WHAT IS A SHARE ?
In finance a share is a unit of account for various financial instruments including stocks, mutual funds, limited partnerships, and REIT's. In British English, the usage of the word share alone to refer solely to stocks is so common that it almost replaces the word stock itself.
In simple Words, a share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company. A share is issued by a company or can be purchased from the stock market.
By owning a share you can earn a portion and selling shares you get capital gain. So, your return is the dividend plus the capital gain. However, you also run a risk of making a capital loss if you have sold the share at a price below your buying price.
A company's stock price reflects what investors think about the stock, not necessarily what the company is "worth." For example, companies that are growing quickly often trade at a higher price than the company might currently be "worth." Stock prices are also affected by all forms of company and market news. Publicly traded companies are required to report quarterly on their financial status and earnings. Market forces and general investor opinions can also affect share price.
Quick Facts on Stocks and Shares
- Owning a stock or a share means you are a partial owner of the company, and you get voting rights in certain company issues
- Over the long run, stocks have historically averaged about 10% annual returns However, stocks offer no
guarantee of any returns and can lose value, even in the long run - Investments in stocks can generate returns through dividends, even if the price
How does one trade in shares ?
Every transaction in the stock exchange is carried out through licensed members called brokers.
To trade in shares, you have to approach a broker However, since most stock exchange brokers deal in very high volumes, they generally do not entertain small investors. These brokers have a network of sub-brokers who provide them with orders.
The general investors should identify a sub-broker for regular trading in shares and palce his order for purchase and sale through the sub-broker. The sub/broker will transmit the order to his broker who will then execute it .
What are active Shares ?
Shares in which there are frequent and day-to-day dealings, as distinguished from partly active shares in which dealings are not so frequent. Most shares of leading companies would be active, particularly those which are sensitive to economic and political events and are, therefore, subject to sudden price movements. Some market analysts would define active shares as those which are bought and sold at least three times a week. Easy to buy or sell.
Investment is a term with several closely-related meanings in finance and economics.
It refers to the accumulation of some kind of asset in hopes of getting a future return from it.
Assets such as equity shares or bonds held for their financial return
(interest, dividends or capital appreciation), rather than for their use in the organization’s operations.
Return on Investments
The money you earn or lose on your investment, expressed as a percentage
of your original investment.
In Simple words, It is the amount received as a result of investing in particular ventures.
Collective Investments Schemes
Funds which manage money for a number of investors and pool it together. This enables investors to benefit from a larger number of individual investments and cost efficiencies.
Short-Term Investments
Short-Term Investments are generally investments with maturities of less than one year.
Capital Investments
Investments into the fixed capital (capital assets), including costs for the new construction, expansion, reconstruction and technical reequipment of the operating enterprises, purchase of machinery, equipment, tools, accessories, project and investigation works and other costs and expenditures.
STOCK BROKER
Are you wondering what a stock broker is and what they do? Here’s your answer.
A stockclients behalf, you tell them what you want to invest in and they will issue the buy or sell order. Some stock brokers also give out financial advice that you a charged for.
It wasn’t too long ago and investing was very expensive because you had to go through a full service broker which would give you advice on what to do and would charge you a hefty fee for it. Now there are a plethora of discount stock brokers such as Scottrade http://www.scottrade.com now you can trade stocks for a low fee such as $7 total.
I can think of three different types of stock brokers.
1. Full Service Broker - A full-service broker can provide a bunch of services such as investment research advice, tax planning and retirement planning.
2. Discount Broker – A discount broker let’s you buy and sell stocks at a low rate but doesn’t provide any investment advice.
3. Direct-Access Broker- A direct access broker lets you trade directly with the electronic communication networks (ECN’s) so you can trade faster. Active traders such as day traders tend to use Direct Access Brokers
So as you can tell there a few options for a stock broker and you really need to pick which one suits you needs
DEMAT
Demat refers to a dematerialised account.
Though the company is under obligation to offer the securities in both physical and demat mode, you have the choice to receive the securities in either mode.
If you wish to have securities in demat mode, you need to indicate the name of the depository and also of the depository participant with whom you have depository account in your application.
It is, however desirable that you hold securities in demat form as physical securities carry the risk of being fake, forged or stolen.
