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What
is Investment? |
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In general terms, investment
means the use of money in the hope of making
more money. In finance, the purchase of a financial
product or other item of value with an expectation
of favorable future returns.
The money we earn is partly spent and the rest
saved for meeting future expenses. So instead
of keeping the savings idle we may use savings
in order to get return on it in the future.
This is called Investment. |
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| Why should one invest? |
| One needs to invest to: |
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earn return on
your idle resources |
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generate a specified
sum of money for a specific goal in life |
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make a provision
for an uncertain future |
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When
to start Investing? |
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As soon as one starts investing
it is better. Early investing allow the investable
amount to grow with more time , and the benefit
of compounding increases the return, by accumulating
the principal and the interest or dividend earned
on it, year after year. |
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There
are three important rules for all investors: |
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Invest early |
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Invest regularly |
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Invest for long
term and not short term |
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| What
care should one take while investing? |
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Before
making any investment, one should consider the
following points: |
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| 1. Obtain written
documents explaining the investment |
| 2. Read and understand
such documents |
| 3. Verify the
legitimacy of the investment |
| 4. Find out the
costs and benefits associated with the investment |
| 5. Assess the
risk-return profile of the investment |
| 6. Know the liquidity
and safety aspects of the investment |
| 7. Ascertain if
it is appropriate for your specific goals |
| 8. Explore all
the available options. |
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What are
various options available for investment? |
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There
are two options for investment: |
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| Physical assets like real estate, gold/jewellery,
commodities etc. |
| and/or |
| Financial
assets such as fixed deposits
with banks, small saving instruments with
post offices, insurance/
provident/pension fund etc. or securities
market related instruments like shares,
bonds, debentures etc. |
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| What
are the various financial instruments available
for investment? |
TOP |
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Following are some of the investment vehicles
considered among the financial instruments:
Savings Bank Account is often the first banking
product people use, which allows interest varying
between 3%-5% p.a.
Money Market or Liquid Funds are a specialized
form of mutual funds that invest in extremely
short-term fixed income instruments and thereby
provide easy liquidity. Unlike most mutual funds,
money market funds are primarily oriented towards
protecting your capital and then, aim to maximize
returns. Money market funds usually yield better
returns than savings accounts, but lower than
bank fixed deposits.
Fixed Deposits with Banks are also referred
to as term deposits. Fixed Deposits with banks
are for investors with low risk appetite, giving
return marginally higher than savings account
but lower than money market fund.
Post Office Savings: Post Office Monthly Income
Scheme is a low risk saving instrument, which
can be availed through any post office. It provides
an interest rate of 8% per annum, which is paid
monthly.
Public Provident Fund: A long term savings instrument
with a maturity of 15 years and interest payable
at 8% per annum compounded annually. A PPF account
can be opened through a nationalized bank at
anytime during the year and is open all through
the year for depositing money. Tax benefits
can be availed for the amount invested and interest
accrued is tax-free.
Company Deposits: These are short-term (six
months) to medium-term (three to five years)
borrowings by companies at a fixed rate of interest
which is payable monthly, quarterly, semi- annually
or annually. The rate of interest varies between
6-9% per annum for company FDs. The interest
received is after deduction of taxes.
Bonds: It is a fixed income (debt) instrument
issued for a period of more than one year with
the purpose of raising capital. The central
or state government, corporations and similar
institutions sell bonds. A bond is generally
a promise to repay the principal along with
a fixed rate of interest on a specified date,
called the Maturity Date.
Mutual Funds: These
are funds operated by an investment company
which raises money from the public and invests
in a group of assets (shares, debentures etc.),
in accordance with a stated set of
objectives. It is a substitute for those who
are unable to invest directly in equities or
debt because of resource, time or knowledge
constraints.
Shares Another most popular high-risk high return
investment option available to investors is
investing in shares of companies. Equity investment
has the potential to yield high return but also
has equivalent risk. However, it is time tested
that investing judiciously for long term in
well known companies always provides better
returns and lower the risk element. |
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| What
is investing in equity? |
| Investing
in equity involves purchasing shares of
a company listed on a stock exchange.
You can acquire these shares in two ways
- either through the Primary Market, i.e.,
when a company makes an offer to issue
its equity for the first time (this is
called Initial Public Offering (IPO))
or through the secondary market, i.e.
via a stock exchange. When you trade in
equity through a stock exchange, you have
to make use of the services of a brokerage
firm, which acts as your agent whenever
you buy or sell. |
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| What
are the risks associated with equity investment? |
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The
major distinction of Equity investment from
all other investment avenues is that while the
return from many avenues such as Bank Deposits,
Small Saving schemes, Debentures, Bonds etc
are fixed and certain, the earnings from equity
investments are highly uncertain and varied.
This is because there is scope for considerable
appreciation or loss of the capital that you
invest, depending on various factors such as
the performance of the company that you have
invested in, general market conditions, the
state of the economy, etc. |
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Equity
is a must for any well-balanced portfolio. So,
irrespective of whether you are a high net worth
investor or a small retail investor and irrespective
of whether you have a large or timid appetite
for risk, you must hold some portion of your
assets in equity. This is because it is the
only instrument that has the ability to truly
deliver a high return, when held over a long
period of time. However, the amount of equity
that you hold in your portfolio is a very subjective
decision and will depend upon investment objectives,
time horizon and risk appetite. |
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| What
is an equity share? |
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Share is nothing but the Ownership of
the company divided into small parts and
each part is called as Share or Stock.
Buying share of a company we become a
shareholder in that company. Shares are
also known as Equities. Equities have
the potential to increase in value over
time. It also provides your portfolio
with the growth necessary to reach your
long term investment goals and equities
have outperformed most other forms of
investments in the long term. |
What
is meant by Face Value of a share/debenture? |
The
nominal or stated amount (in Rs.) assigned
to a security by the issuer. Also known
as par value or simply par. |
What
is Share Market? |
| A
stock market or a share market is a trading
place for buys & sale of company stock/
shares, and derivatives, securities listed
on a stock exchange as well as those only
traded privately. Market is a place where
buyers and sellers can enter into transactions
to purchase and sell shares, bonds, debentures
etc. Now days through Internet and advanced
technology buying and selling of shares
take place anywhere in India and also
from foreign country, there is no need
to be physical presence in stock exchanges. |
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| What
are the various types of Share Markets? |
TOP |
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Markets
are of two types: |
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Primary Market |
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Secondary Market |
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Primary Market |
The primary market provides a platform
for sale of new securities. Primary market
provides opportunity to issuers of securities;
Government as well as corporates, to raise
resources to meet their requirements of
investment or other. This is typically
done through a syndicate of securities
dealers. The issuer may issue the securities
at face value, or at a discount/premium
and these securities may take a variety
of forms such as equity, debt etc. They
may issue the securities in domestic market
and/or international market. |
Secondary Market |
| Secondary
market is the financial market where securities
are traded after being initially offered
to the public in the primary market and/or
listed on the Stock Exchange. In the secondary
market, securities are sold by and transferred
from one investor or speculator to another.
Majority of the trading is done in the
secondary market. Secondary market comprises
of equity markets and the debt markets. |
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What
is Primary Market? |
| The
primary market provides a platform for
sale of new securities. Primary market
provides opportunity to issuers of securities;
Government as well as corporates, to raise
resources to meet their requirements of
investment or other. This is typically
done through a syndicate of securities
dealers. The issuer may issue the securities
at face value, or at a discount/premium
and these securities may take a variety
of forms such as equity, debt etc. They
may issue the securities in domestic market
and/or international market. |
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| How
can one apply for an IPO? |
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To
apply to an IPO you have to fill an IPO
application form. These forms are available
in stalls outside the stock exchanges
and with vendors in various other areas.
You can also get an application form through
a share broker or investment consultant,
if you have one. Else forms are available
at various banks. A good idea is to check
the Web site of the SEBI Website (http://www.sebi.gov.in/)
for the prospectus of a particular IPO.
The prospectus lists the lead managers
for the IPO and you can get a copy of
the application form from their centers.
Once you get the form, you have to fill
it, remit the amount after calculating
the number of shares applied for in the
bank that is designated in the form as
collecting centre for that IPO.
If you have a demat account, then you
can apply for the shares directly through
your demat account or there is an option
of physical delivery of share certificates. |
What
are the factors that one needs to keep
in mind before deciding to apply for an
IPO? |
| Track
record of the promoters Background and
experience of the promoters, the management
team and their expertise is one of the
main factors that needs to be considered
as they will be the ones responsible for
the profitability of the company. Studying
this point will help investors avoid fly
by night promoters and companies.
Financials: The company's balance sheet
is a very important document and investors
should look at it carefully. Investors
should look at not just the current balance
sheet but also that of the last three
to four years to get an idea of the company's
growth and focus.
Prospectus: Read the prospectus for the
company carefully. The prospectus called
as red-herring prospectus is a document
that every company that goes for a public
offering has to file with the SEBI.The
prospectus has all the details about the
company, the risk factors and the company's
financials.
Issue price: Investors need to decide
if the issue is worth investing in at
that price.
Apart from these three important points
other factors like amount to be paid on
application, the lead managers for the
issue, the stock exchanges that issue
plans to list on and the current market
sentiment are other factors to watch out
for. |
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| What
is meant by Issue price? |
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The
price at which a company's shares are
offered initially in the primary market
is called as the Issue price.
