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Anil Poonia

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If you are a person who is new to the Stock Market and is looking to go through the right way to explore the types of stock market analysis, then this blog is for you.

Stock Markets are highly unpredictable, and they can only be mere a gambling game unless you don’t study and invest in the right manner. Stock Markets would always be unpredictable, but with good research and knowledge, we can make some right decisions that can help us to create wealth.

There are various methodologies through which we can analyze the movement of the market. These methods are purely scientific and involve multiple factors like stock price movements, economy and the industry, chart patterns, company balance sheets and profit and loss statements.

Types of Stock Market Analysis:

  1. Fundamental Analysis
  2. Technical Analysis 
  3. Quantitative Analysis 

Fundamental analysis

Fundamental analysis is the study of a company’s stock prices in relation to the factors affecting the organization such as its financials, revenue sources, profitability, expenses etc. Fundamental analysis of the stock markets is to predict the movement of the stock prices in the long term. 

Three essential steps of fundamental research on any stock that needs to be followed are: 

  1. Analyze the company 
  2. Analyze the industry 
  3. Analyze the economy 

The above steps can be followed in a top-down approach or a bottom-up approach. 

Refer article: How to manage your own investment portfolio

Fundamental analysis involves assessing the ‘fair value’ of a company and then evaluate whether the stock prices are undervalued or overvalued.

‍Technical Analysis

Analyzing the stock prices on the basis of statistical data such as volume, moving average, price movements, chart patterns etc. is called the Technical analysis. These analysts believe that stocks follow certain patterns on the chart which have occurred previously and will again repeat causing an upward or downward movement in the stock price. Technical analysis can be considered more on predicting the direction of the stocks, unlike fundamental analysis.

Quantitative Analysis

The third type of analysis is the Qualitative analysis which uses a mathematical formula to predict the price movement of a stock based on certain conditions, if this formula satisify those conditions then a call of buy/sell is given. Quantitative trading analysts (also known quants) use a variety of data including historical investments and stock market data to develop trading algorithms and computer models. 

Conclusion

All the three types of stock market analaysis have thier own pros and cons and none of them can be said as the only perfect way to analyze the stocks. In many cases it has been seen that for a particular stock a technical analyst mai suggest an upward movement and at the same time a fundamental analyst may suggest a potential downward movement. It is always recommended that investors do thier own research and then invest in the stock market.

For beginners as well as seasoned who wish to invest can start their wealth creation journey with StockBasket 

What is StockBasket?

As the name suggests, it is an expert-curated ready-made basket of stocks or mini portfolios. The baskets are curated after considering 60 Intelligent stock rating parameters and evaluating over 2 crore data points. StockBaskets are categorised as per an individual’s financial goals, long term themes, risk appetite and time horizon. So for all those who want to invest in stocks but don’t have the adequate knowledge can invest in these expert-curated baskets, by opening a free account on StockBasket.com

Any investor, expert or novice, who has been in the market must have heard a term used by many, which signals what trend the market is in, that popular term is the “The Dow Theory”. While the term baffles many, it makes perfect sense to some.

The theory was derived from 255 Wall Street Journal editorials written by Charles H. Dow (1851–1902), journalist, founder and first editor of the Wall Street Journal and co-founder of Dow Jones and Company. The popular Dow Jones Industrial Average (DJIA) also has its roots from the same.

Following Charles Dow’s death, William Peter Hamilton, Robert Rhea and E. George Schaefer organized and collectively represented “Dow Theory,” based on Dow’s editorials. It is amusing that Charles Dow never used the term Dow Theory nor did he use it as a trading system.

Dow Theory, put in the simplest form states that all the stocks in the market move in a trend. It could be an upward trend or a downward trend. There are some basic tenets of Dow Theory which help us understand the system better and use it to our advantage.

