The Easy Route: Mastering Stock Trading: 12, #5

By Ganta Kishore Kumar

Goal: To help you learn the main ideas to trade well. By the end of this book, you will know how the Stock Market works.

We also explain:

Tools like BB, RSI, and the ATR, Stock, Broker, Places to trade, How to buy and sell, How to read charts and patterns, How to manage risk and money, How to think like a trader, IPO, Stock Market history and changes, Different places to trade (NYSE, NASDAQ, NSE, BSE, ECNs, Dark Pools), How to check financial reports.

We also show you 2 Trading Methods from start to finish. You will see how we made them, what we used for them, and how you can test them yourself. This is where you use what you learned and see how methods can be made.

We teach you how to make and use your own Trading Methods, How to value stocks, How to study companies, VWAP, How to use numbers easily (Earnings, Earnings Per Share, Price to Earnings, Price To Book, and more).

You will fully understand Indexes, the Economic Cycle, Monetary and Fiscal Policy.

• Language: English
• Publisher: Ganta Kishore Kumar
• Release date: Jan 24, 2024
• ISBN: 9798224350797

Book preview

Terms of Use

The articles and tools are crafted and distributed solely for the purpose of sharing knowledge and information. The insights provided in this book are purely the author's perspective.

The information disseminated in the book is intended strictly for general knowledge and does not constitute any form of financial or investment counsel.

Items such as articles, stock lists, and products should not be construed as investment guidance.

Before making any financial decisions or positions, it is advised to consult with your financial advisor. I (Author) hold no liability for any profits or losses incurred.

The information provided herein is purely for educational purposes.

None of the materials available through us/me may be duplicated, reproduced, translated, or converted to any electronic or machine-readable format, either in part or in entirety, without prior written approval.

Any other form of reproduction without our/my consent is strictly forbidden.

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Inflation: A Motivation to Invest

We're all aware that the cost of goods rises each year. In India, this increase averages about 5%.

Take a pizza, for example. In 2020, it cost me 100₹. But in 2021, with a 5% price increase, that same pizza now costs 105₹. So, I need an extra 5₹ in 2021 to buy the same pizza.

If I want to buy the same pizza in 2022, with another 5% price increase, it will cost me 110.25₹. So, I'll need an extra 10.25₹ by 2022 to buy the same pizza.

This example shows that if you simply hold onto your money, its value doesn't increase, but the cost of products does. This is what we call 'Inflation'.

So, it's wise to put your money into some form of investment to help it grow or generate income.

Why do we need a retirement plan?

We can't work forever,

so planning for retirement is essential.

There are two types of income: active and passive.

Active Income is what you earn by working, like a salary.

Passive Income is what you earn without actively working, like interest on savings or investments.

Some examples of Passive Income :

Savings Account: If you put your money in a savings account, you'll get a 3-4% interest rate. But with an average inflation rate of 5%, you're actually losing 1%.

Fixed Deposits: If you invest your money in fixed deposits, you'll get a 7-8% interest rate. That's 3% more than the average inflation rate, so it's better than a savings account.

Government Securities: If you invest your money in government securities, you'll get a better interest rate than fixed deposits. Plus, you'll get tax benefits.

Mutual Funds: In mutual funds, a fund manager invests on your behalf and generates returns. You can check the fund's performance through its Compound Annual Growth Rate (CAGR).

Direct Investments: At some point, everyone should invest in stocks. But choose your stocks wisely, or you could lose money.

Remember, mutual funds come in two types: index mutual funds and normal mutual funds. In index mutual funds, the fund manager doesn't need to check companies day-to-day. In India, we have two major stock exchanges: the NSE (National Stock Exchange of India Limited) and the BSE (Bombay Stock Exchange). These exchanges fix the companies in the index: NSE NIFTY 50, BSE Sensex, etc.

Watch out for pitfalls!

Don’t invest in stocks without doing your homework.

In the stock market, you’ll often come across enticing statements like this:

(For example, I used yearly share price data from ITC that I found online)

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If you had invested Rs. 1,00,000 in ITC Company in the year 2000, you would have received 5020 shares. If left untouched, these shares would have grown to Rs. 10,96,000 in 15 years.

