Blog

There are several signs that the market gives before going into a correction or even a bear market. If you do your research, you might notice these signs and shield your portfolio from losses. Read on to know more.

Peak valuations: During a stock market bubble, prices go up because of how people feel about the market and because they follow the crowd. Prices are too high compared to what they are worth. Simply put, this means that a company’s fundamentals aren’t getting better as fast as the price of its stock.

High leverage: Speculators can borrow money from brokerage firms (on margin) or NBFCs to keep the bull market going. Due to the high margin and the never-ending cycle of debt, when stocks go down, investors’ wealth may be completely wiped out.

Low-interest rates: They are one way that the government encourages people to borrow money and invest. It also encourages FDI or FPI, which are two types of foreign investment. It doesn’t work well with the stock market. This means that when interest rates go down, the market goes up.

Trend Popularization- There are times when stories about bull markets are told too often. When the media talk a lot about certain stocks, their prices go up a lot. This is called a bubble.

A lot of IPOs that were oversubscribed—Given how things are, there have been a lot of IPOs in the last two years, and 90% of them were oversubscribed, which shows how bullish the market is.

Market Capitalization to GDP Ratio: This metric shows how much a country’s stock market is worth compared to its GDP. India has a market cap that is more than 75% of its GDP. This means that the Indian stock market is worth 75% of the country’s GDP.

PE Ratio: The PE ratio is a good way to tell if the stock market or a company is overvalued.

Most of the time, the Nifty PE ratio is between 15 and 25. If the PE ratio goes below 20, you could say that the market is undervalued. A PE ratio of 20 to 25 means that the market is fairly priced. If the PE ratio is more than 25, it means that the stocks are overpriced. Let’s look at an example of this to help you understand it better.

Several other indicators, such as the Buffet Indicator, the SmallCap Index, and the Sensitivity Index, can also be used to spot a stock market bubble. Even so, you can’t always count on these signs to accurately predict the bubble.

What causes the stock market to drop?

A correction will happen if investors start selling stocks in large numbers because of something like changes in the global economy, rising inflation, a slowdown in economic growth, or even selling out of fear or panic. When a certain number of investors start selling, it causes more investors to do the same. This is called a spiraling effect.

When someone enters the share market as an investor or trader, they will come in after listening to several myths about the share market. Here, we bust a few myths about trading and investing.

Myth 1: Buying stocks is the same as gambling.
People often think that trading is like betting, where you either win or lose.

Myth Shot Down

Investing is more like a science than an art because it requires thorough research into the technical and fundamental aspects of the assets, as well as the market’s current trends and the company’s growth potential.

Myth 2: Past results show what will happen in the future
When making an investment decision, investors look at how the stock has done in the past or how it has been rated.

Myth Shot Down

Investing decisions are made based on the company’s future, not just on what has happened in the past. Some of the most important macroeconomic factors that affect the performance of stocks are the interest rate, GDP, exchange rate, etc. Investors must also look at the company’s quarterly results, how much competition there is, how much it costs to make a product, if a new product is coming out, if there are changes in the top management, etc.

Myth 3: Stocks that go down will go back up, or vice versa.
Most people think that a stock that is going down will go up again at some point. In a similar way, they don’t buy stocks that are at all-time highs because they think the price will drop quickly.

Myth Shot Down

Investors should look into why a stock is going down. Is the collapse just because of the mood of the market, which could change, or is it because of something big that could hurt the company’s finances? Also, a stock’s recent rapid rise does not always mean that it can’t go up more.

Myth 4: To be successful, you have to spend a lot of money.

Myth Shot Down

In reality, all the investors need to do is be disciplined and do thorough research. The power of compounding can be unlocked by making small investments over a long period of time. This can turn regular investors into millionaires.

Myth 5: You have to trade a lot in order to be successful.
A second thing that keeps people from investing is the idea that they will have to trade a lot to make good money.

Myth Shot Down

In reality, quality trades do better than lots of trades. If you don’t do your research, you might make a lot of trades but not get the results you want. On the other hand, you may make good money if you invest wisely and make good trades.

Myth 6: Trading stocks with low P/E (Price-to-Earnings) ratios is smart and safe.
The price-to-earnings ratio (P/E) can be used to tell if a stock is overvalued or undervalued. Most people think that the better the deal, the lower the price is compared to the earnings (P/E ratio).

