If you also want to learn the stock market and make money from it, then first of all you have to understand the mathematics of the share market. If you understand the maths of the stock market properly, then you will be able to save yourself from the loss of the stock market due to ignorance and will be able to earn good money.
AllIndiaEvent is told from the beginning that the stock market is a speculative market. Because of this, fear arises in many people upon hearing the name of the stock market. But if you understand the maths of the stock market correctly, then I have full hope that you can make good money in the long term by understanding its correct concept.
Why Is It Important To Understand The Maths Of The Stock Market?
Why it is important to understand the mathematics of the stock market let me explain to you with an easy example.
You tell yourself that you study for about 25 years of your life to get a job worth 20, 30 thousand. After that, you go and get a job somewhere and there is no guarantee for that either. Same you do extra studies of about 4 to 5 years to become a doctor or CA.
But when it comes to earning money from the share market, then you do not want to learn anything from this and want to earn profit by directly entering the share market. I think this is wrong. Wherever money is involved, you must learn and understand how to earn money from that thing. That’s why it is important to understand the mathematics of the stock market.
Stock Market Maths
(1) Understand The Stock Market Terminology
If a new investor comes to the share market then he should first understand the share market terminologies. Because there are many terms in the stock market which are very important for a new investor to understand. Unless your basic concepts are not clear, you will not understand the maths of the stock market at all.
2. Don’t Try To Make Quick Money
Most investors enter the stock market with the aim of making quick money. Make a point that making quick money in the stock market means taking a lot of risks.
For this, you will have to do short-term trading like intraday F&O which involves a lot of risks. If you stop earning money without learning, it becomes difficult to save capital in it. So never do short-term trading without thinking.
(3) Understand The Whole Process Of the Share Market
You will understand the maths of share market very well when you understand the whole process of share market. You will have to give some time in this. But if you understand the entire process of the share market well by giving a little time, then your way forward will be very easy.
That’s why you have to understand everything from the IPO of the company to its listing, how to buy and sell shares after that, and why the company’s share prices go up and down. With this, you will be able to get basic knowledge which will help in your fundamental analysis.
(4) Mathematics Of Fundamental Analysis
It is very important to learn fundamental analysis in the stock market. If you want to be a good long-term investor, you need to know the fundamental analysis of the company. In this, what business the company does, how it earns money, where does its revenue come from, and how are its financial statements, ratios and its management, you have to analyze the company.
Overall, you have to learn from fundamental analysis how to pick a good stock. If you learn to do fundamental analysis, then understand that you have almost learned the mathematics of the stock market. Because only long-term investment can earn profit through compounding in the stock market.
(5) Mathematics Of Portfolio Diversification
Managing risk is very important in the stock market. In this episode, portfolio diversification plays a very important role.
Suppose you have ₹ 5,00,000 which you want to invest in the share market. You invest the entire ₹ 5,00,000 in a single company. This investment of yours proves to be wrong due to which the company sinks. In this case, you will suffer a huge loss.
But if you had invested that ₹5,00,000 in 10 different companies and even if one or two failed, your portfolio would not have been affected that much.
Therefore it is very important to diversify the portfolio. Never put your money in one or two stocks, but make a good bridge of about 10-20 stocks in which you can invest. You don’t want to buy stocks in too many quantities that you can’t track them. Hence proper portfolio diversification is very important.
(6) Mathematics Of Power Of Compounding
It is very important to understand the power of compounding in the stock market. If you understand the power of compounding at play, you can build decent wealth. This is a huge topic but let me explain it with a simple example so that you will know the importance of the power of compounding.
In the above example, you can see that the first investment is kept for 20 years, then it is going to be around one crore rupees.
(7) Be aware of important ratios
There are many ratios related to the financials of a company in the stock market, which you need to know. You have to see some ratios before buying shares while some have to be seen as monitoring after buying shares.
You may find these financial ratios difficult in the beginning, but gradually you will find them easy.
(8) Profit from share
To understand the maths of the stock market, it is important that you know very well how it is beneficial to buy shares. Whenever you buy shares, you can make profit in two ways –
- Increase In Share Price
- Receiving Dividends
For example, if you buy a share for ₹ 100 and after some time its price increases. If you sell that share at ₹110 then you will make a profit of ₹10.
(9) Mathematics of Investment and Trading
There are two ways of investing and trading in the share market. If you buy a share in the stock market, you can hold it from a few seconds to many years (as long as you want).
When you buy shares and sell them within a few minutes to a few months, it is called trading.
- Intraday: When you buy shares of a company and sell them on the same day, it is called intraday or day trading. This is risky trading.
- Swing Trading: If the bought shares are sold after keeping them for a few days or a few months, then it is called swing trading.
- F&O Trading: In this trading, trading is done in calls and puts of Stock, Nifty and Bank Nifty. This is known as future & option trading. This trading demands a lot of expertise.
In the stock market, when shares are bought and held for a long time, which is usually more than 1 year, then it is called investment. Both investing and trading have different objectives.
In trading, traders try to make profit by understanding the price movement of shares in the short term. On the other hand, in investing, understanding the business along with the fundamentals of the stock/company, is invested for a long time for big profits.
(10) Understand the math of market cap
While investing in the stock market, it is very important to take care of the market cap of the companies. Market cap lets you decide which type of companies you can invest in as per your risk appetite. On the basis of market cap, companies can be divided into three categories:
- Small Cap: Small-caps are those companies whose market cap is less than ₹ 5,000 crores. These are risky companies.
- Mid Cap: These are companies whose market cap lies between ₹ 5,000 crore to ₹ 20,000 crore. These companies have moderate risk.
- Large Cap: Large-caps are companies with a market capitalization of ₹ 20,000 crore or more. There is relatively less risk in these.
(11) Mathematics Of Buying In Stock Market Fall
Many times it happens in the stock market that the stock market crashes. Means it falls around 10-20% in about five-six days which can be more. In such situations, most of the investors want to run away from the stock market and sell their investments.
But if you are a smart investor and believe in the future of the stock market, then you can buy good and quality stocks at a discount at that time. This gives you a very good benefit in the long-term.