MARKET CYCLE

The lifecycle of a stock or even the benchmark indices can be divided into several phases. In every phrase it is the effect of the bulls and bears that influence the stock prices movements. In phrases where the bulls dominate the stock prices move up and in phrases the bears dominate the prices see down side. The behaviour of bulls and bears on stock markets is influenced by several factors like the economic condition of the country. In terms of stock specific activities the performance of the underlying company may influence the behaviour of bulls and bears and thereby influence the stock prices.

The influence of the bulls and bears can also be explained in terms of greed and fear. When the markets look attractive there is greed in the markets and the investors go into buying mood for more returns. This is explained as the markets becoming more bullish. A market is said to be in a bear phrase when there is fear in the investors and they go into selling mode.

This can be explained in a chain. Suppose a stock called is seeing some price appreciation in back of some positive news. The bulls get greedy and there is fear in the bears. As such more buying activity emerges and selling activity weakens. As such the stocks keep getting more bullish and the prices are driven into higher levels. This is termed as a bullish phrase in the stock’s lifecycle. It is always a combined effect of greed and fear which makes a phrase in the stocks lifecycle.

There are basically four phases that kept repeating in the lifecycle of a stock. The bench market indices also seem to have a similar lifecycle.

1.            Accumulation: This phrase generally takes place when a stock is oversold after heavy bear carnage. There is lack of buyers in the market for the stock. At this point the wise and smart long term investors enter the stock with the correct perception that the stock has discounted all the bad news. These investors keep accumulating the stock while the general investors keep dumping their stocks in the fear of facing further losses. Thus the buying activity of the smart investors and the selling activity of the general public keeps stock price stable. On the charts this is shown by a base formation at the bottom levels after a huge decline.

2.  Mark Up: In this phrase the stock begins to show price appreciation. The stock enters into an uptrend after breaking out from the accumulation levels.  The mood of the general investors also turns bullish and buying takes place with huge participation.

3. Distribution: In this phrase the smart and wise investors who entered the stock at accumulation levels start exiting the markets with correct perception that the stock is now getting overpriced. The general investor is not however convinced of that view and they keep buying. The selling activity of the smart investors and the selling activity of the general public keeps stock price stable.

4. Mark Down: In this phrase the general investors suddenly realize that the stock is indeed overbought and overvalued at the current levels. There is fear in them that the ongoing bubble may burst and as such they begin selling the stock. There is breakdown in the price levels and it keeps taking the stock prices lower. 

After the mark down phrase the stock again enters the accumulation period and the cycle continues. Here we have discussed the market cycle in terms of a bull rally. The reverse situation occurs in case of bear rallies.  

STOP LOSS

STOP LOSS
Stop loss orders are a great technique of risk management in equity markets. A stop loss order is an order that is used to exit from a stock when it hits a specified price.
How to use stop loss:
Let us say you have a capital of Rs.1, 00,000. You buy 100 shares a company stock at Rs. 1000.00 per share.  You taking into consideration that the maximum risk you can take on this investment is Rs.5000 or 5% of your investment.
To manage this risk you need to a stop loss.
Consider Rs.1000.00 as the market price of a share the maximum risk we can take is Rs.50 which is in accordance with the 5% risk we are willing to take. So you have that when the stock price hit Rs. 950 you will exit the stock. To put this in place we place a stop loss order at Rs.950. If and when the price of the stock falls to Rs. 950, the stop loss order will be executed and the stock will get sold off.
Generally, most traders will use a stop loss of 1-2% below their buying price when they buy a stock. Likewise in short trades they stop loss is 1-2% above the selling price. In case the trade goes wrong they will only lose 1-2% of their portfolio.  On a good day a skilled trader can easily make up for this loss.