Myth Shot Down

There may be a good reason why the stock is so cheap. Considerations must be made for the company’s growth prospects, operating revenue, product launch (if any), debt structure, peer comparison, management, etc.

Full-service brokers and discount brokers are the two main types of stockbrokers in India.

Full-service brokers are the most common type of broker. They offer a wide range of services, such as buying and selling shares, investment advice, financial planning, portfolio updates, research and analysis on the stock market, help with retirement and tax planning, and more. These brokers will give you advice and services for investing that is tailored to your needs and financial goals.

Discount brokers are online brokers who offer simple stock trading accounts. They are known for providing the most important trade services for the least amount of money while not offering any personalised services.

Here are a few things that share brokers can help you in the times of:

Important things to know

1. Moving averages – They are based on the past performance of a stock and show its general direction and where it is expected to go in the future.

2. The business cycle: In this cycle, market fear is followed by market greed, which is then followed by more market fear. The best time to buy stocks is when people are most afraid, which is when the economy is in a recession and stocks can be bought for cheap. On the other hand, when the economy is doing well, stock prices go through the roof. This lets traders make money by selling their shares for more than they bought them for.

3. Diversification: Investing in many different companies in many different industries is best because it protects investors from inevitable market drops and makes the market less volatile.

4. Stock price: You shouldn’t buy or sell stocks based on how much they cost. Think about whether or not the price is fair, as well as other things like how the market or economy is doing.

5. Traders need to be aware of the type of buy or sell order they place, which may have price or time limits. Brokers will only fill limit orders if the price is exactly what the trader wants it to be. Stop-loss orders are given to stockbrokers by traders so that the value of their stocks doesn’t drop too quickly.

Before investing, there is more information to think about:

Budgeting

The first step in financial planning is making a budget, which is a way to track, plan, and manage how much money comes in and how much goes out. It involves writing down every source of income and keeping track of all current and future costs so that you can reach your financial goals.

Risk and Payoff

Most of the time, the bigger the maximum profit, the riskier the investment, and vice versa. Risk is the chance or potential of losses happening in relation to the expected return on investment. Find out how to weigh risk and return when making an investment.

The ability to add

Compounding is when an asset makes money that can be re-invested or left alone to continue making money. In other words, compounding is the way that old money is turned into new money.

Stock prices on the market are affected by how much demand there is and how much supply there is. The market capitalization of a company affects part of its share price. This is the sum of the stock price times the number of outstanding shares. The most recent sale price is used to set the current asking price on the market. Let’s say that the last closing price of 100 shares of company XYZ was Rs 50, and you want to buy them. The fair market value of the share is (50 x 100), or Rs. 5,000.

The discounted cash flow method is another way to figure out what the fair price is. The fair price, according to the hypothesis, is equal to the sum of all future dividend payments discounted to the present value.

The stock market is a network of exchanges, brokerage firms, and brokers that connects businesses and investors. IPOs, which stand for “Initial Public Offerings,” is how companies get listed on the market before investors can buy their shares. An initial public offering (IPO) can tell what a company’s market capitalization is, and investors can choose shares from separate lists of large-cap, middle-cap, and small-cap companies on the stock markets.

Indexes are also used by stock exchanges. The Indian exchanges NSE and BSE use two different indices: Nifty and Sensex. These indices are made up of the best large-cap firms based on their market size and how popular their shares are. Most investors use these indicators to figure out where the market is going.

The bid-ask spread is another important term to know when you want to talk about how the stock market works. “Bid” is the amount that buyers are willing to pay for an underlying, which is often less than the “ask” price set by the seller. This difference in prices is called the bid-ask spread. For a deal to happen, the seller must lower the price they want and the buyer must raise the price they are willing to pay.

How to invest on the Indian Stock Exchange

Companies send SEBI a draught offer document that has information about the company. After getting approval, the company does an initial public offering (IPO) on the primary market to sell investors’ shares. The Company offers and gives shares to some or all of the investors who bid during the IPO. The shares are then listed on the secondary market, or the stock market, so that they can be bought and sold. After getting orders from their clients, brokers put those orders on the market. When a buyer and a seller are found, the trade goes well.

On the stock market, investors can buy and sell shares, bonds, and other types of financial assets. A stock exchange is a platform where investors and traders can buy and sell shares.

The two biggest stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Also, businesses can list their shares for the first time on a market called the primary market. The shares are then bought and sold again on the secondary market.