Just as you have to open an account with a bank if you want to save your money, make cheque payments etc, Nowadays, you need to open a demat account if you want to buy or sell stocks.
So it is just like a bank account where actual money is replaced by shares. You have to approach the DPs (remember, they are like bank branches), to open your demat account. Let's say your portfolio of shares looks like this: 150 of Infosys, 50 of Wipro, 200 of HLL and 100 of ACC. All these will show in your demat account. So you don't have to possess any physical certificates showing that you own these shares. They are all held electronically in your account. As you buy and sell the shares, they are adjusted in your account. Just like a bank passbook or statement, the DP will provide you with periodic statements of holdings and transactions.
Is a demat account a must? Nowadays, practically all trades have to be settled in dematerialised form. Although the market regulator, the Securities and Exchange Board of India (SEBI), has allowed trades of upto 500 shares to be settled in physical form, nobody wants physical shares any more.
So a demat account is a must for trading and investing.
Most banks are also DP participants, as are many brokers.
You can choose your very own DP.
To get a list, visit the NDSL and CDSL websites and see who the registered DPs are.
A broker is separate from a DP. A broker is a member of the stock exchange, who buys and sells shares on his behalf and on behalf of his clients.
A DP will just give you an account to hold those shares.
You do not have to take the same DP that your broker takes. You can choose your own.
Is your DEMAT Account Frozen ?
What is a Demat Account?
It is an account which can be compared to a bank account wherein here your shares are in electronic form with its respective value (either purchase price or selling price). Don't get bogged down by high fundas like "Demat Account". In simple words, instead of having shares in paper form we are having it in electronic form .That's it! In early days, stocks and shares are traded in paper form by people gathering in stock exchanges and showing signs of company and price through signals. Even now
What should I do to open a Demat Account and where?
You can open a demat account with depositary participant (DP). You can compare this DP with a bank. They will charge you for every purchase and every sale you make. To find a list of DP you can type "Depository Participant" in the search engine and find a one close to your location. Some of the notable ones are
What should I have to open a Demat Account?
You should have a three months bank statement.
PAN Card.
An identity proof.
These depository participants will also advice on stocks and shares. However I personally advice you to have market watch before investing. In next article I will further explain how to trade.
Steps to Defreeze your DEMAT Account
PANCARD your DEMAT Account Today
Demat accounts of investors who failed to furnish their PAN card details were frozen at
SEBI had made it mandatory for all investors to provide PAN card details for transactions in the cash market from
Since
STEPS to unfreeze your DEMAT ACCOUNT:
- Check your DEMAT ACCOUNT status with your DP or from your transaction statement.
- If your account status is “Suspended for Debit” due to non – submission of PAN details, provide copy of your PAN CARD to your DP with the original for verification.
- Your DP will verify the same and update the PAN CARD details.
- Your DP will then unfreeze your account, after which your account will become operational.
DIFFER KINDS OF INVESTMENTS
These days, you can't retire without using the returns from investments. You can't count on your social security checks to cover your expenses when you retire. It's barely enough for people who are receiving it now to have food, shelter and utilities. That doesn't account for any care you may need or in the even that you need to take advantage of such funds much earlier in life. It is important to have your own financial plan. There are many kinds of investments you can make that will make your life much easier down the road.
The following are brief descriptions for beginning investors to familiarize themselves with different kinds of investment options .
401K Plans
The easiest and most popular kind of investment is a 401K plan. This is due to the fact that most jobs offer this savings program where the money can be automatically deducted from your payroll check and you never realize it is missing.
Life Insurance
Life Insurance policies are another kind of investment that is fairly popular. It is a way to ensure income for your family when you die. It allows you a sense of security and provides a valuable tax deduction.
Stocks
Stocks are a unique kind of investment because they allow you to take partial ownership in a company. Because of this, the returns are potentially bigger and they have a history of being a wise way to invest your money .
Bonds
A bond is basically a promise note from the government or a private company. You agree to give them a set amount of money as a loan and they keep it for a set number of years with a predetermined amount of interest. This is typically a safe bet and one that is a good investment for a first time investor because there is little risk of losing your money.
Mutual Funds
Mutual funds are a kind of investment that are based on the gains and losses of a shareholder. Basically one person manages the money of several or many investors and invests in a list of various stocks to lessen the effect of any losses that may occur.