TRAILING STOPLOSS
Using trailing stops are also a great trading strategy to get maximum returns from your stocks. A trailing stop loss is a stop loss which goes up as the price of the stock goes up but never goes down with the fall in stock prices. The trailing stop loss in case of short trades work just in the opposite way.
The trailing stop prices are set at a certain percentage below the current price.  Let us say you are maintaining a trailing stop loss of 5%. If the stock price continues increasing by say 10% above the price you purchased then the trailing stop loss is also increased by 10%. In case the stock price at anytime falls and hits the trailing stop you would have locked in 5% in profits.
How to use Trailing Stops
Let us say you buy a stock at 100.00. We decide that the maximum risk we can take is 10% of our investment. So we will set our trailing stop price at 10% below the current price.
So the initial trailing stop will be 90.00. If the stock price hits 90.00, our trailing stop will be triggered and we will sell our position.
If the stock price falls to 95 we will not change the stop loss and kept holding on to the position.
If the stock price keeps falling and hits the stop loss of 90 then we will let the stop loss get triggered. We will lose 10% value of our investment. If the stock price keeps falling to 80.00, we’ll be protected by the trailing stop loss. The trailing stop loss will ensure that the risk will be limited to 10.
If the stock price keeps increasing we will keep raising our stop loss accordingly. If the stock price goes up to Rs.110 we will raise our stop loss to 99. The stop loss is kept 10% below the current market prices. After this if the stock price falls we will not alter the stop loss. If the stop loss gets triggered then the trailing stop loss will ensure we will not lose money. On the other hand if the stop price goes up further to 150 then we will raise the stop loss to 135. If this stop loss gets triggered then the profit would be locked in.
The advantage of using trailing stop loss is that that we were able to get more profits when the stock prices increases but at the same time have protection. For example in the above case if the stock had turned around from 110 then we would exited positions at 99 and not lost any money.  If it had turned from 150 that we would have exit positions at 135. By raising the stop loss we ensured that the profits remained locked till 135 rather than a static stop loss at 99 which would have lowered the profits levels.

HOW TO USE DOLLAR COST AVERAGING?



Dollar cost averaging
For the last few years, the idea of investing for long term has not worked well in the Indian Stock Markets. The experts on television have kept on recommending stocks for long term and those stocks have kept on lagging. Stocks like DLF, HDIL and Reliance Capital which are household names have not given returns. On the other hand some lesser known names like La Opala and TTK Prestige have worked well. However, in spite of that the number of underperformers clearly exceeds the outperformers. In fact Rakesh Jhunjhunwala’s stocks have also not performed well except for a few like Lupin and Titan. The underperformance of long term investments has been one of the major reasons why the retail participation has kept on declining over the last few years. Perhaps it is time to rethink about the idea of making long term investments in the Indian Equities.
In this article we will explore a strategy that can be used to make great profits on long term investments even in the volatile market conditions- Dollar-cost averaging. In this article we will discuss about the strategy and also some ways on how to get maximum benefits from this strategy. 
The biggest advantage of Dollar-cost averaging is that is lessens the risk of investing a large amount in a single investment. Most investors have the tendency of pouring in huge investments once the market sentiment gets positive. In the end the 1000 DLF shares brought by Mr. X at Rs.400 falls to Rs.250 or the 1000 Suzlon shares brought by Mr. Y at Rs.25 fall to Rs.15. With the lack of knowledge about hedging tools or proper investment strategies the dream of making a fortune turns sour.
The basic idea of Dollar cost averaging is to invest the same amount of money on a regular basis. This takes advantage of the volatility of stock prices as investors get opportunity to buy at various price levels.  As such when the stock prices are low more shares are brought while at higher prices fewer shares are brought. At the end the average price paid is much lower than the average market price. Dollar cost averaging also reduces risk by reducing the difference between the initial investment and the current market value over long time horizon.
This is also a great strategy for dealing with volatile market conditions. It is an effective way of dealing with sudden sell-offs which tumble down stock prices and causes huge losses to investors. An investor is able to make opportunities from such adversities by buying more shares and thereby lowering the buying prices. In sharp contrast to normal averaging where only price is averaged, in dollar cost averaging volumes are also averaged.