But don’t be fooled by this!

Consider this example:

If you had invested Rs. 1,00,000 in Reliance Communications in 2015, you would have bought 1133 shares. However, by 2020, the value of these shares would have fallen to just Rs. 1756.

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Don’t invest without thinking!

In the case of Reliance Communications, if you had set a stop loss, you could have minimized your losses instead of losing your entire investment.

Remember, Reliance Communications’ stock didn’t plummet overnight. It fell gradually.

So, it’s crucial to regularly check the performance of the companies you’ve invested in.

What is a stock?

Also known as shares or equity, a stock is a type of investment that shows you own a piece of a company. If you own stock in a company, it means you’re a part-owner of that company and have a stake in its assets and profits.

Why corporations issue stocks:

Consider this: I own 100% of a company that sells electric cycles. Right now, I'm only selling within my local community and making a decent profit.

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I believe electric cycles are the future and I want to expand my sales nationwide, even globally. But to do that, I need money to open more stores.

1 million rupees is equal to 10 lakhs.

100,000 Rs. (100k) is equal to 1 lakh(1,00,000).

Let's say I made 1 lakh rupees this year from selling electric cycles. To open 5 new stores across the country, I need 5 million rupees (1 million rupees per store).

Earning this 5 million rupees by making just 1 lakh rupees a year would take too long. So, I decide to sell 50% of my company to investors. This way, I can raise the 5 million rupees I need.

With the new stores, we'll be able to make much more money every year. Even though I now only own 50% of the company, this 50% is worth more because the company is bigger and making more money. So, my current 50% ownership is more valuable than my previous 100% ownership.

That's why corporations issue stocks (or sell parts of their company): to raise money for expansion and growth.

Why would someone invest in this stock?

Investors purchase shares in a company to benefit from the company's expansion and earn profits from that growth.

When a seller puts a stock on the market at a certain price, I, as a trader, assess whether that price is overvalued or undervalued. I identify any discrepancies in the stock's price, capitalize on them, and make a profit from these discrepancies.

How can you invest in a stock?

Buying a stock can be done in two ways, depending on whether the company is private or public.

A private company is owned by a small group of shareholders and does not offer its shares to the public on the stock market. The company’s stock is traded privately.

It’s challenging to buy shares in private companies. You either need to know the owner of a private company to buy their stock, or you need to be a qualified investor with a significant amount of money to invest. This makes it difficult for private companies to raise funds when needed.

Public companies are large companies whose shares are freely traded on stock exchanges and owned by the general public. In a public company, you can buy shares on the stock market through a broker.

Examples of shares include Reliance, ITC, Wipro.

Many companies start as private before going public.

There’s a significant difference between private and public companies when it comes to buying and selling stock.

What Is A Market ?

Market: It’s like a big shopping center where people buy and sell things.

Auction Market: Imagine a big room where everyone is shouting their buying and selling prices at the same time, trying to get the best deal.

Stock Market: It’s like an online marketplace, but instead of buying and selling goods, people buy and sell shares of companies.

Primary Market: This is where a company sells its shares to the public for the first time to raise money. It’s like a grand opening sale.

Underwriter: They’re like event planners for a company’s grand opening sale. They decide how much money can be raised and handle the selling of shares to big investors like funds and banks.

IPO (Initial Public Offering): This is the grand opening sale I mentioned earlier. It’s the first time a company’s shares are sold to the public. But it’s usually hard for everyday people to get these shares.

Secondary Market: This is where people buy and sell shares after the grand opening sale. It’s like a second-hand market for shares.

What is a Stock Exchange ?

A stock exchange is like a marketplace for stocks. Just as you would go to a local market to buy vegetables, you go to a stock exchange to buy or sell stocks.

Examples of stock exchanges are the NSE and BSE in India, NYSE and NASDAQ in the USA. These are like different stores in a market, each with their own set of products.

Just like how Walmart and Dmart have different products, each stock exchange has different companies listed. A company like ITC can choose to list its stocks on one or more exchanges, similar to how a product can be sold in more than one store.

To buy or sell stocks, you need a broker, who acts like a middleman. The broker sends your order to the exchange, and if there’s a match in price, the transaction is executed. The broker charges a commission for this service.

