Absolute return is a simple concept that tells you the total profit and loss on your investment without taking into account any time factor. In simple words, it tells you the total return you got in your investment. It does not take into account the time period for which the investment has been made, or the benchmark against which it is compared. It helps in telling the total returns from the beginning of investment in mutual fund or any other instrument till its present time.

How does absolute return work?

Absolute return is one of the easiest and most accurate ways to calculate your investment’s performance and the returns it provides. Using this, we are able to know how much return we have received from our investment time period to the present value of the investment.

Through this return, fund managers and investors can estimate how effective their investment strategy is, and whether they should work further according to this strategy or not. Unlike other returns, profits and losses here are not compared to any benchmark, nor does it matter what the market condition has been during this period. Overall, it shows the difference between the time period of your investment and its initial value in percentage format, so that we can make a correct opinion about our investment.

When is absolute return used?

Every investor, whether long term or short term, wants to know the risks and rewards involved in the investment he makes. This type of investment is usually done in market linked instruments like mutual funds, stock portfolio etc. Using absolute returns, investors can track the returns generated by investment instruments such as mutual funds over a given period of time. A good return confirms that the invested scheme has performed well in the past, and similar performance is expected in the future. All these factors help an investor in taking long term investment decisions, and choosing a good investment instrument.

Importance of Absolute Return

Simple Calculation: Calculating Absolute Return is very easy. Any common citizen or investor can easily understand this. For investors who do not have much knowledge of market ratios and financial formulas, this is a great way to know the performance of their investments.

Portfolio Diversification: Absolute return refers to the simple return of an investment without any fundamental or benchmark factors. Keeping this in mind, the investor can check his various investment returns and take appropriate steps to diversify the portfolio.

Short Term and Long Term Goals: Absolute Return calculates returns without taking the time factor into account. In this way, it can be beneficial for both long term and short term investors. This helps them in taking future decisions related to their investment by looking at its current value.

Effect of market volatility: Market volatility is not taken into account in the calculation of absolute returns. It only works to show positive or negative returns while making the investment returns stable. Thus, it is beneficial for those investors who do not have much knowledge of various market factors and consider total returns as the benchmark for their investment decisions.

How to calculate absolute return?

Absolute returns can be calculated very easily. For this, the principal value of the investment is subtracted from the current value of the investment, after which the value obtained after dividing it by the current value is the absolute value. For example, you invested Rs 1 lakh in a mutual fund on January 1, 2023, the value of which has increased to Rs 1 lakh 30 thousand in December 2024. Your total profit in this case was Rs 30 thousand. By converting this into percentage, we can find out the absolute value, for which the formula given below is used.

Absolute return’s formula

Absolute Value = ((Current price – Purchase price) / Purchase price) * 100

Using the example values above:

Absolute Value : ((130,000-100,000)/100,000)*100 = 30%

Difference between absolute and annual return

Conclusion

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IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

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CRR means: Cash Reserve Ratio

This ratio is an important tool determined by RBI, which helps in controlling the money supply and liquidity in the country. CRR determines the minimum percentage according to which all banks are required to keep some cash and deposits with the RBI as reserves. This percentage is fixed by RBI and every bank is required to follow it.

CRR works to reduce liquidity risk in the country’s economy, where if people need money at once during an emergency, then the bank has sufficient funds to meet the demand. All banks must deposit funds with RBI as per the CRR ratio, failing which they may have to face penalties.

How does CRR work?

CRR plays an important role in controlling financial stability and inflation in the country. This is an important part of monetary policy, which helps in controlling the flow of money in the country. Under this, banks have to keep a certain part of their deposits with RBI as reserve. By increasing or decreasing the CRR rate, the Central Bank maintains the financial stability of the country.

If the CRR rate in the country is high, then the bank has to keep a large part of its deposits with RBI. Due to this, less money is left with the bank and due to shortage of money, banks are not able to give more loans to people and businesses. Due to people not having much money, their expenses will reduce, due to which the demand for products and services will also reduce. If demand is low and supply is high, the price of products and services will be low, which helps in keeping inflation low.

On the contrary, if the CRR ratio is low then the bank will have more deposit money, which it will be able to give to people through loans and other lending tools. As people have more money, their spending power and demand will increase, which boosts the country’s economy and production.

How is CRR calculated?

There is no fixed formula to calculate CRR. Generally it is calculated as a percentage of Net demand and Time liabilities (NDTL) of banks. NDTL includes funding of bank’s savings account, current account, RD and fixed deposits etc.

For example, if the bank has Net Demand and Time Liabilities of Rs 500 crore, and the CRR rate is 4%, then the bank will have to keep Rs 2 crore with RBI as cash reserve ratio.

Importance of CRR

CRR is an important part of monetary policy and it helps in managing money in the country and controlling its flow in the economy. Apart from this CRR main features:

Financial Strength: CRR ensures that the bank has adequate funds available in the form of deposits at all times. In this way, in case of emergency, people do not have to face any kind of problem regarding money.

Control on inflation: RBI controls inflation by controlling the rate of CRR. As already mentioned, if the CRR rate is increased, it helps in controlling inflation, whereas by reducing CRR, demand and production in the economy is promoted.

Balancing liquidity: The flow of money in the country is controlled through CRR. This confirms that there should not be more money in the economy than is needed when needed and if the functioning of the economy is to be accelerated then funds and resources should be available to the people without any problem.

Base Rate: CRR plays an important role in deciding the base rate. Base rate is the minimum rate, considering which any bank can lend money to people as a benchmark.

Why is CRR changed?

According to economic and government policies, CRR is changed from time to time, and it is necessary to do so. When the economy or people have too much money, it causes inflation, because in case of more money, people spend more, which increases demand and due to increase in demand, inflation also increases. Through CRR, RBI can increase or decrease money and its flow in the country, which helps in controlling inflation. There are many such economic and financial reasons due to which the government has to make changes in CRR.

Current CRR rate

The current CRR rate in India is 4.5%. That means if a bank has a deposit of Rs 1000, then it will have to keep Rs 450 with the Central Bank as CRR.

Difference between CRR and SLR – Difference between CRR and SLR

Conclusion

CRR is an important tool of monetary policy which the Central Bank keeps using from time to time. It is used not only in India but by all the banks of the world, which works to maintain balance in the economic and financial condition of the country.

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IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

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Are you also new to the share market and thinking of investing? Being a new investor, it becomes very important for you to know how much profit and to what extent you can lose in the share market. Before making any kind of investment, we should know about its advantages and disadvantages. This is very important so that one can take a better investment decision and avail high returns with minimum loss. Through this article, we have tried to tell you the advantages and disadvantages of share market, but before knowing it, let us take a look at what is share market?

What is Share Market?

Share market is a market where shares of different companies are bought and sold. Share means a part of the company which can be purchased by paying some price. Here different buyers and sellers trade and invest in these shares with the aim of earning profits. If share market is a market then stock exchange is the place where this market is organized and brokers are the shopkeepers who work to connect traders/investors and the exchange. Earlier the shares market used to work in physical state where all the shares were issued in the form of certificates but now they are stored in digital form in demat account.