Issues at Par If shares are offered at
face value then it is said they are being
offered at Face Value or at Par.
Issues at Premium When shares are offered
at more than the Face Value, then it is
said that the issue is at a premium. The
premium is the amount charged over the
Face Value.
Issues at Discount If shares are offered
at a price lower than Face Value, then
the issue is at a discount. The difference
between the Face Value and the Offer Price
is the discount. |
What
are the different kinds of issues? |
| Generally,
issues can be classified as a Public,
Rights or Preferential issues (also known
as private placements). The classification
of issues is illustrated below:
Initial Public Offering (IPO) is when
an unlisted company makes either a fresh
issue of securities or an offer for sale
of its existing securities or both for
the first time to the public.
A follow on public offering (Further Issue)
is when an already listed company makes
either a fresh issue of securities to
the public or an offer for sale to the
public, through an offer document.
Rights Issue is when a listed company
which proposes to issue fresh securities
to its existing shareholders as on a record
date. The rights are normally offered
in a particular ratio to the number of
securities held prior to the issue.
A Preferential issue is an issue of shares
or of convertible securities by listed
companies to a select group of persons
which is neither a rights issue nor a
public issue. This is a faster way for
a company to raise equity capital. |
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| How
issues in primary markets are priced? |
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Issues
are prices in following two modes- |
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Fixed Price |
| (b) |
Book Building |
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Fixed
Price In fixed price issue an investor
has to apply at a fixed rate.
Book
Building Book Building is basically a
process used in IPOs for efficient price
discovery. It is a mechanism where, during
the period for which the IPO is open,
bids are collected from investors at various
prices, which are above or equal to the
floor price. The offer price is determined
after the bid closing date. |
| How does one know if shares are allotted
in an IPO? What is the timeframe for getting
refund if shares not allotted? |
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As per SEBI guidelines, the Basis of Allotment
should be completed with 15 days from
the issue close date. As soon as the basis
of allotment is completed, within 2 working
days the details of credit to demat account
/ allotment advice and despatch of refund
order needs to be completed. So an investor
should know in about 15 days time from
the closure of issue, whether shares are
allotted to him or not. |
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| How
long does it take to get the shares listed
after issue? |
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It
would take around 3 weeks after the closure
of the book built issue. |
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| Some
Common Terms in Primary Market |
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Prospectus
A large number of new companies made public
issues. Some of these companies are genuine,
quite a few may want to exploit the investors.
Therefore, it is very important that an investor
before applying for any issue identifies future
potential of a company. This information is
in the form of
'Prospectus', which includes information regarding
the size of the issue, the current status of
the company etc.
Price Band Price band comes into play when IPOs
are done through a book-building process IPOs
if they have gone for the book-building route
will mention a range of price at which one can
make bid.
Book Running Lead Managers The Company issuing
shares appoints the Book Running Lead Managers.
Such agencies manages the entire issue raising
formalities starting from compliance with the
stipulated requirements of the SEBI and other
regulatory authorities, completion of formalities
for listing on the Stock Exchanges, appointing
of various agencies such as advertising agencies,
printers, underwriters, registrars, bankers
etc. and also management of escrow accounts,
deciding the final issue price, final allotment,
ensuring proper dispatch of refunds, allotment
letters and ensuring that each agency is carrying
out their part properly.
Bankers to the Issue Bankers to the issue, as
the name suggests, carry out all the activities
of ensuring that the funds are collected and
transferred to the Escrow accounts.
Registrars to the Issue The Registrar finalizes
the list of eligible allottees after deleting
invalid applications and ensures that the corporate
action for crediting shares to the demat accounts
of the applicants is done and the refund orders,
where applicable, are sent. |
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What is the
difference between the Primary Market
and the Secondary Market? |
In
the primary market, securities are offered
to public for subscription for the purpose
of raising capital or fund. Secondary
market is an equity trading venue in which
already existing/pre-issued securities
are traded among investors.
The secondary market comprises of broad
segments such as Equity, Debt and Derivatives.
Equity shares are the most widely traded
form of securities. There are various
ways in which equity shares are issued
such as IPOs, rights issues and bonuses. |
What
is Stock Market? |
| A
stock market is a trading place for buys
& sale of company stock/ shares, and derivatives,
securities listed on a stock exchange
as well as those only traded privately.
Market is a place where buyers and sellers
can enter into transactions to purchase
and sell shares, bonds, debentures etc.
Now days through Internet and advanced
technology buying and selling of shares
take place anywhere in India and also
from foreign country, there is no need
to be physical presence in stock exchanges. |
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| Why
should one trade through a recognized stock
exchange? |
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An
investor does not get any protection if
he trades outside a stock exchange. Trading
at the exchange offers investors the best
prices prevailing at the time in the market,
lack of any counter-party risk which is
assumed by the clearing corporation, access
to investor grievance and redressal mechanism
of stock exchanges, protection up to a
prescribed limit, from the Investor Protection
Fund etc. |
What
precautions must one take before investing
in the secondary stock markets? |
| Here
are some useful pointers to bear in mind
before you invest in the markets: |
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| 1. |
Make sure your
broker is registered with SEBI and the exchanges
and do not deal with unregistered intermediaries. |
| 2. |
Ensure that you
receive contract notes for all your transactions
from your broker within one working day
of execution of the trades |
| 3. |
All investments
carry risk of some kind. Investors should
always know the risk that they are taking
and invest in a manner that matches their
risk tolerance. |
| 4. |
Do not be misled
by market rumours, luring advertisement
or 'hot tips' of the day. |
| 5. |
Take informed
decisions by studying the fundamentals of
the company. Find out the business the company
is into, its future prospects, quality of
management, past track record etc |
| 6. |
Do not be attracted
by announcements of fantastic results/news
reports, about a company. Do your own research
before investing in any stock. |
| 7. |
Do not be attracted
to stocks based on what an internet website
promotes, unless you have done adequate
study of the company. |
| 8. |
Investing in very
low priced stocks or what are known as penny
stocks does not guarantee high returns. |
| 9. |
Be cautious about
stocks, which show a sudden spurt in price
or trading activity. |
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| How
to Start Equity investing? |
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A broking account with a stockbroker.
You have to sign the "Member-Client agreement"
for the purpose of engaging a broker to
execute trades on your behalf from time
to time and furnish details relating to
yourself to enable the member to maintain
Client Registration Form. |
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A demat account with a depository participant.
You will hold your purchased shares in
this account in electronic form. Similarly
when you sell shares, your shares will
go out from this account. The account
can be opened with any depository participant
but to ensure prompt transfer it is always
advisable to open the account with the
broker you have your trading account |
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A bank account
for cash payments and receipts. |
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Getting
Started- Investing in Secondary Market |
| Once
your account is opened you can immediately
commence trading in whole range of stocks
listed in Indian bourses at NSE/BSE. Trading
can be done via the phone or by coming
in person to the office of broker or through
any other facility provided by your broker
like Internet trading, WAP trading. |
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| What
are the types of cost involved in secondary
stock market trade? |
TOP |
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The
following are the charges one has to bear while
entering into stock market transaction- |
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Demat Account
Opening/Annual Maintenance Charges (the
rates & pattern vary from broker to broker)
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Brokerages (maximum
limit is 2.5% of the buy/sell value) |
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Statutory Duties
viz.securities transaction tax, service
tax, stamp duty, turnover tax etc. |
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What
is a Demat Account? |
| A
demat account, the abbreviation for dematerialised
account, is a type of banking account
which dematerializes paper-based physical
stock shares. The dematerialised account
is used to avoid holding physical shares:
the shares are bought and sold through
a stock broker.
Documents required for opening a Demat
The DP will ask to provide some documents
as proof of your identity and address.
Following are some list but you may not
require all of them, |
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| PAN
card |
Driver's
license |
Electricity/
Landline phone bill |
| Voter's
ID |
Photo
credit card |
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| Passport |
Employee
ID card |
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| Ration
card |
IT
returns |
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Is
Demat Account a must? |
| The
market regulator, the Securities and Exchange
Board of India (SEBI), has made it compulsory
to open the demat account if you want
to buy and sell shares. So a demat account
is a must for trading and investing. |
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What
are the benefits of opening a demat account? |
| The
benefits of opening a demat account are: |
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| 1. |
Immediate transfer
of securities |
| 2. |
No stamp duty
on transfer of securities |
| 3. |
Elimination of
risks associated with physical certificates
such as bad delivery, fake securities, etc. |
| 4. |
Reduction in paperwork
involved in transfer of securities |
| 5. |
Reduction in transaction
cost |
| 6. |
Nomination facility |
| 7. |
Change in address
recorded with DP gets registered electronically
with all companies in which investor holds
securities eliminating the need to correspond
with each of them separately |
| 8. |
Transmission of
securities is done by DP eliminating correspondence
with companies |
| 9. |
Convenient method
of consolidation of folios/accounts |
| 10. |
Holding investments
in equity, debt instruments and government
securities in a single account |
| 11. |
Automatic credit
of shares into demat account, arising out
of split/consolidation/merger etc. |
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Stockbroker
is person who is licensed to trade in
shares. Brokers have direct access to
the sharemarket and can act as your agent
in share transactions. For rendering this
service they charge a fee. They can also
offer additional services like:
Advice on shares
Debentures
Government bonds
Listed property trusts and non-listed
investment options (cash management trusts,
property and equity trusts.
