In the Indian share markets, you can do your own trading Before starting trading, the investor has

nvestor has to deposit margin

either online or offline. money with the broker. The broker then gives exposure to
that margin money i.e. he allows you to trade up to an
Off line trading :
amount which may be two to three times more than yyour
For this, you can contact a share broker and place your margin money. The brokerage is charged on the basis of
order for investment in stocks/securities in writing, over utilization of margin money by investor and the rate of
telephone or in person. The share broker takes care of your brokerage is fixed as per previously agreed terms.
investment and on execution of your order for trading in
The broker makes payment of the amount of sale of shares
stocks, the stocks are delivered to you or if you are dealing
by check. The shares purchased are deposited in the
in cash, a check is given to you by the broker. All your
investor’s demat account in T+2 days (i.e. transaction +
trading is done by the broker on your behalf.
two days). The payment of amount of purchased shares by
Online trading: check by the broker is called pay-in. The shares sold are
On the internet you can yourself do your trading transaction paid by check which is called pay-out.
on the terminal The Share Market:
The following formalities have to be completed to enable The share market includes :
you to do online trading on the internet:
(i) National Stock Exchange (NSE)
Demat Account:
(ii) Bombay Stock Exchange (BSE)
Demat means de-materialization. In this all transaction is
(iii) Main Broker
done in electronic form. After the transaction is over, your
shares are deposited in electronic form and are fully (iv) Sub-Broker
secured. For opening a demat account, the following (v) Trader
requirements are to be met :
In India, there is screen-based system in which the trading
(i) PAN CARD photo copy terminals are connected to the stock exchanges through
(ii) Address Proof integrated system.
(iii) Photo (passport size) When we place our order on the exchange for trading in
stocks, its automatic system searches for the opposite entry
(iv) Bank account statement for past three months.
for sale/purchase and if it matches an entry, our order is
(v) One signed check favoring the broker. executed otherwise it is kept pending which we can view
(vi) One blank cancelled check. on the screen online.

1
Company :
Company is a kind of business organization. Some people
who are called shareholders, set up a company to start a
business. A board of directors is constituted to run the
affairs of the company and the board members are
generally selected by the shareholders.
The initial amount invested to start a business is called
capital. The initial capital is collected from the shareholders
because they are equal holders in the company. The amount
invested by shareholders is called equity capital. The
company also takes finance from the general public or bank
or a financial institution. The company may take this
finance in the form of fixed deposits or debentures sold.
Debenture is a kind of loan and the holder of debenture is
called debenture holder. The company is debtor to
debenture holders but the shareholder is owner of the
company.
Rights of Shareholders :
Every company has its own legal entity i.e. it is legally
constituted organization which is different from the share-
holders in the sense that the company can enter into
business deals, arrange for taking finance from the market,
without informing the shareholders. The directors or
employees of a company are not responsible to
shareholders for their day-to-day work. The participation of
the shareholders is limited to the extent of their investment
through stocks in the company’s capital. When a company
files bankruptcy, the shareholders responsibility is limited
to the amount of their investment.
Equity Capital :
2
The equity capital of a company is formed from the issue of
equity shares. When the stock is listed on the stock
exchange, the company is not affected or concerned with
the nature in which its stock is traded in the market.
Share, stock, equity, security have the same meaning i.e.
shares of a company. The participation in a company’s
ownership is shares or stocks.
Reasons for Issue of Stocks :
Every company tries to earn profits and maintain growth of
its business from year to year. For maintaining its profit
levels and growth in future, a company needs increased
finance which it has to raise from the financial market and
general public which it does in the form of public issue.
Process of Issue of Stock :
The company issues shares and offers the same to investors
including the general public. The necessary forms and
documents for the public issue are obtained from print
media and online on the internet. The investor can fill in the
I.P.O. form online and participate in the Issue.
Initial Public Offer :
When a company offers shareholding to shareholders for
the first time, it gives initial public offer.
We buy stocks of a company for two reasons – one is that
the investor hopes that price of stocks will rise after he has
purchased them and second the investors share in the
profits of the company in the form of dividend.
Types of Market :
The stock markets are of two kinds :
(i) Primary Market
 (ii) Secondary Market This the sensitive indicator of the BSE. It continuously
shows downward or upward movements in prices of most
Primary Market :
of the shares traded on the Bombay Stock Exchange. The
The issue of Initial Public Offer, issue of shares by a BSE Sensex does not show the downward or upward
company, subscription by investing public and final movements of all the listed shares, but it shows movement
allotment of shares to shareholders by the company is done of prices of shares of large cap companies of 14 sectors
in a market which is called the Primary Market. The issue comprising 30 companies.
of rights shares, bonus shares is also done in this market.
Nifty (Also called Nifty-50) :
Secondary Market :
This is the index of the National Stock Exchange which
After receiving the allotted shares issued through IPO, shows the downward or upward movements of prices of
some shareholders want to sell their holdings at increased stocks 50 selected large cap companies out of 22 sectors.
rates which some investors want to purchase the same in The capital market of these companies is above 5000 crore
the stock market. The sale and purchase transactions are ruppes.
done in the secondary market.
List of BSE companies and their Sensex of Weightage :
BSE (Bombay Stock Exchange) and NSE (National Stock
1) Reliance Industries : 51.2%
Exchange) are the two secondary markets in India.
2) Infosys : 8.05%
NSE (National Stock Exchange) :
3) Larsen & Toubro : 7.90%
This is sponsored by Government of India. It was
established in 1992 and is the biggest exchange in of the 4) ICICI : 7.77%
country. 5) HDIL : 5.63%
[For analysis of corporate balance sheets, visit 6) HDFC Bank : 5.05%
www.bseindia.com]
7) Bharti Airtel : 4.97%
BSE (Bombay Stock Exchange) :
8) ITC : 4.73%
It is the biggest and oldest stock exchange of Asia.
9) SBI : 4.67%
Index :
10) ONGC : 4.23%
It is an index which shows the maximum growth or decline
in stocks and securities in the share markets. The most 11) BHEL : 3.55%
notable indices in India are the BSE and the Sensex. 12) HUL : 2.69%
Sensex :

3
13) NTPC : 2.29% Rights Shares :
14) Reliance Comm. : 2.05% When a companies needs more capital for investment
towards expansion of its business, it offers its shares to
15) TATA Steel : 1.88%
investors in the form of rights shares. The existing
16) TCS : 1.75% shareholders have the prior right over purchase of these
17) Sterlite : 1.70% shares. The shareholder has the right to purchase shares in
the ratio of his/her holding as per terms offered by the
18) Reliance : 1.72% company. The companies keep the rate of their rights issues
19) TATA Power : 1.66% below the ruling market price to make them attractive for
shareholders to invest in them. The equity capital of the
20) Grasim : 1.48% companies is raised after issue, subscription and allotment
21) JP Associates : 1.44% of the rights shares.
22) Maruti Suzuki : 1.43% Bonus Shares :
23) Mahindra&Mahindra : 1.36% The companies generally keep their net profit year after
year in a reserve account instead of distributing the same
24) DLF : 1.33%
entirely to shareholders as dividend. Almost all profit-
25) Hero Honda : 1.28% earning companies raise their reserve fund by this method
26) Wipro : 1.03% and utilize this reserve at an appropriate time for expand
their business activities. When a company feels that it
27) Hindalco : 0.90% needs more capital to enhance its present business, it can
28) Sun Pharma : 0.84% increase its capital by issuing bonus shares. This is done by
the company by withdrawing funds from the reserve
29) ACC : 0.76% account and issuing bonus shares. A company having a
30) TATA Motors : 0.l72% larger reserve fund is supposed to be a well-run company.
Share Buy Back –
Public Issue : Sometimes, a few companies offer their own shares in the
market for the public to buy the shares. This is called ‘Buy-
When a companies offers its shares in the primary market,
Back Offer’. As a result of buy-back, when the company’s
it is called public issue. This may be in the form of Initial
shareholders buy the shares offered by the company, the
Public Offer, Rights Issues etc.
company’s equity capital is reduced because the shares
purchased by it from shareholders are suspended or

4
invalidated in terms of the provisions of the Indian company’s shares and naturally the price of the shares
Companies Act and these shares so bought back can be re- increases in the market.
issued to the investing public. Resultantly, the company’s Shares Index :
shares in the market as well as its equity capital is reduced
to the extent of the ‘buy-back’. Interestingly, however, due The indicator showing the downward or upward
to buy-back the company ‘s E.P.S. (Earning Per Share) or movements of shares and securities in the market is called
return on share is increased because now the company has the share index. Note –
to distribute its net profit on reduced number of shares. The (i) the index of NSe is Nifty which comprises
company’s shares thus get a better PER in the market and 50 companies that shows the movement in
the share price increases more than the buy-back price their shares in the market.
substantially. Generally, buy-back is indication that the
company’s shares were not getting their due price in the (ii) BSE is represented by the index Sensex
Indian stock markets previously. It is advisable that the which comprises the movement of shares of
investors (shareholders) should not sell their stock when 30 companies.
there is a buy-back offer from the company. The (iii) CNX100 is the index of companies having
confidence of the management in its own shares bouncing market capital of 1000 crores and over and
back after a buy-back creates a climate for the shares to go the movement of prices of their shares. This
up in the market. index also includes the 50 companies of
It is profitable for the new investors (shareholders) to buy Nifty.
more shares when there is a buy-back offer. Nifty (Nifty-Fifty) :
Stock Split – This index the downward and upward movements
Stock split means division of shares of a company. This of stocks of the following companies :
division is totally different from Bonus Shares Issue. The 1. ONGC : Oil Sector
equity capital of a company is enhanced after Bonus Shares
Issue but in stock split the existing shares of a company are 2. Suzlon : Energy
merely divided into smaller face-value stocks. This division 3. Bharati Airtel : Telecom
does not have any effect on the company’s equity capital.
4. Cairns India : Oil
The investors (shareholders) stand to gain in stock split
because the face value of shares is reduced as compared to 5. Siemens : Electronics
its previous face value. The reduced face value in turn 6. NALCO : Metal
results in more investors showing interest in purchasing the
7. PNB : Banking