Benefits of Share Market

High Return: Share market is such a medium which has the ability to give you very high returns in a very short time. It is almost impossible to expect such returns in any other investment sector. If stocks are selected thoughtfully and through proper analysis, there is no better way to earn wealth than this.

You can make money in the market through two things, either trading or investing. In investing, this work is done for a long period and for that one must have the ability to tolerate the ups and downs of the market. On the other hand, if one learns trading well and becomes skilled in it, then making big money in a very short time is not a big deal. It doesn’t matter.

Portfolio Diversification: Diversification means not making all your investments in one place but in different assets and sectors, so that even if a situation like recession and epidemic comes tomorrow, some money will remain in such a place which will not be affected by the ups and downs of the market. Can also give an average return and which can be useful when needed.

If you are young and can take risk, then keep maximum part of your portfolio in the stock market. There is risk in this, but if even one of the companies you invest in performs well, then that one stock is enough to make you wealthy.

Owning a part of Company: Generally, investment in big companies is done by big corporates and financial firms which is in crores and billions, but share market is the only means which allows us to own a share in a company even in small amount. Gives the ability to give. Share means a part of the company and even if you buy just one share, you are still a shareholder in the company.

Investment in very less Amount: If we talk about investment in any asset, a minimum price is fixed for investment everywhere. Share market is the only place where you can start investing even with a very small amount. Shares of almost every price are traded in the share market which can range from 50 paise to lakhs. In this way, investors can start investing by purchasing company shares even with a small amount.

Liquidity in investment: Liquidity means how easily you can buy and sell any share. The more shares a company has in the stock exchange and the more people trade them, the higher the liquidity. During the trading time, crores of shares are bought and sold every second, therefore, except in a few situations, one can easily buy and sell shares during the trading time.

Dividend and Bonus: From time to time, companies keep rewarding their shareholders in the form of dividends and bonus shares in return for their investment. In both these ways, the company shares its profit share with the shareholders, which is a good source of passive income.

Protection from Inflation: The stock market can provide protection from inflation because long-term returns on stocks have historically been higher than the rate of inflation. When the price of products and services increases, the value of money decreases, which reduces people’s spending power.

It is important to note that the stock market can be volatile in the short term, and there is no guarantee that stocks will always deliver positive returns. A well-diversified portfolio that includes a mix of stocks, bonds and cash can help control potential risk and balance stock market returns while protecting investors from inflation.

Disadvantages of Share Market

High Volatility: High volatility in the share market is a condition when the prices of shares change rapidly with big fluctuations. This could be due to a number of factors including economic conditions, political events and a sense of fear among investors. High volatility can make it difficult for investors to take good trading decisions and further increases the risk in the market. It is important for investors to keep a close eye on market conditions and consult a financial advisor before taking any investment decision.

Market Crash: Share market crash means a sudden huge fall in the prices of stocks listed in the market. This usually happens with high volatility and panic selling. Market crashes can be caused by many factors including economic decline, political crisis, natural disaster, sudden change in market sentiment and war. The decline in stock prices could last for several months or years, with serious consequences for investors and the economy.

High Brokerage: Brokerage in the stock market refers to the fees charged by brokerage firms for executing trades on behalf of their clients. These fees may vary depending on the firm and the trade being made. In some cases, the fees can be quite high, making it difficult for some investors and traders to make profits.

However, it is important to remember that brokerage firms provide valuable services, such as research and financial advice, that can help investors make better decisions. Additionally, many online brokers now offer commission-free trading, making it affordable for investors to trade and invest in stocks.

Lack of Control: There are many factors in the stock market that can affect its performance and it is difficult for investors to control them. Some of the factors affecting the stock market include economic conditions, government policies and global events. Apart from this, investors’ attitude towards the market can also play an important role in determining stock prices.

One of the main reasons for the lack of control in the stock market is that it is a decentralized market, in which there are many different participants and there is no single entity that can control the market. Additionally, the stock market is complex and is constantly influenced by related economic, political and social factors.

Scams and Frauds: Cases of scams and frauds often come to light in the share market, in which small investors lose their hard-earned money. Some common types of stock market scams include pump-and-dump schemes, insider trading, and Ponzi schemes. In a pump-and-dump scheme, fraudsters artificially inflate the price of a stock by spreading false information about the company. Then they “dump” their shares and sell them at a higher price, causing huge losses to investors who bought the stock at a higher price.

Insider trading occurs when a person uses private information to trade in shares. This is illegal and considered fraud. Ponzi scheme is a type of investment fraud where investors are duped by promising high returns in a short time. It is very important for investors to be aware of these scams and analyze the market and stock before investing.

Complexity: The stock market can be complex due to many reasons. One of these reasons is the huge number of shares and other assets listed for investment. With so many options to choose from, it can be difficult for investors to know which stocks to buy or sell and when to do so. Apart from this, the stock market is affected by economic, political and many other global factors, due to which it can be difficult to predict what will happen next.

Another complex part of the stock market is derivatives i.e. options and futures. Derivatives can be risky, especially for investors who do not fully understand them and trade them just to make a quick buck. Additionally, the stock market involves a lot of technical analysis and complex mathematical models, which may be difficult for some investors to understand.

Short Term Focus: Some investors invest in the share market with short term focus instead of long term investing. This short-term focus can be motivated by many things, such as the desire to get more returns in less time, the influence of media and social media, etc. This short-term focus can be harmful because investors take emotional decisions due to FOMO instead of paying attention to the actual fundamentals, financial conditions and future growth prospects of a company. In this way, decisions taken in haste and without thinking can lead to loss in investment.

Conclusion

In the end, I would like to say that like any investment instrument, the share market is also not free from risk, but by taking investment decisions wisely and after analysis, these risks can be kept under control and high returns can be availed. Therefore, before taking any kind of investment decision, do the analysis as per your understanding and invest your money in any stock only after knowing everything.

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IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

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Like any investment instrument, share market is also not free from risk and loss. With the desire to earn quick money, crores of people trade and invest in this share market every day, but instead of earning more money, many times they lose their hard-earned money overnight. The market is full of such examples of losses. There is no guaranteed way to prevent loss in the stock market, nor can it be completely controlled, yet there are some strategies and methods that can help you reduce your losses. What are those methods? Let us know this in today’s article “Tips to avoid losses in share market”. But before that let us know what are the reasons for loss or damage?

Causes of loss in share market

Economic Factors: Many factors including inflation, rising interest rates and weak customer sentiment can have an impact on the stock market. For example, if interest rates on other investment instruments rise, this may lead to a decline in stock prices as investors may shift to other investment options that offer safer returns.

Company Performance: Investors in the share market invest indirectly in a company in the form of stocks. The performance of a company can directly affect its share price. Poor financial results, disappointing earnings reports, or negative news about a company can cause its stock price to decline.

