Amid the coronavirus pandemic, a large millennial segment in India has taken to the stock market as a passive income source, so here are mentioned a few stock market terms for them to better their understanding on the subject:
Overbought condition in a stock refers to the situation wherein the scrip is deemed to be trading above its fair or intrinsic value. The condition by and large pertains to a short term or recent movement in the security prices and points to a probability that the market shall trigger a price correction in the near term.
Say for instance:
In the case of PNB Housing Finance soon after it announced its fund raising programme and Carlyle's fund infusion, the stock saw huge volumes and was hitting upper circuit day after day last week. After hitting a 52-week high of Rs. 924 on June 8, 2021 on the BSE, the stock today has crashed over 4% to day's low price of Rs. 814.
Typically the stock that is overbought can be a good security to consider for sale.
This condition is typically when the scrip has traded at a lower price and shows the potential to bounce. This situation can persist for a long span and so being oversold does not guarantee that the price rally is soon to come or may come at all. There are various technical indicators that help in identifying oversold and overbought levels. In the process fundamentals are also employed to understand whether a security is oversold and has moved away from its usual value metrics.
Say for instance: There were many oversold stocks during the market mayhem witnessed in March 2020 owing to coronavirus pandemic, typical example being Indian IT stocks for that particular period.
Resistance as the term implies is the price point for a security that acts as a hindrance and does not let the price move further higher. This level is always higher than the current market price and when this level is breached it acts as a support point.
Further it can be understood as the level where the traders start squaring off their position or book their profit. Usually the technically analysis tool is watched out for in the case of a rising market.
Support is the price point offering or extending support to the scrip or asset, meaning to say it doesn't let the price fall further down. The support level is always below the CMP. Whenever the price of the scrip falls to the support line, it is in a general case expected to bounce back
The support level is often taken to be as a trigger to buy the security. And this technical analysis parameter is looked at by market participants in a falling market.