Monday 22 April 2013
Dipen Shah, Head of PCG Research, Kotak Securities
For many it’s their day-to-day livelihood while others have made enough money to last for a lifetime and there are plenty of others who have gullibly fallen prey to the vicious ways of the share market and saw a lifetime of savings wiped out in just the blink of an eye.
The stock market has continued to give decent returns year over year and the returns in turn are way better than one could expect from other modes of investment, and yet not all investors are able to make the most of the opportunity at hand. And there are various reasons attributed to failure to succeed in the market including the common perception that stock trading is as good or bad as gambling.
But why do people consider stock trading as gambling? And why do people tend to lose money on the market? And is there really a formula for success?
Contrary to popular perception, investing in the market can actually be beneficial rather than detrimental. The only catch of course is to make your moves with caution. And the formula for success is simpler than you thought, but first let us begin by attempting to answer the aforementioned questions.
Is Stock Market Really Equivalent to Gambling?
This is what most people think and believe and some literally take it to the heart. Share market investment is more akin to gambling and gambling obviously means getting addicted to something that will make you lose a huge amount of money and may be win some.
And gambling is bad considering the way people get hooked to the thought of someday making good their losses which most never will.
With respect to gambling, however, the cold hard fact is the very people who think stock trading is like gambling are exactly the guys who tend to lose money on the market. They don’t have a set investment goal or strategy to follow and all they are interested in is to make a quick buck and get rich overnight.
This leads us to the next logical question. If this is not gambling, then why or what makes people addicted to the market and lose money in the process?
Why Do People Lose Money in the Market?
The reason is simple – most newbies investing in the Indian share market do not have a definite investment strategy. It’s the “get-rich-quick” mentality that becomes their nemesis and eventually leads to losses – in some cases “suicidal loses.”
Here are five key reasons why people, especially the inexperienced folks, lose money on the market.
- Insufficient knowledge and awareness
- Impatience
- Greed, fear, get-rich quick mentality
- Follow-the-crowd mentality (everyone’s buying, I am buying too or vice versa)
- Ignoring reality and going by gut feel
Most individual investors fall prey to either one or all of the self-explanatory reasons mentioned above. So how can people ensure that they don’t end up on the losing side?
Patience - The Secret of Success
If at all you want to believe there is a secret sauce for stock market success, there’s just one word that most successful stock market investors swear by and that is “patience.” And you need to have loads of if you ever want to hit pay dirt.
Some of the other prerequisites of stock market investment include defining a proper investment strategy that suits your style of investment, keeping yourself up to date with market trends, knowing when to exit and when to hold, and basically keep yourself firmly rooted to the ground. You don’t want to be swayed away by emotions, speculations, rumours and misinformation that most investors are exposed to day in and day out.
The Rewards and Benefits are Immense
It’s a known fact that stock market investments are one of the best known avenues to generate long term income and even beat inflation that is primarily responsible for capital erosion. It’s an arena where even beginners can make good of their investment provided they clearly understand the tricks of the trade.
They need to use a scientific and systematic approach to stock trading rather than an ad hoc approach where people seldom understand what their investment goals and objectives are and indulge in speculative trading.
One good tactic of investing in stock markets is to carryout index based investment rather than individual stocks. According to Sensex, while the returns from investing in individual stocks can vary, index investing has turned to out to be a much more reliable option from year 2000 to 2012 with average returns in the range of approximately 20% .
While the market has performed well in terms of returns on investment in the long run, it remains to be seen as to how investors actually make good of the opportunity by playing their cards wisely.