Optimizing Dollar cost averaging
Many are of the opinion it is better to keep buying during a downward trending market and selling in an upward trending market. In this way the investor buys more of shares as the price falls and keeps on selling with every rise. However in this strategy if the investor keeps investing in regular intervals in a downward trending stock, the losses would keep adding up rapidly. It is thus better not to stop averaging on stocks that are seeing downtrend. Just like the concept of simple average it is better to do dollar cost average in upward trending stocks.
It has been seen that the strategy works well for stock in the path of recovery after a period of underperformance. As such stock selection is an important aspect of this strategy.
Along with this profit booking is also important. As soon as the investor realizes the stock has become overvalued or the growth story in the stock has been factored in, the investor should book profits.
Successfully SIPs are those that in which the investments are continued for many years. In such SIPs the investors are able to make more out of the long growth story in the stock.
The best benefits of combining the benefits of dollar cost averaging strategy are obtained when this strategy is combined with the diversification and thereby an index fund approach is followed.

PARTIAL PROFIT BOOKING


Partial profit booking is a great technique of booking profits on investments. It is a different from the conventional way of profit booking and is aimed to making more out of profitable trades.
It is well known that main idea behind investment is capital appreciation or monetary growth. The main objective is get rewards out of the investments in the form of profit. Wherever there is a chance of reward there is a possibility of risk.

However many investors tend to get so much carried away by greed of making more out of profits that they tend to forget the risk aspect part of investment. It is seen that in the pursuit of making more profits out of good trades they forget to capture the profits. Ultimately they end up losing money on these trades. As such risk management is an essential part of investment. 
To control risk means taking care of “Capital Preservation”. It is often recommended that  “Capital Preservation” should be given preference to “Capital Appreciation”.
For example on an investment the investor quickly earns a profit of 60%. However in his greed to make more profits he does not provide any risk management techniques in place. However, soon some news hits the stock and it price starts falling. The investor ultimately ends up making a loss. For this capital preservation is very important so that the investors can make use of the opportunities when he/she is making profits.
As stock markets are highly speculative in their behavior the need of capital preservation is even more in case of investments in stock markets than other ventures.
Partial profit booking is way of profit booking which is aimed at preservation of profits and ensure that profits are not lost due to sudden price damages in the stock. It aims to minimize risk and control the conservation of profits by booking it in a planned approach.
As we know stock markets are uncertain and volatile and anticipate their movement is very difficult. The idea behind partial profit booking is to book some part of the profits and thereby reduce the risk exposure of investments. If the outstanding investment see loses then it would be compensated by the profits which had been booked earlier. If the outstanding investment see upside then these profits would add up to the profits booked earlier.
Example
An investor invests Rs.1, 00,000 in shares of a company X. Within a span of 3 months the investment sees a growth of 50% and the investments valuation turns Rs.1, 50,000. After 3 more months the markets crash and the shares of X see a huge fall of 40% and the valuations turn Rs.90, 000. If the investor had continued to hold the shares during the entire time span he would end up in making a loss of Rs.10, 000.
The trick of Partial Profit Booking
A safe strategy here would be book partial profits.
Let us divide the investment sum of Rs.1, 00,000 into 2 parts of Rs.50,0000 each and let us call these Investment Pt 1 and Investment Pt 2.
In this table I have shown the fate of the two parts of the investment which went through profit booking in two phrases. They are shown as Investment Pt 1 and Investment Pt 2
Time Frame Investment Pt 1 Valuation of Pt 1 Investment Pt 2 Valuation of Pt 2
3 months 50000 75000 50000 75000
6 months

