Rajveer Rawlin MBA VTU , Dayananda Sagar College of Engineering

Markets for creating and exchanging financial assets Facilitate price discovery of the asset (e.g. Reliance Power IPO was priced at RS 450) Provide liquidity to financial assets by facilitating their purchase and sale (e.g. You can buy and sell shares on the NSE) Greatly reduce transaction costs (advertising and evaluation costs) Several Markets exist including stock, bond, commodity and FOREX Markets.

Primary Market The company raises funds directly from investors through the primary market Public Issue Sale of securities to the public IPO-Initial Public Offering FPO-Follow on Public Offering Rights Issue Rights to buy additional shares are issued to existing share holders The shareholder may or may not exercise his rights to buy additional shares A discount is usually given to shareholders from the current market price Preferential Allotment equity issue to promoters/institutional investors at a certain price

Once a company decides to go public It chooses investment bankers The banker does due diligence Prospectuses are prepared Registration is filed with SEBI The company sets the price for its shares and offers it to the public Trading then starts in its shares

All major stock exchanges Once issued shares are listed and start trading on exchanges such as the National Stock exchange (NSE) and Bombay Stock Exchange (BSE) The NSE established in 1994 is the largest stock exchange in India. Is fully computerized Has two segments Capital markets covering trading in stocks and debentures Debt Market Covering government bonds and commercial paper The NSE computes the NIFTY an index of 50 large cap companies

Trading Open Outcry System Traders shout out buy and sell orders to each other and agree on trades Screen based computers match buy and sell orders You can specify a market order where you get the prevailing price on the exchange Or a limit order where you specify the price and wait for execution Stop loss orders protect you against undue losses

The act of buying and selling securities. Bid/Ask Spread You sell at the bid (best sale price) and buy at the ask (best buy price). Short Term Trend is your friend Selling Short borrowing shares and selling them with the goal of buying them back later at a lower price. Buying and Selling on margin where you put up only a fraction of the cost required for purchase or sale.

Settlement is on a rolling basis Settled on a T + 2 basis The cycle is below: T Trade date T+1 Confirmation T+2 Funds and securities transfer T+3 Auction in the event of shortage T+5 Funds transfer for auction

Stocks Fundamental Analysis Technical Analysis Fundamental Analysis Looking at Earnings and Dividends Looking at key ratios that reflect the above ROE Return on equity = Net Income / Equity Book Value / Share Book Value = (Share Capital + Reserves) / No of Shares Outstanding

Earnings Per Share = Net Income / Outstanding Shares Dividend Payout Ratio = Dividends / Net Income Dividends per Share Growth Duration Matrix select stocks with high expected 5 yr growth rates and dividend yields Looking at growth rates CAGR = Compound Annual Growth Rate CAGR of sales, earnings and dividends of company vs the industry CAGR of sales from 2005-2010 = (Sales 2010/Sales 2005)1/5 -1 Sustainable growth rate = Retention ratio X ROE

Multiple Analysis Price to Earnings Ratio Price to Book Ratio PBV ROE matrix select undervalued stocks with high ROE and low PBV ratios Price to Sales Ratio Price to Cash flow ratio PEG ratio = Price to earnings growth rate Company versus the sector

Determining Intrinsic Value CAPM Discounted Cash flow methods Dividend Discount model Free Cash Flow method Compare intrinsic value to current market price

Slow growers pay dividends, but grow only at GNP Stalwarts grow@12-15%, can provide good upside @ the right price. Fast growers provide growth > 25%, 10 baggers usually are found in this segment. Cyclicals fluctuate based on economic cycles Asset Plays Companies with hidden assets, that make them undervalued. Turnarounds Companies cleaning up and set for a major turnaround in their fortunes.

