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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.

STOP LOSS & TRAILING 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 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.

ALL ABOUT BONDS

First let us look at some basics of bonds. Bonds offer attractive interest rates to investors which are better than even fixed deposits and as such there is a good option for income generation. On the other hand contrary to PPF, bonds do not offer much of capital appreciation.
Let us look at look at an example of how bonds work for investors.

Let us say SBI is offering bonds with 10 year maturity period at interest rate of 9.5% per year. If an investor invests Rs.10, 000 in these bonds he will get Rs.950 per year for the next 10 years. On the other hand, if at any point SBI decides to buyback back the bond by exercising its “Call Option” then the investor has to sell off the bonds to SBI and SBI will pay him the principal of Rs.10, 000 which he had invested earlier. If SBI exercise the Call Option after 2 years then the investor would get a total return of Rs. 11,900. This includes the income of Rs.950 generated from the bond for 2 years and the principal of Rs.10, 000. 

Types of bonds:
Government Bonds:
Bonds that are issued either by Government of India or by the Public Sector Units PSU’s are known are government bonds. These bonds have good deal of security as they are backed up by the government. Generally these bonds tend to offer a low rate of interest compared to the others.
Corporate Bonds:
Corporate bonds are the secured or non secured bonds that are issued by the private corporate companies.
Banks and other financial institutions bonds:
These bonds are issued by banks or any financial institution. Most of bonds that are available are issued by the banks and other financial institutions.
Tax saving bonds:
Tax saving bonds are those that are issued by the Government of India for providing additional benefits to investors in the form of tax savings.
Apply for bonds
The process of buying most corporate bonds at the time of issue is similar. An application form needs to be filled up and submitted it to any branch of the issuing company with the application fee and required documents. These documents may include a copy of PAN card; address proof, identity proof, etc. If the buyer has a demat account, then has be mentioned and the bonds will get credited to it. In the buyer has no demat account, and then the bonds can be received in a physical format.
Most Government bonds are sold at the issue through official distributors and designated branches of banks and post offices. Here also the same process needs to be followed just like Corporate Bonds while buying them.


Listing on Stock Exchange
These days’ most bonds are also listed on stock exchange so that you can buy and sell them in secondary market. These bonds will be issued in demat form only and therefore a demat account is needed. Once the bonds are listed, an investor can exit from a bond before the maturity by selling them at the exchange. Some bonds are listed after some time of their issue. Investors who had brought the bonds at the time of issue can get some premium on the listing day and sell them at decent profits.


Taxation
Basically there are taxable and non taxable bonds. In case of taxable bonds the interest that one gets from the bonds are taxed.  The interest is added to the salary and taxed accordingly.  There are also tax savings bonds that are covered under sec 80C.


Bonds vs. PPF
Basically bonds work if the goal is to generate yearly income at decent rates. However if the goal is capital appreciation and growth of investments then bonds are not preferred. In that case PPFs are the choice.
For this, we just need to look at the basic mathematical concept of simple interest and compound interest. Bonds are basically an example of simple interest while PPF are an example of compound interest. In other words investment of yearly payouts is not taken into consideration in bonds but in PPFs. So even if PPF has an interest rate of 8% and a bond has an interest rate of 9.5%, in long term PPF bring in more of capital appreciation.

FIRST STEP TO STOCK MARKET

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 the individual needs to have is the PAN card.
Bank Account: A bank account needs to be opened through which the individual will carry out the financial transactions. Normal saving account is enough to carry out the process.

After this the individual now 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 is opened which will keep the shares the individual buys just like the banks keep money. When the individual buys shares they are deposited into the demat 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 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. The shares are brought through the trading account and deposited in the demat account and similarly when shares 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 you have to fill certain forms and agreements.
One of these is the Know Your Client (KYC) Form. The KYC form needs to be filled up with your contact details and financial worth. It has to be accompanied with your identity proof, proof of your residence and Permanent Account Number (PAN) card. Proof of identity can be given by submitting a copy of your Passport, Voters card etc. Proof of address is ration card, latest electricity bill etc. All documents should be produced in original for verification.
You will also to sign several agreements which are entered between you and the share broker. The agreements need to be signed separately signed for BSE and NSE.  If you are 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 a bipartite agreement is required.
After this the risk disclosure documents need to be filled up. This document explains the different risk involved with your transaction for which you 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 you are authorizing your broker only for delivering shares to exchange on your behalf against your sale 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 client code to you.
You may need to furnish this code every time you want to a transaction. In case you have opted for Internet based account you will also be allotted a password against your login id that will be mapped to your client code. Normally you will be forced 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 you opened the trading account. In case you open an online trading account you can buy and sell the shares through an online terminal by using the trading software of the financial institution on compatible computer.
Having got your client code you can share dealing or trading. However you need to ensure you have paid the requisite margin money as stipulated by your broker to place any transaction. Initially you start with placing orders in small quantities. Once you have understood the system in full you may gradually increase the size of your transactions. On mastering investing in equity cash segment then you 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.  

