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Third Eye college

H.B Road, Panbaza, Kalpataru Buliding


Guwahati 7!""!, #$ $ode % "&7&


Submitted by,
Name - 'ilabh (yoti )ahata
Roll No 510815695
A project report submitted in partial fulfillment of the requirement for the degree of
Master of Business Administration of Sikkim Manipal University, ndia
Sikkim Manipal University of health,
Medical and technological sciences Distance
education wing
Syndicate
house ,Manipal 576!"

Annexure B
Student Declaration
I here by declare that the project report
entitled
!A strategic study on the "eneral #ublic vie$ on %quity based
nvestment in the current market scenario&
Submitted in partial fulfillment of the requirement
for the degree of Master of business Administration of
Sikkim Manipal University, India is my original work and
not submitted for any other degree, diploma, fellowship, or
any other similar title or prie!
Place Mr. Nilabh Jyoti Mahnata
Registration No 51015!"5
Date
Annexure #
Examiners Certification
$he %ro&et re%ort o'
Mr. Nilabh Jyoti Mahanta
"A strategic study on the #eneral $ublic view
on %quity based
Investment in the current market
scenario&
Is approved and acceptable in
quality and from
(nternal )xa*iner )xternal )xa*iner
Na*e Na*e
+uali'ication +uali'ication
Designation Designation
Annexure D
,ni-ersity study center certi'icate
'his is to certify that the project report entitled
!A strategic study on the "eneral #ublic vie$ on %quity based
nvestment in the current market scenario&
Submitted in partial fulfillment of the requirement
for the degree of Master of (usiness Administration of
Sikkim Manipal University of health, Medical and
technological science!
Mr' (ilabh )yoti Mahnata
)as worked under my supervision and guidance and that
no part of this report has been submitted for the award of
any degree, *iploma, fellowship or other similar titles or
pries and that the work has not been published in any
journal or Magaine!
+ertified
Mr. Abhijeet Dev
C.W.A


ACKNOWLEDGEMENT
ACKNOWLEDGEMENT
I would like to e,press my gratitude to all
those who gave me the possibility to complete this
project work! I like to thank Sikkim Manipal
University and management of 'hird %ye +ollege for
introducing this project work into our M!(!A
program!
I-m deeply indebted to Share.han for allowing
me to conduct this project work in their esteemed
organiation, I like to specially thank Mr! Sumit
Sengupta who happened to be my $roject guide in
Sharekhan, and sparing his valuable time in helping
me out during my project work!
And lastly but not the least I am deeply
indebted to my /aculty #uide Mr! Abhjeet *ev of
third eye whose help, stimulating suggestions and
encouragement helped me in all the time during
preparation and writing of this study!
Tabe of Content
Exec!tive "!mmar#
$. $ntro%!ction &
$$. Objective '
$$$. Metho%oo(# )
$*. Ana#sis an% major fin%in(s +
*. ,ecommen%ation -
*$. Conc!sion .&

/art $
$ntro%!ction of the com0an# .'
/art $$
/roject Overvie1
.. $ntro%!ction
$. $ntro%!ction of the 0robem &.
$$. $ntro%!ction to "hare Mar2et &&
&. Objective 3-
3. Metho%oo(# 3-
'. Ana#sis
$. Mar2et s!rve# Ana#sis '&
$$. $rrationa $nvestors 4'
$$$. "mart $nvestors 45
$*. 6!n%amenta Ana#sis 4+
*. Technica Ana#sis )4
*$. 6!n%ament ana#sis v emotiona investors .7'
*. "toc2 8!bbe .7)
*$. 8ehavior 6inance .7-
*$$. $n%ian stoc2 mar2et .37
*$$$.9n%erstan%in( stoc2 c#ce .'7
:$. "hort "ein( .'.
4. ,ecommen%ation .'4
). Conc!sion .'+
/art $$$
.. A00en%ix .47
&. 8ibio(ra0h# .4&
3. ,eference .43

#itle of the pro$ect %ork
A strategic study on the #eneral $ublic
view on %quity based
Investment in the current market scenario
P.A#) /0 1/R2 3 G!1ahati
/R4AN(5A$(/N 3 "hareKhan Lt%; G!1ahati.
0A#,.$6 4,(D) 3 Mr. Abhijeet *ev'
6ac!t# Member
Mana(ement De0artment
Thir% E#e Coe(e; G!1ahati.
/R4AN(5A$(/N 4,(D) 3 Mr'Sumit Sengupta '
Territor# Mana(er.
"hareKhan Lt%; G!1ahati

&ntroduction of the pro'lem ( Whenever the US sneezes, the
world catches a cold, and this is quite evident from the
fact how rest of the world reacted to US recession. One of
the major areas that were badly affected by global
recession is Stock market. n ndia also im!act of the
global recession was felt badly. t its quite evident from
the fact that our Share "arkets are touching new lows
everyday. Sense# went on to touch all time !eak of $%&'( on
)anuary &(, $&&(. *ut by third week of )anuary $&&(, the
Sense# e#!erienced huge falls along with other markets
around the world on the basis of !ossible US economy slow
down. +he *S, Sense# inde# went into a free fall and
currently it is at ((-% .as on $'
th
feb, $&&-, when
started this !roject work/. 0s for 1ifty it come down to
$'23 .as on $'
th
4eb, $&&- from 5$-(. 0ll this means !rices
of the shares are falling quite dramatically. So to sum it
u! it is a crunch time for the investors and as they have
lost a huge chunk of their money,
0!art form that one of the major question that
occu!ying every one mind is how long this recession going
to stay. +hough analysts around the world doing there best
to !redict the market. Since no !attern seems to fit and no
formulae in sync with this gra!h, one can only assume that
the fundamentals are highly un!redictable. ,ven though our
economic !olicies may serve as a guide as to how the
markets will move in the long term, the daily swings 6 u!s
and downs 6 are still an enigma. 1ews, s!eculation, insider
trading, and !ro!aganda bring about these short7term
movements and the reasons for the fluctuations could be
many. 0t the end of the day, it is the !eo!le who drive
market. 0mong them are retail traders, who constitute $57
3&8 of the market. "ost of the times the numbers that we
see flashing through the Sense# screen are genuine outcomes
of economic !olicies. 9owever, sometime movements are
nothing but emotional numbers on how !eo!le react to a
situation. So it:s very im!ortant to know the mind set of
the investors their !erce!tion toward future, because at
the end of the day it is the action and reaction of general
!eo!le that drives the economy. 4rom marketing !oint of
view it:s very hard time for shares firms to convince there
client to invest in such a scenario when overall economy is
slowing down and investor around the world in is buried in
mist of fear and kee!ing themselves away from the market
that once gives them returns beyond there e#!ectations.
)'$ectives
Objective of this research studies is to find out the
;eneral <ublic view of investors in ;uwahati about
investment in stock market in current scenario with aim of
enhancing the market !otential for the Share khan =td and
to !oint out some recommended strategies kee!ing in view of
the current global recessions.
Secondary Objective
+o find out what kee!ing !eo!le away form investing in
share market
,ffect of global recession on !sychology of investors
m!ortance of 4undament and technical analysis before
making investment.
0n analysis of ndian stock market and how it reacted
to global recession.
Scopes and *imitations
Scopes+
+he sco!es of the research study are given below>
i. +he re!ort will be beneficial to the organization
in making strategic marketing decision es!ecially
in regard to recession.
. findings?recommendations may !rovide the necessary
requirement?solution in the area of marketing to the
concerned organization.
*imitations+
@uring the research study various unseen obstacles, tasks,
!roblems etc. was encountered. +he following are some of
the few limitations of the !roject study>
i. +he research was conducted within a short !eriod few
information and analysis are not made !ossible.
ii. +he biasness of res!ondent deviate actual result from
its actual !arameters as res!ondent don:t want to give
actual information regarding there investment habits.
iii. +he survey was restricted only %&& res!ondents. t is
very small !ercentage to the total !o!ulation of the
entire ;uwahati city. So there may be error between
the actual result and result shown in the survey.
,esearch Methodology 6 +he research deigns has been
!re!ared in such a way that the !erce!tion and view of the
target res!ondent on investing in shares es!ecially in
relation to current scenario can be analyzed and at the end
some recommended strategies can be !oint out. Aee!ing in
view the !ur!ose and im!ortance of the study, Survey study
and analytical study has been ado!ted. +he objective of
ado!ting the survey study is to find out the general view
of investors of ;uwahati. Buestionnaires are !re!ared for
the target !eo!le to find out the general view of the
targeted res!ondent +he objective of analytical study is to
inter!ret and analyze the current market situation.
Data sources 6 +o find out the general view of the !ublic
about investing in Shares <rimary sources is used. +o
inter!ret and analyze the current market situation along
with emotional as!ect mainly secondary methods are used.
Methods of Data -ollection ( +he following methods are used
to collect data for the !ur!ose of this research study.
.or primary sources
+ele!hone interview
<ersonal interview
4irst hand observation
<artici!ative observation

.or secondary sources
nternet
)ournals and 1ews!a!er
*ooks.
C
,esearch approaches Out of the five ty!es of Desearch
a!!roaches the following three a!!roaches are used.
Observation research
Survey research
0nalytical research
,esearch &nstrument *asically questionnaires are used as
research instrument.

Sample unit Sam!le unit for this survey is com!osed of
;overnment em!loyees, 1on ;overnment ,m!loyees,
<rofessionals, *usinessman E traders in ;uwahati who are
investing or ca!able of investment.
Sample si/e 4rom the given Sam!le unit %&& res!ondent
were selected to re!resent the targeted !o!ulation in
survey research. %5& res!ondents are selected for tele!hone
observation.
Sampling 0rocedure Aee!ing in view with objective of the
study, cost and time limitation, and after studying
suitability and limitation of various techniques of
sam!ling .both !robability and non 6 !robability method/,
!ur!osive sam!ling method is decided to be used as sam!ling
method to select the sam!les for this research study.
-ontact methods t is decided that the res!ondent can be
contacted !ersonally, through tele!hone or by mail.
Data 1nalysis *oth quantitative and qualitative
techniques will be used to analysis the data.
1naly/e 2 .indings
Ma$or .indings
t is found that !eo!le are not aware of ShareAhan =td as
only F 8 of res!ondent heard about share khan before.
Where as only $8 knew about their branch in ;uwahati.
nsurance seems to be the most !referred choice of
investment for !eo!le, though the trend is shifting
toward "utual 4und may be because of +a# advantage and
higher return in com!ression to nsurance. nvestment in
Share, ;old, commodities is not !referred at all.
t is interesting to know that F38 of res!ondent believe
that by investing in share market they can e#!ect to earn
return as high as F& 8 annually.
t seems !eo!le are more aware of risk factors then the
reward as most of the res!ondent gives unsafely and lack
of knowledge as !rime reason for not investing in share
market.
t is found that most of the res!ondent lack knowledge
about the fundamental mechanism of stock market.
t found that ndian stock market is still in co7
relation to the fundamentals and !rice reflects true
valueG though sometime emotion takes the market beyond
its real value, but the investor who invest irrational
are the one who lose money in the share market.
,ecommendation
$he 'ollo7ing are the reco**endations based on the analysis and 'indings 'ro* the
research study %ro-ided to the organi8ation
4irst of all would suggest before making any
investment decision one should analysis the market and
the client should also be asked to do so. feel
fundament analysis or technical analysis are still
would suggest that investor should be aware of
emotional sentiment and make themselves familiar with
behavior finance to check their own emotion and also
of the crowd.
would highly recommended that ShareAhan start some
educational and awareness !rogram to s!read an
awareness about investing in stock market, what feel
is that investing in share market requires !ro!er
knowledge and guidance and this something lacking from
the share firms. 0n educational or awareness !rogram
will not only teach a investor how to invest !ro!erly
but it can be benefited to the firm in following way
One of the basic reasons for not investing share
market is !eo!le give over em!hasis to risk factor
but there is a scientific way to managed that risk
so that investor get there desired returns based on
there risk taking ca!acity and most common !eo!le
are not aware of it. So it is im!ortant for
marketers to make investor aware of the investment
!rocess and how risk can be controlled so that
!eo!le feel confident about investing in shares.
+here are !eo!le like Warren *uffet who over the
year creating !ortfolio for !eo!le that gives return
that even out!erform the market, so it humanly
!ossible to out!erform the market if one has the
!ro!er knowledge.
t is seen that !eo!le who have lost money in the
share market not because fundamental are wrong it is
because they lack basic knowledge, they make
emotional based decision or they become too greedy
by holding on to the stock for more then they should
have in antici!ation of more !rofit. 1ow as a
marketer one can do nothing about that, but they
certainly can and should !revent these rotten
mangoes from s!oiling the whole basket. t is
observed that !eo!le have a negative attitude toward
investing in share market because they are afraid of
losing money as they have seen other losing money,
and this fear can be removed only if !eo!le become
more aware of the market through education and
awareness !rogram.
With recent downfall that feeling of unsafely is
stronger then ever. 0gain as a marketer or a broker
one can:t make the economy shiny but they can convey
a massage that it is a !art of the economy and that
doesn:t mean that they have to loss money every time
a recession hit the market and there are e#am!les of
!eo!le making good earning even in bears market.
0gain this !ossible through education and awareness
!rogram.
One of the biggest advantage of this educational or
awareness !rogram would be that it will create a
brand image for ShareAhan which will be diffidently
going to hel! in long run.
t is seen that during bear market !rofit of most of
the firm come down, as volume of trading come down
when !eo!le tend to shy away from the market. don:t
know if there is any rules or !olicy regarding short
selling, but if there are not !eo!le should be
encouraged to go for short selling as it won:t harm
there !ortfolio that much because of economic slow
down or due to bear market. 0gain investor must be
aware of the s!ecific risk involved in short selling.

