1. What is the difference between trading and investing?

Trading involves buying and selling securities frequently (days, weeks, or months) to profit from price fluctuations, while investing is a long-term strategy of holding securities for years to build wealth. Trading requires active market monitoring and technical analysis skills, whereas investing focuses on fundamental analysis and company growth potential.

The primary stock market indices in India are the Sensex (BSE 30) representing the top 30 companies on the Bombay Stock Exchange, and the Nifty 50 representing the top 50 companies on the National Stock Exchange (NSE). These indices serve as benchmarks for overall market performance and economic health.

Fundamental analysis involves evaluating a company’s financial statements, management quality, competitive position, and industry trends to determine its intrinsic value. It is crucial for long-term investors as it helps identify undervalued stocks with strong growth potential and sustainable business models.

Technical analysis focuses on price patterns, chart trends, and volume data to predict future price movements, while fundamental analysis examines company financials and market conditions. Traders typically use technical analysis for short-term trades, while investors rely on fundamental analysis for long-term decisions.

Support levels are price points where a stock consistently finds buying interest, preventing it from falling further, while resistance levels are prices where selling pressure emerges. Understanding these levels helps traders identify optimal entry and exit points for trades.

Intraday trading involves buying and selling securities on the same trading day to profit from short-term price movements. Advantages include no overnight risk exposure, leverage opportunities, and the ability to trade multiple times daily. However, it requires significant capital, time commitment, and strong discipline.

Swing trading holds positions for several days to weeks, capturing medium-term price trends, while day trading closes all positions within a single trading day. Swing traders require less time commitment than day traders but face overnight gap risks. It balances the intensity of day trading with better risk-reward opportunities.

Moving averages smooth out price data by calculating the average price over a specific period (e.g., 50-day or 200-day). Traders use them to identify trend direction, support/resistance levels, and potential reversal points. When shorter moving averages cross above longer ones, it often signals a bullish trend.

The risk-reward ratio compares potential losses (risk) to potential gains (reward) in a trade. A favorable ratio like 1:2 or 1:3 means potential profit exceeds potential loss. Maintaining a positive risk-reward ratio is essential for long-term profitability even if win rates are below 50%.

Candlestick patterns are visual representations of price movements that indicate potential reversals or continuations. Reliable patterns include the doji (indecision), engulfing patterns (reversal signals), and harami (reversal indicators). Combining these with other technical indicators increases prediction accuracy.

A stop-loss is a predetermined price level where you exit a losing trade automatically, limiting losses. It is non-negotiable because it protects capital, manages emotions, and ensures consistent risk management. Professional traders always use stop-losses to prevent catastrophic losses.

Position size should be calculated based on your account size, risk tolerance, and stop-loss distance. A common rule is risking only 1-2% of your total account on a single trade. This ensures that multiple consecutive losses won’t significantly damage your trading capital.

Diversification spreads investments across different sectors, market caps, and asset classes to reduce risk. If one sector underperforms, others may compensate for losses. This strategy protects long-term wealth from sector-specific downturns and market volatility.

Common mistakes include risking too much per trade, ignoring stop-losses, averaging down on losing positions, and lack of position sizing discipline. These errors amplify losses during market downturns and exhaust trading capital quickly. Proper risk management protocols prevent these costly mistakes.

Strategies include maintaining stop-losses, holding defensive stocks (utilities, consumer staples), keeping cash reserves for opportunities, and using options for hedging. During crashes, many traders panic-sell; disciplined traders use predetermined exit strategies to minimize losses.

RSI measures the magnitude of recent price changes to evaluate overbought or oversold conditions on a scale of 0-100. Readings above 70 suggest overbought conditions (potential sell signal), while below 30 suggest oversold conditions (potential buy signal). It helps identify reversal points and momentum shifts.

MACD combines multiple moving averages to show momentum changes and trend direction. When the MACD line crosses above the signal line, it generates a bullish signal, while crossing below generates a bearish signal. It helps confirm trends and identify potential reversals.

Volume represents the number of shares traded in a security during a specific period. High volume during price moves confirms the strength of the trend, while low volume indicates weak moves that may reverse. Volume analysis helps validate trend signals and identify potential breakouts.

Bollinger Bands consist of a moving average with upper and lower bands indicating volatility. When prices touch the upper band, it may indicate overbought conditions, while touching the lower band suggests oversold conditions. Traders use band squeeze (low volatility) to anticipate potential price breakouts.

Fibonacci retracement uses mathematical ratios (23.6%, 38.2%, 50%, 61.8%, 78.6%) to identify potential support and resistance levels during price pullbacks. Traders use these levels to set entry points during retracements within larger trends, increasing win probability.

Important ratios include P/E (Price-to-Earnings), P/B (Price-to-Book), Debt-to-Equity, ROE (Return on Equity), and current ratio. These ratios help determine if a stock is fairly valued, assess profitability, evaluate financial stability, and compare companies within the same sector.

EPS indicates how much profit a company generates per share outstanding. Growing EPS over time signals improving profitability and company health. Comparing EPS growth to stock price helps determine if a stock is overvalued or undervalued relative to earnings growth.

Key elements include assets (what the company owns), liabilities (what it owes), and equity (ownership value). Strong balance sheets show high asset values relative to liabilities, indicating financial stability. Analyzing trends in these components reveals whether the company is strengthening or weakening financially.

Free cash flow is cash generated from operations minus capital expenditures, showing actual cash available for dividends and growth. It is more reliable than net profit because profit can include non-cash items. A company with strong FCF has flexibility for investments and shareholder returns.

Assess management through their track record, compensation structure, insider buying/selling activity, and strategic decisions. Check if management incentives align with shareholder interests, review their past performance across market cycles, and analyze commentary in earnings calls for credibility and strategic clarity.

Rising interest rates increase borrowing costs, reducing corporate profitability and investment appeal, typically depressing stock prices. Conversely, falling rates lower costs and boost lending, generally supporting higher stock valuations. Real estate and finance stocks are particularly sensitive to rate changes.

Inflation reduces purchasing power, increasing business costs and reducing profit margins. High inflation typically pressures stock valuations and favors commodities and defensive sectors. Understanding inflation trends helps traders anticipate market reactions and adjust portfolio positioning accordingly.

The RBI controls monetary policy, inflation, and credit conditions through interest rates and liquidity management. RBI decisions directly impact market sentiment and valuations. Traders monitor RBI announcements closely as policy changes significantly affect stock prices and sector rotation.

Government policies including tax changes, sector regulations, and fiscal stimulus directly impact corporate earnings and investor sentiment. Regulatory changes can make or break specific sectors; traders must stay informed about policy developments affecting their holdings.

Market sentiment reflects investor emotions—fear, greed, optimism, and pessimism—that drive buying and selling decisions. Extreme sentiment (very high or very low) often precedes reversals as contrarian traders profit from emotional excesses. Understanding sentiment helps traders identify potential turning points and validate technical signals.

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