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 55: Basic Stock Market Concept
What is the
Difference Between “Alpha and Beta”?
These measure
different aspects of investment performance:
Beta: Measures
volatility relative to the market (Nifty = 1.0).
Beta 1.2= 20% more volatile than Nifty
Beta 0.8= 20% less volatile
Alpha: Measures excess
returns vs. a benchmark after adjusting for risk (Beta).
Alpha 5% = Outperformed benchmark by 5%
Example: A fund with Beta
1.1 and Alpha 3% means 3% extra return for slightly higher risk.
What are Depository
Receipts (ADRs/GDRs)?
Instruments
allowing Indian companies to list on foreign exchanges:
ADR (American Depository Receipt): Traded on US markets (e.g., Infosys
ADR, TCS ADR)
GDR (Global Depository Receipt): Traded on European/London
exchanges.
How they work:
1. Bank buys shares of (e.g.) Tata Motors in India.
2. Issues receipts against these shares on NYSE.
3. US investors buy ADRs → gain exposure without direct India
access.
What is Monte carlo
Simulation in Finance?
A computer-driven technique that models thousands of possible future
scenarios** to predict outcomes.
Use case: Estimates
retirement success probability by simulating:
Market crashes
Inflation spikes
Salary changes
Output: You have an 85%
chance of ₹50K/month for 30 years with this portfolio.
Benefit: Reveals hidden
risks deterministic models miss.
What are Secular
vs. Cyclical Trends?
Secular Trend: Long-term shift
(>5-10 years) driven by deep structural changes.
Example: Renewable energy
adoption, digital payments in India.
Cyclical Trend: Shorter waves (1-3
years) tied to economic cycles.
Example: Auto/real estate
demand rising in low-rate environments.
Investor takeaway: Build core
portfolio around secular trends; trade cyclical ones cautiously.
What is the VIX
(fear Index)?
The CBOE Volatility Index measures expected market volatility over 30
days.
How it works:
VIX < 15: Market calm (complacency)
VIX > 30: High fear/volatility (e.g., during
elections/wars)
Trading use:
Hedgers buy when VIX spikes
Contrarians see high VIX as buying opportunity
Note: Called India VIX
on NSE.
What is Dollar-Cost
Averaging (DCA)?
Investing fixed amounts at regular intervals** (like SIPs) regardless of
price.
Why it beats timing:
Buys more shares when prices up.
Buys fewer when prices down.
Emotionally neutral.
Math proof: ₹10,000/month in
Nifty over 20 years → 12% CAGR vs. 9% for lump-sum at peaks.
What is Duration
Risk in Bonds?
Measures bond sensitivity to interest rate changes.
Rule: For every 1% rate
rise, bond price falls by its duration.
Example: A 7-year duration
bond drops ~7% if rates rise 1%.
Management:
Short duration (<3 yrs.) if rates expected to rise
Long duration (>7 yrs.) if rates expected to fall
Critical for: Debt mutual fund
investors.
What is Arbitrage?
Profiting from price differences of the same asset across markets.
Example:
TCS trades at ₹3,800 on NSE
TCS trades at ₹3,820 on BSE
Buy on NSE → Sell on BSE → ₹20 risk-free profit
Modern use: Arbitrage funds
exploit futures-cash price gaps.
Limitation: Opportunities
vanish quickly with algorithmic trading.
What is a Dead cat
Bounce?
A temporary recovery in a falling stock** before it declines
further.
Identification:
Sharp drop (e.g., -30%)
Quick 10-15% rebound on low volume.
Resumes downtrend.
Psychology: Traps hopeful
buyers exiting near lows.
Defense: Wait for higher
lows + volume confirmation before buying dips.
What is
Quantitative Tightening (QT)?
When central banks reduce money supply by selling bonds or halting
reinvestments.
Mechanism:
RBI sells govt. bonds → Absorbs cash from banks → Reduces lendable
money
Impact:
Higher Borrowing costs
Lower Stock valuations (cheap money dries up)
Opposite of QE (Quantitative Easing)
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.
