Category: Investing

How Interest Rate Changes Affect the Stock Market
What is Interest Rate?

Interest rate is defined as the price that you pay when you borrow money from someone or it can also be known as income that you earn on your investments like bonds, FDs, and government securities. We will talk about interest rates in the context of lending and borrowing money. Interest rates in India are managed and regulated by RBI and play an important role in the economic growth of a country.

RBI manages various types of interest rates. Let’s have a glimpse at these rates.
1. Repo Rate
  The rate at which the RBI lends money to commercial banks. Any kind of change in repo rate can affect the cost of borrowing for banks as well as retail consumers. The repo rate is considered a key tool to control inflation and stimulate economic growth.
2. Reverse Repo rate
  The rate at which RBI borrows money from commercial banks. This rate is comparatively lower than the repo rate.
3. Cash Reserve Ratio
  CRR, or cash reserve ratio, is the amount that commercial banks need to maintain with RBI in the form of cash. Banks do not receive any kind of interest on this from RBI.
4. Statutory Liquid Ratio
  SLR is the minimum amount in percentage that a bank needs to keep either liquid or as investments in government securities.
The RBI uses these interest rates and tools to manage monetary policy, control inflation, and maintain financial stability. Our major focus today will be on the repo rate and how even a slight change can have wide-ranging effects on the broader economy.

Why interest rates are changed?

RBI changes these repo rates as a part of its monetary policy so that it can achieve its financial objectives. Now, what is monetary policy? Policy framed by the RBI to control and manage the supply of money in the economy. Monetary policy can either be contractionary or expansionary. When the money supply is increased and interest rates are reduced. This is known as the expansionary monetary policy. The vice-versa is known as the contractionary monetary policy. Coming back to our topic RBI changes the repo rate because of the following reasons,
1. To control inflation in the economy.
2. To focus on the economic growth of the economy.
3. Situations prevailing in the global economy
The decisions related to the repo rate are made during the RBI’s monetary policy meetings, which occur at regular intervals. Before moving further, we will give you some basic idea about the concept of inflation and deflation. Inflation is the general increase in the price level of goods and services in an economy. Consumers tend to pay more than the actual value of the good. The purchasing power of consumers decreases. In such a case under the monetary policy, the government of India increases the interest rate to fight inflation. This will decrease the flow of money in the economy.

Deflation is the opposite concept of inflation. A general decrease in the price level of goods and services is called deflation. The purchasing power of the consumer is increased. RBI, in this situation, will lower the interest rate in order to increase the flow of money in the economy. We all know that the stock market of any economy is a true indicator that signals the pace of economic growth. So, we need to analyze the fact of how a change in repo rate can impact the markets.

Read Also: How to Start Stock Market Trading With Low or Limited Capital

Impact of rate change on the Indian stock market.

The impact depends on the direction and magnitude of the interest rate changes, as well as the broader economic context.

Interest rates can be changed in two ways
- Interest rate hikes
- Interest rate cuts
When it comes to interest rate hikes, the cost of borrowing money increases which will make it difficult for the companies to avail loans and this will eventually reduce the profitability of the businesses. This will lead to lower earnings of the companies and decreased prices of the stock.

Any sort of increase in the rate of interest can make other investment options more attractive. From the consumer’s point of view, there can be a significant change in his spending habits since there we be lesser disposable income in his hand thereby affecting his savings and investments. Interest Rate cuts, on the opposite side, lead to a decline in the cost of borrowing making it easier for the investor to grow which will lead to higher earnings and higher stock growth.

The immediate impact of interest rate changes on the stock market may vary. Short-term interest rate changes might lead to short-term stock market volatility, while long-term rate trends can have a more lasting effect on the stock market.

Impact of change in rate by the US Federal Reserve on the Indian stock market

Federal Reserve, since we all know is the central bank of the United States, can either increase or decrease the interest rate depending on the situation and needs of the economy. A change in the rate of the U.S. Federal Reserve affects the economy globally. The relationship between the actions of the Fed and the Indian stock market is influenced by several factors. Some of these factors are listed below.
1. If the Fed increases the rate of interest, foreign investors will find the U.S. markets more lucrative to invest in. They will withdraw their funds from the Indian stock market and deploy it in the U.S. so that they can enjoy higher returns.
2. A slight change in the rate of interest by the Fed can have a significant impact on the exchange rates of currency. If the interest rate increases the U.S. dollar will strengthen and the Indian rupee will weaken.
3. If U.S. rates rise substantially, it may lead to higher interest costs for Indian companies that have borrowed in U.S. dollars or have exposure to foreign currency debt.
Read Also: Impact of Interest Rate Change on Financial Markets

Conclusion

To conclude interest rate and stock market share an inverse relationship. If you wish to receive consistent returns investing for a longer horizon is suggested. These short-term stances of rate change will create many complications. However, an investor should be well aware of the consequences of the rate change on the market so that he can make informed decisions. They should adopt a diversified investment strategy and take into account their own financial goals, and risk tolerance.

Frequently Answered Questions (FAQs)
1. How does interest rate affect bond prices?
  Bond prices and interest rates have inverse relationships i.e., when the central bank increases the interest rates, bond prices decrease, and vice versa.
2. Do all stocks react to interest rate changes in a similar way?
  No, stocks across sectors react differently to interest rate changes.
3. Who regulates and manages the interest rate in the stock market?
  Reserve Bank of India controls and manages the interest rates.
4. Why does RBI increase the interest rate?
  RBI increases the interest rates in order to control inflation and for the overall growth of the economy.
5. What happens to borrowing costs when RBI increases the interest rates?
  Borrowing cost for the companies increases if RBI increases the rates.

November 22, 2023

Types of Investment in the Stock Market

You earn money and you save money, then you get an option to channel your savings in an organised manner. These are called investments. Investments should be based on your desired goal i.e.; emphasis should be on goal-based planning. Goals can be anything marriage, foreign tour, emergency fund, retirement plans or buying a house. Only then any investor can align their investments as per his/her risk tolerance, and time horizon and decide the investment product he wants to opt for. Investments are a source that helps you achieve your desired financial goal. Stock market offers investors various avenues in order to allocate their capital and generate returns over time. Investing in the stock market offers a multitude of opportunities for individuals to grow their wealth.

In today’s blog, we will be classifying investments into three categories.

Modern investment options or investment in the stock market
Traditional investment options
Other investment options

Below is a detailed explanation of the types of investments that are widely used by investors.

Modern Investment Options

Stocks

Stocks are the most chosen and common investment option. Buying shares of a specific company is known as investing in stocks. The investor becomes the partial owner of the company and can enjoy various advantages that include capital appreciation, dividend payouts and voting rights. Stocks are issued by various companies. The initial listing of the stocks is labelled as an IPO (Initial Public Offering) and is introduced in the primary market but is traded in the secondary market. Stocks are volatile and can be risky to invest in.

Mutual Funds

Mutual funds collect money from numerous investors to invest in a diversified portfolio of stocks, bonds, or other assets. These funds are managed and curated by professional fund managers and hence become suitable for investors who have less time and expertise to manage their portfolios. When you invest in mutual funds, NAV (Net asset Value) is allotted to you which reflects the net value of the assets that are chosen by the fund manager to invest your money in. Furthermore, SIP/STP/SWP are different ways through which we can invest in mutual funds.

PMS

PMS stands for Portfolio Management Services and is generally meant for HNIs (High net worth Individuals) and has a minimum ticket size of Rs 50 Lakhs. There are 2 types of PMS. Discretionary and non-discretionary PMS. PMS fund managers charge fees from their clients based on the asset under management. Individuals, NRIs, HUF, partnership firms, and proprietorship firms can invest in PMS.

Bonds

Bonds are fixed-income investments or debt instruments that are issued by the government. When you buy a bond, you are giving money to someone who issues the bond in exchange for interest or coupon, which is paid at regular intervals, and the return of the bond’s face value at maturity. Bonds are regarded as lower-risk investments when compared to stocks. There are generally three types of bonds.

Government Bonds/Securities-

Tradeable bonds which are issued by the central and state governments. These bonds have a fixed coupon rate and maturity. For example, treasury bills.