Money Market Funds A short-term investment is a Money Market Fund. With this kind of investment you can earn interest as an independent shareholder.
Annuities
If you are interested in tax-deferred income, then annuities may be the right kind of investment for you. This is an agreement between you and the insurer. It works to produce income for you and protect your earning potential.
Brokered Certificate of Deposit (CDs)
CDs are a kind of investment where you deposit money for a set amount of time. The good thing about CDs is that you can take the money out at any time without paying a penalty fee. We all know life isn't predictable, so this is a nice feature to have in your option.
Real Estate
Real Estate is a tangible kind of investment. It includes your land and anything permanently attached to your piece of property. This may include your home, rental properties, your company or empty pieces of land. Real estate is typically a smart and can make you a lot of money over time
WHAT IS A PREMIUM ISSUE ?
Generally, most shares have a face value (i.e. the value as in a balance sheet) of Rs.10 though not always offered to the public at this price. Companies can offer a share with a face value of Rs.10 to the public at a higher price.
The difference between the offer price and the face value is called the premium. As per the SEBI guidelines, new companies can offer shares to the public at a premium provided :
1.The promoter company has a 3 years consistent record of profitable working.
2.The promoter takes up at least 50 per cent of the shares in the issue.
3.All parties applying to the issue should be offered the same instrument at the same terms, especially regarding the premium.
4.The propectus should provide justification for the propose premium. On the other hand, exisiting companies can make a premium issue without the above restrictions.
A company’s aim is to raise money and simultaneously serve the equity capital. As far as accounting is concerned, premium is credited to reserves and surplus and it does not increase the equity. Therefore, a company which raises Rs.100 crores by way of shares at say Rs.90 premium per share increases its equity by only Rs.10 crores, which is easier to service with an investment of Rs.100 crores.
Thus the companies seek to make premium issues. As well shall see later, a premium issue can increase the book value without decreasing the EPS. In a buoyant stock market when good shares trade at very high prices, companies realize that it’s easy to command a high premium.
TRADING Vs. INVESTING
Many people confuse trading with investing. They are not the same.
The biggest difference between them is the length of time you hold onto the assets. An investor is more interested in the long-term appreciation of his assets, counting on that historical rise in market equity.
He’s not generally concerned about short-term fluctuations in prices, because he’ll ride them out over the long haul.
An investor relies mostly on Fundamental Analysis, which is the analytical method of predicting long-term prospects of a particular asset. Most investors adopt a “buy and hold” approach to assets, which simply means they buy shares of some company and hold onto them for a long time. This approach can be dangerous, even devastating, in an extremely volatile market such as today’s BSE or NSE Indexs Show.
Let’s consider someone who bought shares of XYZ Company at their peak value of around Rs.650 per share at the beginning of the year 2000. Two years later, those shares are worth Rs.100 each. If that investor had spent Rs. 65,000/-, his net loss would be Rs.55000/- ! I don’t know about you, but losing Fifty Five Thousand Rupees would be a relatively big loss for me.
Many investors suffer such losses regularly, hoping that in five or ten or fifteen years the market will rebound, and they’ll recoup their losses and achieve an overall gain.
What most investors need to remember is this: investing is not about weathering storms with your “beloved” company – it’s about making money.
Traders, on the other hand, are attempting to profit on just those short-term price fluctuations. The amount of time an active trader holds onto an asset is very short: in many cases minutes, or sometimes seconds. If you can catch just two index points on an average day, you can make a comfortable living as an Trader.
To help make their decisions, Traders rely on Technical Analysis, a form of marketing analysis that attempts to predict short-term price fluctuations.
Primary Vs. Secondary Market
There are two ways for investors to get shares from the primary and secondary markets. In primary markets , securities are bought by way of public issue directly from the company. In Secondary market share are traded between two investors.
PRIMARY MARKET
Market for new issues of securities, as distinguished from the Secondary Market, where previously issued securities are bought and sold.
A market is primary if the proceeds of sales go to the issuer of the securities sold.
This is part of thefinancial market where enterprises issue their new shares and bonds. It is characterised by being the only moment when the enterprise receives money in exchange for selling its financial assets.
SECONDARY MARKET
The market where securities are traded after they are initially offered in the primary market. Most trading is done in the secondary market.