Roles of Stock Market Participants: A stock market is a place where financial products can be bought and sold. Brokers, traders, and investors must register with SEBI, the exchange (BSE, NSE, or regional exchanges), and the companies they work for before they can trade (listing their shares).

Securities and Exchange Board of India (SEBI): SEBI is the market regulator whose main job is to make sure that the Indian stock market runs smoothly and openly so that average investors can invest without worrying. SEBI has set up rules that all exchanges, businesses, brokerages, and other participants must follow.

Stockbrokers: Members of exchanges are stockbrokers. They are the middlemen who carry out investors’ buy and sell orders in exchange for a fee. In the Indian system, investors must trade through broking houses or brokers, who act as middlemen.

Investors and traders are the two main types of people who take part in the market. When investors buy stock in a company, they want to keep it for a long time and make money from it. traders buy and sell stocks, while investors only buy and hold stocks.

Investors’ actions are influenced by the success of a company, its potential for long-term growth, dividend payments, and other similar things. On the other hand, traders are affected by price changes as well as supply and demand.

Let’s talk about the two types of markets we’ve already talked about.
When you trade on the stock market, you try to match buyers and sellers. Your broker sends your offer to buy to the stock exchange, which then compares it to a seller’s offer. Once the price has been set, the exchange tells your broker that the trade is done. At that point, the transaction takes place. In the meantime, the bourse checks the information of the buyer and seller to avoid defaults. After that, the actual transfer of stocks takes place to end trading.

The process used to take days, but digitization has helped cut the time down to T+2, or within two days of the transaction, and work is being done to get it down to T+1.

There are two main reasons why some stocks are called “preferred stocks.” The regular dividends paid to people who own preferred shares are more than those paid to people who own common shares. Common stocks pay dividends based on how profitable the company is. Preferred stocks, on the other hand, pay dividends that have already been decided. Preferred stocks are different from common stocks in that they don’t have the right to vote.

In some ways, preferred stock is like a bond. They all have a face value that is used to figure out the dividend. Let’s say that a preferred stock is worth Rs 1,000 and gives a 5% dividend. If the stock is still being traded, it must pay an annual dividend of Rs 50. Preferred stock is riskier than a bond but less risky than regular stock.

Even when a company does well, the value of preferred stocks is not likely to go up by much. So, it is less likely that a person who owns preferred stock will make big money.

Preferred stocks come in many different forms. If you have convertible preferred shares, you can change a preferred stock into a common stock. Also, preferred stock can add up over time. This means that when business is slow, the company might put off paying dividends. But when things get better, they have to pay the dividends that they owe. This must be done before any payments can be made to common stockholders. Another type is redeemable preferred stock. In this case, the business has the option to buy the stock back at a later date.

Know these things about dividends

1. Most companies pay dividends based on their yearly, quarterly, or even one-time profits.
2. The Income Tax Act of 1961 says that income from dividends is taxed.
3. Companies can choose to pay either common dividends, which are payments that change based on how much money they make or preferred dividends, which are payments that always stay the same.

Investor Benefits from Dividends:

Dividends are a predictable, low-risk way for investors to get a return on their investments. Also, as the companies grow, the dividends go up, which makes the stock worth more to investors. You can also use the dividends to buy more shares.

Investors should keep in mind that dividend yields that are higher are not always better. This is because some companies that pay high dividend yields find it hard to keep up these rates over time.

Dividend stocks are a type of stock that is traded on the stock market. These stocks belong to a group of companies that have a history of giving dividends to shareholders. Since these stocks are well-known, have already reached their peak, and are mature, their future growth potential is often much lower than that of growth stocks.

When looking for money, a business needs to think about two main sources. It can raise money through equity, which means selling shares, or through debt, which means borrowing money from lenders through debentures and other debt instruments. In this case, the company gives investors a piece of the company in exchange for their money. There are different kinds of shares, such as preferred shares and equity shares. This article is meant to help you learn more about equity shares, including how they work, what their pros and cons are, and how they can be used.

How do shares work?

Equity shares are a type of long-term financing that businesses that need money can use. Each equity share is a small piece of ownership in the business. People can invest in equity shares, which are also called common stock or common shares.

Investing is riskier than saving, but it can give you higher returns and help you reach your financial goals faster if you do it right. Equity shares are seen as a long-term way for businesses to get money to run their businesses. People who own preference shares can make use of a number of benefits and advantages.