5
8. Grasim : Diversified 31. Maaruti Su: Auto
9. ABB : Engineering 32. Her Honda: Auto
10. HCL : Info. Tech. 33. TATA St : Metal
11. Powergrid : Power 34. TATA com: Telecom]
12. SBI : Banking 35. SAIL : Metal
13. GAIL : Gas&Oil 36. Cipla : Pharma
14. Wipro : IT 37. RCOM :` Telecom
15. RPL : Oil 38. Idea : Telecom
16. TCS : IT 39. Rel Pow : Power
17. IFDC : Infra.diversi. 40. ITC : FMCG Div
18. RIL : Diversified 41. Rel Cap : Finance
19. Infosys : IT 42. TATA Pow: Power
20. L&T : Diversified 43. Sterlite : Metal
21. Ambuja : Cement 44. Unitech : Infrastructure
22. ACC : Cement 45. BPCL : Oil & Gas
23. TATA Mot : Auto 46. DLF : Infrastructure
24. SunPharma : Pharma 47. Ranbaxy : Pharma
25. Axis Bank : Banking CNX Stocks: .
26. Hindalco : Metal 1. Tech Mahind : Tech
27. ICICI : Banking 2. Mphasis : IT
28. HUL : FMCG Diver. 3. Wockpharma Pharma
29. BHEL : Heavy Engineering 4. Patni Comp : IT
30. RIIL : Infrastructure 5. LIC Housing : Infrastructure

6
6. TIML-Tele TATA: Tamailnadu Telecom 29. M&M : Auto
7. Bio-com : Pharma 30. Moser Baer : Pharma
8. Raymond : Textile 31. Suzlon : Energy
9. RNRL Natural Resources 32. Sterlite : Metal
10. IDBI : Mort. financing 33. Idea : Info tech
11. IFCI : Infrastructure 34. ABB : Engg
12. Vijaya Bank : Banking 35. A…
13. Mundra Forge : Engineering 36. Apollo tyres : Auto
14. Chennai Petro : Oil 37. BEL : Engg.
15. Jindal Steel : Metal 38. Bharat Forge : Engg.
16. Birla Nugo : Diversitied 39. BPCL : Oil
17. HCL Tech : Tech 40. H…
18. Nirma : FMCG 41. TATA Comm : Telecom
19. Infosys : IT] 42. Rel Cap : Finance
20. JSW St : Metal 43. IDFC : Infra
21. Cipla : Pharma 44. Cedillas : Pharma
22. HUL : FMCG 45. L&T : Auto-diversified
23. Hindalco : Metal 46. Corp Bank : Banking
24. TATA Pow : Power 47. ITC : FMCG
25. Aban Offshore: Infra 48. Unitech : Infra
26. JP Asso : Infra 49. HDFC : Banking
27. HDFC Bank : Banking 50. Rel Power : Power
28. Rel Infra : Infra 51. Ultratech cem : Cement

7
52. Cairns India : Infra 75. Syndicate Bk : Banking
53. ONGC : Oil 76. Rel Industries : Diversified
54. Concord : 77. Siemens India : Engg.
55. Sun Pharma : Pharma 78. Bharti Airtel : Telecom
56. Axis Bank : Banking 79. Ashok Leyland: Auto
57. BHEL : Engg. 80. ING Vysya : Banking
58. ICICI : Banking 81. SAIL : Metal
59. Maruti Suz : Auto 82. PNB : Banking
60. Union Bank : Banking 83. Zee Ltd : Diversified
61. McDowel : Liquor 84. GAIL : Oil & Gas
62. BOB : Baning 85. DLF : Infra
63. ACC : Cement 86. TATA Mot : Auto
64. Cummins India: 87. ZEE MR : Infra
65. BoIndia : Banking 88. Indian Hotels : Hospitality
66. NTPC : Power 89. Canara Bank : Banking
67. Rel Com : Telecom 90. Indian Overseas Bank : Banking
68. NALCO : Metal 91. TATA Comm : Telecom
69. Grasim : Textile 92. SBI – HDIL Infra
70. Andhra Bank : Banking 93. TCS : Info tech
71. Amjbuja : Cement 94. –
72. SBI : Banking 95. –
73. Lupin : Pharma 96. –
74. Wipro : IT 97. –

8
 98. –
99. –
100. –
Large Cap & other Companies :
Companies having market capital of 5000 crore rupees or
more are called the large cap companies. Companies
having market capital of 3 to 5,000 crore rupees are mid
cap companies and those with market capital of 2000 crore
rupees or less are called small cap companies.
Blue-chip Companies :
The companies which have a long financial history, having
good growth year after year and which net and distribute
profits to investors each year continuously are called blue-
chip companies. The shares of such companies are high
value shares (ruling rates of Rs.500 or over in the market).
Penny Stocks:
Stocks of companies having a poor financial history and
whose stocks are trading very low in the market are called
penny stocks. It is better not to invest in stocks of such
companies.
Security Market :
The Security Market or Share Market are of two types :
1. Cash or Spot Market
2. Futures or Derivatives Market
Cash Market :
In this market, the investors who buy shares have to deposit
cash in their demat account to have delivery of the stocks
9
so purchased. This is done in the cash market. Pay cash and
receive delivery immediately in the demat account.
Futures (Derivatives) Market / Nifty NFO :
The work of buying and/or selling of stocks is done in this
market under a mutually agreed contract. For this the
investor has to deposit an amount stipulated by the
exchange in our account with our brokers. This required
amount to be deposited by investor may 20% or 30% of the
amount of transactions being made in the trading account.
The amount stipulated by the exchange is called margin
money enjoyed by investors while trading in shares.
NFO / Derivatives :
There are two types of derivatives in the market :
1. Futures Contract
2. Options Contract.
Futures Contract :
This is a contract entered into by two parties for trading in
shares. The expiration of this contract is fixed on a date
which is always the last Thursday of a month. The
investors (both buyers and sellers) have to deposit a fixed
margin with the exchange (through brokers).
There are three contracts at one time prevailing in India.
These are three separate contracts for three months which
expire on every last Thursday of a month in which the
contract was made. The contract ending in a particular
month can be carried over by investors. This is called roll
over of contract to the next month or the third month
thereafter.
Options Contract : Reliance 2000 150 3,00,000
2100 150 P. 15,000
When an investor desires to earn maximum profit with
1900 150 L. 15,000
minimum risk, the options contract provides the
We buy in Call Option and use stop loss to minimize loss,
opportunity. The options contracts are of two types :
if any.
1. Put Option Types of Share Trading –
2. Call Option Cash market comprises of two types of trading :
Put Option : 1. Delivery Trading or Positional Trading
When the investors thinks that the price of particular will 2. Intra-day Trading.
fall (the investors in this case are bullish) then they buy the Delivery Trading –
put option in the derivatives market or Nifty NFO market.
When we buy a stock and hold it for more than one day and
In fact the buy the bullish trend. For this the investors have
do not sell it on the same day, it called delivery trading or
to deposit a premium fixed by the exchange.
positional trading. The stock is not sold on the same trading
As the price of stock falls, the value of put options goes on day. This is said to be safe mode of trading in the stock
increasing which is the profit margin for the investors. market.
Call Option : Intra-Day Trading –
When the investors visualizes that the price of a certain When we buy a share and sell it in the same day’s trading it
stock will go up in the market, they buy the call options by is called intra-day trading. This trading is generally fraught
paying a premium fixed by the exchange. with risk.
As the price of stock goes on increasing in the market, the Trading Technique –
value of premium paid by investors also increases which is
When we buy a share for holding it for more than three
the profit margin booked by them for that transaction.
months with an intention to derive profit from such trading,
Nifty Futures Option – NFO : it is called investment. We do not use our capital of daily
How options work : routine trading for this transaction. We make this
investment in shares of blue-chip companies where profit is
Name of Stock Price Lot Amount assured.
Profit/
Loss Lump Sum Investment –
------------------ ------ ----- ----------- Investment of your entire capital in only one stock can not
--------- be called a sound investment strategy, because our entire

10
capital is blocked in one capital only and we cannot take Mutual Funds which invest their capital in the schemes of
advantage of downward movement in stock prices of other other Mutual Funds are called Fund of Funds. They are
stocks which could have been bought by us had we not called market money fund of liquid fund also. They are
invested our capital in only one stock for a long time. called gilt-edged funds also. Such funds invest in fixed-
return schemes like government securities, corporate
Averaging –
debentures etc.
It is a good strategy to work in the averaging market as our
Equity-Funded Savings Schemes –
capital is not blocked. By adopting averaging strategy we
can take advantage of falling stock prices and buying The investor can claim rebate on his income tax by
stocks at lower prices. investing in such funds which provide exemption from
income tax under Section 88 of the Income-tax Act.
Systematic Investment Plan – SIP –
Criteria to select Mutual Funds (Investment therein) –
Under this plan, we invest a fixed amount in a stock on a
fixed date of a month. This is the best strategy and we stand
to gain definitely in the long run. The following table 1. Investment Objective – The objective of investor
illustrates it : is to invest in funds after considering all aspects of
Month Amount Share Price No. of shares the offer made by the Mutual Fund, thus he has to
Invested decide whether he considers to invest in
January 20,000 100 200 i) Equity-oriented Fund;
February 20,000 102 186 ii) Growth-oriented scheme;
March 20,000 98 204 iii) Balanced Fund;
April 20,000 90 222 iv) Diversified or Sect oral
Total 80,000 812 v) The nature of maturity of the fund
Trading – Index Fund – whether it is open-ended or close-ended.
This is a kind of equity growth fund of a Mutual Fund. This It may be clarified that with reference to iv) above,
fund invests in 50 stocks of Nifty and/or 30 stocks of it is advisable to go in for a diversified fund as
Sensex. investment in one single sector is fraught with risk.
With reference to v) above, it is better to invest in
Balanced Fund – an open-ended fund as the investor can buy or sell
This Fund invests 70% of its capital in equity market and units at his convenience.
30% in government securities. 2. Stock Selection – The investor should invest in a
Mutual Fund which has invested its capital in stocks
Fund of Funds –
of large cap companies as the amount invested in

