"Bulls make money, bears make money, but pigs just get slaughtered!” goes an old stock market saying.This may sound comical, but woe unto you if you don’t learn from it. As simple as it sounds, it explains how stock markets operate and the Nairobi Stock Exchange (NSE) is no exception.In stock markets, investors gain or loose. Anyone who comes to trade in stocks should be prepared for this.
Watching the NSE, it’s quite evident that it is on a bulls ride with almost every stock performing well, except for a few that have reached a plateau. Investors have more than often doubled or even tripled their earnings in the recent dealings; from the KenGen and Scan group IPO’s to the East African Cables share split.
In fact, investors have developed a mass bulls psychology where everyone anticipates a rise in stock prices with every IPO, rights issue and even a stock split which in the first place should not change the share value. This has created a very high demand for securities in the secondary market consequently increasing the prices.
Some investors, who can easily be termed as ‘pigs’, have nose-dived into the bourse looking for the one big score that will enable them reap high returns in a short time. They buy every publicized stock without observing due diligence, and end up losing their investment. Seasoned investors love them, as it's often from their losses that they reap their profits.
Even with a bull stock market at the moment, investors should be on alert, testing the wind and watching out for signs of changing trends. Reading the market each day may not be helpful, but understanding the general direction of the market with some expertise support may act as a warning sign of the stock market turning bear. Then, and only then, should an investor consider selling his or her portfolio and wait for the fall.
One does not need a futuristic periscope or psychic advice (some investors use psychics to help them pick stocks) to understand the market trends. You can get a good idea of where the market is headed with just two pieces of information: price and volume. When you put these two together, you get to know whether there are more sellers or buyers in the market. Volume tells you whether there is movement in the market and price shows you the direction of the movement.
When you see the down days too frequently in the NSE, which has been on a bulls trend, this is a sign that the stock market is about to reverse course or stall. Mutual funds and institutional investors are usually the volume buyers and sellers that move the market. When they begin moving in a direction, that’s where the market will definitely go and you can easily see it in the price and volume numbers.
In case the market shows sharp price movements in either direction, without corresponding volume increases, it is sending false messages that should be watched even more carefully. What does this mean to you? Do not buy or sell more shares; stay back and observe the forces of supply and demand. When there are more buyers (higher prices on higher volume) than sellers, the market will trend upwards – bull market. When there are more sellers (lower prices on higher volume) than buyers, the market will trend downwards – bear market
Higher Prices + Higher Volume = Upwards trend (bull market)
Lower Prices + Higher Volume = Downwards Trend (bear market)
If you see more than a few of the latter, prepare for change by selling some of your stocks or holding on to them and wait for the trend to dictate otherwise.
By watching for changes in the market you can be ready for any potential market changes that may affect your earnings. It’s always a good practice to step back and get a better view of what the market trends have been. From that and other information gathered from the market, you can decide to give your broker a call and instruct him on whether you want to buy or sell your stocks.
Learning how to use the stock market is always more than just a little tricky. But even then, being able to foresee what is going to happen in the stock market will always be of great advantage.
You don’t want to be led to slaughter with the pigs. Do you?