Is There A Maths Shortcut For Stock Market Success?

You must have seen adults talk of stock market profits and loss. While some are pros at it, some are eager learners while others simply leave the conversation with ‘I don’t understand stocks, markets at all.’ But while this field is tricky and confusing, if you are able to get a hang of it, it can be truly tempting to buy and sell stocks and earn some good profits on it as well.

As a school student, if you plan to make a career in the stock market, understand that using maths can make the stock market less confusing and making money is exciting.

This article will help you connect the maths concepts with the real world of money and stocks. We'll talk about probability, statistics, and financial maths - all things you've learned in your maths class. We'll show you how these maths ideas can be useful when you think about stocks.

Why To Invest in Stocks and Shares

Investing in stocks can be a smart way to make more money. When you own shares in a company, you're part-owner, and as the company does well, your shares can become more valuable. Some companies also pay you a little extra money called dividends, like a bonus. Investing in stocks is like planting a money seed and watching it grow over time.

Figuring out where to invest your money in the stock market can seem complex, especially if you're new to it. You might wonder if it's a good idea to put your money into big companies like Apple, Tata, Infosys, or SBI. People have different opinions, but let's take a lesson from Warren Buffett, a famous investor known for his smart approach. For beginners who might not have the knowledge to choose individual stocks, index funds are a great option. These funds are easy to understand, cost less, and help you grow your money steadily.

Understanding Money, Investing, and Math

According to Warren Buffett, "Investing is simple but it is not easy." When it comes to money and making it grow, there are some important things to know.

>> Inflation is when things get more expensive over time. This means your money can buy less than it used to. Let's say, a while ago, a burger cost you Rs 100, but now it's Rs 120. This is because of inflation. Your 100 rupee note won't get you that burger anymore. So, what do you do? You need to think about inflation when you plan your spending and saving. You want your money to grow or at least keep up with the rising prices.

>> Investing means putting your money into something with the hope it'll be worth more in the future. You buy it now and sell it later for a higher price. Let's take an example with a house. You buy a house and wait for some time. When you sell it later, you can make money in two ways:

Rental Income: While you own the house, you can rent it to someone, and they pay you rent regularly. This is like getting a paycheck from your property.

Value Increase: Over time, the house's value can go up. This happens when more people want to buy houses in the area or if the neighbourhood gets better. When you sell the house, you make money from the higher price compared to what you paid for it.

>> Yield is like the money you get from your investment. It's usually shown as a percentage. To calculate yield, you divide the money you get from the investment (like rent) by how much you paid for it. For example, if you get 10,000 rupees in rent from a 2,00,000-rupee house.

(10,000 / 2,00,000) x 100 = 5 per cent. Your yield is five per cent.

>> Return on capital is a bigger idea. It looks at how much money you make from the investment, including the increase in its value and the rent you get. To figure it out, add the rent you get to the change in the property's value and divide it by the money you first paid. So, if the house went up by INR 20,000 and you got INR 10,000 in rent from your INR 2,00,000investment.

(20,000 + 10,000) / 2,00,000 x 100 = 15 per cent. Your return on capital is 15 per cent.

Understanding Probability And Risk

One maths idea used in the stock market is called probability. It's like trying to guess the chances of something happening. For example, you might want to know if a stock's price will go up. Using maths, you can make an educated guess about whether it's likely to happen or not. But remember, the stock market is always uncertain, and no maths trick can guarantee you'll be right.

Let's say you're thinking about buying a stock. You can use probability to guess if the stock's price will go up. If the chance of the price going up is high, it might be a good choice.

Another maths idea related to stocks is risk. Investing always has some risk, which means there's a chance you might not make as much money as you hope. In your Class 12 maths syllabus, you may have learned about things like variance and standard deviation. These are ways to measure how risky an investment might be.

For instance, if you're thinking about two different stocks, one with high risk and another with low risk, you can use these maths tools to figure out which stock might be safer.

Also, check - Understanding Maths To Pay Off Student Loans Quickly

Statistics In Stock Analysis

Statistics is another maths tool used in the stock market. It helps people make sense of a lot of information and make smart choices. For example, there's something called a moving average. It's a way to figure out the average price of a stock over a certain time. By watching this moving average, you can see if a stock is doing well or not.

In your Class 12, you may have learned about regression analysis. It's a way to predict future stock prices by looking at past data. Investors use this to understand how different things, like interest rates, might affect stock prices.

You want to know how changes in interest rates might affect a stock's price. By using regression analysis, you can make an educated guess about what might happen. This maths helps you understand how different factors could influence the stock market.

Power of Financial Mathematics

Financial maths is another type of maths used in the stock market. In school classes, you may have learned about things like compound interest and annuities. These ideas are important when you think about money and investing.

For example, compound interest helps you see how your money can grow over time when you invest it. It also helps you figure out how much money you might make in the future.

Imagine you want to invest in a stock for a long time. Understanding compound interest helps you guess how much your investment might grow over time. It helps you make informed choices about your long-term investments.

Annuities are another financial maths idea. They help you calculate regular payments you might get from your investments. If you own a stock that pays out money regularly, annuities help you figure out how much you might earn.

For instance, you might have a stock that pays you dividends. By using annuity maths, you can figure out how much you can expect to earn. This helps you plan your money and make decisions about your stock investments.

No Guaranteed Shortcut, but Invaluable Tools

So, is there a magic maths trick for stock market success? Not really. The stock market is always changing, and no maths trick guarantees success. Investing in the stock market comes with some risk, and no maths trick can make that risk go away.

But the maths ideas you've learned are like helpful tools in your toolbox. They can help you make informed choices when you're thinking about stocks. Probability, statistics, and financial maths are more than just school-college stuff; they are valuable skills that can help you make smart choices and better understand the world of money and investing.

Also, check - Fun Maths Puzzles: Attempt These To Hone Your Number Skills

In the end, while there's no secret maths trick for stock market success, understanding and using these mathematical tools can light your way as you navigate the stock market and head toward financial success.