75000 45000

Booked 75000 Booked 45000
As such it is seen that if the investor booked 50% profit after 3 months and held the rest till now he would be in profits. The valuation at the end of 6 months would stand at Rs.75, 000 (from the Investment Pt 1  which was booked after 3 months) + Rs. 45,000(from the Investment Pt 2  which was booked after 6 months) = Rs.1, 20,000.
We are not discussing how the approach of profit booking would have played out if the Investment Pt 2 also ended up in making profit. It is evident that in such a scenario the profit would only add up.
A trick for long term investors
Many investors use the technique of partial profit booking to recover the capital of the investment. This is a useful trick which can make investments attain a high level of safety.
Example
Let us say an investor invests Rs.1, 00,000 in shares of a company X. Within a span of 6 months the investment sees a profit of 100% and the investments valuation turns Rs.2, 00,000. In such a case the investor can sell 50% of his investment and recover the entire capital he had spent in the investment. The remaining part of the investment would continue to give him returns.

MARKET BASICS



Share Market:
A share market or stock market is the place where the ownership of the stocks changes by the art of buying and selling them. In the earlier days the buying and selling used to take place by physical forms of shares in paper but in the recent era the transfer of shares takes place through online transfer facilitated by internet.
The advent of online systems has made it possible to buy and sell stocks throughout the world provided a stock market allows people outside the domain to trade in them. Different stock exchanges have different opening hours on their local times and their time of their operation may also be different.

The behavior of stock markets has a strong correlation with the economic health of a country. Bull markets are often results of high economic production, low unemployment level and low inflation rates. Bear markets are often results poor economic indicators of economic like increased unemployment and inflation. Besides these many other factors have an impact on the behavior of stock markets.
Investor psychologies which decide the supply and demand cycle also have an impact on the behavior of stock markets. A strong bullish psychology may lead to buying momentum and likewise a strong bearish sentiment can led to a downtrend.

Stock exchanges:
Stock markets are also referred to as stock exchanges. In strict terminology, stock markets are divided into stock exchanges which are like small forms of stock markets. This is more like the class of a school is divided into sections for better management. A country may have a number of stock exchanges where different companies may be listed. It may also happen that the same company may list in several exchanges.
The major stock exchanges of the world are the Shanghai Stock Exchange of China,  the London Stock Exchange of United Kingdom, the Tokyo Stock Exchange of Japan, the Bombay Stock Exchange of India, the Frankfurt Stock Exchange of Germany, the SWX Swiss Exchange of Switzerland, and the New York Stock Exchange, the NASDAQ, and the AMEX of United States.
In India we have 2 exchanges:
NSE- The index Nifty is used by NSE
BSE- The index Sensex is used by BSE


Stock Market related terminology:
Share: The ownership of a company when divided into small parts, each part obtained through this division is called a share.

Stock: Though going by strict terminology a group of shares make up a stock, in the real world the words’ stock and shares have become synonymous.

Demat: To keep the shares in one’s holding they are to be kept I demat accounts just like money in banks is kept in bank account.

Index:In order to keep a general overview of how the stock markets as a whole are behaving an index is used. An index is calculated by the behaviour of the stocks which are a part of it and given a weightage. The price movement of the constituent stocks determine the movement of the index. Generally the stocks of the best companies present in the stock market are used to access the performance of the index. In other words, it is like used the marks of the best students in class to get an overall view of the class performance.
In India we have two indexes
Nifty- It consists of 50 stocks with the best companies like Reliance and TCS having high weightage.
Sensex- It consists of 30 stocks.