Devised by William O Neil C=Current quarterly earnings growth YOY >20% A=Annual earnings growth in each of the last 5 yrs >25% N= Company reinvents itself with a new strategy / product etc. e.g., Apple Ipod S = Supply of outstanding shares, smaller companies are under owned and generally out perform. L= Leader in the Sector. I=Institutional ownership, preferably 3-10 owners M=Market direction (e.g., bull or bear market)

Cash Stocks Bonds Commodities Currencies Exchange Traded Funds (ETFs) Real Estate

Represent ownership or an interest in a publicly traded company. Traded on Major exchanges such as NSE, NYSE, Nasdaq etc. Growth Vs Dividends May Pay significant dividends Value Stocks (e.g. REITs and Utilities in the US) May rapidly increase profits Growth Stocks (e.g. Tech Companies)

Can be classified according to market capitalization as micro, small, mid and large cap. Large cap - > 5000 crores in market capitalization, e.g. Reliance, SBI Mid Cap Between 1000 and 5000 crores in market cap, e.g. IDBI Small Cap - < 1000 crores Market cap e.g. Graphite India.

Oil & Gas Reliance, ONGC Financial SBI, ICICI FMCG HUL, Godrej Ind Health Care Apollo Hospitals Housing DLF, Unitech

Pharmaceuticals Ranbaxy, Cipla IT Infosys, Wipro Capital Goods BHEL Infrastructure L&T, Ivrcl Power NTPC, Neyvelli Lignite

Paper Bhallarpur Ind Metals Nalco, Tata Steel Textiles Arvind Mills Sugar Bajaj Hindusthan Fertilizer Chambal, Nagarjuna

Auto Hero Honda, Maruti Airlines Jet, King Fisher Telecom Bharathi Airtel, RCOM Transports GE Shipping, Shri Ram Transports Beverages Tata Tea

Technical Analysis

A process of identifying trend reversals at an earlier stage to formulate the buying and selling strategy. Technical analyst study the relationship between price-volume and supply-demand for the overall market and the individual stock. Predicting prices from past price history

The market value of the scrip is determined by the interaction of supply and demand. The market discounts everything. The market always moves in trend. History repeats itself. It is true to the stock market also.

Technical analysis is based on the doctrine given by Charles H. Dow in 1884, in the Wall Street Journal. A. J. Nelson, a close friend of Charles Dow formalised the Dow theory for economic forecasting. Analysts used charts of individual stocks and moving averages in the early 1920s.

Dow developed his theory to explain the movement of the indices of Dow Jones Averages. The theory is based on certain hypothesis: The first hypothesis is that no single individual or buyer can influence the major trend of the market. The second hypothesis is that market discounts every thing. The third hypothesis is that the theory is not infallible. According to Dow theory the trend is divided into Primary Intermediate/Secondary Short term/Minor

The security price trend may be either increasing or decreasing. When the market exhibits the increasing trend, it is called bull market and when it exhibits a decreasing trend it is called bear market.

The bull market shows three clear-cut peaks. Each peak is higher than the previous peak. The bottoms are also higher than the previous bottoms.
Bull market Y T3 T2 P R I C E B2 Good corporate earnings Speculation phase

T1 Revival B1 of market confidence phase-1

X Days

The market exhibits falling trend. The peaks are lower than the previous peaks. The bottoms are also lower than the previous bottoms.
Y Bear market

Loss of hope (phase-1) P R I C E T1 Recession in business (phase-2) B1 T2 Distress selling (phase-3) B2 B3 Days X

The secondary trend or the intermediate trend moves against the main trend and leads to correction. The correction would be 33% to 66% of the earlier fall or increase. Compared to the time taken for the primary trend, secondary trend is swift and quicker.

Minor trends or tertiary moves are called random wriggles. They are simply the daily price fluctuations. Minor trend tries to correct the secondary trend movement.

In the support level, the fall in the price may be halted for the time being or it may result even in price reversal.
In this level, the demand for the particular scrip is expected.

In the resistance level, the supply of scrip would be greater than the demand.
Further rise in price is prevented. Selling pressure is greater and the increase in price is halted for the time being.

