ABCD of Stock Market

Ramesh: Hi Suresh! I’ve heard you bought a new house and you are soon going to buy a car.Congratulations! Did you win a lottery? Or is itan ancestral fortune?

Suresh: Yes you’ve heard it right. I bought a new house, but I haven’t got any lottery, neither an ancestral fortune nor a new high paying job. But yes, I have got good returns out of my simple investments in the stock market.

Ramesh: Oh! I have never thought that stock market could yield such good returns. It always seems like a tedious process. Also, I have heard it is a very risky investment and people often end up losing money. May be it is not my cup of tea.

Suresh: I feel you have got the information about the stock market from very wrong sources. It is a risky investment I agree, but the risk could be minimized by proper analysis and people like me have really earned well out of it. Moreover, it is not at all difficult, there are just a few basic tips; once you understand them and start reading the latest updates you could soon be a pro.

Ramesh: Really! I’ve just been thinking about it in a wrong way since long. Will you help me in understanding these basics of the stock market? I would also like to invest in it.

Suresh: Yes sure! To start with, the stock market is a market place with buyers and sellers present in the form of a loose network of economic transactions, to deal in stocks (shares). These stocks represent the ownership claims on businesses. People often buy and sell them to generate earnings.

Ramesh: But how does buying or selling stocks generate earnings?

Suresh: The price of these stocks vary from time to time depending on the value of the company. This value depends on various economic factors. There are three methods in which one can generate earnings based on the convenience and risk capacity. The first method is by investing, in which we buy stocks of promising companies and keep them for long term and sell them years later after the value of stocks largely increases. The second method is by speculating- where we invest in the smaller price fluctuation of stocks and earn between the margins. Speculating is a short term process and is riskier. The third method is by trading, which is a very short term process. It yields lesser returns and has to be performed multiple times. It can last as short as a few hours. The risk quotient remains higher in trading.

Ramesh: Can you please elaborate on the pros and cons of the three methods?

Suresh: Yes, definitely. If you plan to invest then you have to analyse the company. Go by the fundamentals i.e. the performance of the stock. If you are more interested in quick but high margins, you can speculate by understanding the trend of a stock and sell it as soon as you see a close high. At the initial stages, speculating could be riskier. If you are interested in very quick small margins, you can trade by working on the immediate rise and fall of  prices, which is solely based on tips, analysis and instincts. Even the risk quotient for trading is high and you have to involve into many trades so as to generate a decent earning.

Ramesh: I have got the idea of the three modes to earn from stocks. But I still did not understand how to know the direction of the market. Could you please explain?

Suresh: Knowing the direction is based on the analysis which could be done using graphs in different time frames as per the requirement. Locate all the lows of a stock and see if the slope goes upwards. An upward slope indicates uptrend and a downward slope depicts downtrend. Similarly, if you see the slope going in a reverse direction it shows a trend reversal in the market.

Ramesh: Thank you! The information you have given has created a better understanding of the stock market in me. I would definitely do my homework and invest in stocks too.

Suresh: I am glad I could help. Happy Investing!