11
 large cap companies’ stocks never goes to zero
level.
3. NFO or Old Fund – Although we can know about
the various aspects of a New Fund but we are not
aware about its future growth prospects. Therefore,
a new investor should invest in Old Funds as the
performance of such funds is well know which can
be verified from their balance year-on-year.
4. Performance – The investor should analyse the
performance of a fund by studying its balance sheet
for last 3 to 5 years which gives a picture about its
stability in the market.
5. Net Asset Value (NAV) – The investor is confident
about a Fund whose net asset value is good as
compared to other funds. Net Asset Value is
calculated by the following formula :
Net Asset Value (NAV) = Net Assets (After exp.)
No. of Units
6. Fund Size – If the size of capital of a fund is large,
it should be ensured that the management of that
fund is capable of handling such large funds. The
funds which are smaller are better managed which
is in the larger interest of the investors.
How to invest in Mutual Funds – Investment in
mutual funds can be done in two ways :
(i) Offline Investment – When we invest in a
mutual fund through some agent and we take
delivery of units in physical form, it is called
offline investment.
(ii) Online Investment – When we invest in a
mutual fund through an internet based platform,
it is called online investment. The units
12
purchased through this medium are deposited in
our demat account in electronic form.
Examining the Offer Document – All funds issue and
provide the investors with an offer document which
contains information about the fund and its various
schemes in detail. The investor should keep in mind the
following points while studying the offer document :-
(i) The name of the fund house – By examining
this, the investor can know about the financial
and other aspects of the fund which is available
online on the internet.
(ii) What is the Scheme – Whether it is growth-
oriented or sect oral oriented.
(iii) Background of Fund Managers – What is the
background of the fund managers as this will
give a clear picture about how the fund is
managed in the best interests of the investors?
(iv) Fund and performance of its other schemes.
(v) Risk involved – The risk and return involved in
a fund. Please note that risk is less in a balanced
fund.
Principles of Lending in a Mutual Fund –
(i) Prepare a plan – A systematic investment plan
is useful while making investment.
(ii) Close Watch – After investment in a fund, an
investor should keep a close watch on its
performance. What is the return in the fund as
compared to that being offered by other funds. It
is better to invest in an open-ended fund to
enable the investor to buy or sell as per need.
 (iii) Start early – Investment in a mutual fund Buy SBI 1044.85 50 53,342.50
should be done as early as possible to minimize Sell SBI 1063.10 50 53,155.00
loss due to hike in rates in the market.
Loss, say…. 187.50
(iv) Waiting – After investment in a mutual fund,
the investor should wait for some time to know Assuming that the total of both the above buy/sell
the exact direction of growth of the fund. transactions is Rs.1,00,000/-, therefore the transaction
charges could be calculated as under:-
(v) NAV – It should be ensured as to what is the
NAV of the fund (whether low or high). What is
the rate of return on investment in the fund.
(vi) Fixed or growth option – It is advisable to go Sell/Buy
in for the growth option funds which invest in
blue chip or large cap companies or companies (i) Security Tr. Charges
which have high growth prospects like (ii) Stamp Duty
investment in Reliance, Kotak Equity Fund,
State Bank of India Capital Market, etc. (iii) Service Tax

Transaction Charges – (iv) Brokerage

We have to incur the following transaction charges (v) Add Loss (187.50)
when we enter into offline or online trading in stocks :- (vi) Our Demat a/c. debited
(i) Stamp Duty 20P./10,000 Percentage of profit –
(ii) Security trans.tax 20P../10,000 a = Profit/Loss
(iii) Service tax 40P./10,000 b = Total Volume
(iv) Brokerage for both Buy/Sell Profit = 454 x 100 = 1.33
For delivery 30P./10,000 Volume= 33895
For Intra-Day 03P./10,000 Stop Loss –
Task – Calculate transaction charges on the following In the ‘Order Type’ option click Stop Loss. If the sell
transaction : position in short is 100, keep the stop loss at 98 (2%).
Stock Rate No.of shares Total What is a Demat Account? –

13
The demat account is just like a bank deposit account
maintained by the investor with the broker (depository
participant) where all the transactions in share trading are
carried out and securities are deposited in his demat
account in the electronic form. The following documents
are required for opening Trading and Demat Account
(i) Photocopy of PAN (Permanent Account
Number);
(ii) Bank Account Statement of past three months;
(iii) Passport size photograph (3 – colored);
(iv) Address Proof – Ration Card, Number,
Telephone connection, (any one);
(v) Identity Proof (Voter Registration Card, Driving
License, etc. any one)
(vi) Cheque favouring broker for margin money for
trading in stocks, one blank cancelled cheque.
How to Buy and Sell Stocks –
First of all, we give a cheque to our broker. We can trade in
stocks now. When buying is done by investors, the stocks
purchased are deposited in their demat account in T+2 days
(Transaction + 2 days). Similarly we can sell our shares and
the amount is paid to us by the broker by cheque.
Fundamental Analysis –
The study of balance sheet and financial statements of a
company to analyze the performance of the company,
earning of profit, and growth prospects in future (based also
on study of PER – price/earning ratio) is known as
fundamental analysis.
14
There are two factors which affect the growth and
profitability of a company. These are :
(i) External Factors; and
(ii) Internal Factors.
External Factors –
The factors which affect a company externally are stated
below :-
(i) Inflation Rate – If the inflation rate increases
(based on index of wholesale prices) there is a
negative reaction in the share market and in the
performance of companies. Conversely, if the
inflation rate decreases, there is a positive
reaction in the share market.
(ii) Interest Rate – If there is increase in interest
rate, there is a negative reaction in the
infrastructure and auto industries as the cost of
their funds increases and operational costs also
increase resulting in low profit margin. The
effect is positive in the banking sector as the
cost of deposits goes down and interest rates on
the advances and loans go up increasing their
profit margin. The effect is neutral on the
pharmaceutical and IT sectors.
(iii) Cost of Rupees vs. Dollar – If the cost of
Rupee increases, there is a positive effect on the
import-based companies/industries as they have
to pay less in exchange against the dollar. If the
cost of Rupee decreases, there is a negative
reaction on software and export-based
companies and industries as the exchange rate
 for dollar increases. There is no effect on
companies/industries who carry on their
business activity in India only.
(iv) Cost of Crude Oil – If there is increase in the
rates of crude oil, there is a negative reaction on
all sectors across the board because the
production cost increases along with operational
costs. If crude oil prices decrease, there is a
positive reaction on all sectors. While oil
marketing companies suffer when crude oil
prices rise, they stand to gain while the prices go
down.
(v) Political Situation – When the political
atmosphere is favorable in a country, the
markets are buoyant with the support of a strong
and stable government as they pursue a strong
economic policy affecting all sectors positively.
Internal Factors –
The factors that affect the performance of a
company/industry internally are internal factors. They are:-
(i) Management – A company/industry performs
well when its management is efficient,
experienced and resourceful and the staff is
committed to put hard work towards production
and quality.
(ii) Production – The profit of a company/industry
increases when production targets are achieved
with the required but minimum cost. If the
management is good, the company/industry
shows continuously good performance, even if
its equity or market capital is low as against
15
companies/industries having larger capital base
but poor management quality. It is advisable to
invest in shares of companies whose
management is good. A fundamental analysis of
a company/industry gives clear picture about the
experience and quality of management of a
company/industry.
(iii) Profit margin – The profit earned by a
company by the sale of its products and services
is its profit margin. The lesser the production
cost the higher will be the profit margin.
(iv) Holdings – The companies in which large
institutional investors or mutual funds have
invested are generally the blue-chip companies.
These companies assure good returns on their
stocks held by investors. To know the detailed
historical background, performance or
management of a company visit the following
site on the Web :
www.valueresearchonline.com
(v) On the above Website find out details of
companies which are rated by stars (*). The
best-rated companies are shown by three or
more stars. Here the investors can find that the
companies in which best-rated mutual funds
have invested always offer huge returns on their
investments. We should also consider investing
in companies which have holdings of large
Foreign Institutional Investors (FII). It is also
advisable to invest through the mutual funds in
such blue-chip companies in which the
investment by mutual funds is large Therefore,
 investment in Mutual Funds is generally
beneficial in the long run.
Important Fundamental Ratios –
(i) Face Value – This is the real price of the (fair
price of share) of a company. The company
pays dividend only on the face value of the
security.
(ii) Equity Capital – The capital raised by a
company by issue of shares in the form of IPO
(Initial Public Offer) for the first is called equity
capital.
(iii) Market Capital – Current market price of
shares issued by a company is multiplied by the
equity capital of the company. The result
number is the market capital of the company.
(iv) Book Value – Suppose a company has issued
2000 shares of the face value of Rs.10 each,
therefore its equity capital will be 12,000 X 10
= 12,00,000. The company has a reserve fund of
Rs. 14,00,000. So, the book value of the
company will be calculated as under:-
Book Value = Equity Capital + Reserves
No. of Shares Issued
12,00,000 + 14,00,000 = 21.6 B.Value
12,00,000
We should, therefore, always check the Balance Sheet
of a company to find out the company’s book value.
Book value should always be greater than the face
value of shares.
16
(v) Trigger Price – Stop loss is applied –
In Buying – by F2
In Selling - by F1
Stock shows opening price of 100.
In put option prices go down
If price is 95/- Sell for 100 (F2)
If price is 96/- Buy (F1)
Stop Loss @ 101/-
Trigger price 100.50 F1 Trigger Price
(vi) Overvalued Stock – If the stock price is greater
than the book value of the stock, the stock is
considered to be overvalued. Investment in such
stocks is not advisable.
(vii) Undervalued Stock – When the price of the
stock is less than its book value, it is considered
to be an undervalued stock. Whenever the
mutual funds observe such an undervalued
stock, they take the advantage and invest in such
stocks and the unit-holders also stand to gain.
(viii) E.P.S. (Earning Per Share) – This sows the
earning per share (EPS) in a company on the
investment of the shareholders :
EPS = Net Profit
No. of Shares Issued
To find out earning per share (EPS) the Net Profit
earned by a company is divided by the number of
equity shares issued, e.g., if a company has earned a net
Year 199 2000 2001
9 profit of Rs. shares having PER more than 25. The right time to invest in
E.P.S. 3.00 3.50 4.50 20 crores and shares of a company is when the PER is between 15 and
the number 20. There is no need at all to consider investment in shares
Average Price H 40 H 50 H 70 of shares PER of which is between 5 and 8 or less than 5.
H+L/2 L 22 L 24 L 30 issued by the You can check a share’s fair value with the help of PER.
company is 2
C.M.P. 31 37 50 First of all, we have to find out the earning per share (EPS)
crores then for the last three years. Then we have to find out the
AverageYearly 31/3 37/3.5 50/4.5 the earning average of Current Market Price (CMP) by adding the High
per share
10.4 10.6 11.00 and Low of that year and dividing it by 2. Then we will
(EPS) would find out the average PER for the last 3 years. Average PER
be Rs.10/-. will then be multiplied by last year’s EPS to find the fair
(ix) Price to Earning Ration – This is a very value. Then we can predict the EPS for next year and that
important fundamental financial indicator. It is will be multiplied by average for the target price. This can
calculated as under :- be shown by the following example :
Price to Earning Ration (PER) =
Current Market Price
E.P.S.
e.g. if a company has issued 15 lac shares and earned a net
profit of Rs. 30 lacs, then its EPS will be :-
Rs.30,00,000 = 2 Per share
1500000 Shares
And if the current market price (CMP) of the share is 100,
then the Price to Earning Ratio will be :
C. P. M. 100 = Rs. 50 (PER)
2 (E.P.S.)
Average Y-o-Y 10.70 (10.4+10.6+11.00) / 3
With the help of price-earning ratio we can check the price
of the share of a company and whether it is overvalued or For 2001 = 10.6 x 4.5 = 48.15
undervalued. If the share is undervalued then it is the right Prediction for 2002 = 10.6 x 6 = 64.20 (Fair Value).
time to by these shares. There is risk involved in buying the