0nother im!ortant suggestion would be to ste! u! the
!romotional and advertising activity as it is found
that most of the res!ondent never heard of ShareAhan
before. 0nd !romotional actively can be coordinated
with educational or awareness !rogram.
;enerally it is seen that telemarketing is used to
generate lead to bring in new client to the firm which
is a age old method that firm al over the world using
for years. *ut with changing time think it is time
to look for alternative tools, and
what feel is that !otential customer should be
invited to seminar .which should be a !art of
education and awareness !rogram/ think this will
attract a customer more and he will be motivated to
make investment when he will come to know about share
market, rather then sim!ly asking them whether the are
interested in investing in shares.
"y final suggestion to investor and share firm is that
if you are losing slee! due to rescission and you
shouldn:t because it is just a cycle in the economy
and it won:t going to last for ever, but surely it
will hit us again but the e#!erience one again form
this time certainly going to hel! for the ne#t one. So
my suggestion is to learn form this e#!erience.
-onclusion
0fter going trough facts, finding and analysis what
believe still stock market is the best investment o!tions
for investors who are in search of high returns and those
who want to meet their financial goals. Still it seems
investor from our region still !referred insurance as
favorable o!tion as it involves low risk and ta# benefits.
*ut that trend is now shifting toward "utual 4und as it
gives more returns in com!ression to insurance and also
gives them ta# benefitsH. t seems investment in share is
still and risky o!tion for investors as they feel unsafe.
When analysis ndian stock market found that it is
still in co relation to fundamental !rinci!les. Ies there
is a emotional as!ect that influence the market so as
investor one should be aware of this emotional as!ect and
make themselves familiar with behavior science. *ut they
can have full faith in fundamental !rinci!als to make there
investment decisions, and would say investment in shares
is safe o!tion if one is rational and know how market
works. Ies !eo!le have lost money in the share market but
mostly it is not because fundamental are wrong it is
because they lack basic knowledge, they make emotional
based decision or !urely they become too greedy buy holding
on to the stock for more then they should have. 1ow as a
marketer one can do anything about that but they certainly
can and should !revent these rotten mangoes to s!oil the
whole basket as that is what observed in the res!ondent.
Ies stock market is risky but not as unsafe as they !retend
to and most of this fear is in mind and as result !eo!le
forget that there is high reward attached to that risk. 0nd
with some much tools and method that risk can be managed
according to individual and investing in share can be a
safer then it is assumed by the !eo!le. 4or that it is
advisable for share firms to take initiative to s!eared
awareness and education cam!aign to encourage !eo!le to
invest in share. When it come to marketing equity based
!roduct in our region it is like selling shoes in an island
where !eo!le don:t wear shoes and there is two way to look
at this situation, and if we see it !ositively it reflect
that there is a huge !otential for market develo!ment and
that is the reason share firm one after another is o!ening
there outlet here. 1ow it is u! to the res!ective firms who
can jum! on to that o!!ortunities and teach them to wear
shoes.
/A,T (
Brief introduction of the company
Sharekhan is online stock trading company of SSKI (S.S. Kantilal
Ishwarlal Securities Limited) Group, provider of India!ased investment !anking
and corporate finance service. ShareKhan is one of the largest stock !roking
houses in the country. SSKI has !een among India"s leading !roking houses for
more than a century.
Sharekhan#s e$uity related services include trade e%ecution on &S', (S',
)erivatives, commodities, depository services, online trading and investment
advice. *rading is availa!le in &S' and (S'. +long with Sharekhan.com
we!site, ShareKhan has around ,-. offices (share shops) in -/. cities around
the country.
Share khan has one of the !est state of art we! portal providing fundamental and
statistical information across e$uity, mutual funds and I01s. 2ou can surf across
,,,.. companies for indepth information, details a!out more than -,,.. mutual
fund schemes and I01 data. 2ou can also access other market related details
such as !oard meetings, result announcements, 3II transactions, !uying4selling
!y mutual funds and much more.
"ervice 0rovi%e b# share2han
Allow investor to buy and sell stocks online along with the following features
like multiple watch lists, Integrated Banking, demat and digital contracts,
Real-time portfolio tracking with price alerts and Instant credit & transfer.
T*+ dedicated nu,ber- .or placing ytheir order- with ytheir cell phone or
landline. Toll .ree nu,ber/ !%""%&&%7"0". 1or people with di..iculty in
acce--ing the toll%.ree nu,ber, we al-o ha2e a Reliance nu,ber 34their #ocal
5T6 $ode7 8"8"79"" which i- charged at a- a local call.
5i,ple and 5ecure :nteracti2e ;oice Re-pon-e ba-ed -y-te, .or
authentication
'o waiting ti,e. Enter ytheir TP:' to be tran-.erred to their telebro<er-
4ou al-o get the tru-ted, pro.e--ional ad2ice o. their telebro<er-
=.ter htheir- order place,ent .acility between >."" a, and >.8" a, 3ti,ing- to
be e?tended -oon7
Reliable -er2ice, where2er you are
Dematerialisation and trading in the
demat mode is the safer and faster
alternative to the physical existence of
securities. Demat as a parallel solution
offers freedom from delays, thefts,
forgeries, settlement risks and paper work.
This system works through depository
participants (DPs) who offer demat services
and the securities are held in the
electronic form for the investor directly by
the Depository.
harekhan Depository ervices offers
demateriali!ation services to individual
and corporate investors. "e have a team
of professionals and the latest
technological expertise dedicated
exclusively to their demat department,
apart from a national network of
franchisee, making their services #uick,
convenient and efficient.
$t harekhan, their commitment is to provide
a complete demat solution which is
simple, safe and secure
= -ingle plat.or, .or ,ultiple e?change B5E @ '5E 3$a-h @ 1@+7,
)$A, '$6EA, )utual 1und-, :P+-
)ultiple )ar<et *atch a2ailable on 5ingle 5creen
)ultiple $hart- with Tic< by Tic< :ntraday and End o. 6ay $harting
powered with 2ariou- 5tudie-Graph 5tudie- include =2erage, Band%
Bollinger, Know 5ureThing, )=$6, R5:, etc
=pply -tudie- -uch a- ;ertical, Horizontal, Trend, Retrace,ent @
1ree line-
B-er can -a2e hi- own de.ined -creen a- well a- graph te,plate,
that i-, -a2ing the layout .or .uture u-e
B-er%de.ined alert -etting- on an input 5toc< Price triggerTool-
a2ailable to guage ,ar<et -uch a- Tic< Cuery, Tic<er, )ar<et
5u,,ary, =ction *atch, +ption Pre,iu, $alculator, 5pan
$alculator5hortcut <ey .or 1=5T acce-- to order place,ent- @
report-
+nline .und tran-.er acti2ated with !& Ban<-
Get e2erything you need at a 5hare<han outletD
All you have to do is walk into any of their !" share shops across #$" cities in India
to get a host of trading related services - their friendly customer service staff
will also help you with any accouts related %ueries you may have. A &harekhan
outlet offers the following services'
Onine 8"E an% N"E exec!tions <thro!(h 8OLT = NEAT terminas>
6ree access to investment a%vice from "hare2han?s ,esearch team
"hare2han *a!eLine <a month# 0!bication 1ith re2iew- o. reco,,endation-,
-toc<- to watch out .or etc7
Dai# research re0orts an% mar2et revie1 <@i(h Noon = Ea(e E#e>
/reAmar2et ,e0ort <Mornin( C!00a>
Dai# tra%in( cas base% on Technica Ana#sis
Coo tra%in( 0ro%!cts <Darin( Derivati2e- and )ar<et 5trategy7
/ersonaise% A%vice
Live Mar2et $nformation
De0ositor# "ervicesB Demat = ,emat Transactions
Derivatives Tra%in( <6!t!res an% O0tions>
Commo%ities Tra%in(
$/Os = M!t!a 6!n%s Distrib!tion
$nternetAbase% Onine Trading/ 5peedTrade
5ow to open account with Sharekhan6
/or online trading with Sharekhan, investor has to open an
account! /ollowing are the ways to open an account with
Sharekhan! +all them at phone number provided below and
ask that you want to open an account with them!
1. Call on Toll free number: 1-800-22-7500 to speak to a Customer
Servie e!eutive
2. "f #ou are in $umbai all on 022-%%%21111
&isit one of t'eir bran'es. S'arek'an 'as a 'u(e net)ork
all over "n*ia. Clik on 'ttp:++s'arek'an.om+,oateus.asp!
t'is link to fin* out about t'eir nearest bran'. -ust selet
t'e plae near #ou an* #ou.ll fin* a mana(er to assist #ou
t'ere.
/ou an sen* t'em an 0mail on info1s'arek'an.om to
kno) about t'eir pro*uts an* servies.
"f #ou )is' to 'at )it' ustomer servie representative2
#ou an 3oin t'e 'at session.
/A,T ((
#itle of the pro$ect %ork ( "A strategic study on the
#eneral $ublic view on %quity based Investment in the
current market scenario&
&ntroduction of the pro'lem ( Whenever the US sneezes, the
world catches a cold, and this is quite evident from the
fact how rest of the world reacted to US recession. One of
the major areas that were badly affected by global
recession is Stock market. n ndia also im!act of the
global recession was felt badly. t its quite evident from
the fact that our Share "arkets are touching new lows
everyday. Sense# went on to touch all time !eak of $%&'( on
)anuary &(, $&&(. *ut by third week of )anuary $&&(, the
Sense# e#!erienced huge falls along with other markets
around the world on the basis of !ossible US economy slow
down. +he *S, Sense# inde# went into a free fall and
currently it is at ((-% .as on $'
th
feb, $&&-, when
started this !roject work/. 0s for 1ifty it come down to
$'23 .as on $'
th
4eb, $&&- from 5$-(. 0ll this means !rices
of the shares are falling quite dramatically. So to sum it
u! it is a crunch time for the investors and as they have
lost a huge chunk of their money,
0!art form that one of the major question that
occu!ying every one mind is how long this recession going
to stay. +hough analysts around the world doing there best
to !redict the market. Since no !attern seems to fit and no
formulae in sync with this gra!h, one can only assume that
the fundamentals are highly un!redictable. ,ven though our
economic !olicies may serve as a guide as to how the
markets will move in the long term, the daily swings 6 u!s
and downs 6 are still an enigma. 1ews, s!eculation, insider
trading, and !ro!aganda bring about these short7term
movements and the reasons for the fluctuations could be
many. 0t the end of the day, it is the !eo!le who drive
market. 0mong them are retail traders, who constitute $57
3&8 of the market. "ost of the times the numbers that we
see flashing through the Sense# screen are genuine outcomes
of economic !olicies. 9owever, sometime movements are
nothing but emotional numbers on how !eo!le react to a
situation. So it:s very im!ortant to know the mind set of
the investors their !erce!tion toward future, because at
the end of the day it is the action and reaction of general
!eo!le that drives the economy. 4rom marketing !oint of
view it:s very hard time for shares firms to convince there
client to invest in such a scenario when overall economy is
slowing down and investor around the world in is buried in
mist of fear and kee!ing themselves away from the market
that once gives them returns beyond there e#!ectations.
:ntroduction to -toc< ,ar<et
%efore moving into my topic let me give a brief
introduction about shares, share market and few
terms that we come across most often.
Definition
Plain and simple, a &stock' is a share in the
ownership of a company. $ stock represents a claim
on the company(s assets and earnings. $s you
ac#uire more stocks, your ownership stake in the
company becomes greater. ome times different words
like shares, e#uity, stocks etc. are used. $ll
these words mean the same thing.
%hy does a company issue stocks3
)ow comes the #uestion why would the founders
share the profits with thousands of people when
they could keep profits to themselves* The reason
is that at some point every company needs to +raise
money+. To do this, companies can either borrow it
from somebody or raise it by selling part of the
company, which is known as issuing stock.
$ company can borrow by taking a loan from a bank
or by issuing bonds. %oth methods come under +debt
financing+. ,n the other hand, issuing stock is
called &e#uity financing'. -ssuing stock is
advantageous for the company because it does not
re#uire the company to pay back the money or make
interest payments along the way.
$ll that the shareholders get in return for their
money is the hope that the shares will someday be
worth more than what they paid for them. The first
sale of a stock, which is issued by the private
company itself, is called the initial public
offering (-P,).
-t is important that you understand the distinction
between a company financing through debt and
financing through e#uity. "hen a investor buy a
debt investment such as a bond, they are guaranteed
the return of their money (the principal) along
with promised interest payments.
This isn(t the case with an e#uity investment. %y
becoming an owner, investor assume the risk of the
company not being successful . /ust as a small
business owner isn(t guaranteed a return, neither
is a shareholder. hareholders earn a lot if a
company is successful in a way of dividend, but
they also stand to lose their entire investment if
the company isn(t successful.
So what does ownership of a company give us3
0olding a company(s stock means that we are one of
the many owners (shareholders) of a company and, as
such, we have a claim to everything the company
owns.
This means that technically we own a tiny little
piece of all the furniture, every trademark, and
every contract of the company. $s an owner, we are
entitled to our share of the company(s earnings as
well.
These earnings will be given to us. These earnings
are called &dividends' and are given to the
shareholders from time to time.
$ stock is represented by a +stock certificate+.
This is a piece of paper that is proof of our
ownership. 0owever, now.a.days we could also have a
&demat' account. This means that there will be no
&stock certificates'. 1verything will be done
though the computer electronically. elling and
buying stocks can be done /ust by a few clicks.
%eing a shareholder of a public company does not
mean we have a say in the day.to.day running of the
business. -nstead, &one vote per share' to elect
the board of directors of the company at annual
meetings is all we can do. 2or instance, being a
3icrosoft shareholder doesn(t mean we can call up
%ill 4ates and tell him how you think the company
should be run.
The management of the company is supposed to
increase the value of the firm for shareholders. -f
this doesn(t happen, the shareholders can vote to
have the management removed. -n reality, individual
investors don5t own enough shares to have a
material influence on the company. -t(s really the
big boys like large institutional investors and
billionaire entrepreneurs who make the decisions.
2or ordinary shareholders, not being able to manage
the company isn(t such a big deal. $fter all, the
idea is that don(t we want to have to work to make
money, right* The importance of being a shareholder
is that you are entitled to a portion of the
company5s profits and have a claim on assets.
Profits are sometimes paid out in the form of
dividends as mentioned earlier. The more shares we
own, the larger the portion of the profits we5ll
get. ,ur claim on assets is only relevant if a
company goes bankrupt. -n case of li#uidation,
we(ll receive what(s left after all the creditors
have been paid.
$nother extremely important feature of stock is
+limited liability+, which means that, as an owner
of a stock, we are +not personally liable+ if the
company is not able to pay its debts.
-t is important to note that there are no
guarantees when it comes to individual stocks. ome
companies pay out dividends, but many others do
not. $nd there is no obligation to pay out
dividends. "ithout dividends, an investor can make
money on a stock only through its appreciation of
the stock price in the open market.
,n the downside, any stock may go bankrupt, in
which case investment is worth nothing.
0aving understood this, we now want to know what
makes stock prices rise and fall. -f we know this,
we will know which stocks to buy.
0hat makes stock prices go 1up1 and 1down12
tock prices change every day because of market
forces. %y this we mean that stock prices change
because of &supply and demand'. -f more people want
to buy a stock (demand) than sell it (supply), then
the price moves up6
7onversely, if more people wanted to sell a stock
than buy it, there would be greater supply than
demand, and the price would fall. (%asics of
economics6)
8nderstanding supply and demand is easy. "hat is
difficult to understand is what makes people like a
particular stock and dislike another stock. -f we
understand this, we will know what people are
buying and what people are selling. -f we know this
we will know what prices go up and what prices go
down6
To figure out the likes and dislikes of people, we
have to figure out what news is positive for a
company and what news is negative and how any news
about a company will be interpreted by the people.
The most important factor that affects the value of
a company is its earnings. 1arnings are the profit
a company makes, and in the long run no company can
survive without them. -t makes sense when we think
about it. -f a company never makes money, it isn(t
going to stay in business. Public companies are
re#uired to report their earnings four times a year
(once each #uarter).
Dalal treet watches with great attention at these
times, which are referred to as earnings seasons.
The reason behind this is that analysts base their
future value of a company on their earnings
pro/ection. -f a company(s results are better than
expected, the price /umps up. -f a company(s
results disappoint and are worse than expected,
then the price will fall.
%hy Stocks prices 4o Up
77 +he com!any entered in to a big new contract
77 0 great !ositive news coverage on the com!any in the media
77 Scientists discovered and o!ined that the !roduct is good for
something im!ortant
77 0 famous investor is buying shares77 =ots of !eo!le are buying shares
77 0n analyst u!grades the com!any, changing her recommendation from,
for instance, JbuyJ to Jstrong buyJ
77 Other stocks in the same industry go u!
77 "ost of the stock market is u!
77 0 com!etitorKs factory burns down
77 +he com!any wins a lawsuit
77 "ore !eo!le are buying the !roduct or service
77 +he com!any e#!ands globally, and starts selling in other countries
77 +he industry is JhotJ
77 !eo!le e#!ect big things for good reasons
77 +he industry is JhotJ
77 !eo!le donKt understand much about it, but theyKre buying anyway
77 ncreasing sales and !rofits
77 0 great new e#ecutive is hired to run the com!any
77 0n e#citing new !roduct or service is introduced
77 +he com!any is bought by another com!any
77 +he com!any might be bought by another com!any
77 0dditional e#citing new !roducts or services are e#!ected
77 +he com!any is going to Js!in7offJ !art of itself as a new com!any
77 Dumours
77 4or no reason at all
%hy Stocks prices 4o Down
77 =ots of !eo!le are selling shares
77 0 factory burns down
77 Other stocks in the same industry go down
77 <rofits and?or sales are sli!!ing
77 +o! e#ecutives leave the com!any
77 0 famous investor sells shares of the com!any
77 0n analyst downgrades his recommendation of the stock, maybe from
JbuyJ to JholdJ
77 +he com!any loses a major customer
77 "ost of the stock market is down
77 <erha!s in a tem!orary recession or bear market
77 0nother com!any introduces a better !roduct
77 +hereKs a su!!ly shortage, so not enough of the !roduct can be made
77 0 big lawsuit is filed against the com!any
77 Scientists discover the !roduct is not safe
77 4ewer !eo!le are buying the !roduct
77 +he industry used to be Jhot,J but now another industry is more
!o!ular
77 Some new law might hurt sales or !rofits
77 0 !owerful com!any becomes a com!etitor
77 Dumors
77 4or no reason at all
+hese are the some reasons which creates wave in the market both for
and against the com!any in different situations. *ut, an intelligent
investor has to look at all these fundamentals before taking any
reasons regarding buying and selling of shares and stocks of any
com!anies.
%hat are the Sense5 2 the 6ifty3
The ensex is an +index+. "hat is an index* $n
index is basically an indicator. -t gives you a
general idea about whether most of the stocks have
gone up or most of the stocks have gone down.
The ensex is an indicator of all the ma/or
companies of the %1.
The )ifty is an indicator of all the ma/or
companies of the )1.
-f the ensex goes up, it means that the prices of
the stocks of most of the ma/or companies on the %1
have gone up. -f the ensex goes down, this tells
you that the stock price of most of the ma/or
stocks on the %1 have gone down.
9ust like the ensex represents the top stocks of
the %1, the )ifty represents the top stocks of the
)1.
9ust in case you are confused, the %1, is the
%ombay tock 1xchange and the )1 is the )ational
tock 1xchange. The %1 is situated at %ombay and
the )1 is situated at Delhi. These are the ma/or
stock exchanges in the country. There are other
stock exchanges like the 7alcutta tock 1xchange
etc.-n our 4uwahati we have 4uwahati stock
exchange, but they are not as popular as the %1
and the )1. 3ost of the stock trading in the
country is done though the %1 : the )1.
%esides ensex and the )ifty there are many other
indexes. There is an index that gives you an idea
about whether the mid.cap stocks go up and down.
This is called the &%1 3id.cap -ndex'. There are
many other types of indexes.
There is an index for the metal stocks. There is an
index for the 2374 stocks. There is an index for the
automobile stocks etc.
7ow to calculate 8S9 S96S9:3
The ensex has a very important function. The
ensex is supposed to be an indicator of the stocks
in the %1. -t is supposed to show whether the
stocks are generally going up, or generally going
down.
To show this accurately, the ensex is calculated
taking into consideration stock prices of ;<
different %1 listed companies. -t is calculated
using the &free.float market capitali!ation'
method. This is a world wide accepted method as one
of the best methods for calculating a stock market
index.
-t is important to note that the method used for
calculating the ensex and the ;< companies that
are taken into consideration are changed from time
to time. This is done to make the ensex an
accurate index and so that it represents the %1
stocks properly.
To really understand how the ensex is calculated,
we simply need to understand what the term &free.
float market capitali!ation' means. %ut, before we
understand what &free.float market capitali!ation'
means, we first need to understand what &market
capitali!ation' means.
%hat is ;market capitali/ation;3
"hen you are talking about &mid.cap', &small.cap'
and &large.cap' stocks, we are talking about market
capitali!ation6
3arket cap or market capitali!ation is simply the
worth of a company in terms of it5s shares6 To put
it in a simple way, if we were to buy all the
shares of a particular company, what is the amount
we would have to pay* That amount is called the
&market capitali!ation'6
To calculate the market cap of a particular
company, simply multiply the &current share price'
by the &number of shares issued by the company'6

%hat is ;free(float market capitali/ation;3
3any different types of investors hold the shares
of a company6 The 4ovt. may hold some of the
shares. ome of the shares may be held by the
&founders' or &directors' of the company. ome of
the shares may be held by the 2D-5s etc. etc6
)ow, only the &open market' shares that are free
for trading by anyone, are called the &free.float'
shares. "hen we are calculating the ensex, we are
interested in these &free.float' shares6
$ particular company, may have certain shares in
the open market and certain shares that are not
available for trading in the open market.
$ccording the %1, any shares that D, ),T fall
under the following criteria, can be considered to
be open market shares=
>0oldings by founders?directors? ac#uirers which
has control element
>0oldings by persons? bodies with +controlling
interest+
>4overnment holding as promoter?ac#uirer
>0oldings through the 2D- @oute
>trategic stakes by private corporate bodies?
individuals
>1#uity held by associate?group companies (cross.
holdings)
>1#uity held by employee welfare trusts
>Aocked.in shares and shares which would not be
sold in the open market in normal course.
$ company has to submit a complete report about
&who has how many of the company5s shares' to the
%1. ,n the basis of this, the %1 will decide the
&free.float factor' of the company. The &free.float
factor' is a very valuable number6 -f we multiply
the +free.float factor+ with the &market cap' of
that company, we will get the &free.float market
cap' which is the value of the shares of the
company in the open market6
$ simple way to understand the &free.float market
cap' would be, the total cost of buying all the
shares in the open market6
)ow let us come let us discuss how do we find out
the value of the ensex at a particular point*
2irst we have to find out the &free.float market
cap' of all the ;< companies that make up the
ensex6
econd we have to add all the &free.float market
cap5s' of all the ;< companies6
Third we5ll 3ake all this relative to the ensex
base. The value you get is the ensex value6 2or
example suppose, for a &free.float market cap' of
@s.B<<, <<< 7r... the ensex value is C<<<D
Then, for a &free.float market cap' of @s.BE<,<<<
7r... the ensex value will be.. The ensex value
will be F<<< if the &free.float market cap' comes
to @s.BE<,<<< 7r6
-t is important to note that 1very time one of the
;< companies has a &stock split' or a +bonus+ etc.
appropriate changes are made in the &market cap'
calculations.
)ow, there is only one #uestion left to be
answered, which ;< companies, why those ;<
companies, why no other companies*
The ;< companies that make up the ensex are
selected and reviewed from time to time by an
&index committee'. This &index committee' is made
up of academicians, mutual fund managers, finance
/ournalists, independent governing board members
and other participants in the financial markets.

The main criteria for selecting the ;< stocks is as
follows=
Market capitali/ation+ The 7ompany should have a
market capitali!ation in the Top B<< market
capitali!ation5s of the %1. $lso the market
capitali!ation of each company should be more than
<.EG of the total market capitali!ation of the
-ndex.
#rading fre<uency+ The company to be included
should have been traded on each and every trading
day for the last one year. 1xceptions can be made
for extreme reasons like share suspension etc.
6um'er of trades+ The scrip should be among the top
BE< companies listed by average number of trades
per day for the last one year.
&ndustry representation+ The companies should be
leaders in their industry group.
*isted history+ The companies should have a listing
history of at least one year on %1.
#rack record+ -n the opinion of the index
committee, the company should have an acceptable
track record.
7ere are the full lists of companies that have 'een part of
the 8S9 Sense5 since its inception in =>6 ?'aseline to
=7=@A ?1s of Banuary C, C!!=@
Co%e Name "ector A%j. 6actor
500910 A## :ousing Related 0.55
50010; B:). #a%ital 4oods 0.;5
5;<959 Bharti Airtel $eleco* 0.;5
5;<! D.0 ,ni-ersal .i*ited :ousing related 0.15
500;00 4rasi* (ndustries Di-ersi'ied 0.=5
500010 :D0# 0inance 0.5
50010 :D0# Ban> 0inance 0.5
500990 :indalco (ndustries Metal? Metal Products @ Mining 0.=0
500!"! :industan .e-er .i*ited 0M#4 0.50
5;<1=9 (#(#( Ban> 0inance 1.00
500<0" (n'osys (n'or*ation $echnology 0.5
500=5 ($# .i*ited 0M#4 0.=0
5;<5;< Jai%ra>ash Associates :ousing Related 0.!0
500510 .arsen @ $oubro #a%ital 4oods 0."0
5005<0 Mahindra @ Mahindra .i*ited $rans%ort )Aui%*ents 0.=5
5;<500 Maruti ,dyog $rans%ort )Aui%*ents 0.50
5;<555 N$P# Po7er 0.15
500;1< /N4# /il @ 4as 0.<0
500;5" Ranbaxy .aboratories :ealthcare 0.90
5;<=1< Reliance #o**unications $eleco* 0.;5
500;<5 Reliance (ndustries /il @ 4as 0.50
500;"0 Reliance (n'rastructure Po7er 0.!5
50011< State Ban> o' (ndia
0inance
0.95
500"00 Sterlite (ndustries Metal? Metal Products? and Mining 0.90
5<9=15 Sun Phar*aceutical (ndustries :ealthcare 0.90
5;<590 $ata #onsultancy Ser-ices (n'or*ation $echnology 0.<5
5005=0 $ata Motors $rans%ort )Aui%*ents 0.!5
500900 $ata Po7er Po7er 0.=0
5009=0 $ata Steel Metal? Metal Products @ Mining 0.=0
50=!5 1i%ro (n'or*ation $echnology 0.<0
@=4 re!laced @r. DeddyKs =ab on 1ovember %-, $&&'.
Sterlite ndustries re!laced 0mbuja Lements on )uly
$(, $&&(.
+ata <ower Lom!any re!laced Li!la =td. on )uly $(,
$&&(.
Sun <harmaceutical ndustries re!laced Satyam Lom!uter
Services on )anuary (, $&&-
7ow to ,ead 1 Stock #a'leDEuote
-t is very important to know how to read the a
stock table ? Hute that omes every day in our
newspaper. $ny financial paper has stock #uotes
that will look something like the image below=
-olumns 2 C+ 5C(%eek 7igh and *ow ( These are the
highest and lowest prices at which a stock has
traded over the previous EI weeks (one year). This
typically does not include the previous day(s
trading.
-olumn F+ -ompany 6ame 2 #ype of Stock ( This
column lists the name of the company. -f there are
no special symbols or letters following the name,
it is common stock. Different symbols imply
different classes of shares. 2or example, +pf+
means the shares are preferred stock.
-olumn "+ #icker Sym'ol ( This is the uni#ue
alphabetic name which identifies the stock. -f you
watch financial TJ, you have seen the ticker tape
move across the screen, #uoting the latest prices
alongside this symbol.
-olumn 5+ Dividend 0er Share ( This indicates the
annual dividend payment per share. -f this space is
blank, the company does not currently pay out
dividends.
-olumn 6+ Dividend Gield ( The percentage return on
the dividend. 7alculated as annual dividends per
share divided by price per share.
-olumn 7+ 0riceD9arnings ,atio ( This is calculated
by dividing the current stock price by earnings per
share from the last four #uarters.
-olumn >+ #rading Holume ( This figure shows the
total number of shares traded for the day, listed
in hundreds. To get the actual number traded, add
+<<+ to the end of the number listed.
-olumn = 2 !+ Day 7igh and *ow ( This indicates
the price range at which the stock has traded at
throughout the day. -n other words, these are the
maximum and the minimum prices that people have
paid for the stock.
-olumn + -lose ( The close is the last trading
price recorded when the market closed on the day.
-f the closing price is up or down more than EG
than the previous day(s close, the entire listing
for that stock is bold.faced.-t is important to
Keep in mind, we are not guaranteed to get this
price if we buy the stock the next day because the
price is constantly changing (even after the
exchange is closed for the day). The close is
merely an indicator of past performance and except
in extreme circumstances serves as a ballpark of
what we should expect to pay.
Lolumn %$> 1et Lhange 7 This is the value change in
the stock price from the previous day(s closing
price. "hen we hear about a stock being +up for the
day,+ it means the net change was positive.
Euotes on the &nternet
)owadays, it(s far more convenient for most to get
stock #uotes off the -nternet. This method is
superior because most sites update throughout the
day and give us more information, news, charting,
research, etc.
8ull and 8ear
#he 8ulls ( $ bull market is when everything in
the economy is great, people are finding /obs,
gross domestic product (4DP) is growing, and stocks
are rising. Things are /ust plain rosy6 Picking
stocks during a bull market is easier because
everything is going up. %ull markets cannot last
forever though, and sometimes they can lead to
dangerous situations if stocks become overvalued.
-f a person is optimistic and believes that stocks
will go up, he or she is called a +bull+ and is
said to have a +bullish outlook+.
#he 8ears ( $ bear market is when the economy is
bad, recession is looming and stock prices are
falling. %ear markets make it tough for investors
to pick profitable stocks. ,ne solution to this is
to make money when stocks are falling using a
techni#ue called short selling. $nother strategy is
to wait on the sidelines until we feel that the
bear market is nearing its end, only starting to
buy in anticipation of a bull market. -f a person
is pessimistic, believing that stocks are going to
drop, he or she is called a +bear+ and said to have
a +bearish outlook+.
)'$ectives 6 Objective of this research studies is to find
out the ;eneral <ublic view of investors in ;uwahati about
investment in stock market in current scenario with aim of
enhancing the market !otential for the Share khan =td and
to !oint out some recommended strategies kee!ing in view of
the current global recessions.
,esearch Methodology 6 +he research deigns has been
!re!ared in such a way that the !erce!tion and view of the
target res!ondent on investing in shares es!ecially in
relation to current scenario can be analyzed and at the end
some recommended strategies can be !oint out. Aee!ing in
view the !ur!ose and im!ortance of the study, Survey study
and analytical study has been ado!ted. +he objective of
ado!ting the survey study is to find out the general view
of investors of ;uwahati. Buestionnaires are !re!ared for
the target !eo!le to find out the general view of the
targeted res!ondent +he objective of analytical study is to
inter!ret and analyze the current market situation.
Data sources 6 +o find out the general view of the !ublic
about investing in Shares <rimary sources is used. +o
inter!ret and analyze the current market situation along
with emotional as!ect mainly secondary methods are used.
Methods of Data -ollection ( +he following methods are used
to collect data for the !ur!ose of this research study.
.or primary sources
+ele!hone interview
<ersonal interview
4irst hand observation
<artici!ative observation

.or secondary sources
nternet
)ournals and 1ews!a!er
*ooks.
C
,esearch approaches Out of the five ty!es of Desearch
a!!roaches the following three a!!roaches are used.
Observation research
Survey research
0nalytical research
,esearch &nstrument *asically questionnaires are used as
research instrument.

