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Making Money from Stocks

Equity Right IDBI Bank

Everyone has the brainpower to make money in stocks.

Not everyone has the stomach.

-Peter Lynch

A stock is a security that denotes proportionate ownership in the corporation. The stock market is a system made up of exchanges in which one can purchase, sell and issue shares of the publicly-traded company.

 

 

When any company is established, the founders and early investors are the only shareholders. Later, when the company needs finances to expand, the shares may get issued to other investors. Typically, the number of shareholders of private shares is small. When early investors want to monetize their profits or when the company needs more finances, the company opts for initial public offering. IPO is a method offering shares of a private company to the public for the first time.

 

 

A] Types of stocks

Companies can issue 2 types of stocks. These types are common stock and preferred stock.

 

Common stocks

Majority of stocks issued are common stocks. These stocks provide voting rights to investors typically at one vote per share owned.

 

 

Preferred stocks

A fixed dividend is guaranteed to shareholders of preferred stocks. However, shareholders of these stocks don’t have voting rights. When a company liquidates its assets, preferred shareholders get to redeem their shares before common shareholders.

 

 

B] Types of orders

Individuals generally purchase and sell stocks through a licensed broker or a broking firm. Depending on the flow of the market, there are two directions for the trade.

 

 

Long:

The purchase of shares with the expectation that its value will increase is long trade. This is the conventional practice of investment. This type of orders suffers in short drops. Long position indicates that investor has purchased and owned stocks. Losses are limited as compared to short orders.

 

 

Short:

The sale of shares with the expectation that its value will decrease is short trade. This type of orders allows you to take benefits of rising as well as falling markets. Unlike long orders, losses are not limited.

 

 

C] Market phases

The direction of the market and prices are volatile and investors have different perceptions about it. There are typically two phases of the market. These phases are the bull market and bear market.

 

 

Bull market

A bull market is a phase of the market in which the value of shares is expected to rise or is already on a rise continuously for an extended period, say months or years. Generally, when the economy is strong and unemployment is low, the condition of the bull market takes place.

 

 

How to take benefits from the bull market:

In order to take advantage of the bull market, one should purchase when prices start rising and sell when it reaches its peak. Although it is difficult to predict whether the prices will rise or fall, the losses will be temporary and minimal. There are some strategies one can follow to take advantage of the bull market. However, these strategies also involve some risk.

 

 

Buy and Hold

The practice of buying and holding onto a stock is one of the basic strategies. The investor should have optimism that the price of the stock will rise. The bull markets give confidence which leads investors to buy and hold approach.

 

 

Increased Buy and Hold:

Increased buy and hold approach, investor purchases a fixed quantity of stocks with every predefined increase in the price of the stocks. This approach is riskier as compared with the straightforward buy and hold approach.

 

 

Retracement Additions:

Investors look for corrections during the bull market in order to buy stocks at a discounted price. Investors presume that the bull market will continue and the price will again rise. This strategy will be beneficial during the bull market for investors when retracement occurs.

 

 

Full Swing Trading

During the bull market investors take part actively to get maximum benefits by using short-selling. This approach of full swing trading is very aggressive.

 

 

Bear market

A bear market is the phase of the market in which the price of the shares is on a fall. The rise in unemployment and recession are some of the reasons behind the bear market. This phase of the bear market can last up to years or just months. There is no determined entry point for the bull market. 

 

How to take advantage of the bear market:

 
Stocks lose value in the bear market which makes investments in the bear market risky. However, there are techniques which can help in making gains the bear markets. These techniques also involve some risk factor.

 

 

Short Selling

When the market is on a fall, investors borrow shares from a broker. Later investors purchases shares from the market, when the price increases and return it to the lender. Short selling can be approached during bear markets. However, it has a high risk and reward ratio.

 

 

Defensive Stocks

Performance of defensive stocks is minimally affected by the volatility of the market which makes them stable. Therefore, investors can invest in these during the bear market.

 

 

Also, there are certain stocks which will outperform irrespective of declination in the market. Investors can invest in such stocks during the bear market.

 

 

D] Conclusion

While investing in stocks two major decisions any investor has to take is when to buy and when to sell. During the phase of the bull market, investors can invest in more equities as the losses are temporary and minor. However, losses are higher during the phase of the bear market.

 

 

Investments will have an effect of both the bear market and the bull market. Therefore, investors should invest after analyzing the market, in order to make a profit. In the long-term, the stock market has always given positive returns.

 

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