstanding Shares
So looking at the EPS ratio, you should go buy Company A with an EPS of 10,
right? EPS is not the only basis of comparing two companies, but it is one of
the methods used.
Note that there are three types of EPS numbers:
EPS doesn’t tell you whether it’s a good stock to buy or what the market thinks of it. For that information, we need to look at some other ratios next....
by Chirag on December 21, 2009
The Sensex is an “index”. What is an index? An index is basically an indicator. It gives you a general idea about whether most of the stocks have gone up or most of the stocks have gone down.
The Sensex is an indicator of all the major companies of the BSE.
The Nifty is an indicator of all the major companies of the NSE.
If the Sensex goes up, it means that the prices of the stocks of most of the major companies on the BSE have gone up. If the Sensex goes down, this tells you that the stock price of most of the major stocks on the BSE have gone down.
Just like the Sensex represents the top stocks of the BSE, the Nifty represents the top stocks of the NSE.
Just in case you are confused, the BSE, is the Bombay Stock Exchange and the NSE is the National Stock Exchange. The BSE is situated at Bombay and the NSE is situated at Delhi. These are the major stock exchanges in the country. There are other stock exchanges like the Calcutta Stock Exchange etc. but they are not as popular as the BSE and the NSE.Most of the stock trading in the country is done though the BSE & the NSE.
Besides Sensex and the Nifty there are many other indexes. There is an index that gives you an idea about whether the mid-cap stocks go up and down. This is called the “BSE Mid-cap Index”. There are many other types of indexes.
There is an index for the metal stocks. There is an index for the FMCG stocks. There is an index for the automobile stocks etc.
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The terms Sensex and Nifty has been added to the household vocabulary in the current decade. One often comes across these terms at least once in a day. The news channels also keeps flashing these terms on their side bars and scrolls. This also has become an important part of any news broadcast. 'Sensex and Nifty literacy' has become very essential now. So what is Sensex? And what is Nifty? Basically these are indexes which act as barometers of the stock market. In a nut shell, it tells about the performance of majority of traded stocks.
In India there are two major stock exchanges, Bombay Stock Exchange ( BSE) and National Stock Exchange ( NSE). The index of the BSE is called as Sensex and the index of NSE is called as Nifty. The difference between bse and nse is they both are different stock exchanges.
1) Sensex - It is popularly callled as BSE Sensex or BSE Sensitive Index. It
comprises of 30 stocks which are listed in BSE.
2) Nifty - It is popularly called as NSE Nifty. It comprises of 50 stocks which
are listed on the NSE.
The 30 stocks that are included in the Sensex, provide a sample of the entire market. To elaborate, the 30 stocks that are included are a sample. It represents the total effect of all the stocks that are listed in the BSE.
Similarly, Nifty is the representation of all the stocks listed in the NSE. It comprises of 50 shares.
The difference bewteen Sensex and Nifty is they are different indexes which measure the performance of the stock market. S
Sensex has gone up - What does that mean
Often one comes across the news - Sensex has gone up by 100 points and Nifty has gone up by 50 points. This basically means on an average the 30 shares in BSE and 50 Shares in NSE have performed well. Individual stock prices should have increased and decreased. But majority of the stock prices in the list of 30 for BSE and 50 for NSE have increased.
Similarly another news - Sensex has gone down by 60 points and Nifty has gone down by 30 points, basically means on an average the 30 shares and 50 Shares have performed negatively. Individual stock prices should have decreased and increased. But majority of the stock prices in the list of 30 for BSE and 50 for NSE have decreased.
Apart from these indexes, there are many other indexes which are used to gauge the performance of various industry stocks. For example - BSE IT or BSE Bankex shows how the IT companies and banks listed in BSE performed.
All these stocks in these indexes are selected through a mechanism and certain criteria. So, Sensex and Nifty are no longer a mystery now!
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Ishita Sharma has rich experience in the field of investments. She writes articles on investments and also reviews investment related articles. For more information on various investments visit - http://www.investmentbazar.com Article Source: http://EzineArticles.com/?expert=Ishita_Sharma |
Share Trading is basically to make profit in shares on short term price fluctuations. A trader buys share and sell it at a certain amount of profit within a short period of time. The holding period of the stock is in minutes or at times in seconds.
Most of us get confused between share trading and investing in shares. There is a conceptual difference between both.
The basic difference between trading and investing is the time period. The objective behind both is to make profits. An investor is concerned about the long term appreciation of the stock and look at the fundamentals of the stock rather than the price fluctuations. On the other hand, the trader is more concerned on the price fluctuations.
Every individual who is putting money in the stock market should be careful in choosing quality shares having good fundamentals and have a price target. Once the target price is reached, the buyer should sell the shares.