Corporate Bonds

These bonds are issued by private companies and NBFCs which carry a bit higher yield than government bonds.

Municipal Bonds

These bonds are issued by state municipal corporations to fund projects.

AIF

AIF stands for Alternative Investment Funds. It is a privately pooled investment that collects funds from high-class investors. These investors are institutions and high net-worth individuals who have an idea about the higher risk and complex investment arrangements.

Exchange Traded Funds (ETFs)

ETFs are investments that are traded on stock exchanges just like any individual stock and provide investors with a diversified portfolio of assets. ETFs have a very low expense ratio.

Traditional Investment Options

Fixed deposits

FDs are traditional methods of saving and investment and are good for investors with low or nil risk appetite. The fund is deposited in the bank account in a lump sum for a fixed period of time and at the time of maturity, the depositor gets back the principal amount along with the interest. Interest on FDs is fixed by the banks and offers you guaranteed returns.

Public Provident Fund

PPFs are long-term saving schemes offered by the Indian government. PPFs generally have a lock-in period of almost 15 years. However, individuals can withdraw money partially after a tenure of 5 years is completed from the date they have opened the account.

Post Office Schemes

It is a fixed-income investment offered by the Post Offices. Investors are given monthly interest on their investment amount. This investment option comes with low to moderate risk.

Savings Account

A savings account is a basic, interest-bearing deposit account offered by banks. It provides a safe place to store money, and interest is earned on the balance. this account has low risk and high liquidity but has low returns.

Other Investment options

Gold

Gold is considered a safe haven when it comes to investments. Gold is highly liquid and can be easily bought and sold. At times of volatility in the market, the best option to bet upon is gold. It is a popular investment option because of its historical significance. Gold has been a store of value for ages and is believed to be a symbol of wealth. It helps to diversify the risk of your portfolio. You can invest in physical gold, gold ETFs and sovereign gold bonds.

Real-estate investment Trusts (REITs)

Real estate is a great source of rental income from properties because there is a significant growth in the value of the asset be it land or a building, over time. This increases the value of the invested capital which is considered as beneficial for the investor. Real estate investment trusts (REITs) allow investors to invest in real estate without owning physical properties directly. REITs are a source of indirect investment in Real Estate. REITs have emerged as a good option to enable investors to expose themselves to smaller outflow commitments.

Conclusion

Every investment option has different attributes, returns and risk profile. It is always suggested to investors to conduct systematic research or seek advice from financial professionals before making investment decisions. Choosing the right option completely depends on your financial goals, risk tolerance, and investment horizon. Diversification of portfolios across different investment types can help you lower the risk and shape a well-balanced portfolio that aligns well with your financial goals.

FAQ (Frequently Answered Questions)

How do ETFs differ from mutual funds?
ETFs are traded on stock exchanges like individual stocks whereas asset management companies sell mutual funds.
How to choose the right investment as per my financial objective?
Pay attention to factors like your investment horizon, risk appetite and reason for investment and seek advice from a professional.
Are FDs modern or traditional methods of investment?
FDs are a traditional way of investing.
What is the full form of REITs?
REITs stand for real estate investment Trusts.
Is gold highly liquid?
Yes, gold is considered highly liquid and is used as a hedge against inflation.

November 15, 2023

Is It Better To Buy Stocks When The Market Is Up Or Down?

It is technical to decide the right time as to when to buy a stock. Your investment’s chances to perform well depend on when you enter the market. Well, when we talk about stock buying, the first question that comes to our mind is whether to buy a stock in a bull run or a bearish trend.

No worries! We have got you covered. Below are a few points you could consider before buying stocks in the stock market to clarify when it is the right time to enter the market. In the following blog, the topics that we’ll be covering are:

Understanding the market trend
Buying stocks in a bull market
Buying stocks in a bear market
Causes of market correction
What to do when the market corrects
Conclusion

Understanding the market trend

What does it mean when we say the market is up or down?

Up trend

So, when we say that the market is up, it is making higher highs continuously, and we can observe a bull run in the economy. The indexes and stock prices are constantly rising, giving tremendous returns to people who have invested in the favour of the market. For example, before the 1992 Harshad Mehta scam was exposed, we observed a bull run in the economy.

Downtrend

On the other hand, when we say that the market is down, it implies that the market is constantly making lower lows. Thus, we can observe a bearish market movement in the economy. The market indexes and the stock prices of the company are continuously falling. A fun fact about the stock market is that you can make money even in declining markets. You can profit from the market if you short your positions and bet against the rising trend.

What moves the market?

Now that we have understood the meaning of up and down in the market. Let’s discover the reasons for the up or down in the stock market. The stock market works on the simple economics concept of demand and supply. The market forces of demand and supply determine the prices of the stocks. One thing to remember is that the supply for the no. of stock in the stock market is limited as a listed company can only issue a countable number of shares. The demand depends upon the company’s financial performance and the news in the market surrounding it. Generally, we see a rally in share prices when the company declares good financial results. Apart from this, companies announcing dividends, mergers, or acquisitions also significantly impact the price movement. On the contrary, other legal, geopolitical, technological, global, and social factors also affect the markets holistically.

Buying stocks in an Up upmarket

As we have discussed above, about the up trend in the stock market. The bull run generally occurs when the overall economy is strengthening, when the stock prices are up by 20% following a 20% previous decline in the share prices. We can observe a bull run with increased investor confidence in the market; companies will be more willing to launch IPOs, and the businesses will get higher valuations for their equity.

Buying stocks during a bull run is considered less risky because it doesn’t make sense for you to sit on the cash pile and ignore the ongoing rally in the market. Investing your money in the stock market when the market is up requires less research. But still,

Buying stocks in a down market

Talking about the downtrend in the market. A downtrend is followed by the 20% fall in the stock prices from the recent highs amid widespread pessimism and negative investor sentiment. Generally, bear runs occur when the overall economy falls, and rising unemployment persists in the nation. Another definition of a bear market is when investors are more risk-averse than risk-seeking.

Buying stocks when the overall market is down is a strategy opted by various big investors, as when the whole economy is down, you could get shares at a discounted price than their real worth.

Causes of Market Correction

Market corrections are generally short-term in nature. However, chances are likely that corrections can be a call for the bearish market. But in the long run, markets and stocks manage to retrieve their original levels once the correction is over. A correction is generally a 10% to 20% drop in value from a recent peak. Corrections are seen on the stock indexes or even on the shares of your favourite company. Some of the causes of market correction are listed below.

Not-so-favourable economic data like job reports, lower GDP, etc.
A change in interest rate by the central bank (RBI in India) eventually makes it difficult for consumers to get loans at a lower rate.
Political instability, conflicts, trade tensions, or unexpected geopolitical events can create market uncertainty and fear.
Lower earnings from the part of top-performing companies represent the benchmark for the performance of the indices.
General profit booking at the market’s highs and some technical indications like a bearish candlestick pattern can also lead to market corrections.

A market correction can be quite challenging, but you do not need to start liquidating your portfolio or selling your assets (unwanted selling during a market correction can lead to realizing losses); instead, consider it an opportunity to enter the market at lower valuations.

What to do when the market corrects?

We have mentioned earlier that there are typically two types of participants in the market i.e., trader and investor. From the point of view of a trader, one needs to analyse the technical charts and patterns, book their unrealised gains and start looking for some other trading opportunity. But an investor needs to have a long-term mindset and he should have a well-thought-out plan in place to navigate market corrections. Investors generally consider market corrections as a fortunate action since it provides them with an opportunity to buy on dips or lows.

Investors generally develop a curated portfolio with a dynamic allocation of assets. Our suggestion to the investor would be to stick to the investment strategy which they initially adopted and instead of realising your gains, average the stocks that you are holding in your portfolio.

(Note- Averaging is buying more stocks when the price of the stock falls since it lowers the overall buy price of the stock that an investor holds.) Market corrections are like second chances for investors since they get an opportunity to re-evaluate their holdings analyse the stocks that have underperformed and adjust the holding as per their risk appetite. The market has historically recovered and continued to grow over the long term. Avoid making knee-jerk reactions based on short-term events. If you are an investor, you should have an ample amount of funds or sufficient cash in hand so that you can either average the existing stocks or buy any fresh stocks since portfolio readjustment is a part of happy investing.