Geopolitical Events: Political instability, war and other geopolitical events can also affect the share market. These events can create uncertainty that causes investors to sell their stocks. In panic, other investors also sell their shares rapidly, due to which the share prices fall rapidly.

Market Sentiment: The share market is largely influenced by the sentiments of investors. If investors are confident about the future, they may be more likely to invest in stocks, causing prices to rise. Conversely, if investors are pessimistic, they may be more likely to sell shares, causing prices to decline.

Natural Disasters: Natural disasters like storm, earthquake and flood can also affect the stock market. These events can disrupt the operations of companies and cause them to lose profits, which can lead to a decline in stock prices.

Tips to avoid loss in share market

Portfolio Diversification: Portfolio diversification means dividing your capital among different companies, sectors and classes, such as stocks, bonds and real estate, instead of investing all your capital in stocks or assets. In this way, even if one sector or company does not perform well, the loss is reduced to a great extent due to the money being invested in different places. Therefore, never invest all your money in one stock or sector. Take advice from a good financial advisor and diversify your portfolio.

Long Term Investment – The share market is unstable in short time period, which happens due to the news and events etc. going on in the market. But if seen, historically the market has given positive returns in the long term. Therefore, the investor should remain invested in the market for the long term without worrying about the fluctuations of the market in the short term and avail good returns.

Own Research: Before investing in the share market, do thorough research on the company’s financials, management, market competition and growth prospects. Make sure you understand the risks involved and are investing keeping your investment objective in mind. Never invest based on stock market tips and rumours. This will help you in taking a good investment decision and you will avoid investing in high risk companies.

Avoid market timing – Don’t Time the Market: It is very difficult to predict future prices from short-term movements of the stock market, so avoid trying to time the market. Instead, keep buying companies with good fundamentals at fair prices and focus on holding them for the long term.

Make a plan – Stick to a Plan: Make a clear investment plan and stick to it. Keep checking your portfolio regularly and make adjustments as necessary, but avoid taking emotional decisions based on short-term market movements.

Set a stop-loss order: A stop-loss order is an order to sell a stock in which you set a limit price. If the price of that stock falls below that certain limit then the system automatically sells that stock. Setting a stop-loss order limits your losses to a great extent.

Long Term Investment – Most people come to the share market with the hope that they will double, triple their money in a very short time, but this is a wrong thinking. Give time to the market and instead of trying to make quick profits, focus on investing for the long term. Historically, the stock market has delivered positive returns over the long term, so by holding your investments for the long term, you may be able to ride out temporary fluctuations.

Take professional advice: If you do not have much knowledge about investing and researching in the share market and are taking this step only based on hearsay, then you need to think again. In such a case, you should take the help of a professional financial advisor who can help guide you and help you take a good decision.

Conclusion

There is no doubt that the share market has the ability to give very good returns in a very short time. But this is possible only if investment is made thoughtfully and wisely. Many people come into this market with the dream of becoming rich overnight and end up losing whatever they have. It is not possible to completely avoid losses in this market, however, by keeping the above mentioned points in mind, we can control our losses to a great extent.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

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What is share market?

Share market, also called stock market or equity market, is a market where people can buy and sell shares of a company. The companies traded in this market are called public traded companies, which offer their shares to the common people through the share market. When you buy shares of a company from the market, you become a shareholder in that company. According to the performance of the company, the value of the shares of the company keeps increasing and decreasing and which causes profits and losses on your investment.

What is a share?

A share is a single unit of stake in a company. For example, a company divided its stake into 1000 parts and got it listed in the stock market. In this case, we can say that 1000 shares of the company are listed in the market and if you buy even 100 shares out of them, you will become a 10% shareholder in that company. As a shareholder you will have some rights and benefits such as:

Voting right: Whenever the managing directors of the company take any important decision related to the future and management of the company, you will have the right to vote in favor or against that decision.

Dividend: From time to time, companies distribute some part of their profits among the shareholders as a reward for their investment, which is called dividend. Being a shareholder, you will also be entitled to receive this dividend which can become a good source of your passive income.

Capital Growth: Any company can perform either good or bad in its field. Depending on its performance, the value of its shares listed in the market may increase or decrease. In case of increase in the value of shares, the value of your investment also increases.

Main parts of share market

The main parts of the share market are shown below:

Stock Exchange: As already mentioned, stock market is like a market where buying and selling of shares takes place. To operate this market, a place or a platform is required which is called stock exchange. All the stocks which are traded in the stock market are listed on the stock exchange. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are the two main exchanges of India.

Brokers: Brokers are those people or institutes who act as a link between the stock market and the common people. No person can trade or invest directly in the stock market. To invest in the stock market, they have to open a demat account for trading and storing the stocks and this is possible only through brokers. There are many brokers present in India which include full service brokers and discount brokers like zerodha, Grow etc.

Market Index: Thousands of companies are listed in the stock market. It is almost impossible to track the movements of each of those companies on a daily basis. For this reason, a market index was created which includes top companies from all sectors and from whose average move we can estimate the situation of the entire market. Nifty 50 and Sensex are the main stock exchanges of India. Nifty 50 is the index of NSE stock exchange which includes top 25 stocks whereas Sensex is the index of BSE stock exchange and it includes 50 top stocks.

Market regulator: Market regulator is an institution that makes rules to maintain the proper functioning of the market and keeps an eye on the entire market so that wrong and illegal activities of any party can be stopped and investors can be protected. To be protected from fraud. In India, SEBI (Securities and Exchange Board of India) works as a stock market regulator.

Trader and Investor: Traders and Investors include people like me and you who want to earn profits by investing and trading in the stock market.

How does the share market work?

Shares of any company have to be listed in the stock exchange to be traded. The company can list its shares in the stock exchange through IPO i.e. Initial Public Offer. During IPO, any company makes its shares available for purchase by the general public for the first time. IPO remains open for a fixed time period during which the company’s shares can be purchased at a fixed price. Investors can bid at the price of shares fixed by the company. The greater the demand for the share, the higher the premium the share price is listed. Before launching the IPO, the company has to submit all the necessary information like company’s financials, objective and future objectives of the IPO etc. to the exchange and SEBI.

After the time period of IPO is over, the shares are allotted to the bidder and get listed in the stock exchange. Due to its demand and supply, IPO shares are listed in the stock exchange at a price which may be more or less than its issue price. The market in which they trade during IPO before the shares are listed is called the primary market and the market after the shares are listed is called the secondary market.

Once shares are listed on the stock exchange, any common citizen can trade and invest in them. To trade in the stock market, an investor must have a trading and demat account which he can easily open through any broker. Broker is the party that acts as a link between the investor and the stock exchange.