A stock is a small share that represents a partial ownership of a company. Stocks are issued by companies in order to raise capitals and are bought by investors in order to acquire a portion of the company. Even a small share of the company will give the investors the right to have a say in how the company is run. Although they gain a portion of the company’s profits, investors do not carry an obligation to the company in cases of defaults or lawsuits.
Stocks are issued by companies to raise capital. A cash injection is needed for either property acquisition or company expansion. Every stock is limited to a particular number of shares. The growth potential and perceived health of the company influences the market adjustment of the par value of the stocks.
Investors buy stocks with the belief that the company will grow continuously to raise the value of their shares. Acquiring stocks from a new company is considered to be more risky than buying shares from a well-established company but the potential gain is much greater. People who invested in Microsoft shares gained a lot of profit due to the exponential rise of the company.
Only those companies which are listed on public exchanges like the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotation System (NASDAQ) are capable of stock trading. The shares from the companies listed on public exchanges can be bought and sold on the open market. Buying a partial ownership in smaller companies that are not listed on a stock exchange is also possible but that is a very different type of investment.
An individual investor hires a broker to make transactions for him. A broker takes specific orders from the investor regarding the buying or the selling of stocks. These orders may include some specific instructions to trade at a price that the market will bear or at a price that the investor will prefer. The broker then tries to execute the investor’s orders by searching for either a buyer or a seller. The broker receives a commission on the sale.
Stocks have a lot of advantages over savings investments because they represent ownerships in a particular company. This gives the investor a certain right to participate in making decisions for the company. Some important company matters require voting and one stock is equivalent to a single vote. Partial company ownership also allows the stockholders to benefit from the company’s profits which are distributed in the form of dividends. These may be issued one or twice a year at the discretion of the company directors.
A prospering company causes the value of the stocks and the profits to increase while a suffering company causes the value of the stocks and the profits to decrease. Stocks, when compared with savings investments, both carry a higher risk of losing money and a higher potential of earning money. A good knowledge of the different stock markets and the various investment strategies can help investors to minimize their losses.
“Stock market” is a term used to describe the physical location where the buying and selling of stocks take place as well as the overall activity of the market within a particular country. The correct term to be used in pertaining to the physical location for trading stocks is “stock exchange.” Every country may have a couple of different stock exchanges that are usually traded on only one exchange although a lot of large corporations may be listed in several different locations.
The ubiquity of stock exchanges makes it possible to buy or sell stocks throughout the world. The only restriction to stock exchanges is time. Different exchanges may have differing opening hours based on their local times. The major stock exchanges in the world are the Tokyo Stock Exchange of Japan, the Bombay Stock Exchange of India, the London Stock Exchange of United Kingdom, the Frankfurt Stock Exchange of Germany, the SWX Swiss Exchange of Switzerland, the Shanghai Stock Exchange of China, and the New York Stock Exchange, the NASDAQ, and the AMEX of United States.
The economic health of a country is closely followed by stock markets. Bull markets occur when a particular nation experiences high economic production, low unemployment level, and low inflation rates. Bear markets, on the other hand, follow the down trends in the economy. Such indicators of economic downfall are increased unemployment and inflation. These causes the fall of stock prices.
Supply and demand, which are determined to a large extend by investor psychology, also influence the fluctuations in the prices of stocks. A rise in stocks may cause a lot of investors to jump into the bandwagon which later drives the price even faster. A falling price, on the other hand, can drive the same effect called short term fluctuations. After such runs, stock prices tend to normalize.
Aside from the stock exchange, other popular markets that offer many investment opportunities include the Foreign Exchange Market (FOREX), the Futures Market, and the Options Market. The FOREX is the biggest investment market in the world, in terms of trades and values. The traders in a FOREX buy one currency against another and profit from small changes in the value. Most FOREX trades are entered and exited in a 24-hour span so traders have to keep a close watch on the market in order to make profitable trades.
The futures market is a market of contracts where goods are bought and sold at specified prices and times. The desire of most buyers and sellers to lock in the prices of their goods for a future delivery despite the market conditions resulted to the existence of the futures market. The market conditions can make the actual futures contract to fluctuate considerably in value. Most of the investors in the futures market are mainly interested in the profit that can be realized in trading contracts and not in the actual goods.
Another alternative market is the options market. The options market is quite similar to the futures market because it also features a contract that gives the right, and not the obligation, to trade a stock at a certain price before the specified date. These can be traded on their own or purchased as an insurance against price fluctuations within a specified time frame.
The FOREX, the futures market, and the options market are all quite risky markets that require a considerable knowledge and experience to prevent any substantial loss. These also require a very close attention to the different market movements. As compared to the three, stocks are considered to be less risky because the movements of the market are usually gradual and although short term investment strategies are possible, a lot of people view stocks as long term investments.