Conclusion

We all know that market corrections are inevitable, and one should keep their emotions in check while trading or investing in the market. When the market bottoms itself out, leave your holdings in isolation and do not try to time the markets because sometimes anticipating corrections creates more loss than the actual correction. Buying on dips will help you create wealth, and buying on lows will help you generate short-term profits.

For example, if someone had invested in the market during the 2008 global financial crisis or COVID-19, the returns generated on his/her portfolio would have been phenomenal. This is the power of the stock market. To conclude, always invest or trade as per your risk appetite and financial goals. The market will always give you second chances to buy stocks at their highs or lows. Decisions and capital are all yours!

Successful investing requires patience and discipline.

FAQs (Frequently Asked Questions)

What are the two categories of capital markets?
Two categories of capital markets are primary market and secondary market.
Define Correction.
A correction is generally a 10% to 20% drop in value from a recent peak.
Mention two causes of market correction.
Two causes of market correction are stock earnings and changes in interest rates.
What is the averaging of stocks?
Averaging means buying more stocks when the market is down.
When should we buy a stock while investing?
While investing in the stock market, one should buy according to their risk tolerance, investment horizon and capital.

October 27, 2023

Fibonacci Retracement: Complete Guide on How to Use and Strategy

The origin of the Fibonacci series can be traced back to the ancient Indian mathematic scripts. This series was first introduced by an Italian mathematician Leonardo of Pisa, who was also known as Fibonacci. He lived from the late 12th century to the 13th century. His seminal work, “Liber Abaci” (The Book of Calculation), which was published in 1202 helped him introduce the Fibonacci sequence to Europe. The Fibonacci sequence is a series of numbers in which each number is the sum of the two previous numbers, generally starting with 0 and 1. The Fibonacci series is a set of infinite numbers i.e., no matter how many numbers you add to the series, it never ends.

The Fibonacci series is as follows,

(0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377)

In the above set of numbers if you divide any number by the previous number; the ratio is always around 1.618. The Golden Ratio, approximately 1.618, also called Phi is a mathematical constant derived from the Fibonacci sequence. It has many applications in nature, art, and science. Our readers need to keep in mind that 0.618, when expressed in percentage is 61.8%. A number divided by the next highest number comes near to .6180

(13/21=.6190, 21/34=.6176, 34/55=.6181, 55/89=.6179). The estimate nears 0.6180 as the numbers increase. This forms the base for the 61.8% retracement. A number divided by another two places higher comes near to .3820

(13/34=.382, 21/55=.3818, 34/89=.3820, 55/=144=3819). This is the base for the 38.2% retracement

A number divided by another three places higher comes near to .2360

(13/55=.2363, 21/89=.2359, 34/144=.2361, 55/233=.2361).

What is Fibonacci Retracement?

Fibonacci retracement is an indicator of technical analysis that is used in the stock market. The purpose of this tool is to recognize potential support and resistance levels in a candlestick chart of different financial assets. It is constructed on the Fibonacci sequence and the Golden Ratio, and it is a well-known indicator among traders and technical analysts.

Calculation Of Fibonacci Retracement

The commonly used retracement levels by analysts are 23.6%, 38.2%, 50.0%, 61.8%, and 76.4%.

Any trader needs to follow these steps to calculate the retracement levels of a particular stock.

Step 1. You need to identify a significant price move on your chart. This move can be either an uptrend or a downtrend. The starting point that a trader marks on the chart after applying the indicator should be a significant swing high or swing low.

Step 2. Determination of the Fibonacci Ratios

23.6% (0.236): we calculate this level by taking 23.6% of the pre-decided price range and adding it to the low point of an uptrend or subtracting it from the high point for a downtrend.

38.2% (0.382): To Calculate 38.2% of the price range the trader needs to follow the same addition or subtraction technique as above.

61.8% (0.618): To Calculate 61.8% of the price range use the same addition or subtraction method as above.

Other levels of the Fibonacci Retracements like 50% or 76.4% are also calculated similarly.

Step 3. Once you are done with the calculation of retracement levels start drawing horizontal lines at the calculated Fibonacci retracement levels. These lines represent the support and resistance levels for future price action that is expected to happen.

Now, start observing how the price of the asset reacts to these retracement levels. Any kind of bounce or reversal near these levels may provide buyers and sellers with some good trading opportunities.

Example of Fibonacci Retracement:

Let us understand Fibonacci Retracement with an easy and simplified example

Suppose you have identified a swing low of Rs.1000 and a swing high of Rs.1500 in an uptrend of a stock.

After determining these points, you need to calculate the price range by subtracting the swing low from the swing high

which implies that the price range will be (Rs.1500 – Rs. 1000) which equals Rs. 500

Having found the difference between the price ranges you can now calculate the retracement levels

Firstly, calculate 23.6% of the price range and add it to the swing low i.e., 23.6%*500=118+1000=1118

Then calculate 38.2% of the price range and add it to the swing low i.e., 38.2%*500=191+1000=1191

Now for the retracement level of 50%, divide the price range by 2 and add it to the swing low i.e., 500/2=250+1000=1250.

Similarly, calculate the 61.8% of the price range and add it to the swing low i.e., 61.8%*500=309+1000=1309

The values so derived (1118, 1191, 1250 and 1250) are the expected retracement levels.

Since we all know that Fibonacci retracement is a leading indicator as well as a widely used and famous tool in technical analysis applied by traders, it also has some advantages and limitations that traders should keep in mind before making any sort of trading decision.

Advantages of Fibonacci Retracement

Traders commonly value the following advantages of Fibonacci retracement

Fibonacci retracement can be applied to various financial markets, including stocks, commodities, forex, and cryptocurrencies, on different timeframes like hourly, daily, weekly, and monthly, making it a multipurpose indicator for technical analysts.
Traders use Fibonacci retracement in combination with other technical analysis tools, such as trendlines, moving averages, or oscillators. When different indicators give the same indication, like Fibonacci, chances are that the stock will move in the desired direction.
Fibonacci retracement is used by traders to identify stop-loss orders range as per their risk levels.
Fibonacci retracement can be used to identify potential profit targets. Traders often use the levels as reference points for setting profit targets.
Fibonacci retracement is particularly useful for swing traders who often look for short- to medium-term price movements to earn from the stock market.

Disadvantages of Fibonacci Retracement

Selecting the starting and ending points for the Fibonacci retracement analysis can be a tough task. It depends from trader to trader on what point they are choosing, which can eventually lead to varying retracement levels and trading decisions. This can lead to unnecessary confusion.
Relying solely and completely on Fibonacci retracement may lead to false buy or sell signals or missed trading opportunities.
Even though traders use this indicator widely, there is no assurance that the price will precisely bounce at the estimated Fibonacci retracement levels.
Fibonacci retracement may be difficult for beginner traders to understand since it might be confusing for them to choose the swing high or swing low.
Different timeframes can yield different retracement levels. Traders may face variations in levels on daily, weekly, or intraday charts.

Relation between Fibonacci Series and Fibonacci Retracement

The Fibonacci series and the numbers derived from it, such as the Golden Ratio (1.618), are used in the construction of Fibonacci retracement levels.

The important retracement levels in Fibonacci retracement are ratios that are derived from the Fibonacci series. For example, the 61.8% retracement level corresponds to the inverse of the Golden Ratio (1/1.618).

Fibonacci retracement is a real-world application of the Fibonacci series in technical analysis. Traders use the Fibonacci series and its ratios to find levels of support and resistance in financial markets for making sound trading decisions.

Conclusion

Remember that the effectiveness of Fibonacci retracement levels varies, and they should be used in combination with other technical analysis indicators and risk management strategies to make informed trading decisions. Additionally, the choice of starting and ending points can be somewhat subjective, so practice and experience are essential when applying Fibonacci retracement in real trading sessions.

