Monday, April 6, 2009

Investing in Stock Markets - 2

Investing in Stock Markets - 2

There are plenty of web sites which offer literature on fundamental analysis, technical analysis. Hence, I am not going to dwell on those topics.

Investing in IPO:

Free pricing killed the fancy of IPO. Companies with decent track record are allowed to price the IPO freely i.e they will ask for a good amount called as premium. This move brought down the returns on listing considerably. In full fledged bull market, people price it freely, it gets listed freely - in bear market, number of IPOs are handful. When plenty of people are into IPO funding, you can smell a rat !!!

Hence, i feel, people who apply for IPO should cash their investment on listing and keep the remaining quantity for trading. Risk taking should be done only on left over stocks and not on full quantity allotted. In this way, investors can hold the stocks for ever as they recovered investment amount.

Stock Trading Psychology:

Some of these patterns can be observed in stock markets.

1. Anticipation: Stock market works on anticipation methodology i.e market discounts some information and prices the stock accordingly. One statement which stands out for years is "Buy on rumour and sell on news".

2. Herd mentality: Traders get influenced by news, volume to form patterns. Suddenly, one can witness rally in sugar stocks, fertilizer stocks and they can potentially abandon their interest in short term and switch their loyalties to some other sector. Some people call this "momentum trading" too.

3. Fear factor: Pessimists predict multi year lows. It happens sometimes, it doesn't happen sometimes. But too much of pessimism at too little time can be dangerous like the current pull back of world markets.

4. Irrational exuberance: Opposite of fear factor. When the sensex was at 21k lot of people were still bullish. This is also equally dangerous. Warning for points 3 & 4: when you hear too many number predictions, cut your trading and tread cautiously.

5. Demand and Supply: According to me, market works on demand and supply factor coupled with liquidity and sentiment mostly. Stock price goes up when demand increases and decreases when supply increases.

6. Liquidity: Mutual funds and institutions liquidity situation is a major factor which determines short term fluctuations. Markets generally flares up on excess liquidity - i.e cash availability to invest;

7. Charm: Stock has to have some charm to survive. Reliance has got life long charm so far and it indicates the trend majorly. Stocks like Chennai Petro, Numeric power does not have charm to attract trading volume. It is very important to focus on this point while investing for long term.

8. Cash in Balance sheet: Cash is king on all kind markets. Cash allows companies to expand operations, make acquisition etc. Companies like Infosys, sun pharma, hero honda are able to weather the storm because of this.

9. Sentiment: Market sentiment could be a decisive factor when you trade for short term. You can trade for inter mediate swings based on this factor.

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