FIRST STEP

The article will address the basic steps which an individual needs to follow in order to start trading in the Indian stock markets.
In order to start trading an individual first needs to have the following:
PAN Card: The first thing that an individual needs to have is a PAN card.
Bank Account: A bank account has to be opened through which the individual will carry out the financial transactions. A basic saving account is enough to carry out the process.
After this the individual needs to approach a broker and with the help of a relationship manager carry out the following steps:
Opening a Demat Account: A demat account has to be opened which will keep the shares the individual buys in the same way money is kept in bank accounts. When the individual buys shares they are deposited into the demat account and when the individual sells the shares they are taken out from there.
Opening a Trading Account: Along with a demat account the individual also needs to open a trading account with the broker. This trading account is the account through which the shares are bought and sold.
In India, we have two stock exchanges- NSE and BSE. The trading account can be opened to trade in either both the exchanges or any one of the exchanges. The trading account can be online or offline though online is the preferred these days. Online trading accounts have the advantage that in this case trading can be done by the individual through a computer.
Thus three types of accounts are necessary- a trading account with the broker, a Demat Account and a bank account.

It may worth mentioning here that the demat account is more of a back end entity and the trading account is a front end entity. Shares are brought through the trading account and deposited in the demat account and when they are sold through trading account they are actually taken out from the demat account. In the older days the demat and trading account were held in different financial institutions and the individual had to write demat slips to transfer the shares between the two accounts. However these days the demat and trading account are held in the same financial institutions and the use of slips are not required.

After this a couple of forms and agreements have to be signed.
One of these is the Know Your Client (KYC) Form. The KYC form needs to be filled up with the contact details and other details. It has to be accompanied with an identity proof, residential proof and a copy of the Permanent Account Number (PAN) card. Proof of identity can be given by submitting a copy of your Passport, Voters card etc. Proof of address can be a copy of the ration card, latest electricity bill etc. All documents should be produced in original for verification.
A couple of agreements need to signed between the broker and the individual. The agreements need to be signed separately signed for BSE and NSE. If the individual is working through a sub share broker then there is a tripartite agreement between the share broker, sub share broker and client. This agreement allows you to do only cash market trades. For trading in the derivatives market another bipartite agreement is required.
After this the risk disclosure documents needs to be filled up. This document explains the different risks involved with in the stock market transactions for which the indivisaul will be responsible. The document may also contain certain risk mitigation measures that can be used by you.
A power of attorney also needs to be signed. By signing this form the indivisual will authorize the broker only for delivering shares to exchange on his or her behalf against the sell trades and not for anything else.
On submitting the completed set of document the broker will scrutinize them. If everything is in order the broker will allocate a trading code normally referred to as a client code. 
The indivisual will furnish this code every time he or she wants to a transaction. In case the indivisibly opts for Internet based account a password will also be allocated against the  login id. Normally the individual will have to change the password immediately on the first log in.

Charges that you are charged in this process:
Trading Account and Demat Account Opening Charges
Yearly Demat Account Maintenance Charges

Buying and Selling Shares
The order for buying and selling shares can be placed through a phone call to the relationship manager who represents the financial institution with which the trading account was opened. In case the individual has an online trading account he or she can buy and sell the shares through an online terminal by using the trading software of the financial institution on compatible computer.
After having got the client code the individual can do share dealing or trading. However he or she needs to ensure that there is the requisite margin money has been paid to the broker to place any transaction. Initially the individual should start by placing orders in small quantities. After having understood the system in full the indivisual may gradually increase the size of your transactions. On mastering investing in equity cash segment the indivisual may gradually look at derivative segment.

Charges charged during the course of trading:
Charges for holding shares in the Demat
Brokerage charges the brokers takes for execution of your trades
Service Tax
Securities Transaction Tax

The charges mentioned here are the general charges most brokers charge. Charges charged vary from one broker to another. It is recommended to go through the charges of the various brokers before choosing the broker from where to open the trading account.
  
Some other safety precautions and safeguards
Get a contract note for each day’s transactions.
Be very clear and complete while giving instructions to your relationship manager.
Never be in touch with unauthorized mediators because this may lead to very high risk.
Don’t get into speculative trading which may seem interesting but it’s one of the biggest traps. 
Don’t fall under the trap of exciting offer and doing transaction beyond your financial capacity. 