FAQs (Frequently Asked Questions)

Which are the most popular Fibonacci retracement levels?
The most popular Fibonacci levels are 0.236, 0.382, 0.618.
Is Fibonacci a leading or lagging indicator?
Fibonacci is a leading indicator.
Can I use Fibonacci in intraday trades?
Yes, Fibonacci can be used on various timeframes including intraday.
Who discovered the Fibonacci series?
Leonardo Pisano discovered the Fibonacci series in the 12^th century.
What is the Fibonacci Series?
The Fibonacci sequence is a series of numbers in which each number is the sum of the two preceding ones, typically starting with 0 and 1.

October 25, 2023

What is ATR (Average True Range): Calculation, Advantages & Disadvantages Of ATR

In our previous blogs, we have discussed about stocks and technical analysis.

For reference, here are some insights into technical analysis.

Technical Analysis

Technical analysis is a method of analysing financial markets and making trading or investment decisions based on the historical price. It is primarily focused on studying past price movements and chart patterns to predict future price direction. Technical analysts identify support and resistance levels, which are price levels where an asset tends to find buying or selling pressure, respectively. Various technical indicators, including moving averages, Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), provide quantitative measures of price momentum. The average true range is one such technical indicator. Let us go through an in-depth analysis of ATR.

What is ATR?

The Average True Range (ATR) is a technical indicator used in the analysis of stocks, primarily for estimating the volatility and price range of an asset. Developed by J. Welles Wilder in his book “New Concepts in Technical Trading Systems.” ATR is a valuable instrument for traders and investors to measure market conditions and manage risk.

Here are the key points about the Average True Range:

The ATR is designed to measure the volatility of an asset, representing the average range between the daily high and low prices. A higher ATR value indicates greater volatility, while a lower value indicates lower volatility.
The ATR is derived from the True Range, which is the greatest of the following three values:

The current day’s high minus the current day’s low.
The absolute value of the current day’s high minus the previous day’s close
The absolute value of the current day’s low minus the previous day’s close.

To calculate the Average True Range, a moving average is taken of the True Range values over a specified period. The most commonly used period is 14 days, but traders can adjust this period as per their preferences.
Higher ATR values imply that the asset is going through greater price fluctuations, which can be understood as increased uncertainty or risk. Lower ATR values indicate relatively stable or less volatile market conditions.
A rising ATR can confirm the strength of a trend, especially when in combination with other technical indicators. It suggests that the market is experiencing strong price movement.
The choice of the ATR’s look-back period depends on the trader’s goals and time period. Shorter periods provide more responsive values, while longer periods offer a smoother, more stable measure of volatility.

The Average True Range is a multipurpose tool of technical analysis that when used in combination with other indicators and strategies can help in making informed trading decisions. It helps traders better analyse and manage the risks linked with market volatility, allowing for more precise stop-loss and position sizing.

Calculation of ATR.

The Average True Range (ATR) is calculated by following a specific formula. It involves several steps and the use of True Range values for a selected number of periods.

Here’s the formula and a step-by-step explanation of how to calculate the ATR:

Step 1:

Calculate True Range (TR)

True Range represents the greatest of the following three values for a given trading period.

The difference between the current day’s high and the current day’s low.
(Current Day’s High – Current Day’s Low)
The absolute value of the difference between the current day’s high and the previous day’s close
(Current Day’s High – Previous Close)
The absolute value of the difference between the current day’s low and the previous day’s close. (Current Day’s Low – Previous Day’s Close)

Step 2:

Calculate the Average True Range (ATR)

The ATR is calculated as a moving average of True Range values over a specified number of periods (usually 14 days is the default period).

Here’s how to do it:

1. Select the number of periods (e.g., 14).

2. For the first True Range value (TR1), simply take the TR of the first period.

3. For the next ATR calculations, use the following formula:

ATR = [(Prior ATR x 13) + Current TR] / 14
Where “Prior ATR” is the ATR value calculated for the previous period, “Current TR” is the True Range value for the current period, and “14” represents the selected number of periods.

The process is repetitive for each subsequent period. Then continue to calculate the ATR by using the prior ATR and the current True Range.

Here’s an example to illustrate the calculation of the ATR:

Let’s say we want to calculate the 14-day ATR of a stock:

Day 1:

ATR1 = 2 (True Range for the first day)

Day 2:

ATR2 = [(2 x 13) + 4] / 14 = 2.07

Day 3:

ATR3 = [(2.07 x 13) + 3] / 14 = 2.01

Day 4:

ATR4 = [(2.01 x 13) + 6] / 14 = 2.06

The ATR value provides an indication of the average price range and volatility over the selected number of periods. Traders use it to assess the level of price volatility, set stop-loss levels, and determine position sizes based on their risk tolerance.

Advantages & Disadvantages Of ATR

The Average True Range (ATR) is a widely used technical indicator in trading and investing. Like most tools, it comes with its own set of advantages and limitations.

Here are the advantages and disadvantages of using the ATR:

Advantages of ATR:

ATR is a purely mathematical indicator, which means it provides objective data. It’s not influenced by subjective opinions or emotions, making it a reliable tool for risk management.
Traders can adjust the look-back period for the ATR to match their specific trading strategies and time horizons. Common periods include 14 days, but you can choose longer or shorter periods based on your needs.
A rising ATR often indicates increased price volatility, which can confirm the strength of a trend. This is especially useful for trend-following traders.

Disadvantages of ATR:

ATR is based on historical price data, and it doesn’t predict future price movements. It provides information about past volatility, which may not always reflect current or future market conditions.
Like many technical indicators, the ATR is a lagging indicator, which means it reacts to price movements that have already occurred. This lag may limit its effectiveness in rapidly changing or highly volatile markets.
ATR can generate false signals, especially in choppy or sideways markets. Traders need to use it in conjunction with other indicators or tools to minimize false signals.
For beginners, the concept of ATR and its calculations can be complex. Understanding how to use ATR effectively may require some time and practice.
ATR provides information on volatility but doesn’t offer insights into other important factors like trend direction, market sentiment, or the potential impact of news events.

Conclusion

To conclude, the ATR is a valuable tool for traders and investors looking to measure and manage volatility and risk. However, it’s essential to use it in combination with other indicators and analyse it carefully to create a comprehensive trading or investment strategy. Additionally, identifying its limitations can help the investor to use it effectively and in a much better way.

Read Also: Rising Window Candlestick Pattern

FAQs (Frequently Asked Questions)

What is the full form of ATR?
ATR stands for Average True Range.
What is prior ATR?
Prior ATR” is the ATR value calculated for the previous period.
Who developed ATR?
ATR was Developed by J. Welles Wilder in his book “New Concepts in Technical Trading Systems”.
What is the default period of true range for calculating ATR?
The default period of the true range for calculating ATR is 14 days.
Is ATR a leading or lagging indicator?
ATR is a lagging indicator.

October 18, 2023

Why It Is Essential To Teach Your Children About Saving And Investing

According to the Pew Analyzed Census Bureau data, only 24% of adults are financially independent before age 22, to that of 32% in 1980. Most adults today complain that they were, never taught about financial independence in schools or at home. It is because of this reason, they struggled with their finances in the later years of life. Financial knowledge is not something that you can learn in one day, month or year. It takes years of discipline and hard work to be financially independent. Parents must teach their kids the basics of financial literacy, like saving and investing, from a young age.

Addressing the above problem. Today, we will discuss about the importance of teaching your children about saving and investing.

Why Do We Need To Teach Financial Literacy To Our Kids?

Have you ever seen the construction of a building? Laying a strong foundation for the building is important, to make it last for years. Similarly, to achieve financial independence, it is necessary to give financial literacy to children from a young age.

But, what exactly is financial literacy?

Financial literacy

Financial literacy is understanding the behaviour and working of money to make sound financial decisions like budgeting, asset building, loan financing and debt repayment. Having financial knowledge helps a person to feel empowered. Moreover, people with better financial education are less likely to be financially vulnerable in future. According to research in India, only 27% of the people are financially literate. It means only 1 out of 5 Indians are capable of making their crucial money decisions by themselves. The numbers are bizarre because dealing with money is one of the most customary aspects of human well-being.

Thus, it is the responsibility of the parents to instil this basic human understanding in their children.

Why Build a Strong Financial Foundation?

