Share
market – a nightmare to understand? Indexes, stocks, boards, charts, patterns,
commodities, bonds, mutual funds and what not seem like an age old jargon or
Bret Lee’s quick bouncer which is invisible? Well they may look difficult than
the setting up of a 5 year plan for India, but the core or the start to
understand these routine names in the academics of a post-graduate student and
especially an MBA post-graduation should get much simpler if one follows some
basic factors in understanding the uncertainty of the stock market.
Rule number one says – “It is a simple give and take.” When
the old carter system was in existence, people use to exchange commodities for
commodities and later on these commodities were replaced by precious coins of
metal like gold or silver. In a share market, you either buy an existing share
or you sell an existing share which you have already bought. I won’t be going
so early into the depth of short-selling concept since I am writing this like a
layman who understands simple give and take. If you have the money, you buy a
share you like, yes the one you like, when and what to buy would be slowly
covered ahead. If you want the money back from the share you had purchased, you
sell the share and get the money back for the quantity you have sold. By
knowing this term, you have become a trader.
Rule number two says – “Know what you are buying or selling.” This
is even simpler to understand. When your mom asks you to buy 1 kg of tomato,
you go to the vegetable vendor, ask him for a bucket, select the tomatoes
according to their colour and look and then ask the vendor to measure the asked
1 kg quantity by your mom. If we know that we have the brains to look into what
we are buying, share market is the same logic. When you try to buy any share,
you must look for the company’s background, the most simplest way is to Google
it or go to stock market sites where you get the graph and news about the
companies past and present performance. Again, one need not study the in depth
of the company to buy its shares, but since childhood days and especially in
MBA entrances, we can make out just by looking at a graph if it is doing good
or not, reading the headlines of recent news about the company can give you a
slight understanding of the company’s fundamentals and ventures.
Now since you know what you are
buying, you need to know how you should buy it and from where. So here goes
rule number three – “Know from whom are
you buying it and from where.” This would be a bit deep but I would try to
explain it in simpler terms. Let me deal with normal shares (equities) only in
this case, there are 2 places from where you can buy these shares, the BSE
(Bombay Stock Exchange) and the NSE (National Stock Exchange). But an
individual can’t buy a share directly from these 2 places since it would create
a huge mess because of the presence of multiple traders at one single time. So
there is an intermediate entity called as a Share Broker from whom you buy or sell these shares and he is the
one who gets your deal done with the BSE or NSE. The broker charges you a
percentage or a fixed amount depending on your transaction, both when you buy
and sell a share. Know what your broker offers you and select the best
accordingly. Try to go with the best deal which is been offered and see to it
that you don’t lose out a lot on commission (brokerage) of the broker. There
are online means of selling and buying shares as well as through the banks
directly these days where you have your demat account in existence so one needs
to look out and study the best possible deal before starting to invest.
The basic requisites are clear but
when you get 1 kg of tomatoes from the vegetable vendor, you mom takes them and
stores them at a place. So the fourth rule goes – “Know your demat account.” This account is similar to a bank
account, the only exception been you store shares in this account instead of cash.
Whenever you buy a share for investment, your demat account serves as a storage
place for the quantity you buy, and whenever you sell any share, it is as good
as taking out the required quantity from your demat account and selling it via
your broker. With this we complete the basic requisites of the share market,
what is buying and selling, what to buy, from whom to buy and where to buy and
where to store what you have bought.
Now with all the ammunition, one has
entered the battlefield of share market, but one needs to understand some
common safety points while entering the warzone. So the fifth rule is more of
pre-understanding jargons of share market – “Know your stop-loss and target.” I know these are some jargons but
these are like bread and butter if you are thorough with what I have written
prior to this paragraph. Stop-Loss:
This is a level or a line of danger that an investor predicts or marks while
investing or disinvesting in a share so as to minimize his loss if that level
is reached. Let me quote this in an easier way with an example of a share.
Suppose you invest 1000 bucks in company X and expect a return of 1100 bucks in
1 month (i.e. 100 bucks profit). But you don’t want to bare a loss of more than
100 rupees (i.e. your total investment should not go below 900). So the
investor in this case would keep a stop loss of 900 while investing in the
share of X at 1000. This is a very important factor when it comes to an
investor who is new to the world of share market since you should try to minimize
the loss at all possible times. Hence stop loss is the first and the most
important jargon a new investor needs to learn in a stock market so as to
curtail his losses and move out of any investment if he is baring losses which
is beyond his limit of control. Same is when he is trying to sell a 1000 bucks
share thinking that it will go down, he can keep a stop loss of 1100 and if
this level is breached then he may hold on to the share to gain more profits. Target: As the word goes, an investor
should also keep in mind that when he is investing, looking at the charts and
fundamentals of the company, he needs to keep a target in mind. Most
importantly while setting a target, if one happens to be a new investor in
share market, keep realistic and small
targets and exit when your investment reaches that target. A simple reason
to this would be, you are here to learn the trades of the market and not to
make huge profit first up, its best to move out of a share when you feel your
pre-set target is already reached. If a new investor keeps track of these 2
words when he invests, he probably is set to resist the twisting tides of the
unpredictable market.