17
Register of Members – (v) Age above 65 – 30% in stocks and stock market
securities, 70% in fixed income securities.
A company maintains a register in which the names,
addresses and all other relevant information about its share- Ideal Portfolio – It is not advantageous to divide your
holders is recorded. This register is known as the Register portfolio into many unmanageable stocks or securities or a
of Members. small number of securities. Therefore, an ideal portfolio
would be one which will be balanced according to one’s
Portfolio –
capacity to invest and the available capital. The ideal
Every investor should invest his capital by making a division in an ideal portfolio could be as follows –
balanced portfolio. Portfolio is the category of investments
in different sectors. The intention behind making portfolio 1 Capital less than Rs. 20,000 2 to 3 stocks
is diversification of investments in varied sectors and .
categories with the aim of minimizing our risk and 2 Between 20 to 50,000 3 to 5 stocks
maximizing the profit or return on our investments.
3 50,000 to 2,00,000 5 to 8 stocks
The percentage of investment in different investment
categories depends upon the age of the investor which can 4 2,00,000 to 5,00,000 8 to 10 stocks
be broadly outlined as follows – 5 Above 5,00,000 10 to 14 stocks.
(i) Age below 30 years – The percentage may be – As far as possible, every stock should be of different sector
70% in stocks, mutual fund, commodities, 30% and of blue chip companies.
in fixed income securities like Post Office
Savings Schemes, LIC, Bonds, Debentures,
Bank deposits. Types of Portfolio –
(ii) Age below or close to 40 – 60% in stocks, There are three types of portfolios –
securities, mutual funds, commodities etc., 40% (i) Aggressive Portfolio;
in postal savings schemes, stocks, like
debentures, bank deposits etc. (ii) Moderate or Balanced Portfolio;
(iii) Age below or close to 50 – 50% in stocks, (iii) Defensive Portfolio.
securities, commodities etc., 50% in postal Aggressive Portfolio –
savings and fixed income securities.
In this portfolio, there is greater but greater profit too.
(iv) Age below or close to 60 – 40% in stocks,
commodities, 60% in fixed income securities; How to build an aggressive portfolio? It can be as follows –
Blue Chip Companies 30% investment

18
 Dividend –
Large Cap 20% investment (in CNX 100 According to this method, we select such companies as
Companies declare and give dividend to shareholders continuously
Companies.
year after year.
Mid Cap Companies 20% Investment in Junior Nifty
Growth Investing –
and
Shareholders prefer to invest in the companies which show
BSE Mid Cap companies.
high potential for future growth. On analyzing the EPS
Small Cap Cos. 20% investment (earning per share) of a company, we can know the growth
prospects of the company and take our investment decision
Penny Stock Cos. 10% investment.
accordingly.
Balanced Portfolio –
Mutual Fund and FII Holdings –
The following pattern of investments would make a
According to this method, stocks of companies in which
balanced portfolio –
there is large investment by mutual funds and/or FIIs are
Investment in Blue Chip Cos. 40% considered good for long term investment. (See the
Website www.bseindia.com – shareholding pattern.).
Investment in Large Cap Cos. 30%
Precautions before selecting Stock for investment –
Investment in Mid Cap Cos. 20%
(i) We should collect full information about the
Investment in Other Cos. 10%
business of the company, its growth prospects in
Defensive Portfolio – A defensive portfolio would be the future etc.;
formed on the basis of the following pattern – (ii) Analyze the performance of the company during
Investment in Blue Chip Cos. 50% the past 3 to 5 years;
Investment in Large Cap Cos. 40% (iii) Promoters’ holdings. The background of the
promoters, their experience and commitment to
Investment in Mid Cap Cos. 10%
promoting the interests of the company;
Standards to select Stocks for investment- (iv) The holdings in the company by mutual funds,
Value Investing – FIIs, and financial institutions;
According to this method, we should buy stock which is (v) Assessment of future price of the shares of the
undervalued. company on the basis of PE Ratio (PER);

19
 (vi) Whether the stocks of the company are company will not be entitled for bonus shares or dividend
overvalued or undervalued on the basis of thereon due to various reasons like the company closing its
Fundamental Analysis for long term investment. books of accounts for holding Annual General Meeting,
Special General Meeting, etc.
Gap –
Averaging –
When the share market closes above or below its previous
Averaging strategy is beneficial in the long term. If we
(yesterday’s) closing price, the difference in the closing and
have Rs.10,000 for investment we should follow the
open price is called ‘Gap’.
method given below –
Breakout Interest –
We should by more of the stock already in our portfolio
when its price falls. Consider – When a stock crosses its ‘Initial High” or goes below its
‘Initial Low’ it is said to be Breakout Interest, in terms of
Price No. of Shares Amount
technical analysis.
100 400 40,000
Downside Breakout, Upside Breakout, Correction –
95 500 47,500
When there is a temporary trend reversal in the price of a
80 156 12,480 share, it is called ‘Correction’ or ‘Improvement’. The rise
in price of a falling share in a shorter term or fall price of a
Beta – This is a measurement of risk in dealing in a stock
rising share in a shorter term is called ‘Correction’.
in the stock market. When a stock is applied Beta1, the
stock price will be equal to the index price. Similarly, if the Circuit Breaker –
Beta of a stock is 1.5 any price movement of 5 will raise When the price of a share for trading for a particular day is
the price of the stock to 7.5. It tells about the suitability of fixed at a maximum or minimum level (say 5% or 10%) by
the stock as compared to the market. Consider – the Exchange, the stock is said to be Circuit Breaker.
Index is increased by 1% Trading in such circuit breakers is allowed on the day
following the circuit applied by exchange. When the stock
Beta of stock increases by 1.5
exchange imposes such a restriction on a share in the
Beta to be applied to a particular stock is fixed by the market, the investors can purchase shares in low circuit and
Exchange. cannot sell them. In breakout, investors can sell but not
Ex-Bonus – buy.

A company’s stock is notified as Ex-Bonus or Ex- Dividend – This is the return on investment in shares
Dividend. This means that the future buyer of shares of that which a company gives to its shareholders.