SHORT SELLING

The technique of making money in a bull market is known to all through the route of buying and selling stocks. However the technique of making money in a bear market is often a doubt to many. Buying and selling is an easy trick for all but the art of making money through short selling, in other words selling and then buying often is a confusing thing for many. It is in different from the simple way of buying and selling and people who look to invest for long term generally tend to avoid the route of short selling. In this article we will explore the basic aspects of short selling:

The process of short selling:
In purchasing stocks, you simply buy a piece of ownership in the company. The buying and selling of stocks can occur through a stock broker or directly from the company. Brokers commonly serve as intermediates between the investor and the seller. When an investor goes long on an investment, it means that he or she has bought a stock believing its price will rise in the future.
In case of short selling an investor goes short when he or she is anticipates a decrease in share prices. Short selling is the selling of a stock that the seller doesn't own. More specifically, a short sell trade is the selling of a security that isn't owned by the seller, but that is promised to be delivered. In short selling a broker wills lends the stock from another source. The shares are sold and the proceeds are credited to the account. Sooner or later, the seller is required to buy back the same number of shares which is called covering and returning them to his or her broker.
If the stock price decrease drops the seller buy backs the stock at the lower price and make a profit where if the price of the stock increases the seller has to buy it back at the higher price and lose money.

Some key points of short selling:
Against the secular trend
Going by long term trends stocks in general have an upward drift. In most cases stock prices tend to move higher. As such short selling is trading against the overall direction of the market.
Indefinite Losses
A short sell trade theoretically can give infinite loses. Say you are selling a stock at Rs.50. The stock price cannot go below Rs.0 but on the upside it can go to any limit. As such the buying price can be maximum 0 to a profitable trade but to a loss making trade it can be indefinite.
Short squeezes are a trap
When stock prices go up the short sellers somewhat create a sort of rush to buy the stocks in order to cut their losses which keep getting higher.  This phenomenon is known as a short squeeze. It is generally a very fast activity. Traders need to be apt to foresee such situations and get out of such short squeeze as early as possible as these are very fast rallies.


PORTFOLIO MANAGEMENT TIPS

A portfolio is an aggregation of the financial assets that is owned by an individual. It contains the shares that are owned by the individual along with other financial instruments like bonds, cash, etc. Beside individuals Portfolios may also be owned by financial institutions. However in this discussion I will only focus on the portfolio that contains stocks.
A portfolio is not necessarily a group of stocks that you brought. It is not always the individual quality of the stocks in the portfolio that determine the performance of the portfolio but the performance of the portfolio on the whole is also important. In fact building a portfolio is much like building a team. Having the best of players does not make a great team but the balance of the team which decides its performance.  The role of each according to the need of the team is important. Similar is the case with portfolio. In this article we will explore some tricks and tips to build a good portfolio-

