Stock Market Fundamentals Part 1

Article Summary:

A stock or an equity is a financial instrument that represents ownership of a portion of a company. “Shares” are the units of stocks.

Stocks are bought and sold on stock exchanges (it acts as a market where stock buyers connect with stock sellers). Stocks become available on an exchange for the first time after a company’s initial public offering (IPO). In an IPO, often known as the primary market, a company sells shares to an initial group of public shareholders. Shares can be sold and purchased on an exchange or the secondary market after the IPO floats shares into the hands of public shareholders.

Market Clearing Price

The price of a good or service is decided by supply and demand in a market in any transaction between a seller and a buyer. Technology and the conditions under which people work, in turn, impact supply and demand. During a transaction, the agreed upon price is called “equilibrium price” or a “market clearing price”. When either demand or supply shifts, the equilibrium price will change.

Nifty 50

The Nifty 50 is a list of the fifty most popular large-cap stocks in the 1960s and 1970s that traded at high values. The NIFTY 50 is a benchmark Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange. It is one of the two main stock indices used in India, the other being the BSE SENSEX. It is the National Stock Exchange(NSE) of India Ltd’s flagship index . The Index follows the performance of a portfolio of blue chip businesses, which are India’s largest and most liquid equities. It is well suited for benchmarking, index funds and index-based derivatives.

Technical Indicators

Technical indicators are mathematical computations using which the technical analysts predict future price movements (to judge entry and exit points for trades) based on the historical data. A bullish engulfing pattern is formed when a little black candlestick (black candlestick represents downward price movement) is followed by a massive white candlestick(white candlestick represents upward price movement) the next day, the body of which totally overlaps or engulfs the body of the previous day’s candlestick. The price opens lower than the previous low on the second day of the pattern, but buying pressure propels it up to a greater level than the previous high, resulting in an obvious win for the purchasers.

For instance, if the news reads “The Nifty50 snapped a four day losing streak and formed a bullish engulfing candle on the daily chart suggesting a reversal”, it essentially means that these stocks that had relatively low returns over the past month or so would earn positive abnormal returns in the following month. Technical indicators come into the picture in providing such analysis.

That’s it from us this time! Stay tuned for the next issue!!