Crores of people trade and invest in the stock market. Whenever a trader places a buy order to buy a share, it gets listed in the broker’s order book and to match the sell order running in the exchange. When a sell order is received according to that buy order, a transaction takes place and the shares are debited from one account and credited to another account. However, it takes up to 2 days for the shares to be completely settled in the demat account. Due to the similar demand and supply prevailing in the market, the price of shares keeps changing continuously. When there are more buyers and fewer sellers of a share, the share price increases and when there are less buyers and more sellers of the share, the share price decreases. There can be many other reasons behind the increase or decrease in share price such as economic factors, news trending in the market, trend in the share by a big investor etc.

How to invest in share market?

As already mentioned, a common man requires a trading and demat account to invest in the share market. Trading and Demat account can be opened by any broker in India and both the services are provided by the same broker. An account with any broker can be opened very easily both online and offline. For this you must have your PAN card, address proof and income proof. In trading account, you are given a platform or application in which your funds are stored. From here you can track shares and place orders to buy and sell them. On the other hand, Demat account can be opened in two institutions of India, NSDL (National Securities Depository Limited) and CDSL (Central Depository Services (India) Limited.). This is the agency where your shares are stored. Your shares remain safe even if the broker changes or closes down and you do not have to apply separately for opening a demat account. While opening a trading account, the broker gives it to you.

Why invest in share market?

Share market is the best way to increase wealth quickly in a short time. Stock market gambling in the eyes of common people

Maybe or they consider it risky and stay away from it, but history is witness that many people have earned crores of rupees just by trading and investing in share market and if they work in share market with thinking and learning. If done, there can be no better way to earn money than this. Given below are some reasons due to which any common citizen must invest in the share market:

High return – Share market is the only instrument in the whole world which has the capability to double or triple your capital overnight or in a few hours. Yes, it is true that along with high returns, it also involves high risk, but if any investment and trading decision is taken after careful thinking and proper analysis, then the risk can be reduced to a great extent.

Diversification: Diversification means dividing your investment into more than one asset so that the risk can be reduced and the returns remain constant. Share market is a good means of diversification because along with investing in low risk stocks like FD, bonds, PPF etc., you can also invest in high return and high risk stocks.

Liquidity: Liquidity means how easily you can buy and sell an asset. While it takes more than a day to invest and withdraw money in other investment instruments like FD, bonds, property etc., the share market is one of the most liquid investment options. Trading goes on all the time in the stock market during working hours and you can buy and sell any stock in a jiffy without any hassle.

Share in Company – Partner in Company: Whenever you buy shares of a company, you become a shareholder in the company according to the quantity purchased. Due to these reasons, the company incurs losses or incurs losses on your invested capital.

Passive income: Those people who are looking for a means of part income along with their job, then they can make good money by trading in the share market. But it is important to note one thing here that a trade taken out of greed without thinking will only be called gambling. Therefore, give time to know and learn about the market, do your own analysis and enter into any trade only after thinking carefully and keeping the risk in mind.

Conclusion

Share market is an important part of the global market which is beneficial for both investors and companies. It gives common people an opportunity to increase their wealth and become shareholders of a company. But it is also important to keep in mind that to be successful in the share market, it is very important to have research, information and long term thinking. Every investment method involves some degree of risk, keeping this in mind one invests money in it. Similarly, the returns of share market are high but the risk in it is also equally high. Therefore, first know your risk taking ability and instead of investing all the money in this only, you can start increasing the amount by investing only a little money and slowly learning.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

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What is Index Fund?

Index funds are a type of mutual funds which track the performance of a stock index like Nifty 50, Nifty Bank etc. It is a copy of a stock market index which gives you almost the same returns as a stock market index. Now the question in your mind will be that what is this stock market index?

You must have heard about Nifty 50, Nifty Bank or Sensex. This is all a stock market index. There are thousands of companies listed in the stock exchange and it is not possible to track the daily movements of everyone. For this reason the stock market index was created. Some of the leading companies of the country are included in the stock market index which are listed and traded in the stock exchange. Now since these are leader companies, we can estimate the status and direction of the entire stock market from their average performance. The two main indices mentioned above include top 50 companies in Nifty 50 and 30 companies in Sensex.

As already mentioned, an index fund is a copy of a stock index. For example, Nifty 50 ETF, which is built on the basis of Nifty 50, will also include the same 50 companies and will be included in the same ratio as in the Nifty 50 index. Now, whatever Nifty performs, we can expect the same returns from the index fund.

How does an index fund work?

As mentioned above, an index fund is an exact copy of its base stock index. Whenever a mutual fund company has to start an index fund, it first selects a stock index on the basis of which it has to make stock selection. Stock exchange includes many types of indices according to the sector and nature of companies like Nifty Pharma, Nifty Psu, Nifty Transport etc. A mutual fund house selects a stock on the basis of a stock index and invests in it in the same proportion as it is included in an exchange.

Index funds are called passively managed funds because they do not need to be managed daily. Changes are made only when a stock is removed or included from the index or its ratio is changed.

How to invest in index fund?

You can invest in index funds both online and offline. Like investing in any common mutual fund scheme, investing in index funds is very easy. To invest online, you can use any discount broker like Grow, Etmoney, Zerodha Coin etc. By creating an account in these, you can easily invest in index funds and stocks etc. without any extra charges.

Another option for online investment is AMC i.e. Mutual Fund House’s own website. That is, if you want to invest in the index fund of any AMC, then login to the website of that AMC and after following a few easy steps, invest in the index fund. For example, if you want to invest in HDFC’s index fund, then you can know about it and invest by visiting the website of HDFC Mutual Fund.

To invest offline in index funds, you will have to take help from AMC office or any mutual fund agent. You can invest in these index funds by submitting the application form and necessary documents.

Why invest in index funds?

Diversification: Index funds, as mentioned earlier, are copies of their base stock index and include more than one stock. For this reason we get the benefit of diversification in index funds. Diversification reduces the loss and risk in our portfolio to a great extent.

Low expenses: Index funds are passively managed funds because no research or analysis of stocks is done to manage them. Due to this, the expense ratio of the fund also reduces, which further increases the return potential of our investment in the long term.

Ease of tracking performance: To track the performance of investments in index funds, we do not need to learn any separate skill or take help from any expert. You can track your investment returns simply by tracking the performance of the base stock index.

Ease of investing: Investing in index funds is very easy as it is available in almost every AMC and broker in both offline and online modes. For this reason, you can easily invest in it without any hassle.

Beneficial for long term investors: Only those people who have long term perspective invest in index funds. Mostly it has been seen that stock indices give positive returns in the long term.

What is the difference between Index Fund and Mutual Fund?

Both index and mutual funds are good means of investment but there is a lot of difference in their functioning and management. Let us know how index funds are different from mutual funds:

Management: Index funds are only passively managed funds because they are created only as a copy of their base index and they only copy its performance. The same mutual funds can be of both active and passive types. In this, the main objective of the fund manager is to invest people’s money in the market in such a way that it can give better returns than the benchmark index.