To explain further, it is Trading in previously issued financial instruments. An organized market for used securities. Examples are the New York Stock Exchange (NYSE), Bombay Stock Exchange (BSE),National Stock Exchange NSE, bond markets over-the-counter markets, residential mortgage loans, governmental guaranteed loans etc.
STOCK OPTIONS – WHAT THEY ARE ?
A stock option is a specific type of option with a stock as the underlying instrument (the security that the value of the option is based on). Thus it is a contract to buy (known as a "call" contract) or sell (known as a "put" contract) shares of stock, at a predetermined or calculable (from a formula in the contract) price.
It is Having the Rights to purchase a corporation's stock at a specified price.
Infact There are two definitions of stock options.
1. The right to purchase or sell a stock at a specified price within a stated period. Options are a popular investment medium, offering an opportunity to hedge positions in other securities, to speculate on stocks with relatively little investment, and to capitalize on changes in the market value of options contracts themselves through a variety of options strategies.
2. A widely used form of employee incentive and compensation.In some Companies, Stock options constitute part of remuneration.
Employee stock options are stock options for the company's own stock that are often offered to upper-level employees as part of the executive compensation package. An employee stock option is identical to a call option on the company's stock, with some extra restrictions.
Performance Stock Options are Options that vest if pre-determined performance measures are achieved. The performance goal (revenue growth, stock-price increases…) must be reached for the options to be exercisable or for the vesting to be accelerated.
STOCK MARKET TIPS
The stock markets are at all time highs and just like the last time around when the market was at its previous high every one thinks that nothing can go wrong and there is just one way where the market can go which is UP. Nothing could be farther from the truth and this will be clear from the way the market behaves in the next few months. Here are a few tips that would hopefully save you from losing a lot of cash in the current frenzy.
Time and again investors have burnt their fingers in the markets and here are some tips to you so that you do not end up burning your fingers in this market.
The number one tip at this point would be to sell if you have stocks and not to buy them if you have cash. The golden principle in the markets is “Buy when everyone else sells and sell when everyone else buys”. Simple enough right? Not really.
Why? Because of peer pressure pure and simple. When everyone else around you seems to be having a ball at the markets you would feel like a fool if you didn’t participate now.
OK so you can’t resist buying at this time then at least do yourself a favor and stay away from unknown Penny Stock and hot tips that your barber gave you. True that the stock has tripled in the last fifteen days but that was before people like your barber started buying the stock. Chances are that the Promoter of the company have started buying into the stock and have spread rumors like acquisition or a big export order to fool investors and sell out to them at a later date.
Another tip that would serve useful is to value a stock based on its future growth and not its past performance. For instance many investors say that I will not buy stocks of X company because it has doubled in the last year. Well it may have doubled in the last year but that should not be the thing you should be telling yourself. Rather you should ask yourself why has this doubled in the last year and can it do so again? There should be a solid answer to your question like the launch of a new product or reduction in the prices of raw material. And indeed if the answer is in the positive then by all means go ahead and buy that stock regardless of what has happened in the last year.
Another tip would be to remember what you are buying. Quite simply investors often forget that when buying a stock they are simply buying ownership in the companies. Most of you would know that nothing spectacular would happen in the company that you work for, in a month, they are not going to double their revenues and certainly not double your salary every month. Then why expect anything different from the companies that you are investing in. Why expect the prices to double in a month or two. Give time to your investments; don’t reduce it to a gamble. Only when you invest in fundamentally sound companies and then give the investments sufficient time to grow will you see some healthy returns on your investments. Ideally a minimum horizon of one year is a good time.
Hope these tips will prove helpful and you will make a lot more in the stock markets than you have already been making. Happy Investing!
The author is MBA Finance and is part of the Mint India team. More about Mint is given below:
The Indian stock markets provide an excellent opportunity to diligent investors who are willing to spend time and effort on the stocks that they buy. Money is there to be made by people who are willing to spend time understanding the business model, risks faced and other nuances about the company that they are buying.Increasingly the investor is becoming more sophisticated and has stopped looking for hot tips and stories about stocks, which can double overnight.Mint is aimed at people who understand that stock markets are not a gamble but reward investors who work hard understanding the companies that they are buying and then give time to their investments to grow and generate handsome returns.
