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 51: Basic Stock Market Concept
What is Fundamental
Analysis?
Fundamental Analysis (FA) focuses on a company's intrinsic value.
Analysts study financial statements (profit/loss, balance sheet, cash flow),
management quality, competitive advantages, industry health, and overall
economic factors. The goal is to determine if a stock is undervalued (good buy)
or overvalued (sell/avoid) based on its actual business performance and
long-term prospects. It's like assessing a company's health and potential.
What is Technical
Analysis?
Technical Analysis (TA) focuses on studying historical price charts and
trading volume to identify patterns and trends. Technical analysts believe past
price movements can predict future direction. They use indicators (like moving
averages, RSI, MACD) and chart patterns (head & shoulders,
support/resistance levels) to time their entry and exit points. It's more about
understanding market psychology and supply/demand reflected in the price action
itself. FA asks what to buy, TA often asks when to buy/sell.
What is MCX (Multi
Commodity exchange of India)?
This is India's leading platform for trading commodity derivatives
(futures and options contracts). Trading on MCX allows participants (farmers,
producers, consumers, speculators, investors) to:
Hedge Price Risk: Producers (e.g.,
farmers) or consumers (e.g., jewellers) can lock in future prices to protect
against adverse price movements.
Speculate: Traders/investors
can bet on future price directions to profit from volatility.
Investment
Perspective: Commodities like Gold are often seen as a hedge against inflation or
currency weakness. However, trading commodity futures is complex and carries
high risk due to leverage and volatility, making it generally unsuitable for
beginners without significant research and risk management.
What is the Biggest
myth about technical Analysis?
Myth: TA guarantees
profits.
Truth: TA is a
probability tool, not a crystal ball.
Why it fails?
Black swan events (e.g., war, regulations).
Over-reliance on 1 indicator.
Ignoring fundamentals (e.g., debt crisis).
How to fix:
Combine TA
with:
Risk management (stop-loss!).
Fundamental checks (e.g., earnings growth).
Macro trends (interest rates, sector cycles).
Can Technical
Analysis (TA) Predict Bitcoin or Crypto Price Movements?
TA works in Bitcoin
or in crypto but with caveats such as:
Pros: Identifies trends, support/resistance (useful in volatile
markets).
Cons: More prone to "false signals" due to low
liquidity/pump-and-dumps.
Key tools we should
use:
Exponential moving average or EMA like 20,50,200 (trend
filter)
RSI (overbought/oversold or momentum)
Volume spikes (confirms breakouts).
Never risk more than 3% of capital per trade.
What
is Trailing- Loss?
A
trailing stop-loss automatically adjusts your exit price as a stock rises,
trailing behind the peak by a fixed percentage or amount.
Fixed
Stop-Loss: Set at ₹90 for a ₹100 stock (static 10% risk).
Trailing
Stop-Loss (10%):Stock rises to ₹120 → stop-loss moves to ₹108. If it drops 10%
from peak, you exit at ₹108 (locking ₹8 profit vs. ₹10 loss with
fixed).
Advantage:
Protects profits during uptrends without manual adjustments. Ideal for volatile
growth stocks.
How do Interest rate Hike by RBI affect Stock
Price?
Higher
interest rates Increase borrowing costs and reduce corporate profits thus lower
stock valuations.
Make
bonds/FDs more attractive, investors sell stocks for safer assets.
Hurt
debt-heavy sectors (real estate, autos) but help banks (higher lending
margins).
Key
Insight: Rate-sensitive stocks fall when RBI hikes. Defensive sectors (FMCG,
pharma) often outperform.
What is Sector Rotation in Investing?
Sector
rotation refers to scrolling an restructuring the different cycles of the
market strategically shifting investments between sectors based on economic
cycles.
Early Recovery: Cyclicals (autos, housing) rise.
Peak Growth: Commodities, industrials shine.
Recession: Defensives (healthcare, utilities)
outperform.
Beginner Tip: Don’t time sectors blindly. Invest via sectoral
index funds (e.g., Nifty Bank ETF) for diversified exposure.
Why do Commodity Prices like Crude Oil impact Stock Markets?
Commodities are economic building
blocks:
Rising
crude oil prices mean higher transport/manufacturing cost higher inflation
which can hurt consumer spending. It will lower corporate profits.
Falling
metals prices signal slowing industrial demand in effect mining/auto stocks
fall.
Key link: Nifty movements correlate with Brent crude prices.
Track MCX for early signals.
What is Confirmation Bias in Investing?
In
investing bias confirmation means seeking only information that confirms your
beliefs while ignoring opposing views.
Example: Buying a stock, then only reading bullish analyst
reports – dismissing risks.
Danger:
Traps you in bad investments.
How to Fix: Actively seek bearish perspectives and analyze probable dangers and write down "Why I might be wrong?" before buying.
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.
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Weekly Q&A for Stock Market Newbies- part - 50
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