20
Panic Selling – A situation in the stock market when not
only inexperienced but also experienced investors indulge
in heavy selling rally and the shares start falling to bottom
in the market, it is called ‘Panic Selling’.
Price-Time Priority – The buy or sell orders received by
the Exchange are all active on the principle of ‘Prime Time
Priority’ which means the Best Buy Order is activated first
with the Best Sell Order.
Pay-in – The payment by brokers in the share market of
amount of shares traded in the market is called ‘Pay-in’.
Pay-Out – The amount received from the Exchange by
investors for the sale of their shares is called ‘Pay-out’.
Price-Bank – The Exchange fixes a certain minimum or
maximum price for a particular share for a particular day
(both for buying or selling) which is called ‘Price Band’
The movement of price of the share is thus restricted to the
Price Band.
Price-Sensitive Information – A news / notification /
information in respect of a company which may impact the
trading in shares of that company (both positively or
negatively) it is called price sensitive information.
Demant Account -
Previously share issue, allotment, trading and related paper
work was done manually on paper and this involved
voluminous human labour. With the introduction of Demat
(De-materialization) all paper work has been replaced by
electronic form on the computer through internet. Now
trading in stocks, issue of shares and securities and their
delivery is done on the internet in electronic form. This
work is done by Depositories and the shares and securities
21
of investors are safely deposited with the Depositories.
There are two Depositories in India :
(i) Central Securities Depository Limited. This is
the depository of Bombay Stock Exchange
(BSE).
(ii) National Securities Depository Limited. This
is the Depository of the National Stock
Exchange (NSE).
The working of a Depository is similar to the working of a
Bank. Just as the banks take deposits and enter the
transaction in the Pass Book, the Depositories also does the
same in electronic form in respect of shares and securities
which are safely deposited with them in electronic form on
behalf of the investors. The Depositories issue the
statements of shareholders’ or investors’ holdings in the
form of ‘Account Holding Statement’ and ‘Account
Transaction Statement’. The depository services are availed
of by the investors through Agents known as Depository
Participants. The work of Depository Participants is also
done by banks, financial institutions/organizations or
brokers. Depositing or withdrawal of shares or other
instruments is similar to what bank’s customer enjoys.
Diversification –
When investor invests his capital in the stocks of various
different sectors, this is called Diversification. By doing
this, the investors distributor their risk in different stocks of
different sectors so that when one sector shows downtrend
in prices of its stock, the loss to investors is kept to
minimum.
FII-s – Foreign Institutional Investors –
These are foreign institutional investors who invest in India
with the permission and on terms and conditions stipulated
by Sebi (Securities and Exchange Board of India).
Correction –
When there is a temporary trend reversal in the price of a
stock in the market, it is called ‘correction’. This is seen by
short temporary downtrend in a rising stock or temporary
uptrend in the price of a falling stock.
Circuit Breaker –
When the price of a stock touches a certain maximum or
minimum percentage, and the Exchange feels it necessary
to apply control over the price movement of the stock,
trading in that stock is closed for that day by the Exchange.
These minimum or maximum percentages are decided by
the Exchange.
Short Sell –
When an investor or trader is bearish about a certain stock
and this that price of that stock will go down, he sells the
shares in the Options Market. Note that he has no shares in
his possession. It means that during slow down in the
market, it is profitable to short sell the stocks. Conversely,
in the long position, the investor should first purchase the
stocks at lower prices and sell them when prices rise.
Spot Purchase or Sale –
Spot Purchase or Sale means the transaction in share
trading is done in cash and delivery of the stock is made on
the spot or immediately. Spot Market is called Cash
Market.
Volatility –
22
The upward or downward movement in rate or price of a
stock is called volatility.
Equity Capital and Market Capital –
The capital raised through issue of shares by a company for
investment by the general public (investors) is called equity
capital. The market capital of a company is formed by
multiplying the number of shares issued by a company with
the current market price of the shares in the stock market.
Dividend –
This is the return on the holdings of shareholders which a
company distributes in the form of dividend at the end of
its financial year.
Market Moves –
The market movers are bigger players in the market who
have the capacity to move the stock price lower or higher
and these are the MII-s, Mutual Funds, High Net-worth
Individuals.
Non-delivery Period –
When a company announces its Book Closure or Record
Date, the Exchange fixed ‘No Delivery Period’ for the
stock of that company. During No Delivery Period the
shares bought by investors are deposited in their Demat
Account after expiry of the No Delivery Period.
Book Closure –
A company keeps its books closed for the purpose of
holding the Annual General Meeting or for any other
reason as per Company Laws during a certain period for
which it issues notice to shareholders and announces the
same through media and this period of closure of Books is
known as Book Closure.
Over-subscription –
A company issues a fixed number of shares for investment
by the prospective investors in the form of an IPO (Initial
Public Offer). When the number of applications received
from investors for these shares is more than the number of
shares issued by the company, then the IPO is said to be
over-subscribed.
Mutual Fund –
A Mutual Fund Company collects money from investor
public and invests it in the stock market.
Mutual Funds in India –
The Unit Trust of India (UTI) was the first Mutual Fund in
India, established in 1963.
Advantages of investing in Mutual Funds –
The investor gets the following benefits from investing in
Mutual Funds –
(i) Affordable – Anyone can invest in a Mutual
Fund even with the meager amount of rupees
five hundred;
(ii) Professional Management – It is not easy to
select and invest in the stock market for the
common individual. He does not know when to
make an ‘entry’ or trading in stock and when to
make an ‘exit’. This services of making proper
investment on behalf of the investors is done by
a Mutual Fund through their Fund Managers.
23
(iii) Diversification – According to principles of the
financial market, our investment in a Mutual
Fund Company is in turn invested by the Mutual
Fund in different stocks of different sectors to
minimize our risk and maximize the gains.
(iv) Liquidity – When we invest in a Mutual Fund,
based on the type of investment, we can take
back our money any time from the Fund.
Types of Mutual Fund –
Mutual Fund Investments can be made by us based on their
maturity which are of two types, (i) Open-ended and (2)
Close-ended Mutual Funds.
(i) Open-ended Mutual Funds – The Mutual
Fund in which an investor can buy and sell
continuously is called an ‘Open-ended Mutual
Fund’.
(ii) Close-ended Mutual Funds – This is a Fund in
which there is a fixed maturity period of 3 to 5
years. This Fund is available for buying only at
the time of launching of the Fund. We can take
selling option only after the period of maturity.
a) Equity Growth Fund – These Funds are
called high-risk, high-return funds as they
invest almost 100% of their capital in the
market. These are of two types – (i) Equity-
oriented Funds which invest in different
equities thereby minimizing risk and (ii)
Sector-oriented Equity Fund. By investing in
a particular sector, our investment is
affected if performance of that particular
 sector is not good as we do not get proper
return on our investment.
b) Index Fund – This is a form of Equity
Growth Fund. These Funds invest their
money in Nifty or BSE stocks only.
c) Balanced Fund – These Mutual Funds
invest their capital in the proportion of 70%
in stock market and 30% in government or
gilt-edged securities.
d) Fund of Funds – (FOF) – These Mutual
Funds invest their capital in schemes of
other Mutual Funds.
e) Funds providing Tax Savings (ELSS) – In
terms of Section 88 of the Income Tax Act,
investment in ELSS Fund provides relief
from income tax payment to the extent
stipulated by the Act.
Criteria for Selecting Mutual Fund –
a) Investment Objective of the Fund;
b) Equity-oriented, growth-oriented, balanced
investment, diversified investment, maturity
– open-ended or close-ended, stock selection
– where invested – large cap companies or
otherwise, New Fund (NFO) or old Fund.
Performance – We should analyze the performance
of the Fund for the past 3 to 5 years.
Net Asset Value (NAV) – A Net Asset Value is is
return on investment by investors and is said to be
satisfactory when the performance of the Fund is
24
good and we should verify by fundamental analysis
that the Fund has invested in good schemes.
Risk Grade – The risk involved in investing in a
Mutual Fund is shown by stars which is the credit
rating allotted by a statutory credit rating agency.
Mutual Funds which have three or more stars are
considered good Funds for investment therein.
Refer to www.valueresearchonline.com
Based on their capital, the companies are listed
below –
a) Nifty Junior – Companies with capital of
Rs. 500 crores
b) Large Cap Companies – Companies with
capital of Rs. 5000 crores and over.
c) Mid Cap Companies – Companies with
capital of Rs. 2000 to 5000 crores.
d) Small Cap Companies – Companies with
capital up to Rs. 2,000 crores.
e) CNX100 Companies – 100 Companies with
companies included in Nifty.
Blue Chip Companies – These are companies
having very large capital base (above 5000 crore
rupees). These companies show continuous future
growth, declare and distribute divided every year
and the return on investment therein is generally
high.
Types of Stock Market – Stock Markets are of two
types –
a) Primary Stock Market;
 b) Secondary Market.
Primary Stock Market – The declaration,
processing and allotment of fresh shares that
companies offer to the investing public through
Initial Public Offer (IPO) takes place in the Primary
Stock Market.
Similarly, the issue of Rights and Public Issue take
place in the Primary Stock Market.
Secondary Stock Market – After allotment and
receipt of shares through IPO, some of the
shareholders are ready to sell the shares at an
increased rate and there are investors who are ready
to purchase these shares. The market in which all
this process takes place is known as the Secondary
Stock Market.
In India, presently, there are two main Secondary
Stock Markets – (i) the BSE and (ii) the NSE.
BSE (Bombay Stock Exchange) – This is the
oldest stock exchange of Asia situated at Mumbai.
NSE (National Stock Exchange) – Established in
1992, the National Stock Exchange (NSE) is
sponsored by the Government of India. Today, it is
the largest stock exchange of the country.
Systematic Investment Plan – According to this
plan, an investors invests a fixed amount every
month to take advantage of movement of stock
prices. Example –
Month Amount Price No. of Shares
January 20,000 100 200
25
February 20,000 95 210
March 20,000 105 190
April 20,000 90 222
In this way, the investor can minimize his losses
and maximize his gains.
Short-Selling – In this type of trading, the trader
first sells the shares in the stock market and then
buys them when prices fall. This is done in intra-
day trading.
Trading – To rotate our capital investment again
and again within a period of three months isknown
as Trading. The aim of the investor by trading is
nothing but to take advantage of the downward or
upward movements in the prices of stocks. This is
the correct strategy to deal in the stock market.
Trading is mostly done in the stocks which are high
value stocks, attract a large number of traders
thereby increasing the trading volume constantly
and whose prices are volatile.
Swing Trading – This is another form of positional
trading. Trading volume of such stocks increases
when there is upward or downward breakout in
these stock prices. It is here that the investors
position themselves. This position is made to take
advantage and book profit in the short term (1-3
months).
Speculation – The companies whose shares’ prices
are increased very high by rumor although their
financial position is not satisfactory are those which
 are trading based purely on speculation. Much risk
is involved in dealing in stocks of such companies
and the investors generally end up as losers.
Long Position (Buying) – In the long position, the
investor first makes buying position and then makes
selling position, applying ‘stop loss’ to keep loss, if
any, to the minimum.
Short Position (Sell) – In this position, the investor
first makes a selling position and then buying
position, applying ‘stop loss’ to keep loss, if any, to
the minimum.
Both long position and short position have to be
initiated in the intra-day transaction period only.
Support and Resistance Level-Based Trading –
This is the most popular strategry of intra-day
trading. In this buying is done on support level and
resistance is resorted to for selling. It is illustrated
by the following charge –
Process of Trading –
We have to open two types of accounts for trading in stocks
and securities –
(i) Trading Account; and
(ii) Demat Account.
Types of Trading Account –
26
We can ourselves make trading transactions through the
medium of trading account opened with a broker in the
stock market. These are of two types –
(i) Online Trading
(ii) Offline Trading
Online Trading -.
When we operate our own trading account, it is called
Online Trading. We need computer and internet connection
for online trading in stocks and securities.
Offline Trading –
When we conduct our trading account through the medium
of a broker, it is called Offline Trading. We place our order
for purchase or sale of stocks and securities with the broker
either orally or over phone.
Methods for Investing in Mutual Funds – There
are two methods to invest in Mutual Funds –
(i) Offline Method
(ii) Online Method
Offline Investment Method – When we invest our capital
in a Mutual Fund through a dealer and get the unit
certificate in physical form it is called an ‘Offline’
Investment Method.
Online Investment Method – When we invest our capital
in a Mutual Fund through the Internet platform in which the
units bought by us are deposited in our Demat Account in
electronic for this is called an ‘Online’ Investment Method.
Offer Document – How we should examine? – Before
investing in a Mutual Fund, we should carefully examine
the Offer Document of the Fund which they have to give to
investors under Sebi guidelines. The following points
should particularly be examined in the Offer Document of a
Mutual Fund –
(i) Name of the Fund House – After knowing the
name of the Fund House, we can examine the
financial position and performance and working
results of the Fund. This information is available
online. We should also examine whether the
Fund is Aggressive or Balanced.
(ii) Background of Fund Managers –
Performance of a Mutual Fund depends on the
knowledge and expertise of the Fund Managers
whose background must be sound.
(iii) Risk and Return involved in the Fund – The
possibility of investment risk in a Mutual Fund
and the return thereon should be carefully
examined. It should be borne in mind that risk
factor is far less in a balanced Fund than in an
Aggressive Fund or any other scheme.
We should first make a plan for investment by examining
the performance of the Fund.
There is no need to invest regularly in a Mutual Fund like
we do when we trade in the stock market. It is enough to
invest only once in a good scheme and wait for return on
our investment.
We should start investing in a Mutual Fund as early as
possible after it is launched, to take advantage before there
is price rise.
27
An inexperienced or new investor is not an expert to know
about the Fund’s Scheme when it is launched for the first
time particularly when it is a New Fund Offer. Therefore,
he should invest in the known Old Fund.
It does not matter whether the units of the Fund have low
Net Asset Value (NAV) or high NAV.
We should give preference to a Growth Fund by making
sure that the Fund has invested in companies with high
growth potential.
Technical Analysis is the scientific study of price
movements. In other words, it means finding out on the
basis of technical analysis the possibility of movement of
price in a certain direction in the future based on the study
of the price and volume of the stock in the past. Technical
analysis can be applied on only those stocks which are
actively traded in the stock market where daily/weekly
trading volume is high. Technical analysis is not useful in
the study of price movement of stocks which are not
actively traded in the stock market.
However, we can not say that technical analysis is an exact
science. It helps in the analysis of the possible movement
of future price of a stock which may be 80% accurate. For
the remaining 20% which may or may not be our loss we
can take the help of ‘Stop Loss” while trading in that share.
Scope of Technical Analysis – Technical Analysis can be
applied on any stock or market where prices and volume
are available. Due to this technical analysis is very useful
for study of foreign exchange market, commodity market
and stock market.
Advantages and Pitfalls of Technical Analysis –
(i) We can find out the price of movement of any
stock in the future, with the help of Technical
Analysis.
(ii) Technical Analysis helps you in taking fast
investment decisions.
(iii) It tells you or forewarns you when you should
apply ‘Stop Loss’ on your trading transaction to
minimize your loss, if any.
(iv) It tells about trend reversal i.e. when a stock that
is falling will take up the uptrend or upward
movement, or a stock which is going high in an
uptrend will be falling or take the downtrend, so
that you may exit or enter at the appropriate
opportunity as suggested by technical analysis.
(v) It tells about the entry and exit point as
mentioned in (iv) above to minimize your loss,
if any, and maximize gains.l
Technical analysis is still not a complete science or we can
say the predictions brought out by technical analysis may
be relied upon only up to 80%.
In Technical Analysis ‘Short Term’ means trading for some
days, ‘Medium Term’ means trading for some weeks and
‘Long Term’ means trading for some months.
Trend Analysis – It is correctly said, “Always follow trend
because trend is your friend” Trend relates to prices/rates of
shares and their upward/downward movements during a
given period. We know the trend in prices/rates movements
of a stock with the help of ‘Price Charts’ which we can plot
online in respect of any stock we are interested in investing.
The types of Price Charts are as given below –
(i) Charts based on time-frame
a) Daily Chart – This Chart shows the
Open/High/Low/Close level figures of the
day.
b) Weekly Chart – This Chart shows the
Open/High/Low/Close level figures of a
week.
c) Monthly Chart– This Chart shows the price
level of a stock at High/Low/Open/Close
during a month.
Charts based on Price –
a) Line Chart – Closing Chart – Line Chart
is based on the closing price of a stock. This
is used to identify the trend and direction of
the stock. Line Chart can be plotted
daily/weekly/monthly. See Chart below :
b) Bar Chart–This is the most popular and
useful chart. This shows Open /High
/Low /Close of the price of a stock. The