In short, a stock exchange is a place where buyers and sellers meet to trade stocks, just like a market is a place where buyers and sellers meet to trade goods.

Orders And Order Types

An order is a command to buy or sell a stock on a stock exchange. It’s like placing an order at a restaurant - you specify what you want (the stock), how much you want (the quantity), and whether you want to buy or sell.

There are different types of orders, each with its own specifics. A Market Order is like saying I want this dish right now, no matter the cost. A Limit Order is more like I want this dish, but only if it’s within this price range.

When your order is executed, it’s called a Fill. It’s like your dish being served at the restaurant.

Choosing the right order type is crucial. A Market Order is quick but might not get you the best price. A Limit Order can get you a better price, but it might take longer. It’s all about balancing speed and cost.

Orders Determine Prices

Level1 - Level2 - Time and Sales

While some believe that news or events influence market prices, the real driver is the orders placed by people.

Let’s illustrate this with an example:

Outstanding Shares refers to the total number of shares our company has, i.e., the number of shares issued by the company at its Initial Public Offering (IPO))

Float refers to the number of shares currently being traded on the market. Some shares may be locked away or held by the company itself, while the rest are traded on the exchange.)

Company(or Ticker): The Bicycle Company (TBC)

Exchange: NSE

Outstanding Shares: 100k shares

Float: 75k shares

Let’s imagine that the following participants have shares in our company, TBC, which they acquired in the primary market:

Participant 1: Holds 40,000 shares

Participant 2: Holds 10,000 shares

Participant 3: Holds 2,000 shares

Participant 4: Holds 0 shares

Participant 5: Holds 2,000 shares

Participant 6: Holds 5,000 shares

Participant 7: Holds 1,000 shares

Participant 8: Holds 0 shares

Participant 9: Holds 10,000 shares

Participant 10: Holds 5,000 shares

This is just an illustration with 10 people. In reality, there would be millions of participants.

If no one has traded this stock yet, then the stock will not have a price on the exchange.

In the Exchange Matching System, all the buyers are listed in the left column, and all the sellers are listed in the right column.

An order is executed only when a buyer’s order price matches a seller’s order price. This list of buyers and sellers is known as LEVEL 2 or THE ORDER BOOK.

The Order Book, an electronic list of buy and sell orders for a stock, is sorted by price and then by time.

The Buyers Column is sorted based on price priority for buyers. Those who are willing to pay more for the stock will have their orders executed first. If two participants quote the same price to buy, the one who quoted first will have their order executed first (First In, First Out).

The Sellers Column is sorted based on price priority for sellers. Those who quote a lower price for the stock to sell will have their orders executed first. If two participants quote the same price to sell, the one who quoted first will have their order executed first (First In, First Out).

Level 1 displays the best bid and ask prices, as well as the quantities available now on Level 2. Level 1 also displays the last trade executed, i.e., the Last Traded Price (LTP) or Current Market Price (CMP).

Let's look at the following example:

Time

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and Sales, reported by the Exchange, show every single transaction that occurs in the market in real-time. This includes details such as the time of the transaction, its direction, the quantity of shares traded, and the exchange where the transaction took place.

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In the example above, 3000 shares were filled at Rs. 40 from a limit order of 3000 shares at Rs. 41 at 1 PM. This is a partially filled order, so the Last Traded Price (LTP) is Rs. 40.

After an order is matched, Level 1 updates and provides the LTP, and the algorithm runs to find another match. In this case, the LTP becomes Rs. 40. This demonstrates that the prices are driven by the executed orders of exchanges.

Price fluctuations are purely based on the orders people send. In simple terms, prices change based on orders. It's basic supply and demand shown through the order book of NSE.

This is why, when a company has good news, the stock price often goes down due to a large supply from sellers and less demand from buyers, except for some instances.

The Bid or Bid Price is the maximum price that a buyer is ready to pay for a stock. Simply put, the Bid is the best price at which we can buy.

The Ask, Ask Price, or Offer is the minimum price a seller is ready to accept for a stock. In simple terms, the Ask is the best price at which we can sell.

The Spread is the difference between the Ask Price and the Bid Price. If the Spread is large, it's better to avoid placing market