Category Archive : Stock Market

Market Emotion Cycle

It’s important to understanding that traders have specific emotions which have varying magnitude. This understanding is critical to learning how either you or another investor might behave. There is a cyclic process of psychology that explains the relationship between our feelings and our judgments.

The knowledge of this cycle can help you very much in your own trading. Following are the main stages in the market emotion cycle:-

1] Optimism –

The average investor enters the market feeling optimistic. It all starts with a hunch or a positive outlook leading us to buy a stock. We generally expect things to go our way, or may also have high expectations for the returns they will experience. Here, we feel positive about our investments and the overall market.

Example – Period of year 2004-2006 was time of Optimism.

2] Euphoria –

At the top of the cycle is when investors experience euphoria. This marks the point of maximum financial risk but also maximum financial gain. Our investments turn into quick and easy profits, so we begin to ignore the basic concept of risk. We now start trading anything that we can get our hands on to make money. We fool ourselves into believing we can beat the market, we cannot make mistakes. Also, that excessive returns are ordinary and that we can tolerate higher levels of risk.

Example – Year 2006 -2007 was time of Euphoria

3] Fear –

Reality sets in that we are not as smart as we once thought. Instead of being confident in our trading we become confused. Many people will then start to act defensively. They may think about switching out of riskier assets to more defensive shares or other asset classes such as bonds. At this point we should get out with a small profit and move on but we don’t for some reason.

Example – Feb-June 2008 was time of Fear

4] Panic –

This is the most emotional period till now in the cycle. We are clueless and helpless. At this stage we feel like we are at the mercy of the market and have absolutely no control. In this phase of the cycle, the realities of a bear market come to the fore and an investor may become desperate. Many panic and withdraw from the market altogether, afraid of further losses.

Example – Sept 2008 – Jan 2009 was time of Panic

5] Depression –

We think to ourselves how we could have been so dumb. While the investor drowns in depression, the market hits bottom and gives way to a new bull. Some start to look back and analyze what went wrong. Real traders are born here, learning from past mistakes.

Example – Feb – Apr 2009 was time of depression

6] Hope –

We can still do this! As the market continues to strengthen, the investor is hopeful that the market will continue up. Eventually we come to the realization that the market actually does have cycles. We begin to start analyzing new opportunities. We start considering new investments. Also, our confidence about the market grows.

Example – May 2009 till Mar 2010 was time of Hope

market emotion cycle graph
market emotion cycle

Characteristics of Trading

India is an emerging market for trading, and is fast becoming a market for future growth. At present, only a very low percentage of the household savings of Indians are invested in the domestic stock market for trading, but with GDP growing and a stable financial market, these investments may see a rise.

Trading everywhere has some basic characteristics, which are :–

1] Frequent Trades –

Trading involves frequent buying and selling of commodities, currencies or other securities. Frequents trades help take advantage of the fluctuations in the market. Trading practice generally is buying when the market is down and selling when the market rises to its maturity and is about to fall again. Even smallest changes in market give high profits through frequent trades.

Some financial advisors and trading institutions advise not to make trades frequently. By engaging in frequent trading, the trader may increases the costs of buying and selling. This in turn reduces the overall returns.

 “What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower.”

– William O’Neil

2] Short term Gains –

Trading helps to earn short term gains by taking advantage through volatility through buying and selling. Even smallest volatility can give high gains. Short term gains are helpful in satisfying the currents need and fulfill the short term goals. Short term gains increase the corpus available in the longer period.

In theory arbitrage profits (short term gains) may seem possible, but practically they are not possible.

3] Short Term Approach –

Trading has a short term approach. This approach can be very lucrative, but it can also be risky. In trading, investment period can be as short as few minutes. Investments are bought when the market is low and are sold immediately when they rise even a little.

To succeed in this approach, traders must understand the risks and rewards of each trade. They must not only know how to spot good short-term opportunities, but also how to protect themselves. Some basic steps to be followed are – watch the moving averages, understand overall cycles or patterns, and get a sense of market trends.

 “The four most dangerous words in investing are: This time it’s different.”

– Sir John Templeton

(Any time you hear that things are different this time, invest as if things are the same as they always were.)

4] Focus –

In trading, complete focus is given on short term aspects. Basically, trading is short term and therefore its focus is also on short term opportunities. Trading focuses on finding out short term trends of underlying asset’s price movements. These short term trends in price movements can be analysed and sometimes predicted. Thus, gains can be made by focusing on short term trends in price movements.

Focus should be on trading process and not trading results. Overall trading results are the end game, i.e overall results should be the focus in trading. A trader must look at the big picture.

5] Technical Analysis –

Technical analysis is the forecasting of future financial price movements based on a study of past price movements. 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.

Technical analysis is the most important part of trading. Technical analysis provides the entire base for making decision about trading. For this, charts and graphs are used extensively. Charts and graphs help understand various patterns, trends, etc on the basis of which trading decisions are dependent. Technical analysis provides with information on the past performance of an investment instrument, current performance of that instrument and its future probabilities.

“The stock investor is neither right nor wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.”

― Benjamin Graham; The Intelligent Investor

( Stock prices ultimately go up because companies perform and the profits go up. They do not go up sustainably because of people’s speculation. Facts and analysis ensure that any uncertainties that an investor may have are satisfied leading to lower risk and good profit margins.)