28
 Open figure is always shown on the left of
the Bar while the Close is always shown on
the right side of the Bar, thus –
The chart shows that the stock is showing a
higher Close Price than the Open Price. The Bar
Chart can be plotted or drawn
daily/weekly/monthly. The Bar Chart is used to
draw the trend lines to find out the price pattern
to know the support and resistance levels or
prices to enable the investor to make timely
investment decisions.
c) This is a Chart where the Open /High / Low
/ Close are plotted in the form of Japanese
Candle Sticks. The candle stick has a real
body, upper shadow and lower shadow.
Thus –
Upper shadow shows high price, lower shadow shows low
price. Two types of candle sticks appear on the chart. One
is green candle stick that is called bullish candle stick
indicating the bullish trend in the stock and the other is the
red candle stick that is called the bearish candle stick
indicating bearish trend in the market stock price. The
shape of the candle stick (short or long) depends upon the
difference in open and close price of a stock, that is, if
29
difference in prices is small, the candle stick will be smaller
while the stick will be larger if the difference is large.
This is a very important chart which helps us to predict the
price of the security. Candle stick chart is also used to find
out the support and resistance levels in prices of a stock or
security to draw the trend lines and to find out the price
pattern. If today’s open price is lower than its yesterday’s
closing price then the candle stick will be green or bullish
and if today’s current market price is higher than its
yesterday’s closing price then the candle stick will be red or
bearish. The candle stick chart can be drawn on the basis of
daily/weekly/monthly/yearly price trends.
Support Nifty shows open and close price of a security as
the same level then one can buy that security. If open and
high are equal, then one should make a short position.
Short Position in Nifty –
Open = High – Short position with 2% Stop Loss
Long Position - Buy then sell with S/L 2%
Short Position - Sell then buy with S/L 2%
The Basis of Trends – Decades of Price Charts have
demonstrated one basic truth that all prices work and
follow trends. A trend indicates that there exists an
inequality between the forces of demand and supply. If the
demand is more than supply there is upward trend in stock
prices and when supply is more than demand the trend in
prices is downward. When, however, the demand and spply
are equal, the trend is range-bound or flat.
Types of Trends –
Broadly, there may be two types of trends. The first is a
rising trend or uptrend and the second is the falling or
downtrend.
Uptrend – It is said to exist when prices are generally
rising. Slight corrections in prices is not considered when
drawing a trend line in an uptrend. To be more specific,
uptrend is seen when prices show higher lows, that is to
say, that from the second higher low the trend line when
drawn shows an uptrend, thus –
In the above chart, the downward or upward correction
(slight corrections) are not included when drawing the trend
line. Consider the following charge –
Downtrend – A downtrend is said to exist when prices are
generally falling down. Here, in this trend line, a small up-
move is not considered. More precisely, when prices move
to lower highs it is a case of downtrend. Consider the
following chart –
Sideways Movement –
30
This movement is called a zigzag, flat or range-bound
movement. During an uptrend, when prices move in a
narrow range on the chart, this would appear to be a case
where prices move horizontally or sideways or range-
bound.
Correction – This term does not mean falling prices. It
simply means a smaller price move which is opposite to the
prevailing trend or ongoing trend.
(i) Trend Reversal – When the basic and
necessary conditions defining a trend are
invalidated, it is the signal that there is a trend
reversal. Thus, when, after consistently making
higher lows in an ongoing rising trend the
market index or price trend of a stock starts
formation of lower lows, the uptrend is said to
have had a reversed direction into a downward
trend or downtrend. Refer the following chart –
(ii) Conversely, when after making consistently
lower highs in the downtrend, the market or
stock makes a higher high formation, the
downtrend is said to have reversed direction to
uptrend.
(iii) Knowledge of both the prevailing trend and
trend reversal is important for traders and
investors for making appropriate trading and
 investment decisions. Thus, in an uptrend a
trader’s strategy would be to buy stock on any
falls (corrections) and then wait for the price
reverse its uptrend.
Conversely, when the main or major trend is down, a
trader’s or investor’s strategy would be to exit trading
in the stock on price rise and then wait for lower trends
to re-enter the market to enable them to make buying
positions.
Drawing Trend Lines of Price Charts –
Trend lines are lines drawn on Price Charts that usually
depict the direction of trend (upward or downward) and
also the buying and selling choices. Thus –
(i) In order to show an uptrend, a trend line is
drawn on a Price Chart by joining the two
successive higher lows being formed.
Remember that higher lows are a pre-condition
for an uptrend to appear on a price chart.
(ii) Conversely, a downward line on a price chart is
drawn by joining the successive lower highs
being formed.. Lower highs are a pre-condition
for forming an opinion that there is downtrend
in prices of a stock.
(iii) The important aspect to be kept in mind is that it
is possible to draw more than one trend line in
the same direction. These additional trend lines
are called ‘Steeper Lines’. These steeper lines
are less effective for making investment
decisions, as they can be easily broken by
volatile price movements or sideways price
movements.
31
When we draw more than one trend line on a price chart, it
is observed that the major trend line is less steeper than the
other steeper lines which are shorter. These steeper lines
indicate the immediate support and resistance levels
whereas the major trend line provides you with the
important, reliable and major support and resistance levels
as the case may, for making considered investment
decisions which may be profitable in the long run.
Support and Resistance –
A trend line formed by joining the higher lows of an
uptrend line is also called a support line. These are the price
levels where fresh buying interest comes in which leads to
the price bouncing back to higher levels. Prices are likely to
find buying support around the support trend line.
So, if a support trend line gives a support level of Rs. 325/-
for a stock, one should be alerted as the price starts
approaching Rs. 325/-.
Conversely, a downward trend line formed by joining the
lower highs also acts as a resistance level. The price levels
along this line are price points where the stock attracts
selling pressure.
How Support and Resistance Levels reverse their roles–
Let us understand first what really happens when the
support line is broken. Traders or investors who bought
near the support level did so in the belief that the prices
could bounce back high from there. Once the support line is
broken, the same traders or investors would exit their
positions with minimum loss and try to re-enter the market
from where the prices start to rise considering the support
line as the resistance line. Now, the traders or investors
start selling from the support level because that level has b) Falling price along with rising volume is a
turned to resistance level. See the following chart : signal of bearish trend –
Volume Price Buying – Bullish
Volume Price Selling – Bearish
Conversely, any price move which is not
supported by volume expansion is suggestive of
The paradox of periodicity –
a weak trend.
Many traders or investors are confused when selecting the
Rising price followed by a falling volume is
timeframe chart to study the daily, weekly or monthly price
indicative of a bearish trend.
chart. For this purpose, firstly, they need to decide about
the shareholding time that they want to hold the shares i.e., A falling price supported by a falling volume is
for some days, weeks or months. When it is decided about indicative of Bullish trend in which reversal of
what should be the timeframe for holding the shares, then trend appears to be round the corner.
one can select the chart accordingly. Also consider – 1) Volume Price Bullish – Buying
(i) If you want to take the trading position for the 2) Volume Price
next 3-4 days, you must actually select a lower
timeframe and analyze the intra-day chart and 3) Volume Price Bearish – Selling
not the daily chart. 4) Volume Price Bullish – Buying
(ii) Similarly, if you want to take the trading (Reversal of trend is near).
position for 30 days (4 weeks) or for some
weeks, it would be better that you analyze the Notes –
daily chart and not the weekly chart. (i) For Intra-Day trading in Nifty visit
(iii) Again, if you take a trading position for some www.finance.yahoo.com
months (more than 4 weeks), you should in that
case study the weekly chart. (ii) For Technical Analysis and all activities on BSE
(Bombay Stock Exchange) and NSE (National
Importance of Volumes – Stock Exchange) visit the following Website:
Firstly, any price move supported with higher or increasing (i) bseindia.com
volume is suggestive of a strong trend –
(ii) www.ichart.in
a) Rising price along with rising volume is a
signal of bullish trend. (iii) www.java.com