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.

GROWTH INVESTING & VALUE INVESTING

Value Investing and Growth Investing has two of the most popular ways of investment. Both these strategies have been used by several ace investors to build their wealth. In this article we will explore these two ways of investment in a detailed perspective:

Value Investing
Value investing has been one of the most favoured strategies used by long term investors. The basic idea of value investing is to buy stocks at valuations less that the intrinsic value. This is in contrary to the belief that stocks get priced by factoring in all the information that is available and also events that are likely to occur in future. The value investor looks for differences between the market price and the intrinsic value of the stock.
The earliest concept of value investing came from the investment strategies used by Ben Graham and David Dodd in 1928. Value investing generally takes into account various fundamental aspects of the company like earnings, dividends and cash flow. It looks for stocks that are undervalued in the current market situations and expect the stocks to get fairly prices in due course of time.

Some important points of value investing:
1. Studying the financial aspects- Important parameters like assets value, outstanding debt and financial liabilities which play a key role in the fundamentals of the company should be studied. The ‘intangible’ assets like intellectual property, patents and trademarks should also be considered in the analysis.
2. Reason behind low prices- Investors should not rely on historical prices to determine the point of bargain hunting. The current market price of the stock should be compared to the intrinsic value of the company in current market situations and not on historical values.
3. Fundamental parameters- Important fundamental parameters like P/E ratio should be studied to compare earnings of the company to the current stock price. Stocks with low P/E, or low P/B ratio are generally regarded as good buying opportunities.

Growth Investing
Growth investing is also one of the most popular approaches of investing in stock markets. This strategy focuses on the long term growth potential of the company for appreciation in stock prices.  It also takes into account the fundamentals of the company while analysing the stocks, but the difference with values investing is that in growth investing the focus is on buying good stocks at good valuations while in value investing the focus is on the future potential of the company without much regard to the current scenario.
Growth stocks are often the stocks of new companies which show opportunities for rapid progress. However whether the tide will continue to bloom will decide the fate of the investor.

Some important points of growth investing:
1. Check the earnings history- The earning per share (EPS) of the stock over the last few years can give good idea of how the company has been doing. The growth in EPS can reflect the growth story of the underlying company.
2. Estimating forward earnings- Since the idea is to identify growth, the analysis of forward earnings is very important. The investor can use the research reports of various broker houses and then do a bit of research himself/herself for this. Generally small caps and midcaps show greater growth prospects than large caps though they carry more risk.
3. Competitive Advantage- When looking for growth specific stocks it often good to buy stocks which have a dominant presence in their area of operation. Companies which have patents over certain technologies or ideas often prove to have high competitive advantage. Companies facing high competition often face high pricing pressures and in turn the growth outlook faces lack of clarity.
4. Good management- Efficiency of the company’s management is perhaps the most importantly factor when choosing growth stocks. Ultimately it is the management which decides the policies of the company.
5. Government policies- It is extremely important to keep a track of how the government policies’ would impact the company of the underlying stock. Often the government looks to give certain sectors incentives or tax benefits which in turn give a positive outlook to the companies which operate in the sector.


Growth investing v/s Value investing
Growth investing is a strategy in which investors select stocks of companies that are expected to have a high growth rate. They expected the stocks of the companies to outperform the market and in the process achieve capital gains.
Value investing, on the other hand, is a strategy in which investors select stocks of companies that are assumed to be trading a discount to the intrinsic value.  For this metrics such as a company’s price-to-book ratio or price-to-earnings ratio are used in order to estimate a company’s worth.

