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Basics of Stock Market
A stock market, as well as an equity market or share market, is an accumulation of buyers and sellers. A loose network of economic transactions and not a physical facility or separate entity of stock is also known as “share”. This represents ownership of the business as well. Such shares include securities encountered in a public stock exchange and also in private trade.
Companies at first offer shares to the general public via “Initial public offer” or “IPO”. Next to this, the shares go to the secondary market and investors buy their shares at the market price or at the prices, which were agreed by other investors. The secondary market is called the stock market. Hence, the stock market is the place, where the trading of shares is done.
Stock market trends
There are significant stock market trends, which are listed below:
Bull market- A group of securities in which prices are rising or expecting to be raised is called the Bull market. This market can be featured by full of hope, investors' confidence, and expectations of securities.
Bear market- In this market, prices are falling and it is caused by pessimism. It is followed by the “Wall Street crash” of 1929. In July 1932, 89% of the "Dow Jones Industrial Average's market capitalization" has been erased. After experiencing the greatest depression, 50% regaining happened and a long bear market from 1932 to 1942 occurred, in which the market was again cut in half.
Market top- It is the situation, where the market reached the top and for some years it will be at its peak level. It is measured by “NASDAQ-100”, the peak of the “dot-com bubble”, which occurred on 24th March 2000. That index closed at 4,704.73, and the NASDAQ peaked at 5,132.50 and S&P 500 at 1525, 20.
Market down- In this situation, the bear market will be erased and securities will be removed towards the bull market. It is the ultimate point, from which no more downfalls can happen. In 1987, on 19th October, “the Dow Jones Industrial” average hit at the bottom of 1738.74, declining from 2722.41 and this is called Black Monday.
Correction- This is misunderstood with the bear market. For example, from April to June 2010 S&P 500 went above 1200 to nearly 1000. This was beaten as the ending point of the bull market and starting point of a bear market, however, basically it was not, and the market turned back up.
Bear market rally- Price securities rise during a bear market. Bear market rallies happened in the “Dow Jones Index” after the 1929 stock market crash, which reached the bottom line in the year 1932. It was in such a position throughout the late 1960s and early 1970s.
Forex- Buying and selling currencies take place in the Forex. It is the largest liquid market. It is open 24 hours a day and 5 days a week. In this largest market, total cash values are traded and any person, market, or any country can take part in this market.
The rate at which currencies are bought and sold is defined by this market. In the international trade market, this forex is very significant. For example, in the USA it permits a business to import goods from European member states. Especially to Eurozone members and payment of Euros, even after earning in US dollars.
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Determination of foreign exchange rate
There are many ways to determine the foreign exchange rate:
Demand supply approach of foreign exchange- Economists apply demand-supply to price theory and determine foreign exchange. India and the USA are the two countries, in which the domestic currency is the rupee and for that US dollars will be foreign exchange for Indian people, the price to get one dollar will be its exchange rate.
Demand- If the Indian people and business firms want to make payment in US dollars for using US goods and services demand, an exchange rate is generated. If Indian people can get one dollar by paying one rupee, the slope of the demand curve is negative in this case. In the same way, the dollar appreciates, if the country does not import more goods as the goods will be more expensive. It will result in a fall in demand for foreign currency as well. Foreign currency movements happen in different directions and importing country’s demand curve for foreign exchange is downward sloping from left to right.
Supply of foreign exchange- Foreign currency comes from exports in supply-demand and foreign nation purchases goods from the domestic country then the demand for foreign currency is created. It will increase the foreign nations to get more from India which will develop the supply of foreign exchange. Alternatively, a low exchange rate causes the exchange rate to fall and for that reason, the supply curve is positively sloping. “E” is the point, where supply and demand both meet the mean, where an equilibrium level is attained. When the prices go up to the P1, there will be an increase in supply, and ab demand will be less. According to demand and supply, if supply exceeds the demand, then the price will be reduced and equilibrium achievement will be at the level of OP. Alternatively, when demand exceeds supply, then the price will be increased and once again it will achieve equilibrium.
Forex volatility
In currency exchange, risks are involved, which is known as forex volatility. A higher volatility means, the exchange rate can potentially exceed the larger range of values and the lower volatility means the exchange rate does not fluctuate dramatically and only changes the value at a pace over time.