Sample unit Sam!le unit for this survey is com!osed of
;overnment em!loyees, 1on ;overnment ,m!loyees,
<rofessionals, *usinessman E traders in ;uwahati who are
investing or ca!able of investment.
Sample si/e 4rom the given Sam!le unit %&& res!ondent
were selected to re!resent the targeted !o!ulation in
survey research. %5& res!ondents are selected for tele!hone
observation.
Sampling 0rocedure Aee!ing in view with objective of the
study, cost and time limitation, and after studying
suitability and limitation of various techniques of
sam!ling .both !robability and non 6 !robability method/,
!ur!osive sam!ling method is decided to be used as sam!ling
method to select the sam!les for this research study.
-ontact methods t is decided that the res!ondent can be
contacted !ersonally, through tele!hone or by mail.
Data 1nalysis *oth quantitative and qualitative
techniques will be used to analysis the data.
1naly/e 2 .indings

Analysis has been done on the basis o' res%onse %ro-ided by the res%ondent 7ith the hel%
o' Auestionnaire. Necessary diagra*s li>e bar diagra*? %ie chart etc. has been used to
ha-e a better understanding and -ie7 o' the re%ort. $hen an inBde%th study is conducted
to analysis the (ndian stoc> *ar>et.
1nalysis of Market Survey
+hese major findings are based on the analysis of the
collected data for the !ur!ose of the !roject study. +he
following are the findings7
t is interesting to know that only F 8 is of !eo!le have
heard about share khan before. which is terribly low.
'o
>9E
4e-
FE
0ercentage of respondent heard a'out share Ihan 'efore
0nd what is more interesting is that only $ 8 form the
above know that they have a branch in ;uwahati.
'o
>E
4e-
&E
0ercentage of respondent know a'out 4uwahati 'ranch of sharekhan
t is found that insurance seems to be most favorable
investment choice of most of the res!ondent, and one of the
main reasons may be the low risk involved in this kind of
investment, and another !rime reason for investing in
insurance is ta# benefits. t seems <ost office de!ositG
*ond and 1SL are things of the !ast which used to be !o!lar
among !eo!le to save ta#. nstead !eo!le now a days goes
for "utual 4und which seems to be the ne#t best choice of
the res!ondent reason may be again because of ta# saving an
a slightly better return then insurance. Still investment
in shares, commodities and gold seems to be very minimal.
F7
!
7
F
&
"
&
!
!
(one
Share
7ommodities
Gold
0ost 1ffice
(S7 4 &ond
8.3
Insurance
0roffered investment choice of respondent
t is observed that !eo!le s!ecially the salary class
get insurance !olicy not mainly because of investment
!ur!ose but !rimarily to save ta#. n an attem!t to find
out the awareness among !eo!le whether they know that there
are other investment scheme that offer ta# benefit it seems
25 8 of the res!ondent already know about it. One of the
reason may be the mutual fund agents are already !laying
there !art in wooing investor toward "utual 4und. So now we
can say that the investment trend which seems to be
nsurance is now moving toward "utual 4und and it will move
toward equity based investment only if it can give
something better then "utual 4und.
4e-
90E
'o
80E
-omparison of &nsurance, Mutual .und 2 Shares
&nsurance Mutual
.und
9<uity
Disk 1il 9igh 9igh
Deturns =ow "edium 9igh
+a#
benefits
M M H MHH
H Mutual fund offer ta, benefit only in few selected schemes and with a lock period of F
yearsA
JJ )nly dividend received form &ndian -ompany are ta5 freeA
4rom the above table it is clear that there is no
other investment that gives higher return then investment
in equity. *ut on negative side it more risky and does not
offer any ta# benefits like the insurance and on other hand
in com!ression to "utual fund it si as risky as equity
because most mutual fund invest in equity to give higher
returns but it loss out to "utual 4und as some schemes
offer ta# benefits. So if we leave out ta# benefits there
are no other investment that is as fruit full as equity.
.Only if you invest smartly/
t is seen for last $& years ndian Stock market on
average giving returns around $&8. 9igh return is only
factor that should attract the investor to investment in
share market and generally most annalist and share firm try
to out !erform an average return that market offer and they
claim that they can give 3& 6 F& 8 return !er annum which
though not guaranteed but seems quite !ossible. 1ow
question is 7 are !eo!le aware of this and this is how
res!ondent res!onse to the above question
'o
07E
4e-
F8E
0ercentage of respondent 'elieve that they can earn F! "! K returns
F3 8 of res!ondent believe that they can earn
return u!to F& 8 in a year. +his seems to be quite a
high !ercentage, in com!ression to !ercentage of
!eo!le invested in shares even after knowing that they
can e#!ect to earn such a high returns.
1ow it will be interesting to find out what are the factors
that are kee!ing away investors from investing in share and
this is how res!ondent reacted.
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2& 8 !eo!le say it is because of risk involved in
share market, 3- 8 say because of lack of knowledge, $F 8
totally ignore the stock market, and rest %F 8 because of
lack of time and infrastructure are the factor for not
investing in share market.
f they ha!!ened to be investing in shares what are the
things they we look for and this is how res!ondent reacted.
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Series9
&f they had to invest they would have invested for the a'ove reasonsA
Where most of them goes for Wealth creation, =iquidity
E high returns what is most sur!rising is that 2&8 of
!eo!le would have invested in share to meet their finical
goals.
n order to know how much !eo!le are aware of basic things
like do they know that they can invest from home or office
through internet, or !hone '' 8 res!ondent resonded that
they are aware of it.
'o
&8E
4e-
77E
0ercentage of respondent know that they can invest through 0hone
or internet
Same way when ask are they aware that investment in share
is most liquid from of investment which gives share a edge
observed any from of investment and again found that '38
of !eo!le have reacted !ositively
'o
&7E
4e-
78E
0ercentage of respondent know that share is very li<uid
So overall the basic awareness and advantages of
investment in share market is quite high among the
res!ondent
'o
&0E
4e-
70E
)verall response if we com'ine the a'ove two <uestions
1ow the big question is why !eo!le are shy away from
investing in shares even if they know that they can earn
high returns, it is high liquidity, if take only the
res!onse of those !eo!le who believes they can earn 3& 6 F&
8 of returns as it will be interesting to know what kee!
them away from investing in share
:gnorance
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Knowledg
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t seems unsafe is the !rime reason for not investing
in shares. nvestor feels they might loss money in share
market and this seems to be one reason for not investing in
shares, and s!ecially at a time when recession is affecting
the economy and market seems to be volatile unsafe is
certainly a cause of concerns for the !eo!le.
What interested me and feel as a !ositive sign is
that second reason for not investing is lack of knowledge.
n my earlier !art analyses why !eo!le loss money in
stock market, and lack of knowledge was one of the !rime
factors for making irrational investment decision and
losing money in share market, and they not only loss money
for themselves but also crate a notion that stock market is
risky and unsafe for investment and have a negative
influence on others, and !eo!le as a whole give more
im!otence to risk factors and !eo!le s!ecially from our
region tend too kee! themselves away from the share market.
4undamentally rescission is the best time to invest
in stock market and they say one should buy when there is a
blood in the street, and this is how smart knowledgeable
investors invest. it is antici!ated and now !roven that
during month of "arch and 0!ril it will be a good time to
buy stock as most of the stocks is trading in their lows or
about to make a u!ward movement so fundamentally it is a
good time to enter the market and any knowledgeable
investor will say that it is a good time for buying, but
from the res!ond of the !eo!le it is found that 2- 8 of
!eo!le doesn:t know this. 4rom this fact had a feeling
that !eo!le are not aware of how the market works and they
totally lack knowledge and this also one of the !rime
reasons why they feel unsafe about investing in shares and
tend to shy away from the market.
'o
9>E
4e-
8!E
0ercentage of people 'elieves that current market situation is good for investment
What found from above analysis is that there tend to
be a fear or negative attitude toward stock market. f
take from marketing !oint of view, for a share firm in
terms of !roduct and service share is their !roduct and
service will be to ma#imize returns of their client. *ut
with such a negative sentiment and fear among investors it
is going to be very difficult for firm to encourage
investors to invest in market. 0s investor won:t
!artici!ate in market as long as they have this fear or
unsafe feeling about the market. 0s marketer of course we
can:t change the economy or make the stock market money
making machine again to attract client, but we can
certainly analysis and find out is it really stock market
is unsafe or it is just a !sychology of !eo!le. 4or that
did a little analysis on how smart investor:s investment in
stock market and remain ahead of the other and how some
irrational investor:s loss money and create a irrational
negative notion that share market is unsafe and kee! others
away.
7ow irrational investors invest in market
)ow let us assume that 3r. $ is irrational investors. o
the #uestion come to our mind is who is an irrational
investor, well sometime irrational investors also termed as
emotional investors. Though irrational may have other
characteristic but the basic character he inherent is he
lack proper knowledge about stock market and tend to take
investment on euphoria and on emotional sentiment.
o now let us assume that 3r $ inhernite the above
mentioned character but no matter weather one is rational
investor or emotion investor all investors have one common
character that is higher return on there investment.
upposed 3r $ and his friend 3r. % has a fixed deposit of
B<< in bank which give them a return of BI G per annum. $nd
at the same time their friend let say 3r 7 invested same
amount of money but he invested in share market. ay he
purchase stock of 7ompany $ at B<<, "here he supposed to
get say I< G of returns per annum and though it is not
guaranteed but on an average -ndian stock market gives a
return of I< G per annum including the best and worst
scenario. o in a bullish market in a year his stock price
went up to BI<.
ince 3r. $ and 3r. % and 3r. 7 are good friends they
discuss about there regular activities. $nd it is in nature
of a human being to show there smartness 3r. $ will
defiantly talk about his investment and how is share is
doing well and price rose to BI< after a year and which is
#uite natural in bullish market. 3r $ and % though little
curious that their friends is making more money but they
will still stay out of shares %ecause goes by common
notion that share market is all about making money and also
about losing money. -t involves both reward but also risk
and he is right about it. $t this moment he is happy that
at least his money is safe.
)ow after two year since market is in bullish nature
and people are starting to invest and shares price of
7ompany $ rose to BE< more then expected by 3r. $. where if
we compound the investment of 3r. $ and 3r. %5s investment
rose only to @s. BIE.$s the share market is doing well it5s
#uite obvious that it is in news and both 3r. $ and 3r. %
are well aware of it that it is not only there friend but
there are other also making good money in share market. o
3r. % is little tempted so after doing a little research he
decided to withdraw his bank deposit of BIE and decided to
invest in company $ but now he have to purchase it on BE<
since the price goes up. o he add another @s. IE and
purchase a stock of 7ompany $. but 3r. $ is still holding
on to his bank deposit.
)ow market is making headline every day as we used to
have one year back like sensex touching new height
everyday. $s more and more people are entering the market
and demand is going up and so is the price and the price of
7ompany $ is now @s. I<< beyond imagination of both 3r. %
and 3r. 7. o 3r. $ now believes that since so many people
have entered market and making money he feel it is #uite
safe to enter the market and he don5t want to left behind.
o he withdraws his bank deposit and bought the share of
the same company at @s. I<<.
)ow price of the shares are getting expensive and
there will be few people who are willing to buy at such
high price specially those who are making investment like
3r 7 based on research and analysis knows that marketing is
trading above it is value and it is not right time to buy.
$s a result price will start to fall and at the same time
people like 3r 7 %ased on there knowledge knows that it is
time to sell. $nd there will be a heavy selling but not at
high price but on low price since no one is willing to pay
a high price and there will be a panic in the stock
exchange. )ow company $ is trading is at BL<. and
historically it is seen that over the time a price of the
share take less time to come down then to move up mainly
because people enter market gradually but when it come to
selling all sell at the same time fearing more loss if they
hold on to stocks.
)ow coming back to our three friends 3r. $, 3r. % and
3r. 7. Though 3r. 7 should have sold a little earlier but
he decided to hold on to the stock in anticipation of
making more money but still he is happy to sell at BL<. and
making a profit of L<, same way 3r. % decide to sell at BL<
but he managed to make a profit of I< only still happy he
gets more then his bank deposit. )ow #uestion is what 3r $
will do, based on his emotion and euphoria he bought at I<<
and now the share of company is BL< and like his friend if
he sell now he5ll make a loss of @s. ;<. Though he had
other option let say he sold it at the same price and he
makes a loss of @s. ;<. it all because of wrong timing. 0e
ignored the basic principle of investment and took descion
based on emotion or say with out any research and if he
sells now he will incurred loss of @s. ;<. )o doubt he
still have other options and there is a way out to get him
out of this situation, but lets keep it for another
discussion because if he want to recover his loss he have
to analysis the market and make decision based on
principles and research and if he do that he will loss that
emotional investor tag. 2rom the above example we come to
know how an emotional investors like 3r. $ loss money, and
3r. 7 makes money as he has proper knowledge.
7ow smart investors invest in market
n my last e#am!le if you tag "r. 0 as emotional
investors now we can term "D. L as Smart investors since he
earn more then both his friends and in a way because of him
one of his friends also make a !rofit of $& still better
than he bank de!osit. So let first find out what are the
quality a so call smart investors !ossess.
EU1*&#&9S ). 1 SM1,# &6H9S#),+
+hough there may be number of qualifies a smart investor
inherent following are some of the basic qualities.
+hey don:t ever buy a stock without first e#amining its
financial health.
+hey don:t ever buy a stock without first learning about
its business and who its com!etition is.
+hey think rationally not emotionally and don:t have any
emotional connection with stock they are investing or money
they are investing.
1ow the question is how he !icked u! a stock at %&&
and sold it at %'& to make a !rofit of '&. One scenario is
that he ha!!ened to !ick it by mere chance and he is !lain
lucky but let us !ut that as!ect out of the conte#t. Over
the years analyst are introducing new methods for stock
valuation and to make there investment decision. 0nd one of
such tool that stood test of time is fundament analysis.
Over the year analyst are using fundament analysis to
analysis stock to make !rofitable investment and "r L also
did same before investing he did fundament analysis, 1ow
what is 4undament 0nalysisN
1unda,ental =naly-i- 6e.inition
3undamental analysis is a stock valuation method that uses financial and
economic analysis to predict the movement of stock prices.

*he fundamental information that is analy?ed can include a company#s financial
reports, and nonfinancial information such as estimates of the growth of demand
for products sold !y the company, industry comparisons, and economywide
changes, changes in government policies etc..
General 5trategy
*o a fundamentalist, the market price of a stock tends to move towards it#s @real
valueA or @intrinsic valueA. If the @intrinsic4real valueA of a stock is a!ove the
current market price, the investor would purchase the stock !ecause he knows
that the stock price would rise and move towards its @intrinsic or real valueA
If the intrinsic value of a stock was !elow the market price, the investor would sell
the stock !ecause he knows that the stock price is going to fall and come closer
to its intrinsic value.
+ll this seems simple. &ut the $uestion is how do one find out what the intrinsic
value of a company is6 1nce the real value is known one can easily compare
this price to the market price of the company and decide whether he want to !uy
it or sell it if you already own that stock.
(ow the ne%t o!vious $uestion is to start finding out the intrinsic value, the
fundamentalist analy?er makes an e%amination of the current and future overall
health of the economy as a whole.
+fter they analy?ed the overall economy, they have to analy?e firm they are
interested in. they analy?e factors that give the firm a competitive advantage in
it"s sector such as management e%perience, history of performance, growth
potential, low cost producer, !rand name etc. 3ind out as much as possi!le a!out
the company and their products.
)o they have any @core competencyA or @fundamental strengthA that puts them
ahead of all the other competing firms6
=hat advantage do they have over their competing firms6
)o they have a strong market presence and market share6
1r do they constantly have to employ a large part of their profits and resources in
marketing and finding new customers and fighting for market share6
+fter they understand the company B what they do, how they relate to the market
and their customers, they are in much !etter position to decide whether the price
of the companies stock is going to go up or down.
5aving understood the !asics of fundamental analysis, let us go into some more
details.
=hen investing in the stocks, we want the price of our stock to rise. (ot only do
we want our stock price to rise, we want it to rise fastC So the challenge is to
figure outD which stock prices are going to rise fast6
Some stocks are cheap and some are costly. Some are worth >s.,.. and some
are even worth ,.paise. &ut the price of the stock is not important. *he price of
the stock does not make a stock good to !uy. =hat is important is how much the
price of the stock is likely to rise.
If we invest >s.,.. in one stock of >s.,.. and the price goes up to >s.,;. we
will make >s.;.. 5owever, if we invest >s.,.. in a >s.-. stock, we will have ,.
stocks. If the price of the stock goes up from >s. -. to >s.9., then the >s.,.. we
invested is now >s.-....and we made a profit of >s.,...
So the price of the stock is not important. =hat is important is the rise in the
stock"s price. 8ore specifically the @percentageA rise in the stock price is
important.
If the >s.,.. stock !ecomes worth >s.,;., then that is a EF rise. *his EF rise
only makes us >s.;.. 1n the other hand when we invest the same >s.,.. in the
>s. -. stock and the stock price goes up to >s.9., it is a -..F rise as the stock
price has dou!led. *his -..F rise makes us >s.,...
*he point is that when picking a company, we are interested in a company whose
stock price will rise !y a large percentage.
&ut one important thing looking at the a!ove paragraphs, it may seem like a good
idea to !uy all the really cheap >s. -. and >s.9. stocks hoping that their price
will rise !y -..F or more. *his sounds good, !ut it can also !e really really !ad
some timesC *hese really small stocks are very volatile and unless one know
what we are doing, do it is !etter not to get into them.
5owever, the point to !e noted is that we are interested in stocks that will have
the highest F rise in the stock price. (ow the $uestion is, how do you compare
stocks. 5ow do you compare a stock worth >s.,.. to a stock worth >s. -. and
figure out which one will have a higher percentage rise.