To build a strong financial foundation, children should be made familiar with basic concepts like saving and investing from a young age.
Saving is that part of your income that is left, after spending upon your consumption. Any person who has just started earning spends a prominent chunk of their income on consumption and saves little to no amount.
But, as they grow professionally, they start saving more for their future & the people dependent on them. Saving helps to build a cushion to rely on during uncertain times.
Investing is putting your money to work. Heard this famous quote, “Rich doesn’t work for Money, Money works for them” Weird right? But true.
By putting your money into Assets, you can make your money work for you even when you are not working. For example, investing in real estate could earn you a rental income and give you capital appreciation in the long run.

Parents should focus on securing their children’s future financially but also focus on building and developing their characters. So that, in case of future uncertainties, they can fight through.

Preparing for Future Financial Challenges

The majority of the people feel anxious when asked about their financial situations. As we grew, we realised that we weren’t ever, taught about financial education in our schools or colleges on which we’re supposed to make real-life decisions. How many of you have learned about finances in your schools or colleges?

I could confidently say that none. Our educational curriculum was never designed in a way to help us with our day-to-day problems. Most adults even today, don’t even know that there are options other than FD and mutual funds to invest in the markets.

Providing your children with early financial knowledge could help them to have a better future.

Introducing Financial Concepts to Children As They Grow

First, introduce them to the notion of money at a young age. Its importance, how it works, why it is necessary & other things related to it

Rewarding- Reward them every time they progress in their work, like for every book they read. Give them a certain amount of money as a reward or when they complete their homework on time.

Budgeting- Give them a monthly or weekly allowance and tell them to manage their expenses in that fixed amount. Explain how they should allocate their money towards their needs, wants and savings.

Savings- explain to your kids why saving is important and how it can help them. Encourage them to Save a portion of their allowances or paychecks (when they start working).

Taxes- When they grew a little old and started doing part-time work. Teach them how taxes work and how employer deducts taxes from their paycheck.

Investing- When they start to work, teach them about investing and financial markets. Explain to them how they should build assets.

Compounding- Teach them about compounding and the significance of early investing in life. Financial literacy is something that everyone should learn about. No matter your profession or field of interest, money is something that we all deal with daily.

Therefore, every person needs to be financially independent & financially literate in life because life is very uncertain.

Conclusion

If you are a parent or a guardian to any child, now you know why you must teach them about finances. No parent wants to see their child. Therefore, they must teach kids about money, which they were never taught about by their parents. It is easy to instil good habits in children at a young age as they are growing. Apart from just giving financial learning, parents should also start to save and invest early to give their children a more secure future.

FAQs (Frequently Asked Questions)

Why financial literacy is necessary?
Financial literacy is necessary to make sound financial decisions in life. Money is something that we all deal with on a day-to-day basis.
How to improve financial literacy?
To improve financial literacy you can read finance books like ‘Rich Dad, Poor Dad, ‘Think and Grow Rich’, ‘And Intelligent Investor’ to learn about the stock market.
Why financial literacy is essential for students?
Financial literacy is essential for students as it helps them understand how to make real-life money-related decisions once they start earning.
Is it necessary for children to learn how to wisely spend their money?
Yes, children need to learn to wisely spend their money.
How to explain investing to a beginner?
You can learn investing by understanding the basic technical jargon like return, risk, portfolio etc. After that, you consume content from different sources like books, online platforms & courses.

September 20, 2023

Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

In the last 10 years, the mutual fund industry in India has experienced a growth of ₹ 40,00,000 crore in the value of AUM (Assets Under Management). It implies that India is unleashing the full potential of mutual funds to grow their money. Investing directly in the stock market can be an overwhelming task. Thus, investing in mutual funds offers a more straightforward way to create long-term wealth.

Understanding What are Mutual Funds

As stated earlier, mutual funds pool the money from small investors and invest them in the securities of other companies listed on the stock exchange. Investment holders share the income earned through these investments of interest and dividends with the capital gains benefits. Thus, a mutual fund is the most suitable form of investment for the common man, as it allows them to diversify and invest in a more professionally managed security basket, without them being actively involved.

Mutual Funds as a concept first originated in Britain in the 19th century but developed in the U.S. in the late 19th and early 20th century at the principal money centres of the North-East. These funds were primarily close-ended and used to finance growth in the U.S.A. after the Civil War. However, the crash of stock markets in 1929 led to the demise of these close-ended funds. In 1940, the U.S. had about 68 funds; currently, there are several thousands of schemes. More significantly, in the year 1965 only 2 to 3% of U.S. households, owned fund shares. Nearly one-fourth of all U.S. households invest today in Mutual Funds.

The Indian mutual fund industry began with the formation of Unit Trust of India (UTI) in 1963 with the introduction of its first biggest scheme ‘Unit Scheme ’64’. The UTI then introduced several schemes for different sections of people. The public sector monolith operated under monopoly conditions and in an over-regulated economy till the mid-eighties. In 1987, commercial banks and insurance companies were also permitted to launch schemes.

Read Also: Types of Mutual Funds in India

Features of Mutual Funds

Professional management

Mutual funds are managed by professional experts, who are experienced in their respective fields. It gives the investor a sense of satisfaction that their hard-earned money is in good hands. These professionals are highly skilled and know when to enter and exit the market and accordingly churn the portfolio depending on the market dynamics.

Diversification

Mutual Funds let you invest in a more diversified portfolio without setting in much time. The main idea behind diversification is the simple reason given by the investor Mr. Warren Buffet, that never put all your eggs in one basket. Diversification helps to lower the risk of the investor. Diversification in mutual funds is done based on the objectives of the investors.

Liquidity

The liquidity of any asset shows how quickly it can be converted into cash. Assets that take less time to convert are highly liquid and the assets which take more time to convert into cash are less liquid. Mutual funds allow the investors to withdraw their money anytime until there are some restrictions by selling them at the current NPV.

Time-Saving

People who want to grow their money but do not have time to be actively indulged in the financial markets invest in mutual funds. Since mutual funds are managed by professionals investors do not have to spend their time researching every single company they want to invest in.

Types of Mutual Funds

There are various types of mutual funds present in the market. A person can invest in diverse mutual funds depending upon their needs. Mutual Funds could be differentiated based on their structure, choice of asset class and financial goals. Let’s try to understand each one of them one by one.

Based on the choice of the asset class

1. Equity Mutual Funds

Equity Mutual Funds are the one wherein the pooled money of the investors are invested in different companies listed on the stock exchange. They are expected to yield more returns as compared to debt and hybrid funds. Therefore, the risk associated with them is also higher. The investment holders earn through dividends and capital gains in Equity mutual funds.

2. Debt Mutual Funds

When the pooled money of the investors is invested in the debt securities of the company they are called debt mutual funds. Debt mutual funds are suitable for investors who do not want to bear high risk and want consistent returns. Investors earn an interest income on them and also capital gains.

3. Hybrid Mutual Funds

Hybrid mutual funds are a mix of both debt and equity funds. The money of the investors is invested in such a way that they could earn higher returns compared to debt funds & the risk involved is less than the equity funds.

Based on the Financial Goal

1. Growth Mutual Funds

When the majority amount of the investor’s money is invested in growth companies or equity funds, they are called growth mutual funds. The investor should have a high-risk tolerance to invest in growth mutual funds.

2. Income Mutual Funds

People who want a consistent stream of passive income generally invest in Income mutual funds. Funds that fall under this category generally invest in securities like bonds, corporate debentures and Government securities.

3. Balance Mutual Funds

Investing in balanced mutual funds provides the best of both worlds. The basic objective of the portfolio manager handling balanced Mutual funds is to provide the investors with a steady income flow along with growth.

Based on their structure

1. Open-ended Mutual funds

Open-ended mutual funds do not have any kind of restrictions over them. Restrictions could be the number of units sold, or having a maturity date. Open-ended funds are very flexible and allow the investors to exit anytime at the given NPV.

2. Close-ended Mutual Funds

Close-ended mutual funds have some restrictions over them like no repurchase facility and a pre-defined maturity period. With all the restrictions they have lost their significance among the investors and now are hardly in any use.

