Know your risks before joining the stock market bandwagon

Stock Market
A trader looks at a screen at a stock brokerage firm in Mumbai March 13, 2008. Reuters/Arko Datta/Files

During a recent conversation, a senior Human Resources professional with a prominent firm shared a few observations. A sizeable number among the new generation -- freshers seeking employment and those seeking a change to a better job -- are active in online stock trading.

Additionally, the Covid-enforced work-from-home norm, too, has triggered a trend of several people trying their luck in the bourses.

His observations made me think. There is no second opinion that the country's economy will gain when more people participate in the capital market, look for prospects and acquire related knowledge.

Investing in stocks wisely, after understanding the risks involved, will bring better returns than any other investments. But extensive studies are required about those investing after keenly observing the markets for years and others who impulsively invest on seeing bullish trends in the bourses.

An investor opting for delivery trading (wherein purchased stocks remain in the demat account until sold) rather than the risky intra-day (buying and selling a stock within a trading session, ie., the same day) and derivative (based on speculations on the future price action of an asset) has much to learn before putting in his/her money:

1. Never raise funds by selling or mortgaging assets. The funds should be found from investor's savings -- that is money left after meeting the daily expenses and other possible emergencies.

2. You might have heard of shares of several companies, which made their initial public offering at a lower price, increasing manifold in a short period. Note that the equities of all companies will not have the same bullish run.

India stock market
People walk past the Bombay Stock Exchange (BSE) building in Mumbai, India, November 4, 2020. File photo: REUTERS/Francis Mascarenhas

3. Putting money in stocks is considered ideal for long-term investments, despite brief fluctuations in share value. One should not buy or sell impulsively based on market fluctuations or certain news regarding the stocks.

4. Train yourself to be a disciplined investor. The value of some stocks may dip even if the market is bullish. It is natural. The investor should wait patiently until the price stabilizes. Patience has been a common trait of all successful investors, who have invested in select shares.

5. A diverse portfolio reduces risk and loss. Investing in different sectors helps in making up for any loss caused by a poor-performing industry, since the investor will be holding stocks having an upward swing.

6. Do not invest in penny stocks (originally, shares of small firms trading for less than a dollar) -- stocks trading below the face value. It could even be doubtful if such companies are still operational. Additionally, there could be only one reason if the stocks of those companies existing for several years are trading below the face value: their performance is below par.

7. An important point to remember while investing is to select performing firms. Ignore speculations and baseless news. Invest in transparent firms engaged in businesses that will have a better potential in future. Firms could be selected based on expert advice or making an analysis of your own.

Stocks should be purchased only after considering the functioning of the promoters of the company, their status, whether it has experts at the management level, if it protects the interests of the investors, its growth over the previous years, and statistics regarding its annual profits. The investor may seek the help of financial advisors if s/he cannot do the analysis on his/her own. Credible reports, too, help in zeroing-in on a firm.

Investors have found in equity, or shares, an alternative to traditional investment methods, which have been losing sheen. The increasing investment in the stock market reflects this fact. Approaching the bourses with patience and disciple after understanding the market will bring good returns to the new investors.

Stock Market
A man walks out of the Bombay Stock Exchange (BSE) building in Mumbai, India, February 28, 2020. Reuters/Hemanshi Kamani/File photo

Understanding intra-day & derivative trading

New investors should understand the risks involved in intra-day and derivative trading.

1. Most people new to the bourses lose money after dabbling in intra-day trading. Speculative trading is meant mostly for experts with years of experience in the stock market. Intra-day trading, buying and selling shares on the same day, is a risky business. Higher indices, or a firm's stocks breaking new records, need not necessarily make intra-day trading profitable.

2. Derivative trading is not a child's play. Sound knowledge of futures and options are required before indulging in derivative trading. Information on derivative trading is available on YouTube and websites of broking firms. Like intra-day, chances of incurring huge loss is high in derivative trading also.

(The writer is Head, Investment Advisory Division, Geojit)


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