5ow do we compare two companies that are in different fields and different
industries6 5ow do we know which one is fundamentally strong and which one is
week6
If we try to compare two companies in different industries and different customers
it is like comparing apples and elephants. *here is no way to compare themC
So fundamental analysts use different tools and ratios to compare all sorts of
companies no matter what !usiness they are in or what they doC
(e%t let me get into the tools and ratios that tell will a!out the companies and
their comparison....
Earning- per -hare 3EP57 ratio
'ven comparing the earnings of one company to another really doesn"t make any
senseG 'arnings will tell us nothing a!out how many shares the company has.
&ecause we do not know how many shares a company has, we do not know how
many parts that companies earnings have to !e divided into. If the company has
more shares, the earnings will !e divided into more parts.
3or e%ample, companies + and & !oth earn >s.-.., !ut company + has -.
shares outstanding, so each share holder has in effect earned >s.-..
1n the other hand, if company & has ,. shares outstanding and they too have
earned >s.-.. then each shareholder has earned >s.9. So it is important to
know what is the total num!er of outstanding shares are as well as the earnings.
*hus it makes more sense to look at earnings per share ('0S), as a comparison
tool. =e can calculate earnings per share !y taking the net earnings and divide
!y the outstanding shares.
'0S H (et 'arnings 4 1utstanding Shares
So looking at the '0S ratio, we should !uy 7ompany + with an '0S of -., !ut
'0S is not the only !asis of comparing two companies, !ut it is one of the
methods used.
*here are three types of '0S num!ersD
I *railing '0S J last year"s num!ers and the only actual '0S
I 7urrent '0S J this year"s num!ers, which are still proKections
I 3orward '0S J future num!ers, which are o!viously proKections
'0S doesn"t tell you whether it"s a good stock to !uy or what the market thinks of
it. 3or that information, we need to look at some other ratios.
Price to earning 3PGE7 ratio
If there is one num!er that people look at than more any other num!er, it is the
@0rice to 'arning >atio (04')A. *he 04' is a ratio that investors throw around with
confidence as if it told the complete story. 1f course, it doesn"t tell the whole
story if it does investing in share would have in much easier.
*he 04' looks at the relationship !etween the stock price and the company"s
earnings. *he 04' is the most popular stock analysis ratio, although it is not the
only one we should consider.
we calculate the 04' !y taking the share price and dividing it !y the company"s
'0S ('arnings 0er Share that we saw a!ove)
04' H Stock 0rice 4 '0S
3or e%ampleD + company with a share price of >s.;. and an '0S of E would
have a 04' ofD (;. 4 E) H ,
*hat doe- PGE tell u-H
Some investors read a high 04' as an @overpriced stockA.
5owever, it can also indicate the market has high hopes for this stock"s future
and has !id up the price.
7onversely, a low 04' may indicate a @vote of no confidenceA !y the market or it
could mean that the market has Kust overlooked the stock. 8any investors made
their fortunes spotting these overlooked !ut fundamentally strong stocks !efore
the rest of the market discovered their true worth.
In conclusion, the 04' tells you what the market thinks of a stock. It tells us
whether the market likes or dislikes the stock.
0'G (0rice to future growth ratioC)
*he market is usually more concerned a!out the future than the present, it is
always looking for some way to figure out what is going to happen in the
companies future.
+ ratio that will help you look at future earnings growth is called the 0'G ratio.
=e can calculate the 0'G !y taking the 04' and dividing it !y the proKected
growth in earnings.
0'G H (04') 4 (proKected growth in earnings)
3or e%ample, a stock with a 04' of :. and proKected earning growth ne%t year of
-,F would have a 0'G of :. 4 -, H 9.
*echnically speaking the lower the 0'G num!er, the less we pay for each unit of
future earnings growth. So even a stock with a high 04', !ut high proKected
earning growth may !e a good value. So, to put it very simply, we are interested
in stocks with a low 0'G value.
Lust for the sake of understanding, consider this situation, we have a stock with a
low 04'. Since the stock is has a low 04', we start do wonder why the stock has
a low 04'. Is it that the stock market does not like the stock6 1r is it that the
stock market has overlooked a stock that is actually fundamentally very strong
and of good value6
*o figure this out, you look at the 0'G ratio. (ow, if the 0'G ratio is !ig (or close
to the 04' ratio), you can understand that this is pro!a!ly !ecause the @proKected
growth earningsA are low. *his is the kind of stock that the stock market thinks is
of not much value.
1n the other hand, if the 0'G ratio is small (or very small as compared to the
04' ratio, then we should know that it is a valua!le stock) you know that the
proKected earnings must !e high. 2ou know that this is the kind of fundamentally
strong stock that the market has overlooked for some reason.
&ut important fact is one must understand that the 0'G ratio relies on the
proKected F earnings. *hese earnings are not always accurate and so the 0'G
ratio is not always accurate.
+nd in order to find out the proKected growth a fundament analyst goes through in
depth study of the company. +t this point it is !eyond my scope to go deep into
the various ratio or fact that fundament analyst go through !efore they come to
intrinsic value of the particular stock.
Summary of fundamental analyst analysis
-. 7heck the political situation. Is it safe6 +re there pro!lems6 7ould the
government !e overthrown and could there !y difficulties as a conse$uence6
9. =hat is revealed !y the economic indicators6 Is the growth rate reasona!le6
5ave e%port improved6 5ow comforta!le is the !alance of payment position6
:. 7heck the industry or industries in company is in6 =hat is its competition6
5ow easy is it to enter or e%it the !usiness6
;. *hen check the company. *he factors one should look at is its managreement
+nd its annual report. *he ratios should !e analy?ed and thecash flow checked.
,.3inally, !efore purchasing or selling a share, check its intrinsic value.+ decision
should only !e taken after this is done.
7alculation of Intrinsic value
5ow does one calculate the intrinsic value of a share6 Let us assume that one
e%pects a return of 9.F on an investment every year for : years. Let us also
assume that the company would pay dividends of 9.F, 9,F and :.F on its
>s.-. share.*he dividend received on a share would therefore !e >s.9... in the
first year, >s.9.,. in the second, and >s.:... in the third. Let us also assume
that the share can !e sold at >s.9.. at the end of : years. *he intrinsic value of
the share will !eD
9 M 9., M : M 9.. H >s.-9..EE
-.9 (-.9)9 (-.9):
*he logic is to discount the dividend received and anticipated to !e received in
3uture years and the e % p e c t e d price at a future date with the return or yield
'%pected. Since the price at that future date is also considered, the possi!ility of
7apital appreciation is considered and this is why this method of arriving at the
intrinsic value is considered the most !alanced and fair. If the market price of the
share is !elow >s.-9..EE then the share is !elow its intrinsic value and therefore
well worth purchasing. If, on the other hand, the market price is higher, it is a sell
signal and the share should !e sold.
In our earlier e%amples 8r. + incurred loss where 8r. & and 8r. 7 made
a profit of >s. 9. and >s. /. if we leave out 8r. + and 8r. & out of the picture we
have 8r. 7 who is termed as smart investors since he use scientific methods like
3undamental analysis made a profit of >s. /. in three year. (ow let me introduce
another investor into the frame and let say 8r. N who enter the market only a
year !ack and invested in same company as 8r. c has invested !ut difference is
he made a profit of >s. -.. in the same year. In a same stock 8r. 7 take three
years to earn a profit of /. whereas 8r. N enter in a market where fundamentally
one shouldn"t invest as the stock already a!out to touch it"s intrinsic value and
still made more profit. (ow $uestion is what his formula is. =ell formula is
*echnical analysis. *here is a long argument !etween fundament annalist and
technical analysis and what is !etter method. 5ere I"m not going to Koin that
argument !ut I Kust like to mention if we see the graph of any stock it has up and
down in every stages. 0rice of stock does not go up or down in a flat line and it
had movement within a trend. + technical annalist makes !est use of those small
movements to earn more returns.
Technical =naly-i-/ :ntroduction
*he methods used to analy?e securities and make investment decisions fall into two very
!road categoriesD fundamental analysis and technical analysis. 3undamental analysis involves
analy?ing the characteristics of a company in order to estimate its value. *echnical analysis takes
a completely different approachG it doesn#t care one !it a!out the OvalueO of a company or a
commodity. *echnicians (sometimes called chartists) are only interested in the price movements
in the market.
)espite all the fancy and e%otic tools it employs, technical analysis really Kust studies
supply and demand in a market in an attempt to determine what direction, or trend, will continue
in the future. In other words, technical analysis attempts to understand the emotions in the market
!y studying the market itself, as opposed to its components. If you understand the !enefits and
limitations of technical analysis, it can give you a new set of tools or skills that will ena!le you to
!e a !etter trader or investor.
*he field of technical analysis is !ased on three assumptionsD
- the market discounts everything.
9. 0rice moves in trends.
:. 5istory tends to repeat itself.
*he 8arket )iscounts 'verything
+ maKor criticism of technical analysis is that it only considers price movement, ignoring
the fundamental factors of the company. 5owever, technical analysis assumes that, at any given
time, a stock#s price reflects everything that has or could affect the company including
fundamental factors. *echnical analysts !elieve that the company#s fundamentals, along with
!roader economic factors and market psychology, are all priced into the stock, removing the need
to actually consider these factors separately. *his only leaves the analysis of price movement,
which technical theory views as a product of the supply and demand for a particular stock in the
market.
0rice 8oves in *rends
In technical analysis, price movements are !elieved to follow trends. *his means that
after a trend has !een esta!lished, the future price movement is more likely to !e in the same
direction as the trend than to !e against it. 8ost technical trading strategies are !ased on this
assumption.
5istory *ends *o >epeat Itself
+nother important idea in technical analysis is that history tends to repeat itself, mainly in
terms of price movement. *he repetitive nature of price movements is attri!uted to market
psychologyG in other words, market participants tend to provide a consistent reaction to similar
market stimuli over time. *echnical analysis uses chart patterns to analy?e market movements
and understand trends. +lthough many of these charts have !een used for more than -.. years,
they are still !elieved to !e relevant !ecause they illustrate patterns in price movements that often
repeat themselves.
*he Pse of *rend
1ne of the most important concepts in technical analysis is that of trend. *he meaning in
finance isn#t all that different from the general definition of the term a trend is really nothing more
than the general direction in which a security or market is headed. *ake a look at the chart !elowD
It isn#t hard to see that the trend in the a!ove diagram is up. 5owever, it#s not always this easy to
see a trendD
*here are lots of ups and downs in this chart, !ut there isn#t a clear indication of which direction
this security is headed.
+ 8ore 3ormal )efinition
Pnfortunately, trends are not always easy to see. In other words, defining a trend goes
well !eyond the o!vious. In any given chart, one will pro!a!ly notice that prices do not tend to
move in a straight line in any direction, !ut rather in a series of highs and lows. In technical
analysis, it is the movement of the highs and lows that constitutes a trend. 3or e%ample,
an uptrend is classified as a series of higher highs and higher lows, while a downtrend is one of
lower lows and lower highs.
the a!ove diagram is an e%ample of an uptrend. 0oint 9 in the chart is the first high, which is determined
after the price falls from this point. 0oint : is the low that is esta!lished as the price falls from the high. 3or
this to remain an uptrend, each successive low must not fall !elow the previous lowest point or the trend is
deemed a reversal.
*here are three types of trendD
Pptrend
)owntrends
Sideways45ori?ontal
*rends +s the names imply, when each successive peak and trough is higher, it#s referred to
as an upward trend. If the peaks and troughs are getting lower, it#s a downtrend. =hen there
is little movement up or down in the peaks and troughs, it#s a sideways or hori?ontal trend. If
one want to get really technical, one might even say that a sideways trend is actually not a
trend on its own, !ut a lack of a welldefined trend in either direction. In any case, the market
can really only trend in these three waysD up, down or nowhere.
*rend Lengths
+long with these three trend directions, there are three trend classifications. + trend of
any direction can !e classified as a longterm trend, intermediate trend or a shortterm trend.
In terms of the stock market, a maKor trend is generally categori?ed as one lasting longer than
a year. +n intermediate trend is considered to last !etween one and three months and a
nearterm trend is anything less than a month. + longterm trend is composed of several
intermediate trends, which often move against the direction of the maKor trend. If the maKor
trend is upward and there is a downward correction in price movement followed !y a
continuation of the uptrend, the correction is considered to !e an intermediate trend. *he
shortterm trends are components of !oth maKor and intermediate trends. *ake a look a
3igure ; to get a sense of how these three trend lengths might look.
=hen analy?ing trends, it is important that the chart is constructed to !est reflect the type of trend
!eing analy?ed. *o help identify longterm trends, weekly charts or daily charts spanning a five
year period are used !y chartists to get a !etter idea of the longterm trend. )aily data charts are
!est used when analy?ing !oth intermediate and shortterm trends. It is also important to
remem!er that the longer the trend, the more important it isG for e%ample, a onemonth trend is
not as significant as a fiveyear trend.
Trend line-
+ trend line is a simple charting techni$ue that adds a line to a chart to represent the
trend in the market or a stock. )rawing a trendline is as simple as drawing a straight line that
follows a general trend. *hese lines are used to clearly show the trend and are also used in the
identification of trend reversals. &elow is an e%ample of time line.
7hannels
+ channel, or channel lines, is the addition of two parallel trend lines that act as strong
areas of support and resistance. *he upper trend line connects a series of highs, while the lower
trend line connects a series of lows. + channel can slope upward, downward or sideways !ut,
regardless of the direction, the interpretation remains the same. *raders will e%pect a given
security to trade !etween the two levels of support and resistance until it !reaks !eyond one of
the levels, in which case traders can e%pect a sharp move in the direction of the !reak. +long with
clearly displaying the trend, channels are mainly used to illustrate important areas of support and
resistance.
+!ove figure illustrates a descending channel on a stock chartG the upper trend line has !een
placed on the highs and the lower trend line is on the lows. *he price has !ounced off of these
lines several times, and has remained range!ound for several months. +s long as the price does
not fall !elow the lower line or move !eyond the upper resistance, the range!ound downtrend is
e%pected to continue.
*he Importance of *rend
It is important to !e a!le to understand and identify trends so that you can trade with rather than
against them. *wo important sayings in technical analysis are Othe trend is your friendO and Odon#t
!uck the trend,O illustrating how important trend analysis is for technical traders.
Support and >esistance
*he ne%t maKor concept is that of support and resistance. we often hear technical
analysts talk a!out the ongoing !attle !etween the !ulls and the !ears, or the struggle !etween
!uyers (demand) and sellers (supply). *his is revealed !y the prices a security seldom moves
a!ove (resistance) or !elow (support).
+s we can see in the a!ove 3igure, support is the price level through which a stock or market
seldom falls (illustrated !y the !lue arrows). >esistance, on the other hand, is the price level that
a stock or market seldom surpasses (illustrated !y the red arrows).
=hy does it happen6
*hese support and resistance levels are seen as important in terms of market psychology
and supply and demand. Support and resistance levels are the levels at which a lot of traders are
willing to !uy the stock (in the case of a support) or sell it (in the case of resistance). =hen these
trend lines are !roken, the supply and demand and the psychology !ehind the stock#s
movements is thought to have shifted, in which case new levels of support and resistance will
likely !e esta!lished.
>ound (um!ers and Support and >esistance
1ne type of universal support and resistance that tends to !e seen across a large
num!er of securities is round num!ers. >ound num!ers like -., 9., :,, ,., -.. and -,... tend
!e important in support and resistance levels !ecause they often represent the maKor
psychological turning points at which many traders will make !uy or sell decisions.
&uyers will often purchase large amounts of stock once the price starts to fall toward a maKor round num!er
such as >S.9,.. , which makes it more difficult for shares to fall !elow the level. 1n the other hand, sellers
start to sell off a stock as it moves toward a round num!er peak, making it difficult to move past this upper
level as well. It is the increased !uying and selling pressure at these levels that makes them important points
of support and resistance and, in many cases, maKor psychological points as well.
>ole >eversal
1nce a resistance or support level is !roken, its role is reversed. If the price falls !elow a support level, that
level will !ecome resistance. If the price rises a!ove a resistance level, it will often !ecome support. +s the
price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing
the !reached level to reverse its role. 3or a true reversal to occur, however, it is important that the price
make a strong move through either the support or resistance.
3or e%ample, as it seen in the a!ove 3igure, the dotted line is shown as a level of resistance that
has prevented the price from heading higher on two previous occasions (0oints - and 9).
5owever, once the resistance is !roken, it !ecomes a level of support (shown !y 0oints : and ;)
!y propping up the price and preventing it from heading lower again.
8any traders who !egin using technical analysis find this concept hard to !elieve and don#t
reali?e that this phenomenon occurs rather fre$uently, even with some of the most wellknown
companies.
*he Importance of Support and >esistance
Support and resistance analysis is an important part of trends !ecause it can !e used to make
trading decisions and identify when a trend is reversing. 3or e%ample, if a trader identifies an
important level of resistance that has !een tested several times !ut never !roken, he or she may
decide to take profits as the security moves toward this point !ecause it is unlikely that it will
move past this level.
Support and resistance levels !oth test and confirm trends and need to !e monitored !y anyone
who uses technical analysis. +s long as the price of the share remains !etween these levels of
support and resistance, the trend is likely to continue. It is important to note, however, that a
!reak !eyond a level of support or resistance does not always have to !e a reversal. 3or
e%ample, if prices moved a!ove the resistance levels of an upward trending channel, the trend
has accelerated, not reversed. *his means that the price appreciation is e%pected to !e faster
than it was in the channel.
&eing aware of these important support and resistance points should affect the way that one
trade a stock. *raders should avoid placing orders at these maKor points, as the area around them
is usually marked !y a lot of volatility. If one feel confident a!out making a trade near a support or
resistance level, it is important that we follow this simple ruleD do not place orders directly at the
support or resistance level. *his is !ecause in many cases, the price never actually reaches the
whole num!er, !ut flirts with it instead. So if we#re !ullish on a stock that is moving toward an
important support level, it is !etter to not place the trade at the support level. Instead, place it
a!ove the support level, !ut within a few points. 1n the other hand, if we are placing stops or
short selling, it is good to set up our trade price at or !elow the level of support.
*he Importance 1f Qolume
=hat is Qolume6
Qolume is simply the num!er of shares or contracts that trade over a given period of time, usually a day. *he
higher the volume, the more active the security. *o determine the movement of the volume (up or down),
chartists look at the volume !ars that can usually !e found at the !ottom of any chart. Qolume !ars illustrate
how many shares have traded per period and show trends in the same way that prices do.
=hy Qolume is Important
Qolume is an important aspect of technical analysis !ecause it is used to confirm trends and chart patterns.
+ny price movement up or down with relatively high volume is seen as a stronger, more relevant move
than a similar move with weak volume. *herefore, if you are looking at a large price movement, you should
also e%amine the volume to see whether it tells the same story.
Say, for e%ample, that a stock Kumps ,F in one trading day after !eing in a long downtrend. Is this a sign of
a trend reversal6 *his is where volume helps traders. If volume is high during the day relative to the average
daily volume, it is a sign that the reversal is pro!a!ly for real. 1n the other hand, if the volume is !elow
average, there may not !e enough conviction to support a true trend reversal.
Qolume should move with the trend. If prices are moving in an upward trend, volume should
increase (and vice versa). If the previous relationship !etween volume and price movements
starts to deteriorate, it is usually a sign of weakness in the trend. 3or e%ample, if the stock is in an
uptrend !ut the up trading days are marked with lower volume, it is a sign that the trend is starting
to lose its legs and may soon end.
=hen volume tells a different story, it is a case of divergence, which refers to a contradiction !etween two
different indicators. *he simplest e%ample of divergence is a clear upward trend on declining volume.
Qolume and 7hart 0atterns
*he other use of volume is to confirm chart patterns. 0atterns such as head and
shoulders, triangles, flags and other price patterns can !e confirmed with volume, in most chart
patterns, there are several pivotal points that are vital to what the chart is a!le to convey to
chartists. &asically, if the volume is not there to confirm the pivotal moments of a chart pattern,
the $uality of the signal formed !y the pattern is weakened.
Qolume 0recedes 0rice
+nother important idea in technical analysis is that price is preceded !y volume. Qolume
is closely monitored !y technicians and chartists to form ideas on upcoming trend reversals. If
volume is starting to decrease in an uptrend, it is usually a sign that the upward run is a!out to
end.
(ow that we have a !etter understanding of some of the important factors of technical analysis, we can
move on to charts, which help to identify trading opportunities in prices movements.
=hat Is a 7hart6
In technical analysis, charts are similar to the charts that you see in any !usiness setting.
+ chart is simply a graphical representation of a series of prices over a set time frame. 3or
e%ample, a chart may show a stock#s price movement over a oneyear period, where each point
on the graph represents the closing price for each day the stock is tradedD
*he a!ove figure provides an e%ample of a !asic chart. It is a representation of the price movements of a
stock over a -., year period. *he !ottom of the graph, running hori?ontally (%a%is), is the date or time scale.
1n the right hand side, running vertically (ya%is), the price of the security is shown. &y looking at the graph
we see that in 1cto!er 9..; (0oint -), the price of this stock was around >s. 9;,, whereas in Lune 9..,
(0oint 9), the stock#s price is around >s. 9<,. *his tells us that the stock has risen !etween 1cto!er 9..;
and Lune 9..,.
7hart 0roperties
*here are several things that we should !e aware of when looking at a chart, as these factors can affect the
information that is provided. *hey include the time scale, the price scale and the price point properties used.
*he *ime Scale
*he time scale refers to the range of dates at the !ottom of the chart, which can vary from decades to
seconds. *he most fre$uently used time scales are intraday, daily, weekly, monthly, $uarterly and annually.
*he shorter the time frame, the more detailed the chart. 'ach data point can represent the closing price of
the period or show the open, the high, the low and the close depending on the chart used.
Intraday charts plot price movement within the period of one day. *his means that the time scale could !e as
short as five minutes or could cover the whole trading day from the opening !ell to the closing !ell.
)aily charts are comprised of a series of price movements in which each price point on the chart is a full
day"s trading condensed into one point. +gain, each point on the graph can !e simply the closing price or
can entail the open, high, low and close for the stock over the day. *hese data points are spread out over
weekly, monthly and even yearly time scales to monitor !oth shortterm and intermediate trends in price
movement.
=eekly, monthly, $uarterly and yearly charts are used to analy?e longer term trends in the movement of a
stock#s price. 'ach data point in these graphs will !e a condensed version of what happened over the
specified period. So for a weekly chart, each data point will !e a representation of the price movement of the
week. 3or e%ample, if you are looking at a chart of weekly data spread over a fiveyear period and each data
point is the closing price for the week, the price that is plotted will !e the closing price on the last trading day
of the week, which is usually a 3riday.
*he 0rice Scale and 0rice 0oint 0roperties
*he price scale is on the righthand side of the chart. It shows a stock#s current price and compares it to past
data points. *his may seem like a simple concept in that the price scale goes from lower prices to higher
prices as you move along the scale from the !ottom to the top. *he pro!lem, however, is in the structure of
the scale itself. + scale can either !e constructed in a linear (arithmetic) or logarithmic way, and !oth of
these options are availa!le on most charting services.
If a price scale is constructed using a linear scale, the space !etween each price point (-., 9., :., ;.) is
separated !y an e$ual amount. + price move from -. to 9. on a linear scale is the same distance on the
chart as a move from ;. to ,.. In other words, the price scale measures moves in a!solute terms and does
not show the effects of percent change.
If a price scale is in logarithmic terms, then the distance !etween points will !e e$ual in terms of
percent change. + price change from -. to 9. is a -..F increase in the price while a move from
;. to ,. is only a 9,F change, even though they are represented !y the same distance on a
linear scale. 1n a logarithmic scale, the distance of the -..F price change from -. to 9. will not
!e the same as the 9,F change from ;. to ,.. In this case, the move from -. to 9. is
represented !y a larger space one the chart, while the move from ;. to ,., is represented !y a
smaller space !ecause, percentagewise, it indicates a smaller move. In 3igure 9, the logarithmic
price scale on the right leaves the same amount of space !etween -. and 9. as it does !etween
9. and ;. !ecause these !oth represent -..F increases.
7hart *ypes
*here are four main types of charts that are used !y investors and traders depending on
the information that they are seeking and their individual skill levels. *he chart types areD the line
chart, the !ar chart, the candlestick chart and the point and figure chart. In the following sections,
we will focus on the SB0 ,.. Inde% during the period of Lanuary 9..< through 8ay 9..<. (otice
how the data used to create the charts is the same, !ut the way the data is plotted and shown in
the charts is different.
Line 7hart
*he most !asic of the four charts is the line chart !ecause it represents only the closing prices
over a set period of time. *he line is formed !y connecting the closing prices over the time frame. Line
charts do not provide visual information of the trading range for the individual points such as the high, low
and opening prices. 5owever, the closing price is often considered to !e the most important price in stock
data compared to the high and low for the day and this is why it is the only value used in line charts.
&ar 7harts
*he !ar chart e%pands on the line chart !y adding several more key pieces of information
to each data point. *he chart is made up of a series of vertical lines that represent each data
point. *his vertical line represents the high and low for the trading period, along with the closing
price. *he close and open are represented on the vertical line !y a hori?ontal dash. *he opening
price on a !ar chart is illustrated !y the dash that is located on the left side of the vertical !ar.
7onversely, the close is represented !y the dash on the right. Generally, if the left dash (open) is
lower than the right dash (close) then the !ar will !e shaded !lack, representing an up period for
the stock, which means it has gained value. + !ar that is colored red signals that the stock has
gone down in value over that period. =hen this is the case, the dash on the right (close) is lower
than the dash on the left (open).
0oint and 3igure 7harts
*he point and figure chart is not well known or used !y the average investor !ut it has
had a long history of use dating !ack to the first technical traders. *his type of chart reflects price
movements and is not as concerned a!out time and volume in the formulation of the points. *he
point and figure chart removes the noise, or insignificant price movements, in the stock, which
can distort traders# views of the price trends. *hese types of charts also try to neutrali?e
the skewing effect that time has on chart analysis.
=hen first looking at a point and figure chart, you will notice a series of Ns and 1s. *he Ns
represent upward price trends and the 1s represent downward price trends. *here are also
num!ers and letters in the chartG these represent months, and give investors an idea of the date.
'ach !o% on the chart represents the price scale, which adKusts depending on the price of the
stockD the higher the stock#s price the more each !o% represents. 1n most charts where the price
is !etween >s. 9. and >s.-.., a !o% represents >s. -, or - point for the stock. *he other critical
point of a point and figure chart is the reversal criteria. *his is usually set at three !ut it can also
!e set according to the chartist#s discretion. *he reversal criteria set how much the price has to
move away from the high or low in the price trend to create a new trend or, in other words, how
much the price has to move in order for a column of Ns to !ecome a column of 1s, or vice versa.
=hen the price trend has moved from one trend to another, it shifts to the right, signaling a trend
change.
7andlestick 7harts
*he candlestick chart is similar to a !ar chart, !ut it differs in the way that it is visually
constructed. Similar to the !ar chart, the candlestick also has a thin vertical line showing the
period#s trading range. *he difference comes in the formation of a wide !ar on the vertical line,
which illustrates the difference !etween the open and close. +nd, like !ar charts, candlesticks
also rely heavily on the use of colors to e%plain what has happened during the trading period. +
maKor pro!lem with the candlestick color configuration, however, is that different sites use
different standardsG therefore, it is important to understand the candlestick configuration used at
the chart site you are working with. *here are two color constructs for days up and one for days
that the price falls. =hen the price of the stock is up and closes a!ove the opening trade, the
candlestick will usually !e white or clear. If the stock has traded down for the period, then the
candlestick will usually !e red or !lack, depending on the site. If the stock#s price has closed
a!ove the previous day"s close !ut !elow the day#s open, the candlestick will !e !lack or filled
with the color that is used to indicate an up day.
7onclusion
7harts are one of the most fundamental aspects of technical analysis. It is important that you
clearly understand what is !eing shown on a chart and the information that it provides. (ow that
we have an idea of how charts are constructed, we can move on to the different types of chart
patterns.
7hart 0atterns
+ chart pattern is a distinct formation on a stock chart that creates a trading signal, or a
sign of future price movements. 7hartists use these patterns to identify current trends and trend
reversals and to trigger !uy and sell signals.
I we talked a!out the three assumptions of technical analysis, the third of which was that in
technical analysis, history repeats itself. *he theory !ehind chart patters is !ased on this
assumption. *he idea is that certain patterns are seen many times, and that these patterns signal
a certain high pro!a!ility move in a stock. &ased on the historic trend of a chart pattern setting up
a certain price movement, chartists look for these patterns to identify trading opportunities.
=hile there are general ideas and components to every chart pattern, there is no chart pattern that will tell
you with -..F certainty where a security is headed. *his creates some leeway and de!ate as to what a
good pattern looks like, and is a maKor reason why charting is often seen as more of an art than a science.
*here are two types of patterns within this area of technical analysis, reversal and continuation. + reversal
pattern signals that a prior trend will reverse upon completion of the pattern. + continuation pattern, on the
other hand, signals that a trend will continue once the pattern is complete. *hese patterns can !e found over
charts of any timeframe. In this section, we will review some of the more popular chart patterns.
5ead and Shoulders
*his is one of the most popular and relia!le chart patterns in technical analysis. 5ead and
shoulders is a reversal chart pattern that when formed, signals that the security is likely to move
against the previous trend. +s you can see in 3igure -, there are two versions of the head and
shoulders chart pattern. 5ead and shoulders top (shown on the left) is a chart pattern that is
formed at the high of an upward movement and signals that the upward trend is a!out to end.
5ead and shoulders !ottom, also known as inverse head and shoulders (shown on the right) is
the lesser known of the two, !ut is used to signal a reversal in a downtrend.
In the a!ove figure 5ead and shoulders top is shown on the left. 5ead and shoulders !ottom, or
inverse head and shoulders, is on the right.
&oth of these head and shoulders patterns are similar in that there are four main partsD two shoulders, a
head and a neckline. +lso, each individual head and shoulder is comprised of a high and a low. 3or
e%ample, in the head and shoulders top image shown on the left side in 3igure -, the left shoulder is made
up of a high followed !y a low. In this pattern, the neckline is a level of support or resistance. >emem!er that
an upward trend is a period of successive rising highs and rising lows. *he head and shoulders chart
pattern, therefore, illustrates a weakening in a trend !y showing the deterioration in the successive
movements of the highs and lows.
7up and 5andle
+ cup and handle chart is a !ullish continuation pattern in which the upward trend has
paused !ut will continue in an upward direction once the pattern is confirmed.
+s we can see in the a!ove 3igure, this price pattern forms what looks like a cup, which is
preceded !y an upward trend. *he handle follows the cup formation and is formed !y a generally
downward4sideways movement in the security#s price. 1nce the price movement pushes a!ove
the resistance lines formed in the handle, the upward trend can continue. *here is a wide ranging
time frame for this type of pattern, with the span ranging from several months to more than a
year.
)ou!le *ops and &ottoms
*his chart pattern is another wellknown pattern that signals a trend reversal it is
considered to !e one of the most relia!le and is commonly used. *hese patterns are formed after
a sustained trend and signal to chartists that the trend is a!out to reverse. *he pattern is created
when a price movement tests support or resistance levels twice and is una!le to !reak through.
*his pattern is often used to signal intermediate and longterm trend reversals.