The Six basic tenets of Dow Theory can be understood as given:

  1. The three movements: Dow stated that the market action can be represented by the movement the stock price makes on the charts. He compared the stock movement to waves in the ocean. Any stock would move in 3 types of ways viz. Primary movement, Secondary movement and Tertiary movement. The primary movement or wave is the overall trend the stock or the market is in. It can be compared to a Tide in the ocean. The primary trend may last from several months to several years. The primary wave consists of a number of secondary waves just as the tide consists of small waves. The secondary trend may last from 3 weeks to 3 months. The final and the most insignificant trend is the tertiary which is the daily movement in the stock price much like the ripples in the sea.
  2. Accumulation and Distribution phases: Each stock can be in the accumulation phase, frenzy phase and distribution phase. Astute investors accumulate the stock when the rest of the market is quiet. As the rest of the market participates, we see heavy buying and a lot of frenzies. Smart investors distribute it at the top as the stock later heads for frenzy selling.
  3. The average discounts everything: It is assumed that any news pertaining to stock is already factored into the stock price. The average or the index discounts every such news.
  4. The averages must conform each other. The US stock market had the Industrials index and the Railroad index. Dow Theory states that sooner or later, both the indices move in sync. The averages must conform each other or else, the trend is not confirmed.
  5. Volume moves with price: Any change in the stock price must be confirmed with the change in volume. Any divergence in the price and volume action must be looked at with suspicion. The price must move with the volume.
  6. Trend exists until we see reversal: The trend in stock continues to exist until and unless we see clear indications of a trend reversal. The intermediate movement is just the market noise and must be ignored.

Although the Dow Theory was formed almost a century ago, the principals still hold. We may see a lot of critics of the Dow Theory disregarding its validity. But an astute investor must have an open mind and try to analyse what investing pattern suits them the best.

In this blog, we will compare StockBasket VS Fixed Deposits and will discuss which asset class can really work for you to achieve your dreams. We will first have a look at fixed deposits:

Fixed Deposits

A fixed deposit (FD) is a financial instrument provided by Banks or NBFCs which provides investors with a higher rate of interest than a regular savings account, until the given maturity date. The amount deposited can be in the form of Lumpsum amount, there are also recurring fixed deposit schemes, that allow investors to increase the savings on a monthly basis, in this case, the interests are added on a quarterly basis to your savings. Fixed Deposits have fixed interest rate ranging from 6-7%. FDs don’t give you stellar returns but they make sure that you get stable returns over the period of time. 

Let’s have a look at some of the Pros and Cons of fixed deposits:

Pros

  1. Low-Risk investment option: Fixed Deposits are the most risk-free investing options, although the returns are low but are steady.
  2. Low Minimum investment amount: Though the minimum amount varies from bank to bank an investor can start investing from Rs. 1,000 to Rs. 10,000 depending on his investing capacity.
  3. Independent to Market forces: FDs are not dependent on the market forces and generates stable income in a specific amount of time.

Cons

  1. Low Return on Investment: Fixed Deposit gives low returns as compared to the other investment options in the market
  2. Taxation: The interest generated by bank fixed deposits are fully taxable, a 10% TDS is charged if the FD generates an interest of more than Rs.10,000 for the respective year.
  3. Low Inflation Beating Capacity:  In 2018, inflation was 4.86%, this factor when taken into consideration nullifies the growth of wealth for the investors

This was all about Bank Fixed deposits that an investor should know before investing his hard-earned money, we move on to give you an idea about what is StockBasket 

StockBasket

StockBasket is India’s first buy and hold long-term investing platform, it operates under the Samco brand. It has a pool of expert-curated ready-made basket of stocks designed as per the investor’s financial goals like International Vacation, Retirement plans, or saving for one’s child education. Investors have to hold the basket for at least 5 years for wealth creation.

Let’s have a look at some of the Pros and Cons of StockBasket :

Pros

  1. High Returns on Investment: Average return on investment on StockBasket are very high. The CAGR of average StockBasket lies between 15-17% which has the potential to double your investments in just 5 Years
  2. High Inflation Beating Capacity:  As the Compounded annual growth return is very high it can easily beat the inflation and give you some staggering return on investment.
  3. Tax-free Dividends: With StockBasket you get the benefit of dividends which are directly credited to your bank account.
  4. Low Minimum investment amount: StockBasket was made with a purpose that wealth creation should be accessible to all, the min investment in StockBasket starts from Rs. 3,0000.

