Our society is filled with examples of traders and investors who have multiplied their capital by investing in stock markets. At the same time, we have examples of investors who have lost all their savings due to unfavourable market movements.
So, what exactly controls the stock prices, and how do stock markets function? How can you benefit from market fluctuations in Sensex and Nifty? Knowing the answers to these questions can make you a pro at building & managing your portfolio. This article demystifies the stock market trends for you.
What are stock market indices?
- Stock market index, also known as stock index, is a statistical measure that reflects changes taking place in the stock market.
- Stock index is created by grouping a few similar stocks listed on the exchange basis the size of a company, its market capitalization or type of industry.
- Change in prices of underlying stocks impacts the overall value of the index. If the stock prices rises, the index will rise, and if it goes down, so will the index.
However, people often make the mistake of thinking that market indices and stocks move in the same direction. Though it might be true to some extent, it cannot be generalised. Here’s how:
- Sensex: It is an index based on the movement of 30 major stocks from different industries that lead the market.
- Nifty: Nifty is an index based on 50 major stocks.
Clearly, stock market indices only show a market trend 📈📉, and all stocks do not react in the same way.
So, 🤔 how can you identify and benefit from fluctuations in market indices?
👉 Know about the Factors that Cause Fluctuation
The stock prices of a company operating in the public space are affected by many factors. These can broadly be classified into two categories, namely:
- Internal Factors (Controllable)
- Earnings of the Company
- Change in Management
- Fraud by Management
- External Factors (Uncontrollable)
- Demand & Supply
- Monetary Policies
- Political Stability or War
- Industry Policies
- Technology & Innovation
- Exchange Rates
- Global Market Trends
👉 Understand the Basic Stock Market Terms
You need to read and understand the reports about the company and the industry to make your investment decisions correctly. Most of these reports include some commonly used financial terms like bear and bull markets, price corrections, margins, etc.
👉 Be Aware of the Market News
Sometimes, a company may announce the introduction of a benchmark product or a breakthrough in technology innovation. Such news affects the market prices of a stock. Moreover, by following stock market news, you can keep track of global developments that can impact stock prices.
👉 Identify the Boom and Bear Market Trends
Many stocks respond to a market trend driven by changes on the political and economic fronts. These factors cannot be controlled by the company. Therefore, it is important to be aware of the ongoing market trends. Based on the trends, you can make your decision to buy or sell the stocks.
👉 Buy Cheaper and Sell Dearer
Mispriced stocks always attract investors because they have the potential to provide extraordinary gains. But, you should also check the fundamentals of the business whether it is worth investing in. Stocks priced cheaper should be your preference while online trading. Here undervalued stocks can be a great opportunity.
👉 Make Long-Term Investments
If you are new to the stock market, it is advisable to focus on investing for the long term. It is hard to correctly predict the short-term fluctuation in prices, whereas businesses always grow in the long term. Hence, there are fewer chances of a loss.
👉 Never Give-up due to Temporary Setbacks
When you invest for the first time, there are chances that you have to face some losses. You should not let that discourage you. Take baby steps by investing lesser amounts in the beginning. Once you gain confidence, you can increase your investments. You will eventually succeed.
While there are many investors in the stock markets, not all of them end up earning handsome amounts. This is because they try to take higher risks without doing proper homework. Investments should never be made based on friends’ advice. By following the above tips, you can surely succeed in earning good profits from online investing and trading.