“Average investors who try to do a lot of trading will only make their brokers rich.” -Michael Jenson, Finance Professor -Harvard.
According to a research conducted by the ISB under the leadership of Executive Director of Analytical Finance Sankar De, it was found that during the period of January 2005 to June 2006, retail investors in India lost 83.76 billion rupees. Later it was found that these losses were close to 0.77% of the country’s gross saving per year at that period of time. Since India has got the largest number of retail investors after China i.e. around 2.02 million, hence it was considered to be one of the largest losses.
Although the investors were making zero return out of the market, still they continued with the investment. They mainly do emotional trading, rather than giving deeper thought to the data. They would sell the profitable stocks very soon while holding onto the loss-making stock for a longer period of time.
A similar tragedy happened with Mr. Rajesh, who was trading into the market by relying on his broker who had given him 10X leverage (commonly known as margin trading). He believed that he got a good opportunity to trade for the sum of 10 lakh with the amount of 1 lakh from his account, and could turn over 3 times a day (i.e. 6 times of buy and sell). So his total amount of trade execution per day was 60 lakh. Rajesh was very happy with such kind of flexibility. Adding a cherry to the top of ice-cream, he was just charged 0.01% per transaction. He had never imagined that this seemingly small amount could cost him ₹ 600 per day (0.01% of 60 lakh). He had just ignored the brokerage charge so he used to do a transaction every day, which simply deducted ₹ 13200 from his account.
For each three transactions, he made a loss in 2 and profit in 1. This didn’t stop him from trading because of the belief that if he continues trading in the market, he will soon be able to turn the table on his side. The average size of the profit was 1.0% while 0.6% for the loss. He had to bear 0.2% of net loss in the market, which amounted to ₹ 2000. In a month, he made ₹ 44,000 loss. He was oblivious to all these losses. Ultimately, Mr. Rajesh made a loss of 57.2% within a month.
Most of the stock market traders go bullish and lose money because of the absence of the complete knowledge of the market. They look for silver spoon-feed from the hands of un-authentic market-advisors/tips providers.
Some of the common investing advice taken by the investors is to invest in low trading volume stocks or Intra-day trading. They fall victim to the slippage, commission and sharp loss due to the abrupt fall in the price of the purchased stocks. The cause of such losses is due to sharks and piranhas of the market. Here I am talking about none other than the Institutional Investors and traders of the stock market. They are very lethal just like a shark. They are the game player of the market.
The sharks use high-end software based system (accumulation & distribution software) to deploy their money in the market or to exit from the market. Such software-based system may start with opposite action (If they have to buy then start with sharp sell) and create a pattern which impacts retail investors/traders’ psychology to think contrary to the actual move. Many times, retail investors also get influenced by various media (which includes free SMS tips) to take a decision which is ultimately favorable to the large players. At the end, retail players think it was their hard luck and the volatile nature of the stock market which made the loss. They do not realize the fact that there are systems which are working very hard to make them unlucky, while the retail investors are hardly working to beat the market.
Slippage & commission takes a small piranha-sized bite out of the investor’s pocket. The size of the bite may look small but due to the high-frequency sum of the bites become huge.
Slippage is the difference between the price at which trading occurs and the expected price of the trade. Let me tell you one story from the broker himself, it will clear your doubts regarding slippage.
Once upon a time….. Oh! Let’s just cut to the chase.
A contract was going to occur for 100 ounces of gold futures. Five traders decided to buy a contract each which was being sold short in the market. Gold falls to ₹ 4 per ounce and the buyer moves out of the market after the contract. The seller who shorted the contracts earned ₹ 400 per contract, making a total of ₹ 2000. But actually, he didn’t make ₹2000. He had to pay ₹ 15 commission and $10 slippage for the volatility. Thus, he ultimately earned just ₹ 1825while the other party lost more than ₹ 2000 due to the extra commission they had to pay. They must have paid quite a commission, let’s say ₹ 25 for the commission and ₹ 20 for the slippage and ultimately lost a total amount of ₹ 2325.
Guess, who got the bigger chunk of the profit?
The sum of ₹ 500 went into the broker’s pocket.
All that glitters are not gold. So, stocks recommended by your free tips provider may not be sound
The piranhas may ask the investors to focus on the short term gain when the companies make the dividends declaration etc... These companies may have the weak stock which is being neglected by the investors.
The very next question that strikes our mind is why we should bother about stock market. If it is so risky then one should avoid it completely. However, this thought is not correct. The reason, no other asset class or instrument returns better than stock market if we play strategically. For example, in-spite of the fact that last financial year was not good for Indian stock market (market index is down by nearly 10%), many stocks have performed extremely well. For example following 5 stocks are top performers from NIFTY (India’s top 50 companies’ collection).
Above sample is from our large cap section. We know mid-cap grow even faster than large cap. For example one of the mid-cap stock (Rajesh Exports) even grew by 200% during the same period of time.
Nevertheless, the risk associated with stock market is also significant. Following is the list of top 5 losers.
The crux is, you can’t avoid stock market if you really want inflation-beating growth. However, due to various kind of risk associated with the market you need to be strategically smart.
WHAT TO BE AWARE OF?
The investors shouldn’t be completely dependent on the broker/tips providers or any un-authentic advisors (especially free ones).
There are some important rules of the investment you need to know before entering the market. An investor needs to decide what his appetite for risk is. Of course, stories of other’s investment have been tempting but the market doesn’t run in your favor. A prior check of the market as well as of the stocks is required. Leaving it just onto the tips providers won’t help. For retail investors, it is very important that they should think of long term investment i.e. for the period of 3-5 years, as well as focus on some strategy to play in the market.
Thankfully, now robo-advisors are available in India who provide quality investment advisory service at shoe string cost e.g. ArthaYantra, Fundsindia, SAFE Trade, Scripbox. Robo advisory services are based on software hence, they are untouched from human biases and are pre-validated statistically. They recommend which stock/mutual fund to buy, when to buy and when to sell with minimal risk statistically. Among all these SAFE Trade is the only platform which provides robo advisory for the stock market (others are mostly limited to mutual funds). SAFE Trade manages diversified portfolio by alerting users for the right moment to buy and sell on analytics based evidence. So, even if the investors have little or no knowledge about the equity/stock market, they can still make the correct judgment and grow their investment with market-linked growth rate.
STOP worrying, START safe investing! Beware of sharks & piranhas of the stock market. Practice safe investment.
Disclaimer- Not for people who want to double their money within a fortnight.