Characteristics of trading.png

Characteristics of Investing

Investing has the following characteristics:-

1] Buy & Hold –

While money may be tight, young adults have a time advantage. Investing requires only two things: the reinvestment of earnings and time. The longer money is put to work, the more wealth it can generate in the future. Gradually build wealth over an extended period of time through buying and holding a portfolio of stocks and also mutual funds.

For example, if an investor had bought shares of HDFC Bank Limited stocks at its closing price of Rs. 213.49 per share on 11th July 2008, and held onto the stock until 6th July 2018, then the stock was worth Rs. 2,114.05 per share. The share price has been increased by almost 11 times.

2] Compounding –

Magic of Compounding Explained returns are extremely powerful over the long run, and the earlier you get started the greater your chance is to take advantage of this. Regular investments in an investment portfolio or a retirement account can lead to huge compounding benefits. Investors enhance their profits through compounding.

3] Long Term –

Investments start giving results after a period of time. Holding the investments for the long term is important. Some are in a hurry and sell their investments before it starts giving actual results. Investments made with long term perspective are always beneficial. Investments are held for years or even decades.

4] Focus –

While investing, minor fluctuations are ignored. These fluctuations have no real impact on the investments in the long run. Focusing on long term goals that are set and are to be achieved is important. Short term fluctuations do not deviate investors from their long term goals.

While investing, there are some factors that can be controlled and some that cannot be controlled. An investor should always focus on things that can be controlled. The markets cannot be predicted as there many factors affecting it simultaneously. And therefore, focusing on factors that can be controlled is crucial. While investing an investor should focus on three basic things that can be controlled, which are – what we buy, how much of it buy and at what price we buy.

 5] Fundamentals –

Investors don’t give much importance to information which is qualitative and not quantitative. Investing focuses on past as well as future (forecasts), but more importance should be given to future. Investors are more concerned about fundamentals such as PE ratio and management forecasts.

But this is wrong. Fundamental data is given in a standard format, so analysis made by anyone from this data would be the same. Results from standardized data are of use as they don’t reveal anything new or interesting. This means that for successful investing an investor needs to look for data or information which most people don’t see. People think that fundamentals provide a sense of security, which is exact opposite, i.e fundamentals are dangerous.

The image below shows data on where and how much do people in India invest their money.

Financial assets of the household
benefits or featurs of investing

Stock Market Participants

The Stock Market refers to the collection of markets and exchanges where the issuing and trading of equities or stocks of publicly held companies, bonds, and other classes of securities take place.

Following are the main participants of a stock market:-

Regulator –

A Regulator or regulatory authority amends and approves different laws, makes sure that no broker/company is indulged in fraudulent activities.

SEBI (Securities and Exchange Board of India) is basically a regulator of the Indian Stock Market. Also SEBI is known as India’s most strict and efficient regulatory body.

The Securities and Exchange Board of India is the regulator for the securities market in India. It was established in the year 1988 and given statutory powers on 30 January 1992 through the SEBI Act, 1992.

Brokers –

Stock brokers are licensed by the SEBI and are entitled to trade at the stock exchange. They act as the middlemen or agents between the sellers and the buyers of stocks in the stock market.

Brokers & dealers charge a fee to handle trades between the buyers and sellers of securities. A broker-dealer may buy securities from their customer who is selling or sell from their own inventory to its customer who is buying. Here are top 10 Brokers in India by number of clients in NSE –


Stock Exchanges –

A stock exchange is an organized marketplace or facility that brings buyers and sellers together and facilitates the sale and purchase of stocks.

Stock/Securities exchanges are markets where securities are bought and sold. It makes sure that trading transactions are done in an efficient, orderly, fair, and transparent manner. It enforces rules and regulations that its publicly listed companies and trading participants must strictly abide by.

Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been in existence since 1875. The NSE, on the other hand, was founded in 1992 and started trading in 1994. However, both exchanges follow the same trading mechanism, trading hours, settlement process, etc.

Investors –

Investors, also referred to as stockholders or shareholders, are those who own shares of stock of a publicly listed company. They are given certain privileges like the right to fair and equal treatment, the right to vote and exercise related rights, and the right to receive dividends and other benefits due to stockholders. They are classified as either retail or institutional, and domestic or foreign.

Investors are regular people who buy/sell shares of different companies. An investor is a person who buys shares and keeps them for long term (i.e. >1 year). A trader is the one who buys and keeps the shares for short term (i.e. <1 year). Normal people who invest in the stock markets are called Retail Investors, whereas when banks or big fund companies invest they are called Institutional Investors.

Stock Market Participants

New Market Cap Classification

In the revised circular (October 2017), SEBI prescribed that for mutual funds, the market capitalization for the previous six months would be considered.

Market capitalization is the basis for fund classification. As per the circular issued by SEBI, schemes were to follow the rules below:-

  • Large-cap oriented schemes should invest at least 80% of their assets in large cap stocks
  • Large-cap and mid-cap schemes shall have minimum allocation of 35% in each
  • Similarly, mid-cap schemes and small-cap schemes shall invest at least 65% in mid-cap and small-cap stocks respectively

And here’s how the market capitalization categories were defined:-

  • Large cap stocks are defined as the top 100 companies in terms of market capitalization.
  • Mid cap stocks are companies having rank between 101-250 in terms of market capitalization.
  • Small cap stocks are companies are from 251st onwards on full market capitalization basis.
Market Cap classification

Here is the list of Large Cap & Mid Cap Companies in India as per 30th June 2018 data. Rest all the companies fall under Small Cap space.


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