In the a!ove figure + dou!le top pattern is shown on the left, while a dou!le !ottom pattern is
shown on the right.
In the case of the dou!le top pattern in 3igure, the price movement has twice tried to move a!ove a certain
price level. +fter two unsuccessful attempts at pushing the price higher, the trend reverses and the price
heads lower. In the case of a dou!le !ottom (shown on the right), the price movement has tried to go lower
twice, !ut has found support each time. +fter the second !ounce off of the support, the security enters a new
trend and heads upward.
*riangles
*riangles are some of the most wellknown chart patterns used in technical analysis. *he
three types of triangles, which vary in construct and implication, are the. symmetrical triangle,
ascending and descending triangle *hese chart patterns are considered to last anywhere from a couple of
weeks to several months.
*he symmetrical triangle in the a!ove 3igure is a pattern in which two trend lines converge
toward each other. *his pattern is neutral in that a !reakout to the upside or downside is a
confirmation of a trend in that direction. In an ascending triangle, the upper trend line is flat, while
the !ottom trend line is upward sloping. *his is generally thought of as a !ullish pattern in which
chartists look for an upside !reakout. In a descending triangle, the lower trend line is flat and the
upper trend line is descending. *his is generally seen as a !earish pattern where chartists look
for a downside !reakout.
3lag and 0ennant
*hese two shortterm chart patterns are continuation patterns that are formed when there is a sharp price
movement followed !y a generally sideways price movement. *his pattern is then completed upon another
sharp price movement in the same direction as the move that started the trend. *he patterns are generally
thought to last from one to three weeks.
+s we can see in the a!ove 3igure, there is little difference !etween apennant and a flag. *he
main difference !etween these price movements can !e seen in the middle section of the chart
pattern. In a pennant, the middle section is characteri?ed !y converging trend lines, much like
what is seen in a symmetrical triangle. *he middle section on the flag pattern, on the other hand,
shows a channel pattern, with no convergence !etween the trend lines. In !oth cases, the trend is
e%pected to continue when the price moves a!ove the upper trend line.
=edge
*he wedge chart pattern can !e either a continuation or reversal pattern. It is similar to a
symmetrical triangle e%cept that the wedge pattern slants in an upward or downward direction,
while the symmetrical triangle generally shows a sideways movement. *he other difference is that
wedges tend to form over longer periods, usually !etween three and si% months.
*he fact that wedges are classified as !oth continuation and reversal patterns can make reading signals
confusing. 5owever, at the most !asic level, a falling wedge is !ullish and a rising wedge is !earish. In the
a!ove 3igure, we have a falling wedge in which two trend lines are converging in a downward direction. If
the price was to rise a!ove the upper trend line, it would form a continuation pattern, while a move !elow the
lower trend line would signal a reversal pattern.
Gaps
+ gap in a chart is an empty space !etween a trading period and the following trading
period. *his occurs when there is a large difference in prices !etween two se$uential trading
periods. 3or e%ample, if the trading range in one period is !etween >s. 9, and >s. :. and the
ne%t trading period opens at >s. ;., there will !e a large gap on the chart !etween these two
periods. Gap price movements can !e found on !ar charts and candlestick charts !ut will not !e
found on point and figure or !asic line charts. Gaps generally show that something of significance
has happened in the security, such as a !etterthane%pected earnings announcement.
*here are three main types of gaps. &reakaway, runaway (measuring) and e%haustion !reakaway gap forms
at the start of a trend, a runaway gap forms during the middle of a trend and an e%haustion gap forms near
the end of a trend.
Triple Top- and Botto,-
*riple tops and triple !ottoms are another type of reversal chart pattern in chart analysis. *hese
are not as prevalent in charts as head and shoulders and dou!le tops and !ottoms, !ut they act in a similar
fashion. *hese two chart patterns are formed when the price movement tests a level of support or resistance
three times and is una!le to !reak throughG this signals a reversal of the prior trend.
7onfusion can form with triple tops and !ottoms during the formation of the pattern !ecause they
can look similar to other chart patterns. +fter the first two support4resistance tests are formed in
the price movement, the pattern will look like a dou!le top or !ottom, which could lead a chartist
to enter a reversal position too soon.
>ounding &ottom
+ rounding !ottom, also referred to as a saucer !ottom, is a longterm reversal pattern
that signals a shift from a downward trend to an upward trend. *his pattern is traditionally thought
to last anywhere from several months to several years.
+ rounding !ottom chart pattern looks similar to a cup and handle pattern !ut without the handle.
*he longterm nature of this pattern and the lack of a confirmation trigger, such as the handle in
the cup and handle, makes it a difficult pattern to trade.
8oving +verages
8ost chart patterns show a lot of variation in price movement. *his can make it difficult for traders
to get an idea of a security#s overall trend. 1ne simple method traders use to com!at this is to
apply moving averages. + moving average is the average price of a security over a set amount of
time. &y plotting a security#s average price, the price movement is smoothed out. 1nce the day
today fluctuations are removed, traders are !etter a!le to identify the true trend and increase the
pro!a!ility that it will work in their favor.
*ypes of 8oving +verages
*here are a num!er of different types of moving averages that vary in the way they are calculated, !ut how
each average is interpreted remains the same. *he calculations only differ in regards to the weighting that
they place on the price data, shifting from e$ual weighting of each price point to more weight !eing placed
on recent data. *he three most common types of moving averages are simple, linear and e%ponential.
Simple 8oving +verage (S8+)
*his is the most common method used to calculate the moving average of prices. It simply takes the sum of
all of the past closing prices over the time period and divides the result !y the num!er of prices used in the
calculation. 3or e%ample, in a -.day moving average, the last -. closing prices are added together and
then divided !y -.. +s you we can see in 3igure !elow, a trader is a!le to make the average less responsive
to changing prices !y increasing the num!er of periods used in the calculation. Increasing the num!er of
time periods in the calculation is one of the !est ways to gauge the strength of the longterm trend and the
likelihood that it will reverse.
8any individuals argue that the usefulness of this type of average is limited !ecause each point in the data
series has the same impact on the result regardless of where it occurs in the se$uence. *he critics argue
that the most recent data is more important and, therefore, it should also have a higher weighting. *his type
of criticism has !een one of the main factors leading to the invention of other forms of moving averages.
Linear =eighted +verage
*his moving average indicator is the least common out of the three and is used to address the pro!lem of
the e$ual weighting. *he linear weighted moving average is calculated !y taking the sum of all the closing
prices over a certain time period and multiplying them !y the position of the data point and then dividing !y
the sum of the num!er of periods. 3or e%ample, in a fiveday linear weighted average, today#s closing price
is multiplied !y five, yesterday#s !y four and so on until the first day in the period range is reached. *hese
num!ers are then added together and divided !y the sum of the multipliers.
'%ponential 8oving +verage ('8+)
*his moving average calculation uses a smoothing factor to place a higher weight on recent data points and
is regarded as much more efficient than the linear weighted average. 5aving an understanding of the
calculation is not generally re$uired for most traders !ecause most charting packages do the calculation for
you. *he most important thing to remem!er a!out the e%ponential moving average is that it is more
responsive to new information relative to the simple moving average. *his responsiveness is one of the key
factors of why this is the moving average of choice among many technical traders. +s we can see in 3igure
!elow, a -,period '8+ rises and falls faster than a -,period S8+. *his slight difference doesn"t seem like
much, !ut it is an important factor to !e aware of since it can affect returns.
8aKor Pses of 8oving +verages
8oving averages are used to identify current trends and trend reversals as well as to set up support and
resistance levels.
8oving averages can !e used to $uickly identify whether a security is moving in an uptrend or a downtrend
depending on the direction of the moving average. +s we can see in 3igure !elow, when a moving average
is heading upward and the price is a!ove it, the security is in an uptrend. 7onversely, a downward sloping
moving average with the price !elow can !e used to signal a downtrend.
+nother method of determining momentum is to look at the order of a pair of moving averages. =hen a
shortterm average is a!ove a longerterm average, the trend is up. 1n the other hand, a longterm average
a!ove a shorterterm average signals a downward movement in the trend.
8oving average trend reversals are formed in two main waysD when the price moves through a moving
average and when it moves through moving average crossovers. *he first common signal is when the price
moves through an important moving average. 3or e%ample, when the price of a security that was in an
uptrend falls !elow a ,.period moving average, like in 3igure !elow, it is a sign that the uptrend may !e
reversing.
*he other signal of a trend reversal is when one moving average crosses through another. 3or
e%ample, as we can see in 3igure !elow, if the -,day moving average crosses a!ove the ,.day
moving average, it is a positive sign that the price will start to increase.
If the periods used in the calculation are relatively short, for e%ample -, and :,, this could signal
a shortterm trend reversal. 1n the other hand, when two averages with relatively long time
frames cross over (,. and 9.., for e%ample), this is used to suggest a longterm shift in trend.
+nother maKor way moving averages are used is to identify support and resistance levels. It is not
uncommon to see a stock that has !een falling stop its decline and reverse direction once it hits
the support of a maKor moving average. + move through a maKor moving average is often used as
a signal !y technical traders that the trend is reversing. 3or e%ample, if the price !reaks through
the 9..day moving average in a downward direction, it is a signal that the uptrend is reversing.
8oving averages are a powerful tool for analy?ing the trend in a security. *hey provide useful support and
resistance points and are very easy to use. *he most common time frames that are used when creating
moving averages are the 9..day, -..day, ,.day, 9.day and -.day. *he 9..day average is thought to
!e a good measure of a trading year, a -..day average of a half a year, a ,.day average of a $uarter of a
year, a 9.day average of a month and -.day average of two weeks.
8oving averages help technical traders smooth out some of the noise that is found in daytoday price
movements, giving traders a clearer view of the price trend. So far we have !een focused on price
movement, through charts and averages.
Indicators and 1scillators
Indicators are calculations !ased on the price and the volume of a security that measure such
things as money flow, trends, volatility and momentum. Indicators are used as a secondary
measure to the actual price movements and add additional information to the analysis of
securities. Indicators are used in two main waysD to confirm price movement and the $uality of
chart patterns, and to form !uy and sell signals.
*here are two main types of indicatorsD leading and lagging. + leading indicator precedes price
movements, giving them a predictive $uality, while a lagging indicator is a confirmation tool
!ecause it follows price movement. + leading indicator is thought to !e the strongest during
periods of sideways or nontrending trading ranges, while the lagging indicators are still useful
during trending periods.
*here are also two types of indicator constructionsD those that fall in a !ounded range and those
that do not. *he ones that are !ound within a range are called oscillators these are the most
common type of indicators. 1scillator indicators have a range, for e%ample !etween ?ero and
-.., and signal periods where the security is over!ought (near -..) or oversold (near ?ero). (on
!ounded indicators still form !uy and sell signals along with displaying strength or weakness, !ut
they vary in the way they do this.
*he two main ways that indicators are used to form !uy and sell signals in technical analysis is
through crossovers and divergence. 7rossovers are the most popular and are reflected when
either the price moves through the moving average, or when two different moving averages cross
over each other.*he second way indicators are used is through divergence, which happens when
the direction of the price trend and the direction of the indicator trend are moving in the opposite
direction. *his signals to indicator users that the direction of the price trend is weakening.
Indicators that are used in technical analysis provide an e%tremely useful source of additional
information. *hese indicators help identify momentum, trends, volatility and various other aspects
in a security to aid in the technical analysis of trends. It is important to note that while some
traders use a single indicator solely for !uy and sell signals, they are !est used in conKunction
with price movement, chart patterns and other indicators.
+ccumulation4)istri!ution Line
*he accumulation4distri!ution line is one of the more popular volume indicators that measures money flows
in a security. *his indicator attempts to measure the ratio of !uying to selling !y comparing the price
movement of a period to the volume of that period.
7alculatedD
+cc4)ist H ((7lose Low) (5igh 7lose)) 4 (5igh Low)
R 0eriod#s Qolume
*his is a non!ounded indicator that simply keeps a running sum over the period of the security.
*raders look for trends in this indicator to gain insight on the amount of purchasing compared to
selling of a security. If a security has an accumulation4distri!ution line that is trending upward, it is
a sign that there is more !uying than selling.
+verage )irectional Inde%
*he average directional inde% (+)N) is a trend indicator that is used to measure the strength of a
current trend. *he indicator is seldom used to identify the direction of the current trend, !ut can
identify the momentum !ehind trends.
*he +)N is a com!ination of two price movement measuresD the positive directional indicator
(M)I) and the negative directional indicator ()I). *he +)N measures the strength of a trend !ut
not the direction. *he M)I measures the strength of the upward trend while the )I measures the
strength of the downward trend. *hese two measures are also plotted along with the +)N line.
8easured on a scale !etween ?ero and -.., readings !elow 9. signal a weak trend while
readings a!ove ;. signal a strong trend.
+roon
*he +roon indicator is a relatively new technical indicator that was created in -SS,. *he +roon is a trending
indicator used to measure whether a security is in an uptrend or downtrend and the magnitude of that trend.
*he indicator is also used to predict when a new trend is !eginning.
*he indicator is comprised of two lines, an O+roon upO line (!lue line) and an O+roon downO line (red dotted
line). *he +roon up line measures the amount of time it has !een since the highest price during the time
period. *he +roon down line, on the other hand, measures the amount of time since the lowest price during
the time period. *he num!er of periods that are used in the calculation is dependent on the time frame that
the user wants to analy?e.
+n e%pansion of the +roon is the +roon oscillator, which simply plots the difference !etween the +roon up
and down lines !y su!tracting the two lines. *his line is then plotted !etween a range of -.. and -... *he
centerline at ?ero in the oscillator is considered to !e a maKor signal line determining the trend. *he higher
the value of the oscillator from the centerline point, the more upward strength there is in the securityG the
lower the oscillator#s value is from the centerline, the more downward pressure. + trend reversal is signaled
when the oscillator crosses through the centerline. 3or e%ample, when the oscillator goes from positive to
negative, a downward trend is confirmed. )ivergence is also used in the oscillator to predict trend reversals.
+ reversal warning is formed when the oscillator and the price trend are moving in an opposite direction.
*he +roon lines and +roon oscillators are fairly simple concepts to understand !ut yield powerful information
a!out trends. *his is another great indicator to add to any technical trader#s arsenal.
8oving +verage 7onvergence
*he moving average convergence divergence (8+7)) is one of the most well known and used indicators in
technical analysis. *his indicator is comprised of two e%ponential moving averages, which help to measure
momentum in the security. *he 8+7) is simply the difference !etween these two moving averages plotted
against a centerline. *he centerline is the point at which the two moving averages are e$ual. +long with the
8+7) and the centerline, an e%ponential moving average of the 8+7) itself is plotted on the chart. *he
idea !ehind this momentum indicator is to measure shortterm momentum compared to longer term
momentum to help signal the current direction of momentum.
8+7)H shorter term moving average longer term
moving average
=hen the 8+7) is positive, it signals that the shorter term moving average is a!ove the longer
term moving average and suggests upward momentum. *he opposite holds true when the 8+7)
is negative this signals that the shorter term is !elow the longer and suggest downward
momentum. =hen the 8+7) line crosses over the centerline, it signals a crossing in the moving
averages. *he most common moving average values used in the calculation are the 9<day and
-9day e%ponential moving averages. *he signal line is commonly created !y using a nineday
e%ponential moving average of the 8+7) values. *hese values can !e adKusted to meet the
needs of the technician and the security. 3or more volatile securities, shorter term averages are
used while less volatile securities should have longer averages.
+nother aspect to the 8+7) indicator that is often found on charts is the 8+7) histogram. *he
histogram is plotted on the centerline and represented !y !ars. 'ach !ar is the difference
!etween the 8+7) and the signal line or, in most cases, the nineday e%ponential moving
average. *he higher the !ars are in either direction, the more momentum !ehind the direction in
which the !ars point. (+s you can see in 3igure !elow, one of the most common !uy signals is
generated when the 8+7) crosses a!ove the signal line (!lue dotted line), while sell signals
often occur when the 8+7) crosses !elow the signal.
>elative Strength Inde%
*he relative strength inde% (>SI) is another one of the most used and wellknown
momentum indicators in technical analysis. >SI helps to signal over!ought and oversold
conditions in a security. *he indicator is plotted in a range !etween ?ero and -... + reading
a!ove /. is used to suggest that a security is over!ought, while a reading !elow :. is used to
suggest that it is oversold. *his indicator helps traders to identify whether a security"s price has
!een unreasona!ly pushed to current levels and whether a reversal may !e on the way.
*he standard calculation for >SI uses -; trading days as the !asis, which can !e adKusted to meet the
needs of the user. If the trading period is adKusted to use fewer days, the >SI will !e more volatile and will !e
used for shorter term trades.
1n&alance Qolume
*he on!alance volume (1&Q) indicator is a wellknown technical indicator that reflect
movements in volume. It is also one of the simplest volume indicators to compute and
understand.
*he 1&Q is calculated !y taking the total volume for the trading period and assigning it a positive
or negative value depending on whether the price is up or down during the trading period. =hen
price is up during the trading period, the volume is assigned a positive value, while a negative
value is assigned when the price is down for the period. *he positive or negative volume total for
the period is then added to a total that is accumulated from the start of the measure.
It is important to focus on the trend in the 1&Q this is more important than the actual value of
the 1&Q measure. *his measure e%pands on the !asic volume measure !y com!ining volume
and price movement.
Stochastic 1scillator
*he stochastic oscillator is one of the most recogni?ed momentum indicators used in
technical analysis. *he idea !ehind this indicator is that in an uptrend, the price should !e closing
near the highs of the trading range, signaling upward momentum in the security. In downtrends,
the price should !e closing near the lows of the trading range, signaling downward momentum.
*he stochastic oscillator is plotted within a range of ?ero and -.. and signals over!ought conditions a!ove
E. and oversold conditions !elow 9.. *he stochastic oscillator contains two lines. *he first line is the FK,
which is essentially the raw measure used to formulate the idea of momentum !ehind the oscillator. *he
second line is the F), which is simply a moving average of the FK. *he F) line is considered to !e the
more important of the two lines as it is seen to produce !etter signals. *he stochastic oscillator generally
uses the past -; trading periods in its calculation !ut can !e adKusted to meet the needs of the user.

