Nifty Primer

Readers, At the outset I would like to extend a warm welcome on my blog.  

What is Nifty and why it appears on newspaper ? Why it is associated with economic condition? What are Financial markets? How do we price something which we cannot taste, smell or see and still its value is derived and changes. What and who moves its value? These are some questions which are still an Enigma to me, Nevertheless, I would like to take up this challenge of answering these questions  on myself.

Financial markets just like any other market place is an organized platform where Financial instruments  are traded. Sellers and buyers reach at a price where trade is facilitated. Yes! It is simple as this. Buyer and seller meet, Seller offer its price and if he gets a buyer who agrees to pay the price then hurrah! The trade is executed only it is done virtually at mostly NSE or BSE which are India’s biggest stock exchanges.

Nifty in itself is not an instrument but an Index whose value is derived from 50 stocks from different sectors which are paramount to run an Economy- Banking, Healthcare, Commodities, Automobile, Fast moving consumer goods to name few. It is a small piece of market whose components represent the economy. Just like Nifty Bank Nifty is another Index which is the representative of Indian Banking system.

Banking sector is the backbone of an economy and therefore Bank Nifty is one of the biggest driver of Nifty and one can observe that the two move in tandem.  

 Who moved the market?     

Buyers and sellers are the only culprits who moves the market based on their feelings. Sorry what? Yes, You heard it right more than anything it is their sentiments which moves the market. Emotions - Fear , Anxiety, Greed, Happiness moves the market which could be triggered by any new information and can be seen on charts. No wonder one of the leading stock market trader is a psychologist. A trader is a psychologist of stock market.

Risk Management

Study of human behavior is psychology and study of market behavior is technical analysis. Psychologist conducts initial diagnosis to assess current mental state of a person and then gauge the severity of his behavior by counselling which triggers patient's emotions, gives him prescription or medication  and in return charges him . Traders are not very different, They do initial market assessment and see how prices are behaving on charts and use it to their advantage to earn profits.  

Can you guess the difference between the two then? Yes! A Trader is both a patient and the doctor. He charges fees/profits from the markets based on his analysis and pays fees/Losses if it goes wrong,  He is both the receiver and giver of the fees. He has "Skin in the game". Trader knows his risk well in advance before jumping into the trade. Risk management is the holy grail of any trade.