State and explain two Theories used to explain when to time investment in the stock exchange.

CPA-Financial-Management-Section-3 Revision kit

 Timing of investment at Stock Exchange
The ideal way of making profits at the stock exchange is to buy at the bottom of the market (lowest MPS) and sell at the top of the market (highest MPS). The greatest

problem however is that no one can be sure when the market is at its bottom or at its top (prices are lowest and highest)

Systems have been developed to indicate when shares should be purchased and when they should be sold. These systems are Dow theory and Hatch system

1. Dow Theory
This theory depends on profiting of secondary movement of prices on a chart. The principal objective is to discover when there is a change in the primary movement.

This is determined the behaviour of secondary movement but tertiary movements are ignored. E.g in a bull market, the rise of prices is greater than the fall of prices.

In a bear market the opposite is the case i.e the fall is greater than the rise.
 In a bear market the volume of the business being done at a certain stage can also be used to interpret the state of the market.

Basically, it is maintained that if the volume increases along with rising prices, the signs are bullish and if the volume increases with falling prices, they are bearish.

2. Hatch System
This is an automatic system based on the assumption that when investors sell at a certain percentage below the top of the market and buys at a certain percentage above the market bottom, they are doing as well as can reasonably be expected. This system can be applied to an index of a group of shares or shares of individual companies e.g Dow Jones and NASDAQ index of America.

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