32
User : Anant market players’ reaction to these including
their sentiments like hope, fear and greed.
Password : Startt
(ii) Market Movements consist of 3 trends –
Remember – Login
According to Dow Jones, there are three
Jcharts (EOD) then enter. trends in the market – First is the Primary
Tax Planning – Trend which may be as shown in the
following chart -
Exemption under Section 88 of the Indian Income Tax
Act. The following Mutual Funds offer value for your
money as well as income tax exemption on return on
your investments You may consider investing in these :
Second is the Secondary Trend in which
(i) Concor Robecco Tax Saver Fund – NAV the prices correct upward or downward. The
19.43 following chart shows this -
(ii) Sundaram BNP Paribus Tax Saver Fund –
NAV – 37.00
The Dow Jones Theory –
In 1897, Charles Dow Jones gave the theory known
today as the ‘Dow Jones Theory’ which gives two
indices to track the US Stock Market. These are now Third is Minor Trend comprising mainly of
called the Down Jones Industrial Averages and the the day-to-day fluctuations as shown below -
Down Jones Transportation Averages (which originally
consisted of the Railway Companies of America).
These were the growth sectors of that period. The Dow
Jones Theory broadly specifies the following six
points:-
The Down Jones Theory holds that minor
(i) The Prices discount Averaging – It trends are insignificant since these are
suggests that market price of a stock is volatile in nature.
nothing but the combined impact of various
factors affecting it, such as relevant news (iii) Primary Trends have three phases – Dow
about the company or stock, information, Jones recognized the relationship of market
movements to the varying sentiments of

33
 investors and accordingly identified three
phases of the Primary Trend. They are –
1) The first phase occurs near the beginning of a
bullish market when investment in stock is
considered idle by the general public or common
investor. In this phase, it is the smart investor who
realizes that prices have fallen much below the
fundamentals and then goes in for what is popularly
known as ‘bottom fishing’ while the market still
appears to be in bad shape. These smart investors
realize that the worst is almost over and enter the
market when prices are near bottom level.
2) Thereafter, comes the second phase when corporate
results start pouring in and show signs of growth
and progress and encouraging working results.
Companies which had posted losses in the previous
quarter(s) start getting profit. It is the phase when
large investors such as FII-s (Foreign Institutional
Investors), Mutual Funds and High Net-worth
Individuals who were earlier on the sidelines,
slowly start investing.
3) Finally, a few quarters after the second phase,
comes the third phase in which the small investors
make a jump in the market thinking that they are
missing the uptrend. Due to entry of small traders,
the day trading volume rises. In India, we have seen
these phases most recently in the current Bull Run
since 2003 to 2007.
Similarly, the Bear Market also has following phases –
1) The first phase of a Bear Market leads to a sell-off
from the market peak with small investors exiting
34
entirely, realizing that the market has gone much
beyond its fundamentals.
2) The second phase of selling comes when the
corporate performance actually starts showing
downtrend. Big players such as Institutions, Mutual
Funds, FII-s, High Net-worth Individuals start
offloading their stock.
3) The third phases comes with panic selling by the
investors who would often have entered at the peak.
They are forced to near bottom usually with big
loss.
4) In the fourth phase, the different indices must
conform with one another. Another point or aspect
or feature of the Dow Jones Theory is that the two
indices created by Dow Jones, namely (a) Dow
Jones Industrial Averages (DJIA) and (b) Down
Jones Transportation Averages (DJTA) should
conform with each other. Thus, a bullish trend in
one Index should also be in conformity with a
similar bullish trend in the other. If an index is
showing signs of trend reversal the other should too.
5) Volumes confirm the Trend – The Dow Jones
Theory holds that a Primary Trend, whether up or
down, would be supported by volume expansion.
Volume expansion is indicative of larger market
participation in both buying and selling activity and
confirms the strength of a trend. Consider the
following chart :
 17-01-08 491 1000 4,91,000
18-01-08 Sell 475 1000 4,75,000
21-04-08 Buy 267 1780 4,74,000
6) A trend remains intact while it shows a definite 08-05-08 Sell 300 1780 5,34,000
reversal. The theory of a Trend Analysis is based on
the Doe Jones Theory. As we noted earlier, the Date Buy/Sell Price No. of Amount
basic characteristics of a trend is the formation Shars
either Higher Lows or Lower High’s . When these 31/-07-08 Buy 163 3,276 5,34,000
conditions are broken, a definite trend reversal is
14-08-08 Sell 169 3,276 5,54,000
said to have taken place. Consider the following
chart 16-12.08 Buy 38 14,570 5,54,000
Moving Averages – Simple Moving Average – 07-01-09 Sell 36 14,570 5,24,000
Simple moving average means value of observation divided 20-03-09 Buy 27 19,407 5,24,000
by number of observations. If we want average of 1, 2, 3, 4,
5 then we need to add values 1 to 5 and divide the same by 18-06-09 Sell 76 19,407 14,75,000
5. The formula for this is – 20-07-09 Buy 82 17,986 14,75,000
Sum of value of ‘n’ observations Current Market 112 17,986 20,15,000
n Rate