There are two ways to describe the general conditions of the stock market: it can be a bull market or a bear market. A bear market indicates the continuous downward movement of the stock market. Conversely, a bull market indicates the constant upward movement of the stock market. A particular stock that seems to be increasing in value is described to be bullish while a stock that seems to be decreasing in value is described to be bearish.
The bull and bear terms do not refer to the short term fluctuations in the stock market. A bear market is the stock market wherein the prices of the key stocks have fallen by 20% or more over a period of at least two months. Prices, even during a bear market, may temporarily increase. Bull markets, being the opposite of bear markets, indicate a rise in the prices of the key stocks over a certain period of time.
The economical state of a country is usually reflected through the stock market conditions. The stock market of an economy with reasonable interest rates and low unemployment rates is considered to be bullish since it is doing just well. Bear markets, on the other hand, usually occur during a slowdown in an economy. The investors tend to lose their confidence and the companies begin to lay off their workers. An exaggerated bear market will eventually lead to a crash that is brought on by panic selling while an exaggerated bull market will actually result to a market bubble that is brought on by investor over-enthusiasm.
Even if most money can be made during bull markets, bear markets also present a lot of financial opportunities. Investors use their knowledge of the characteristics of each type of market as an investment strategy. It is expected that a bullish market will generate a huge number of investors who wish to buy some stocks. Because a bullish market could also mean that the economy is doing well, there will be a lot of people interested in buying stocks since they have the extra money to spend. This kind of situation will cause an increase in the prices of the stocks because there will be a shortage in the supply of stocks. During bear markets, it is expected that a lot of investors will have the desire to unload their stocks and put their money in fixed-return instruments like bonds due to the continuous decrease in the prices of the stocks. Supply tends to exceed demand as money is withdrawn from the stock market. This causes the prices of the stocks to lower even further.
It is easier to make money during bull markets. In a bull market, all dips are temporary and they are going to be corrected any time soon. Since the upward rising of the prices cannot go on forever, the investors need to sell their stocks when the market reaches its peak.
Bear markets are considered to be opportunities of picking up stocks at bargain prices. Approaching the end of a bear market will offer the greatest chance to generate some profit. Since the prices will most likely fall before they recover, the investors have to be prepared for some short-term loss. One investment strategy used during bear markets is short selling. It involves the selling of the stocks that they do not own in the anticipation of further decrease in prices. This strategy gives the investors a chance to buy the stocks for a price that is lower than their previous selling price.
During bear markets, fixed-return investments such as CAs and bonds can also be used to generate income. Defensive stocks, which include government-owned utilities that provide necessities despite the current economic state, are also safe to buy even during bear markets.
Mutual funds are diverse stock holdings which are managed on behalf of the investors who buy into the fund. Mutual funds allow investors to take advantage of a diversified portfolio without the need of investing a large sum of money.
A diversified portfolio carries the advantage of offering protection against the rapid market losses of any particular stock. If stocks lose their value, the effect will be less if they belong to a portfolio that is spread across twenty stocks than if they belong to a portfolio that is consist of a single stock.
Diversification is always a good idea in making investments. The problem for small investors is that usually don’t have enough funds to buy a variety of stocks. Despite their limited funds, small investors benefit from diversification through mutual funds.
Mutual funds, aside from stocks, can be consisted of a variety of holdings that include bonds and money market instruments. Mutual funds are actually the companies and the investors are really the company share buyers. The shares in a mutual fund are either directly bought from the fund itself or indirectly bought from the brokers who represent the fund. Selling them back to the fund is a way of redeeming shares.
There are some funds which are managed by investment professionals who decide on which securities to include in the fund. Non-managed funds are also available. Indexes, such as the Dow Jones Industrial Average, usually serve as the bases for the funds. The funds, which simply duplicate the holdings of the index where they are based on, rise by a percentage that is the same as that of the chosen index. Non-managed funds often perform well and they sometimes perform even better than managed funds.
Mutual funds also carry some downsides. Aside from paying some fees no matter what the performance of the funds is, individual investors also have no say in which securities have to be included in the funds or not. In addition to this, the actual value of a mutual fund share is not as precise as that of the stocks on the stock market.
For small investors, a mutual fund is still considered to be a better choice than either stocks or bonds because they offer the diversity that provides cushion against unpredictable stock market movements. They also provide a greater return than bonds. Mutual funds can also lose value especially in the short term. Short-term investors are better off with bonds that offer a set rate of return.
The three main types of mutual funds are money market funds, bond funds, and stock funds. The type that offers the lowest risk, money market funds consist solely of high quality investments like those which are issued by the US government and blue chip corporations. Although they rarely lose money, money market funds also pay a low rate of return.
The aim of bond funds to produce higher yields than money market funds caused them to carry a correspondingly higher risk. The risks that are associated with bonds, such as company bankruptcy and falling interest rates, are also applicable to bond funds.