Expense Ratio: Being passive managed funds, the expense ratio of index funds is much lower than that of mutual funds, whereas mutual funds can be of both active and passive types. In active mutual funds, the fund manager has to constantly make changes to the fund as per the market conditions, hence its expense ratio or fee is higher than that of index funds.

Performance: Index funds are copies of their base stock index, hence their returns also depend on the performance of the stock index. On the other hand, the performance of a mutual fund depends on its management and the quality of the assets invested. The effort of the fund manager of a mutual fund is that the returns of the scheme should be more than the benchmark index and the investor should get maximum profit.

Tax Benefit: According to index funds, mutual funds are tax efficient because their returns are also low due to which the investor does not have to pay much capital gains tax. The case tax rate of a mutual fund depends on its returns and its type. The tax rate is different in case of debt and equity mutual funds and it also depends on the return on investment and the investment objective of the scheme.

Diversification: The benefit of diversification in an index fund is limited only to the sector of which the benchmark index is a copy. That means, if an index fund is a copy of Nifty Bank, then only banking and financial stocks will be included in it. We also get the benefit of diversification in mutual funds, but each of its schemes is prepared under the supervision of the management keeping in mind an investment objective. For this reason, the scope of diversification in mutual funds is slightly more than that of index funds.

Conclusion

Index funds allow even an investor unfamiliar with the market to take advantage of stock market returns. Overall we can say that index funds are a simple and economical way of investment. Its objective is to provide you a good return from old methods of market investment like FD, RD etc. which can beat inflation. This is a better option for long term investors than short term. We hope that this article has helped you to understand index funds better.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

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The Intelligent Investor by Benjamin Graham

“The Intelligent Investor” book written by Benjamin Graham, also known as the Father of Value Investing, is one of the best books written on investing. This book was first published in 1949 and since then it is the favorite book of every investment and stock market veteran. This book gives us important information for long term investing which is based on Benjamin Graham’s own stock market experience. In this book, Graham emphasizes on the philosophy of value investing. He believed that a stock is not just a piece of paper but a proof of your stake in a company. He would emphasize on investing in those stocks which are trading at a discount to their real value and which have great potential for growth in the future. He had three main principles of intelligent investing – analyze for the long term, protect yourself from loss and do not get too greedy. He calls the stock market Mr. He used to call him Market and he believed that Mr. Never trust the market which can change its behavior at any time in the short and medium term. Therefore, whatever investment formula you have, keep following it and take any step according to long term thinking.

The Warren Buffett Way by Robert G. Hagstrom

As the name suggests, this book is based on the investment philosophy and strategy of the world’s greatest investor Warren Buffett. This book was written by Robert G. Hagstrom and published in 1994. Through this book, he has exposed Warren Buffett’s approach towards the market, his thinking, analysis and principles of value investing. According to this book, we should invest only in those companies whose business model and product we understand and whose market value is less than their intrinsic value. That means the fundamentals of the company are good but due to temporary market factors the stock is trading at a discount. We should pay attention to what competitive advantage the company being invested has over other companies which will help it to be profitable in the long term and remain in business. Buffett is known for his restraint and long term approach. His main principle was to choose shares of a good company for investment and remain invested in it for a long time to get good returns without getting distracted by the ups and downs of the market.

One Up On Wall Street by Peter Lynch

The book One Up On Wall Street was written by Peter Lynch and published in 1989. Peter Lynch was a well-known investor, mutual fund manager and author. He told through this book that people often think that to be a successful investor, a person should be genuine, but on the contrary, with the use of a little logic and common sense, anyone can become a successful investor. Instead of understanding the huge balance sheet of any company or business, focus only on those companies which you know, whose products you use daily and which you can easily understand. Complicating anything only makes investing complex, whereas if seen carefully, investing is a very simple task. Through this book, he has shown three points of investing – 3 stock categories that you should know, if you are looking for a multibagger, then 13 points with the help of which you can find it, 4 important things that you should know. Should be avoided in investing.

Rich Dad’s Guide to Investing by Robert T. Kyosaki

Rich Dad’s Guide to Investing is a great book on investing written by Robert T. Kyosaki. Robert T. Because is a great investor and business coach who has opened the eyes of millions of people with his finance principles in his book Rich Dad Poor Dad. One main thing emphasized in the book is that 90 percent of the world’s money is with 10 percent of the rich people because they invest in those things in which 90 percent of the middle class people do not and what are the means, methods and thinking to do so? By adopting which we too can join those 10 percent rich people. This book will help us know and understand the money cycle and will shed light on how you can fulfill your dream of financial freedom with the right investing techniques.

The Market Wizards by Jack D. Schwager

One of the best books written based on share market experiences is The Market Wizards. This book was written and published in 1989 by Jack D. Schwager, a futures trader and successful hedge fund manager. This book has been written on the basis of interviews with some of the great traders of history and it shows how these people took their small capital to great heights by trading and investing in the market on the basis of their skills. This interview makes us aware of the thinking of those great traders who have set new records in the market through their thinking and skills and from whom we need to learn a lot.

Trading in the zone by Mark Douglas

Trading in the Zone book is written by Mark Douglas and it was published in 2001. This book focuses more on improving psychology and mindset to be successful in the share market. Through this book, Mark Douglas says – In the market, it is more important to master your psychology rather than analysis and strategy, because this is what helps you in decision making and controlling the outcome of trading. Almost every trade involves risk, but a successful trader is not the one who acts right every time but is the one who understands the market situation and accordingly enters into any trade keeping his risk in mind. . Like any other field of business, in share market also you have to work continuously and improve your mindset so that you remain disciplined and do not take any step due to emotions.
According to Douglas, we should consider trading as a business and also keep in mind that like every business, success in trading also does not happen overnight, for this we need skill, ability and patience.

Come into my trading room by Dr. alexander elder

Dr. The book Come into my Trading Room, written by Alexander Elder, works as a complete guide to financial and stock market. Dr. Elder was a well-known psychiatrist who brought to the public a different approach to trading and emphasized on working on psychology and mindset to be successful in the stock market. In this book, he has combined his psychology expertise and trading strategy to become a successful trader. He emphasized on the importance of three M’s, Mind, Money and Management and how these three play an important role in your trading journey. The first m, mind, means your mindset, the art of learning and changing with time. Second m, money i.e. money or initial capital through which you trade or invest in the market. Finally, the third m means management on which your entire trading setup works. Because if there is no management and discipline in your trading then it will remain just a gamble. Apart from this, this book focuses on the practical side of trading like planning your trades, using different time frames and working on your mindset as the market changes over time.

The Art and Science of Technical Analysis by Adam Grimes

The book, published in 2012, was written by renowned trader Adam Grimes. As the name suggests, this book is based on the basics of technical analysis, its logic and why it works in the stock market. Technical analysis means finding out the possibility of the share price increasing or decreasing in the future with the help of different patterns on the candlestick chart of the share. It is often said in the stock market that the market repeats history and works in trends and on the basis of this, the price action i.e. the movement of the share price can be tracked. In this book, the author has covered some main topics which are – Trend, Pullback, Treand analysis, Indicators, Rate of trend, Support and Resistance and Breakout etc. All this is the term of technical analysis and is used to do the same. According to the author, a trader has to find his edge i.e. what works for him in the market, and improve his skills by working on a single strategy. This book helps every beginning trader to understand the basics of good value and technical analysis.

