Types of Trading

The stock market is a reliable indicator of the actual value of companies which issue stock. Values of stocks are based on verifiable financial data such as sales figures, assets and growth. This reliability makes the stock market a good choice for long term investing – well-run companies should continue to grow and provide dividends for their stockholders.

The stock market also provides opportunities for short-term investors. Market skittishness can cause prices to fluctuate quite rapidly and investor psychology can cause prices to fall or rise – even if there is no financial basis for these variations.

How does this happen? News reports, government announcements about the economy, and even rumours can cause investors to become nervous or to suspect that a company will increase in value. When the price starts to fall or rise, other investors will jump on the bandwagon, causing an even faster acceleration in price. Eventually the market will correct itself, but for savvy short-term investors who watch the market closely, these price changes can offer opportunities for profitable trading.

Short term traders are divided into 3 categories: Position Traders, Swing Traders, and Day Traders.

Position Traders
Position trading is the longest term trading style of the three. Stocks could be held for a relatively long period of time compared with the other trading styles. Position traders expect to hold on to their stocks for anywhere from 5 days to 3 or 6 months. Position traders are watching for fundamental changes in value of a stock. This information can be gleaned from financial reports and industry analyses. Position trading does not require a great deal of time. An examination of daily reports is enough to plan trading strategies. This type of trading is ideal for those who invest in the stock market to supplement their income. The time needed to study the stock market can be as little as 30 minutes a day and can be done after regular work hours.

Swing Traders
Swing traders hold stocks for shorter periods than position traders – generally from one to five days. The swing trader is looking for changes in the market that are driven more by emotion than fundamental value. This type of trading requires more time than position trading but the payback is often greater. Swing traders usually spend about 2 hours a day researching stocks and executing orders. They need to be able to identify trends and pick out trading opportunities. They usually rely on daily and intraday charts to plot stock movements.

Day Traders
Day trading is commonly thought of as the most risky way to play the stock market. This may be true if the trader is uneducated, but those who know what they are doing know how to limit their risk and maximize their profit potential. Day trading refers to buying and selling stock in very short periods of time – less than a day but often as short as a few minutes. Day traders rely on information that can influence price moves and have to plot when to get in and out of a position. Day traders need to be rational and analytical. Emotional buyers will quickly lose money in this type of trading. Because of the close attention needed to market conditions, day trading is a full-time profession.

5 Basic rules of investing

1. Do your homework

Before investing your money, ensure that you have done your homework well. It is 'normal' for sales pitches to be aggressive. Most sales executives are mainly interested in 'commission earned' or 'business garnered', which reflects in their monthly targets. That is why one only gets to hear the 'best case scenario' from agents/sales executives.

A lot of sales agents/consultants try to exploit the individual's vulnerability and lack of knowledge while making a sales pitch. For instance, how else can you explain so many individuals in the low-risk category investing in high-risk ULIPs?

Or why term plans, in spite of being the cheapest form of insurance, are still not bought by most individuals? Or why mutual fund IPOs find so much favour with investors even when there is no fit in their portfolios?

One should understand his own profile in terms of income, risk appetite and future plans and only then, make investments in tune with the same. Individuals need to know what benefits different products offer and how they fit into their financial portfolios before taking a call on investing in them. 

You must listen to advice from different quarters but the final decision should rest with you alone after a careful analysis. After all, it's your own hard-earned money.

2. Keep your eyes and ears open

Keep your eyes and ears open at all times for any investment opportunity that comes your way. The opportunity could be by way of changing market scenario or new product launches. Individuals shouldn't lose out on any opportunity just because they didn't know it existed.

Of course, this involves a bit of updating yourself with latest product trends, market conditions and changing economic scenario. This way, you will not be completely at the mercy of the consultant/agent to provide you with investment-related information and solutions.

3. Involve yourself

While buying any financial product, ensure that you have involved yourself at critical stages. For example, while taking life insurance, see to it that you personally fill all the details in the proposal form. I

nsurance agents many a times, used to, themselves, fill up details like the height and weight of the insured, his age and medical history among other things, based solely on their own judgement. They merely asked the individual to sign on the form at the end.

What individuals don't realise is that this can lead to rejection of claims at a later stage if discrepancies are found in the proposal form. The insurance company cannot be faulted for rejecting such a claim. It is a shortcoming on the agent's part who should have requested you to fill the form yourself, else fill it himself after verifying your details.

All the necessary medical tests should also be diligently given. As mentioned earlier, any 'false claims' might lead to rejections at a later date.

4. Inform your near and dear ones

This is especially true in case of life insurance. Inform your near and dear ones as soon as the policy is bought. If your spouse and/or parents know that you have a life insurance cover wherein he/they are nominees, they will be better placed to follow up with the life insurance company for the claim proceeds should something happen to you.