Volume of Trade
Volume expands along with the bull market and narrows down in the bear market. Technical analyst use volume as an excellent method of confirming the trend.

Breadth of the Market

The net difference between the number of stock advanced and declined during the same period is the breadth of the market. A cumulative index of net differences measures the market breadth.

Short sales
This is a technical indicator also known as short interest. It refers to the selling of shares that are not owned. They show the general situations.

The word moving means that the body of data moves ahead to include the recent observation. The moving average indicates the underlying trend in the scrip. For identifying short-term trend, 10 to 30 days moving averages are used. In the case of medium-term trend 50 to 125 days are adopted. To identify long-term trend 200 days moving average is used.

Oscillator shows the share price movement across a reference point from one extreme to another. The momentum indicates:
Overbought and oversold conditions of the scrip or the market. Signaling the possible trend reversal. Rise or decline in the momentum.

RSI was developed by Wells Wilder. Identifies the inherent technical strength and weakness of a particular scrip or market. RSI can be calculated for a scrip by adopting the following formula
RSI = Rs = 100 100 1 + Rs

Average gain per day Average loss per day If the share price is falling and RSI is rising, a divergence is said to have occurred. Divergence indicates the turning point of the market.

ROC measures the rate of change between the current price and the price n number of days in the past. ROC helps to find out the overbought and oversold positions in a scrip. ROC can be calculated by two methods.
In the first method current closing price is expressed as a percentage of the 12 days or weeks in past. In the second method, the percentage variation between the current price and the price 12 days in the past is calculated.

Charts are graphic presentations of the stock prices. These also have the following uses:
Spots the current trend for buying and selling Indicates the probable future action of the market by projection Shows the past historic movement Indicates the important areas of support and resistance

These charts are one-dimensional and there is no indication of time or volume. The price changes in relation to previous prices are shown. The change of price direction can be interpreted.
Some inherent disadvantages are: They do not show the intra-day price movement. Only whole numbers are taken into consideration, resulting in loss of information regarding minor fluctuations. Volume is not mentioned in the chart.

The bar chart is the simplest and most commonly used tool of a technical analyst. A dot is entered to represent the highest price at which the stock is traded on the day, week or month. Another dot is entered to indicate the lowest price on that particular date. A line is drawn to connect both the points. A horizontal nub is drawn to mark the closing price. Chart Patterns
V Formation Double top and bottom shoulders Inverted head and shoulders Tops and bottoms Head and

The triangle formation is easy to identify and popular in technical analysis. The different triangles are: Symmetrical Ascending Descendinginverted

L a Gro up

Investools Discussion Group

Helping People Invest Smartly

Brian Cox 5/21/06

The greatest advantage to using candle on your charts, instead of bars is that single candle lines and multiple candle patterns offer more reliable, earlier and more effective reversal singles

Invented by the Japanese. Used first in the 1870s with the opening of the Japanese stock market. Can be used with the weekly, daily and 5 minute charts. Candlesticks do not give price targets and need a close to confirm candle signal

Before placing a trade based on a candle signal:

other technical signals should be considered Consider the risk / reward of the trade.

Candle charts are best used as a tool not a system.

Upper Shadow

White: Open low and close higher

Black / red: Open high and close lower Real body

Lower Shadow

High = 37 Close = 35 White: Open low and close higher

Upper Shadow High = 37 Open = 35 Black / red: Open high and close lower

Real body

Open = 30 low = 29 Lower Shadow

Close = 30 low = 29

The rectangular portion of the candlestick is called the real body. The thin line extending above the real body is called the upper shadow. The upper shadow of a black candle represents the range between the high and the sessions price.

The lower shadow of a white real body candlestick represents the range between the sessions open and low. The black real body means that the close was lower than the opening. The white real body means that the close was higher than the opening.

Candles play a powerful role in early reversal signals. Candle lines and patters confirm support and resistance.