The next rule is a bit of common
sense when it comes to investing; here goes the sixth rule of market investment
– “Never invest more than 25% of your
money in one share.” I again quote that this rule applies strictly to
people who are new and want to learn the trading business to its core. The
actual amount that one should sensibly invest in one share is 10% of the total
cash in hand. If the cash is really low then one can think of 25% at max. The
simple reason may be it is not possible to predict the flow of the market and
understanding its movement with respect to one share, just because at times,
there are some shares which do not follow the market trend and move in the
opposite direction to what could have been predicted. Investing in more than
4-5 shares atleast gives you the trend of a particular stock you want to track.
Not only that but it may give you a blink idea of the sector that stock belongs
too if you have another share or maybe 2 different company shares belonging to
the same sector. It is best to keep investing in company which you feel you
have learned and researched a lot about and then go on to know the sector which
the company belongs to by investing in other companies in the same sector. This
creates a sense of confidence for a person in a particular sector and hence he
can know the sector and keep investing by increasing his targets and stop loss
ranges to earn more profits and know the sector even better.
With almost everything said and done
then latter parts are more upto psychology and sense making when it comes to
investments in share market. The seventh rule says – “Keep yourself on ground even after bearing loss or gaining profit.” Needless
to say on this point but a true investor is the one who remains calm at mind
even when he earns huge profit or makes a tremendous loss. This is because,
share market is unpredictable; it is like a casino where you may earn one
minute and the very next minute you may go in severe loss. A true investor
learns from his losses, and avoids future debacles learning from his past
investments. At the same time, he betters his investments if they are earning
him profits and mimics them to keep on expanding in his profit margins and
bettering them with every buy and sell.
Seven rules down and still it’s much
easier ahead, the next rule is more of a practice, which is useful for an
investor to do net practice before the match starts. Rule eight says – “Try your shot at virtual markets before
you invest in real.” The rule is as simple as I have quoted it, but along
with practicing the share market and its nature, there is an added benefit of playing
in virtual market. Not only is it free but if you are confused on the
performance of a share, you can fearlessly invest in virtual market and look
out for the trend of that share before investing in real. This may reduce your
profit (or loss) margins by a huge amount but it is always better to be safe
than sorry when you are investing for real. For a new investor, virtual markets
are a place where he should start his journey just to build up that confidence
he needs before he goes in for the real war.
The ninth rule is a simple rule
which many elders in your life would have guided you and asked you to do ever
since the time you learned to read in your young days and the same applies here
as well – “Read and listen as much as
you can.” Probably the easiest way to grasp the knowledge of share markets
and their trend is to read newspapers which give you the insights about latest
happening in a market, the deals and ventures been done, the debacles happening
all over and the recommendations too. Even news channels which are related
specifically to stock markets help in understanding the flow of market and
knowing the investment patterns of big shots in the bull zone. This may be a
bit dicey but it is always preferable to hear to expert advice and go in for
investment rather than blindly putting forth our cash. They may not be perfect
but atleast we may get an insight on how to look out for a share or investment,
charts and news regarding the shares are always an add on to these opinions.
Nine rules of principles and still
there is one thing which differs from all the 9 rules which I have quoted
above, the tenth and the most important rule says – “Believe in yourself for you are the carrier of your luck in the stock
market.” It is an instinct driven market and self-confidence (and not over
confidence) is the most important criteria while investing. It is partially
luck when a new investor starts and one should trust his luck when he invests,
for this is the only thing which can make an investor as well as break him. The
dice is rolled and the stage is all set, share market is pretty easy to
understand and looking at the 10 bold rules above, it is easy for a person to
enter the market and start investing. The difficult jargons like short-sell or
intraday trading would be learned eventually in the due course of understanding
the market. Last but not the least, all the best to all my fellow investors and
hope so you make the best of the available opportunity to you – from the heart
of a layman in share market.
Regards,
Abhijeet
(Gladi).
[P.S.
– I have written this article as a layman and I still don’t understand the core
concepts in a share market, all I know are the above rules and to make money, I
guess the simplest possible way to say that share market is easier than it
actually looks like.]