Benefits of investing in Mutual Funds

Convenience

Mutual funds are a convenient form of investing. You can start investing in mutual funds with as little as Rs.500 per month through an SIP investment. You can invest in mutual funds depending upon your convenience. Investing in mutual funds can be done through either SIP or lumpsum investment.

Financial discipline

It is very important to have financial discipline nowadays. Because today life is more unpredictable than ever before. Everyone wants to give a secure future to their loved ones and investing in mutual funds is one way of doing it. Doing early financial planning not only helps oneself but also ensures a secure future for the people who are dependent on you.

Low-cost

Since so many investors pool their money to invest in mutual funds, therefore, the cost of mutual funds per investor comes out to be less. The expense ratio of managing mutual funds is also less as compared to when an investor invests his money directly into the markets.

Reliability

Mutual funds are very reliable as they are watched by the regulatory body SEBI (Security Exchange Board of India). There are various mutual funds present in the market like the ICICI prudential mutual fund, SBI mutual fund, HDFC mutual fund etc.

How do Mutual Funds work?

First, many small investors come together who share a common financial objective. The objective could be, investing in growth funds or having a regular source of passive income.
Then, these small investors pool their funds together.
After that, these funds are transferred to the portfolio manager who will manage these funds.
He will then invest these funds in various financial securities depending upon the financial expectations of the investors.
After investing, the portfolio manager analyses how the investments are performing and accordingly sells and buys the new and existing mutual fund units.
Then, the returns generated on investments are returned to the investors.
Bonus tip mutual fund units are deposited in the investor’s Demat account. Open your Demat account today with Pocketful.

Conclusion

Thus, after reading the above article, you must be clear that investing in mutual funds is a simple and easy way to invest your money in the stock market. Investing in mutual funds lets you experience the massive potential of the stock market without devoting much time to it. But one thing that you should keep in mind is that investing in mutual funds is subject to market risk so invest accordingly. As stock market is highly volatile and reacts aggressively to market news.

FAQs (Frequently Asked Questions)

How to invest in mutual funds?
To invest in a mutual fund, you need to have a demat account. Open your Demat account today using Pocketful.
What is NAV in mutual funds?
NAV stands for Net Asset Value in mutual funds. It tells about the performance of the mutual funds.
What is SIP in Mutual Fund?
SIP in mutual funds is a way of investing in mutual funds. Wherein you invest a small amount regularly in mutual funds.
Can I invest Rs. 2000 in mutual funds?
Yes, you can invest Rs.2000 in mutual funds using SIP.
What are Tax-saving mutual funds?
ELSS is an example of a Tax-saving mutual fund. Tax saving mutual fund is like any other regular mutual fund with added tax advantage.

September 16, 2023

What are ETFs? Are ETFs good for beginner investors?

Recently, Exchange Traded Funds abbreviated as ETFs have gained popularity among investors. For the various benefits they offer. ETFs are a good investment option for beginner investors as they offer a collection of stocks with similar characteristics in one place. Investing in ETFs enables investors to have a diversified portfolio without doing research for individual stocks. ETF helps to minimise the risk of the investor & maximise his return on his portfolio.
By the time you finish reading this article. You will have a clear idea of whether you should invest in ETFs or not.

What are ETFs or Exchange- Traded Funds?

In simpler words understand like, that it is a box filled with many pebbles,& these pebbles are individual stocks or bonds with similar characteristics. An interesting fact is that specific ETFs track the movement of indices like NIFTY50, SENSEX, etc. So, you expect the same returns on your investment as the index’s annual CAGR.

Looking into the history of ETFs in India, we see that. The first ETF in India was launched in 2002 by Nippon India Mutual Fund (erstwhile Benchmark Asset Management Company Ltd). Listed on January 8th 2002, it witnessed a trading of 1.30 crores on the first day. The journey to listing of the 100th ETF on NSE took more than 19 years. The last one-year period has seen a lot of activity in the ETF space, with 21 ETFs getting listed on the NSE. The assets under management of ETFs in India are now at Rs. 3.16 lakh crores (end of May 2021), witnessing more than 13.8 times increase in five years,  compared to Rs. 23,000 crores (end of April 2016).

ETFs offer the best of both worlds, like Mutual Funds, ETFs represent professionally managed collections or baskets of stocks or bonds. And just like individual stocks, they trade on the stock exchanges, which means you can buy and sell them like individual stocks.

Types of ETFs in India

There are different types of exchange-traded funds (ETFs) available in India, offering investors a variety of options to choose from according to their financial goals and risk tolerance.

Equity ETFs : Equity ETFs track stock market indices such as Nifty 50, Sensex, or Nifty Next 50. They provide investors with broad market exposure and are suitable for the long term.
Debt ETFs : Debt ETFs invest in government or corporate bonds, such as Bharat Bond ETFs. These are known for stable income and low risk and are suitable for retirement or capital preservation. Investments in them can generate regular interest income.
Gold ETFs : Gold ETFs track gold prices and give investors an opportunity to invest in gold without buying physical gold. They are suitable for inflation protection and portfolio diversification.
International ETFs : International ETFs track stocks or indexes from foreign markets such as the US, China, etc. They offer global diversification and the opportunity to invest in foreign markets but also carry certain risks.
Smart Beta ETFs : Smart Beta ETFs move away from traditional index tracking and focus on tracking smart beta indices focused on value, growth, etc. They provide investors with an opportunity to earn better risk-adjusted returns.

Investors should consider their investment goals, risk tolerance, and time horizon when choosing among these different types of ETFs. Choosing the right ETF can improve portfolio performance and help achieve financial goals.

What are the pros of investing in ETF?

Investing in ETF has several benefits, some of which are listed below.

1. Diversification:

ETFs enable the investor to diversify their portfolio without the hassle of individually picking out each stock. Investors seeking to invest in a specific type of sector or industry. ETFs are a go-to option for people who do not want to spend their time researching each company individually. They cover most of the asset classes and sectors for the most part.

2. Low expense ratio:

The expense ratio is the operating expense of the Security, divided by the value of that security. In other words, it is the expense that the investor has to bear for the Security. An expense ratio below 1 is good. And ETFs offer an expense ratio below 1.

3. Easily tradeable:

Investors can trade ETFs just like individual stocks, which makes them highly liquid, meaning you can sell and buy them anytime during market hours.

4. Tax-efficiency:

Due to its low turnover, ETF offers tax relief to investors. The investors are charged 15% on short-term equity gains. And 10% on long-term equity hains after the exemption of the first 1 lakh rupees.

5. Transparency:

ETFs typically have the same securities as the index or the benchmark they track. Some ETFs disclose their holdings regularly, while others disclose them on a monthly, or quarterly basis.

What are the cons of investing in ETFs?

Investing in ETF has several disadvantages, some of which are listed below.

1. Low trading volumes:

Even though ETFs have become popular lately, their trading volume is considerably low compared to the other securities listed. Volume is the total buying and selling of a specific security over the trading exchange.

2. Lack of liquidity:

Due to low trading volume, sometimes it becomes hard to sell the ETFs because there is no one willing in the market to buy them at the price you are offering at that time. Therefore, ETFs are not the most liquid asset to hold.

3. Composition risk:

Since ETFs are already tailored-made investment options. Sometimes, they may have some securities in the group that you do not want to hold. Therefore, you do not have a choice for customisation.

4. Issue of control:

ETFs offer less control as the investor does not choose the securities in the ETF by his own will. Also, the portfolio manager swaps or churns the portfolio depending on his expertise.

ETFs vs. Stocks vs. Mutual Funds: Which is Better?

Before starting to invest, it’s important to understand the difference between ETFs, stocks, and mutual funds and which option is suitable for whom.

