Understanding the Stock Markets in a better way

The stock market always fascinated Ajay from his childhood. The last part of the TV news which used to mention about the stock markets movement, relating it to all sort of national and international events increased his curiosity to know more about its relationship to the external world.

As he grew old, he didn't let off  his peripheral view on the markets. Even though he knew less he tried to understand them in the hopes of mastering them one day.

Early in the 2000s his father's investment turning ten-fold within no time after applying an IPO fascinated him more. The dividend returns which covered all the invested money within a year cemented his views on the stock markets making him think that this is one venue to follow to make easy money.

He seriously decided to make it a money making machine with 100% efforts after attending a class on Technical Analysis. The simple chart patterns taught there made him confident enough to take trading as his full-time career.

Trading the stocks

 
To fulfill his dreams, he took a few thousand rupees from his father and started to trade in intraday setups. As the trade setups ripened with breakouts, he took the positions and eagerly waited to take his profits. But in practice, he understood that there are a lot more things to learn to be successful in trading the markets.

Some of them were -

1. Confluence/place of entry plays more important role than technical signals.
2. A person who is trading needs to follow the rules and keep his emotions at bay.
3. The most important are the money management rules that keeps him in the market for a long time.

Over time he understood that Technical Analysis alone is not enough but he needs to be prudent enough to follow the money management rules strictly to stay in the game along with the other two important rules mentioned above. Technical Analysis may help for about 20% of the time only to take an informed decision and we need to create those set-ups that have more probability to work in our favor.

Investments in the stock market

As the time passed, Ajay also heard success stories of Wipro, Infosys, EicherMotors and the recent DMart which turned out to be multi-baggers. The widely available stock market stories of investing for long, turning ten thousand rupees to hundreds of crore rupees fascinated him more towards Investments as well.

On the other hand, he also understood the flipside of the coin, seeing the wealth destroyer stories like Rcom, Unitech, JPAssociates and Satyam etc. So he understood a few basic concepts of Investments as outlined below.

1. Investments need time to get ripe to reap the benefits.
2. Only those companies with genuine growth in earnings show a steady and sturdy increase in their stock price. For the rest whose stock prices increased either by euphoria or with any other reason, with no reasonable earnings prospects will fall by their own weight ultimately.
3. For those companies, whose growth has been saturated we need to look for a value buying rather  than overvalued hot stocks.
4. Exit a company if it make losses for the last two quarters.
5. Scrutinize the company's earnings every quarter rather than turning a blind eye to them and holding it for eternity.

Trading in Options

 
Most people trade in options with the least knowledge ignoring how it works. Ajay also was attracted to its theoretical phrase of limited loss with unlimited profit potential ignoring its disastrous effects in the purge of quick money.

In this case, one needs to understand, that by buying options they are fighting against time. Apart from all the other trading factors in consideration of the above, option buying needs to consider the timing of stock movement as well. Unless one expects a huge movement in the stock price, option buying may not give you an edge in generating profits consistently.

On the other hand, if you consider the selling options prudently by knowing the direction of the markets you may make consistent money with a probability of 0.67 but in fractional amounts compared to the investment. 

 

After all, building wealth takes time. The trick here is knowing how not to lose. The stock market is not a gambling casino. To survive here, we need to know what is the right stock to buy with a systematic approach.