Hello readers, we are happy to announce that our team of MoneyWiseMind.com launched a new section “Investing Insights: Weekly Q&A for Stock Market Newbies”, to spread the basic stock market knowledge to the beginners.
This is your go-to resource for
demystifying the stock market from the scratch. Each day, we will present 10
carefully curated questions with answers that will cover essential concepts,
strategies, and terminologies. Whether you have just entered into the market,
or trying to starting your stock market journey, or looking to strengthen your
foundation, our weekly post will guide you through the basics and beyond,
making investing accessible and understandable for everyone. Happy reading.
Day
44: Basic Stock Market Concept
What is Pre-Market / After-Hours Trading, and Should Beginners Try IT?
Pre-market (9:00–9:15
AM) and after-hours (3:30–4:00 PM) trading allow buying/selling shares outside
regular market hours.
Risks:
Prices can swing
wildly due to low trading volumes. For example, a ₹100 stock might jump to ₹120
on a rumor, then crash to ₹90 when markets open.
Beginners Should Avoid:
These sessions require
experience to interpret news (earnings reports, global cues). Stick to regular
hours until you understand price patterns.
Exception: Use these
sessions to place limit orders for the next day safely (e.g., Buy HDFC Bank at
₹1,600 if it dips, when it trades on ₹1620).
How Do Stock Buybacks Affect Investors?
A buyback is when a
company repurchases its shares from the market.
It indicates the
company thinks its shares are undervalued. Example: TCS’s ₹18,000 crore buyback
in 2022 boosted investor confidence.
Benefit:
Reduces total shares,
increasing earnings per share (EPS) for remaining investors.
Risk:
Sometimes used to
artificially inflate stock prices.
Check if the company
is using cash reserves (healthy) or taking debt (risky) for buybacks. Favor
companies with consistent buybacks and profits.
How Do Currency Changes Impact Global Stock
Investments?
Currency fluctuations
affect returns on foreign stocks.
Example: You invest ₹10 lakh in a US stock when $1 = ₹75. If the rupee
weakens to ₹83/dollar:
Stock value rises
10%.You gain 10% + 10% currency gain = 20% profit.
Stock value drops
10%.Loss reduced to 0% due to currency gain.
Beginner Tip:
Invest in global funds
with “currency hedging” to minimize this risk. Focus on Indian markets first to
avoid complexity.
What is Sector Rotation, and How Can Beginners
Use?
Answer:
Sector rotation means
shifting investments between industries based on economic cycles:
Recovery Phase (post-recession): Auto, real estate (people spend
more).
Peak Phase (booming economy): Tech, luxury goods.
Recession Phase: Utilities, healthcare (stable demand).
Simple Strategy:
Invest 70% in
diversified index funds (auto-rotates sectors) and 30% in 2–3 trending sectors.
Example: During COVID, healthcare stocks surged, while travel stocks
crashed.
What are Market Sentiment Indicators (Like
VIX), and do they Matter?
Sentiment indicators measure investor fear or
greed:
VIX (Fear Index):
Above 20 = more
volatility and negative sentiments in the market. Avoid short term trading. Below
15= positive sentiments in the market.
Put/Call Ratio: More put options = bearish
sentiment.
Beginner Approach:
Use these as secondary
tools. For example, if VIX spikes but your stock’s fundamentals are strong,
hold instead of panic-selling.
Avoid: Day-trading based on sentiment alone, fundamentals always
matter more.
How does “Herd Mentality” Hurt Beginners?
Herd mentality is
blindly following crowds (e.g., buying Bit coin because everyone is
buying).
Example: In 2021, many bought GameStop shares during the Reddit frenzy,
only to lose money when prices crashed.
1. Ask: "Why am I
buying this stock?" If the answer is "Because others are,"
pause.
2. Track contrarian
indicators (e.g., extreme optimism in news = potential bubble).
Action:
Allocate only 5% of
your portfolio to "trendy" stocks—limit FOMO damage.
How do Geopolitical Tensions (Like Wars)
Affect Stocks?
Conflicts disrupt
supply chains and investor confidence.
Example: Russia-Ukraine war (2022) caused oil stocks (ONGC) to rise but
IT stocks (Infosys) to fall in Europe-dependent companies.
Beginner Strategy:
Hold 20% in
"defensive" sectors (pharma, utilities) during crises.
Avoid panic-selling: Most markets recover within 1–2 years
post-conflict.
How to Read a Balance Sheet in 5 Minutes?
Answer: Focus on three numbers:
Debt-to-Equity Ratio: Below 1 = low debt (safe).
Current Ratio (Current Assets ÷ Liabilities): Above 1.5 = good liquidity.
Reserves & Surplus: Growing yearly = profitable
company.
Tool: Use Screener in pre-calculated ratios. Ignore complex notes
initially.
What are “Stop-Loss” Strategies for Volatile
Market?
A stop-loss automatically sells a stock if it
drops to a set price.
Beginner Rules:
Short-term trades: Set stop-loss at 8–10% below buy
price.
Long-term holds: Use 15–20% stop-loss to avoid false
triggers.
Example: Bought Tata Motors at ₹500? Set stop-loss at ₹450
(10%).
How do Dividends Work, and are they Free
Money?
Dividends are company
profits shared with shareholders.
Math: "Dividends = free cash." Reality: Stock price drops
by the dividend amount.
Example: Stock at ₹100 pays ₹5 dividend → Price adjusts to
₹95.
Strategy: Reinvest dividends via DRIPs (Dividend Reinvestment Plans) for
compounding.
If you have any other questions in your mind
relating to stock market basics or need any clarification, please put your
query into the comment box, We will try our best to clarify the same
Disclaimer: The information
provided on MoneyWiseMind is for educational and informational purposes only.
It is not intended to be financial advice, and you should not rely on it as
such. Before making any financial decisions, you should consult a licensed
financial advisor.
