Page 197 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes never let sentiment of emotion override facts (as shown by technical indicators) and
should always get out of a situation which, on available evidence, is no longer profitable.
4. Technicians do not separate income from capital gains: They look for total returns, that is,
the realized price less the price paid plus dividends received. This is in sharp contrast to
most long-term investors who buy a high-dividend paying stock and hold it for years,
through up-and-down fluctuations. To the technicians, such strategy is foolish. A stock
may continue to pay liberally but lose 50% of its value. If a stock is to be judged solely on
its income, a non-dividend payer would have no value at all.
5. Technicians act more quickly to make commitments and to take profits and losses: They
are not concerned with maintaining a position in any market, any industry or any stock.
As a result, they are willing to take smaller gains in an up-market and accept quick losses
in a down market. Traders/technicians want to keep their money working at maximum
efficiency. Technicians know that there is no real value to any stock and that price reflects
supply and demand, which are governed by hundreds of factors, rational and irrational.
No one can grasp and weigh them all, but to a surprising degree, the market does so
automatically.
6. Technicians recognize that the more experience one has with the technical indicators, the
more alert one becomes to pitfalls and failure of investing: To be rewarding, technical
analysis requires attention and discipline, with quality stocks held for the long terms. The
duration can make up for timing mistakes. With technical approaches, the errors become
clear quickly.
7. Technicians insist that the market always repeats: What has happened before will probably
be repeated again; therefore, current movements can be used for future projection. With
all markets and almost all securities, there are cycles and trends which will occur again
and again. Technical analyses, especially charts, provide the best and most convenient
method of comparison.
8. Technicians believe that breakouts from previous trends are important signals: They
indicate a shift in that all – important supply and demand. When confirmed, breakouts are
almost always accurate signals to buy or sell.

9. Technicians recognize that the securities of a strong company are often weak and those of
a weak company may be strong: Technical analysis can quickly show when such situations
occur. These indicators always delineate between the company and the stock.
10. Technicians use charts to confirm fundamentals: When both agree, the odds are favourable
for profitable movement if the trend of the overall stock market is also favourable.

In view of the above comparison between technical and fundamental analysis, let us consider
some of the tools used by technical analysts to measure supply and demand and forecast security
prices.
Table 10.1: Distinctions between Fundamental Analysis and Technical Analysis

S.No. Fundamental Technical
1. His perspective is long-term in nature. He His outlook is short-term oriented. He is
is conservative in his approach. He acts on aggressive. He acts on ‘what is’.
‘What should be’.
2. He adopts a buy-and hold policy. He does He believes in making a quick buck. He
not usually expect any significant increase snuffles his investments quite often
in the value of his investments in less than recognizing and foresees changes in stock
a year. prices.
3. He considers total gain from equity He does not distinguish between current
Contd...
investment consists of current yield by way income and capital gains. He is interested in
of dividends and long-term gains by way short-term profits.
of capital appreciation.
4. He forecasts stock prices on the basis of He forecasts security prices by studying
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economic, industry and company statistics. patterns of supply of and demand for
The principal decision variables take the securities. Technical analysis is study of
form of earnings and dividends. He makes stock exchange information.
a judgment of the stock’s value with a risk-
return.
5. He uses tools of financial analysis and He uses mainly changes of financial
statistical forecasting techniques variables besides some quantitative tools.