We realize that this area of our field of endeavor is a serious matter for any investor of the stock market, so it is best to start with the basics. We expect that, the investor has an understanding of the various aspects of investment management. Now, we would be introducing the aspect of 'trading'.
Trading is basically buying and selling a financial instrument, like a stock quoted in the stock market. And making a profit from the transaction. That is the investor's selling price is more than the cost price.
To get things into perspective, the stock market does not go straight up or straight down. It moves in steps. Depending on the information flow it may move forward (or up) or move back (or down). With research, we have concluded that a step is 6.25% of a base price. That is, if the base price of a stock is ₹100.00, then one step is ₹6.25. This base price is the fair value of a stock at that point in time.
The stock market over a period of time would show the following conditions or phases:
Bull phase. Where the equities traded in the stock market are taking at least 2 steps forward with one step back. This may extend to 6 steps forward to 2 steps back. In further extreme conditions there would be no top to the stock market.
Bear phase. Where the equities traded in the stock market take 2 steps back for every one step forward. This may extend to 6 steps back to 2 steps forward. In further extreme conditions there would be no bottom to the stock market.
Consolidation phase. Where the stocks traded in the stock market have reached an equilibrium level and are taking one step forward for every one step back. However, the various participants of the stock market are awaiting some news to take the price up or down depending on the nature of the news. That is whether the news is as per expectation, better than expectation or not as per expectation and what effect it has on the valuation of the stock in question. Thereafter we can expect a further move in the price levels.
Distribution phase. Where the stocks traded in the stock market have achieved high price levels maybe their yearly highs. It is here that the strong hands (knowledgeable investors) are selling equities to the weak hands (not so knowledgeable investors). After the selling is over and done with, we may safely expect a down move in price levels. That is, prices would move down and back to their fair values or below it. Let's face it, which knowledgeable investor would buy stocks when he knows that there is no margin of safety available in the transaction.
Please remember, whichever phase the market may exist in, it is taking one step at a time. However, depending on the nature of the stage the market may take more than one step in a day. This would cause happiness to investors if the net outcome is positive and sadness if the net outcome is negative.
We have provided links to various webpages of our website which would be relevant to this aspect of investment management. It is expected that the investors after read these webpages listed below would have a better understanding of the stock markets, the preparation they must do before engaging it in a better than amateur fashion. It may also be understood that, in spite of all the knowledge and wisdom the investors may gain with regard to investment management at the various stages of their learning curve, the stock markets would still do what they must do; so, caution would be advisable at all the various stages of the investment program the investors may implement from time to time.