Conclusion

All the books mentioned in this post have been written inspired by the lifelong learnings of experienced traders and investors. If we read these books carefully, we can learn a lot from them. It is also said that to learn anything quickly, learn from the experiences of others and avoid repeating the mistakes they have made. We hope that you will find the information given in this post useful and you can read our post for basic information about share market.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

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The world of finance is very vast in which we hear many terms every day. One such important term is IPO. IPO is the first step of entry for companies whose shares are traded in the market and helps a lot in further expanding their business. From an investor’s point of view, IPO is also a good way for us to earn a good return on our money in a short time. But before investing money in anything, it is very important for us to have complete information about it and how it works. Through today’s article, we will learn completely about IPO and by looking at its advantages and disadvantages, we will also understand how we can invest in an IPO.

What is IPO – Initial Public Offer?

IPO means Initial Public Offering. IPO is the process by which a private company offers its shares to the general public for investing and trading for the first time. The transformation of a private company into a public company happens only during IPO. Before IPO, only a few shareholders and investors are involved in the company, but after IPO, the shares of the company get listed in the stock exchange and any common investor and trader can buy and sell them. The main objective of the company behind bringing IPO is to raise money from people and increase the value of its company.

Why is IPO issued?

There can be many reasons behind a company issuing its IPO and getting listed in the stock market. The main ones are:

The company raises funds during the IPO for its further expansion and to repay the loans already taken. These funds are collected due to people investing in the company’s shares during the IPO and after its listing in the stock exchange.

When a company is converted from private to public, the confidence of the common people in it increases because being eligible for listing in the stock market is good for its reputation. Now the company has to disclose its every work and step taken in front of SEBI and the public, which brings transparency in its functioning.

Another major reason behind issuing IPO can be the attitude of the existing investors of the company. These investors, who are also called angel investors, invest money in the company in the initial days in the hope that when the company becomes profitable, they will get their investment. But you will get a good return. In this way, when the company performs well and gets listed in the share market, these investors sell their shares to the general public and encash their profits.

How many types of IPO?

There are two types of IPO: Fixed Price IPO and Book Building Issue.

Fixed Price IPO: In Fixed Price IPO, the company underwriters or the people who are hired to handle the entire process of IPO, determine the price of IPO shares based on the financial state of the company. A company’s finances can include many financial metrics including its assets, liabilities, profits and revenues, etc. In this type of IPO, usually the price of the share is undervalued i.e. less than its actual price, hence people are more interested in investing in this type of IPO, because when the company is listed in the stock exchange, its price goes up. The possibility of increase is quite high.

Book Selling Issue: This type of IPO is a new concept in India. In this, there is no fixed price of IPO, only minimum and maximum price is determined which is called floor price. Investors can bid to buy shares between these prices. According to the demand for shares, their price is determined after the end of the IPO bidding.

Process of IPO in India

The IPO process of a company includes the following steps:

Appointing an Investment Bank: There is a team of Underwriters in the Investment Bank whose job is to evaluate the financial state of the company. In this the company can take help from more than one bank. These people collect all the necessary information about all the financial aspects of the company like its assets, liabilities, profits, revenue, market capital etc. In this, an underwriting document is signed in which all the important information like how much money is to be raised through IPO, total number of shares to be issued etc. is described.

Preparing RHP and submitting it to SEBI: After the first step, the company files the Underwriter Registration Certificate and RHP i.e. Red Hiring Prospectus to SEBI. RHP contains all the necessary information related to IPO.

Application for listing in the stock exchange: In this step the company decides on which stock exchange it wants to list its shares and files the application there. The two main stock exchanges of India are NSE and BSE.

Roadshow: For two months before the IPO goes public, the company does extensive marketing about the IPO. In this, the company’s executives travel across the country and present all the positive facts related to the company in front of people and big investors so that good investment can be made in the IPO. The company also provides the option to some big investors like DII and FII etc. to buy shares at a fixed price before the company goes public.

Fixing the price of IPO: After marketing, the price of IPO shares is fixed, according to the two types of IPO mentioned above, this price can be fixed on the basis of fixed or book building price method.

Subscription of IPO: After all the marketing and price of IPO share is fixed, it is opened for public subscription. According to SEBI, an IPO can remain open for subscription for 5 days. During this time period all interested investors bid for IPO. When the subscription of IPO is closed, the company submits the final prospectus to ROC and SEBI which contains information related to the funds raised and the final price of shares.

Listing of shares: When the subscription of IPO is closed, the underwriters of the company credit the shares to the accounts of their subscribers. Usually, all the shares are delivered to the investors but in some cases like oversubscription etc., not all the IPO shares are allotted and their money is refunded to them. On a fixed date, shares are listed on the stock exchange for common people to trade and invest.

How to invest in a company’s IPO?

To invest in the IPO of any company, an application has to be submitted and the status of shares allotment is informed within 2-4 days after the closing of the IPO. Here it is not at all necessary that your application gets selected for shares allotment. It is like a lottery system and if you are lucky then you are allotted shares. If there is high demand for the shares of the company, many investors do not get even a single lot of shares. The IPO of any company remains open for subscription for 3 to 5 days in which shares are available for purchase within a fixed price band. Investors can bid at any price they want or submit an application to buy. IPO shares are available for bidding in the form of one lot. The price of one lot of IPO cannot be more than Rs 15000 and there are some rules for buying it:

To submit an application in IPO, you have to buy at least one lot, the price of which is between Rs 12000 to Rs 15000.
The limit for a common citizen to invest in IPO through a PAN is Rs 2 lakh. That means he can buy only that many lots which fall within the range of Rs 2 lakh. To invest more than Rs 2 lakh, you should be in NII category.

To invest in IPO, you must have a trading and demat account. In case of both these, you can invest in an IPO online in the following ways:

ASBA (Application Supported by Blocked Amounts)

Through UPI ID

ASBA (Application Supported by Blocked Amounts)

ASBA facility is available with almost all big banks. In this, the required balance in the bank for IPO is blocked through net banking, which is debited if you are allotted shares. Under ASBA:

1. Login to your net banking account.
2. Find the option of Request Tab or IPO Issue Tab.
3. Once you find that option, click on the Apply option.
4. After filling the necessary details there, the amount for IPO will be blocked in your account.
5. If you get allotment of IPO then this amount is debited.

Through UPI ID

1. Login to your trading account or App.
2. Go to the New IPO option and select the IPO in which you want to invest.
3. After filling the application form, share the UPI id.
4. Allow blocking of funds on your UPI app.

