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Friday, July 29, 2011

The Explainer: Stock Market - Part II

The first part of The Explainer on Stock Markets focused on a few basic aspects of the stock market, like meaning of share, types of markets, stock exchange, and demat account.

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

There are two important types of brokers: Bear and Bull. Though brokers, they are called by these peculiar names after the kind of speculation they indulge in. 

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?

A bull is a broker and a speculator. He is an optimist; he expects the price of shares to rise.  So what he tries to do is to buy at today's price, which he hopes will rise in the future. He believes that by buying the shares at today's lower price, he can make a big profit in the future after selling the shares at a higher price. If there is large-scale buying by a large number of bulls, such a market sentiment is called bullish.

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.

Types of Investors
There are three important types of investors: Stag, Chicken, and Pig. I will not focus on the long term investor. 

Who is a Stag?
A Stag is an investor who buys shares through a famous company's Share Issue, i.e. on application when the company comes out with a share issue. He does this with a simple view: Buy at the face value (i.e. par value) and sell either before the company gets listed on the stock exchange (i.e. before trading starts on the stock exchange), or on the first day of the listing or in the first few days after the company gets listed on the stock exchange. 

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?
Ever heard the term - 'chicken-hearted'? If you called someone 'chicken-hearted', you meant to call that person a coward,  i.e. someone lacking courage. 

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?
As an investor, a Pig is the antithesis of a Chicken; a Pig loves to take risk, to make that LARGE profit. Being impulsive and greedy by nature, he buys on the spur of the moment, without doing any background check on how the company is performing or whether the share price will rise. 

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)

(Please post your reaction to this post; see below.)

41 comments:

venkat said...
This comment has been removed by the author.
Dileep Prabhu said...

Simple and Crisp. Good work, Bharath

Rahul Galla said...

looking forward for part-3
and what about my doubt sir is stock broker mandatory for selling or buying shares

jksharma said...

nice concise work. Keep it up Bharat!!

sudeep said...

very informative sir. looking forward to part 3.

Vikk said...

very helpful sir..

Kamalakar Reddy said...

Hi sir... Your articles are very interesting and very informative. easily understood by beginners also.
thank u sir.

vinay said...

very helpful,simple to understand,interesting...thnx a lot sir....looking forward for the part 3

AparnaGajula said...

Very clean,neat and simple .Simple to understand.Looking forward for more !

Kakarla said...

very brief but useful..thank u sir...

Anonymous said...

sir, if you can please let us know how to analyze the company's stock price may go up or down.Or in other words when to buy or sell a particular stock,seeing the graphs...

the champ said...
This comment has been removed by the author.
the champ said...

hello sir could u explain the factors that affect the stock market??

Deekshith said...

sir whats your next topic???

maverick said...

read both d articles..thanks for writing them....it provides definitions to a lot of terms i kept hearing....looking forward for some other terms that i hear like sensex,point n y do they keep rising and falling and when they fall why do prices keep rising...n if possible some tips on investing.....thanks in advance...

Aryan said...

very very informative.. put in the simplest way possible.. thank you very much sir.. can you explain- what should we do to become a stock broker?.. i mean.. how should we register?

saumya said...

very informative.........looking forward for part 3......thank you

Rupali said...

really very simple to understand..thanq for all ur efforts

Anonymous said...

I've a doubt...who will be charged by the brokerage - seller or buyer or both ?

Bharat C. Jain said...

Typically, both!

Sushma said...

Thank you sir..pretty easy to understand..:)

Anonymous said...

thanks a lot..

adityakumar voona said...

with this article i am very comfortable with this terms 100% lucid

Abhishek said...

Good simple undestandable SIr..

Anonymous said...

Great work Sir...Short & crisp :)

swapnil tikar said...

sir what does "company gets listed on the stock exchange" means??

Neha Sharma said...

thanks sir.great job.

Anonymous said...

thank you sir

santu....bablu said...

awesome!!

dream said...
This comment has been removed by the author.
dream said...

Really helpful blog Sir. I have a doubt.
A broker should be bearish or bullish. Why should a "broker" be a bear or a bull? Isn't it only the speculator.

sridhar said...

wot an explanation sirji...... Awesome....

Profit said...

This was really interesting info in this blog that to very happy for the nice technology in this blog. I am really admired for this info in this blog that to very much enjoyed for the great technology in this blog.

Samir Kumar said...

Very informative. Thanks. Can you shed some light on "equaties"
Thnx

hamed mohd said...

good one sir!!!! sir please write about private equities.

Anonymous said...

very helpful sir!!

Kp Sailesh said...

1)what are intra-day trades??
2)and derivatives?? how these derivatives are derived ??

Anonymous said...

Sir, very much thanks for sharing this kind of useful stuff with us through your blog!! Most appreciable!!!

Anonymous said...

Sir, thanks alot for making it very easy.Really, your explanation went on so smoothly that i felt i was reading a nice story book.Thanks alot sir

nnn said...

sir please explain difference between share and dedenture,call option and put option.

Rakesh said...

Wow...Really awesome sir....