Mint's mission is to help such people learn more about the stocks available in the markets, more about macro and micro economic concepts that impact the markets and more about the industry in general to enable the investors to make an informed and profitable decision.
ONLINE STOCK TRADING
Online Stock Trading is a recent way of buying and selling stocks. Now you can buy and sell any stock over the Internet for a low price and you don’t need to call up a broker.
You can buy any stock and sell any stock and it doesn’t take much to get started.
All you need is a brokerage account. A broker that I use is Scottrade http://www.scottrade.com/ and you can start an account with them for $500 and their commissions are only $7, so they are not expensive at all.
Once you have setup a brokerage account you then need to choose an investment method and then research different companies and then buy stock in the ones that you feel will go up because they are good sound companies.
So as you can see there are several benefits to online stock trading but let’s recap.
With online stock trading all you need is $500 to open a brokerage account, the brokerage commissions are low at Scottrade they’re only $7 and you can buy and sell your stocks from your home computer anytime that the stock market is open.
Well now that you know that you can do online stock trading with a minimal investment you should get started today and then start learning about the stock market and choose the stocks you want to invest in.
HOW STOCK MARKET WORKS ?
In order to understand what stocks are and how stock markets work, we need to dive into history--specifically, the history of what has come to be known as the corporation, or sometimes the limited liability company (LLC). Corporations in one form or another have been around ever since one guy convinced a few others to pool their resources for mutual benefit.
The first corporate charters were created in
Privately owned corporations came into being gradually during the early 19th century in the
In order for a corporation to do business, it needs to get money from somewhere. Typically, one or more people contribute an initial investment to get the company off the ground. These entrepreneurs may commit some of their own money, but if they don't have enough, they will need to persuade other people, such as venture capital investors or banks, to invest in their business.
They can do this in two ways: by issuing bonds, which are basically a way of selling debt (or taking out a loan, depending on your perspective), or by issuing stock, that is, shares in the ownership of the company.
Long ago stock owners realized that it would be convenient if there were a central place they could go to trade stock with one another, and the public stock exchange was born. Eventually, today's stock markets grew out of these public places.
Stocks
A corporation is generally entitled to create as many shares as it pleases. Each share is a small piece of ownership. The more shares you own, the more of the company you own, and the more control you have over the company's operations. Companies sometimes issue different classes of shares, which have different privileges associated with them.
So a corporation creates some shares, and sells them to an investor for an agreed upon price, the corporation now has money. In return, the investor has a degree of ownership in the corporation, and can exercise some control over it. The corporation can continue to issue new shares, as long as it can persuade people to buy them. If the company makes a profit, it may decide to plow the money back into the business or use some of it to pay dividends on the shares.
Public Markets
How each stock market works is dependent on its internal organization and government regulation. The NYSE (
Most companies that go public have been around for at least a little while. Going public gives the company an opportunity for a potentially huge capital infusion, since millions of investors can now easily purchase shares. It also exposes the corporation to stricter regulatory control by government regulators.
When a corporation decides to go public, after filing the necessary paperwork with the government and with the exchange it has chosen, it makes an initial public offering (IPO). The company will decide how many shares to issue on the public market and the price it wants to sell them for. When all the shares in the IPO are sold, the company can use the proceeds to invest in the business.
STOCKMARKET MYTHS
1. You can tell if a Stock is cheap or expensive by the Price to Earnings Ratio.
False: PE ratios are easy to calculate, that is why they are listed in newspapers etc. But you cannot compare PE’s on companies from different industries, as the variables those companies and industries have are different. Even comparing within an industry, PE’s don’t tell you about many financial fundamentals and nothing about a stock’s value.
2. To make Money in the Stock Market, you must assume High Risks.
False: Tips to Lower your Risk:
· Do not put more than 10% of your money into any one stock
· Do not own more than 2-3 stocks in any industry
· Buy your stocks over time, not all at once
· Buy stocks with consistent and predictable earnings growth
· Buy stocks with growth rates greater than the total of inflation and interest rates
· Use stop-loss orders to limit your risk
3. Buy Stocks on the Way Down and Sell on the Way Up.
False: People believe that a falling stock is cheap and a rising stock is too expensive. But on the way down, you have no idea how much further it may fall. If a stock is rising, especially if it has broken previous highs, there are no unhappy owners who want to dump it. If the stock is fairly valued, it should continue to rise.