Typically, life insurance should not be so sacred that you don't broach the topic in the family. All related (and affected) parties must know exactly what needs to be done in your absence.

5. Maintain a logbook

Always maintain a logbook of your life insurance policies/investments. Individuals can and do have a variety of investments ranging from life insurance (endowment, term plan, ULIPs) to mutual funds and PPF/NSCs. A logbook should contain details about the same.

Over an extended period of time, it becomes difficult for one to remember or track investment details like maturity date, maturity value and rate of interest. This logbook will take care of that problem. Of course, it goes without saying that for the logbook to be really effective and useful, it should be updated periodically to reflect investments and redemptions.

This logbook should also include details of an individual's liabilities like home loans, personal loans, the amount outstanding on such loans, the EMI and business liabilities (in case the individual runs a business) among others.

Details of the logbook should also be shared with your dependents (spouse, children, parents). An important reason for making a copy is, in case of an unfortunate eventuality, the spouse knows his/her            exact financial status. Also, one wouldn't want someone to come out of nowhere one fine day and stake a claim on the family's assets based on some 'fictitious' liability.

Do and don'ts for stock market investments

What you must NOT do

1. Don't panic

The market is volatile. Accept that. It will keep fluctuating. Don't panic.

If the prices of your shares have plummeted, there is no reason to want to get rid of them in a hurry. Stay invested if nothing fundamental about your company has changed.

Ditto with your mutual fund. Does the Net Asset Value deep dipping and then rising slightly? Hold on. Don't sell unnecessarily.

2. Don't make huge investments

When the market dips, go ahead and buy some stocks. But don't invest huge amounts. Pick up the shares in stages.

Keep some money aside and zero in on a few companies you believe in.

When the market dips --buy them. When the market dips again, , you can pick up some more. Keep buying the shares periodically.

Everyone knows that they should buy when the market has reached its lowest and sell the shares when the market peaks. But the fact remains, no one can time the market.

It is impossible for an individual to state when the share price has reached rock bottom. Instead, buy shares over a period of time; this way, you will average your costs.

Pick a few stocks and invest in them gradually.

Ditto with a mutual fund. Invest small amounts gradually via a Systematic Investment Plan. Here, you invest a fixed amount every month into your fund and you get units allocated to you.

3. Don't chase performance

A stock does not become a good buy simply because its price has been rising phenomenally. Once investors start selling, the price will drop drastically.

Ditto with a mutual fund. Every fund will show a great return in the current bull run. That does not make it a good fund. Track the performance of the fund over a bull and bear market; only then make your choice.

4. Don't ignore expenses

When you buy and sell shares, you will have to pay a brokerage fee and a Securities Transaction Tax. This could nip into your profits specially if you are selling for small gains (where the price of stock has risen by a few rupees).

With mutual funds, if you have already paid an entry load, then you most probably won't have to pay an exit load. Entry loads and exit loads are fees levied on the Net Asset Value (price of a unit of a fund). Entry load is levied when you buy units and an exit load when you sell them.

If you sell your shares of equity funds within a year of buying, you end up paying a short-term capital gains tax of 10% on your profit. If you sell after a year, you pay no tax (long-term capital gains tax is nil).

What you MUST do

1. Get rid of the junk

Any shares you bought but no longer want to keep? If they are showing a profit, you could consider selling them. Even if they are not going to give you a substantial profit, it is time to dump them and utilise the money elsewhere if you no longer believe in them.

Similarly with a dud fund; sell the units and deploy the money in a more fruitful investment.

2. Diversify

Don't just buy stocks in one sector. Make sure you are invested in stocks of various sectors.

Also, when you look at your total equity investments, don't just look at stocks. Look at equity funds as well.

To balance your equity investments, put a portion of your investments in fixed income instruments like the Public Provident Fund, post office deposits, bonds and National Savings Certificates.

If you have none of these or very little investment in these, consider a balanced fund or a debt fund.

3. Believe in your investment

Don't invest in shares based on a tip, no matter who gives it to you.

Tread cautiously. Invest in stocks you truly believe in. Look at the fundamentals. Analyse the company and ask yourself if you want to be part of it.

Are you happy with the way a particular fund manager manages his fund and the objective of the fund? If yes, consider investing in it.

4. Stick to your strategy

If you decided you only want 60% of all your investments in equity, don't over-exceed that limit because the stock market has been delivering great returns.

Stick to your allocation.

HOW STOCK MARKET WORKS ?

Before you start investing in the stock market it is a good idea to ask yourself, “How does the stock market work?” The answer to this question is simple. Companies go public by offering a specific number of shares in their company to the public through the stock exchange. Investors then can use the stock exchange to buy and sell stocks of companies that they are interested in. While this basic description of how the stock market works is adequate enough to understand what the stock market is, to get a better understanding of how it actually works it will be important to learn about some of the terms that are commonly used when discussing the stock exchange including stock prices and market capitalization.