Some great investors
Philip Fisher was one of the greatest investors in the world who followed the growth investing philosophy.   Fisher began his career on Wall Street in September 1929 one month before the devastating crash that marked the beginning of the Great Depression. In 1931 he started his own investment firm, Fisher & Co, which followed a growth investing philosophy.
 As the American economy pulled out of the Depression, Fisher began investing heavily in companies that grew profits.  One of his largest investments was in Motorola, which he bought in 1955 when it was a young start-up held it until his death in 2004.  He said that if a company is strong, well-managed and able to grow, there’s no reason to sell it.  Fisher is known as the “Father of Growth Investing.”
 Benjamin Graham on the other has been a follower of Value Investing. He also launched his career during the Great Depression and found tremendous success with the philosophy of Value Investing.
However, Warren Buffett has said that his philosophy is “15 percent (Philip) Fisher and 85 percent Benjamin Graham” meaning that follows both Growth and Value Investing.

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.  

THE DOW THEORY

The Dow Theory
The Dow Theory was established from a series of Wall Street Journal editorials authored by Charles H. Dow from 1900 until the time of his death in 1902. Today even after 110 years they remain the foundation of what we know today as technical analysis. Dow never published his complete theory but several of his followers compiled his works and that has come to be known as "The Dow Theory”. 




The Dow Theory has six points:
The stock market discounts all news
The Dow Theory suggests that all information be it of the past, present or future is factored into the prices of stocks and indexes. It includes all micro and macroeconomic factors ranging from inflation to earnings.
It also includes events that are expected to happen and could happen. New information that has not been factored into get factored in as soon as they are available.

A market has three trends
The Dow Theory identifies three trends within the market- major, intermediate and minor. A major trend may last from less than a year to several years. An intermediate trend, which is often a reaction to the primary trend, may last from ten days to three months. A minor trend lasts less than three weeks.

A market has three phrases
Dow Theory suggests that major market trends are composed of three phases: an accumulation phase, a public participation phase, and a distribution phase. In case of a bull market the accumulation phase is the start of an uptrend. It is where the informed investors are actively buying stock against the general opinion of the market. Here a sort of price consolidation takes place after a strong sell off. In the public participation phase the general opinion of the market turns bullish. The business conditions look better. As the good news starts coming in, more and more investors participate. As a result the markets keep moving higher and higher. The final stage is the distribution phase where there is rampant speculation. However sensing that the Bull Run is approaching its end the smart investors who entered in the accumulation phrase start selling off their holdings. Finally the speculation creates a bubble which bursts and leads to the end of the rally.
Market Indexes Must Confirm Each Other
When Dow was considering this point he used two indexes- the Dow Industrial and Rail Averages. Dow stated that to assume that a new trend has begun the two indexes must confirm each other. Through this he meant that the direction of the stock market is a reflection of overall business conditions in the economy. If the two indexes are not moving in the same direction, there is no clear trend in business conditions. As such there the trend in the markets cannot be confirmed.

Volume Must Confirm the Trend
This means that the volume should increase when the price moves in the direction of the trend and decrease when the price moves in the opposite direction of the trend to confirm the trend. That is in an uptrend, volume should increase when the price rises and fall when the price falls. When volume increases with the direction of the trend it shows that traders are in the belief that the momentum in the trend will continue. Likewise low volume during the corrective periods of primary the trend shows that most traders are not willing to close their positions because they believe the momentum of the primary trend will continue. If volume runs counter to a trend, it is a sign of weakness in the existing trend signalling that the trend is starting to dissipate as the participants are losing conviction in the trend.

Trends exist until definitive signals prove that they have ended
Dow stated that trend should be followed and unless they show definite signs of reversals. There may be temporary corrections to a trend but soon the trend will resume. Traders should look clear signals of trend reversal and not confuse a reversal in primary trend with a secondary trend.

Current Relevance
The Dow Theory had laid down the basic principles of technical analysis. However with the advent of more advanced techniques and tools the Dow Theory needs some expansion. One of the big problems with the theory is that the conservative nature of a trend-reversal signal. A reversal in the bullish and bearish trend is confirmed when there is an end to successive highs and successive lows respectively. However it is difficult to predict the end of trends and by the time it gets confirmed the markets have already move a long way.
However the Dow Theory will always remain important in technical analysis. It was the first step to technical analysis of stocks and even after 110 years its tenants remain very much relevant. One can find Dow Theory playing out in the market moves every now and then. It has been, it is and it will always be the first chapter in technical analysis.