In addition a stock broker can plan, implement
and monitor your investment portfolio,
conduct research and help you optimize
your returns. |
What
is the maximum brokerage that a broker
can charge? |
The
maximum brokerage that can be charged
by a broker from his clients as commission
cannot be more than 2.5% of the value
mentioned in the respective purchase or
sale note. |
What
are the various ways of share trading? |
Mainly
there are two ways of doing share trading.
1.Online Share Trading.
2.Offline Share Trading. |
Online
Share Trading |
Doing
share trading with help of computer, internet
connection and with trading/demat account
is called Online Share Trading.If you
would like to do online share trading
then you should have a computer, internet
connection and online trading account. |
Offline
Share Trading |
| Doing
share trading with the help of broker
or through phone is called Offline trading.
In other words trading will be done by
another person on your behalf based on
the instructions given by you, and then
the other person can be a broker. The
broker will do buying and selling of shares
on your behalf depending on the instructions
given by you. |
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| What
is Rolling Settlement? |
TOP |
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Rolling
Settlement Cycle means when you will get
your shares in your demat account or in
physical form.In a rolling settlement,
each trading day(T) is considered as a
trading period and trades executed during
the trading day(T) are settled on a T+2
basis i.e. trading day plus two working
days. |
Settlement
Cycle |
| The
settlement process is briefly defined
in the following flowchart-
Trade Execution (T-Day) ' Payment to Broker
(T+ 1 Day) OR Transfer security to Broker
A/C (T+ 1 Day) ' Delivery of security
to Demat by Broker (T + 2 Day) OR Payout
by Broker (T + 2 Day)
T Day means the Trade Date
T + 1 Day means Trade Date plus One Day
(Pay In Day)
T + 2 Day means Trade Date plus Two Day
(Pay Out Day)
At present the settlement of transaction
is done through T+2 settlement basis. |
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| What
are different types of share trading? |
TOP |
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Day
trading and Delivery trading are the two
main types of shares trading. |
1)
Day trading |
Day
Traders usually buy and sell (or sell
first and then buy) securities during
the same day and, as a general rule, do
not hold the securities overnight. They
are therefore said to have "Zero Position"
at the end of the day. Whatever you buy
today you have to sell it today OR whatever
you sell today you have to buy it today
and very importantly during market hours
that is 9.55 am to 3.30 pm (Indian time). |
2)
Delivery Trading |
In
Delivery Trading, as the name say, you
have to take the delivery of shares and
after getting these shares in your demat
account you can sell them at anytime (or
you can hold them till you want, there
is no restriction). In delivery trading
you need to have the amount required to
buy shares; once you purchase shares will
get deposited in your demat account (say
after basically, trading day and 2 additional
days). Then you can sell these shares
when the price of these shares goes up
or else you can sell whenever you want.
Please Note - First you have to buy and
sell. You can't sell before buying in
delivery trading while it's possible in
day trading. |
How
to place orders with the broker? |
You
may go to the broker's office or place
an order on the phone/internet or as defined
in the Model Agreement, which every client
needs to enter into with his or her broker. |
What
are the different methods of trading? |
| In
order to BUY or SELL stocks you need to
place BUY/SELL Order to your broker.There
are several types of orders that you can
dictate to a broker.
Market order The most
common type, which is a regular buy or
sell order, is called a market order.
A market order instructs your Trading
Terminal or shares broker to buy or sell
shares immediately at the current market
price. This will usually take place at
the "ask" price.
Limit order Another type of order is a
limit order wherein you ask the broker
to trade only if the price reaches a specific
level.
Stop loss order in a stop loss order,
you tell the broker to sell your shares
if the price drops to a certain level
to prevent significant loss because if
it drops to that level it is likely to
drop further and your losses are likely
to increase. |
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| What
is a Contract Note? |
TOP |
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Contract
Note means confirmation of trades done
on a particular day on behalf of the client
by a trading member. It imposes a legally
enforceable relationship between the client
and the trading member with respect to
purchase/sale and settlement of trades.
It also helps to settle disputes/claims
between the investor and the trading member. |
What
is Pay-in and Pay-out? |
| Pay-in
day is the day when the securities sold
are delivered to the exchange by the sellers
and funds for the securities purchased
are made available to the exchange by
the buyers.
Pay-out day is the day the securities
purchased are delivered to the buyers
and the funds for the securities sold
are given to the sellers by the exchange.
At present the pay-in and pay-out happens
on the 2nd working day after the trade
is executed on the stock exchange. |
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The
securities are put up for auction by the
Exchange on account of non-delivery of
securities by the selling trading member
to ensure that the buying trading member
receives the securities due to him. The
non-delivery by the trading member could
arise on account of short delivery. The
Exchange purchases the requisite quantity
in the Auction Market and gives them to
the buying trading member. |
Some
important terms in secondary market trade |
| Open
- The first price at which the stock opens
when market opens in the morning.
High - The stock price reached at the
highest level in a day.
Low - The stock price reached the lowest
level in a day.
Close - The stock price at which it remains
after the end of market timings or the
final price of the stock when the market
closes for a day.
Volume - Volume is nothing but quantity.
Bid - The Buying price is called as Bid
price.
Offer - The selling price is called offer
price.
Bid Quantity - The total number of shares
available for buying is called Bid Quantity.
Offer Quantity - The total number of shares
available for selling is called Offer
Quantity.
Squaring off - This term is used to complete
one transaction. Means if you buy then
have to sell (means square off) and if
you sell then you have to buy (means square
off). |
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What
is a Book-closure/Record date? |
Book
closure and record date help a company
determine exactly the shareholders of
a company as on a given date. Book closure
refers to the closing of the register
of the names of investors in the records
of a company. The benefits of dividends,
bonus issues, rights issue accrue to investors
whose name appears on the company's records
as on a given date which is known as the
record date. |
What
is an Ex-date? |
|
The
first day of the no-delivery period is
the ex-date. If there is any corporate
benefits such as rights, bonus, dividend
announced for which book closure/record
date is fixed, the buyer of the shares
on or after the ex-date will not be eligible
for the benefits. |
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Whenever
a book closure or a record date is announced
by a company,the exchange sets up a 'no-delivery'
period for that security.During this period,
trading is permitted in the security.
However,these trades are settled only
after the no-delivery period is over.This
is done to ensure that investor's entitlement
for the corporate benefits is clearly
determined. |
What
is Dividend? |
|
Dividend
is the part of profit distributed by the
company among its investors. It is usually
declared as a percentage of the paid-up
value or face value of the share. |
|
|
What
is Bonus? |
A
Share issued by companies to their shareholders
free of cost by capitalization of accumulated
reserves from the profits earned in the
earlier years. |
What
is Stock Split? |
|
An
increase in the number of outstanding
shares in a corporation. This is usually
brought about by the division of existing
shares. For example, a two-for-one split
means that shareholders will receive two
new shares for each old share, making
a total of three. Alternately, a reverse
stock split brings about the decrease
in the numbers of shares in a corporation. |
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|
This
is a unique number allotted to each security
by NSDL. |
What
is meant by Market Capitalization? |
The
market value of a quoted company, which
is calculated by multiplying its current
share price (market price) by the number
of shares in issue is called as market
capitalization. E.g. Company X has 120,00,000
shares in issue. The current market price
is Rs. 100. The market capitalization
of company A is Rs. 120,00,00,000.00. |
What
is an Index? |
|
An
Index shows how a specified portfolio
of share prices are moving in order to
give an indication of market trends. It
is a store of securities and the average
price movement of the basket of securities
indicates the index movement, whether
upwards or downwards. |
|
|
| What
is the Nifty index? |
TOP |
|
|
S&P
CNX Nifty (Nifty), is a scientifically
developed, 50 stock index, reflecting
accurately the market movement of the
Indian markets. It comprises of some of
the largest and most liquid stocks traded
on the NSE. It is maintained by India
Index Services & Products Ltd (IISL) |
What
is a Depository? |
A
depository is like a bank wherein the
deposits are securities (viz. shares,
debentures, bonds, government securities,
units etc.) in electronic form. |
What
is Dematerialization? |
Dematerialization
is the process by which physical certificates
of an investor are converted to an equivalent
number of securities in electronic form
and credited to the investor's account
with his Depository Participant (DP). |
Can
a person dematerialize any share certificate? |
|
You
can dematerialize only those certificates
that are already registered in your name
and are in the list of securities admitted
for dematerialization. |
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|
It
is an order placed with a broker to buy
or sell once the stock reaches a certain
price. A stop loss is designed to limit
an investor's loss on a security position.
Stop loss orders are traditionally thought
of as a way to prevent losses. (After
all, it's called a "stop loss" for a reason.)