Cons

  1. Dependent on Market forces: Like other investments in Stocks, StockBasket is also dependent on the market forces, but due to the selection of top companies in the basket, they usually have less impact of the market corrections on them.
  2. Penalty on Early Exit: StockBasket charges twice the exit fee if the investors sell his StockBasket before 5 years, this policy is purposely made to bring discipline in investors to stay invested for at least 5 years for long-term wealth creation

Summary:

“Money is always eager and ready to work for anyone who is ready to employ it.” Idowu Koyenikan

StockBasket VS Fixed Deposits:  We can clearly say that though Fixed deposits are safe bets for investors,  they can hardly help investors to generate wealth over a long term period, instead investors should invest in StockBasket which has a high inflation-beating capacity that will help to achieve their financial goals within the stipulated period of time.

To change the password of your StockBasket app all you need to do is to follow this simple process:

Step 1: Login to your StockBasket app.

Step 2: From Home screen go to My Account.

Step 3: Click on Settings and Profile sections, then click on Change Password.

Step 4: You will be asked to enter your Old Password, after filling the old password you need to enter your new password two times to avoid any errors, click on submit and pat your back for a job well done.

To Rebalance/Repair order on StockBasket app, all you need to follow is this simple process:

Step 1: Login to your StockBasket app.

Step 2: From Home screen go to My Account.

Step 3: In Your Orders section, you will see the Pending Rebalances and Orders option, click on:

Rebalance – In case of pending rebalances, click on rebalance to rebalance you basket

Click on Apply Update

An that’s it your job is done!

Note: What is a Rebalance? We at StockBasket continuously monitor every basket. Our research team takes corrective action of removing under-performing stocks and adding better stocks that increase the overall performance of the basket bought to you.

In case of Broken order click on Broken order to check your order is broken.

Click on Fix This Order

Click on Fix This Order, and your job is done.

Note: What is a Broken Order: An order is categorised as broken when it is not executed partially or fully. There are multiple reasons for the order to be broken including rejections, circuit limits etc. In order to fix a broken order, you might need to add funds to your account or reconfirm a change in order fields.

Additional Links

To Add funds you can refer our article on How to Add Funds to your account.

Adding funds to StockBasket account is a very simple process all you need to follow are these simple steps:

Step 1: Login to your StockBasket Account.

Step 2: Click on Add Funds button, you will be redirected to the Pay In page, select the segment (ex. CASH/FO/CUR), your preferred bank name, enter the account number, select the transfer type (either NetBanking or UPI) and enter the amount you want to add.

Step 3: Click on submit, an OTP will be sent on your mobile, enter the OTP and submit and your job is done 

In case you have started a StockBasket SIP you must always go for an auto-debit mandate or you need to keep sufficient funds in your account for smooth transactions.

To withdraw funds from your account all you need to follow is this simple process:

Step 1: Login to your StockBasket app.

Step 2: From Home screen go to My Account.

Step 3: In Your Funds section, you will see the Withdraw funds option, you will be redirected to Pay Out the page.

Step 4: Enter the amount that you want to withdraw (ex Rs. 1000), submit by clicking on Equity Payout and your job is done.

Note: Once the withdrawal request is processed, you should receive credits in your Primary Bank a/c within 24 hours, ( Fund withdrawals requests are not processed on Saturday’s and requests on the weekend will be processed on the following Monday).

Any retail investors can get in doubt when asked about which among Concentration vs Diversification would be a good portfolio strategy for his portfolio.

Even some of the most excellent guru has some different approach to this problem. Some of them advocate spreading your portfolio, i.e. to invest in various asset classes to limit the risk related to it.

Warren Buffett, the famous investors say “Diversification may preserve wealth, but concentration builds wealth.” on the other hand Jack Bogle the founder of Vanguard quotes “Don’t look for the needle in the haystack. Just buy the haystack!”

 Let us analyze all the arguments and see which portfolio strategy works for you. 

Let us first discuss about Concentration strategy:

What is a Concentrated Portfolio?

