How to Understand the Stock Market

How to Understand the Stock Market

Stock market strategies can be implemented only after carefully studying macro as well as micro aspects of the market. The explanation given in the next few sections will help you understand the stock market.
Studying the technical and fundamental aspects of the stock market is important for raking in good profits. There are various concepts which you need to study for understanding the stock market clearly. Practical and theoretical knowledge are equally important to execute your trades professionally and without any help from anyone.

Interpreting the Stock Market

Following are the ways of educating yourself about the stock markets:
  • Research and Self Study: Self research is extremely important for all active traders/investors. Use newspapers, internet and business magazines for your research. You will know the market trends clearly only through self study.
  • Expert Guidance: Guidance from people who have been active traders is a must for all beginners to get their basics cleared.
  • Actual Trading: Till you trade stocks practically, you will not understand the difficulties in the markets. So, use your knowledge and trade yourself to learn things better.
The important comparisons given below will help you to know how to understand the stock market.

Bull Market vs Bear Market
The bull market is a situation in which securities trade in the positive territory, and the market capitalization of companies rises fast due to good results and positive economic scenario and investor interest. On the contrary, the bear market is characterized by a decline in stock prices due to excessive selling from retail as well as institutional investors.

Suggested Action: Invest in quality stocks in a bull market and stay away from equities in a bear market phase.

Short Term Uptrend vs Short Term Downtrend
Now, this is another easy yet vital concept. Short term uptrend is when momentum in the index, as well as specific stocks, is expected to continue upwards just for a few trading sessions. After the uptrend is over, an analyst expects a fall in stock prices. Short term downtrend involves a sudden fall in stock prices, which is believed to continue for a short time before the market finds support on the downside.

Suggested Action: Buy in the short term downtrend, and sell at higher levels during an uptrend. Stay in cash till stocks reach key support levels.

Buying vs Profit Booking
As a beginner, you must be keen to know how stocks are bought and sold. Stocks are bought online, or by placing an order with the stock broker. The action of buying is done with a hope of appreciation in stock prices in the future. Profit booking is selling of securities on higher levels to generate cash for future investments.

Suggested Action: Buy when valuations of a stock are reasonable as compared to its peers and sell in a continuous upward rally.

The table given below will help you know how to read the stock market.

MeaningSuggested Action
Current market price
This is the price at which a particular stock is trading in the market. A stock trading at a low price does not necessarily mean that it is cheap.Track the CMP to buy stocks at the best possible prices.
Valuations
A stock can be cheaply valued, fairly valued or highly valued depending on the earnings of the company and number of outstanding shares. Buy and sell calls are taken on the basis of valuations.Buy when valuations are cheap and sell when a stock is highly expensive. Use valuation ratios like net profit ratio, gross profit ratio, and price to earnings ratio to distinguish between cheap and expensive stocks.
Technical and Fundamental Analysis
Technical analysis includes making use of technical charts to study stock price movements and find out support and resistances for stocks on charts. Fundamental analysis includes analysis of company earnings, turnover, project execution, business model and scope of expansion.Technical and fundamental analysis are both to be done before buying stocks for getting them at the right prices.
Short and Long Positions
Short selling involves selling securities and buying them on the same day to pocket the difference. Long positions involve buying at lower levels and selling at higher levels to earn profits.Go short in weak stocks in weak markets and long in stocks showing strength on charts in a rising market.
IPO and Open Market
IPO investors apply for shares in a company which is about to list itself on the stock exchange, whereas open market investors buy stocks of already listed companies.Participate in IPOs of fundamentally strong companies and ignore the ones with a bad rating. Open market transactions need to be done after studying valuations and other above mentioned aspects

By making smart moves at the right time, you can earn decent money. So, carry out some research and invest wisely to emerge as a winner. Good luck!

DISCLAIMER: This article is just for reference purposes and does not recommend any stock market transactions.
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