In short, a good stock portfolio is one that is aimed to achieve high degree of profits. So, all the strategies and tricks should be aimed to achieve this objective.
Efficient and effective management of a portfolio should be marked by certain ideas:
A good strategy – The strategy with which one aims to build a good portfolio is perhaps the most important thing. The strategy should take into account all the possible issues and concerns surrounding the constituents of the portfolio. The time frame for which the portfolio is built should be considered while buying the constituents that would make up the portfolio. For example, when building a long term the way the stock would play out in future should be analysed with apt. A wide variety of approaches can be taken to suit the required objective. For example, an individual may focus only on the stocks of a particular sector when he/she feels that in long term the sector would be prospering. On the other hand it can be based on a short term theme. For example, before the rail budget a short term portfolio of rail stocks can be made. Similarly, a portfolio can be built on a long term theme by having stocks from a particular sector which is expected to have good benefits in the long run. From time to time the portfolio should be analyzed to see that the stocks which are being included are in line with the purpose. If not, then the stocks should be shuffled to get the portfolio in line with the target.
Diversity- Investments done across a wide range of stocks and sectors provides diversity that protects a portfolio from certain shocks that may affect a particular stock. In later case an individual who holds one single stock with high allocation in it suffers from over dependency in that which may result in huge loss when this stock faces unexpected declines. Capital allocation across a range of stocks and sectors saves one from this kind of a scenario as price decline in one stock is counter-balanced by the other holdings which are relatively unaffected.
Selection of stocks- Before buying the stocks to build the portfolio they must be analysed to a T. If you’re building a long term portfolio all fundamental aspects of the company should be considered while investing in it. The fundamental indicators like P/E, cash flow and earnings should be taken into account while analysing the stock. A greater degree of attention should be given to the management of the company. Similar if you are buying stocks based on technical analysis then it needs to done as accurately as possible. Avoid taking decision based on rumours and unfounded tips and adopt a sound judgement and proper mindset in the process of selection. Don’t remain emotional on your holding and clutch onto them on basis of sentiments.  
Cut down losers and let runners run - It has been seen that investors tend to carry which tend which are continuously losing value and booking out in the stocks which are in minor profits.   It is seen that the investors tend to lose more money on these loss making stocks than the amount of profit they make on the profit making stocks. These kinds of stocks are called sacred cows. It is good to trigger stop losses on the loss making stock rather than waiting for the return of their good times. A portfolio should have as much less sacred cows as possible. These stocks tend to block the investor from investing in better stocks. Investor should be prompt in eliminating the weak stocks in his portfolio and invest in strong counters which can give better returns. It is advisable to use trailing stop losses so that more profits can be derived out of the profit making stock. It is even better if one can get rid of loss making stocks and replacing them with the profit making stocks.
Regular investing: The best way to build a portfolio especially long term portfolio is to follow a systemic investment plan where there is regular investment. Rather than investing the entire sum of investment at one go the investor can keep adding the stocks at regular intervals. In this investment pattern the investor is able to buy a stock in a wide range of prices. An investor can further enhance this by investing small amount of money in some stocks and later keep adding positions to the stocks which are performing well. The investor thus buys good stocks and does not build positions in the weak positions. This strengthens the quality of the portfolio.
Cash- Carrying strategy:  Cash should also be considered as a form of asset, instead of staying invested all the time. Cash helps the investor to avoid losing money in times where the markets are not in the best of form. Staying in cash is better than losing money by taking wrong trades which result in losses. In future the investor can use the cash to get trading positions which are of more value than getting invested in scenarios where there is no clear indication about the market trend. An investor should switch his investment in equity and cash according to the market scenario. In risky situation there should be more of allocation in cash than stocks while in rewarding situation the allocation in stock should be high.
Monitor performance: Just like the performance of mutual funds is measured by comparing their performance relative to the benchmark indices, the performance of your portfolio should also be measured so as to see whether your strategy is working well. You can also compare the performance of your portfolio to the benchmark indices over a particular time frame to get a good measure of how your portfolio is doing. The time frame should be based on the time frame for which your portfolio is being built. For portfolio based on short term goals time frame of 1 week to 1 month can be used while for long term portfolios yearly comparisons can be done.

HOW TO SELECT STOCKS


Many market participants often wonder about how stocks are getting priced. There are no mathematical equations or formula which can help to determine how a stock will get priced. However a number of factors play a key role in the pricing of a stock. This article will look to explore some of these factors:




Fundamental Outlook: One of the most important factors that influence stock prices is the fundamental outlook of the underlying company. The earnings per share (EPS) and the Price to Earnings ratio (P/E) is an important indicator of how the stock has been priced relative to the company's performance. Along with this free cash flow per share is also a good indicator of earnings potential of the company. These indicators can be used to determine how a stock will get priced in relation to the fundamental outlook of the underlying company.

Take-overs or mergers: When there is anticipation that a company will become a potential takeover target there is positive price movement seen in the stock of the company. This happens as companies are generally taken over at a premium to the current market valuations. In other words it means that the shares of the company will be bought over at a higher price than its current market price.