Thus, if you have price data of 5 days add all data and
divide it by 5. Use of the Moving Averages –
How Moving Averages help in the study of Price Moving Average shows support and resistance levels so
Behavior- that based on these indicators investors find it helpful in
Since we get moving averages from price data, we can making their buy and sell moves. It tells them when to enter
understand the price behavior with the help of moving into trading/investment and also when to properly and
averages. We can find out the ongoing trend with the help timely exit.
of moving averages. The following example illustrates it – Moving Average gives us the signal of trend reversal and
Date Buy/ Price No.of Amount helps in taking buying and selling decisions.
Shares Methods to use Moving Average for Trading /
Sell
Investment –

35
Since we get the Moving Average from the available price
data, we can find out the trend of the price when the market
is trending. Thus, the trading/investments based on Moving
Average are highly profitable.
Similarly, when the market is non-trendy or shows
sideways or range-bound movements, decisions based on
Moving Average are not so profitable.
Price line crossing Above or Below Moving Average –
This is a simple method to follow when price line crosses
above/below a certain Moving Average line and then we
should make our decision regarding buying or selling.
Again, when there is a short term Moving Average, then
price will cross it many times. It is for this reason that we
should use 26-SMA (Simple Moving Average for past 26
days) for the Short Term, 50-SMA for Medium Term (3 to
6 months) and the 200-SMA for Long Term Price
Movement. Consider the following chart –
Similarly, if we have 5-SMA and 15-SMA the buying
position is formed when the 5-SMA line crosses the 15-
SMA line in an uptrend and the sell position is formed
when the 5-SMA line crosses the 15-SMA line in a
downtrend. Consider –
36
Two Moving Averages Cross-over Method
Many Technical analysts use the Moving Average Cross-
over Method to find out the strong Bullish signal. In the
Moving Averages Method, there will be one Shorter Term
Moving Average (5-SMA) and another will be Longer
Term Moving Average (15-SMA). When the shorter term
Moving Average crosses the Longer Term Moving
Average line, we should make ‘Buy’ decisions (the 5-SMA
will cross it in an uptrend). Likewise, when the 5-SMA line
crosses the 15-SMA line in a downtrend, we should make
the ‘Sell’ decision.
Weekly highs and lows are also good indicators to make
‘Buy’ or ‘Sell’ decisions. A stock has recorded a 52-Week
Low of 1500 and a 52-Week High of 1600 and when it
crosses over to 1650 from 1600 then the stock is supposed
to record a 10-15% increase.
Relative Strength Ratio (RSI) –
Relative Strength Index (RSI) is a financial indicator
developed by Wells Wilder. This shows the overbought or
oversold condition of the shares. Generally 14 days’
‘Closing’ prices’ RSI is plotted. When the RSI volume
(Strength) is above 70 then the stock is considered to be
overbought. When RSI is below 30, the stock is considered
to be oversold. Consider the following chart:
 method was developed by Gerald Apple who used 12-SMA
as a shorter term moving average and 26-SMA as the
Thus, we can find out the Overbought condition of the
longer term moving average. In this method of calculation,
stock which means that the stock is overvalued and it can
the longer moving averages are subtracted from the shorter
take a downward direction. Similarly, oversold condition
term moving averages. One 9-day-SMA signal line is
indicates that the stock is undervalued and it can take an
plotted on the MACD which generates Buy and Sell
upward direction.
signals. Consider –
RSI tells about –
Recent Gains versus Recent Losses (Generally
during 14 days). The formula of RSI is –
RSI = 100 -100
1+(RS)
With 26-SMA you invest half of your money when RSI
RS = Average Gains
shows strength of 48. When RSI is 51 or above, you invest
Average Losses up to full capital. When 26-SMA shows a downtrend and
Av. Gains = Total of Gains RSI is 52, you sell half of you investment. When RSI is 50
and below, you sell fully but hold it when it is 51-52.
14
When MACD line crosses the signal line from downward
Av. Losses = Total of Losses to upward, Buy signal is generated.
14 Conversely, when MACD crosses signal line from uptrend
Note: [For online advice of Team Leader, go to to downtrend, then Sell signal is generated.
www.teamviewer.com] MACD is a lagging (slow moving) indicator which gives
signal much after the trend is confirmed. This is an
MACD – Moving Averages Convergence and important indicator for Buy and Sell decisions. Consider –
Divergence
MACD is the trend defining indicator. It calculates the
distance between two Moving Averages. In MACD one is
the shorter term moving average and the other is the longer
term moving average. Due to the price action either these
moving averages converge or diverge. Thus MACD gives
us visual picture of divergence and convergence. This Systematic Investment Plan –

37
With the help of the following technical indicators, an position and if it is below the Bar you have long position or
investor starting with Rs. 10,000 can earn the unbelievable buy position.
amount of return of a crore of rupees –
Year MACD RSI RSI 15/5 26- PARABOLIC SAR
50 50 SMA SMA
Sell Buy
Invest 10,000
in
20,000
40,000
80,000
1,60,000
3,20,000
6,40,000 Pivot Point –
Pivot Point is used to find support and resistance levels for
12,80,000
intra-day trading. It is found out by adding previous high,
25,60,000 low and previous closing. Consider –
51,20,000 High = 105
10,00,000 Low = 96 = 105+96+101 = 303 = 101 P.P.
Close = 101 3
Parabolic SAR (Stop and Reverse) –
Parabolic SAR is a lagging (slow moving) indicator and 108_____________R2
gives Buy and Sell signals slowly. It is used to find out +ve Zone 105_____________R1
trend reversal for shorter term SAR. If there is a trend
reversal, you should change buying position or long 100_____________ Pivot Point
position into short position or short position into long -ve Zone 96______________S1
position. If the parabola is above the Bar, you have short

38
 92______________S2 Important Tip –
[For routine trading with minimum risk and assured
maximum profit, 26-SMA is always useful]
In Fibbonacci Retracement, the following Table clarifies
Fibbonacci Retracement –
the correction in upward movement of the stock price –
Correction in Uptrend -
23.6% Price From 135 to peak of 312 177
38.2% Peak Price – (Price Move X 1.236)
50.0% 312 – (177 X 0.236)
61.8% = 245
100%
123.6%
136.2%
Similarly, if the correction is in downtrend –
Sir Nelson Elliot used this tool while using Fibbonacci
Price = 128-69 59
Series. He found after the downward or upward rally of
stock levels where the stocks confirmed the support and Low Price + (Price Move X 38.2%)
resistance levels. Fibbonacci Retracement is used to find 69 + (59 X 38.2%)
the levels of Stop Loss, Support and Resistance.
Gap Theory –
A Gap occurs when the opening price of a stock is higher
than or lower than its immediate previous close :

Gap Up Opening

Similarly, in the downward to upward trend the support and Gap Down Opening
resistance levels start from 23.6% and go up to 123.8%

39
 and the small investors are buying or selling. This Gap
shows exhaustion of price. It can not go any further.
(iv) Runaway Gap – It is just like the breakout gap.
It occurs after consolidation of the price (i.e.
When does Gap occur? when a stock is moving in range-bound
When there are some significant events or developments in direction) at the peak or at the bottom. In this
the market in regard to a particular stock, the price opens as gap the prices are not covered by the price
a reaction to the event or development or news (either move. This gap gives trend to the stock price
higher or lower). therefore it is called a Runaway Gap.

Types of Gap – Basis of Trends –

According to different reasons, Gaps are classified into four Demand Supply = Uptrend
categories: Demand Supply = Downtrend
(i) Common Gap – When Gap is due to general Demand = Supply = Flat,
events like allotment of ex-dividend shares,
Range-bound
stock, or any specific news which can impact
the stock price, it will be a common gap. Types of Trends –
Generally, common gap is covered by price There are broadly two types of trends –
move on the next two-three days.
(i) Rising Trend or Uptrend
(ii) Breakout Gap – When a stock is close to its
support or resistance level and during opening (ii) Falling Trend or Downtrend
there is a gap, it is a breakout gap. It can be in Uptrend –
any direction (downward or upward) and may
continue for some days. Uptrend or rising movement in prices of stocks occurs
when prices are generally going up. In this, slight
(iii) Exhaustion Gap – During an opening rally or corrections (downward) are not included. It is when prices
falling price, if there is opening with gap it is an make specifically higher lows there is an uptrend.
Exhaustion Gap. It can be in the ongoing Consider-
direction only.
A Gap gives a confirmed reversal signal. This type of Gap
occurs with huge volumes. If this Gap is at the upper level,
it indicates that the bigger players are selling their stocks

40
Downtrend –
There is a downtrend when prices are generally falling.
Small corrections (upward movements) are not included
when drawing trend line. When prices make Lower Highs it
is a downtrend.

41