I was out with my wife for shopping last week. She is very much fond of shopping. Of course, majority of ladies are shopaholic. I am sure you won’t disagree. It’s their birthright. Well, nowadays every one of us is becoming shopaholic, thanks to all the online marketplaces. Shopping has become super easy. You can order anything from the comfort of your home just with a touch of a screen. Let that be garments or electronic items or food or shares of a company. Yes, I am talking about shopping for shares in online bazaar called “Stock Market”.
In our traditional marketplace, have you ever realized how do you come to know that a particular product is available in the market that you are looking for? Companies have magic wand called “Advertisements”. They bombard us with advertisements on TV, magazines, newspapers, Facebook ads and the list is endless. If a film star or a famous sportsperson is endorsing the product, then that ad becomes even more effective, isn’t it? But just tell me one thing, do you immediately go and buy that product even if your favorite star has recommended it? Even if your close friend or relative buys that product, do you immediately go to market and buy one for yourself?
Let’s take an example here. You want to buy a car. Your friend tells you about a new car model that is just launched. What will you do? Go to the nearest showroom and immediately purchase the car? No, right? If you do, that would be one of the silliest things you’d ever do in your life. But you are smart. You park the advice from your friend and start your own research. That’s the most important part of any big-ticket purchase we do in our life – may it be a car, a mobile phone, a house or an International trip.
So, in our car purchase example, what will you ideally do? You will research the car, check all available variants and colors, its engine capacity, fuel capacity, seating capacity, on-road price in all possible showrooms you can check, compare with other shortlisted cars and if everything is a good fit for your needs as well as you pocket then and only then you decide to purchase that car, isn’t it?
Now, take another example. People want to purchase shares or stocks of a company. There are two big marketplaces in India for stocks shopping – NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). And just like traditional shopping, they want to purchase those stocks at the lowest possible price.
Now, this is where the fun begins. People are smart when buying car and they take all necessary steps to do the research on the car. But when it comes to stocks, suddenly all the wisdom is gone. They buy stocks blindly and say things like,
- My friend told me to buy this stock.
- My office colleague gave me this hot tip about the stock.
- My neighbor told me that there is an insider news and I should buy this stock.
- Mr. ABC from some XYX financial news channel recommended this stock.
- I got the stock recommendation from my favorite financial website.
- I read newspaper and they suggested this stock as a MUST BUY.
What’s wrong with these people?
They don’t buy a car just because their friend, colleague or neighbor told them to do so.
They don’t buy a car based on just the advertisements on TV, newspaper or website.
Then why people buy stocks like this without knowing anything about that stock or doing any research? I think the reason is simple – They DON’T KNOW that they can do research on the stocks also in a similar way they do research on a car.
Yes, you can do research on the stocks and for that you don’t have to go to any website or read newspapers or watch news channels. There are various methods of doing this stock market research and one of the most prominent and widely accepted methods is known as “Technical Analysis”.
I know what is the exact question that’s popping up into you mind – “I don’t have any finance background. How will I understand all the technical aspects of it?”. Relax. Take a deep breath. Count five… 1…2…3…4…5. Ok, now read on. You don’t need to be finance graduate or MBA in finance. You don’t need any finance background or degree to learn Technical Analysis. It’s very simple and anybody can learn it.
Technical Analysis mainly involves study of stock price movements. Now you’ll ask – “But I don’t have time to watch stock prices all day long”. Fine buddy, slow down. Don’t rush. Do that quick breathing exercise once again. Done? Feeling better? Ok. Now listen. There are two ways you can watch and study price movements,
- When the market is OPEN
- When the market is CLOSED
Now, you will wonder “how can I watch price movements when market is closed and prices are not moving at all?”
Yes, you can.
For that we are going to see the concept of technical charts. Stock Market is a very chaotic place. There are large number of participants who are constantly buying and selling multiple stocks. This buying and selling happens because of two human emotions – Greed and Fear. And because of these emotions, demand and supply are created in the market. That’s why stock prices move up and down. More is the demand and stock prices move upward. More is the supply and stock prices move downward. It’s simple demand and supply principle.
I know that’s little heavy to digest right now and that’s OK. Just understand the concept and move on. You don’t have to write any definition or demand-supply principle in an exam.
What I am trying to explain here is that it’s very difficult to analyze all these actions in the Stock Market and track every price movement in every stock on daily basis. That’s next to impossible for any human being. For this simple reason, Technical Analysis makes use of charts to extract all these emotions and actions and put those into a pictorial form. A picture speaks a thousand words. What is mainly plotted on this chart is the stock price. A stock price is a cumulative result of all the emotions and actions in the Stock Market. In a way, it’s an extract of all the action that is happening in the Stock Market.
Words can lie but actions never lie. So, in Technical Analysis, stock price is considered as God.
Price Never Lies.
By looking at the chart, you will understand where the stock price is going, what is exactly happening with this stock, what were the maximum and minimum prices that a stock could attain and so on. You can study charts based on historical stock prices as well. For example, you can study price movements for A DAY, A WEEK, A MONTH and A YEAR.
Technical Analysis itself is a separate topic of study. It’s not possible to cover entire Technical Analysis in one post. However, the main intention of this post was to make you aware that something like this really exists and you should start using these sophisticated methods to make your own stock purchase decisions.
When you stop buying stocks based on someone else’s recommendations and start making your own well-informed decisions, that’s when I will feel that the purpose of this post is fulfilled.
Did you buy any stocks in the past because someone told you do to so? Which stocks did you buy? What was the consequence of that purchase? Did you have profit or loss? Please write it in the comments below. I’d love to hear your experiences.