4. You can Hedge Inflation with Stocks.
False: When interest rates rise, people start to pull money out of the market and into bonds, so that pushes prices down. Plus the cost of business goes up, so corporate earnings go down, along with the stock prices.
5. Young People can afford to take High Risk.
False: The only thing true about this is that young people have time on their side if they lose all their money. But young people have little disposable income to risk losing. If they follow the tips above, they can make money over many years. Young people have the time to be patient.
YOU BUY PRICE FALL , YOU SELL PRICE RISE
One say's "I bought "XYZ Company" at Rs.2200 and immediately after I bought the stock price dropped to Rs.2000." I feel sad. Another comes with a different version "I sold "XYZ Company" at Rs.2000 and it went up to Rs.2400 same evening" I made an imaginary loss of Rs.400 per share.
Solution:
You can buy more shares @ Rs.2000 and reduce your overall buying cost. This has to be done only if believe in the fundamentals,management and the future prospects of the company.
To do this you need to keep money ready.whatever money you have and want to invest,split it into two parts. Then keep 50% cash aside, only invest with other 50%.So if need to buy more of any stock when the price falls you have ready cash .
Also now if you have 200 shares of XYZ Company 100 @ Rs.2200 and 100 @ Rs.2000.Then the price goes up to Rs.2400. Sell only 100 of the shares.Then if the price further shot up, you have some shares to sell And participate in the rally to make money .
Next, You sold the share and the price went up. The solution to this is never sell all the shares at one time. Sell only 50% of your shares.So if he price goes up later you still have the other 50% to sell and make profit.
The golden Rule is to first do your own analysis of the stock before investing and buy on tips.
Also invest only in companies which declare dividends every year. To be sure that you are not investing in loss making companies.
Every Market expert advise to do your stock analysis before investing in the stock market. But nobody tells you how.
Well in my next article I will write about how to do stock analysis using various tools such as financial ratios and by checking the track records of the companies you plan to invest in.
P.S: If you are not Indian then replace the Rs. into your own local currency to understand the article
WHAT IS A BULL MARKET
Share Market Basics - Explained
There are two classic market types used to characterize the general direction of the market. Bull markets are when the market is generally rising, typically the result of a strong economy. A bull market is typified by generally rising stock prices, high economic growth, and strong investor confidence in the economy. Bear markets are the opposite. A bear market is typified by falling stock prices, bad economic news, and low investor confidence in the economy.
A bull market is a financial market where prices of instruments (e.g., stocks) are, on average, trending higher. The bull market tends to be associated with rising investor confidencefurther capital gains. and expectations of
A market in which prices are rising. A market participant who believes prices will move higher is called a "bull". A news item is considered bullish if it is expected to result in higher prices.An advancing trend in stock prices that usually occurs for a time period of months or years. Bull markets are generally characterized by high trading volume.
Simply put, bull markets are movements in the stock market in which prices are rising and the consensus is that prices will continue moving upward. During this time, economic production is high, jobs are plentiful and inflation is low. Bear markets are the opposite--stock prices are falling, and the view is that they will continue falling. The economy will slow down, coupled with a rise in unemployment and inflation.
A key to successful investing during a bull market is to take advantage of the rising prices. For most, this means buying securities early, watching them rise in value and then selling them when they reach a high. However, as simple as it sounds, this practice involves timing the market. Since no one knows exactly when the market will begin its climb or reach its peak, virtually no one can time the market perfectly. Investors often attempt to buy securities as they demonstrate a strong and steady rise and sell them as the market begins a strong move downward.
Portfolios with larger percentages of stocks can work well when the market is moving upward. Investors who believe in watching the market will buy and sell accordingly to change their portfolios.Speculators and risk-takers can fare relatively well in bull markets. They believe they can make profits from rising prices, so they buy stocks, options, futures and currencies they believe will gain value. Growth is what most bull investors seek.
WHAT IS BEAR MARKET ?
The opposite of a bull market is a bear market when prices are falling in a financial market for a prolonged period of time. A bear market tends to be accompanied by widespread pessimism.A bear market is slang for when stock prices have decreased for an extended period of time. If an investor is "bearish" they are referred to as a bear because they believe a particular company, industry, sector, or market in general is going to go down.