If you want to know what things should be kept in mind while investing in an IPO, then you can read our article:

Conclusion

An IPO is a golden opportunity for Indian investors to buy shares of good growth companies at low prices. But like any investment option, it is very important to thoroughly investigate every aspect of the IPO or consult a good financial advisor. Investing by knowing the IPO process well and understanding the risks involved can be a better step towards your financial goals.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

iifra.com/blog

The post What Is IPO? appeared first on IIFRA's Official Blog - Indian Institute of Financial Research & Analysis.

Trading means a trade in which one asset or item is exchanged for another. The main reason behind doing this exchange is to earn some profit by both the parties. Trading is done in almost every type of market such as the market for selling everyday goods, Forex market, stock market, business trading etc. Trading started when people did not have resources like money available and they made their living by exchanging the things they needed with each other. As time changed, instead of exchanging one thing for another, trade started being done with money and the profit earned also started being measured in terms of the money earned.

Trading is a basic and most heard concept in the world of finance. If you are new to the share market then it becomes important for you to understand trading. In today’s article, we will completely understand the concept of stock trading and take a complete look at its types and how to do it.

What is Stock Trading?

Trading in share market means buying the stock of a company at a lower price and selling it at a higher price or selling it at a higher price and buying it at a lower price, which is called short selling. People who trade in the share market are called traders. For example, suppose Reliance’s share is trading at Rs 2100 and there is a possibility of its price increasing in future due to chart pattern or some news. You can buy that share at the current price of Rs 2100 and suppose after 2 days its price becomes Rs 2300. Now you can sell the purchased shares and earn the difference in price as profit.

There are mainly two types of trading, short term trading and long term trading. People who want to make quick money from the market mostly try their hand in short term trading. Long term trading mostly involves investing and holding positions in stocks for a long time.

How many types of stock trading are there?

As already mentioned, there are mainly two types of trading and under them there are different categories of trading, which are:

Intraday Trading

Intraday trading means buying and selling shares of a company in the same day. If someone does intraday trading then he has to sell the shares before the market closes on the same day of purchase. If you do not do this, then as per SEBI guidelines, your broker automatically closes the position by selling the shares and in such a case you may have to pay some penalty.

1. Intraday trading is mainly done by analyzing chart patterns in small time frames, such as 5 or 15 minutes.
2. In this, the main objective of the trader is to capture the move of half to 1 percent.
3. Intraday is the most popular form of trading and the main reason behind its popularity is the amount of money lent by the broker to do it, hence it is also called margin trading.
4. According to the new rules of SEBI, the margin given can be up to 5x, that is, if you have Rs 10,000 in your trading account, then you can trade up to Rs 50,000 with it.
5. You can do intraday trading in any stock which has good movement and volume.
6. Due to margin, you can earn good profits even with less money in intraday, but the possibility of risk and loss is also the same.

Scalping

Scalping is a form of intraday trading, the only difference is that it is done in a very small time frame which ranges from a few seconds to a few minutes. In Sculpting:

1. An attempt is made to capture very small movements of a stock or asset.
2. In this, trading is done in large volume or large quantity of shares so that even small moves can make big profits.
3. In this, trade execution is done very fast and many trades can be taken in a day.
4. Mostly chart time frame of 1 to 3 minutes is used in this.

Swing Trading

In swing trading, the stock is held for a few days to a few weeks, that is, delivery of shares is taken in it, due to which no margin is available in it like intraday trading. In this, traders analyze the charts on a timeframe ranging from 1 hour to 1 day and enter into a trade as per the patterns seen in them. In swing trading, the profit potential is usually 5% to 20%. Compared to intraday and scalping, this is a much safer form of trading and in this the trader does not need to keep looking at the screen all the time.

Positional Trading

In positional trading, traders hold a stock for several weeks to several months and the target of profit is more than 15% or 20%. In this, chart patterns are analyzed in daily and weekly time frames and the fundamentals of the company.

Arbitrage Trading

Under arbitrage trading, the trader earns profit by trading one asset in two different markets. There is some difference in the prices of the assets which are being traded in different locations as per their market sentiment, liquidity and time zone and traders take advantage of this to earn their profits. For example, a stock ABC is listed in both National Stock Exchange and Bombay Stock Exchange. Due to many factors, the stock price in NSE is higher than BSE. In such a situation, a trader will buy the stock at a lower price on BSE and sell the same quantity at a higher price on NSE. Whatever amount remains after settling brokerage, taxes and other charges will be his profit. Arbitrage trading is done in almost all types of asset markets such as stocks, bonds, currencies, commodities and derivatives etc. A trader must be quick to take arbitrage trades because the profits are temporary and all trades have to be completed in a limited time.

How to learn stock trading?

Nowadays, there is a lot of content available on online social media to learn share market. You will get a lot of important information related to share market on our site also. You can also gather basic information about share market by reading the blog written by us. Apart from this, you can use these methods to learn and practice share market:

Paper Trading: Paper trading means that method of trading in which you can trade in any stock without actually buying it. It is exactly like real trading but no real money is involved in it. This is the best way to practice before actually trading in the share market. There are many apps available online for paper trading such as FrontPage.

Trading Books: Only the one who is an expert in that field and has a good experience in that field can teach you the most about anything. There have been many such veteran traders in the share market who have earned a good fortune due to their skills and right mindset and have passed on their experiences to us in the form of books. By reading these books you can gather good information about share market and trading. You can know about some such popular books in this post of ours.

Online Learning: A lot of free information about share market is easily available online. There are many such sites and apps using which you can get complete information about the share market from basic to advanced.

Also see Top Stock Market Courses in Delhi NCR:

• Stock Market Courses in Delhi With Fees & Duration
• Stock Market Courses in Noida With Fees & Duration
• Stock Market Courses in Ghaziabad With Fees & Duration
• Stock Market Courses in Greater Noida With Fees & Duration
• Stock Market Courses in Faridabad With Fees & Duration
• Stock Market Courses in Gurgaon With Fees & Duration

Conclusion

In the end, I would like to say that trading in the stock market looks complex but if done with the right mindset, it is quite easy. Like any business, trading also takes time to establish itself and become profitable, so do not take shortcuts, understand it completely and keep improving your skills with patience.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

iifra.com/blog

The post What Is Stock Trading? appeared first on IIFRA's Official Blog - Indian Institute of Financial Research & Analysis.

In the world of stock market, people are often in search of such tools and strategies which can help them in making quick money from the market. One such tool or method which has been very popular almost since the beginning of trading is technical analysis. Technical analysis is a method that investors and traders use to predict price movements in stock, currency, commodity and derivative markets. Many of you might have heard about it but very few people would be aware of it. In today’s article, we will learn in detail about technical analysis, its concept and method of learning. After reading this article, you will completely understand about technical analysis and know why traders and investors give it so much importance.

What is Technical Analysis?

Technical analysis is a method of analyzing an asset or stock in which its future price is predicted by looking at the historical movement of the price chart of that asset. Technical analysis helps you to know at what price any share should be bought, how long it can be held and at what price it should be sold.