Another use of this tool, though, is to
lock-in profits, in which case it is sometimes
referred to as a trailing stop. |
What
does it mean to "short" a stock? |
|
To
"short" a stock, you simply sell the stock
without actually owning it. You will have
the obligation to buy back the stock on
the same Trading Day in order to "cover"
your short sale to make you have 'zero
position'. When you short sell a stock,
you are hoping that the stock price will
drop so that you can buy it back at a
lower price than what you sold it for,
thereby making an Intra-Day profit on
the transaction. |
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| What
is meant by bullish and bearish trend? |
TOP |
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When
the market goes up it is called a bullish
trend and when the market goes down it
is called a bearish |
What
is taking a position? |
|
When
you act upon a stock and buy into it,
you are taking a position. A position
is an amount of money committed to an
investment in anticipation of favorable
price movements.
There are two kinds of positions : -
a) Long
positions are what most
people do.When you buy long, that means
you are anticipating an upward movement
in the price,and that is how you profit.
People usually buy stocks at prices expecting
to sell them later at higher prices and
hence make profits.
b) Short
positions are when you
buy short, you are anticipating a fall
in the price and the fall is the source
of your profits. The shares will be sold
and when the price falls they will be
repurchased and given back and the difference
is the where the investor profits. |
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| What
do you mean by 'Market Trades' and 'Off
Market Trades'? |
|
|
Any
trade settled through a clearing corporation
is termed as a 'Market Trade'.
These trades are done through stock brokers
on a stock exchange.'Off Market Trade'
is one which is settled directly between two
parties without the involvement of a clearing
corporation. The same delivery instruction slip
can be used either for market trade or off-market
trade by ticking one of the two options. |
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| What
are Principles of Trading? |
TOP |
|
|
Don't put all your money in one bucket |
|
As
part of the successful money management, it
is always advised to divide your risk capital
which you can afford to lose into several equal
parts and at any given time. At the same time
always keep some spare money for any Buying
Opportunity, which may come any time. |
|
Trade in active & high Volume Stocks |
|
Many
Traders get stuck with stocks for want of liquidity.
Always rely upon Stocks which have reasonably
high volume over a period of time. High Volume
are always advised for easy Entry, Exit and
Stop Loss. |
|
Always maintain a Trading Plan |
|
Successful
traders always keep their Trading Plans ready
before entering into any transactions. One must
prepare a Watch List or Probable candidates
for trading and remain focused on the movement
of those stocks only. |
|
Never Over Trade |
|
This
is the most common mistake committed by Traders,
particularly after a Streak of winning Trades.
This mistake generally not only wipes off all
the profits, but puts traders in heavy losses. |
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Trade with limited stocks at a time |
|
It
is always advisable not to keep open positions
in numerous stocks at a time so that one can
keep control on the position with strict Stop
Loss and keep a strict vigil to avoid any misfortune
in case of any eventuality. |
|
Don't Trade if you have no clear indication |
|
If
market is not giving specific signals or are
extremely volatile it is advisable not to initiate
trade in that market condition. |
|
Every trade not always give profits |
|
It
is not always possible to predict the price
movement correctly. So always be flexible and
accept the fact as soon as you realize that
you are on wrong side of the trade. Simply get
out of the trade without changing your strategy
during the market; it may cause you double losses. |
|
Withdraw portion of your profits |
|
It
is must that trader must take a portion of the
profit whenever there is a decent gain and keep
rolling because notional profit has no value
unless it is booked in time. |
|
Don't go by 'Tips'/'Rumors' |
|
Tips
and Rumors are part of the game in Stock market.
In most cases these are spread by vested interests
parties for whatever reasons. There are high
chances that you are likely to be trapped in
sooner or later if trading on 'Tips' or 'Rumors'
is part of your strategy. |
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| What
are Deadly Trading Mistakes? |
TOP |
|
|
The
following are the most common but deadly Trading
Mistakes, which traders should avoid at all
costs. Anyone of them can literally destroy
one's financial dreams and goals! |
|
Trading for excitement & thrill Not for profits
|
|
Many
traders consider stock market as casino and
trade for thrill and fun only. As soon as one
trading action gives losses they jump into another
trading action and thereby incur more losses.
Be patient and wait for the next high probability
opportunity. Don't rush back in. |
|
Trading with a high ego |
|
If
you trade with a high ego and can't think of
that you may take wrong trading positions you
will definitely be on the loser side. |
|
Trading with money you can't afford to lose |
|
One
of the greatest obstacles to successful trading
is using money that you really can't afford
to lose. |
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No Trading Plan |
|
Many
of them do trading without any plan but out
of sheer excitement and with unreliable tips
and rumours. Such actions can never give profitable
results and will drag you to sheer losses. |
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Spending profits before you make them |
|
Nothing
is more exciting than getting into a trade that
blasts off and puts you into a highly profitable
situation. This can cause major problems however,
because this type of trade puts you in a highly
euphoric state and leads to daydreaming about
the huge profits still to come. This causes
you to not be prepared to get out as the market
reverses and wipes off all your profits because
you have convinced yourself of the eventual
outcome and will deny the reality of the situation. |
|
Not Cutting Losses or letting Profits run |
|
One
of the most common mistakes made by traders
is that they let their losses grow too large.
Nobody likes to take a loss, but failing to
take a small loss early will often result in
being forced to take a large loss later. |
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Not sticking to your plans & Changing strategies
during market hours |
|
If
you change your strategy during the day while
the markets are still open, be mindful of the
fact that you are likely to be subject to emotional
reactions of fear and greed. |
|
Not knowing how to get out of a losing trade |
|
When
you are in a loss in a particular trading action
and not following any definite stoploss position
instead of getting out of it you wish for and
wait when it will become profitable and thereby
increase the quantum of loss. |
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| Some
more Stock Market Terms |
TOP |
|
|
Accumulation-The
first phase of a Bull market. The period when
farsighted investors begin to buy shares from
discouraged or distressed sellers.
Arbitrage-The
simultaneous buying and selling of two different,
but closely related securities to take advantage
of a disparity in their prices in one market
or different market.
Bar chart-Also
called a line chart. A graphic representation
of prices using a vertical bar to connect the
highest price in the time period to the lowest
price. Opening prices are noted with a small
horizontal line to the left. Closing prices
are shown with a small horizontal line to the
right.
Bear market-A
Bear Market is a period when prices are primarily
declining, usually for a long period of time.
Bear Markets generally consist of three phases.
The first phase is distribution, the second
is panic and the third is akin to a washout.
Blue chips-The
nickname given generally to high priced companies
with good records of earnings and price stability.
Breakout-When
a stock or commodity exits an area pattern.
Bull market-A
period when prices are primarily rising, normally
for an extended period. Usually, but not always,
divisible into three phases. The first phase
is accumulation. The second phases is one of
fairly steady advance with increasing volume.
The third phase is marked by considerable activity
as the public begins to recognize and attempt
to profit from the rising market.
Correction-A
move in a commodity or stock which is opposite
to the prevailing trend, but not sufficient
to change that trend. Called a rally in a downtrend
and reaction in an uptrend.
Hedging-To
try to lessen risk by making a counterbalancing
investment.
Inflation-Increase
in the prices for goods and services.
Hot stock-A
stock whose price rises quickly the day it goes
public.
Growth stocks-
Stocks that pay low dividends, but are expected
to grow.
Dip-A
drop in the price of a stock that is temporary,
making it the ideal time to buy the stock
Blue-Chip Stock-Well-established
and financially strong corporations, with little
investment risk and good records of earnings
and dividend payments.
Bottom line-The
last line of a company's profit and loss ledger
sheet. The bottom line usually refers to the
net profit or loss of a company at any given
time.
Debt to Equity
Ratio-Long-term debt divided
by shareholders' equity, showing relationship
between long-term funds provided by creditors
and funds provided by shareholders; high ratio
may indicate high risk, low ratio may indicate
low risk.
Forex-An
abbreviated name for foreign currency.
Stag-
An investor, who buys and sells stocks rapidly,
usually to make profits quickly. |
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What
is Derivative? |
Derivative
contracts, commonly known as Derivatives
are tradable instruments which derive
its value from an underlying asset or
assets such as commodities, equities,
equity indices etc. There are a variety
of derivative products like swap, forward,
futures, options etc. The latter two are
widely applied in the equity market allover
the world and have already been introduced
in the Indian equity market too. |
What
is a Futures Contract? |
|
Futures
can be defined as derivative contracts
based on an underlying asset or assets
and the holder of the contract is entitled
to purchase a specified quantity of the
asset on a future date at the predetermined
price. On the other side, the seller of
the contract is under obligation to sell
the agreed quantity of the asset in question
as per the contract terms such as price,
time etc.
Trading in futures is regulated by the
Securities & Exchange Board of India (SEBI).
SEBI exists to guard against traders controlling
the market in an illegal or unethical
manner, and to prevent fraud in the futures
market. |
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| What
is Index Future? |
TOP |
|
|
Index
Futures are future contracts on which
the underlying asset is an index like
equity indices like the Sensex or Nifty.
For trading convenience, these contracts
have been standardised as far as market
lot, minimum contract value etc are concerned. |
What
are Stock Futures? |
Stock
Futures or equity futures can be defined
as future contracts in which the underlying
asset is an individual share. The holder
of such a contract is eligible to purchase
a certain quantity of the equity in question
on a future date at the mutually agreed
price. |
How
to Settle Futures Contract? |
|
Futures
contracts are usually not settled with
physical delivery. The purchase or sale
of an offsetting position can be used
to settle an existing position, allowing
the speculator or hedger to realize profits
or losses from the original contract.