Voting rights: One of the best things about having equity shares is that you can vote for general managers and other company officials and have a say in how the business is run. This is because the way a company runs has a direct effect on the returns it gives to equity shareholders. If you own a large number of equity shares, you also have a large number of voting rights.

Attending meetings: People who own equity shares are allowed to sit in on all annual and/or general body meetings of the company and have a say in how the family business is run through their voting rights.

Dividends: They can also be paid to people who own equity shares. In this area, though, the benefits for people who own common stock are different from those for people who own preferred shares. Dividend payments to equity owners are not set in stone. They can change depending on how well the company does and whether or not certain goals are met. So, people who own equity stocks have a right to dividend payments, even though these payments are not promised. Dividends are set, though, for people who own preference stock.

Equity shares cannot be redeemed, which means that investors will not get their money back as long as the company is in business. When the company goes out of business, equity shareholders will either get this money based on the value of their equity shares at that time, or they can sell their equity shares to get it back.

There are a lot of companies that only give out common stocks, and more common stocks are traded on stock exchanges than preferred stocks. Common investors, on the other hand, have the least chance of getting any of their money back if a company goes bankrupt. Paying back the people who loaned money to the business comes first. If there is still money left over after creditors are paid, it goes to the people who own preferred stocks. There is a limit to how much of this you can get. Common investors only get their money back if there is still money left over.

Stop loss is like a gauge that tells you how much you could lose on a trade. It’s important to set your stop loss ahead of time so you can be ready if a trade goes in a different direction. A stop-loss order is used to cut down on the loss if the price of a stock doesn’t move as expected and makes the traders lose money.

A day trader sets her stop loss level before she makes her trade. When the cost hits the predetermined stop loss level, the trade ends automatically. The trader can keep the rest of the money she has put in. One can start making a plan for getting the lost money back. By putting in a stop-loss order, a losing trade doesn’t lose any more money.

How does Stop Loss work?

Let’s look at an example to see how a stop loss would show up on a trade. You must now decide where to put your stop loss. For example, if you want to buy a stock that is selling for 105 right now, you must decide where to put your stop loss. Keeping the stop loss below 100, at 99, is a great goal. This means you are willing to lose Rs 6 on this particular trade.

You should also set your target at 1.5 times the percentage of the stop loss. In this case, the stop loss was set at Rs 6, which you were willing to lose. So, you should try to get at least 9 points, which would bring you to 105 + 9 = 114.

Where should your stop loss be?

Most new traders have a hard time figuring out where to put their stop loss settings. If the stop loss level is set too high and the stock moves against you, you could lose a lot of money. Instead, traders who put their stop loss level too close to the purchase price lose money because their trades are closed out too quickly.

There are different ways to figure out how much each trade’s stop loss should be. From these strategies, you can figure out three ways to choose where to put your stop loss:

How does Stop Loss work?

Intraday traders often use the percentage method to figure out where their stop losses are. With the percentage approach, all a trader has to do is say what percentage of the stock price they are willing to lose before they close the position.

Think about the case where you don’t mind if your stock loses 10% of its value before you sell it. And let’s say that one share of your stock is currently worth 50 cents. So, your stop loss would be Rs 60 x 10%, or Rs 6, less than what the stock is worth on the market right now.

Determine Stop Loss Using the Method of Support

Using the support method to figure out stop loss is a little harder for intraday traders than using the percentage method. But it is often used by intraday traders who know what they are doing. For this strategy to work, you need to know what your stock’s last support level was.

Zones of support and resistance are places where the stock price often stops going up or down. Once you’ve found the support level, you only need to set your stop loss price point below that level. Let’s say you own stock that is now selling for Rs 500 per share, and the most recent support level you can find is Rs 490. It is recommended that you put your stop loss just under 490.

Most of the time, the levels of support and resistance are not exact. Before quitting a trade, it’s smart to give your stock a chance to fall and then bounce back from the support level. Set the bar just a little bit below the support level to give your stock some room to move before you decide to close the deal.

Using the Moving Averages Method to Figure Out the Stop Loss

Compared to the support method, the moving average method makes it easier for intraday traders to decide where to put their stop loss. A moving average has to be put on the stock chart first. A longer-term moving average is better because it keeps you from putting your stop loss too close to the stock price and getting out of your trade too soon. Once you’ve put in the moving average, set your stop loss a little below it so it has more room to move in either direction.