Feature	ETF (Exchange Traded Fund)	Stocks	Mutual Funds
Risk	Moderate (Diversified portfolio)	High (Investment in a single company)	Low to High (Depends on type of fund)
Returns	Index-based, relatively stable	Can be very high or very low	Depends on fund manager’s performance
Cost	Low (Lower expense ratio)	Brokerage charges	Slightly higher (Includes fund management fee)
Liquidity	High (Traded throughout the day)	High	Lower (Redeemed at NAV, once daily)
Diversification	Yes (Index-based spread across many stocks)	No (Single stock exposure)	Yes (Diversified portfolio by fund manager)
Management	Passive (Tracks an index, no active manager)	Self-managed (Investor makes decisions)	Actively managed (By professional managers)
Ownership	Indirect (Holds a basket of underlying assets)	Direct (Ownership of shares in a company)	Indirect (Units of pooled fund investments)

ETFs are a better choice for those who want low costs and good diversification and are comfortable trading on their own.
Stocks are suitable for active traders and high risk takers.
Mutual funds are for investors who like the convenience of professional management and prefer regular SIPs.

Points to keep in mind before investing in ETFs

First, determine the assets, in which you want to invest. Choose the best possible ETF according to your risk appetite and availability of funds.
Go for those ETFs that offer a low expense ratio. So, you can save on your operating costs.
Invest in ETFs with high liquidity so you can sell them without any hassle whenever you want. Otherwise, it would be a hectic task.
Check the ETF disclosure reports to ensure that your financial goals align with the objectives of that particular ETF.
Lastly, regularly check the performance of the ETFs and take the required measures according.

Conclusion

From the above article, we can conclude that, as a beginner investor, ETFs could be an adequate option to start your investing journey. Keep in mind that everything has pros and cons & the same applies to ETFs. Keeping a check on a few things and investing with patience and discipline can yield lofty returns for investors.

FAQs (Frequently Asked Questions)

What are ETFs in the stock market?
ETFs or exchange-traded funds are financial securities that resemble the characteristics of both Mutual Funds and Stocks. In simpler words, a collection of different stocks to track the performance of a specified index.
How do ETFs work?
ETFs are like common stocks on the stock exchanges. They track the movement of the underlying asset and perform accordingly.
What are the types of ETFs?
Different types of ETFs are present in the market like index ETFs, sector ETFs, and commodity ETFs.
Which are the best-performing ETFs in India?
Kotak PSU Bank ETF, CPSE Exchange Traded Fund, UTI S&P BSE Sensex ETFETF are the top-performing ETF funds for the past year.
What are CPSE ETFs?
CPSE ETF (Central Public Sector Enterprises Exchange-Traded Fund). An investment instrument that allows you to invest in Central Government public sector enterprise.

September 12, 2023

How to use technical analysis on charts

If you are active in the stock market, you must have heard the term technical analysis quite often. Technical analysis is analysing the market movement and catching the trend. Technical analysis is used for short-term trading or investment. Wherein you gain by capturing the small price difference within a short period.

What is technical analysis?

Technical analysis is analysing the market based on historical data, price & volume primarily. The Main objective of technical analysis is to predict future trends & price movements. This objective goes against the past established theories. Like never trying to predict the markets, focusing on the long term, doing fundamental analysis and more, because for all these reasons Relevance of technical analysis gets questioned.

Technical analysis follows the ideology of history repeating itself. Following this principle, various techniques have been developed over the years. Like trading using price action, indicators, chart patterns and more. Patterns get identified using the past historical data of the companies and the indices present. To draw inferences for making the entry-exit decisions in a trade.

How to do technical analysis?

There are a few things you should understand before starting to do a technical analysis which are:

1. Trend:

The direction in which the market moves is called a trend. In the stock market Trends can be of three types. Upward, Downward and Sideways. Let’s understand each one of them:

Upward trend-
The market is in an upward trend when it keeps making new higher highs. And when the market is in an upward trend we say that the market is bullish.
Downward trend-
The market is in a downward trend when it keeps making lower lows. When the market is in a downward trend and keeps falling we call it a bearish sentiment.

Sideways trend–
When the market moves in a fixed range for some duration it is said to be sideways. We often say that the market is consolidating when it moves like this.

2. Price action:

If you are active in the Stock Market you must have heard the term Price Action. So Price Action is the process of analysing the price movement of a security or asset and determining potential entry and exit points for a trade. While trading with Price Action, the main task is correctly identifying the support and resistance levels on the chart.

Let’s briefly understand what support and resistance levels are:

Support –
Support is that level on the chart from where the price is likely to increase or reverse its trend. Support shows the minimum willingness of the buyers to buy the security. To make a support line on a chart you look for a common point from where the price is bouncing back. Support levels on the chart help to identify breakouts.
Resistance-
Resistance is the price level zone on the chart from where the price is likely to decrease or change its trend. Mark the points on the chart, from where the price is reversing. This way, You will see the resistance levels on the chart.

3. Chart patterns:

Chart patterns are the Figures and patterns that form on the chart of an asset. These patterns have been developed over a while, using historical data from the past 100 years. Chart patterns show or predict the price movements considering how the price has redacted in the past. Broadly chart patterns fall into three main categories that are listed below:

A continuous pattern indicates that a trend will continue for some time.
A reversal pattern indicates that the price may change its movement & there will be a price reversal.
A bilateral pattern may show that the market is highly volatile & the price could go either way.

4. Candlesticks:

Candlesticks are a type of price chart used in technical analysis. It is the most popular type of charts used by traders. It shows the High, Low, Open and Close prices.

A green candlestick depicts that the price is moving in an upward direction. The wick shows the maximum price level it had touched in that period. The upper part of the green body shows the closing. The lower part of the green body shows the opening of the price.
A red candlestick depicts that the price is moving in a downward direction. The wick shows the highs and lows it had made. The upper body part of the red candle indicates the price opening & the lower body part shows the closing price.

5. Indicators:

Indicators in the stock market are mathematical tools developed using advanced algorithms and historical data to predict price movements. Different charting platforms provide their users with several indicators to use. Some famous indicators are listed below:

RSI (Relative Strenght Index):
RSI is one of the most popular indicators among traders. It helps in identifying the overbought and oversold stocks. After reaching a saturation point potential exits and entries are forming in the trade.
MACD (Moving average divergence Convergence):
MACD was developed by ‘Gerald Appel’ in the late 1970s. It was designed to reveal changes in the strength, direction, momentum, and duration of a trend in a stock’s price.
VWAP ( Volume Weighted Average Price):
Vwap is a technical indicator that indicates the price movement based on the volume of the security. Volume is the total buying and selling of the financial asset. In case of high buying volume, the price falls. On the other hand higher buying volume, the price increases.

After understanding all these terms like Trend, Price Action, Indicators, and Chart patterns, it depends on the personal preference of the trader and which tools they use for technical analysis.

Five simple steps of technical analysis for any beginner or a seasoned trader

1. Identify the trend:

The first thing in doing technical analysis is to identify the trend in the market. You can use trendlines to identify the Trend. To draw a Trendline join the higher highs or, the lower lows of the candles. Another way of identifying the trend in the market is by using indicators. Many indicators help to capture the Trend. Analyse if the market is in a downtrend. Up trend or sideways.

2. Make support and resistance levels:

After identifying the Trend in the market, make support and resistance levels. Look for the points from where the price is reversing its movement. Again, you can identify the support and resistance level by yourself or with indicators.

3. Look for breakouts:

A breakout indicates a trend movement in the price after breaking the support or the resistance levels. For example, if the resistance breaks, the price may move in a bullish trend for some time. However, if the support breaks, the price may move in a Downward Trend.

4. Identify entry and exit points:

After identifying a Breakout it’s important to determine your entry & exit prices. Sometimes, the markets are so volatile that you can’t get an entry in the trade at the desired price. In that case, you should not run after the Trade but look for another entry.

5. Pre-determining targets and stop loss:

The last and most crucial step is to pre-define your targets and stop loss even before entering the trade. When you enter a Trade & it’s going in your desired direction. It makes you overwhelmed and without a definitive target. You keep on trailing the trade and end up making a loss.

Conclusion

Thus, summarising the above read, we can conclude that Technical Analysis is also an important branch of investing. It helps us to invest and trade in the market in the short-term and medium-term. Doing technical analysis requires precision, perseverance and practice. While investing or trading one must keep their emotions under control to be successful in the market.

FAQs (Frequently Asked Questions)

What is technical analysis in the stock market?
Technical analysis in the stock market is the process of identifying the trends and predicting the price direction.

