The Explainer: Stock Market - Part II
The first part of The Explainer on Stock Markets focused on a few basic aspects of the stock market, like meaning of share, types of markets, stock exchange, and demat account.
This article will focus on participants in the stock market, like brokers and investors.
What is Speculation?
In the world of stock markets, Speculation relates to any activity that involves risk-taking. For example, a speculator may try to buy at a low price to sell later at a higher price, thus making a neat profit in the bargain. Now, you may wonder where is the risk here?
Any activity which is future-based involves risk. Look at it this way: the speculator buys at what he believes is a low price; he does this to sell at a higher price - something that may happen in the future. But there is no guarantee that the price will rise in the future. Thus he is taking a chance; in stock market jargon, this 'taking a chance' is called speculation.
In a simple way, let's say, even before the third test between India and England starts, you place a bet on its outcome - that India will win the match. Now what you are doing here is that you are speculating, with considerable risk involved - India may or may not win the match!
Who is a Broker?
A broker is a middleman who brings a buyer and a seller together. He helps strike a deal; he charges brokerage or commission for his services. He does not buy or sell for himself; he does this to earn commission. In the stock market, there are both individual brokers as well as corporate brokers (like Motilal Oswal).
Types of Stock Brokers
Who is a Bear?
A bear is a broker and a speculator. He is a pessimist; he expects the price of shares to fall. So what he tries to do is to sell at today's price, which he fears will fall in the future. He believes that by selling the shares at today's higher price, he can avoid making a loss in the future. If there is large-scale selling by a large number of bears, such a market sentiment is called bearish.
Who is a Bull?
After this simple take on stock brokers like bulls and bears, now let us look at two important types of investors: Chicken, Pig, and Stag.
The idea behind this is simple: buy at a low price (on application) and sell at a profit when the price goes up in the first few days of the company's listing. There is pretty little risk involved in this kind of trading.
Who is a Chicken?
In the same way, a Chicken is an investor who does not have the courage to take risk. He is risk-averse, i.e. he avoids taking risk. He does not wish to lose money (and sleep!). So he does not speculate; he also avoid buying / selling anything for the short term. Typically he invests money in fixed deposits (mostly with nationalised banks; the guy would not trust private sector banks) and government bonds, like those issued by the RBI. On a rare occasion, he might invest in some blue chip stocks for the long term.
For your information, blue chip stocks relate to those companies that are financially secure, have a long track record of consistent growth, and sometimes, high dividend payout history.
Who is a Pig?
A Pig is the darling of a stock broker (bear / bull). Since he is a huge risk-taker, the stock brokers love him. The Pig may or may not make money but the stock broker does (by earning his commission).
I wanted to keep this article short; I hope this helps.
(Read The Explainer: Stock Market - Part I)
(Please post your reaction to this post; see below.)
This article will focus on participants in the stock market, like brokers and investors.
What is Speculation?
In the world of stock markets, Speculation relates to any activity that involves risk-taking. For example, a speculator may try to buy at a low price to sell later at a higher price, thus making a neat profit in the bargain. Now, you may wonder where is the risk here?
Any activity which is future-based involves risk. Look at it this way: the speculator buys at what he believes is a low price; he does this to sell at a higher price - something that may happen in the future. But there is no guarantee that the price will rise in the future. Thus he is taking a chance; in stock market jargon, this 'taking a chance' is called speculation.
In a simple way, let's say, even before the third test between India and England starts, you place a bet on its outcome - that India will win the match. Now what you are doing here is that you are speculating, with considerable risk involved - India may or may not win the match!
Who is a Broker?
A broker is a middleman who brings a buyer and a seller together. He helps strike a deal; he charges brokerage or commission for his services. He does not buy or sell for himself; he does this to earn commission. In the stock market, there are both individual brokers as well as corporate brokers (like Motilal Oswal).
Types of Stock Brokers
There are two important types of brokers: Bear and Bull. Though brokers, they are called by these peculiar names after the kind of speculation they indulge in.
Who is a Bear?
A bear is a broker and a speculator. He is a pessimist; he expects the price of shares to fall. So what he tries to do is to sell at today's price, which he fears will fall in the future. He believes that by selling the shares at today's higher price, he can avoid making a loss in the future. If there is large-scale selling by a large number of bears, such a market sentiment is called bearish.
Who is a Bull?
A bull is a broker and a speculator. He is an optimist; he expects the price of shares to rise. So what he tries to do is to buy at today's price, which he hopes will rise in the future. He believes that by buying the shares at today's lower price, he can make a big profit in the future after selling the shares at a higher price. If there is large-scale buying by a large number of bulls, such a market sentiment is called bullish.
After this simple take on stock brokers like bulls and bears, now let us look at two important types of investors: Chicken, Pig, and Stag.
Types of Investors
There are three important types of investors: Stag, Chicken, and Pig. I will not focus on the long term investor.
There are three important types of investors: Stag, Chicken, and Pig. I will not focus on the long term investor.
Who is a Stag?
A Stag is an investor who buys shares through a famous company's Share Issue, i.e. on application when the company comes out with a share issue. He does this with a simple view: Buy at the face value (i.e. par value) and sell either before the company gets listed on the stock exchange (i.e. before trading starts on the stock exchange), or on the first day of the listing or in the first few days after the company gets listed on the stock exchange.
The idea behind this is simple: buy at a low price (on application) and sell at a profit when the price goes up in the first few days of the company's listing. There is pretty little risk involved in this kind of trading.
Who is a Chicken?
Ever heard the term - 'chicken-hearted'? If you called someone 'chicken-hearted', you meant to call that person a coward, i.e. someone lacking courage.
In the same way, a Chicken is an investor who does not have the courage to take risk. He is risk-averse, i.e. he avoids taking risk. He does not wish to lose money (and sleep!). So he does not speculate; he also avoid buying / selling anything for the short term. Typically he invests money in fixed deposits (mostly with nationalised banks; the guy would not trust private sector banks) and government bonds, like those issued by the RBI. On a rare occasion, he might invest in some blue chip stocks for the long term.
For your information, blue chip stocks relate to those companies that are financially secure, have a long track record of consistent growth, and sometimes, high dividend payout history.
Who is a Pig?
As an investor, a Pig is the antithesis of a Chicken; a Pig loves to take risk, to make that LARGE profit. Being impulsive and greedy by nature, he buys on the spur of the moment, without doing any background check on how the company is performing or whether the share price will rise.
A Pig is the darling of a stock broker (bear / bull). Since he is a huge risk-taker, the stock brokers love him. The Pig may or may not make money but the stock broker does (by earning his commission).
I wanted to keep this article short; I hope this helps.
(Read The Explainer: Stock Market - Part I)
(Please post your reaction to this post; see below.)