Stocks are risky, volatile and uncertain when it comes to price. But they are not a gamble:there is a method in their madness. That is why stock pickers, who understand the market dynamics well enough, invest in emerging opportunities.

Picking stocks is actually all about identifying opportunities before others do, using information before it becomes a commodity and putting your money where your mouth is. It requires guts to put money to back your convictions (based on analysis, naturally). But when picking stocks, the speed with which you act is of the essence. You cannot wait decisions based on what information to be available. You will have to make decisions based on what information you can gather at any given point of time.

The bottom line is, you are in the stock markets for money, not glory. And the winner takes all. It may on occasion be luck, intuition or a gamble that has paid off rather than sound research. It does not matter, just as long as you get it right (and as long as you are not breaking the law).

Boom and busts have been part of stock markets ever since the market first appeared. It’s a tale that repeats itself in a never-ending cycle. What no one knows for sure is the duration and timing of these boom and bust cycles.

There are lots of reasons as to why booms happen? A number of theories do the round to justify boom cycles. Booms follow excessive demand of quality stocks, economy changes, the new economy will benefit stocks of companies that capture markets first and establish a dominant position. Stocks markets may also get a boost if other investment avenues like bank deposits and bonds are giving pathetic returns.

Now the question is: why do market go bust? Economy slows down, monetary and fiscal changes change the dynamics of the market or the stock. When you see investors picking up stocks like there was no tomorrow, or hear your aunt or the panwalla talking about what stocks they have bought or sold, get out of the markets. Such activity is a sure sign of an impending bust.

Monetary and fiscal changes disturb markets’ balance. In most stock markets, a steep rise in interest rates sucks money out of the stock markets into debt markets. Fiscal changes like a hike in tax rate could also send markets into the dumps. Stock markets simply bring investors and capital seekers together. Usually, it’s a win-win deal for everyone. Investors get a piece of a business they could not have dreamed of starting, companies get the kind of money they need to finance business without having to run from house to house and brokers make a neat bundle arranging the deal between investors and companies. All this happens when a company issues its stock to investors.

One of the key aspects in stock market is timing. In today’s economy, how do you ask investors who can double their money in a month to invest in stocks that perform in the ‘long term’. Conventionally, I would say it works, specially in Pakistan markets. That’s because these markets don’t always react to fundamentals. Certain market patterns peculiar to Pakistan could make you time your decisions. For example, the first and last day of the settlement could either make stocks shoot up or fall rapidly depending on the kind of positions investors have built up.

If you are investing in stocks, why should you care about bonds? That’s because both are investments and what all investors care about is best returns, assuming risk and liquidity remains. If interest rates were to fall, stock markets would rise sharply as money would flow out of the bond market into better yielding stocks. The opposite would happen if interest rates went up.

If you are the type of person who likes to be in the driver’s seat and felt the thrill of picking great stocks, mutual funds are boring. Mutual funds give you diversification, but diversification cuts down return. Moreover, since investors are continuously walking in and out of a mutual fund, you don’t get the full benefit of the returns.

What you pay for the stock will depend on your anticipation of how much more the stock will appreciate and what it will pay as dividends. That’s about the only two things a stock does for you. No matter how strong the fundamentals of a company, unless there is some buying momentum, either because of institutional interest or speculative interest, a stock’s price is going to remain static. So buying ‘value’ may sound good on paper, but other investors also have to believe that the stock has ‘value’. Stock price depends on valuations. That means it is as important to keep track of who is interested in the stock as to what the stock is valued at. For example, if the fund manager at one of the larger mutual funds takes a fancy to a stock, you can be sure its price is going to go up sharply, specially if its equity base or market capitalization is low.

Pakistan market regulators use margin as brakes and accelerators of markets. An increase in margins, that is the security the broker has to pay to the exchange on any particular stocks, can suddenly put the squeeze on market volumes and investors activity in that stock. Stocks of a well managed, low-equity base, small market capitalization companies usually get premium valuations. Here the gain is simply because demand for the stock outstrips supply. Buyers want to buy the stock, but not enough of it is available in the market. The only way one can buy is to up the price, and the investor gains from the illiquidity of the stock.

There are only two ways to justify a stock’s price. Either the stock will produce returns that will make you happy or, if that is not happening currently, the potential of the stock to generate future profits is great enough to justify its current prices.

Greed drives markets up and fear takes it down. When markets are heading up, most of us are overcome with greed as we continue to buy at ever-higher prices. Caught in general frenzy, the thought that prices may crash do not even occur to us. And when markets turn down, fear overcomes the greed factor. All we can see is losses everywhere and we rush to sell the stocks we own at bargain basement prices.

Apart from the greed and fear syndrome, stock prices in Pakistan react to a number of factors. Stock prices are also influenced by impact of economic data, financial results, bonuses and stock splits, operator activity, institutional demand. The announcements that materially affect the prospects of stocks, supply and demand for the stock are factors that can react in the stock market.