It is often said in the stock market that all the information about the increase and decrease in the price of a stock is hidden in its price chart and if one learns to analyze and understand it well, then anyone can become a great player in the stock market. Could. Technical analysis is also based on this, where an attempt is made to predict the further movement of the stock with the help of only the price movement of the chart and many other tools called indicators.

Unlike fundamental analysis where stocks are selected for long term investing by studying only the balance sheet, financial ratios and market trends, technical analysis mainly focuses on price action and price volume to draw conclusions and is mostly short term. Used for term trading.

How does technical analysis work?

There is a saying that we hear many times, “History repeats itself” and the same holds true for technical analysis. What do we analyze in technical analysis? Historic market data. That is, data on how the price of a stock, commodity, currency has performed in the past and the possibility that the stock can repeat its past price action.

The second thing that plays an important role in technical analysis is the market trend. Everything in the stock market moves in trend and this trend can be of three types. Uptrend, downtrend and sideways. The price of any stock moves on one of these three trends at a time. In an uptrend, the price of the stock continuously moves upwards in the formation of higher high and higher low, whereas in a downtrend, the price of the stock continuously decreases in the formation of lower high and lower low. In sideways market, the price does not move in any one direction but keeps moving through a channel or price range.

Due to the trend of price, many types of patterns are formed in the stock chart, on the basis of which we can predict the future price movement of the stock. For example, the chart pattern given below is called double top pattern.

According to this pattern, when the stock price tries to go up by breaking its middle neckline or the middle price of the pattern, then it is considered as a buy signal and the trader can take this trade with the per-determined target and stop loss price level. Is. There are many similar chart patterns in technical analysis like falling wedge, cup and handle, bullish/bearish flag, ascending triangle etc. which work very well in favorable market conditions. Apart from these patterns, there are many tools and indicators which help us in taking any trade decision in technical analysis.

Tools of technical analysis

Price Chart: Price chart can be called the basis of technical analysis. It shows the price movement of any financial instrument over a specific time frame by plotting it in a chart. Candlestick charts, bar charts and line charts are most commonly used in technical analysis.

Indicators: Indicators are tools used in technical analysis which are made on the basis of some mathematical calculations. They drive their data from price action and give buy and sell signals based on that. Some commonly used indicators are moving average, bollinger bands, RSI etc.

Chart Patterns: Patterns are a type of chart formation that are formed due to the price movement of a stock. Based on these chart formations, the trader can decide to buy or sell a stock.

Support and Resistance: Support is the price level at which buyers become active on a stock and prevent its price from falling further. On the contrary, resistance is that price level where sellers of the stock are active and prevent the price of the stock from increasing further. These two levels play an important role in technical analysis.

Volume: The quantity in which stock is transferred from a buyer to a seller and from a seller to a buyer is called volume. In simple language, volume means how many shares have been traded in a specific time frame. If the volume of shares is high then we can assume that many traders are interested in that share, whereas if the volume is low then we can say that the chances of the price going in the same direction in the future are less.

Types of charts

In technical analysis, mainly an attempt is made to understand charts and chart patterns. There are many types of charts and traders use them depending on their convenience and skill. Some of the most commonly used charts are:

Line Chart: This is the simplest form of chart. In this, price movement is shown only through line graph. This line graph is based on the closing price of the stock and detailed information is not available in it.

Bar Chart: This chart shows the high, low, open and close price of the stock in a certain time frame. They provide better information than line charts and are used by many traders.

Candlestick Chart: Candlestick charts are a gift from Japan and were used by rice traders there. They present the price movement of the stock in the best way, hence using them it becomes very easy to take any kind of trading decision.

How to learn technical analysis?

Technical analysis is a skill that can help us a lot in making trading and investing decisions. To learn this, there are many free videos, blogs and courses available on the internet and social media from which you can easily get information about it. Apart from this, there are some steps given below which can be followed to learn technical analysis step wise from beginning to end.

Start from Basic: First understand the basic concepts of technical analysis on the basis of which it works like price, volume, charts, support and resistance and indicators etc. Read about it thoroughly and try to understand the price movement on the chart.

Trading Books: The best way to learn about anything is to learn it from people who are experts in that field. There have been many such traders in history who have earned crores of rupees with the help of technical analysis in the stock market. Some such traders and the books written by them are: “Technical Analysis of the Financial Markets” by John J. Murphy and “Japanese Candlestick Charting Techniques” by Steve Nison. By studying these books, you will get thorough knowledge of all the basic and advanced concepts of stock market and technical analysis.

Understand technical indicators: As already mentioned, technical indicators are some tools which give you buying and selling signals on the basis of price data. Study these indicators and try to use them in your trading strategy.

Join the trading community: Social media, Telegram and many charting platforms have communities of traders who discuss and share things related to technical analysis and charts. Join such communities and try to overcome the difficulties related to technical analysis.

Do paper trading: There are many sites and apps online which allow us to do paper trading. Paper trading does not involve any kind of real money and is done only with virtual money through the app. In this you can trade exactly like the real stock market and the practice done in this way helps you a lot in trading in the future. You can practice your technical analysis knowledge on these platforms without any loss.

Create a trading journal: A trading journal is a trading record that contains accounts of the trades you make on a daily basis. In this, keep notes of when the trade was taken, what is the reason for taking it, stop loss, target and on the basis of which chart pattern the trade was taken etc. which is a good way to improve your trading by finding your mistakes and shortcomings.

Backtesting: Backtesting means testing the trading strategy you are using on historical data before using it in the real market. By doing this you will get to know whether a chart pattern and strategy works or not in trading.

Risk Management: The most important and important thing to pay attention to in learning and trading technical analysis is risk management. Risk management means entering into any trade by managing your trading properly so that even if the trade goes in your opposite direction, you know how much loss you can incur and when to exit the trade. If we understand risk management in simple language, then keep in mind the target and stoploss of the trade taken.

Right Mindset: The mindset of the person doing it plays a big role in the success of any business or work. A positive and disciplined mindset can improve your trading manifold. Whatever be the strategy or chart pattern, if it is used as discipline by following the rules properly, then you will remain in profit even if less trades are placed correctly.

Continuous learning: Any business keeps changing according to the market, technology and people’s thinking. Similarly, in stock market and technical analysis also, new technologies and rules keep coming with the passage of time. Therefore, it is important that you keep improving your mindset and trading with time so that you will be able to survive in trading even in adverse circumstances.

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Conclusion

Almost every trader uses technical analysis in short term trading. It requires less time and less skill as compared to fundamental analysis. Also keep in mind that learning and applying technical analysis is an ongoing process. It gets better with practice. You should work on any strategy in the long term instead of the short term and with the passage of time you will become an expert in it. Do not be afraid of loss because it is a part of trading and trading cannot be done without it. Yes, such a discipline can definitely be brought in that in every trade you have minimum loss and the profit is much more than that.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

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