Stock Market Analyst
Forecasting is an equation, which is based on past events to a large extent. If I want to relate it I would say it is the product of past data and safety factor or probability factor. In case of share markets I want to extend this thought by putting investor into the customer basket, shares as a product and experts as a market researcher. Here comes the question of what kind of product are shares? Is it a convenience product or specialty product or unsought product? I would not prefer to put this in any of this category. I would say this investment product where customer (investor) wants to buy this to make this more. As a researcher it is somewhat easy to foretell when a customer will next buy a particular product based on usage rate and lifetime of the product. In case of shares it is the first thing the investor wishes to dispose in case of any emergency to make money. How can an expert predict emergencies of an investor who may suddenly act on his holdings? Though stock market is not driven by single investor we have to agree the fact that it is driven by group of investors.
As we all know forecasting is also a decision making process in which we narrow down to certain conclusions. Experts have several variables to take as input in consideration for forecasting. But it is time consuming and they tend to follow what we call "Bounded Rationality" which saves time by limiting to specific predominant variables in decision-making. The point, which is that dominant variable, becomes a foggy concept because markets change much faster than marketing.
We have generally two types of analysts what we call "Fox" type analysts and "Hedgehog" type analysts. In Greek mythology "Fox" knows many things and "Hedgehog" knows one big thing. TETLOCK in his book "Expert Political Judgment" has applied this to stock experts. The fox takes information from many sources including those they disagree with and incorporate their thinking. But hedgehog fits everything into one big idea and that is his final outcome. We should understand the fact that when we are trying to narrow down to one big idea the area of bounded ness becomes very small we are forced to exclude many variables in prediction from consideration set. We are also likely to make more assumptions in predictions. History also reveals that fox like experts predictions are more likely to be true when compared to hedgehog experts.
Then the question arise "Do Always Fox like Experts Succeed in Prediction?" here the principle of "Knowing More" comes into play.
TETLOCK also agrees this "Knowing A Little Might Make Someone More Reliable Forecaster than a Person Who Knows A Lot". He reports, "We Reach the Point of Diminishing Marginal Predictive Returns For Knowledge Disconcerting Very Quickly". Then what is the use of information given by experts? That is what now zooming the size of question mark in our minds now. The answer would be if an investor has a myopic view or if a business has a myopic view and if one expert's advice gives different idea miles away from their rigidity it is thousand million dollars worth in saving the business and investor's wealth.
During Second World War, Nobel winner KENNETH ARROW worked as an army weather forecaster. At one point his colleagues alerted the higher-ups that forecasts didn't work. The reply from him was "We Are Aware That Forecasts Are No Good. But We Need It for Our Planning Purposes!"
Remember though investors cry when they lose based on predictions there are alsoinvestors who have made enormous money based on forecasts. But the physics of financial markets states "The velocity of failure is greater than the success".
Why stock expert’s predictions fail?
Stock market is one of the areas which fascinate each and every soul which is craving for making money. At the same time they get confused and sometimes even get demotivated because of foggy ideas and opinion that surrounds this concept.
Most of the time investors blame experts for not guiding them properly. Usual comments are "Experts will be there when market performs well, but camouflage themselves when it fails". People should understand that experts can only guide us but can't spoon feed us.
However there are some legitimate basic reasons that can be attributed to failures of expert's opinions sometimes.The basic reason that can be attributed is the awareness of investors and the information reach or access to information is more and easy when compared with earlier days.
Few years back, only few people invested in shares and they had some knowledge about the companies and the announcements the company makes every day or monthly. The source of information could be newspapers, business magazines.etc. But now the awareness among the people has increased and they are provided with medias, web-sites, and mobile phones through which all information about company announcements reaches all investors at lightening speed.
So whatever information got by one person is more or less the same. The idea behind this is democratization of knowledge. As a result only information oriented analysis and buying of shares based on that has become and will become a concept of less meaning in the upcoming years.
As all know share market is suppose to be like a bargain in which you watch or expect people to buy in future and you buy today. Every individual has this sense of risk-security and so he wants to ensure atleast some people do the same mistake what he does if his idea goes wrong. So stock analysis only based on information will have less significance.