At this point the margin balance is returned
to the holder along with any additional
gains, or the margin balance plus profit
as a credit toward the holder's loss.
Cash settlement is used for contracts
like stock index futures that obviously
cannot result in delivery. |
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|
| Some
Terms in Future Market |
TOP |
|
|
Minimum
Contract value and Market lot |
Futures
on the Sensex and Nifty are being traded
in the standardised form, that is, the
market lot, minimum contract value etc
are standardised. Trading positions could
be taken as multiple of these market lots. |
Contract
Value |
Contract
value at any point of time is the value
of the underlying future at that time
period multiplied by the market lot. Hence,
the contract value may go up or down at
different time intervals in accordance
to the movement of the price of the underlying
asset on which the contract is based. |
Maturity
Period |
In
the derivative segment of the Indian equity
market, contracts are available with three
maturity periods at any point of time
namely near month contracts, next month
contracts and far month contracts. Normally,
the duration of a contract is from the
beginning of a month and expires on the
last Thursday of that month. In case the
last Thursday is a holiday, the working
day prior to that will be treated as the
expiry or settlement day. |
Trading
and Settlement |
Trading
in Futures contracts can be effected on
a daily basis and one can enter into the
trading scenario as a buyer or seller
through the Futures and Option Terminals
of approved stock brokers. After entering
into a futures contract, the trader can
keep his position open till the day of
settlement, normally the last Thursday
of that month or the position could be
closed out by effecting an opposite transaction(a
sell against a buy and vice versa).So
long as the position is open(open position
refers to outstanding purchase or sales
positions at any point of time),the same
will mark to market(MTM, that is, revaluation
of the asset on a daily basis) everyday
at the daily settlement price, that is,
the closing value of the index on that
day and the difference will be credited
or debited to the trader's account. Thus,
the position will be brought forward to
the next day at the daily settlement price.
On the day of settlement(expiry day) all
open contracts for that month will be
closed out by the Exchange at thesettlement
price(Settlement price is the closing
value of the asset on the day of settlement/maturity
day). |
Margins |
Two
types of margins need to be paid to take
up and hold positions in the futures segment.
They are known as Initial margin and Mark
to Market Margin (M2M).
While the initial margin has to be paid
upfront as a percentage of the value of
the underlying before the deal is struck,
mark to market margin emerges daily when
the contract is mark to marketed and the
same has to be paid on next day basis.
Failure to pay margins by clients will
result into compulsory close out of one's
position as insisted by SEBI. |
Hedging |
|
Hedging
is the act of taking a position in the
futures market which is exactly the opposite
of one's position in other segments of
the market such as the equity segment,
with a view of offsetting losses in one
segment (say, in equities) with a gain
in the other (say, futures).
The rationale behind these acts lies on
the fact that both segments of the market
(Futures and equities) are moving in tandem
and hence the loss on buying positions
in equities could be eliminated or reduced
to the minimum by taking a reverse position
in the futures market.
The main drawback of hedging is that the
profit generated from one side is eaten
up by the loss on the other and hence,
profitability would be the minimum. Therefore,
hedging is widely used by large fund managers,
high networth individual investors etc
and the major objective is to eliminate
risk rather than making big gains from
trading. |
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|
An
option is a contract giving the buyer
the right, but not the obligation, to
buy or sell an underlying asset (a stock
or index) at a specific price on or before
a certain date. An option is a derivative.
That is, its value is derived from something
else. In the case of a stock option, its
value is based on the underlying stock
(equity). In the case of an index option,
its value is based on the underlying index
(equity). It is a security, just like
a stock or bond, and constitutes a binding
contract with strictly defined terms and
properties.
What are the types of options?
There are two types of options,
|
Call Options |
A
call option gives the holder (buyer/ one
who is long call), the right to buy specified
quantity of the underlying asset at the
strike price on or before expiration date.
The seller (one who is short call) however,
has the obligation to sell the underlying
asset if the buyer of the call option
decides to exercise his option to buy. |
Put Options |
A
Put option gives the holder (buyer/ one
who is long Put), the right to sell specified
quantity of the underlying asset at the
strike price on or before an expiry date.
The seller of the put option (one who
is short Put) however, has the obligation
to buy the underlying asset at the strike
price if the buyer decides to exercise
his option to sell. |
What
is the difference between options and
futures? |
|
Futures
are agreements/contracts to buy or sell
specified quantity of the underlying assets
at a price agreed upon by the buyer and
seller, on or before a specified time.
Both the buyer and seller are obligated
to buy/sell the underlying asset.
In options the buyer enjoys the right
and not the obligation, to buy or sell
the underlying asset. In case of Options,
for a buyer (or holder of the option),
the downside is limited to the premium
(option price) he has paid while the profits
may be unlimited. For a seller or writer
of an option, however, the downside is
unlimited while profits are limited to
the premium he has received from the buyer.
The futures contracts prices are affected
mainly by the prices of the underlying
asset. Prices of options are however,
affected by prices of the underlying asset,
time remaining for expiry of the contract
and volatility of the underlying asset. |
|
|
| Some
Option terminologies |
TOP |
|
|
Underlying-The
specific security / asset on which an options
contract is based.
Option Premium-This
is the price paid by the buyer to the seller
to acquire the right to buy or sell.
Strike Price or
Exercise Price-The strike or
exercise price of an option is the specified/
pre-determined price of the underlying asset
at which the same can be bought or sold if the
option buyer exercises his right to buy/ sell
on or before the expiration day.
Expiration date-The
date on which the option expires is known as
Expiration Date. On Expiration date, either
the option is exercised or it expires worthless.
Exercise Date-is
the date on which the option is actually exercised.
Assignment-When
the holder of an option exercises his right
to buy/ sell, a randomly selected option seller
is assigned the obligation to honor the underlying
contract, and this process is termed as Assignment.
Open Interest-The
total number of options contracts outstanding
in the market at any given point of time.
Option Holder-is
the one who buys an option which can be a call
or a put option. He enjoys the right to buy
or sell the underlying asset at a specified
price on or before specified time. His upside
potential is unlimited while losses are limited
to the Premium paid by him to the option writer.
Option seller/
writer-is the one who is obligated
to buy (in case of Put option) or to sell (in
case of call option), the underlying asset in
case the buyer of the option decides to exercise
his option. His profits are limited to the premium
received from the buyer while his downside is
unlimited.
Option Class-All
listed options of a particular type (i.e., call
or put) on a particular underlying instrument,
e.g., all Sensex Call Options (or) all Sensex
Put Options
Option Series-An
option series consists of all the options of
a given class with the same expiration date
and strike price.
Covered Call-If
a call is written on an asset on the backing
of long position (buying) of the same asset
in the cash market; it is known as a covered
call. Since, the call seller has bought the
required quantity of the asset in the cash market;
losses due to a price increase of the asset
could be eliminated.
Naked Calls-A
naked call is one where the seller of the call
option does not have position in the underlying
asset. |
|
| What
are the benefits of options trading? |
TOP |
|
|
Some
of the benefits of Options are as under: |
|
|
High leverage as by investing small amount
of capital (in form of premium), one can
take exposure in the underlying asset
of much greater value. |
|
Pre-known maximum
risk for an option buyer |
|
Large profit potential
and limited risk for option buyer |
One
can protect his equity portfolio from
a decline in the market by way of buying
a protective put wherein one buys puts
against an existing stock position. |
|
|
What are
the risks of an options buyer? |
|
The
risk of an Options Writer is unlimited
where his gains are limited to the Premiums
earned. When a physical delivery uncovered
call is exercised upon, the writer will
have to purchase the underlying asset
and his loss will be the excess of the
purchase price over the exercise price
of the call reduced by the premium received
for writing the call.
The writer of a put option bears a risk
of loss if the value of the underlying
asset declines below the exercise price.
The writer of a put bears the risk of
a decline in the price of the underlying
asset potentially to zero. |
|
|
| When
not to buy an option? |
TOP |
|
| |
|
Avoid
trading in an illiquid option market. |
|
Avoid
purchasing call options just prior to
a stock going ex-dividend. Avoid buying
or selling options based upon anticipated
news (buyouts in particular). Besides
bordering on unethical trading, the information
received is more likely to be rumor than
correct. |
|
Avoid
purchasing options well after the market
has established a defined trend - this
is especially true when day trading, as
any option premium advantage will have
dissipated. |
|
Avoid
purchasing way out-of-the-money options
when day trading, as any favorable price
movement will have a negligible effect
upon premium. |
|
Avoid
purchasing call options when the underlying
security is up for the day versus the
prior day's close, unless one intends
to take a trend-following stance |
|
Avoid
purchasing put options when the underlying
security is down for the day versus the
prior day's close, unless one intends
to take a trend-following stance. |
|
Be
careful when holding long option positions
beyond Friday's trading day's close unless
one is option position trading. Many option
theoreticians recalculate their volatility,
delta, and time decay numbers once a week,
usually after the close of trading on
Fridays or over the weekend. The resulting
adjustments in these values most often
have a negative effect on the value of
the long option, which may be acceptable
when holding an option over an extended
period of time but is detrimental when
day trading. |
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| |
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|
What
is Technical Analysis? |
Technical
Analysis is the forecasting of future
financial price movements based on an
examination of past price movements. Like
weather forecasting, technical analysis
does not result in absolute predictions
about the future. Instead, technical analysis
can help investors anticipate what is
"likely" to happen to prices over time.