3undamental vs. *echnical +nalysis
*echnical analysis and fundamental analysis are the two main schools of thought in the
financial markets. +s we#ve mentioned, technical analysis looks at the price movement of a
security and uses this data to predict its future price movements. 3undamental analysis, on the
other hand, looks at economic factors, known as fundamentals. Let#s get into the details of how
these two approaches differ, the criticisms against technical analysis and how technical and
fundamental analysis can !e used together to analy?e securities.
+lthough technical analysis and fundamental analysis are seen !y many as polar opposites the oil and
water of investing many market participants have e%perienced great success !y com!ining the two. 3or
e%ample, some fundamental analysts use technical analysis techni$ues to figure out the !est time to enter
into an undervalued security. 1ftentimes, this situation occurs when the security is severely oversold. &y
timing entry into a security, the gains on the investment can !e greatly improved.
+lternatively, some technical traders might look at fundamentals to add strength to a technical signal. 3or
e%ample, if a sell signal is given through technical patterns and indicators, a technical trader might look to
reaffirm his or her decision !y looking at some key fundamental data. 1ftentimes, having !oth the
fundamentals and technical on your side can provide the !estcase scenario for a trade.
=hile mi%ing some of the components of technical and fundamental analysis is not well received !y the
most devoted groups in each school, there are certainly !enefits to at least understanding !oth schools of
thought.
-omparison of fundament analysis and emotional
investors
1ow let me give you another e#am!le let us assume there are
only 5 !eo!le in and stock e#change say "r 0 "r. * "r. L
"r. O and "r. I. Out of that 3 investors say "r 0, "r. *
and "r. L use fundament analyst to take investment decision
and other two "r. O and "r. I are emotional inventors.
,motional in the sense that they lack knowledge about the
basic analysis of stock market .though emotional investors
doesn:t restrict only to such investors who don:t have
knowledge but for this e#am!le only that factor is taken/
1ow su!!ose say there is only % com!any listed in the
e#change and it issues $ shares and scenario is such that
economy is in de!ression stage. 1ow as !er fundament
analysis it is a good time to buy stock so our 3 investors
who use fundament analysis decided to buy, but !roblem is
there are only $ stocks. Since "r. 0 decided to buy at
earliest so he got a stock at Ds. %& and "r. * also got the
same stock at Ds. %& but "r. L is left out. So in order to
buy that stock he have to bid a little higher so he rise
his offer !rice to Ds. %$ but both "r. 0 and "r. * decided
to hold on and not to sell. So "r. L again raises his !rice
to %F. Su!!ose intrinsic value of the stock now is %5. So
"r. 0 let us assume that didn:t want to be too greedy and
decided to sell the stock to "r. L at Ds. %F by making a
!rofit of F and "r. L bought it ho!ing that market will
take his stock beyond the intrinsic value and with the same
thought "r. * decided to hold on to that stock. 1ow we in
stage where !eo!le like "r. O and "r. I are tem!ted to
enter into market. So "r. I wanted to buy the stock at Ds.
%2, which is above the intrinsic value but both "r. * and
"r. L didn:t want to sell ho!ing that economy will im!rove
and they can increase there !rofit. So "r. I decided to buy
at Ds. %( and "r. * decided enough is enough because we
knows the longer he wait he may make more !rofit but at the
same time it is risky also as !rice may go down any moment
so he decided to sell at Ds. %( making a !rofit of Ds. ( .
1ow economy is in boom, com!any is making !rofit !aying
good divided. So "r. O don:t want to left behind and he
also decided to ste! in, he wanted to buy at %( but nobody
is ready to sell. So he increases his bid to Ds. $& and
this time "r. L sold his stock to "r. O at Ds. $&. 1ow in
the market we have $ emotional investors one bought the
stock at Ds. %( and another at Ds. $&. 1ow they are holding
this stock and e#!ecting a good dividend. 1ow we are into
the recession and !rofit of the com!any are falling. So "r
I and "r. O decided to sell at $$. *ut "r. 0, "r. * and "r.
L now that at Ds. $$ the stock is too overvalued so
they don:t want to buy. 1ow both "r. O and "r. I knew that
they invested in a wrong time which is quite natural with
lot of investor so in order to get rid of further loss they
want to sell at %( but nobody is ready to buy and being a
fundament analysis they won:t buy until it come down to
intrinsic value. 0s a result "r. O and "r. I have to sell
there stock at %5 or hold onto there stock without getting
much divided. n both the case they are in loss. n the
above e#am!le though there could be lots of if and buts
still if we look at today:s market this is how the market
is running. 4ew knowledgeable investors who are ready to
take more risk in order to make !rofit above their normal
e#!ectation are able to make such !rofit at the e#!enses of
emotional investors like "r. O and "r. I. and when stock
market trade above it:s normal intrinsic value such
situation is called a stock market bubble.
Stock market 'u''le
0 stock market bubble is a ty!e of economic bubble taking
!lace in stock markets when !rice of stocks rise and become
overvalued by any measure of stock valuation.
+he e#istence of stock market bubbles is at odds with the
assum!tions of efficient market theory which assumes
rational investor behavior. *ehavioral finance theory
attribute stock market bubbles to cognitive biases that
lead to grou!think and herd behavior.
,motional and cognitive biases .see behavioral finance/
seem to be the causes of bubbles. *ut, often, when the
!henomenon a!!ears, !undits try to find a rationale, so as
not to be against the crowd. +hus, sometimes, !eo!le will
dismiss concerns about over!riced markets by citing a new
economy where the old stock valuation rules may no longer
a!!ly. +his ty!e of thinking hel!s to further !ro!agate the
bubble whereby everyone is investing with the intent of
finding a greater fool. 0 rising !rice on any share will
attract the attention of investors. 1ot all of those
investors are willing or interested in studying the
intrinsic of the share and for such !eo!le the rising !rice
itself is reason enough to invest. n turn, the additional
investment will !rovide buoyancy to the !rice, thus
com!leting a !ositive feedback loo!.
=ike all dynamical systems, financial markets o!erate in an
ever changing equilibrium, which translates into !rice
volatility. 9owever instable is this balance, a self7
adjustment .negative feedback/ takes !lace normally> when
!rices rise more !eo!le are encouraged to sell, while fewer
are encouraged to buy. +his !uts a limit on volatility.
9owever, once !ositive feedback takes over, the market,
like all systems with !ositive feedback, enters a state of
increasing disequilibrium. +his can be seen in financial
bubbles where asset !rices ra!idly s!ike u!wards far beyond
what could be considered the rational Jeconomic valueJ,
only to fall ra!idly afterwards.
&ntrinsic value very with individuals
1ow let me take another situation let say there are no
emotional investor e#it in the market. 0nd everybody uses
fundament analysis to trade in the market. 4irst question
that will come to our mind is what will ha!!en if all the
investors will have same intrinsic value, but sur!risingly
even if they do fundament analysis the intrinsic value will
differ from !erson to !erson. t will differ because of
the growth factor how individual antici!ate growth of that
certain stock. 1ow let us take an e#am!le
f we go back to !revious e#am!le where we assume that say
"r. 0 e#!ects a return of $&8 on an investment every year
for 3 years, which the com!any would !ay dividends of $&8,
$58 and 3&8 on its Ds.%& share. +he dividend received on a
share would therefore be Ds.$.&& in the first year, Ds.$.5&
in the second, and Ds.3.&& in the third, the share can be
sold at Ds.$&& at the end of 3 years. so ntrinsic value
for "r. 0
$ P $.5 P 3 P $&& Q Ds.%$&.((
%.$ .%.$/$ .%.$/3
;enerally based on there fundament analysis they assume
that they are going get such amount of dividend, sale
value to calculate intrinsic value and individually it very
and it also de!ends on there risk taking ca!acity and how
!ro!erly one able to inter!ret the data. 1ow lets add two
more !erson to the scenario say "r. * who e#!ects a return
of %28 on the same stock whereas a third individual say "r.
L e#!ects a return of $58 the intrinsic value .assuming the
dividends and the sale value at the end of 3 years will
remain the same/
ntrinsic value for "r. *
C L CA5 L F LC!! M ,sAFFA6F
A6 ?A6@C ?A6@F
ntrinsic value for "r. L
C L CA5 L F L C!! M ,sA!7A"
AC5 ?AC5@C ?AC5@F
+hus if the market !rice is Ds.%$&.((, the first individual
"r. 0 will hold onto the share whereas "r. L would sell the
share and "r * would !urchase it. n short, the intrinsic
value of a share will vary from individual to individual
and will be de!endant both on that individualKs ability to
bear risks and the return that individual.
So it is seen that though fundament analysis is good way to
decide which stock to buy and when to buy or sell but even
intrinsic value differ form !erson to !erson as they
inter!ret the information differently. So we can say that
there involves an emotional as!ect that influence the
investment decision of all the investor irres!ective of
whether they use fundament or technical analysis. 0nd this
is where behavior finance come into !lay, as a investor
they should never invest on there emotion but they should
aware of behavior finance so that they can kee! check there
own emotion and get idea of market sentiment.
8ehavioral .inance+ &ntroduction
0ccording to conventional financial theory, the world and
its !artici!ants are, for the most !art, rational Jwealth
ma#imizersJ. 9owever, there are many instances where
emotion and !sychology influence our decisions, causing us
to behave in un!redictable or irrational ways.
&ehavioral finance is a relatively new field that seeks to com!ine !ehavioral and
cognitive psychological theory with conventional economics and finance to
provide e%planations for why people make irrational financial decisions.
.*hy i- beha2ioral .inance nece--aryH
When using the labels JconventionalJ or JmodernJ to
describe finance, we are talking about the ty!e of finance
that is based on rational and logical theories.
3or a while, theoretical and empirical evidence suggested that 7+08, '85 and
other rational financial theories did a respecta!le Ko! of predicting and e%plaining
certain events. 5owever, as time went on, academics in !oth finance and
economics started to find anomalies and !ehaviors that couldn#t !e e%plained !y
theories availa!le at the time. =hile these theories could e%plain certain
Oideali?edO events, the real world proved to !e a very messy place in which
market participants often !ehaved very unpredicta!ly.
,conomic man
One of the most rudimentary assum!tions that conventional
economics and finance makes is that !eo!le are rational
Jwealth ma#imizersJ who seek to increase their own well7
being. 0ccording to conventional economics, emotions and
other e#traneous factors do not influence !eo!le when it
comes to making economic choices.
n most cases, however, this assum!tion doesnKt reflect how
!eo!le behave in the real world. +he fact is !eo!le
frequently behave irrationally. Lonsider how many !eo!le
!urchase lottery tickets in the ho!e of hitting the big
jack!ot. 4rom a !urely logical stand!oint, it does not make
sense to buy a lottery ticket when the odds of winning are
overwhelming against the ticket holder .roughly % in %F2
million, or &.&&&&&&2(F-8, for the famous <owerball
jack!ot/. @es!ite this, millions of !eo!le s!end countless
dollars on this activity.
+hese anomalies !rom!ted academics to look to cognitive
!sychology to account for the irrational and illogical
behaviors that modern finance had failed to e#!lain.
*ehavioral finance seeks to e#!lain our actions, whereas
modern finance seeks to e#!lain the actions of the
Jeconomic manJ.
:,portant $ontributor-
Like every other !ranch of finance, the field of !ehavioral finance has certain
people that have provided maKor theoretical and empirical contri!utions. *he
following section provides a !rief introduction to three of the !iggest names
associated with the field.
Daniel Kahneman and Amos Tversky
7ognitive psychologists )aniel Kahneman and +mos *versky are considered the
fathers of !ehavioral economics4finance. Since their initial colla!orations in the
late -S<.s, this duo has pu!lished a!out 9.. works, most of which relate to
psychological concepts with implications for !ehavioral finance. In 9..9,
Kahneman received the (o!el 8emorial 0ri?e in 'conomic Sciences for his
contri!utions to the study of rationality in economics.
Kahneman and *versky have focused much of their research on the cognitive
!iases and heuristics (i.e. approaches to pro!lem solving)that cause people to
engage in unanticipated irrational !ehavior. *heir most popular and nota!le
works include writings a!out prospect theory and loss aversion topics that we#ll
e%amine later.
Richard Thaler =hile Kahneman and *versky provided the early psychological theories that would !e
the foundation for !ehavioral finance, this field would not have evolved if it weren#t for economist >ichard
*haler.
)uring his studies, *haler !ecame more and more aware of the shortcomings in
conventional economic theoryies as they relate to people#s !ehaviors. +fter
reading a draft version of Kahneman and *versky#s work on prospect theory,
*haler reali?ed that, unlike conventional economic theory, psychological theory
could account for the irrationality in !ehaviors.
*haler went on to colla!orate with Kahneman and *versky, !lending economics
and finance with psychology to present concepts, such as mental accounting, the
endowment effect and other !iases.
7ritics
although !ehavioral finance has !een gaining support in recent years, it is not
without its critics. Some supporters of the efficient market hypothesis, for
e%ample, are vocal critics of !ehavioral finance.
*he efficient market hypothesis is considered one of the foundations of modern
financial theory. 5owever, the hypothesis does not account for irrationality
!ecause it assumes that the market price of a security reflects the impact of all
relevant information as it is released.
*he most nota!le critic of !ehavioral finance is 'ugene 3ama, the founder of
market efficiency theory. 0rofessor 3ama suggests that even though there are
some anomalies that cannot !e e%plained !y modern financial theory, market
efficiency should not !e totally a!andoned in favor of !ehavioral finance.
In fact, he notes that many of the anomalies found in conventional theories could
!e considered shorterterm chance events that are eventually corrected over
time. In his -SSE paper, entitled O8arket 'fficiency, Long*erm >eturns +nd
&ehavioral 3inanceO, 3ama argues that many of the findings in !ehavioral finance
appear to contradict each other, and that all in all, !ehavioral finance itself
appears to !e a collection of anomalies that can !e e%plained !y market
efficiency.
1nomalies
+he !resence of regularly occurring anomalies in
conventional economic theory was a big contributor to the
formation of behavioral finance. +hese so7called anomalies,
and their continued e#istence, directly violate modern
financial and economic theories, which assume rational and
logical behavior. +he following is a quick summary of some
of the anomalies found in the financial literature.
The *innerI- $ur-e
One assum!tion found in finance and economics is that
investors and traders are rational enough to be aware of
the true value of some asset and will bid or !ay
accordingly.
9owever, anomalies such as the winnerKs curse 7 a tendency
for the winning bid in an auction setting to e#ceed the
intrinsic value of the item !urchased 7 suggest that this
is not the case.
Dational7based theories assume that all !artici!ants
involved in the bidding !rocess will have access to all
relevant information and will all come to the same
valuation. 0ny differences in the !ricing would suggest
that some other factor not directly tied to the asset is
affecting the bidding.
0ccording to Dobert +halerKs %-(( article on winnerKs
curse, there are two !rimary factors that undermine the
rational bidding !rocess> the number of bidders and the
aggressiveness of bidding. 4or e#am!le, the more bidders
involved in the !rocess means that you have to bid more
aggressively in order to dissuade others from bidding.
Unfortunately, increasing your aggressiveness will also
increase the likelihood in that your winning bid will
e#ceed the value of the asset.
7onventional financial theory does not account for all situations that happen in
the real world. *his is not to say that conventional theory is not valua!le, !ut
rather that the addition of !ehavioral finance can further clarify how the financial
markets work.
n the following section, weKll e#!lore eight key conce!ts
that !ioneers in the field of behavioral finance have
identified as contributing to irrational and often
detrimental financial decision making. 0s you read through
them, consider whether as an investor youKve fallen !rey to
some of these biases. Lhances are, at one !oint or another,
we all have.
Iey -oncept 6oAA 1nchoring
Similar to how a house should !e !uilt upon a good, solid foundation, our ideas
and opinions should also !e !ased on relevant and correct facts in order to !e
considered valid. 5owever, this is not always so. *he concept of anchoring draws
on the tendency to attach or OanchorO our thoughts to a reference point even
though it may have no logical relevance to the decision at hand.
+lthough it may seem an unlikely phenomenon, anchoring is fairly prevalent in
situations where people are dealing with concepts that are new and novel.
A *iamond Anchor
7onsider this classic e%ampleD 7onventional wisdom dictates that a diamond
engagement ring should cost around two months# worth of salary. &elieve it or
not, this OstandardO is one of the most illogical e%amples of anchoring. =hile
spending two months worth of salary can serve as a !enchmark, it is a
completely irrelevant reference point created !y the Kewelry industry to ma%imi?e
profits, and not a valuation of love.
8any men can#t afford to devote two months of salary towards a ring while
paying for living e%penses. 7onse$uently, many go into de!t in order to meet the
OstandardO. In many cases, the Odiamond anchorO will live up to its name, as the
prospective groom struggles to keep his head a!ove water in a sea of mounting
de!t.
+lthough the amount spent on an engagement ring should !e dictated !y what a
person can afford, many men illogically anchor their decision to the twomonth
standard. &ecause !uying Kewelry is a OnovelO e%perience for many men, they are
more likely to purchase something that is around the OstandardO, despite the
e%pense. *his is the power of anchoring.
Investment Anchoring
0nchoring can also be a source of frustration in the
financial world, as investors base their decisions on
irrelevant figures and statistics. 4or e#am!le, some
investors invest in the stocks of com!anies that have
fallen considerably in a very short amount of time. n this
case, the investor is anchoring on a recent JhighJ that the
stock has achieved and consequently believes that the dro!
in !rice !rovides an o!!ortunity to buy the stock at a
discount.
While, it is true that the fickleness of the overall market
can cause some stocks to dro! substantially in value,
allowing investors to take advantage of this short7 term
volatility. 9owever, stocks quite often also decline in
value due to changes in their underlying fundamentals.
4or instance, su!!ose that OIR stock had very strong
revenue in the last year, causing its share !rice to shoot
u! from Ds. $5 to Ds. (&. Unfortunately, one of the
com!anyKs major customers, who contributed to 5&8 of OIRKs
revenue, had decided not to renew its !urchasing agreement
with OIR. +his change of events causes a dro! in OIRKs
share !rice from Ds.(& to Ds. F&.
*y anchoring to the !revious high of Ds. (& and the current
!rice of Ds. F&, the investor erroneously believes that OIR
is undervalued. Aee! in mind that OIR is not being sold at
a discount, instead the dro! in share value is attributed
to a change to OIRKs fundamentals .loss of revenue from a
big customer/. n this e#am!le, the investor has fallen
!rey to the dangers of anchoring.
Avoiding Anchoring
When it comes to avoiding anchoring, thereKs no substitute
for rigorous critical thinking. *e es!ecially careful about
which figures you use to evaluate a stockKs !otential.
Successful investors donKt just base their decisions on one
or two benchmarks, they evaluate each com!any from a
variety of !ers!ectives in order to derive the truest
!icture of the investment landsca!e.
Iey -oncept 6oAC+ Mental 1ccounting
8ental accounting refers to the tendency for people to separate their money into
separate accounts !ased on a variety of su!Kective criteria, like the source of the
money and intent for each account. +ccording to the theory, individuals assign
different functions to each asset group, which has an often irrational and
detrimental effect on their consumption decisions and other !ehaviors.
0lthough many !eo!le use mental accounting, they may not
realize how illogical this line of thinking really is. 4or
e#am!le, !eo!le often have a s!ecial Jmoney jarJ or fund
set aside for a vacation or a new home, while still
carrying substantial credit card debt
n this e#am!le, money in the s!ecial fund is being treated
differently from the money that the same !erson is using to
!ay down his or her debt, des!ite the fact that diverting
funds from debt re!ayment increases interest !ayments and
reduces the !ersonKs net worth. Sim!ly !ut, itKs illogical
.and detrimental/ to have savings in a jar earning little
to no interest while carrying credit7card debt accruing at
$&8 annually.
In this case, rather than saving for a holiday, the most logical course of action
would !e to use the funds in the Kar (and any other availa!le monies) to pay off
the e%pensive de!t.
*his seems simple enough, !ut why don#t people !ehave this way6 *he answer
lies with the personal value that people place on particular assets. 3or instance,
people may feel that money saved for a new house or their children#s college
fund is too OimportantO to relin$uish. +s a result, this OimportantO account may not
!e touched at all, even if doing so would provide added financial !enefit.
Mental Accounting In Investing
*he mental accounting !ias also enters into investing. 3or e%ample, some
investors divide their investments !etween a safe investment portfolio and a
speculative portfolio in order to prevent the negative returns that speculative
investments may have from affecting the entire portfolio. *he pro!lem with such
a practice is that despite all the work and money that the investor spends to
separate the portfolio, his net wealth will !e no different than if he had held one
larger portfolio.
=2oiding )ental =ccounting
+he key !oint to consider for mental accounting is that
money is fungibleG regardless of its origins or intended
use, all money is the same. Iou can cut down on frivolous
s!ending of JfoundJ money, by realizing that JfoundJ money
is no different than money that you earned by working.
0s an e#tension of money being fungible, realize that
saving money in a low7 or no7interest account is fruitless
if you still have outstanding debt. n most cases, the
interest on your debt will erode any interest that you can
earn in most savings accounts. While having savings is
im!ortant, sometimes it makes more sense to forgo your
savings in order to !ay off debt.
Iey -oncept 6oAF+ -onfirmation and 7indsight 8iases
It#s often said that Oseeing is !elievingO. =hile this is often the case, in certain
situations what you perceive is not necessarily a true representation of reality.
1ur minds have a tendency to introduce !iases in processing certain kinds of
information and events.
n this section, weKll discuss how confirmation and
hindsight biases affect our !erce!tions and subsequent
decisions.
Confirmation Bias
It can !e difficult to encounter something or someone without having a
preconceived opinion. *his first impression can !e hard to shake !ecause people
also tend to selectively filter and pay more attention to information that supports
their opinions, while ignoring or rationali?ing the rest. *his type of selective
thinking is often referred to as the confirmation !ias.
In investing, the confirmation !ias suggests that an investor would !e more likely
to look for information that supports his or her original idea a!out an investment
rather than seek out information that contradicts it. +s a result, this !ias can often
result in faulty decision making !ecause onesided information tends to skew an
investor#s frame of reference, leaving them with an incomplete picture of the
situation.
7onsider, for e%ample, an investor that hears a!out a hot stock from an
unverified source and is intrigued !y the potential returns. *hat investor might
choose to research the stock in order to OproveO its touted potential is real.
=hat ends up happening is that the investor finds all sorts of green flags a!out
the investment (such as growing cash flow or a low de!t4e$uity ratio), while
glossing over financially disastrous red flags, such as loss of critical customers or
dwindling markets.
Hindsight Bias
+nother common perception !ias is hindsight !ias, which tends to occur in
situations where a person !elieves (after the fact) that the onset of some past
event was predicta!le and completely o!vious, whereas in fact, the event could
not have !een reasona!ly predicted.
8any events seem o!vious in hindsight. 0sychologists attri!ute hindsight !ias to
our innate need to find order in the world !y creating e%planations that allow us to
!elieve that events are predicta!le. =hile this sense of curiosity is useful in many
cases (take science, for e%ample), finding erroneous links !etween the cause
and effect of an event may result in incorrect oversimplifications.
3or investors and other participants in the financial world, the hindsight !ias is a
cause for one of the most potentially dangerous mindsets that an investor or
trader can haveD overconfidence. In this case, overconfidence refers to investors#
or traders# unfounded !elief that they possess superior stockpicking a!ilities.
Avoiding Confirmation Bias
Lonfirmation bias re!resents a tendency for us to focus on
information that confirms some !re7e#isting thought. <art
of the !roblem with confirmation bias is that being aware
of it isnKt good enough to !revent you from doing it. One
solution to overcoming this bias would be finding someone
to act as a Jdissenting voice of reasonJ. +hat way youKll
be confronted with a contrary view!oint to e#amine.
Iey -oncept 6oA "+ 4am'lerNs .allacy
=hen it comes to pro!a!ility, a lack of understanding can lead to incorrect
assumptions and predictions a!out the onset of events. 1ne of these incorrect
assumptions is called the gam!ler#s fallacy.
n the gamblerKs fallacy, an individual erroneously
believes that the onset of a certain random event is less
likely to ha!!en following an event or a series of events.
+his line of thinking is incorrect because !ast events do
not change the !robability that certain events will occur
in the future.
4or e#am!le, consider a series of $& coin fli!s that have
all landed with the JheadsJ side u!. Under the gamblerKs
fallacy, a !erson might !redict that the ne#t coin fli! is
more likely to land with the JtailsJ side u!. +his line of
thinking re!resents an inaccurate understanding of
!robability because the likelihood of a fair coin turning
u! heads is always 5&8. ,ach coin fli! is an inde!endent
event, which means that any and all !revious fli!s have no
bearing on future fli!s.
0nother common e#am!le of the gamblerKs fallacy can be
found with !eo!leKs relationshi! with slot machines. WeKve
all heard about !eo!le who situate themselves at a single
machine for hours at a time. "ost of these !eo!le believe
that every losing !ull will bring them that much closer to
the jack!ot. What these gamblers donKt realize is that due
to the way the machines are !rogrammed, the odds of winning
a jack!ot from a slot machine are equal with every !ull
.just like fli!!ing a coin/, so it doesnKt matter if you
!lay with a machine that just hit the jack!ot or one that
hasnKt recently !aid out.
#ambler3s /allacy In Investing
It#s not hard to imagine that under certain circumstances, investors or traders can
easily fall prey to the gam!ler#s fallacy. 3or e%ample, some investors !elieve that
they should li$uidate a position after it has gone up in a series of su!se$uent
trading sessions !ecause they don#t !elieve that the position is likely to continue
going up. 7onversely, other investors might hold on to a stock that has fallen in
multiple sessions !ecause they view further declines as Oimpro!a!leO. Lust
!ecause a stock has gone up on si% consecutive trading sessions does not mean
that it is less likely to go up on during the ne%t session.
Avoiding Gambler's Fallacy
tKs im!ortant to understand that in the case of
inde!endent events, the odds of any s!ecific outcome
ha!!ening on the ne#t chance remains the same regardless of
what !receded it. With the amount of noise inherent in the
stock market, the same logic a!!lies> *uying a stock
because you believe that the !rolonged trend is likely to
reverse at any second is irrational. nvestors should
instead base their decisions on fundamental and?or
technical analysis before determining what will ha!!en to a
trend.
Iey -oncept 6oA5+ 7erd 8ehavior
1ne of the most infamous financial events in recent memory would !e the
!ursting of the internet !u!!le. 5owever, this wasn#t the first time that events like
this have happened in the markets.
9ow could something so catastro!hic be allowed to ha!!en
over and over againN
+he answer to this question can be found in what some
!eo!le believe to be a hardwired human attribute> herd
behavior, which is the tendency for individuals to mimic
the actions .rational or irrational/ of a larger grou!.
ndividually, however, most !eo!le would not necessarily
make the same choice.
+here are a cou!le of reasons why herd behavior ha!!ens.
+he first is the social !ressure of conformity. Iou
!robably know from e#!erience that this can be a !owerful
force. +his is because most !eo!le are very sociable and
have a natural desire to be acce!ted by a grou!, rather
than be branded as an outcast. +herefore, following the
grou! is an ideal way of becoming a member.
+he second reason is the common rationale that itKs
unlikely that such a large grou! could be wrong. 0fter all,
even if you are convinced that a !articular idea or course
or action is irrational or incorrect, you might still
follow the herd, believing they know something that you
donKt. +his is es!ecially !revalent in situations in which
an individual has very little e#!erience.
'he +osts of (eing 4ed Astray
5erd !ehavior, is usually not a very profita!le investment strategy. Investors that
employ a herdmentality investment strategy constantly !uy and sell their
investment assets in pursuit of the newest and hottest investment trends. 3or
e%ample, if a herd investor hears that internet stocks are the !est investments
right now, he will free up his investment capital and then dump it on internet
stocks. If !iotech stocks are all the rage si% months later, he#ll pro!a!ly move his
money again, perhaps !efore he has even e%perienced significant appreciation in
his internet investments.
Keep in mind that all this fre$uent !uying and selling incurs a su!stantial amount
of transaction costs, which can eat away at availa!le profits. 3urthermore, it#s
e%tremely difficult to time trades correctly to ensure that you are entering your
position right when the trend is starting. &y the time a herd investor knows a!out
the newest trend, most other investors have already taken advantage of this
news, and the strategy#s wealthma%imi?ing potential has pro!a!ly already
peaked. *his means that many herdfollowing investors will pro!a!ly !e entering
into the game too late and are likely to lose money as those at the front of the
pack move on to other strategies.
Avoiding the Herd Mentality
While itKs tem!ting to follow the newest investment trends,
an investor is generally better off steering clear of the
herd. )ust because everyone is jum!ing on a certain
investment JbandwagonJ doesnKt necessarily mean the
strategy is correct. +herefore, the soundest advice is to
always do your homework before following any trend.
)ust remember that !articular investments favored by the
herd can easily become overvalued because the investmentKs
high values are usually based on o!timism and not on the
underlying fundamentals.
Iey -oncept 6oA6+ +2ercon.idence
In a 9..< study entitled O&ehaving &adlyO, researcher Lames 8ontier found that
/;F of the :.. professional fund managers surveyed !elieved that they had
delivered a!oveaverage Ko! performance. 1f the remaining 9<F surveyed, the
maKority viewed themselves as average. Incredi!ly, almost -..F of the survey
group !elieved that their Ko! performance was average or !etter. 7learly, only
,.F of the sample can !e a!ove average, suggesting the irrationally high level of
overconfidence these fund managers e%hi!ited.
0s you can imagine, overconfidence .i.e., overestimating or
e#aggerating oneKs ability to successfully !erform a
!articular task/ is not a trait that a!!lies only to fund
managers. Lonsider the number of times that youKve
!artici!ated in a com!etition or contest with the attitude
that you have what it takes to win 7 regardless of the
number of com!etitors or the fact that there can only be
one winner.
Keep in mind that there#s a fine line !etween confidence and overconfidence.
7onfidence implies realistically trusting in one#s a!ilities, while overconfidence
usually implies an overly optimistic assessment of one#s knowledge or control
over a situation.
Overconfident Investing
In terms of investing, overconfidence can !e detrimental to your stockpicking
a!ility in the long run. In a -SSE study entitled OQolume, Qolatility, 0rice, and
0rofit =hen +ll *raders +re +!ove +verageO, researcher *errence 1dean found
that overconfident investors generally conduct more trades than their less
confident counterparts.
1dean found that overconfident investors4traders tend to !elieve they are !etter
than others at choosing the !est stocks and !est times to enter4e%it a position.
Pnfortunately, 1dean also found that traders that conducted the most trades
tended, on average, to receive significantly lower yields than the market.
Avoiding Overconfidence
Keep in mind that professional fund managers, who have access to the !est
investment4industry reports and computational models in the !usiness, can still
struggle at achieving market!eating returns. *he !est fund managers know that
each investment day presents a new set of challenges and that investment
techni$ues constantly need refining. Lust a!out every overconfident investor is
only a trade away from a very hum!ling wakeup call.
Iey -oncept 6oA7+ )verreaction and the 1vaila'ility 8ias
One consequence of having emotion in the stock market is
the overreaction toward new information. 0ccording to
market efficiency, new information should more or less be
reflected instantly in a securityKs !rice. 4or e#am!le,
good news should raise a businessK share !rice accordingly,
and that gain in share !rice should not decline if no new
information has been released since.
>eality, however, tends to contradict this theory. 1ftentimes, participants in the
stock market predicta!ly overreact to new information, creating a largerthan
appropriate effect on a security#s price. 3urthermore, it also appears that this
price surge is not a permanent trend although the price change is usually
sudden and si?a!le, the surge erodes over time.
Winners and osers
In -SE,, !ehavioral finance academics =erner )e &ondt and >ichard *haler
released a study in the Journal of Finance called O)oes the 8arket 1verreact6O In this study, the two
e%amined returns on the (ew 2ork Stock '%change for a threeyear period. 3rom these stocks, they
separated the !est :, performing stocks into a Owinners portfolioO and the worst :, performing stocks were
then added to a Olosers portfolioO. )e &ondt and *haler then tracked each portfolio#s performance against a
representative market inde% for three years.
Surprisingly, it was found that the losers portfolio consistently !eat the market
inde%, while the winners portfolio consistently underperformed. In total, the
cumulative difference !etween the two portfolios was almost 9,F during the
threeyear time span. In other words, it appears that the original OwinnersO would
!ecame OlosersO, and vice versa.
So what happened6 In !oth the winners and losers portfolios, investors
essentially overreacted. In the case of loser stocks, investors overreacted to !ad
news, driving the stocks# share prices down disproportionately. +fter some time,
investors reali?ed that their pessimism was not entirely Kustified, and these losers
!egan re!ounding as investors came to the conclusion that the stock was
underpriced. *he e%act opposite is true with the winners portfolioD investors
eventually reali?ed that their e%u!erance wasn#t totally Kustified.
+ccording to the availa!ility !ias, people tend to heavily weight their decisions
toward more recent information, making any new opinion !iased toward that
latest news.
*his happens in real life all the time. 3or e%ample, suppose you see a car
accident along a stretch of road that you regularly drive to work. 7hances are,
you#ll !egin driving e%tra cautiously for the ne%t week or so. +lthough the road
might !e no more dangerous than it has ever !een, seeing the accident causes
you to overreact, !ut you#ll !e !ack to your old driving ha!its !y the following
week.
Avoiding Availability Bias
<erha!s the most im!ortant lesson to be learned here is to
retain a sense of !ers!ective. While itKs easy to get
caught u! in the latest news, short7term a!!roaches donKt
usually yield the best investment results. f you do a
thorough job of researching your investments, youKll better
understand the true significance of recent news and will be
able to act accordingly. Demember to focus on the long7term
!icture.
Iey -oncept 6oA>+ 0rospect #heory
*raditionally, it is !elieved the net effect of the gains and losses involved with
each choice are com!ined to present an overall evaluation of whether a choice is
desira!le. +cademics tend to use OutilityO to descri!e enKoyment and contend that
we prefer instances that ma%imi?e our utility.
9owever, research has found that we donKt actually !rocess
information in such a rational way. n %-'-, Aahneman and
+versky !resented an idea called !ros!ect theory, which
contends that !eo!le value gains and losses differently,
and, as such, will base decisions on !erceived gains rather
than !erceived losses. +hus, if a !erson were given two
equal choices, one e#!ressed in terms of !ossible gains and
the other in !ossible losses, !eo!le would choose the
former 7 even when they achieve the same economic end
result.
+ccording to prospect theory, losses have more emotional impact than an
e$uivalent amount of gains. 3or e%ample, in a traditional way of thinking, the
amount of utility gained from receiving >s.,. should !e e$ual to a situation in
which you gained >s.-.. and then lost >s. ,.. In !oth situations, the end result
is a net gain of >s. ,..
5owever, despite the fact that you still end up with a >s. ,. gain in either case,
most people view a single gain of >s. ,. more favora!ly than gaining >s. -..
and then losing >s. ,..
Financial !elevance
*he prospect theory can !e used to e%plain $uite a few illogical financial
!ehaviors. 3or e%ample, there are people who do not wish to put their money in
the !ank to earn interest or who refuse to work overtime !ecause they don#t want
to pay more ta%es. +lthough these people would !enefit financially from the
additional afterta% income, prospect theory suggests that the !enefit (or utility
gained) from the e%tra money is not enough to overcome the feelings of loss
incurred !y paying ta%es.
0rospect theory also e%plains the occurrence of the disposition effect, which is
the tendency for investors to hold on to losing stocks for too long and sell winning
stocks too soon. *he most logical course of action would !e to hold on to winning
stocks in order to further gains and to sell losing stocks in order to prevent
escalating losses.
=hen it comes to selling winning stocks prematurely, consider Kahneman and
*versky#s study in which people were willing to settle for a lower guaranteed gain
of >s.,.. compared to choosing a riskier option that either yields a gain of >s.
-,... or >s. .. *his e%plains why investors reali?e the gains of winning stocks
too soonD in each situation, !oth the su!Kects in the study and investors seek to
cash in on the amount of gains that have already !een guaranteed. *his
represents typical riskaverse !ehavior. (*he flip side of the coin is investors that
hold on to losing stocks for too long. Like the study#s su!Kects, investors are
willing to assume a higher level of risk in order to avoid the negative utility of a
prospective loss. Pnfortunately, many of the losing stocks never recover, and the
losses incurred continued to mount, with often disastrous results.
=2oiding the 6i-po-ition E..ect
t is !ossible to minimize the dis!osition effect by using
a conce!t called hedonic framing to change your mental
a!!roach.
4or e#am!le, in situations where you have a choice of
thinking of something as one large gain or as a number of
smaller gains .such as finding S%&& versus finding a S5&
bill from two !laces/, thinking of the latter can ma#imize
the amount of !ositive utility.
4or situations where you have a choice of thinking of
something as one large loss or as a number of smaller
losses .losing S%&& versus losing S5& twice/, framing the
situation as one large loss would create less negative
utility because the marginal difference between the amount
of !ain from combining the losses would be less than the
total amount of !ain from many smaller losses.
4or situations where you have a choice of thinking as
something as one large gain with a smaller loss or a
situation where you net the two to create a smaller gain
.Ds. %&& and 6Ds. 55, versus PDs.F5/, you would receive
more !ositive utility from the sole smaller gain.
4inally, for situations where you have a choice of thinking
as something as one large loss with a smaller gain or a
situation where you have a smaller loss .7Ds.%&& and
PDs.55, versus 7Ds.F5/, it would be best to try to frame
the situation as se!arate gains and losses.
+rying these methods of framing your thoughts should make
your e#!erience more !ositive and if used !ro!erly, it can
hel! you minimize the dis!ositional effect.
Whether itKs mental accounting, irrelevant anchoring or
just following the herd, chances are weKve all been guilty
of at least some of the biases and irrational behavior
highlighted in behavioral finance. 1ow that we can identify
some of the biases, itKs time to a!!ly that knowledge to
our own investing and if need be take corrective action.
9o!efully, our future financial decisions will be a bit
more rational and lot more lucrative as well. 0nd at the
end still like to remained you that fundament are still
strong and it !urely reflect in the market we should only
be familiar with the !rinci!les of behavior finance to be
aware of the market sentiment and why market is reacting
certain way. Or sometime sim!ly to know why we are reacting
to certain situation.
1 *ook into &ndian Stock Market
-t is enough of practical and bookish knowledge what
is important is how these theory and principals reflect in
real world. o let see how our -ndian stock market reflect.
$nd how it behaves during the rescission and let5s found
out is our stock market really unsafe or people /ust
sitting in grip of fear and irrationally keeping them away
from the stock market. 2or this analytical purpose -5m
taking @eliance -ndustry as an example and let see how it
reacted during rescission. The reason for taking @eliance
is that it is one of the fundamentally strong stock and one
of the most active stock in both )ational stock exchange
and %ombay stock exchange.
Reliance (ndustries .td.
C!arter# ,es!ts <,s. in Miions>
Dec <00= Mar <00 June<00 Se%<00 Dec <00 March<00"
Sales $urno-er ;500.00 ;!"=0.00 9;0500.00 9!11;0.00 ;<5;50.00 <;!<0.00
/ther (nco*e <910.00 <"0.00 <<!0.00 1510.00 !!;0.00 "";0.00
$otal (nco*e ;!1<10.00 ;"!0.00 9;<=!0.00 9!<!90.00 ;;1"0.00 <";550.00
$otal )x%enditure ;009=0.00 ;<!="0.00 ;!"<"0.00 ;"!;"0.00 <=1=<0.00 <<"<50.00
/%erating Pro'it !0=90.00 !;0=0.00 !;9=0.00 !!<50.00 !0<!0.00 !9;00.00
(nterest <5;0.00 <=<0.00 <"90.00 9;=0.00 990.00 9==0.00
4ross Pro'it 5<10.00 !0;50.00 !05;0.00 !10.00 559<0.00 5"5;0.00
De%reciation 1<1;0.00 1;00.00 11510.00 1<!90.00 1;1=0.00 1;<=0.00
$ax 1<!<0.00 =9;0.00 ="<0.00 0<0.00 =<90.00 =100.00
Re%ortedPA$ 0="0.00 ;"1<0.00 91100.00 91<<0.00 ;5010.00 ;59!0.00
)Auity #a%ital 19590.00 19590.00 19590.00 19590.00 15=90.00 15=90.00
)xtra /rdinary (te*s 9=;;0.00 0.00 0.00 0.00 0.00 B;=00.00
Ad&usted Pro'it ;;9!0.00 ;"1<0.00 91100.00 91<<0.00 ;5010.00 ;"1!0.00
Boo> Calue 0.00 0.00 0.00 0.00 0.00 5"".15
)PS 44.4) &).-. &+.&5 &+.34 &&.&' &&.43
Di-idend 0.00 0.00 0.00 0.00 0.00 0.00
Price movement of Reliance Industries Ltd. From November 2007.
t is quite evident in relation to ,<S the !rice movement
is co 6 related. Deliance !rice reach it !ick some where in
)anuary, and earning for !revious quarter .@ecember, $&&'/
is 55.52. *ut generally market reflects the antici!ation of
future growth. So fundamentally !rice of Deliance industry
should fall as result for ne#t quarter is coming down and
that is e#actly what ha!!ened, market reacted to it and
!rice started to fall.
n a same way we can com!are !ercentage change of ,<S in
com!ression to !revious year.
"arch,
$&&(
)une ,
$&&(
Se!tember,
$&&(
@ecember
$&&(
"arch, $&-
3%.F2 $&.'2 $.-( 75-.-' 7%2.$(
So if we look at the !ercentage change of ,<S in
com!arison to same quarter of !revious year we can see that
the growth is coming down and so is the !rice and it is at
its low on Se!tember to @ecember quarter and this when
!rice reached it:s low, 0nd in the very ne#t quarter though
it is not as good as !ervious quarter of "arch $&&( but
earning is im!roving and so is !rice. So it:s quite evident
that !rice is co 6 related to earnings. *ut at the same
time it is interesting to note that there are !eo!le who
bought it on at its !eak in )anuary where fundamentally
they should have avoided and as a result they !aid the
!rice. 0nd we can see that it over a year and !rice have
not touched that mark, so if !ure e#am!le of how one can
loss if we don:t follow fundament !rinci!als. 0nd our
ndian stock market is still in correlation to the
fundament.
1ow let us take another scenario of what ha!!ened when
U<0 govt, come to !ower for the second time and we all know
how market reacted to that, now if we talk about !rice of
Deliance ndustries =td and how it behave over the week
stating from %5
th
may when !eo!le started to !redict who is
coming to !ower, the very ne#t day result is out and U<0
government come to !ower and this time without any su!!ort
form left they can remain in the !ower for ne#t 5 years. f
we talk about fundament this !ositive news and !eo!le
should start to buy and we all know what ha!!ened when
trading o!en ne#t day, 0nd how it reacted over the ne#t
week.
1ow if we analysis what ha!!ened the !rice went u! the
!revious day when few !eo!le !redicated that U<0 government
is coming to !ower and !rice started to climb u! say
someone managed to buy at the highest intra day !rice that
is rs. %-5- is a good buy as we can see through out the
ne#t week !rice remain well over that mark, but what
ha!!ened ne#t day obviously it is !ositive news for the
market and demand should go u! but !ositive emotion !ush it
beyond it:s real value because of market sentiment based on
eu!horia and not on fundament !rinci!als, and those who buy
following their emotion or eu!horia have !aid the !rice as
over the ne#t few day !rice come down till it reached it:s
intrinsic value as !eo!le are not ready to !urchase it in
such a abnormal value.
t is quite evident in relation to ,<S the !rice movement
is co 6 related. Deliance !rice reach it !ick some where in
)anuary, and earning for !revious quarter .@ecember, $&&'/
is 55.52. *ut generally market reflects the antici!ation of
future growth. So fundamentally !rice of Deliance industry
should fall as result for ne#t quarter is coming down and
that is e#actly what ha!!ened, market reacted to it and
!rice started to fall.
n a same way we can com!are !ercentage change of ,<S in
com!ression to !revious year.
"arch,
$&&(
)une ,
$&&(
Se!tember,
$&&(
@ecember
$&&(
"arch, $&-
3%.F2 $&.'2 $.-( 75-.-' 7%2.$(
So if we look at the !ercentage change of ,<S in
com!arison to same quarter of !revious year we can see that
the growth is coming down and so is the !rice and it is at
its low on Se!tember to @ecember quarter and this when
!rice reached it:s low, 0nd in the very ne#t quarter though
it is not as good as !ervious quarter of "arch $&&( but
earning is im!roving and so is !rice. So it:s quite evident
that !rice is co 6 related to earnings. *ut at the same
time it is interesting to note that there are !eo!le who
bought it on at its !eak in )anuary where fundamentally
they should have avoided and as a result they !aid the
!rice. 0nd we can see that it over a year and !rice have
not touched that mark, so if !ure e#am!le of how one can
loss if we don:t follow fundament !rinci!als. 0nd our
ndian stock market is still in correlation to the
fundament.
@o our ndian stock markets reflect economic fundamentalsN
=ooking at the above two scenario believe so. =ong7term
returns on ca!ital and growth have been remarkably
consistent for the !ast years, in s!ite of some recessions
and !eriods of very strong economic growth. +he median
return on equity for all ndian com!anies has been a very
stable around $& 8,