The first term that you may hear when you start learning about how the stock market works is stock prices. Stock prices are the price that a specific stock sells for. This price is set by several market factors including the health of the economy, trading trends, spending trends, and financial or technical reports put out by a company or an independent third party. The next term that you may hear about is market capitalization. Market capitalization is the value of the company or the stock that is being offered. To calculate the market capitalization of a company, or stock, simply use this formula: The number of outstanding shares X the price of the stock = market capitalization of the company.
After you learn about the basics features of the stock exchange you will next need to learn how to buy and sell shares. To buy a stock you will need to establish some kind of investment account. In most cases you will open an investment account with a stock broker that works at a local firm. However, today you can also open an online investment account and make trades without the help of a stock broker. After you have set up your account you will need to fund it before you can make a purchase. Once your account is funded you will be able to enter your order for a stock purchase. When you are ready to sell your shares you will either tell your stock broker that you want to sell X number of shares of Company A, or you will need to enter a sell order via your online investment account.

Stock Markets

The term 'Stock Market' is commonly used to encompass both the physical location for buying and selling stocks as well as the overall activity of the market within a certain country. When we hear an expression such as 'The stock market was down today' it refers to the combined activity of many stock exchanges i.e. the New York Stock Exchange (NYSE), Nasdaq etc. in the United States.

The 'Stock Exchange' is the correct term for the physical location for trading stocks. Each country may have many different stock exchanges and usually a particular company's stocks are traded on only one exchange, although large corporations may be listed in several different locations.

Stock exchanges exist throughout the world and it is possible to buy or sell stocks on any of them. The only restriction is the opening hours of each exchange. Both the NYSE and Nasdaq for example operate from 9:30 a.m. to 4:00 p.m. Eastern Time from Monday to Friday. Other exchanges have similar opening hours based on their local time. If you want to trade on the Hong Kong Stock Exchange your order will be executed sometime between 9:30 p.m. and 4:00 a.m. New York time.

The major stock exchanges of the world are located in Japan (Tokyo Stock Exchange), India (Bombay Stock Exchange), Europe (London Stock Exchange, Frankfurt Stock Exchange, SWX Swiss Exchange), the People's Republic of China (Shanghai Stock Exchange) and the United States. The major exchanges in the US are the NYSE, Nasdaq, and Amex.

Stock markets closely follow the economic health of a country. When the economy is doing well the market is bullish. Bull markets occur during times of high economic production, low unemployment and low inflation. Bear markets, on the other hand, follow downtrends in the economy. Inflation and unemployment are rising and stock prices are falling.

Fluctuations in stock prices are also driven by supply and demand, which in turn are determined to a large extent on investor psychology. Seeing a stock rise in price may cause investors to jump on the bandwagon and this rush to buy drives the price even faster. A falling price can have the same effect. These are short term fluctuations. Stock prices tend to normalize after such runs.

The stock exchange is only one of many opportunities to invest. Other popular markets include the Foreign Exchange Market (FOREX), the Futures Market, and the Options Market.

The FOREX is the biggest (in terms of value of trades) investment market in the world. FOREX traders buy one currency against another and can profit from small changes in value. Most FOREX trades are entered and exited in one 24 hour span, and traders have to keep a close watch on the market in order to make profitable trades.

The Futures Market is a market of contracts to buy and sell goods at specified prices and times. It exists because buyers and sellers of goods wish to lock in prices for future delivery, but market conditions can make the actual futures contract fluctuate considerably in value. Most investors in the futures market are not interested in the actual goods – only in the profit that can be realized in trading the contracts.

The Options Market is similar to the Futures Market in that an option is a contract that gives you the right (but not the obligation) to trade a stock at a certain price before a specified date. They can be traded on their own or purchased as a form of insurance against price fluctuations within a certain time frame.

All three of these markets are quite risky and require considerable knowledge and experience to prevent substantial losses. They also require close attention to market movements. Stocks, on the other hand, are less risky because movements of the market are usually gradual. Although short term investment strategies are possible, most view stocks as long term investments.

WHAT IS A STOCK BROKER ?

A stock broker is a qualified and regulated professional who buys and sells shares and other securities through market makers on behalf of investors.

Services provided
A transaction on a stock Exchange must be made between two members of the exchange .Stock Exchanges must be done through a broker.
There are three types of stockbroking service.

• Execution-only, which means that the broker will only carry out the client's instructions to buy or sell.
• Advisory dealing, where the broker advises the client on which shares to buy and sell, but leaves the final decision to the investor.
• Discretionary dealing, where the stockbroker ascertains the client's investment objectives and then makes all dealing decisions on the client's behalf.

