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MENTORING - Fundamentals - Market fundamentals - Coggle Diagram
MENTORING - Fundamentals - Market fundamentals
We should always check market fundamentals before taking a trade.
A rising tide lifts all boats, so goes the saying.
So while taking long trades we should ensure that the market is strong.
Similarly, while taking short trades we should ensure that the market is weak and ready to fall.
How should we analyse whether the market is going up or going down.
What is market? For us the market is nothing but an index. An index represents a market for us.
What is an index? An index is a basket of securities collected to observe the general direction of its population/components.
The index is formed by selecting the top stocks from all sectors in the market.
A sector is a segment of a business where companies of the same business are operating.
How are these companies selected? The companies are selected based on their market capitalisation, also called market value or market cap.
What is market cap? Market cap is equal to the number of shares in the company * price in the market.
Market value is the value where a new buyer or seller can buy or sell the company.
The market value changes based on the fundamental valuation of the company, apart from the psychological value attached by buyers and sellers.
The market value of a stock keeps changing as it is traded in the stock market.
To form an index, companies with the top market value are picked up from various sectors and are formed an index.
While forming an index, the weightage factor is first calculated and then attached to that price to arrive at the index.
Here the index is moved by its constituents.
The companies or constituents with the top weightage move the index all the time.
To understand market fundamentals, we have to analyse the advance-decline ratio and then the behavior of the heavyweights
The advance to decline ratio indicates how many stocks are advancing (rising) and how many are declining (falling) at a given time.
We should not look at the mere advance decline ratio. We should see the quality of the ratio. How do we observe quality? By observing the price movement of the heavyweights.
Assignment: (a) Find out the weightages of all the Nifty 50 stocks; (b) Find out the top sectors in the Nifty or NSE; (c) Find out the weightages of all the Bank Nifty stocks; (d) Find out the weightages of all sectors in the NSE.