Module 1   Introduction to Stock MarketsChapter 13

Getting started

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13.1 – Dig deeper

Congratulations! If you’ve read all the chapters and scrolled through the numerous comments in each chapter, then that means that you dont have a passing interest in stock markets but rather a genuine interest to learn and profit from the market.

I guess you are now warmed up to dig deeper!

The objective of the first module is to give you a quick hands-on introduction to the stock markets. In our endeavor to introduce the stock markets, we have carefully selected concepts you need to know, especially if you are new to markets.  At this point, it is a good sign if you have many unanswered questions. You will find your answers as we proceed to other modules.

Before we proceed further, you need to understand why we have so many different learning modules and how these modules are interrelated. Here are some of the modules that we will cover in Varsity.

    1. Introduction to Stock Markets
    2. Technical analysis
    3. Fundamental Analysis
    4. Futures Trading
    5. Option Theory
    6. Option Strategies
    7. Markets & Taxation
    8. Currency, Commodity, and Govt Securities
    9. Risk Management & Trading Philosophy
    10. Trading Systems
    11. Personal Finance (Mutual Funds)
    12. Integrated Financial Modelling

Apart from these, we will add other modules on the go.

13.2 – So many modules, how are they interrelated?

The idea of ‘Varsity at Zerodha’ is to create a repository of high-quality market-related educational content. The content will cover fundamental analysis, technical analysis, derivatives, trading strategies, risk management, financial modeling, etc. Each main topic is categorized as a module. So think of a module as reading a book with several chapters within.

You may wonder how each topic fits within the grand scheme. To help you get a perspective, let me ask you a question. To be successful in the markets, what, according to you, is the single most important factor? Success in markets is easily defined – if you make money consistently, you are successful, and if you don’t, you are not!

So if you were to answer this question for me, chances are you would think about risk management, discipline, market timing, access to information, etc., as the key to success in markets. While one cannot deny the importance of these factors, developing a point of view (POV) is even more compelling and primary.

A point of view is the art of developing a sense of direction on a stock or the index. If you think the stock is going up, your POV is bullish; hence you would be a buyer of the stock. Likewise, if you think a stock is going down, your POV is bearish; you would be a stock seller. Without a POV, you won’t know what to do in the market. Once you develop a POV, you add other elements like risk management, timing, macro & micro factors, etc., to improve the odds of your trade, but without a POV, you just can’t get started. For that reason, I’d consider developing POV as the most important factor.

Having said that, how do you develop a point of view? How do you figure out if the stock is going up or down?

One needs to develop a systematic approach to analyze the markets to develop a point of view. A few methods are using which you can figure out/ analyze what to buy or sell. They are:

  1. Fundamental Analysis (FA)
  2. Technical Analysis (TA)
  3. Quantitative Analysis (QA)
  4. Outside views

To give you a preview, here is a typical illustration of a trader’s thought process while developing a POV (whether to buy or sell stocks) based on a particular method of analysis –

FA-based POV – The company’s quarterly numbers look impressive. The company has reported a 25% top-line and 15% bottom-line growth. The company’s guidance also looks positive. With all the fundamental factors aligned, the stock looks bullish; hence the stock is a buy.

TA-based POV – The MACD indicator has turned bullish along with a bullish engulfing candlestick pattern; the stock is also trading at its support point, with that study, its short-term sentiment looks positive; therefore, the stocks are a buy.

QA-based POV – With the recent up move, the stock’s price to earnings (PE) touched the 3rd standard deviation. There is only a 1% chance for the PE to breach the 3rd standard deviation. Hence, it is prudent to expect a reversion to mean the stock is a sell.

Outside view – The analyst on TV recommends a buy on the stock; therefore, the stock is a buy.

The POV you take should always be based on your own analysis rather than an outsider’s view, as more often than not, one regrets taking action based on an outside view.

So after developing a POV, what does one generally do? Does the straightaway go and trade the point of view? Here is where the complexity of markets starts to kick in.

If the POV is bullish, you can choose to do one of the following:

  1. Buy the stock in the spot market.
  2. Buy the stock in the derivatives markets.
    1. Within derivatives, you can choose to buy the futures.
    2. Or choose to trade via the options market.
      1. Within the options market, there are call options and put options.
      2. You can combine call and put options to create a synthetic bullish trade.

So what you choose to do after developing a POV is a different ball game.  Choosing the right instrument to trade that complements your POV is critical to profitable trading.

For example, if I’m extremely bullish on the stock from a 1-year perspective, I’m better off making a delivery trade. However, if I’m out rightly bullish on the stock from a short-term perspective (say one week), I’d rather choose a futures instrument to trade.

If I’m bullish with constraints attached (for example – I’m expecting the markets to bounce because of a great budget announcement, but I don’t want to risk much), it would be prudent to choose an option instrument.

So the message here is – the market participant should develop a point of view and complement the POV with the right trading instrument. A well-researched POV combined with the right instrument to trade is a perfect recipe for market success.

Also, by now, hopefully, you have got a sense of how all the different modules in “Varsity” play an important role in assimilating the market.

M1-ch13-chart

So keeping this in the background, go ahead and explore the content on Varsity at Zerodha.

The next two modules will explore concepts that will help us develop POV based on Technical and Fundamental Analysis.

After reading through these two modules, you will get a sense of developing a point of view on markets. In the later modules, we will discuss the different trading instruments you can choose to complement your perspective. As we progress, we will ramp up the flow to help you start calibrating your trades with effective risk management techniques.

Let’s roll!

602 comments

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  1. kashish shambhwani says:

    loved it..learn a lot many new things..thanks 🙂

    • Karthik Rangappa says:

      Most welcome 🙂

      • harikrishnan says:

        Sir I had some doubt regarding the purchase of stocks of a company. After listing a company in stock exchange they are actually selling their share to the public, right. If company xyz issues 10rupee 10000 shares to the public, and I bought a 1000 shares of that company at rupees 10000. After some time I wish to sell my share. Then I ll put an ask price for my shares. What will happen if nobody buys my share?

        • Karthik Rangappa says:

          Well, this depends on the liquidity of the company. For a really large company like infy there is always someone buying and selling its shares…however there are some really small obscure companies in which trading does not happen…even if it does the volumes are low. So you need to make sure there is ample liquidity before you take positions.

        • Ajmal says:

          Hi Hari,

          In simple terms, like any traditional business that involves buying and selling trading is not any different. By liquidity we mean that the shares that you purchase should be easily sell-able. In other words if you purchase a stock that nobody wants then you will not be able to sell it.

          Before you purchase any stock check the volume of the stock that is being traded. This is a great indicator that tells you that so many people are buying and selling. More the volume the better. More volume involves more trades and more buyers and sellers which improves your chance of selling your stocks

          • Frank says:

            I have a question which bothers me. The volumes of shares like MRF and Eicher are always low then how do the price move so much in a day despite low volumes?

          • Karthik Rangappa says:

            When volumes are it is actually easy to move the price, even a small buy-sell can influence the price.

        • srinivas Karanam says:

          If no body is interest in your ask price ..trade will not execute.

      • Dipen kotecha says:

        How can i get inside information ( such as cmpny goes to anounce xyz) 😁

  2. Gaurav Lulu says:

    Excellent material with quality content. Thanks Zerodha.

  3. jagadeesh says:

    Thank you so much for the content sir.Thanks Zerodha. 🙂

  4. DS3717 says:

    Thanks for an introduction marked by clarity, and simplicity of explanation. Was very useful in following the material.

  5. Anishcharith says:

    This is like HC verma for stock market
    awesome 🙂

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