Stock Brokers
Brokers handle most of the buying and selling on the stock market, and the average investor will use a brokerage service to handle his trades. There is a broad range of brokerage services available. There are brokers who offer many services for aiding their clients meet their investment goals. These 'full-service brokers' can give advice about which stocks to buy and sell and often have full research facilities for analyzing market trends and predicting movements.

These perks are not free – full service brokers charge the highest commission rates in the industry. Whether or not you decide to use a full-service broker depends on your level of self-confidence, your knowledge of the stock market and the number of trades you regularly make.

Investors who wish to save on commission fees can use a 'discount broker'. These brokers charge much lower commissions but don't offer advice or analysis. Investors who like to make their own trading decisions and those who make many trades often use discount brokers for their transactions. Some traders may use both types – there is no reason why you can't have two brokers.

The least expensive way to trade stocks is usually with an online brokerage. Both full-service and discount brokers usually offer discounts for orders placed online. Some brokers operate exclusively online and offer even better rates.

No matter what type of broker you choose, you must first open an account. Each broker sets their own requirements for maintaining an account balance but it is usually between $500 and $1000. When choosing a broker look at the fine print and find out about the fees involved. Some brokers charge an annual maintenance fee while other charge fees whenever your account balance falls below the minimum.

There are two basic types of brokerage accounts. A 'cash account' offers no credit – when you buy you pay the full amount of the stock price. A 'margin' account, on the other hand, allows you to buy stock 'on margin' – the brokerage will carry some of the cost of the stock. The amount of margin varies from broker to broker but the margin must be protected by the value of the client's portfolio. If the portfolio falls below a specified amount the investor will have to add more funds or sell some stock. Margin accounts allow investors to buy more stock with less cash thereby realizing greater gains (and losses). Because they involve more risk than cash accounts, margin accounts are not recommended for inexperienced traders.

Before choosing a particular broker the investor should carefully consider his needs. Does he wish to receive advice about which stocks to buy? Is he uncomfortable making trades on the Internet? If so, he should go with a full-service broker. Technology savvy investors who have the knowledge and confidence to make their own trading decisions are better off with a discount broker.

After deciding which type, compare a few competitors. There can often be significant differences in costs when all the annual fees and brokerage rates are factored in. Try to gauge how many trades you expect to make in a year, how much cash you can deposit into your account, whether you wish to use margin accounts and which services you need. This information will allow you to compare the actual costs of various brokers.

What is Share?

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.

Stock Basics

Understanding the stock market starts with understanding stocks. A stock represents partial ownership of a company – the smallest share possible. Company's issues stocks to raise capital and investors who buy stock are actually buying a portion of the company. Ownership, even a small share, gives investors rights to a say in how the company is run and a share in the profits (if any). While stocks give owners certain rights, they do not carry obligation in case the company defaults or faces a lawsuit. In a worst-case scenario the stock will become worthless but that is the limit to the investor's liability.

Companies issue stocks to raise capital. They may need a cash injection to expand or to acquire new properties. Each stock issue is limited to a certain number of shares, and when they are issued they are given a par value. The market quickly adjusts that par value according the perceived health of the company and its potential for growth.

Investors usually buy stocks because they believe the company will continue to grow and the value of their shares will rise accordingly. Investors who acquire stock in a new company are taking more of a risk than buying shares of well-established companies but the potential gain is much greater. Those who bought Microsoft shares early in the game (and did not sell them) saw an exponential rise in their value.

Stock trading is done on stock exchanges like the New York Stock Exchange (NYSE) or NASDAQ (National Association of Securities Dealers Automated Quotation System). This means that only companies listed on a public exchange have shares that can be bought and sold on the open market. Of course, you could also buy partial ownership in a smaller company that is not listed on a stock exchange but that is a very different type of investment than buying stocks.

Because stocks must be bought and sold on a stock exchange, an individual investor needs a broker to make transactions for him. Brokers take orders to buy or sell a certain stock. The order may include instructions to trade at a certain price or simply what the market will bear. Once the broker receives the order he attempts to execute it by finding a buyer or seller as the case may be. The buyer or seller is also represented by a broker and each broker receives a commission on the sale.

Stocks have several advantages over savings investments. Because they represent ownership in a company they give the holder rights to participate in major decisions the company faces. Every share represents one vote and shareholders are regularly asked to vote on important matters. Ownership also allows stockholders to benefit from any profits the company makes. Profits are distributed in the form of dividends, and may be issued once or twice a year at the discretion of the company directors.

If the company prospers the value of the stock will rise and distribution of profits also increases. The downside of this is that if the company does poorly the value of the stocks may fall.

When compared with savings investments (like bonds or bank certificates of deposit) stocks have the potential to earn more money -- but they also carry the risk of loss. Learning about the stock market and the various investment strategies can help to minimize loss, and most investors find they do much better on the stock market than is possible with any kind of savings investment.