Technical analysis uses a wide variety
of charts that show price over time. |
Some
Important Technical Terms |
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A|
B|
C|
D|
E|
F|
G|
H|
I|
J|
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Absolute
Breadth Index (ABI)
A market indicator used
to determine volatility
levels in the market
without factoring in
price direction. It
is calculated by taking
the absolute value of
the difference between
the number of advancing
issues and the number
of declining issues.
Accumulation/Distribution
Line
The Accumulation/Distribution
Line was developed by
Marc Chaikin to assess
the cumulative flow
of money into and out
of a security. It is
calculated using the
following formula:
Acc/Dist = ((Close –
Low) – (High –
Close)) / (High –
Low) * Period's volume
A bullish signal is
given when the Accumulation/Distribution
Line forms a positive
divergence and a bearish
signal is given when
the Accumulation/Distribution
Line forms a negative
divergence.
Advance/Decline
Index
A technical analysis
tool that represents
the total difference
between the number of
advancing and declining
security prices. This
index is considered
one of the best indicators
of market movements
as a whole.
Advance/Decline
Index = (Advances –
Declines) + Prior Advance/Decline
Index Value
Advance/Decline
Line (A/D)
A technical indicator
that plots changes in
the value of the advance-decline
index over a certain
time period. Each point
on the chart is calculated
by taking the difference
between the number of
advancing/declining
issues and adding the
result to the previous
period's value, as shown
by the following formula:
A/D
Line = (# of Advancing
Stocks - # of Declining
Stocks) + Previous Period's
A/D Line Value
Aroon
Indicator
A technical indicator,
developed by Tushar
Chande in 1995, used
for identifying trends
in an underlying security
and the likelihood that
the trends will reverse.
It is made up of two
lines: one line is called
"Aroon up",
which measures the strength
of the uptrend, and
the other line is called
"Aroon down",
which measures the downtrend.
The indicator reports
the time it is taking
for the price to reach,
from a starting point,
the highest and lowest
points over a given
time period, each reported
as a percentage of total
time. Both the Aroon
up and the Aroon down
fluctuate between zero
and 100, with values
close to 100 indicating
a strong trend, and
zero indicating a weak
trend. The lower the
Aroon up, the weaker
the uptrend and the
stronger the downtrend,
and vice versa. The
main assumption underlying
this indicator is that
a stock's price will
close at record highs
in an uptrend, and record
lows in a downtrend. |
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A trend-following indicator
that uses aspects of
the Aroon indicator
("Aroon up"
and "Aroon down")
to gauge the strength
of a current trend and
the likelihood that
it will continue. The
Aroon oscillator is
calculated by subtracting
Aroon down from Aroon
up. Readings above zero
indicate that an uptrend
is present, while readings
below zero indicate
that a downtrend is
present.
Average
Directional Index (ADX)
J. Welles Wilder developed
the Average Directional
Index (ADX) to evaluate
the strength of a current
trend, be it up or down.
The ADX is measured
on a scale between zero
and 100. Readings below
20 are used to indicate
a weak trend, while
readings over 40 indicate
a strong trend. Readings
above 60 are relatively
rare. ADX is not used
to determine the direction
of a particular trend,
but only to gauge its
strength.
Average
True Range (ATR)
Developed by J. Welles
Wilder the Average True
Range (ATR) indicator
measures a security's
volatility. As such,
the indicator does not
provide an indication
of price direction or
duration, simply the
degree of price movement
or volatility. The True
Range indicator is the
greatest of the following:
-current
high less the current
low.
-the absolute value
of the current high
less the previous close.
-the absolute value
of the current low less
the previous close.
The
Average True Range is
a moving average (generally
14-days) of the True
Ranges. |
|
Bearish
Belt Hold
A candlestick pattern
that forms during an
upward trend. This is
what happens in the
pattern: following a
stretch of bullish trades,
a bearish or black candlestick
occurs; the opening
price, which becomes
the high for the day,
is higher than the close
of the previous day;
the stock price declines
throughout the day,
resulting in a long
black candlestick with
a short lower shadow
and no upper shadow.
Bearish
Engulfing Pattern
The Bearish Engulfing
Pattern consists of
two candlesticks; the
first is white and the
second black. The black
body must totally engulf
the body of the first
white candlestick. After
an advance, the second
black candlestick begins
to form when residual
buying pressure causes
the security to open
above the previous close.
However, sellers step
in after this opening
gap up and begin to
drive prices down. By
the end of the session,
selling becomes so intense
that prices move below
the previous open. The
resulting candlestick
engulfs the previous
day's body and creates
a potential short-term
reversal.
Bearish
Harami
A trend indicated by
a large candlestick
followed by a much smaller
candlestick whose body
is located within the
vertical range of the
larger candle's body.
Such a pattern is an
indication that the
previous upward trend
is coming to an end.
Bollinger
Band
Developed by John Bollinger,
Bollinger Bands are
an indicator that allows
users to compare volatility
and relative price levels
over a period time.
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A price movement through
an identified level
of support, which is
usually followed by
heavy volume and sharp
declines. Technical
traders will short sell
the underlying asset
when the price of the
security breaks below
a support level because
it is a clear indication
that the bears are in
control and that additional
selling pressure is
likely to follow.
Breakout
A price movement through
an identified level
of support or resistance,
which is usually followed
by heavy volume and
increased volatility.
Traders will buy the
underlying asset when
the price breaks above
a level of resistance
and sell when it breaks
below support.
Bullish
Belt Hold
A trend in candlestick
charting that occurs
during a downward movement.
After a stretch of bearish
candlesticks, a bullish
or white candlestick
forms. The opening price,
which becomes the low
for the day, is significantly
lower then the closing
price. This results
in a long white candlestick
with a short upper shadow
and no lower shadow.
Bullish
Engulfing Pattern
A chart pattern that
forms when a small black
candlestick is followed
by a large white candlestick
that completely eclipses
or "engulfs"
the previous day's candlestick.
The shadows or tails
of the small candlestick
are short, which enables
the body of the large
candlestick to cover
the entire candlestick
from the previous day.
Bullish
Harami
A candlestick chart
pattern in which a large
candlestick is followed
by a smaller candlestick
whose body is located
within the vertical
range of the larger
body. In terms of candlestick
colors, the bullish
harami is a downtrend
of negative-colored
(black) candlesticks
engulfing a small positive
(white) candlestick,
giving a sign of a reversal
of the downward trend.
Bullish
Homing Pigeon
A trend indicated by
a large candlestick
followed by a much smaller
candlestick whose body
is located within the
vertical range of the
larger candle's body.
In both candlesticks,
the stock price has
to have closed down
from the opening price.
This pattern may indicate
that there is a weakening
of the current downward
trend.
Bar
chart
Also called a line chart.
A graphic representation
of prices using a vertical
bar to connect the highest
price in the time period
to the lowest price.
Opening prices are noted
with a small horizontal
line to the left. Closing
prices are shown with
a small horizontal line
to the right.
Breakout
When a stock or commodity
exits an area pattern. |
|
Chaikin
Oscillator
Developed by Marc Chaikin,
An oscillator created
by subtracting a 10-day
EMA from a 3-day EMA
of the accumulation/distribution
line.
Chande
Momentum Oscillator
A technical momentum
indicator invented by
the technical analyst
Tushar Chande. It is
created by calculating
the difference between
the sum of all recent
gains and the sum of
all recent losses and
then dividing the result
by the sum of all price
movement over the period.
This oscillator is similar
to other momentum indicators
such as the Relative
Strength Index and the
Stochastic Oscillator
because it is range
bounded (+100 and -100). |
| Commodity
Channel Index (CCI) |
TOP |
|
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An oscillator used in
technical analysis to
help determine when
an investment vehicle
has been overbought
and oversold. The Commodity
Channel Index, first
developed by Donald
Lambert, quantifies
the relationship between
the asset's price, a
moving average (MA)
of the asset's price,
and normal deviations
(D) from that average.
It is computed with
the following formula:
CCI
= Price - MA
0.015 x D
Commodity
Selection Index (CSI)
A technical momentum
indicator that attempts
to identify which commodities
are the most suitable
for short-term trading.
The larger the CSI value,
the stronger is the
trend and volatility
characteristics associated
with the asset. This
indicator should only
be used by traders who
can handle large amounts
of volatility as it
indicates strong trending,
but reversals are always
possible.
Crossover
The point on a stock
chart when a security
and an indicator intersect.
Crossovers are used
by technical analysts
to aid in forecasting
the future movements
in the price of a stock.
In most technical analysis
models, a crossover
is a signal to either
buy or sell.
Cumulative
Volume Index (CVI)
A momentum indicator
that gauges the movement
of funds into and out
of the entire stock
market by adding the
difference between advancing
and declining stocks
to a running total.
Channel
If the tops of the rallies
and bottom of the reactions
develop lines which
are approximately parallel
to one another, the
area between these lines
is called channel.
Chart
A graphic representation
of a stock or commodity
in terms of price and/or
volume.
Consolidation
Pattern
It is an area pattern,
which breaks out in
the direction of the
previous trend. |
|
Dark
Cloud Cover
In candlestick charting,
a pattern where a black
candlestick follows
a long white candlestick.
