Basics of Stock Market you need to know!! Part-2

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stock market basics

Stock Markets seem to be the craze of everyone right now. People of all ages are investing in the stock market.

To give you an idea of how this craze has grown, from 90s until 2019, there were only 4 crore demat accounts. From 2019 to 2021, it has grown to 8 crore demat account. The number of accounts have grown 2x in 2 years!!.

With the LIC IPO about to launch and special provisions for LIC Policy Holders, this number is sure to increase.

People are attracted to the stock market because of the potential to earn a lot of money. Sadly, a lot of people who enter think they would earn, end up losing their all, and quit the market.

Pratik Gandhi as Harshad Mehta

With so much uncertainty still, the interest in the stock market seems to be increasing.

But how is it, that you make money in the market? We will look into the basics of what causes a stock to move up or down on a technical basis.

Buying a stock in the market

Suppose you have recently started a demat account and are operating through a broker. You have put some money in your account and want to buy shares.

You will simply punch an order in the broker’s app and buy that stock. When you buy the stock, there is some other person who is actually selling you the stock.

Illustration of transaction in stock market
Illustration of transaction in stock market

Now that you have bought the stock, you will wonder, why did the seller sell his share? What was the reason behind his selling?

A seller sells his stock because he/she feels that the stock may not move any further and will fall down in the future. Hence he wishes to safeguard his profits before it is too late. This is the rationale behind his selling the share. And you? You buy the share because you feel it will go up in the future.

So whenever a transaction happens in the stock market, there are two people who have opposing views who trade. Meaning, the seller thinks the stock price will fall and the buyer thinks the stock price will rise.

But who wins? The winner is the one whose view the majority of people in the market echo. So if there are more sellers in the market who want to sell the stock which you have bought, the stock price will fall. If there are more people who want to buy the stock you have bought, the stock price will rise.

So whatever position you take, the other market participants will decide if you will make a profit or loss.

So how to understand the market? There are some ways in which you can check what the market wants to do, like for example Technical analysis or other market data like volume, delivery volume and others.

How will you make profit?

Like I said earlier, you make a profit when the market moves in your direction i.e when the majority of people echo your sentiment and you lose when the majority is against your view.

Price appreciation of a stock over a longer time is due to sustained demand.

For Long-Term Investing, you have to buy a stock of a company that will be in great demand and will continue to be in great demand over a number of years.

What this will do is it will push the prices of the stock up, since the stock will always be in demand.

Take for example Shree Cement. The stock was trading in 1999 around Rs. 25. The market perceived the company to be a good company and the company always kept on growing and increasing their business which led to the increase in demand of Shree Cement shares over a period of shares. Today the price of one share of Shree Cement is Rs. 24,724. So you can see that since the company was always in demand the price of the shares went on increasing. Also, the company has provided the shareholders with dividends and stock splits, which have given increased benefits to shareholders. Check out here to know more about dividends.

Weekly candlestick chart of Shree Cement Ltd
Weekly candlestick chart of Shree Cement Ltd

Consider Infosys Ltd, a very good company which was available for very less in the 90s and today is trading at Rs. 1700. But this company has provided lot of stock splits, bonuses. Though the absolute number may not look big the company has provided its shareholders with ample wealth. Infosys Ltd has also given dividends, Split of shares and buyback of shares is done regularly. All these events help in increasing your wealth. Check out here to know more about buybacks.

What I explained to you works well in Long Term investing. You can apply the same logic for shorter terms and make profits as a trader in the short term also. Only thing you will have to consider is the demand/supply of shares in the smaller time frame.

One secret tip on reading charts

Here I will share with you one secret, which will give you a different perspective on how you read charts.

For the stock price to move above a particular level, the supply at that level should be met and the demand should be more than the supply.

For example, if a stock is trading at Rs. 100 and there are 100 sellers who are selling the stock at Rs.100. Then for the stock price to move to Rs. 101, the buyers should buy all the shares the sellers are selling. Once the supply at Rs. 100 is over, then the stock price will move to the next supply price.

If buyers overpower the sellers, the stock price will move up
If buyers overpower the sellers, the stock price will move up

This can also work in the other direction. If there are 200 sellers at Rs. 100 and only 100 buyers at Rs. 100, then the remaining sellers will have to sell their shares at a lower rate, thereby decreasing the price of the stock.

If sellers overpower the buyers, the stock price will fall down
If sellers overpower the buyers, the stock price will fall down

Consider the following chart of Tata Consumer Ltd.

Daily Candlestick chart of Tata Consumer Ltd
Daily Candlestick chart of Tata Consumer Ltd

From the chart you can see, the stock made a high of around 890 levels. What does this mean?

It means that people were willing to buy it until 890 levels but no one was ready to buy it above 890 levels. So This was an indication of the demand drying up. The supply increased to such a level that it ceeded the demand and the stock price fell down. The stock eventually found some demand but that demand was never enough to take it above the previous high. This showed that the previous interest in the stock has receeded. Less people are willing to buy the stock with the previous intensity.

So if it breached this level of 890, then there may be a probability that the market wants to take the stock further higher up. Although there is no guarantee in the market that once the level breaks, it will definitely go up, but the probability of the stock going up is more once it breaches 890.

Conclusion

So understand the core concept of how you will make money. If your view coincides with the market, you will make money. If not, you stand to lose. Also any share is not good at any price. Short-term fluctuations of the stock price can cause the stock price to fall or rise. So always make sure you do proper research before investing or trading.

(Disclaimer:- the advice given is for educational purposes and you should contact your financial advisor before any investing.)

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