Market expectations
This term refers to the expected change of the foreign exchange price by the players and it is important because players invest in the foreign market and the price will define how good is their investments. For example, there is an expectation of rising in rupee per dollar the next day, if anyone purchases 100 shares dollars 2 each at 60 INR per dollar. On the next day, the price of rupees rises at 65 rupees per dollar, hence the person will save 1000 by investing on the day when the price will be lower.
New York stock exchange
According to the “New York stock exchange”, which is abbreviated as NYSE or as “The big board”, the American stock exchange is located at 11 Wall Street, Lower Manhattan, in New York City. The market capitalisation of its listed companies in the US is $21.3 trillion. The trading value was nearly US$169 billion in 2013. NYSE is owned by Intercontinental Exchange, an American holding company.
Trading
The trade includes the movement of goods and services from one person to another via exchange of money or by other monetary rewards (Bhullar and Bhatnagar, 2020). Thus, trading indicates buying and selling o0f goods and services from one person to another. Traders can be financial institutes, banks or private traders, or other government organizations.
Forex pairs
Forex pairs are those currency pairs that are the liquid in the rex market. These pairs and combinations are “EUR/JPY”, “GBP/JPY”, “EUR/GBP”. Other examples are: “AUD/CAD, AUD/CHF, AUD/JPY, AUD/NZD, AUD/USD, CAD/CHF” (Li et al. 2019).
Spot market
A spot market is where commodities or financial institutes are traded for immediate delivery. It is opposite to the future market and delivery happens at a later date. Settlement happens in T+2 working days and cash and commodity are done after two working days. The Spot market can be through an “Over the counter” or OTC, which is also called a “cash market”.
Future market
Financial instruments and commodities are bought at a specific price with delivery at a particular time in the future. For example, the price of one dollar is INR 63 in 2018, though on 5th April 2018 is increased to INR 70 for a dollar. Thus, mutual decisions occur upon price and the process of buying and selling at an agreed price.
Difference between Spot and Future market
- In the spot market, the transaction is settled in two working days and the future market transaction is settled on a future date.
- Price is generally taken in the prevailing situation in the spot market and in case of a future market, a predetermined price is taken.
Forex option trading
There are two options are available:
“Call option”- In this option, it is the right of the buyer is to purchase currency pair at a given exchange rate at some time in the future.
“Put option”- In this option, it is the right of the buyer to sell currency pairs at a given exchange rate at some time in the future.
Another option is:
“SPOT option”- This is stands for "Single payment options trading". This option is used when higher premium costs are compared to traditional options, however, they are easier to set and execute.
These options are helpful in earning profit and protecting the trader from losses.
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Risk management
Risk management is defined as the identification, analysis, and acceptance of uncertainty in the investment process (Idrees, Alam, and Agarwal, 2019). At the time of investing the risk is necessary to identify and the investor should quantify his investment so that he can predict his losses or profits at the right time. “International organization for standardisation” has been stated certain principles:
- Create value – resources expended to mitigate risk should be less than the consequence of inaction
- Be part of the decision-making process
- Be an integral part of organizational processes
- Try to be diligent with the uncertainty and assumptions
- Be a systematic and structured process
- Be customizable
- Take human factors into account
- Be based on the best available information
- Be transparent and inclusive
- Be dynamic, iterative and responsive to change
- Be capable of continual improvement and enhancement
Disadvantage of trading
There are certain risks as well as disadvantages of trading and investment.
Risks- Risks are always associated with trading and it is somehow like both of these terms are synonymous. Wrong-way or any wrong movement can lead to a loss and it is necessarily required to assess risks at every step of investment respectively.
Higher fees- Brokers generally charge a high amount of rate and if in that case, investor invests for a short period then the benefit may not be received.
Steps to open a trading account
There are some significant steps for trading accounts that are:
Broker- In the first step, the trading account holder should find a broker. Two types of brokers are there in the market, the first one is for full services, like tax, advice planning, and planning for buying and selling. The second type of broker is for discounts. Fewer fees are charged by this discount broker compared to full-time brokers, even though other services are not provided by them.
Brokerage rate- Every broker wants a different charge for their different services. Some discounts on the specific amount of trade could be compared to the minimum brokerage charges that should be given.
KYC- This KYC stands for “know your customer”, in which name, address, contact numbers are verified by providing evidence. This step can be done in the office of the broker or any representative from the chosen broker to the customer's home during account opening.
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