It can be an indication
of a future bearish
trend.
Diamond
Top Formation
A technical analysis
reversal pattern that
is used to signal the
end of an uptrend. This
relatively uncommon
pattern is found by
identifying a period
in which the price trend
of an asset starts to
widen and then starts
to narrow. This pattern
is called a diamond
because of the shape
it creates on a chart. |
| Directional
Movement Index (DMI) |
TOP |
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An indicator developed
by J. Welles Wilder
for identifying when
a definable trend is
present in an instrument.
That is, the DMI tells
whether an instrument
is trending or not.
The scale for the DMI
is from 0 to 100. The
average directional
movement index (ADX)
is a moving average
of the DMI.
Displaced
Moving Average
A moving average that
has been adjusted forward
or back in time in order
to forecast trends.
Displaced moving averages
are constructed by taking
the moving average and
shifting it by a number
of intervals, either
positive or negative.
If the number is negative,
the displaced moving
average will lag the
original moving average,
and if the number is
positive the displaced
moving average will
lead the original moving
average.
Divergence
A situation in which
the price of an asset
and an indicator, index
or other related asset
move in opposite directions.
In technical analysis
traders make transaction
decisions by identifying
situations of divergence,
where the price of a
stock and a set of relevant
indicators, such as
the money flow index
(MFI), are moving in
opposite directions.
Double
Bottom
A charting pattern used
in technical analysis.
It describes the drop
of a stock (or index),
a rebound, another drop
to the same (or similar)
level as the original
drop, and finally another
rebound.
Double
Top
A term used in technical
analysis to describe
the rise of a stock,
a drop, another rise
to the same level as
the original rise, and
finally another drop.
Doji
A name for candlesticks
that provide information
on their own and also
feature in a number
of important patterns.
Dojis form when a security's
open and close are virtually
equal. A doji candlestick
looks like a cross,
inverted cross, or plus
sign. Alone, doji are
neutral patterns.
Dynamic
Momentum Index
An indicator used in
technical analysis that
determines overbought
and oversold conditions
of a particular asset.
This indicator is very
similar to the relative
strength index (RSI).
The main difference
between the two is that
the RSI uses a fixed
number of time periods
(usually 14), while
the dynamic momentum
index uses different
time periods as volatility
changes. |
|
Elliott
Wave Theory
Theory named after Ralph
Nelson Elliott, who
concluded that the movement
of the stock market
could be predicted by
observing and identifying
a repetitive pattern
of waves. |
|
|
A trading band composed
of two moving averages,
one of which is shifting
upwards and the other
shifting downwards.
Evening
Star
A bearish candlestick
pattern consisting of
three candles that have
demonstrated the following
characteristics:
1.The
first bar is a large
white candlestick located
within an uptrend.
2. The middle bar is
a small-bodied candle
(red or white) that
closes above the first
white bar.
3. The last bar is a
large red candle that
opens below the middle
candle and closes near
the center of the first
bar's body.
Exponential
Moving Average (EMA)
A type of moving average
that is similar to a
simple moving average,
except that more weight
is given to the latest
data. Also known as
"exponentially
weighted moving average". |
|
Fibonacci
Retracement
A term used in technical analysis
that refers to the likelihood
that a financial asset's price
will retrace a large portion
of an original move and find
support or resistance at the
key Fibonacci levels before
it continues in the original
direction. These levels are
created by drawing a trendline
between two extreme points
and then dividing the vertical
distance by the key Fibonacci
ratios of 23.6%, 38.2%, 50%,
61.8% and 100%. |
Hammer
A price pattern in candlestick
charting that occurs
when a security trades
significantly lower
than its opening, but
rallies later in the
day to close either
above or close to its
opening price. This
pattern forms a hammer-shaped
candlestick.
Hanging
Man
A bearish candlestick
pattern that forms at
the end of an uptrend.
It is created when there
is a significant sell-off
near the market open,
but buyers are able
to push this stock back
up so that it closes
at or near the opening
price. Generally the
large sell-off is seen
as an early indication
that the bulls (buyers)
are losing control and
demand for the asset
is waning.
Harami
Cross
A trend indicated by
a large candlestick
followed by a doji that
is located within the
top and bottom of the
candlestick's body.
This indicates that
the previous trend is
about to reverse. |
| Head
And Shoulders Pattern |
TOP |
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A technical analysis
term used to describe
a chart formation in
which a stock's price:
1.
Rises to a peak and
subsequently declines.
2. Then, the price rises
above the former peak
and again declines.
3. And finally, rises
again, but not to the
second peak, and declines
once more.
The
first and third peaks
are shoulders, and the
second peak forms the
head.
Heikin-Ashi
Technique
A type of candlestick
chart that shares many
characteristics with
standard candlestick
charts, but differs
because of the values
used to create each
bar. Instead of using
the open-high-low-close
(OHLC) bars like standard
candlestick charts,
the Heikin-Ashi technique
uses a modified formula:
Close
= (Open+High+Low+Close)/4
Open = [Open (previous
bar) + Close (previous
bar)]/2
High = Max (High,Open,Close)
Low = Min (Low,Open,
Close) |
|
Intraday
Intensity Index
A volume based indicator
that depicts the flow
of funds for a security
according to where it
closes in its high and
low range. Calculated
as:
=
2 x Close – High
- Low
(High – Low) x
Volume
Inverse
Head and Shoulders
A chart pattern used
in technical analysis
to predict the reversal
of a current downtrend.
This pattern is identified
when the price action
of a security meets
the following characteristics:
1.
The price falls to a
trough and then rises.
2. The price falls below
the former trough and
then rises again.
3. Finally, the price
falls again, but not
as far as the second
trough.
Once
the final trough is
made, the price heads
upward toward the resistance
found near the top of
the previous troughs.
Investors typically
enter into a long position
when the price rises
above the resistance
of the neckline. The
first and third trough
are considered shoulders,
and the second peak
forms the head.
Inverse
Saucer
A technical chart formation
that indicates the stock's
price has reached its
high and that the upward
trend has come to an
end. An inverse saucer
is characterized by
a steady flattening
of the uptrend to such
a degree that the market
at one moment enters
a sideways range, but
then slowly starts to
fall slowly and finally
accelerates downward.
This rare formation
provides no clear price
target but usually implies
quite a lot of potential
since 50% or more retracement
of the preceding uptrend
can be expected. Also
known as "rounded
top".
Island
Reversal
An occurrence in technical
analysis where a stock
price will gap up/down,
trade higher than this
price, and then gap
down/up below the initial
price. |
|
|
In Edwards and Maggie,
the term "Intermediate"
or "Secondary"
refers to trend (or
pattern indicating a
trend) against primary
(Major) trend which
is likely to last from
three weeks to three
months, and which may
retrace one-thirds of
the previous Primary
advance or decline. |
|
Jennifer
Lopez (J.Lo)
A slang technical analysis
term referring to a rounding
bottom in a stock's price
pattern. |
Linearly
Weighted Moving Average
A type of moving average that
assigns a higher weighting
to recent price data than
does the common simple moving
average. This average is calculated
by taking each of the closing
prices over a given time period
and multiplying them by its
certain position in the data
series. Once the position
of the time periods have been
accounted for they are summed
together and divided by the
sum of the number of time
periods.
For example, in a 15-day linearly-weighted
moving average, today's closing
price is multiplied by 15,
yesterday's by 14, and so
on until day 1 in the period's
range is reached. These results
are then added together and
divided by the sum of the
multipliers (15 + 14 + 13
+ ... + 3 + 2 + 1 = 120). |
McClellan
Oscillator
A market breadth indicator
that is based on the
difference between the
number of advancing
and declining issues
on the NYSE. It is primarily
used for short and intermediate
term trading.
To calculate subtract
a 39 day EMA (of advancing
issues - declining issues)
from a 19 day EMA (of
advancing issues - declining
issues).
Simplified, it looks
as follows: (19 Day
EMA of Advances - Declines)
- (39 Day EMA of Advances
- Declines)
Money
Flow Index (MFI)
A momentum indicator
that is used to determine
the conviction in a
current trend by analyzing
the price and volume
of a given security.
The MFI is used as a
measure of the strength
of money going in and
out of a security and
can be used to predict
a trend reversal. The
MFI is range-bound between
0 and 100 and is interpreted
in a similar fashion
as the RSI.
Positive and negative
divergences between
the stock and the MFI
can be used as buy and
sell signals respectively,
for they often indicate
the imminent reversal
of a trend. If the stock
price is falling, but
positive money flow
tends to be greater
than negative money
flow, then there is
more volume associated
with daily price rises
than with the price
drops. This suggests
a weak downtrend that
threatens to reverse
as money flowing into
the security is "stronger"
than money flowing out
of it.
Morning
Star
A bullish candlestick
pattern that consists
of three candles that
have demonstrated the
following characteristics:
1.The
first bar is a large
red candlestick located
within a defined downtrend.
2.The second bar is
a small-bodied candle
(either red or white)
that closes below the
first red bar.
3. The last bar is a
large white candle that
opens above the middle
candle and closes near
the center of the first
bar's body. |
| Moving
Average Convergence
Divergence (MACD) |
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|
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Developed by Gerald
Appel, Moving Average
Convergence/Divergence
(MACD) is a trend-following
momentum indicator that
shows the relationship
between two moving averages
of prices. The MACD
is calculated by subtracting
the 26-day exponential
moving average (EMA)
from the 12-day EMA.