1ow if we take the second scenario when U<0 government
comes to !ower !rice of the stock went u! beyond its
intrinsic value. 0lso in the first scenario believe
looking at the !erformance of the com!anies such high !rice
is not justified and rightly the market bottom out. So it
is seen that in ndian market also such a deviation
occurred but it is seen that the stock market returned to
its intrinsic7valuation level within a years or. +hus,
although valuations have been wrong from time to timeTeven
for the stock market as a wholeTeventually they have fallen
back in line with economic fundamentals, and believe
market is still safe if one use !ro!er knowledge to invest.
So it:s seen that when such deviations occurred, the
stock market returned to its intrinsic7valuation level
within about three years. +hus, although valuations have
been wrong from time to timeTeven for the stock market as a
wholeTeventually they have fallen back in line with
economic fundamentals, and !eo!le who lose money in the
market did so either they went too greedy by holding on to
there stock for that long or they just lack knowledge and
doesn:t even understand the basic things like stock market
cycle, economic cycle.
Understanding -ycles ( #he Iey to Market #iming
0lthough there are !lenty of lessons to be learned from
!ast bubbles, market !artici!ants still get sucked in each
time a new one comes around. 0 bubble is only one !art of
an im!ortant !hase in markets, so if we want to avoid being
caught off guard, it is essential to know what the
different !hases are. 0n understanding of how markets work
and a good gras! of technical analysis can hel! us
recognize market cycles.
#he .our 0hases
Lycles are !revalent in all as!ects of life. +hey range
from the very short term, like the life cycle of a )une
bug, which lives only a few days, to the life cycle of a
!lanet, which takes billions of years.
1o matter what market we are referring to, all have similar
characteristics and go through the same !hases. 0ll markets
are cyclical. +hey go u!, !eak, go down and then bottom.
When one cycle is finished, the ne#t begins.
+he !roblem is that most investors and traders either fail
to recognize that markets are cyclical or forget to e#!ect
the end of the current market !hase. 0nother significant
challenge is that, even when we acce!t the e#istence of
cycles, it is nearly im!ossible to !ick the to! or bottom
of one. *ut an understanding of cycles is essential if you
want to ma#imize investment or trading returns. 9ere are
the four major com!onents of a market cycle and how you can
recognize them>
A 1ccumulation 0hase
+his !hase occurs after the market has bottomed and the
innovators .cor!orate insiders and a few value investors/
and early ado!ters .smart money managers and e#!erienced
traders/ begin to buy, figuring that the worst is over.
Ualuations are very attractive. ;eneral market sentiment is
still bearish. 0rticles in the media !reach doom and gloom,
and those who were long through the worst of the bear
market have recently ca!itulated, that is, given u! and
sold the rest of their holdings in disgust. *ut in the
accumulation !hase, !rices have flattened and for every
seller throwing in the towel, someone is there to !ick it
u! at a healthy discount. Overall market sentiment begins
to switch from negative to neutral.
CA Mark(Up 0hase
0t this stage, the market has been stable for a while and
is beginning to move higher. +he early majority are getting
on the bandwagon. +his grou! includes technicians who,
seeing that the market is !utting in higher lows and higher
highs, recognize that market direction and sentiment have
changed. "edia stories begin to discuss the !ossibility
that the worst is over, but unem!loyment continues to rise,
as do re!orts of layoffs in many sectors. 0s this !hase
matures, more investors jum! on the bandwagon as fear of
being in the market is su!!lanted by greed and the fear of
being left out.
0s this !hase begins to come to an end, the late majority
jum! in and market volumes begin to increase substantially.
0t this !oint, the greater fool theory !revails. Ualuations
climb well beyond historic norms, and logic and reason take
a back seat to greed. While the late majorities are getting
in, the smart money and insiders are unloading. *ut as
!rices begin to level off, or as the rise slows down, those
laggards who have been sitting on the sidelines see this as
a buying o!!ortunity and jum! in en masse. <rices make one
last !arabolic move, known in technical analysis as a
selling clima#, when the largest gains in the shortest
!eriods often occur. *ut the cycle is nearing the to! of
the bubble. Sentiment moves from neutral to bullish to
downright eu!horic during this !hase.
FA Distri'ution 0hase
n the third !hase of the market cycle, sellers begin to
dominate. +his !art of the cycle is identified by a !eriod
in which the bullish sentiment of the !revious !hase turns
into a mi#ed sentiment. <rices can often stay locked in a
trading range that can last a few weeks or even months.
When this !hase is over, the market reverses direction.
Llassic !atterns like double and tri!le to!s, as well as
head and shoulders to! !atterns, are e#am!les of movements
that occur during the distribution !hase.
+he distribution !hase is a very emotional time for the
markets, as investors are gri!!ed by !eriods of com!lete
fear, inters!ersed with ho!e and even greed as the market
may at times a!!ear to be taking off again. Ualuations are
e#treme in many issues and value investors have long been
sitting on the sidelines. Sentiment slowly but surely
begins to change, but this transition can ha!!en quickly if
accelerated by a strongly negative geo!olitical event or
e#tremely bad economic news. +hose who are unable to sell
for a !rofit settle for a breakeven or a small loss.
+he 4our <hases of an nvestment Lycle
"A Mark(Down 0hase
+he fourth and final !hase in the cycle is the most !ainful
for those who still hold !ositions. "any hang on because
their investment has fallen below what they !aid for it,
behaving like the !irate who falls overboard clutching a
bar of gold, refusing to let go in the vain ho!e of being
rescued. t is only when the market has !lunged 5&8 or more
that the laggards, many of whom bought during the
distribution or early mark7down !hase, give u! or
ca!itulate. Unfortunately, this is a buy signal for early
innovators and a sign that a bottom is imminent. *ut alas,
it is new investors who will buy the de!reciated investment
during the ne#t accumulation !hase and enjoy the ne#t mark7
u!.
#iming
0 cycle can last anywhere from a few weeks to a number of
years, de!ending on the market in question and the time
horizon we are looking at. 0 day trader using five7minute
bars may see four or more com!lete cycles !er day while,
for a real estate investor, a cycle may last %(7$& years.
0lthough not always obvious, cycles e#ist in all markets.
4or the smart money, the accumulation !hase is the time to
buy since values have sto!!ed falling and everyone else is
still bearish. +hese ty!es of investors are also called
contrarians since they are going against the common market
sentiment at the time. +hese same folks sell as markets
enter the final stage of mark7u!, which is known as the
!arabolic or buying clima#. +his is when values are
climbing fastest and sentiment is most bullish, which means
the market is getting ready to reverse.
Smart investors who recognize the different !arts of a
market cycle are more able to take advantage of them to
!rofit. +hey are also less likely to get fooled into buying
at the worst !ossible time.
Importance of Short selling
n order to be active investor and get best of share
market one needed wait for stock cycle to turn good. Stock
market is a !lace where u! and down is universal !henomena
and everyday it give o!!ortunity make investment and earn
returns. *ut it is seen that during recession people tend to shy away from
market and few investor knew that they could see thier portfolio increase in value
during a !ear market6 =ell it is possi!le investors make money on a decline in
an individual stock or during a !ear market, thanks to an investing techni$ue
called short selling. +s a share firm one can"t change the cycle of the economy
!ut they surely can suggest there client to go along with the flow of the cycle and
encourage there client to participate in the !ear market through short selling to
increase there returns.
Short selling is not com!le#, but itKs a conce!t that many
investors have trouble understanding. n general, !eo!le
think of investing as buying an asset, holding it while it
a!!reciates in value, and then eventually selling to make a
!rofit. Shorting is the o!!osite> an investor makes money
only when a shorted security falls in value.
Short selling involves many uni$ue risks and pitfalls to !e wary of. *he
mechanics of a short sale are relatively complicated compared to a normal
transaction. +s always, the investor faces high risks for potentially high returns.
It#s essential that we understand how the whole process works !efore we get
involved.
%hat &s Short Selling3
4irst, letKs describe what short selling means when we
!urchase shares of stock. n !urchasing stocks, we buy a
!iece of ownershi! in the com!any. +he buying and selling
of stocks can occur with a stock broker or directly from
the com!any. *rokers are most commonly used.
When using a broker, we will need to set u! an account. +he
account thatKs set u! is either a cash account or a margin
account. 0 cash account requires that we !ay for our stock
when we make the !urchase, but with a margin account the
broker lends we a !ortion of the funds at the time of
!urchase and the security acts as collateral.
=hen an investor goes long on an investment, it means that he or she has
!ought a stock !elieving its price will rise in the future. 7onversely, when an
investor goes short, he or she is anticipating a decrease in share price.
Short selling is the selling of a stock that the seller doesn#t own. 8ore specifically,
a short sale is the sale of a security that isn#t owned !y the seller, !ut that is
promised to !e delivered. *hat may sound confusing, !ut it#s actually a simple
concept.
=hen we short sell a stock, our !roker will lend it to us. *he stock will come from
the !rokerage#s own inventory, from another one of the firm#s customers, or from
another !rokerage firm. *he shares are sold and the proceeds are credited to our
account. Sooner or later, we must OcloseO the short !y !uying !ack the same
num!er of shares (called covering) and returning them to our !roker. If the price
drops, we can !uy !ack the stock at the lesser price and make a profit on the
difference. If the price of the stock rises, we have to !uy it !ack at the higher
price, and we lose money.
8ost of the time, we can hold a short for as long as we want, although interest is
charged on margin accounts, so keeping a short sale open for a long time will
cost more 5owever, we can !e forced to cover if the lender wants the stock we
!orrowed !ack. &rokerages can#t sell what they don#t have, so we will either have
to come up with new shares to !orrow, or we#ll have to cover. *his is known as
!eing called away. It doesn#t happen often, !ut is possi!le if many investors are
short selling a particular security.
&ecause we don#t own the stock we#re short selling (we !orrowed and then sold
it), we must pay the lender of the stock any dividends or rights declared during
the course of the loan. If the stock splits during the course of our short, we#ll owe
twice the num!er of shares at half the price.
#he #ransaction
Su!!ose that, after hours of !ainstaking research and
analysis, we decide that com!any OIR is dead in the water.
+he stock is currently trading at Ds.25, but we !redict it
will trade much lower in the coming months. n order to
ca!italize on the decline, we decide to short sell shares
of OIR stock. =etKs take a look at how this transaction
would unfold.
Step D Set up a margin account. =e should >emem!er, this account allows us
to !orrow money from the !rokerage firm using our investment as collateral.
Step CD 0lace our order !y calling up the !roker or entering the trade online.
8ost online !rokerages will have a check !o% that says Oshort saleO and O!uy to
cover.O In this case, we decide to put in our order to short -.. shares.
Step FD *he !roker, depending on availa!ility, !orrows the shares. +ccording to
the S'7, the shares the firm !orrows can come fromD
the brokerage firmKs own inventory
the margin account of one of the firmKs clients
another brokerage firm
Step "D *he !roker sells the shares in the open market. *he profits of the sale
are then put into our margin account.
One of two things can ha!!en in the coming months>
The 5toc< Price 5in<- (stock goes to >s. ;.)
&orrowed -.. shares of N2T at >s. <, R-.9,0""
&ought &ack -.. shares of N2T at >s.;. %R-.F,"""
1ur 0rofit R-.&,0""
The 5toc< Price Ri-e- (stock goes to >s.S.)
&orrowed -.. shares of N2T at >s.<, R-.9,0""
&ought &ack -.. shares of N2T at >s.S. %R-.>,"""
1ur loss R-.&,0""
Llearly, short selling can be !rofitable. *ut then, thereKs
no guarantee that the !rice of a stock will go the way we
e#!ect it to .just as with buying long/.
Shorter sellers use an endless num!er of metrics and ratios to find short a!le
candidates. Some use a similar stock picking methodology to the longs, !ut Kust
short the stocks that come out worst. 1thers look for insider trading, changes in
accounting policy, or !u!!les waiting to pop.
9thics and the ,ole of Short Selling
tKs safe to say that short sellers arenKt the most !o!ular
!eo!le.. Some critics even believe that short sales are a
major cause of market downturns,. =awmakers wanted to look
at the effects short sellers had on small com!anies and
e#amined the need for regulation after allegations of
wides!read mani!ulation by short sellers of over7the7
counter stocks. *ut des!ite its critics, itKs tough to deny
that short selling makes an im!ortant contribution to the
market by>
0dding liquidity to share transactions. +he additional
buying and selling reduces the difference between the
!rice at which shares can be bought and sold.
@riving down over!riced securities by loouring the
cost to e#ecute a trade
ncreasing the overall efficiency of the markets by
quickening !rice adjustments
While the conflicts of interest from investment banking
kee! some analysts from giving com!letely unbiased
research, work from short sellers is often regarded as
being some of the most detailed and highest quality
research in the market. tKs been said that short sellers
actually !revent crashes because they !rovide a voice of
reason during raging bull markets.
Short selling is another techni$ue we can add to our trading tool!o%. *hat is, if it
fits with our risk tolerance and investing style. Short selling provides a si?a!le
opportunity with a hefty dose of risk so it is recommended only if one can !ear
that risk along with high rewards.