Also no one could accurately predict what could happen. All can just sense the trend or understand the fundamentals and technical aspects. Also it's a developing area every technical knowledge in that area is an outcome of experience. If something like today has already happened, say a particular trend we can predict tomorrow it may happen based on analyzing the situation.
So analysts can only assist us but not perfectly predict daily market changes but by understanding the fundamentals of company they can suggest us a company for investment which in long term will pay us valuable returns.
What Drives Bear and Bull Markets?
The stock market is affected by many economic factors. High employment levels, strong economy, and stable social and economic conditions generally build investor confidence and encourage investors to put their money in the stock market. Often, this can bolster bull markets. Also, new technologies and companies that encourage investors to put their money in stocks can create bull markets. For example, in the 1990s, the dot com craze encouraged many investors to put their money in stocks that they felt would keep increasing. In some cases, a bullish market is simply self-perpetuating. Since the market is doing well, it only encourages investors to invest more money or to start investing.
On the other hand, discouraging economic or social political changes in a society can push the market down. Sudden instability or unemployment -- or even fears of unemployment caused by wars and other problems -- can start to make investors more conservative and therefore lead to bear markets. Of course, again this becomes a self-perpetuating trend. As the economy slows down, companies begin downsizing. Increased unemployment makes people far less willing to gamble on the stock market. Sometimes, a panic caused by dire predictions about the market can also create bearish conditions.
How To Predict Bear and Bull Markets?
The easiest way to predict both types of markets is to realize that what goes up must come down. That is, if the market is rising, then you know that at some point it will start to fall again. Similarly, if the market is currently falling, you can be certain that eventually it will pick up again. There are no precise ways to predict either bull or bear markets, although general social economic situations can help you to determine what will happen. A country which wages a war will experience bullish market conditions as government contracts create more jobs and boost investor confidence if their expectation is to win. Sudden international crises push the market downward and create bearish conditions. News is very often a good indicator of where investors are headed. The reports will inform about loss of investor confidence as well as sudden economic downturns that may affect the market. If you notice from stock market research that several indexes have changed by 15% to 20%, you can be sure that market direction is changing. When you notice such changes, it is time to sit up and take notice. You may be headed for a bullish or bearish market.
Market Conditions In Both Cases
While referring to markets is either bull or bear is very general, there are certain types of specific markets conditions that exist in both markets. For example, a bullish market is often accompanied by a sudden increase demand for securities and smaller supplies of the same securities. This is because more investors are willing to buy securities while fewer wish to sell. This, of course, only pushes prices higher. The very opposite is true in a bearish market.
The investor's behavior is another condition prevalent in both markets. In bullish markets, there's a sudden increase interest in the stock market. More people are hopeful about possible profits on the stock market and most people are optimistic about economic conditions. In a bearish market, investors are not very confident and therefore invest less.
Investing During Bear and Bull Markets
New investors often assume that they need to avoid investing during bear markets, and invest heavily during bull markets. This is not the case. Experienced investors know that you need to be able to invest in any sort of market condition, provided that you do so wisely. Each investor has a different strategy for dealing with a bull market or bearish markets. Many investors try to take advantage of bull markets by buying stocks as soon as the market gets bullish, and then starting to sell when prices seem to have reached their peak. The difficulty, of course, is that it is almost impossible to tell when the trend is beginning and when it will peak. In general, investors can take more chances with the market during a bullish phase. Since overall prices will rise, the chances of making a profit are good.
In bearish market conditions, prices are falling and the possibility of loss is pretty good. What is worse, it is not always possible to tell when bearish conditions will end. Therefore, if you invest during such market conditions, you may have to suffer some losses before bullish times return and you're able to realize a profit. For this reason, many investors decide on short selling or fixed income securities and other more conservative types of investment. Defensive stocks are another good option that remain stable during bearish conditions. On the other hand, some investors see bearish market conditions as an ideal time to invest in more stocks. Since many people are selling off their stocks -- including valuable blue-chip stocks -- at low prices, it is possible to set up long-term investments that will prove valuable during bullish times.
While every investor loves to see the upswing in prices during a bull market, the wise investor will be able to handle a bear market as well. Whether you are just beginning to invest or are an experienced investor, learning to deal with various market conditions you neen not panic but decide patiently on investment.