A nine-day EMA of the
MACD, called the "signal
line", is then
plotted on top of the
MACD, functioning as
a trigger for buy and
sell signals.
MACD generates bullish
signals from three main
sources (a) Positive
Divergence (b) Bullish
Moving Average Crossover
(c) Bullish Centerline
Crossover
A Positive Divergence
occurs when MACD begins
to advance and the security
is still in a downtrend
and makes a lower reaction
low. MACD can either
form as a series of
higher Lows or a second
Low that is higher than
the previous Low. Positive
Divergences are probably
the least common of
the three signals, but
are usually the most
reliable, and lead to
the biggest moves.
A Bullish Moving Average
Crossover occurs when
MACD moves above its
9-day EMA, or trigger
line. Bullish Moving
Average Crossovers are
probably the most common
signals and as such
are the least reliable.
If not used in conjunction
with other technical
analysis tools, these
crossovers can lead
to whipsaws and many
false signals.
A Bullish Centerline
Crossover occurs when
MACD moves above the
zero line and into positive
territory. This is a
clear indication that
momentum has changed
from negative to positive,
or from bearish to bullish.
After a Positive Divergence
and Bullish Centerline
Crossover, the Bullish
Centerline Crossover
can act as a confirmation
signal. Of the three
signals, moving average
crossover are probably
the second most common
signals. |
|
Negative
Directional Indicator (-DI)
A component of the average
directional index (ADX) that
is used to measure the presence
of a downtrend. When the -DI
is sloping upward, it is a
signal that the strength of
the downtrend is increasing.
This indicator is almost always
plotted with the positive
directional indicator (+DI).
Negative
Volume Index (NVI)
An index that focuses on days
where the volume has significantly
decreased from the previous
day's trading. |
On-Balance
Volume (OBV)
A method used in technical
analysis to detect momentum,
the calculation of which relates
volume to price change. OBV
provides a running total of
volume and shows whether this
volume is flowing in or out
of a given security. This
indicator was developed by
Joe Granville. |
Parabolic
SAR
Developed by Welles
Wilder, the Parabolic
SAR sets trailing price
stops for long or short
positions. Also referred
to as the stop-and-reversal
indicator (SAR stands
for "stop and reversal"),
Parabolic SAR is more
popular for setting
stops than for establishing
direction or trend.
Wilder recommended establishing
the trend first, and
then trading with Parabolic
SAR in the direction
of the trend. If the
trend is up, buy when
the indicator moves
below the price. If
the trend is down, sell
when the indicator moves
above the price.
Percentage
Price Oscillator (PPO)
A technical momentum
indicator showing the
relationship between
two moving averages.
To calculate the PPO,
subtract the 26-day
exponential moving average
(EMA) from the nine-day
EMA, and then divide
this difference by the
26-day EMA. The end
result is a percentage
that tells the trader
where the short-term
average is relative
to the longer-term average.
Calculated as: |
| |
| PPO= |
| 9
Day
EMA-26
Day
EMA
|
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| 26
Day
EMA
|
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| Polarized
Fractal Efficiency
(PFE) |
TOP |
|
A technical indicator
developed by Hans
Hannula that was
invented to determine
price efficiency
over a user-defined
time period. This
indicator fluctuates
between -100 and
+100 with 0 as
the center line.
Securities with
a PFE greater
than zero are
deemed to be trending
up, while a reading
of less than zero
indicates the
trend is down.
Positive
Directional Indicator
(+DI)
A component of
the average directional
index that is
used to measure
the presence of
an uptrend. When
the +DI is sloping
upward, it is
a signal that
the uptrend is
getting stronger.
This indicator
is nearly always
plotted along
with the negative
directional indicator.
Positive
Volume Index (PVI)
An index that
focuses on days
where the volume
has significantly
increased from
the previous day's
trading.
Put-Call
Ratio
A ratio of the
trading volume
of put options
to call options.
It is used to
gauge investor
sentiment. |
|
|
Relative
Strength Index (RSI)
A technical momentum indicator
that compares the magnitude
of recent gains to recent
losses in an attempt to determine
overbought and oversold conditions
of an asset. It is calculated
using the following formula:
RSI = 100 – 100
1 + RS
RS
= Average of x days' up closes
/ Average of x days' down
closes.
Relative
Vigor Index (RVI)
An indicator used in technical
analysis that measures the
conviction of a recent price
action and the likelihood
that it will continue. The
RVI compares the positioning
of a security's closing price
relative to its price range,
and the result is smoothed
by calculating an exponential
moving average of the values.
The indicator is calculated
by using the following formula:
RVI = Close - Open
High - Low
Rising
Bottom
A pattern on a security's
chart that results from the
daily low price rising over
time, creating a series of
ascending troughs. Technical
traders use this pattern to
confirm that the trend of
the underlying security is
heading upward. The chart
below illustrates a security
that has three rising bottoms,
indicating progressively higher
lows over time.
Rounding
Bottom
A chart pattern used in technical
analysis, which is identified
by a series of price movements
that, when graphed, form the
shape of a "U".
Rounding bottoms are found
at the end of extended downward
trends and signify a reversal
in long-term price movements.
This pattern's time frame
can vary from several weeks
to several months and is deemed
by many traders as a rare
occurrence.
Rounding
Top
A chart pattern used in technical
analysis which is identified
by price movements that, when
graphed, form the shape of
an upside down "U".
A rounding top may form at
the end of an extended upward
trend and indicates a reversal
in the long-term price movement.
The pattern can develop over
several weeks, months or even
years, and is considered a
rare occurrence by many traders.
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Shooting
Star
A type of candlestick
formation that results
when a security's price,
at some point during
the day, advances well
above the opening price
but closes lower than
the opening price. |
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Moving Average (SMA) |
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A simple, or arithmetic,
moving average that
is calculated by adding
the closing price of
the security for a number
of time periods and
then dividing this total
by the number of time
periods. Short-term
averages respond quickly
to changes in the price
of the underlying, while
long-term averages are
slow to react.
Stochastic
Oscillator
A technical momentum
indicator that compares
a security's closing
price to its price range
over a given time period.
The oscillator's sensitivity
to market movements
can be reduced by adjusting
the time period or by
taking a moving average
of the result. This
indicator is calculated
with the following formula:
%K
= 100[(C - L) / (H -
L)]
C
= the most recent closing
price
L = the low of the 14
previous trading sessions
H = the highest price
traded during the same
14-day period.
%D = 3-period moving
average of %K
StochRSI
An indicator used in
technical analysis that
ranges between zero
and one and is created
by applying the Stochastic
Oscillator formula to
a set of Relative Strength
Index (RSI) values rather
than standard price
data. Using RSI values
within the Stochastic
formula gives traders
an idea of whether the
current RSI value is
overbought or oversold
- a measure that becomes
specifically useful
when the RSI value is
confined between its
signal levels of 20
and 80. |
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Three
Black Crows
A bearish candlestick
pattern that is used
to predict the reversal
of the current uptrend.
This pattern consists
of three consecutive
long-bodied candlesticks
that have closed lower
than the previous day
with each session's
open occurring within
the body of the previous
candle.
Three
White Soldiers
A bullish candlestick
pattern that is used
to predict the reversal
of the current downtrend.
This pattern consists
of three consecutive
long-bodied candlesticks
that have closed higher
than the previous day,
with each session's
open occurring within
the body of the previous
candle.
Trade
Volume Index (TVI)
A technical indicator
that measures the amount
of money flowing in
and out of an asset.
Unlike many technical
indicators, the TVI
is generally created
using intraday price
data. The underlying
assumption of this indicator
is that there is buying
pressure when the price
trades near the asking
price and selling pressure
when it trades near
the bid.
Triple
Bottom
A pattern used in technical
analysis to predict
the reversal of a prolonged
downtrend. The pattern
is identified when the
price of an asset creates
three troughs at nearly
the same price level.
The third bounce off
the support is an indication
that buying interest
(demand) is outweighing
selling interest (supply)
and that the trend is
in the process of reversing. |
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A pattern used in technical
analysis to predict
the reversal of a prolonged
uptrend. This pattern
is identified when the
price of an asset creates
three peaks at nearly
the same price level.
The bounce off the resistance
near the third peak
is a clear indication
that buying interest
is becoming exhausted.
It is used by traders
to predict the reversal
of the uptrend.
True
Strength Index (TSI)
A technical momentum
indicator that helps
traders determine overbought
and oversold conditions
of a security by incorporating
the short-term purchasing
momentum of the market
with the lagging benefits
of moving averages.
Generally a 25-day exponential
moving average (EMA)
is applied to the difference
between two share prices,
and then a 13-day EMA
is applied to the result,
making the indicator
more sensitive to prevailing
market conditions. After
the data is smoothed,
some calculations are
done to make the indicator
fall in a range from
+100 to -100, or from
+1 to -1. |
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Williams
%R
In technical analysis, this
is a momentum indicator measuring
overbought and oversold levels,
similar to a stochastic oscillator.
It was developed by Larry
Williams and compares a stock's
close to the high-low range
over a certain period of time,
usually 14 days. |
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