,ecommendation
$he 'ollo7ing are the reco**endations based on the analysis and 'indings 'ro* the
research study conducted.
4irst of all would suggest before making any
investment decision one should analysis the market and
the client should also be asked to do so. feel
fundament analysis or technical analysis are still
would suggest that investor should be aware of
emotional sentiment and make themselves familiar with
behavior finance to check their own emotion and also
of the crowd.
would highly recommended that ShareAhan start some
educational and awareness !rogram to s!read an
awareness about investing in stock market, what feel
is that investing in share market requires !ro!er
knowledge and guidance and this something lacking from
the share firms. 0n educational or awareness !rogram
will not only teach a investor how to invest !ro!erly
but it can be benefited to the firm in following way
One of the basic reasons for not investing share
market is !eo!le give over em!hasis to risk factor
but there is a scientific way to managed that risk
so that investor get there desired returns based on
there risk taking ca!acity and most common !eo!le
are not aware of it. So it is im!ortant for
marketers to make investor aware of the investment
!rocess and how risk can be controlled so that
!eo!le feel confident about investing in shares.
+here are !eo!le like Warren *uffet who over the
year creating !ortfolio for !eo!le that gives return
that even out!erform the market, so it humanly
!ossible to out!erform the market if one has the
!ro!er knowledge.
t is seen that !eo!le who have lost money in the
share market not because fundamental are wrong it is
because they lack basic knowledge, they make
emotional based decision or they become too greedy
by holding on to the stock for more then they should
have in antici!ation of more !rofit. 1ow as a
marketer one can do nothing about that, but they
certainly can and should !revent these rotten
mangoes from s!oiling the whole basket. t is
observed that !eo!le have a negative attitude toward
investing in share market because they are afraid of
losing money as they have seen other losing money,
and this fear can be removed only if !eo!le become
more aware of the market through education and
awareness !rogram.
With recent downfall that feeling of unsafely is
stronger then ever. 0gain as a marketer or a broker
one can:t make the economy shiny but they can convey
a massage that it is a !art of the economy and that
doesn:t mean that they have to loss money every time
a recession hit the market and there are e#am!les of
!eo!le making good earning even in bears market.
0gain this !ossible through education and awareness
!rogram.
One of the biggest advantage of this educational or
awareness !rogram would be that it will create a
brand image for ShareAhan which will be diffidently
going to hel! in long run.
t is seen that during bear market !rofit of most of
the firm come down, as volume of trading come down
when !eo!le tend to shy away from the market. don:t
know if there is any rules or !olicy regarding short
selling, but if there are not !eo!le should be
encouraged to go for short selling as it won:t harm
there !ortfolio that much because of economic slow
down or due to bear market. 0gain investor must be
aware of the s!ecific risk involved in short selling.

0nother im!ortant suggestion would be to ste! u! the
!romotional and advertising activity as it is found
that most of the res!ondent never heard of ShareAhan
before. 0nd !romotional actively can be coordinated
with educational or awareness !rogram.
;enerally it is seen that telemarketing is used to
generate lead to bring in new client to the firm which
is a age old method that firm al over the world using
for years. *ut with changing time think it is time
to look for alternative tools, and what feel is that
!otential customer should be invited to seminar .which
should be a !art of education and awareness !rogram/
think this will attract a customer more and he will be
motivated to make investment when he will come to know
about share market, rather then sim!ly asking them
whether the are interested in investing in shares.
"y final suggestion to investor and share firm is that
if you are losing slee! due to rescission and you
shouldn:t because it is just a cycle in the economy
and it won:t going to last for ever, but surely it
will hit us again but the e#!erience one again form
this time certainly going to hel! for the ne#t one. So
my suggestion is to learn form this e#!erience.
-onclusion
0fter going trough facts, finding and analysis what
believe still stock market is the best investment o!tions
for investors who are in search of high returns and those
who want to meet their financial goals. Still it seems
investor from our region still !referred insurance as
favorable o!tion as it involves low risk and ta# benefits.
*ut that trend is now shifting toward "utual 4und as it
gives more returns in com!ression to insurance and also
gives them ta# benefitsH. t seems investment in share is
still and risky o!tion for investors as they feel unsafe.
When analysis ndian stock market found that it is
still in co relation to fundamental !rinci!les. Ies there
is a emotional as!ect that influence the market so as
investor one should be aware of this emotional as!ect and
make themselves familiar with behavior science. *ut they
can have full faith in fundamental !rinci!als to make there
investment decisions, and would say investment in shares
is safe o!tion if one is rational and know how market
works. Ies !eo!le have lost money in the share market but
mostly it is not because fundamental are wrong it is
because they lack basic knowledge, they make emotional
based decision or !urely they become too greedy buy holding
on to the stock for more then they should have. 1ow as a
marketer one can do anything about that but they certainly
can and should !revent these rotten mangoes to s!oil the
whole basket as that is what observed in the res!ondent.
Ies stock market is risky but not as unsafe as they !retend
to and most of this fear is in mind and as result !eo!le
forget that there is high reward attached to that risk. 0nd
with some much tools and method that risk can be managed
according to individual and investing in share can be a
safer then it is assumed by the !eo!le. 4or that it is
advisable for share firms to take initiative to s!eared
awareness and education cam!aign to encourage !eo!le to
invest in share. When it come to marketing equity based
!roduct in our region it is like selling shoes in an island
where !eo!le don:t wear shoes and there is two way to look
at this situation, and if we see it !ositively it reflect
that there is a huge !otential for market develo!ment and
that is the reason share firm one after another is o!ening
there outlet here. 1ow it is u! to the res!ective firms who
can jum! on to that o!!ortunities and teach them to wear
shoes.
/A,T $$$
A00en%ix
C!estionnaire for Mar2et "!rve#
Res%ected res%ondents?
Myself a student of MBA
t!
semester of "!ird #ye $olle%e of "ec!nolo%y and
Mana%ement affiliated by &i''im Mani(al )niversity. As (er our course curriculum* I !ave been
assi%ned a (ro+ect in t!e conte,t of -!ic! I am conductin% a survey. &o* I -ould li'e to re.uest
you to 'indly s(are a fe- minutes to ans-er a fe- .uestions.. /our !el( -ill %o a lon% -ay in
assistin% me to com(lete my (ro+ect.
Please make tick () mark against the appropriate option.
1. 6ou are currently in-esting or thin>ing about *a>ing an in-est*ent in
Ban> 0D Mutual 0unds
Post /''ice De%osits 4old
NS# D Bonds Shares
.i'e (nsurance #o**odities
<. Are you a7are that by in-esting in shares you can ex%ect to earn ;0 E 90 F returns
annuallyG

6)S N/
;. Do you >no7 that current *ar>et situation is %ro-iding a good o%%ortunities 'or
*a>ing 'resh in-est*ent in share *ar>etG
6)S N/
9. Are you a7are o' the 'act that by in-esting in shares itHs %ossible to 7ithdra7 your
*oney 7hene-er you 7ant toG
6)S N/
5. Do you >no7 that you can trade in share *ar>et 'ro* the co*'ort o' your ho*e or
o''iceG
6)S N/
!. Are you a7are o' the 'act that there are in-est*ent sche*es other then insurance that
o''er tax bene'its uDs 0c 7herein in-est*ent u% to 1 la>h can be clai*ed as deductionG
6)S N/
=. 1ould you li>e to >no7 *ore about shares and share *ar>etG
6)S N/
. 1ould you li>e to in-est in sharesG
6)S N/ (H.. $:(N2 AB/,$ ($
". 1hat are the 'actors 'or 7hich you donHt 7ant to in-est in sharesG
(gnorance .ac> o' 2no7ledge .ac> o' ti*e
,nsa'e .ac> o' in'rastructure
10. 1hat are the 'actors 'or 7hich you 7ant to in-est in share.
1ealth #reation :igh returns
Regular (nco*e .ac> o' >no7ledge
.iAuidity
$o *eet 'inancial goals
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10. :a-e you e-er heard o' Share >han .td Be'oreG
6)S N/
11. :a-e you e-er heard about the 4u7ahati Branch o' Share2han
6es No
1<. 1ould you %re'er to be contacted by Shar2han 7hich o''er custo*i8ed solution 'or
your o-erall 'inancial needsG
6)S N/
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&ecurity Analysis and Portfolio Mana%ement 0&M) "e,t Boo'1
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Fundament analysis 0&!ar2!an Manual boo'1
,eferences
$nternet
111.1i>i%edia.co*
111.(n-esto%edia.co*
111. 0inancial ti*es.co*
111.Share>han.co*