A concentrated portfolio can be said a portfolio that holds a small number of different securities to have a level of diversification. It can consist of 10 stocks or even less than that. A concentrated portfolio may increase your risk but with higher risks comes higher reward. One of the worlds most successful investors Mr. Warren Buffett himself advocates this idea and he says that ‘‘An investor should act as though he had a lifetime decision card with 20 punches on it.” that means with every investment decision that he makes, his card will get punched, and he will be left with fewer cards for his rest of the life.

Let us also discuss the risks related to it, the first risk that comes with concentration portfolio strategy is Portfolio concentration risk, so 

What is Concentration Risk?

It is a banking term, which is used to describe the level of risk in a bank’s portfolio arising from the concentration to a single counterparty, sector or a country.

More concentration leads to less diverseness and therefore, the returns on the underlying assets are more correlated.

With Securities Concentration there is a risk of suffering losses that may occur as the investors have a large portion of their holdings in one particular investment class or market segment, in relation to their overall portfolio.

This was all about Concentration Portfolio strategy, let us now discuss about Diversification strategy

What is a Diversified Portfolio?

Diversified Portfolio means a portfolio in which the assets don’t correlate with each other. It lowers your risk, as no matter what the economy does, few of your asset classes will definitely perform. The main reason why risk will be reduced because it’s rare that the entire portfolio would be wiped out by any single black swan event. 

Benefits of Diversification: 

Diversification strategy reduces the overall level of volatility and risk. The simple reason is because of the simple reason that when investments in one area perform poorly for you, the other investments can offset its losses. 

While Diversification is a good strategy to reduce the risk, it can also be a disadvantage for you as over-diversification can lead to low returns. To know more about Diversification you can read our blog Power of Diversification 

Summary 

Investors who aim to beat the market can choose Concentration vs Diversification as per their risk appetite.

While Diversification strategy is a good way to preserve wealth, Concentration is often a better way to build a fortune.

What are Defensive Stocks?

Defensive stocks are those stocks that provide constant dividends and stable earnings regardless of how good or bad the market is performing. These stocks have constant demand in the market, and due to this, they remain stable during the various phases of the business cycle. 

Remember: Do not get confused with the Defence stock companies which are into weapon and ammunition manufacturing.

Advantages:

These stocks are a good bet for the long term as they give consistent dividends and stable earnings and can help you grow a huge wealth.

 These stocks are considered to have a high Sharpe ratio. These stocks have low risk thereby protecting you from losses. They can be the best bet for those investors who are looking for safe bets in long term. 

Disadvantage

Due to low volatilty of these stocks the chances of getting high returns also reduces. They give less profit even during the bull run. These stocks can also underperform when you realy expect them to perform in the bull markets.

Industries covered by defensive stocks:

  1. Consumer goods: Companies producing or distributing consumer goods usually fall in the category of defensive stocks. Consumer goods include food, beverages, certain household items, tobacco, hygiene products, etc. These are day to day use items that have a certain cash flow at all economic conditions. So, these stocks outperform during weak economic conditions and underperform during strong economic conditions when compared with cyclical stocks.
  2. Healthcare Stocks: Major pharmaceutical companies and manufacturers of medical devices are considered to be defensive stocks because medical aid is required irrespective of the economic condition. But now with an increase in competition from new branded and generic drugs these stocks have become less defensive.
  3. Utilities: Utilities such as water, gas and electricity are basic requirements of livelihood. So, the demand remains the same at all phases of the economy and thus are least affected by the market changes. Further utility companies draw benefits at the time of recession as they get borrowings at lower interest rates with minimal competition.

Now as you have understood the meaning of defensive stocks, you may think why to choose defensive stocks over risk-free investment options? During the downfall of the market, why to even invest in a stock when you can invest in treasury bills and other safe investment options? Yes, it’s absolutely right to choose safe investment options during the downfall of the market. But just a chance to earn dividend at a higher rate than that of interest on treasury bills with less risk attracts investors towards defensive stocks.

As an investor, you should take calculated amounts of risks so that you can go through the hard times and enjoy the benefits. Proper knowledge and understanding of the market and stocks before investing will help you fetch better returns.

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