This article will focus on participants in the stock market, like brokers and investors.
What is Speculation?
In the world of stock markets, Speculation relates to any activity that involves risk-taking. For example, a speculator may try to buy at a low price to sell later at a higher price, thus making a neat profit in the bargain. Now, you may wonder where is the risk here?
Any activity which is future-based involves risk. Look at it this way: the speculator buys at what he believes is a low price; he does this to sell at a higher price - something that may happen in the future. But there is no guarantee that the price will rise in the future. Thus he is taking a chance; in stock market jargon, this 'taking a chance' is called speculation.
In a simple way, let's say, even before the third test between India and England starts, you place a bet on its outcome - that India will win the match. Now what you are doing here is that you are speculating, with considerable risk involved - India may or may not win the match!
Who is a Broker?
A broker is a middleman who brings a buyer and a seller together. He helps strike a deal; he charges brokerage or commission for his services. He does not buy or sell for himself; he does this to earn commission. In the stock market, there are both individual brokers as well as corporate brokers (like Motilal Oswal).
Types of Stock Brokers
Who is a Bear?
A bear is a broker and a speculator. He is a pessimist; he expects the price of shares to fall. So what he tries to do is to sell at today's price, which he fears will fall in the future. He believes that by selling the shares at today's higher price, he can avoid making a loss in the future. If there is large-scale selling by a large number of bears, such a market sentiment is called bearish.
Who is a Bull?
After this simple take on stock brokers like bulls and bears, now let us look at two important types of investors: Chicken, Pig, and Stag.
There are three important types of investors: Stag, Chicken, and Pig. I will not focus on the long term investor.
The idea behind this is simple: buy at a low price (on application) and sell at a profit when the price goes up in the first few days of the company's listing. There is pretty little risk involved in this kind of trading.
Who is a Chicken?
In the same way, a Chicken is an investor who does not have the courage to take risk. He is risk-averse, i.e. he avoids taking risk. He does not wish to lose money (and sleep!). So he does not speculate; he also avoid buying / selling anything for the short term. Typically he invests money in fixed deposits (mostly with nationalised banks; the guy would not trust private sector banks) and government bonds, like those issued by the RBI. On a rare occasion, he might invest in some blue chip stocks for the long term.
For your information, blue chip stocks relate to those companies that are financially secure, have a long track record of consistent growth, and sometimes, high dividend payout history.
Who is a Pig?
A Pig is the darling of a stock broker (bear / bull). Since he is a huge risk-taker, the stock brokers love him. The Pig may or may not make money but the stock broker does (by earning his commission).
I wanted to keep this article short; I hope this helps.
(Read The Explainer: Stock Market - Part I)
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