Launch of new products and services: The launch of new products also lead to appreciation in stock prices. This happens as there are hopes that the product will breaks into new markets and earns more revenues for the company. New orders and contracts: When a company wins new contracts or orders there are expectations that they will add more revenues to the companies and the earnings will see appreciation. This leads to sharp increase in stock prices. The reverse occurs when a company loses order and contract.

Analysts upgrade and downgrades:   Stock prices generally see upside on analysts upgrade as it leads to a positive sentiment. Investors get confidence about the stock when analysts upgrade them. There is belief that the experts are finding the stocks undervalued in comparison to the earning potential.  This boosts the sentiment and the stocks generally see bullishness. Similarly stocks see sell off on analyst downgrades as investor lose confidence in the stock.

Share buy-backs:  The share buy-back by a company is seen by investors very positively. It reflects that the company's management have confidence in the company and they are finding the current market valuations cheaper to its prospects. Share buy-backs also reduce the number of share available in the open market.  This means that there will be a reduction in shares available for trading after the buy-back which will cause a drop in supply and this will help increase the share price.

Management changes:  Management changes too influence stock pricing. If investors feel that the new management has the potential to take the company into greater heights they buy into the stock. This happens as there is anticipation decision the new management has the ability to increase the earnings potential of the company which will lead to appreciation in stock prices.

Technical & Charts: Stock pricing patterns on the charts too have a major role. In fact it is often said that the charts tend to price in all the factors that influence stock prices. The patterns or indicators in stock prices, volumes, moving averages and many others over a time frame can give good indications as to how the stock will get priced in futures. For example crossover of stock prices over the 50-day and 200-day Moving Averages generally led to a sharp increase in stock prices.

Demographics: Macroeconomic factors play a major role on the stock markets as a whole. Amongst the various macroeconomic factors demographics is an important factor. Generally middle-aged people tend to invest more in stock markets than old aged people. So stock markets of countries that have more of middle-aged people tend to perform well than the stock markets of countries that have aged demographics.

Interest Rates:  Interest rates are also a major macroeconomic factor that has an overall influence on the stock markets. Higher interest rates mean that money becomes more expensive to borrow. As a result the economic activity tends to slowdown and the earning tends to see depreciation. This leads to drop in stock prices. Similarly when the interest rates are low there stocks see bullishness.
Along with the above discussed factors other factors like inflation, natural disaster, product recalls and lawsuits, patent approval, war and political outlook too have an impact on stock prices.
The way these factors play out creates a positive or negative sentiment in the market. In the positive sentiment the market participants are bullish then there is a drive of greed in the market participants. When the sentiment is negative there is fear in the market participants and they are bearish in the markets.
The ways these two sentiments play determine the supply and demand of stock. The bullish participants tend to create demand for the stock as they buy the stock where the bearish participants tend to create supply for the stock as they sell the stock. The pricing of stocks generally happens due the supply and demand of stock. When there are more sellers there is more of supply and selling takes over buying. This leads to fall in stock prices. Similarly when there are more buyers there is more of demand and buying takes over selling. This leads to rise in stock prices.

STOCKS AND MUTUAL FUNDS

Investors are often in dilemma of whether to buy stocks directly from the markets of using the route of mutual funds. In this article some basic differences between investing in mutual funds and investing in stock will be discussed.
In case of Mutual funds the investment is carried out by professional fund managers who work on behalf of the investors who buy into the fund. The investors rely on decision making ability of the fund manager to carry out their investment. Here not much of knowledge is required for the investor’s side except for the fact that he needs to choose a good mutual fund. In case of investment in equity the investor has to rely on his own research and decision making abilities to take make decisions on the investments. The investor needs to analyze and choose the stocks to invest in. He needs to have the knowledge of stock picking in order to make wise investment decisions.