Candles come in many different shapes

Spinning Tops Tends to indicate indecision

High Wave Candles Tends to indicate confusion

Spotting reversals
Hammer following a down trend Hanging man following an up trend Bullish signal Possible Bearish signal Bearish signal

Shooting Star following an up trend

Real Bodies can be black or white

A long lower shadow on a daily charts shows the market bouncing off from the lows of the day. The spinning top is another name for a small real body. The real body of a spinning top can be black or white. A wave candle must have long upper and lower shadows

A spinning top indicates indecision. A wave candle indicates confusion. A hammer occurs in a downtrend. A hammer can be white or black. A hanging man occurs in an up trend. The confirmation for the hanging man is a close under the hanging mans close

A shooting star occurs during an up trend. A shooting star is considered bearish

The doji can signal a significant trend shift or reversal. A doji forms when the opening and closing price are the same. There are bearish and bullish doji. Are valuable for calling the market tops (especially after a long white candle).

Long-legged Doji Market in Balance Rally could be losing steam

Dragonfly Doji Possible Bullish signal

Gravestone Doji Bearish signal

The doji is more influential when it is a rare occurrence.

Northern doji

Southern doji

A doji forms when the open and close are the same. A doji signals that the bears and bulls are in stalemate. The dragonfly doji, the high of the session represents the open, high and close. The doji in a rally is sometimes a sell signal.

A doji in an uptrend is called a northern doji. The northern doji is most effective when the market is overbought and the doji appears at a resistance area.

Candles with extended real bodies can also display strong signals

Bullish belt-hold

Bearish belt-hold Resistance

Support

Bullish belt hold is white near support and bearish is black near resistance

The bullish belt-hold; following a downtrend will starts low near resistance and raises up and closes out higher The bearish belt-hold; following a uptrend will start high near resistance and closes out lower.

The bearish belt hold becomes more signification as it nears resistance. The longer the height of the belt-hold candle, the more important the signal it gives. On the chart, we draw the support line from the bottom of the lower shadow.

The smaller the real body, the less force the move behind the move. A series of long lower shadows as the market is descending shows that the market is descending reluctantly. On the chart, we draw the support line from the bottom of the lower shadow.

If the trend is mostly higher, caution is warranted due to long upper shadows

Candle charts are most powerful when two or more candle lines combine in a candle pattern. A dark cloud cover pattern is a bearish signal consisting of a two-candle patter that indicates a top reversal.

Piercing Pattern

Dark Cloud cover

White real body that closes within the back body, perferably more than 1/2 of black body lenght

Follows a strong white body session. The second session opens above and closed below the center of the white body.

Bullish Engulfing

Bearish Engulfing

White real body opens lower and closes higher than the black body (the bulls have taken over!)

Black body opens higher and closes lower than the white body (the bears have taken over)

As the second session of a piercing pattern pushes more and more deeply into the first candle, it may become a bullish engulfing pattern. The opposite pattern to the dark cloud cover is the piercing pattern. A piercing pattern is to a bullish engulfing pattern as a dark cloud cover is to a bullish engulfing pattern.

A bullish engulfing pattern occurs when at second sessions white real body raps around the prior sessions black body If an extremely large white candle completes a bullish engulfing pattern you should buy or sell based on the risk reward profile.

Lets see an actual set of candle stick patterns

What would you Do now?

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What would you Do now?

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What does this indicate?

What is this called? (bearish or bullish)

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Is it time to buy?

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What will you do now?

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What is the name of this?

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Buy? Sell?

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What is this called?

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What will you do now?

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Strong Resistance

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Fundamental analysts analyses financial strength of corporate, growth of sales, earnings and profitability. The technical analysts mainly focus the attention on the past history of prices. Fundamental analysts estimate the intrinsic value of the shares. Technical analysts mainly predict the short term price movement. Fundamentalists are of the opinion that supply and demand for stocks depend on the underlying factors. Technicians opine that they can forecast supply and demand by studying the prices and volume of trading.