What are the best books for technical analysis?
There are so many good books in the market for technical analysis. Example Encyclopedia of Chart Patterns, Technical Analysis of the Financial Markets: and many more.
What is the difference between fundamental analysis and technical analysis?
Fundamental analysis assesses the financial health of the company. Technical analysis analyses the share price movement.

What is the Dow Theory of technical analysis?
Dow’s theory was taken from the editorials of Charles H. Dow. According to this theory, a shift in the bullish or bearish trend is confirmed by multiple indices.

September 7, 2023

5 points to be considered before buying or selling any stocks

Choosing the right stock to invest in is a very grinding task and selecting the right Stock at the time is even more gruelling. So many Investors find it hard to decide when to Buy and Sell a stock. Even after doing a thorough analysis of a company or an industry if you fail to enter the investment at the right time, all the research goes in vain. Similarly, not exiting from the Stock at the right time can also result in losses. So, what to do in that case?

5 Points to Consider Before Buying and Selling

Below We have mentioned five such points that could help you to make Buying and Selling decisions timely. So that you could invest in the stock market with ease.

1. Invest in the industry of your interest:

The first step for anybody, when they start investing in the stock market, is choosing the right industry. Choosing the right industry, sector or business is the core foundation for building a strong portfolio.
Legends like Warren Buffet always suggest investing in companies in which you have an interest or you are familiar with their business. It encourages you to regularly update yourself on the company’s performance.

To make an appropriate Buy or Sell decision it is very important to be updated with the company’s performance. When you are familiar with a company, or industry and know how the price reacts to market dynamics, it becomes simple to ignore unnecessary news and stick to your target.
Therefore, it is always suggested to invest in companies that you know well. Who’s business model excites you and you are willing to hold the stock for a longer period?

2. Understanding the Market sentiment:

For example,

We have seen that during COVID-19 the markets were affected badly because of fear among the people. At that time the market had a bearish sentiment, the stocks of so many companies were at a price lower than their actual value. Which was a very good buying opportunity in certain specific sectors like FMCG, Healthcare, etc.

3. Evaluating the financial reports:

Understanding and interpreting the company’s financial reports helps you to have a clear viewpoint on Buying and Selling decisions. The financial reports of the company consist of the balance sheet, profit and loss statement and the cash flow statement.

A Balance Sheet is a concise summary of the company’s current market standing. Showing what all the company’s assets and liabilities are and how are they financing their operations.
The Profit and Loss Statement depicts the performance of the company during a financial year. It shows how effectively the company is using their resources to generate revenue and how much expense they are incurring.

Cash is considered to be the lifeline of any business. Having a positive cash flow is a big green flag for any company. The Cash Flow Statement shows the net flow of cash in the business during a financial year, from the operating, financing and investing activities of the business.
Being able to read and understand the financial reports of the company helps the individual to make optimum buying and selling decisions.

Financial reports provide you with insight into the sales growth, gross and net margins, and profitability of the company which helps you to determine whether the company is making any progress or not.

4. Determining the fair value of the stock:

Evaluating the fair price of the share is very important before buying or selling it. Many financial ratios help you assess that if the share is fairly valued or not, on the stock exchange.

Three Important ratios that you can look at

P/E Ratio
Debt to Equity Ratio
Intrinsic value

Let’s briefly understand each one of them-

P/E Ratio:
The P/E ratio shows the relation between the stock price and the company’s earnings. It is calculated by dividing the current market price of the stock by the earnings per share.

Debt to Equity Ratio:
The debt-to-equity ratio is a financial ratio that is used to assess how much proportion of debt to equity a company is using to finance its assets.
Debt is the creditor or debt holders’ money that is invested in the company against which they receive a payment in the form of interest regularly.

Intrinsic value:
Intrinsic value is the anticipated value of any stock. Based on specific parameters the IV of any stock is calculated. Taking into consideration both tangible and intangible factors.

Intrinsic value = Future cash flows(1+ discount rate)#of periods

5. Investment goal

While investing in the stock market or building your portfolio it is very important to set your financial investment goals. Some Goals are short-term, and some are long-term. It is very important for an individual to correctly pre-define them to make the buy and sell decision at the right time.
Various factors determine one’s investment goals like the need for money in the coming years. A person who might not need his money for a decade can invest in more riskier assets. On the other hand, a person who might need his money in the coming years will invest in more liquid assets.

Conclusion

Summarising the above article We can conclude that while making a Buying and Selling decision we should always consider the market dynamics at the given point. Always try to invest in the industry or sector you are familiar with or are interested in. We have also seen that even at Rs.1000 a stock could be undervalued. Whereas, a stock trading at Rs.50 could be overpriced for what the company is offering.

And remember at the end of the day, investing in the stock market is a very whelming experience and you should always have control over your emotions. Often people get carried away with their emotions and end up making rash decisions and having to bear the consequences over the years.

FAQs (Frequently Asked Questions)

How to start buying and selling stocks?
To start buying and selling stocks, you first need to have a Demat account. There are several brokers present online, so it becomes complicated to choose the right one. Now. you can open a Demat account using Pocketful’s app within a few seconds.
Which are the best apps for buying and selling stocks?
There are many applications present online which facilitate the buying and selling of stocks. It depends on the use case and preference of the customer. Pocketful offers a trading platform for both your investing and trading needs. Simple interface combined with modern technology to make your finance journey smooth.
What are the buying and selling of stocks?
When you buy a stock you are not buying it with the company but the shareholder. Similarly, when you sell a stock the company is not buying it but some other investor.
What points should one consider before buying and selling stocks?
In the above article, five key points are mentioned that you should consider before buying and selling stocks. Never buy a stock in a company or industry, you do not know about. Analyze what the market dynamics are and how other investors are reacting.

September 6, 2023

Category: Investing

What is Interest Rate?

Why interest rates are changed?

Impact of rate change on the Indian stock market.

Impact of change in rate by the US Federal Reserve on the Indian stock market

Conclusion

Frequently Answered Questions (FAQs)

How does interest rate affect bond prices?

Do all stocks react to interest rate changes in a similar way?

Who regulates and manages the interest rate in the stock market?

Why does RBI increase the interest rate?

What happens to borrowing costs when RBI increases the interest rates?

Modern Investment Options

Stocks

Mutual Funds

PMS

Bonds

AIF

Exchange Traded Funds (ETFs)

Traditional Investment Options

Fixed deposits

Public Provident Fund

Post Office Schemes

Savings Account

Other Investment options

Gold

Real-estate investment Trusts (REITs)

Conclusion

FAQ (Frequently Answered Questions)

How do ETFs differ from mutual funds?

How to choose the right investment as per my financial objective?

Are FDs modern or traditional methods of investment?

What is the full form of REITs?

Is gold highly liquid?

Understanding the market trend

Up trend

Downtrend

What moves the market?

Buying stocks in an Up upmarket

Buying stocks in a down market

Causes of Market Correction

What to do when the market corrects?

Conclusion

FAQs (Frequently Asked Questions)

What are the two categories of capital markets?

Define Correction.

Mention two causes of market correction.

What is the averaging of stocks?

When should we buy a stock while investing?

What is Fibonacci Retracement?

Calculation Of Fibonacci Retracement

Advantages of Fibonacci Retracement

Disadvantages of Fibonacci Retracement

Relation between Fibonacci Series and Fibonacci Retracement

Conclusion

FAQs (Frequently Asked Questions)

Which are the most popular Fibonacci retracement levels?

Is Fibonacci a leading or lagging indicator?

Can I use Fibonacci in intraday trades?

Who discovered the Fibonacci series?

What is the Fibonacci Series?

Technical Analysis

What is ATR?

Calculation of ATR.

Calculate True Range (TR)

Calculate the Average True Range (ATR)

Advantages & Disadvantages Of ATR

Advantages of ATR:

Disadvantages of ATR:

Conclusion

FAQs (Frequently Asked Questions)

What is the full form of ATR?

What is prior ATR?

Who developed ATR?

What is the default period of true range for calculating ATR?

Is ATR a leading or lagging indicator?

Why Do We Need To Teach Financial Literacy To Our Kids?

Financial literacy

Why Build a Strong Financial Foundation?

Preparing for Future Financial Challenges