When an investor sells shares he does not own, this is called “short selling.” In a short sale, a trader borrows shares from the owner with the help of a brokerage. The trader then sells the shares at market value, hoping that prices will go down. The person who sells short buys the shares at a loss and makes money when the prices go down. It’s important to know that short selling is done by experienced traders and investors who think that the price of shares will go down before they are returned to the owner. Short selling has a high risk-to-reward ratio because you could make or lose a lot of money.

Information about short sales:

1. In a short sale, the seller does not own the stock that is being sold. They are borrowed from someone else.

2. Both individual investors and large groups of investors can do short sales.

3. Short selling is based on guessing what will happen.

4. The seller bets that the price will go down by using short selling. If prices go up, the seller will lose money.

5. Traders have to do what they have to do and give the shares back to the owner when the trade is settled.

6. It’s important for investors to know that the deal is a short sale.

7. Most of the time, short selling happens when the market is down and the price drop is big.

On the stock market, a short sale is done when people want to make money quickly. Some people say it’s like holding on to stocks for a long time. Long-term investors buy stocks with the hope that their prices will go up in the future. Short-sellers, on the other hand, watch the market and profit when prices go down.

How does the short sale process work?

Pros of short-selling:

Financial experts have had a lot to say about the benefits of short selling. Even though this approach has been criticised, market watchdogs all over the world support it because it helps fix irrational overpricing of any stock, provides liquidity, stops bad stocks from rising quickly, and makes sure promoters can’t change prices.

Short-selling disadvantages

Short-selling is an illegal practice that market manipulators often use to raise stock prices artificially. Because of this, there is a higher chance of market instability and more volatility. The planned drop in stock prices could hurt the company’s confidence and make it harder for them to raise money.

A “naked short sell” when a trader sells shares without borrowing them or making plans to borrow them. If the trader doesn’t borrow the shares before the clearing time, he or she can’t give them to the buyer. The trade is said to have “failed to deliver” if the trader doesn’t close the position or borrow the stock. Since it goes against the laws of supply and demand, naked short selling is illegal in most countries. If a large number of naked short sales are made, the market can become unstable.

Short selling is not a good idea for new traders and gamblers who don’t understand the risks. Short selling should only be done by people who know a lot about how the market works.

Equity delivery, which is also called “delivery-based trading,” is one way to trade on the stock market. In an equity delivery, you buy some shares and store them for a while in your demat account. In delivery trading, you can keep the shares for as long as you want once they have been sent to you. You own all of the stocks you buy, so you can keep them until the right time to sell them and make a good profit. Intraday trading, which is the second most common way to trade stocks and involves buying and selling shares during the same trading day, is the opposite of this. When you do intraday trading, you don’t have to pay the full price of the stocks. But if you want to buy shares in delivery, you must have enough money in your account because there are no margins.

Let’s look at some ways to invest that will give you better returns:

Don’t put all your eggs in one basket. This saying is also true for shares. Mix and match things. Try to buy a wide range of stocks when you buy shares. After doing your research, pick a few businesses in different fields. Choose companies that do business in the areas you think have the most potential. Diversifying your investments will help you because you will make money if good things happen in any of them.

Be patient. The stock market is so unpredictable that it will often test your patience. There is always a chance that the value of the shares you buy will go down. The price of each share changes from time to time. Don’t get scared and sell your shares just because the price is going down. Delivery-based trading is much better than intraday trading because you don’t have to sell your shares in a certain amount of time. If you stay calm, your chances of making money will go up. Most traders wait to sell their shares until they reach their cost price.

What does it mean to deliver equity?

Among the benefits of delivery-based trading are:

There is no waiting period, so you can keep the shares even if the market is going down and sell them when the price is right.
Some banks and other financial institutions give loans based on the stock you own. So, when you are going through a hard time, your shares can help you out.
If you see that a company is making money, they might declare a dividend per share. Then, if you own shares in these companies, you will get dividends for each share.
If you keep your money in a bank, you will only get 6-7% in interest per year. But if you use that money to buy shares in companies that are growing, you could make 15% or more on your money. Even some stocks can give you returns of 30–40% per year. Long-term trading is the best way to make money on the stock market.
If a company makes a lot of money, it might give out bonus shares. If they say 1:1, you could get a free share in addition to the ones you already own.

Conclusion

Do your research on the companies whose shares you want to buy before you buy them. Try to buy the shares when they are trading for less than what they are worth. If you do this, your chances of succeeding will go up. Knowing when to buy and when to sell is helpful for both intraday traders and traders who buy and sell for delivery.