The types of funds that carry both the greatest potential for profitable investment and the greatest risk for losses are stock funds. The risk in stock funds is mostly for short-term mutual fund holders because stocks have traditionally outperformed other investment instruments in the long run.
There are different types of stock funds including ‘growth funds’ that attempt to maximize capital gain and ‘income funds’ that concentrate on stocks that pay regular dividends.
Those with limited funds or investment experiences are recommended to invest on mutual funds. When choosing the right fund, investors have to consider how much risk they are willing to take against their expected investment returns.
Pink Sheets is an electronic quotation system for many Over-the-Counter (OTC) securities. The name of the system was derived from the color of the paper where the quotes were originally printed on. Nowadays, Pink Sheets publishes quotations on the Internet. Most of the listings on Pink Sheets are penny stocks.
Securities that are less than $5 in value are called penny stocks. Most of the companies listed in the Pink Sheets are those that cannot meet the requirements of other exchanges like NYSE and NASDAQ. Since the Pink Sheets has no listing requirements, companies opt for this kind of system in order to trade penny stocks. Companies with no financial histories can also be listed on the Pink Sheets.
Although the Pink Sheets is not a registered stock exchange, it can list companies that will otherwise be unable to raise capital through stock offerings. It is not regulated by the Securities and Exchange Commission (SEC). The Pink Sheets is only accessible by brokers who are licensed by the National Association of Security Dealers (NASD). The brokers are required to follow the regulations set by the NASD while the companies are required to follow the Federal and State security laws.
The stocks listed in the Pink Sheets carry more risks than the stocks which are listed on regulated exchanges like AMEX. A lack of financial data usually indicates that a company may be on the effort of preventing bankruptcy or on the attempt of staying afloat. Some companies just use the Pink Sheets as an intermediate to raise capital while still in the process of becoming listed on regular exchanges.
In order to get listed in the Pink Sheets, companies need to hire broker dealers that will quote the stocks. The only requirement is that the broker has to be a member of the National Association of Securities Dealers (NASD). Once they are listed, the companies remain in the Pink Sheets list as long as the stocks are quoted. It is also possible for a stock that no longer exists to stay quoted in the Pink Sheets.
The low cost is the main advantage of buying Pink Sheets securities. Investors who wish to get in on a new company from the beginning are able to pick up stocks for literally pennies. In the event that the company does well and grows, the small initial investment will then pay large dividends.
The main advantage of buying Pink Sheets securities is their low cost. Investors who hope to get in on a new company right at the beginning can pick up stock for literally pennies. In the event that the company does well and grows the small initial investment will pay large dividends.
There is also a very real risk that the company will simply vanish. It will just leave the valueless stock issues behind so investors who are interested in penny stocks listed on the Pink Sheets should be prepared to lose all. Because of that reason, Pink Sheets investments have to represent only a small portion of an overall investment portfolio.
The lack of liquidity in the Pink Sheets listings is another risk that investors need to deal with. Because the volume is generally low and the search for stock buyers is actually difficult in Pink Sheets, a lot of sellers tend to settle for even lower prices just to unload their shares.
The art and science of examining stock chart data and predicting future stock market movements is called technical analysis. This style of analysis is used by investors who are often concerned about the nature and the value of the companies where they trade their stocks in. The holdings are usually short-term since the investors drop the stocks once they reach their projected profit.
The belief that stock prices move in predictable patterns is the basis for technical analysis. The factors that influence the movement of the price are supposedly reflected in the stock market with great efficiency. These factors include company performance, economic status, and natural disasters. The efficiency, when coupled with historical trends, produces movements that can be analyzed and applied to the future movements of the stock market.
Because the fundamental information about the potential growth of a company is not taken into account, technical analysis is not intended for long-term investments. Trades are entered and exited at precise times so technical analysts need to spend a lot of time watching the movements of the stock market. Investors can take advantage of both upswings and downswings in price by going either long or short. In the event that the market doesn’t move as expected, the losses can be limited by stop-loss orders.
Hundreds of stock patterns have been developed over time. Most of these patterns rely on the basic concepts of “support” and “resistance.” The level where downward prices are expected to rise from is called the support while the level where the upward prices are expected to reach before falling again is called the resistance. Once they hit the support or the resistance levels, the prices tend to bounce.
Technical analysis is heavily reliant on charts for tracking market movements. The most commonly used of these charts are the bar charts. Bar charts contain vertical bars that represent a particular time period. The top part shows the highest price for the period while the bottom part shows the lowest price. There are two small bars in the chart. The small bar in the right indicates the opening price while the small bar in the left indicates the closing price. A large price spread is indicated by long bars. The position of the side bars shows if a price increased or decreased and it al
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